petec

Gio great quotes...how good is the book overall?

Why would it be a positive to corporate profit? It implies lower costs but it also implies lower buying power. And anyway, in a competitive environment lower costs ought to get passed on.

Interesting. Also, as we all know, margins are high and mean-reverting for good reason. If I take current S&P revenues (i.e. if I assume they are not inflated by stimulus) and multiply by the long run average net margin and P/E multiple, I come out at a target index value of about 1,000. I'm not saying that's the right number, but it makes me nervous in the context of a) fiscal and monetary stimulus that must one day be withdrawn and b) staggering total debt loads that we know correlate with slower GDP growth.

Is this even true? It looks like the government debt went from 40% GDP to 110-120% during world war 2. 08-present, roughly 40% to 80%. There is also the ramp up in federal reserve holdings which might add another 10-15%. Combined it seems the current situation is very much comparable to back then. I don't understand the hyperbole, you can make a strong case without it. Yes, but in that time the private sector deleveraged hard: total debt / GDP actually fell during WW2. Taxes rose and the public were encouraged to put money into war bonds rather than to spend it. And the Fed monetised debt, but not as much. (And it is worth saying that production rose but it was largely things that got shipped abroad and blown up rather than things that created value.) So yes, I think it is fair to say that this is the most stimulated economy ever, and that particularly goes for the consumer. I'm currently reading David Stockman's The Great Deformation, which is very interesting on this topic and essentially argues that the US has been getting more stimulative fiscally and monetarily ever since it originally came off the gold standard.

I don't think you get a bonus point for oil as an inflation hedge because you need to continually reinvest to maintain production and inflation hits capex hard. Inflation hedges work when your revenues rise over an existing asset base, not one that needs replenishing. Other than that, A1 company in a C3 industry.

Parsad: +1.

Thanks :)

Is this a guess or have you done some sneaky maths? (Either is fine, just wondering!)

And/or: he's been saying a lot internally and not having an impact, because he was only one man. We just don't know and probably won't. +1 to the comment about investing in tech. I don't really get why FFH love these complex situations so much when there are occasionally 50c dollars lying on the ground in plain sight. If I have a criticism of them it is that they try to be too clever - which is especially odd since they seem to have learned this lesson when it comes to buying whole insurance businesses, and now focus on quality at reasonable valuations.

I am not a tech specialist at all, and I don't know BBRY at all, but there is a *tiny* voice in my head that says, "what if he's right"? I suspect Prem gets quite excited when everyone else can only see downside.

Also...is this total return or just share price?

1. Whatever rate of return you want, or expect on the next-best investment. I use 10% because over very long periods this beats the nominal return on the stock market. 2. 10%, because it is the rate of return I want. 3. Yes. It is called the equity risk premium. 4. I do. I try to discount at 10% using a conservative estimate of future cash flows. 5. DCF models have no flaws...it's the assumptions that go into them that have flaws. So make conservative assumptions, use a conservative discount rate, buy at a discount to the price that the DCF gives for intrinsic value, and you should have a good margin of safety. Just my methods - there are no right answers!

The Shiller PE may well have been above its LT average for nearly all of the last 22 years...but for nearly 15 of those years the market (SP 500) has barely gone up despite incredibly cheap money. To get an above average return (7% nominal without dividends) you have to go back to 1990 which is...23 years ago. So as far as I am concerned the Shiller PE retains its predictive power (simply stated, >average Shiller PE implies <average LT returns). This is not to say that it helps with market timing - I suspect nothing does.

This is very exciting, but...what are we actually capturing when we filter by # of board posts? Not the best ideas IMHO, but the ones that generate the most controversy and/or are the most complex. No surprise to see banks, tech stocks, insurers on the list! Clearly complexity and uncertainty can create great investment opportunities...but so can boredom and apathy. Can anyone think of a way of generating ideas from the posts here that *don't* attract a lot of attention?

I love the covers of the Coke reports :)

To me it is not about fundamentals any more. The market is pretty fully valued on fundamentals. Either things stay smooth and we advance into an equity bubble due to QE, or something disrupts and we get a wobble.

