petec

Are you implying that they will do more than 10-12% compounded if interest rates stay low? If only it were really that easy. Why would anyone buy any of these stocks if they did not expect at least 10-12% compounded for long period of time? So, yeah, I think he's implying this and I would imply it too for the ones that I hold from this list: aapl, bac, brkb Although I don't hold wfc, axp, ibm, xom, I can see reasonable scenarios where all of them return >10% for coming 10+ years. I can see those scenarios too (and own axp, wfc, and brk). But stock markets have done 7% give or take compounded over the very long run. So to assume that big, established companies - even very high quality ones - will deliver a 3-5% premium to this against a headwind of rising rates seems pretty punchy to me. Don't get me wrong, I'll be delighted if it happens. But it's not my base case.

Are you implying that they will do more than 10-12% compounded if interest rates stay low? If only it were really that easy.

Exactly.

Not quite - but it is where I would say that, since you can't guarantee the quality of government in the future, I think government ought to be chosen at a much smaller level. As I've said before, the bigger the area of government the less each vote is worth. Also, there is HUGE value in having different governments trying different things in the world. I view that as a massive-scale competition for ideas and even population (via migration) and I think a unified world government would be a total disaster for that reason. Now, perhaps the optimum is 5 regional governments instead of 190 national ones. Byt my suspicion is not. I totally agree. You mention the USA as a counterargument to my point that tensions can build up within a large unit of democracy. But the USA is a key historical example that scares me. States joined the union but then turned out to have different ideas of what that meant and the result was a civil war that killed more Americans than all of the USA's other wars put together. I genuinely see that as a tail risk of future federalisation of the EU. I truly hope I am wrong but I need a very good reason to take the risk. Now clearly, Europe has proved that nation states can war very effectively too - but I don't believe the EU is the way to stop that happening again. EDIT: thanks for taking the time on this. I realise I look like I'm arguing back, but I am also learning new perspectives and getting less sure about my vote!

As an aside, I believe animals (including humans) are quite deeply conditioned to see red as a danger signal. So I find it fascinating that the convention is to display falling share prices in red and rising ones in green. Tells you a lot about mass psychology vs. value psychology.

I think you are being waaaaay to rational about this. The vast majority of investors don't know anything about stock valuations or any such. They simply invest in their retirement accounts and track their account balance. When a $500,000 401k balance drops by $150,000, they simply think oh my god, I've lost 8yrs of savings or something like that. If they lose anther $100,000 or so they might just throw in the towel and sell no matter what logic you apply to them. I have had many talks in the company break room explaining to people, don't think about your account balance, think of what you own. You own a piece of MSFT or KO or whatever. This is especially true in the last few months. Precisely. And these people are, without knowing it, momentum investors. Momentum investors comprise a lot of the market and are the polar opposite of value investors: they get excited when things go up, and they invest because things have gone up. Similarly, they get scared when things go down, and sell because things are going down. The faster they go down the faster they sell, until they've all sold and all that's left is value investors buying. The other thing I would add to this thread is the power of an overarching idea. They tend to be present at the tops of bubbles ("tech is going to change the world", or "peak oil") and I suspect they tend to be present at the bottoms of busts ("it's going to be the Great |Depression all over again" or "the ATMs will go dark"). In other words people panic-sell because a) things are going down and b) they have some overarching reason to believe things won't get better.

Jurgis why would you not, then, unite the entire world under one government? I actually agree with your moral argument on the face of it. But I worry that: a) the bigger the unit of democracy, the smaller the power of the individual area/person to influence policy, meaning that you bottle up tensions everywhere that the government is influenced by them and isn't working for us, which historically is very dangerous. b) the more the poorer countries are bailed out by the richer ones the less incentive they have to sort out their poor policies - so your moral argument could perhaps be turned on its head. I realise I'm sounding like a diehard "out"er - I am not, I'm merely offering the counterarguments to the tone of this thread. I'm genuinely undecided, although I lean towards out for political, not economic, reasons. P

Even if it was true that the EU has benefited more from the UK than the other way around, would this make for an argument against a membership? This is not the relevant question. What matters for GB is whether they benefit more from a membership than from being outside. I highly doubt that you'll find sensible economic arguments that show that being outside will be better. Also think about the fact that GB will face a far less liberal EU if it decides to leave, simply be because the EU would have lost its driving liberal force by then. The current issue of the Economist has a good summary of what is more or less my position, too. I could argue that if the EU benefits more from the UK than vice versa, then the EU's influence on the UK must by definition be negative - for the reasons Aberhound proposes, probably. I'm not sure I care very much if the EU becomes less liberal if we leave - in fact in the end I think that would be its undoing and I don't see the benefit of delaying that. Thanks for the recommendation of the Economist - will find and read.

