petec

CM really is great: "I realised what I needed to do is compete against idiots, and luckily there is a large supply". :)

My only disagreement would be this: you could make the same argument about buying it at 89% of IV, but no-one would because there would not be enough upside to the target. But you might hold at that level, to obey your rule. You could argue that obedience to a rule is psychological, but surely most of us impose rules on ourselves precisely to take psychology out of investing.

Yes. Not that this has anything to do with the original argument at all, but we tend to look at holds as sell recommendations given the hot water analysts can get into if they actually publish sells.

Apologies!

OK, well my final word (you'll no doubt be delighted to hear!) on this is that if your original post had included position sizing as a caveat along with tax and psychology, I'd have agreed with it. It didn't, so I erroneously assumed tax and psychology were the only caveats. P

Incidentally, earlier you wrote: Taken to its logical extreme, your argument suggests I'd only ever hold 100% cash or 100% of my favourite investment. These two reasons you give here could have been offered in refutation. That's one of the problems with the "taken to the logical extreme" approach. Once I took your own buying to the logical extreme, you immediately came up with two reasons that quickly dismissed the logical extreme approach. However, you didn't do that when you yourself presented the logical extreme argument. Anyways, "logical extreme" approach is often just a "slippery slope" fallacy. They usually seem better reasoned to the giver of the argument than to the taker (who immediately can see how the situation is more nuanced than that). Hmm. You wrote (my wording) that if I'm happy to hold, I'm happy to buy, except for tax and psychological reasons. I said that that isn't true, because taken to logical extremes that would have me at 100% or 0% invested (probably just in one stock). You pointed out that that is not what I have done. I agreed, telling you why. You agreed that my reasons were not tax- or psychology-related. Doesn't that mean that you've agreed that there are non-tax, non-psychological reasons why I might not be happy to buy when I am happy to hold? And isn't that contrary to your original post? Or to put it another way, I took your original statement (un-amended for the later caveat about position size) to what I consider to be its logical extreme. You took my buying to what I consider to be an illogical extreme. So I don't see the similarity. Either way have a great day - mine is ending :) P

I thought you made exactly that claim, because I understood you to say that tax and psychology were the *only* reasons why, if I was bullish enough to hold, I might not be bullish enough to buy. Perhaps that's where the misunderstanding lies.

That part was correct. I did indeed mean to convey that if you are bullish enough to hold, you are bullish enough to buy. How much of a position, that varies from person to person. Similarly, everything you hold today was at one point in time trading for a price where you were bullish enough to buy. However, just because you were bullish enough to buy didn't make you go overboard with your position size. You didn't go to 100% (the logical extreme) merely because you were bullish enough to buy. No, for two reasons: 1. I (nearly) always keep some cash for better opportunities later; and 2. I had other good ideas. I don't really regard either of those as tax or psychology related reasons.

Ha, there was probably an element of that. However, just for interest, this was my actual thinking: You wrote "So how is that any different? Buying vs holding? Other than taxes and psychology, they are the same bullish sentiment. Having cash and buying is basically the same vote of confidence as holding and not selling to raise cash (other than taxes and psychology)." I read that to mean that if I'm bullish enough to hold, I'm bullish enough to buy, which logically ends up with me being 100% invested or 0% invested. Simple misunderstanding.

That isn't true. The first clue is that I didn't make such a statement (nor would I). I figure that whenever you have to stretch somebody else's statement, you've probably changed the meaning of what they are saying and therefore shouldn't do so. Your statement is no different from claiming that when prices are cheap enough (the price at which you buy at) you only take 100% positions. Now, is that what you actually do? Do you only take 100% positions when things are cheap enough where petec is convinced to buy a new position? You are making a straw man argument. We aren't discussing positions sizing at all. Instead, I am saying (for example) that if a 10% position is worth holding at $50 per share on the way back up (from the lower price where you bought it at), then it is also worth buying it at that price for the first time if you don't already hold it. The rest is psychology (and possibly taxes). Ah - that (your last paragraph) is *not* how I read your original post, primarily because it is not what you actually said. However my intention was not and is not to rile you so I apologise if I did. I understand your point better now. On a philosophical level, however, I disagree with you about stretching someone's argument - mine or someone else's. I generally (but not always) find that following things to their logical (if extreme) end-point makes me think quite hard! Pete

Not for me. I'll happily hold great companies at fair prices, but I try to buy them at cheap prices. Taken to its logical extreme, your argument suggests I'd only ever hold 100% cash or 100% of my favourite investment. I'll very seldom do either because the risk of being wrong is just too high.

They have one of the clearest philosophy of almost any company I know: buy things with a margin of safety. That underlies everything they do, I believe, with the possible exception of the hedges which, for better or for worse, are there to protect the equity in case the Fed's attempt to reflate an overindebted economy fails. I don't find that hard to understand and the record is pretty good. What I do find amusing is how this board seems to have exploded with questions about their (investing) sanity/organisation/philosophy/competence/etc. after one bad investment (the hedges). P Edit: I should have added that I do wonder when they will shift from value to quality on the investing side, as they seem to have done on the insurance acquisition side. A Buffett conversion yet to come?