I had not thought of it in this way exactly but I do think that easy money generally is responsible for the softness of the insurance market. Easy money has boosted asset prices and book values which has made surviving cat losses easier, and has also funded a lot of new entrants which has depressed pricing. So yes, insurance and leveraged bonds have similarities in that they both likely provide low ROEs at the same time...but equally they are both likely to have a better performance in terms of cash flows and ROEs (but not mark to market book values) as monetary conditions tighten. I would not be surprised to see the mother of all hard markets at that point, whenever it is! Excellent discussion everyone, thanks.

I find it hard to believe that underwriting results won't be better all else equal than they have been in the past, since we (probably) have no under-reserved acquisitions to worry about. I also think it is slightly missing the point to say that the S&P has to drop 40% before the hedges breakeven. Clearly the hedges were a bad call (and I concur entirely on their nature vs the CDS bet) but they are marked to market and will protect BV *from here* if the market falls *from here*. (Correct me if I am wrong.) I think I am right in saying y/e BV in 1998 was $185 per share. They've only compounded BV at ~5% since then, but they are way ahead of the S&P, and are unlikely to repeat the TIG/C&F experience. Personally this is my biggest single positon at 17% and I think it offers me a good chance of market beating returns in the long run starting from 1xBV plus a very good hedge (equity hedges + deflation options + cash + reinvesting all this at the bottom) against another major crash. 20% a year? No, but I haven't the time (or skill!) to get that anyway so it is not a relevant benchmark.

I can't see how one can be anything other than bearish on bonds for the long term (and I think Prem has said as much) but I agree with jay21 that he's taken a deflation position. He owns bonds and he runs an insurance business that logically should see combined ratios rise in a deflationary period, so I have never quite understood why the deflation hedges are necessary to 'protect the business' as Prem has described them. That said he bought them cheap so I actually regard them as a good investment either way.

Catlin is an insurer - is it really valid to value an insurer on a net-net basis? Camellia looks interesting though - will read the AR and revert tomorrow :)

FFH 17% BRK 6% KO 5% BEG LN, ULVR, JNJ 4% each 3M, DGE, PEP, MSFT 3% each LRE, OAK 2% each PG, KFT 1% each Various funds 16% Cash 26%

Packer I'm in total agreement re interest rates. And if you are arguing that the influx of communist workers into the global market and massive advances in IT have curbed inflation and kept inflation low, thus boosting asset prices, then I agree with that too (although that is not how I read your earlier posts). What interests me however is that that period has been truly unique - unless you think there is another huge pool of workers set to enter the workforce. The ending of a period of supernormal productivity growth combined with the beginning of an era of money printing? That spells lower multiples to me. What I have no handle on is the timing.

1) I don't think this holds - capitalism also creates a lot more investment opportunities so you do not have more wealth chasing fewer opportunities. I could even argue that creative destruction ought to lower multiples, all else equal. 2) Bubbles do more than destroy paper capital! They totally wipe out the leveraged, have a massive impact on multiples, destroy physical capital through lack of maintenance in a recession (you think all those subprime homes are in the same state now that they were 6 years ago?) and curb investment in R&D. 3) That said I do take your general point that wars and communism may have distorted historic average multiples. I'd just counter that other things, e.g. monetary policy, are highly likely distorting multiples today. The bottom line is that margins and multiples revert for reasons related to competition and required returns and that hasn't changed. Pete

A couple of thoughts. First, two world wars destroyed a lot of capital but also created a lot of activity (building war machines and rebuilding countries). I wonder - and I have no idea how to measure this, but I do wonder - whether they destroyed more capital, net, than the various asset bubble-crashes that killed levered investors: Japan, interweb, subprime, etc. To put it more simply, the market's ability to destroy capital is powerful and undimmed. Secondly, is the developing world really saving in the non-developing world? Most emerging markets that I know of, especially China, have huge fixed investment numbers. I think that what drove asset prices up had more to do with lots of workers entering the global workforce (hence inflation down and asset prices up) than emerging market wealth flooding into the developed world. The more pertinent now question is: how much of the investment we see, whether in non-developing world financial assets or in developing world fixed assets, is a) levered and b) priced to provide a decent return? My guess is a) lots and b) not much and that, eventually, will determine asset prices. Pete

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.