Ni-co, Thanks, useful post. I actually think my first point is a key one, akin to starting with a blank sheet of paper with an investment portfolio. There is literally no way you could persuade the British to join the EU today if we were on the outside - unless, of course, the EU had gone from strength to strength and we had suffered from being on the outside. I don't think that would have happened, personally. Your second paragraph, however, goes right to the heart of what I am trying to understand: the hidden benefits and costs. I'll need to think about what you've said and read more. My first reading if what you wrote is that mainland Europe has benefited more from Britain's influence than Britain has, but maybe that is arrogant. I also have a strong sense that I don't want to be part of a federalising Europe. No European President for me, thanks. Pete PS and I totally agree about the Greek tragedy being a problem with the Euro and not the EU.

Mine would be two simple observations: 1. if we were on the outside debating whether to join, we wouldn't dream of it. 2. I'm a big believer that democracy works best at a fairly local level. I don't want to vote on what happens in Germany/Greece/anywhere else - and I don't think they should vote on what happens here. That's not because I'm a nationalist, but because I think different policies suit different peoples at different times. I think you see that in Greece today. I also see few benefits in staying in; lots of the claims made for the EU are nonsense (e.g. that it is responsible for peace in Europe) and I believe we could trade freely with it and the rest of the world on our own. And I am really not sure we need another layer of government and regulation: our own politicians produce quite enough of that. The problem is, so few people really understand the implications, and so much of the debate is going to be hyperbole, that making an intelligent decision is pretty tough.

As a Brit with a responsibility to vote, I'm interested to know if anyone has informed views on the pros and cons for Britain (and Europe). Always useful to get an external perspective... Thoughts?

New favourite ever post!

D'oh - yes, that is the obvious answer.

This is where it genuinely does matter whether you include prefs and noncontrol because I'd argue that reported is $403 (which is also what they say). That gets you to 1.3x and making your adjustments is 1.16. NOT expensive - but definitely accretive to BVPS and more accretive to TBVPS.

Yea - it really doesn't matter when we're talking high-level though. The inclusion, exclusion, or scaling of $1-2B in the P/B multiple doesn't change much when we're talking about whether or not it was a high value or low value. Especially considering the investment portfolio could return that amount in a single year and make up for any "mistake". I'm just trying to keep things very high level using round numbers. I just can't for the life of me figure out why they needed an extra $500M and certainly don't think it was because the stock was expensive or they think they'll need more cash when the market drops. I just hope we're 2-3 days away from announcing a large acquisition where they'd need the extra $500M to complete it, but I'm skeptical after having read the press release. It matters a lot if it is the difference between 1.7x and 1.2x tbv!! But on the rest I agree with you. I felt the same when they issued to buy Brit and then promptly sold some of it. I don't think it's a shocking price to sell equity at, so I don't *really* care, but it isn't easy to explain why they need to.

Thanks. Personally I'd argue that the noncontrol interests don't belong to us (presumably this is shareholders other than FFH in things FFH consolidates like Thomas Cook and Fairfax India). As for the prefs, I agree there is a spread but there are two ways to treat them IMHO: 1. exclude them from equity, as you would do with debt (prefs are very debt-like, after all, and you wouldn't dream of adding back the debt to the equity value just because they earn a spread on it). You could exclude (a) the face value or (b) the market value, on the basis that they could buy them back. 2. include them as equity, but increase your scare count accordingly to take account of the fact that owning common stock doesn't give you economic rights to the prefs. Since I haven't the foggiest clue how many prefs are out there I tend to stick with option 1! Just my way of doing it. Bottom line for me is that the p/tbv of the common is 1.7x assuming your quarter-to-date earnings. Adding 1x intangibles gets you to 1.2x.

This I agree with entirely.