Pete, you know I couldn't agree more. ;) Gio Yeah, I'd got that impression ;)

At the risk of bringing this back to AZ Value's post... ;) I agree that a) they clearly got the equity hedges wrong and b) if they wanted to hedge, out of the money puts would have been a better and less cash-heavy option. However, I'd counter come of the points in the post as follows: 1) JNJ and WFC have doubled since the annual report covered them, but IV has not. I don't find their sale *that* odd (although I do find the timing suspicious for the reasons AZ has given). 2) They *did* take once in a lifetime opportunities to buy great businesses: Zenith, TCIL, arguably BKIR, minorities in Odyssey and Northbridge, and some smaller things. This is a very different business than in 2008. 3) Are the equity hedges pure macro, as AZ argues? To me, trying to predict next year's GDP is foolhardy but observing that there are some dangerous imbalances in the world is not. Observing that there is too much debt and government stimulation in the world is arguably macro (but very important and very historically aware). Observing that margins are at all time highs and are a mean-reverting series is really quite micro, IMHO. And shorting indices while maintaining an equal long in equities you like isn't macro so much as it is backing yourself to generate beta. 3a) On the comparison with Buffett: he spent a lot of time talking up America and US govt financial policy. That, to me, is as much a macro call as Prem made. It just wasn't couched in macro terms. 4) It's a little harsh to dismiss Jha, Chennakeshu, and Bucher as 'some consultants'. I for one am very glad that Fairfax looked outside for industry experts when deciding what to do with BBRY. But I agree that doing it after making the offer seems odd from the outside. I'm long and quite happy that a guy who is so content to differ from the crowd, while building and strengthening his core business, is managing some of my money. Pete Edit: I meant also to say thanks for a genuinely interesting and thought provoking read :)

Could?! China is 12% of world GDP and accounted for 40-50% of world money creation in the last 3 years. They have been on the printing press big time. Why else do you think Central Bank reserves are so high? (CBank reserves/global GDP matched only by 1920s US and 1980s Japan...)

No it isn't. It is just saying what we'd say in any other debate: be aware of where the data comes from. If global warming was disproved tomorrow, a lot of people would have to redefine themselves as scientists totally and have to find new funding sources or be out of a job. (I know this first hand having studied in the field.) That doesn't make them liars or cheats but it does introduce a bias.

I have looked at doing this fairly extensively. Be careful that they are fully declaring revenues, and are fully tax compliant. If not, make adjustments accordingly (assuking you would want to be fully compliant).

This is important. :) Thank you, Phoenix01! Gio +1 Very interesting.

The positive side is that the further along we get in this deleveraging, the less of it's drag there is ahead of us. What deleveraging? The US is, a little (total debt down from ~390% of GDP to 340%). But the world overall has added 30% to its debt load since 2007. Private sector debt carries higher financing costs than public sector debt. So you may scoff at 390% vs 340%, but I think the difference is more significant than that. Let's say you take a private citizen that was paying 6% interest on his personal debt, and you tell him instead that he only has to pay 3% interest if it is moved to the public sector. I am not scoffing at it - it is a very significant improvement. But I would point out that it is still far above the long run normal, so there will be a lot more deleveraging to come if rates return to their long run normal (and that will be hard given the rising cost of service in that situation). My bigger point though is the global figure. That, ultimately, is what Watsa is fretting about, as I understand it. I think he fears a *global* deleveraging focussed on China with all the deflation that entails. A. Gary Shilling has been saying that there is about 4.5 years left on the deleveraging. He thinks before 2019 we'll be growing GDP at the normal long term trend growth again. I hear that and I get bullish. I mean, that's really good news. It's been a long time since I've heard something so optimistic out of his mouth. More than ten years ago, in 2003, he said we were facing a decade of deflation. His reasoning is that we've already deleveraged so much. I am inclined to agree with him for the US. Although I suppose that he could be wrong if rates rise because deleveraging will need to go further. But I still see potential issues in the rest of the world. 330% banking assets/global GDP in China. Eek.

The positive side is that the further along we get in this deleveraging, the less of it's drag there is ahead of us. What deleveraging? The US is, a little (total debt down from ~390% of GDP to 340%). But the world overall has added 30% to its debt load since 2007. Private sector debt carries higher financing costs than public sector debt. So you may scoff at 390% vs 340%, but I think the difference is more significant than that. Let's say you take a private citizen that was paying 6% interest on his personal debt, and you tell him instead that he only has to pay 3% interest if it is moved to the public sector. I am not scoffing at it - it is a very significant improvement. But I would point out that it is still far above the long run normal, so there will be a lot more deleveraging to come if rates return to their long run normal (and that will be hard given the rising cost of service in that situation). My bigger point though is the global figure. That, ultimately, is what Watsa is fretting about, as I understand it. I think he fears a *global* deleveraging focussed on China with all the deflation that entails.

That 10% is a massive assumption! What have corporations been doing in that time? Not investing and adding to productive capacity. Buying back shares and paying dividends perhaps but that doesn't add to IV. Growing profits, yes, but by expanding margins in ways that may or may not be sustainable (given the mean-reverting nature of this series). I find it very hard to get at how much value has genuinely been added in a world where the cost of capital is seriously distorted. I would not be surprised if IV has barely grown. 10% seems to me to be very aggressive, especially given that my understanding is that total returns from the market in the very long run (which presumably is roughly in line with IV added) have been about 7%, the biggest part of which is dividends which clearly don't add to IV once they are paid.

The positive side is that the further along we get in this deleveraging, the less of it's drag there is ahead of us. What deleveraging? The US is, a little (total debt down from ~390% of GDP to 340%). But the world overall has added 30% to its debt load since 2007.

Yes - but what *I* want to buy is Watsa's brain. Insurance is just the lever.

There's another aspect here, which is that debt bubbles/busts get worse the longer they go on. In other words, the longer Watsa is wrong, the more right he may eventually be. That said my personal opinion is that he was wrong to hedge in this way (rather than just buying puts) when the market was reasonably priced, which is what he did.

This is the part I agree with... ;D ;D ;D Gio Me too, especially having read Michael Pettis' latest book on China which is a big part of the Watsa deflation thesis.