petec

They do give money to others - Kennedy Wilson - but I think that was more for value opportunities than for stable returns. My sense is they back themselves (rightly) to invest for themselves, and that if they see an opportunity in an asset class they'd go for it by building a business around it with some very clever people in charge. NB one of their biggest equity investments now is their controlling stake in Grivalia, the Greek REIT. - I can see them doing something like that in another country if they see an opportunity.

I can and have started to do so, but I haven't found many that I really like. Also, I find my confidence in a sector thesis is never as strong as my confidence in a stock thesis. In practice what this means is if a stock I like goes down I am likely to add, whereas if a sector I like goes down I question my thesis and sell. So far this hasn't worked out well!

Speaking as someone who has a high cash allocation, I won't find this difficult. People tend to forget that even if you're (say) 25% in cash, you're still 75% invested. If 75% of my money goes up 50% over the next 5 years I'll be delighted. Stressing yourself over the fact that you could have been a little richer if you'd made different decisions seems like a great way to reduce happiness! (What I would find extremely difficult is being fully invested into a drawdown, because I'd look back and ask myself: why were you fully invested when valuations and margins were high, you moron?) But that is me, and my psychology. I'm not recommending anyone follows me. Each to their own. I should say that I am a firm believer in margin and valuation mean reversion over the long term. It was ever thus - and if free markets don't cause it, social policy will. In particular I wonder if the stock market would go up 50% if the economy boomed. If the economy boomed inflation would probably rise, and even if it didn't rates would because the Fed would probably use the cover of a strong economy to raise rates and given themselves some wiggle room for the next downturn. Also, if the economy booms employment and wages will presumably rise, depressing margins. The last 8 years have (with hindsight) been a goldilocks period for the stock market: low rates, abundant money, gently rising revenues, no cost pressures, low starting valuations, and lots of buybacks because there's been no need to invest cash flows in capex. The only one of these that would get better in an economic boom is revenues.

Or maybe this really is the most broadly overvalued market in history, as the stats suggest.

Does anyone recognise his description of pharma stocks being on 10x earnings? They look like they're on nearer 20x to me.

Actually yes I can invest in investment trusts (but not European holdings companies - go figure). And guess which three I hold?! CGT, PNL, and a little RICA, though I'm less convinced by it! But the thing is they are not absolute return in the hedge fund sense. They are absolute return in the valuation sense - they go long when they see value and hold cash or ST bonds etc. when they don't. Today they hold roughly 40% equity and 60% ST bonds/cash, so selling equities to buy them is very similar, in asset allocation terms, to selling equities to hold cash. So the original question stands. I have seriously considered selling everything and putting it all in PNL and CGT.

TCC, re: resource companies, you might be interested in the link I just posted in the Macro Musings II thread.

Disappointing ;)

That's true of most value-based investing techniques. Thing is, the longer value doesn't work the more it will work in the end! Thanks to all for commenting - you've all helped me refine my thinking considerably which will, in the end, mean I am happy with my decision whatever the outcome.

If my net worth was $10m I'd be on the beach. It's at a point where gains are not spectacularly useful to me but losses are a problem. Current market valuation levels have historically led to 10 year returns closer to 0% than 4% (that's total, nominal returns). And there are several occasions in history where the market has taken >10y to regain prior highs. That would have a material impact on my quality of life for those 10 years, so I don't see the risk/reward as attractive.

Because I did do better than he did! I've no idea why he did not buy then: his valuation measures were all telling him to. CAPE was at 13x briefly. I'm interested in his stats, not his opinions! That's exactly what I'm doing. And I'll adjust it back if I see more reward for taking less risk (i.e., lower valuations). I have plenty of exposure there already!

