petec

1000% in Prem's camp. We're seeing a once in a lifetime commodity boom caused by two decades of underinvestment ending just as China went into infrastructure overdrive (and absurdly cheap money). Supply is coming, innovation is coming, substitution is coming, and efficiency is coming. Some commodities may be approaching serious scarcity but not the whole lot.

I'm certainly nervous and cash has been rising. But this sea of liquidity could equally lead to an equity bubble. No point trying to call it either way IMHO!

I would expect Prem, when he says 4.55%, to be talking about the yield to maturity not the running yield. No proof, but that's what I would assume. Is it too hard to imagine that these bonds are trading at par?

Also, they may not be able to sell some of them - Prem implies on the call that some of these bonds are now highly illiquid. In fairness, he always said he'd be very happy to hold them to maturity.

Yeah I don't really see why the entrepreneur is 'romantic'. He's just got a very clear understanding that if you have a 75% chance of zero profit, odds are you won't make much!

I think it depends on how much time you're going to invest. I have most of my money in high quality stocks where I think the long term return (FCF yield + 3% inflation + real growth) is likely to be >10%. I broadly regard that portfolio as having very low operational risk but also as not being particularly undervalued, so I do try to hedge out tail risks that would severely affect valuations of very high quality operations. If I wanted to dedicate more time, I would edge towards undervalued situations with 2-3x in 2-3y potential, but I don't because my current focus needs to be on the day job! I do keep a cash pot aside for the occasional just-too-cheap stock though :) It's what makes investing fun.

I've met various Coke bottlers over the years and when their costs rise they can't pass it all on straight away without seeing volumes decline. They *may* be able to if salaries are rising as fast as costs, but basically it is a discretionary item at the margin. That said, I still think in the long run it is one of the best inflation *businesses*. In the short run the *stock* will get crucified as multiples collapse. Disclosure: long KO and most of its peers, likely for life.

+1

Agreed on the 10-15 year front. I just keep buying slowly at reasonable multiples of BV and I'm fairly sure things will work out OK. I hope so - it's 19% of my book ;)

On V and MC, I've always worried that they are ripe for regulation. This is a near-duopoly that charges a toll fee for a basic everyday necessity/an undifferentiated service, without the consumer even being aware of being charged. That's virtually the definition of a utility. (Most of the fee money goes to the banks, which use it to subsidise points and cashback offers for high-end customers, which is even less justifiable.) If you destroyed this system, and instituted a regulated fee that covered the cost of running the system, you'd cut most retail prices by 1-2% immediately, no? If not they are great companies, but I think there is a non-negligible risk that regulation or competition get them in the end.

Possibly *because* of home alarm companies ;) I'd perhaps controversially add 3M. The more I study them the more I think the years of materials knowledge they have accumulated adds up to a wide moat. They do have to keep innovating, but I think they will, and they generate a lot of cash. I'd love to buy that in a real crash.

I think this is a key question actually. *If management becomes weak* are the key words, in other words if something goes wrong with the culture so that either a) the businesses are not being so well run or b) the capital they generate is not being well allocated, it is important to know that the conglomerate can be dismantled.

I managed $345...amazing how annoying it is to have missed the lows ;)

Remind me, does HW control the investments at ICICI Lombard? I think not?

Interesting on small caps - it bothers me that the SP500 is on a long term average PE despite all time high margins...but it bothers me even more that the Russell 2000 is on 22x fwd.

I'd argue there's a big moral difference as well: a country's assets are heritable, so forcing a sale means later generations pay for the mistakes of the current one. Not so for companies, which simply die if the current generation screw up. If the debt is actually secured by a specific island/asset, fine. If not, default rightly penalises the capital providers for having done poor due diligence in lending to a profligate state without insisting on asset-backing.

Hi Packer. Do you have data supporting that logic? Because I'm not sure: OK labour costs ought to be lower now, but in a competitive world that means prices should be lower, not margins higher. Also, in a world where a big segment of the population was hors de combat as it were, demand and therefore revenues must also have been below potential. I think it is far more likely that margins are being supported by low interest rates, low effective taxes, and vast government spending during a time of aggressive cost cutting. All of which are temporary. I think Montier's work shows the impact of government spending on margins very effectively. Another way to think about it. If we agree that competition will cause returns on equity to trend towards the cost of equity, then the only ways that margins can rise permanently are: 1. Investors permanently raise their RoE requirements. Possible, but why? 2. One of the other components of RoE falls permanently, necessitating higher margins to get to the same RoE. Using Dupont, these components are asset turns and gearing. I see no reason why one of these should have fallen permanently. 3. A higher proportion of companies have a strong moat. Automating your plant won't raise your margins if everyone else can do it. Only moats can sustain returns above the cost of capital. In this world of ever-acccelerating technology, I'm inclined to think moats are getting harder to build, not easier. Personally I think we have lived through a period of anomalously cheap credit and therefore anomalously high demand, which is currently being sustained by high government spending. That's probably not sustainable and so returns (margins) will fall; if it is sustainable, then companies will develop the confidence to invest in more capacity and then returns (margins) will fall. When this happens, I have no idea. Just my tuppence.

Packer, what constraining factors? Over the long run the only constraining factor ought to be required returns on equity. Unless more companies have a sustainable competitive advantage than used to be the case, returns on equity (and therefore, all else equal, margins) ought to be mean reverting as excess returns get competed away. On a related note, has anyone seen data for margins relative to history by sector, rather than for the whole S&P/market?

txitxo, interesting post and intuitively right, imho. But you write as though this is is a public, or at least numeric, indicator, rather than a subjective one. Is it, or have I misread you? Would be very interested to know how you calculate it and what companies of this sort you see out there now.

Sculpin, shhhh! All this positivity makes me bearish! TariqAli, I can't remember the exact source - will try to dig it out - but it was a sell-side broker. (Should I be shot for talking to them? At least it wasn't Tilson...)

Another here, though not a charterholder as I never bothered joining. The exams were enough penance for me ;)

Associated gas is ~14% of production so I am not sure it is as significant as some say. What's more important is that the number of wells drilled per rig has risen a lot as operators have gotten better rigs and figured out how to use them better. Even so, I agree with the thrust of the article. By thw way, does anyone know what this sentence refers to? "A national fueling system is near completion with locations along the major interstate arteries." I am aware that some locations have been built but this makes it sound like a major, co-ordinated effort.

Is C&F that bad? Annual meeting slides that I saved suggest it has a 2002-2010 average combined ratio of 99.8% and average annual reserve redundancies 8.9%. Accident year triangles suggest that pre-2001 it was reserved poorly but since then has done well in hard markets but and only moderately poorly in soft ones. Is that not better than average in a non-niche insurance business? I'm happy to be corrected as I am fairly new at analysing insurers, but I am broadly in the camp that thinks FFH as a whole is an improving underwriter but that this has been hidden by unfavourable developments on old policies. I think the next decade is likely better, especially because they're buying better stuff, and in a hard market they'll make hay.

Grenville, sounded like 'biography of a bank' to me: http://www.amazon.com/The-Story-Bank-America-Biography/dp/1587981459

Would be interesting to get more data on this - I based the comment partly on a comment, I think from Markel, that the great depression was a great period for underwriting.