As an aside, and this is a genuine question not a dig, how do you get to the $441? I have, per share: $403 bv, less $144 intang, plus $20 unrealised gains on associates, plus $27 quarter to date profits (your $600/22.2) equals $306 total tbv/share compares to USD524 share price = 1.7x What am I missing? I haven't added the investments/prefs spread simply because you have to make such a big assumption on what the investment return is.

I didn't say it was. The original poster asked why it was required. And the only answer I can think of is: given that they anticipate a market collapse, perhaps they see selling at the current reasonable price to invest at seriously cheap levels in the future as an attractive relative value trade. I'm not arguing about the current FFH valuation. It's a third of my net worth so you can be fairly confident I don't think it's overvalued (although I always use historic BV hence our multiple discrepancy). As to why TBV, I tend to watch both. TBV is clearly extremely cautious. I'm sceptical about putting a multiple above 1 on goodwill (it can be justified, but I prefer not to do it usually) so I tend to value it using a >1 multiple of TBV plus 1x GW. If the newly outstanding underwriting results survive the next few cats, I will allow myself to put the GW on >1x.

And you haven't even mentioned Sandridge or Resolute Forest Products. Those were 10 footers'. Absolute atrocious stock picking and total head scratchers. I sound like a broken record but I cringe lately when I hear people give them accolades for their brilliant stock picking. You're absolutely right that they'd be much better off had they stuck with the "great companies at a fair price" philosophy. I'm still in and they've had a helluva run this year but I sure hope they go to school on those mistakes. Wish they could've hedged their stock picking instead of their stocks. Correct as you both are in some regards, there are things that worked very well (Ridley) and JNJ/WFC, while they might* be one-foot-hurdles, haven't made a huge amount of money since Fairfax sold them if I have the timing right despite the storm of criticism that those sales generated on this board. Clearly they have done better than BBRY, but the bottom line for me is that Fairfax have never said they aim to buy great businesses at fair prices. They are out and out value merchants and that sometimes goes wrong. The exception is when they buy operating businesses which they have done very well. *It's fairly easy to argue they are not, given the impact of technology on healthcare and possible NIRP on banking.

I can't understand why having billions on the books in cash with hedged downside isn't enough. I don't buy that they taking advantage of the current valuation - it doesn't trade at an excessive multiple to book (not even anywhere close to the high end of it's historical range) and it trades at around a 10x P/E of the average of the last two years earnings which have been reduced by a non-contribution from equities and losses on the hedges. Yep - am long and wasn't suggesting it is excessive in absolute terms. My point is that at >2x tbv they may feel they will do well selling FFH now to buy stupidly discounted stuff in the next year or so.

Taking advantage of the valuation I suspect, vs. the valuations at which they expect to be able to buy investments in the future given how bearish they are.

Thanks Vinod, I'll read it. Re Dalio, I would agree that monetary policy in the US and Europe has reached an ineffective point now; but the long fall in rates from 1980 to (say) 2006 was very effective in boosting all the things I talked about - clear example being HELOCs boosting household spending before the last crisis. But as you say, we may have to agree to differ. ;)

@ Vinod on margins: Fascinating post. I disagree on monetary stimulus: falling rates a) reduces interest costs for companies with debt, b) increases discretionary spending power (after interest) for indebted consumers, and c) encourages consumers to spend using debt. All of these boost margins directly or indirectly (via operating leverage inherent in most businesses). This is extremely clear to me having watched Brazil go through a leverage-boom and deleverage-bust over the last 7 years. I believe US margins are on a much longer cycle but with similar underlying drivers. My view is that corporate margins will go below the long run average at some point in the future. I have no view on the timing of that and I don't really use it to guide my investing although it is a reason I am cautious about overall market valuations. I'm also sceptical of the winner-takes-all economics argument simply because for it to be true we'd have to prove that prior periods did not have temporarily monopolistic winner-takes-all companies - and for it to last you'd have to believe that the current winners are permanent winners, which I don't. *However* the point of my post is really this: could you point me to the sources for your stats about 80% of companies having flat or falling margins, and about earnings growth compounding at 10% when margins last fell structurally? (I am not at all surprised by either stat although I'm interested to know if the 10% earnings growth was nominal or real?) Many thanks. Pete

Why's that?