Interesting chart on p1 and p1-9 has some good commentary on 1969 and 1999, when money creation drove stock bubbles and - later - commodity prices. http://www.gorozen.com/static/assets/pdf/ql/GRAQuarterlyLetter2Q2017.pdf

To be clear on CAPE, I am NOT using it as a timing tool, but as as a measure of valuations and future returns for the market given that I have to have general market exposure. Hussman argues that P/S and P/GVA have 90% correlations with future nominal 7, 10, and 12 year returns. Maybe I should use those instead but CAPE does have a strong correlation with future returns too. The key point is that most of the valuation metrics I know of suggest the market return from here is likely to be low, and I want a preplanned selling discipline to reduce the chance that I will make emotional decisions (i.e. I want to sell on the way up, not the way down!). I do the same with individual stocks and the market is just a collection of individual stocks. Again this is not a comment on timing but just refers to the amount of risk I am willing to assume given the likely reward. As for the opportunity cost of cash: I am quite happy to lose out on 5% a year for a few years before a correction for three reasons. 1) Including the correction, that sounds like a roughly flat market to me, and that's not a big opportunity cost. 2) My net worth is at a point where losses mean materially more to me than gains, so my focus isn't on eking out an extra couple of percent, it's on not taking risk unless there's a really good reward. 3) A serious inflation pickup would erode stock prices much faster than it will erode the value of cash, giving me buying opportunities. As an aside, I was struck by a piece I read recently saying that all 45 countries monitored by the OECD are growing in 2017. That's only the third time that's happened in >40 years. We are looking at high valuations (record highs on some important measures), low inflation despite growth everywhere, record low interest rates, and record high margins. Does that not look like the very definition of "perfection, priced in"? What was it Buffet said about when to be fearful?

That's only true if you have great ideas to invest in. I'm stuck with the market, in effect. And the market is on a valuation that suggests prospective long run returns are poor and the downside if investors get scared is significant. The opportunity cost of cash is therefore low, and the option value is high. I will raise a little cash and let cash accumulate. I have also set targets (using CAPE) at which I will raise more cash if valuations keep rising (subject also to the valuations of the individual stocks I hold). CAPE should actually come down over the next 2y as the 2008-9 earnings come out of the denominator so these targets may well not trigger.

I was a little confused at first, but maybe I understand. So you can no longer pick securities (I guess because of job conflict?), but you are allowed to choose sell (or not to sell) the ones you own? Sounds like a nightmare in the current environment. I would be very tempted not to sell the individuals if they are good, as it seems like you are restricted from rebuying them later. I'd probably raise cash by saving current income if I couldn't pick any current securities. That's exactly the dilemma. Selling the individuals will pay off if there is a market selloff and I can reinvest in collectives at better valuations. Otherwise it won't. Not a pleasant decision.

Yes, I think that's a key condition, and one I am struggling to meet!

We have had a lot of good discussions on whether it is worthwhile adjusting cash levels for general market valuation levels. I have a conundrum. On the one hand I basically believe in holding great companies forever. On the other hand, I think markets look expensive here. They look expensive on PEs, and they look extremely expensive on metrics that have historically done a much better job than PEs of predicting future long run returns (P/S, P/GVA, and others - I am taking this from Hussman whose numerical work I respect even if his calls have sometimes been wrong). I can't invest in individual securities - only collective vehicles - so I can't stock pick my way around expensive markets. I can keep the individual stocks I do own, and I own long term survivors, but they are not cheap. I am very tempted to raise cash. This is a value call, not a macroeconomic prediction. I just think the skew between risk and reward here looks unpleasant. Several smart members on here have argued strongly against holding cash. Does this advice still apply at current market values?

Parsad, could you elaborate? They've sold one of the absolute crown jewels. Yes, they got a high price. And yes, they surfaced some hidden value, and yes, they can de-lever a bit. Good for the short term. But long term the success of this will hinge on how much value the Mitsui partnership delivers, and that seems very vague. Yes, a crown jewel, but they received a stupid price for it...over 3 times book! What I can't believe is that they get to underwrite 25% of MSI's insurance book. The $1.6B was indecent enough, but that 25% is simply criminal! Take a look at slide 3. You notice three significant regions where Fairfax does not do as much business as MSI: Russia, Japan and South America. FC does about $400M in GPW...MSI does $25B GPW in Japan alone in non-life business. Then add the Russian market and parts of South America that Fairfax wasn't heavily involved with. Just think it was a really one-sided deal...and fortunately Fairfax is on the right side of it! Cheers! Yes, I wrote mine before fully appreciating the 25% of FC that they effectively keep. One could argue the p/bv was effectively 4.4x. If they can sell at that price and buy back shares at 1.1x then I see the rationale. But I actually wouldn't describe 3x as a stupid price for a 72%CR insurer. I'm really interested to know why Athappan thought this was such a good deal. Why is he happier at MSI than at FFH? For me, the real win/lose of this deal will be in the details of the ongoing partnership with MSI.

With the exception of Crum, the biggest bits of FFH have either been acquired in the recent past (Zenith, Brit, AW) or public in the recent past (Odyssey, Northbridge), so I doubt there are big surprises there. On the investment side, we know the unrealised gains. FC is the biggest and best bit of Fairfax Asia - there may be more unrealised value in there but not on the same scale. I would say this sale and the ICICI transaction surface the majority of the unseen value. I doubt it. This is the biggest and best bit of Fairfax Asia.

Prem was clear on the call that the 25% quota share of FC's premiums basically meant Fairfax keeps 25% of the profits and 25% of the growth. Whichever Fairfax company gets that has to have capital to back it, but doesn't have to inject equity into FC. Do Fairfax also get to invest the float thus created, or are they just sharing 25% of the underwriting profit?

...Which should grow from $400m to $1bn. What intrigues me is why Athappan championed this? Why is MSI a better home for FC than Fairfax is? And how good, really, will the Mitsui partnership with wider FFH turn out to be? EDIT: shares up 2.8%. Efficient markets my a**.

Parsad, could you elaborate? They've sold one of the absolute crown jewels. Yes, they got a high price. And yes, they surfaced some hidden value, and yes, they can de-lever a bit. Good for the short term. But long term the success of this will hinge on how much value the Mitsui partnership delivers, and that seems very vague.

It wasn't just the bet on deflation that soured my opinion of Fairfax. I agreed with that play and, IMO, your take on it is exactly correct. Who knows, it still may play out. It was the poor quality of equity purchases that was the nail in the coffin for me and, frankly, inexplicable at this level. Too many Hail Mary's for my taste. Six months ago I would have agreed with this entirely. I'm now moving to a more balanced view. There have certainly been some major duds. But there have been some solid winners too: TCIL/Quess, Fairfax India and its contents, BKIR, Grivalia, and potentially in the future Eurobank (I haven't made up my mind on Cara and Blackberry yet). I'd also add Zenith, the Odyssey Re stub, and hopefully Brit and Allied - I realise these aren't what you meant by equity investments but they are huge permanent equity commitments so I include them. I also like the pref/warrant investments they've made recently. So overall I'm feeling more positive on the investment side, FWIW.

I think they're just investment vehicles that allow Fairfax to pool knowledge and get real scale without overcommitting themselves (charging a fee into the bargain).

SD - why are the spinoffs, as you call them, related to Prem's age and succession planning? It looks to me like Prem has built a deep bench, with Paul Rivett and Andy Barnard at the forefront - that's to do with succession planning. But I don't understand what FIH and FAH have to do with it. Uccmal - BKIR and ICICI Lombard spring to mind as realised successes. But why are realised gains more important than unrealised ones? One thing many have said on this board is that they wish the investing was more Buffett-like, long term investments in high quality compounders. I think they are moving that way, with the platforms they have built in FIH, FAH, Thomas Cook, Cara and maybe Grivalia (they didn't build Grivalia, but they have recently taken control and I am intrigued to know whether it is intended to be another close-to-permanent investment). Anyway, my point is that I'll be delighted if they can turn these into great businesses and never realise the gains. Interesting thought on Tim Hortons!