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racemize

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    Munger interview WSJ 4/17/20

    in General Discussion

    Posted

    https://www.bloomberg.com/news/articles/2020-04-23/private-equity-to-get-squeezed-out-of-another-stimulus-program

    Sounds like all these “sophisticated” PE investors now want some assistance from the government. Here’s a gem:

    Privately, the industry complains that the Fed’s leverage limits are taking aim at a practice that the central bank itself has encouraged through its own monetary policy. Since the 2008 economic crisis, interest rates have remained low and are currently at zero -- a decision that has encouraged borrowing by corporations of all sizes.

    Oh, why did the Fed make us take on too much leverage over the past decade! Who knew that leverage can be a bad thing!

    Let’s see who makes it out of this stronger—PE with high leverage or BRK with cash on hand...

    just as a data point, BX just said they took no money from the government, don't plan to, and have ample reserves to support their companies.

    just as a data point, the largest 19 US banks 'returned' almost $80B to shareholders between the third quarter of 2007, when some felt trouble was being contained,  through the accelerating phase of 2008. Interesting to note that the $80B (and more) was 'returned' to banks as part of a plan labelled, as typically is in those cases, with capital letters.

    The banks are much better capitalized at this point and the present environment, by itself, has little 'predictive' power but this is only to say that it may be risky to assess risk from the point of view of actors (like private equity) who tend to act pro-cyclically and to be lagging indicators.

     

    BX has > $100 billion in available dry powder.

     

    edit: anyway, you guys have helped me decide to continue not to post here.  Carry on!

    Munger interview WSJ 4/17/20

    in General Discussion

    Posted

    https://www.bloomberg.com/news/articles/2020-04-23/private-equity-to-get-squeezed-out-of-another-stimulus-program

     

    Sounds like all these “sophisticated” PE investors now want some assistance from the government. Here’s a gem:

     

    Privately, the industry complains that the Fed’s leverage limits are taking aim at a practice that the central bank itself has encouraged through its own monetary policy. Since the 2008 economic crisis, interest rates have remained low and are currently at zero -- a decision that has encouraged borrowing by corporations of all sizes.

     

    Oh, why did the Fed make us take on too much leverage over the past decade! Who knew that leverage can be a bad thing!

     

    Let’s see who makes it out of this stronger—PE with high leverage or BRK with cash on hand...

     

    just as a data point, BX just said they took no money from the government, don't plan to, and have ample reserves to support their companies.

    FFH AGM 2020

    in Fairfax Financial

    Posted

    Found it funny when Prem lost track of his thought as he was answering the question about deflation hedges. Reminds me of my dad, who likes to speak in public gathering and doesn't really listen to the question. :-)

     

    He's also hard of hearing, so he often just never heard the question right.

    Fairfax2019

    in Fairfax Financial

    Posted

    When you look at Fairfax over the past year they have been very busy (and many of their equity holdings havealso been very busy). In aggreggate it is clear that the company is worth more today than it was 12 months ago. I think Faifax is better positioned today than at any time in the past 7-8 years to grow BV. As they continue to execute we will get growth in BV and a higher PE multiple which will be very nice for shareholders.

     

    It is also interesting to look at Fairfax’s year end closing share price (from 2018 AR):

    2014 = $608.78 CAD

    2015 = $656.91

    2016 = $648.50

    2017 = $669.34

    2018 = $600.98

    2019 = $608.19 (Dec 24)

     

    Thanks. The price history at close for past 5 years that you shared, suggests if one was holding since Dec 2014, annual return has been about 2%/yr (from dividends) in generally a bull market. Wow! Will take a substantial run up in price to justify for those of us who have held.

     

    Looking in the rear view mirror is important. Why has the stock price gone sideways for 5 years?

    1.) what errors were made?

    2.) has the company learned the lessons?

     

    The much more important number for me is $608.19 (Dec 24 stock price).

    3.) What will the company do moving forward?

     

    The shares currently trade below book value (cheap compared to other insurance companies).

    - Their insurance businesses are performing well and look to be in a hardening market; this is a big positive.

    - their bond portfolio is positioned well (short end of curve) should rates continue to move higher

    - their equity portfolio looks well positioned as we enter 2020 should we see economic growth continue to chug along

     

    And sentiment towards the company is terrible.

     

    This is not to suggest the company is perfect; it is not. I think the company has learned some valuable lessons. However, on balance, i like the decisions the company has made the past 2 years. More importantly, the company (and its equity holdings) is doing lots of things to drive shareholder value in 2020 and beyond. Q4 results should be solid. I like the risk reward at current prices.

     

    +1 to this post.

     

    A couple of add-ons:

    1) It is annoying that they have USD BVPS, but Canadian stock price, as it doesn't let you compare them that directly.  Anyway, 2014 was something like $530 USD share price, on a book value of 394.83, which is a P/B of 1.35 vs $460 USD/462 BVPS (unadjusted) of basically 1.  So value creation was more like 3.4%+2% div = 5.4% CAGR.  Obviously still not a great result, but that tells you more about how they did as a company than the stock price does.  I think Q4 will make this look a bit better too, with the recent sales, depending on cats.

     

    2) Let's compare to Markel that has much better sentiment (although last year didn't help them much).  2014 YE bvps was 543.96, price was $687 (P/B was 1.26).  Current is BVPS of $768, and price of $1,123 (P/B of 1.46).  Value creation (again using BVPS) was 7.5% CAGR. 

     

    So Fairfax underperformed Markel by 2.1% per annum on BVPS+div, even though the price change was quite a bit different. 

     

    3) Continuing this Markel comparison, if you go back and look at combined ratios of the two companies, FFH is pretty close to Markel.

    Markel Combined ratios, 2014 to current: 95%, 89%, 92%, 105%, 98%, 95%; average: 95.7%

    FFH Combined ratios, 2014 to current: 90.8%, 89.9%, 92.5%, 106.6%, 97.3%, 97.1%, average: 95.7%

     

    Thinking about the above, it seems quite clear to me that FFH is undervalued and/or MKL is overvalued.  I tend to think the former, but a mix is possible.

    New Essay: Price and Value

    in General Discussion

    Posted

    Nice essay.  Are your changes intrinsic value based upon changes in BV plus dividends or is there some modification for situations above BV?

     

    Packer

     

    Hi Packer, the proxy for IV changes depend on the company in question.  For Berkshire, I used Book value and also added 1% per year to make up for IV changing from 1->1.7 over the entire time period (per Buffett's comments this year).  For KO/S&P I used earnings.  For Giverny, I used his internal OE projections.  (Dividends are added in all cases)

     

    Thanks.  So for KO what did you use as your base value for IV?  I am assuming book value would have some issues due to buybacks & earnings above the WACC.

     

    Packer

     

    Ah, I see.  I didn't have any base value, so there's no explicit calculation of an "IV".  There is only a proxy for the change in IV, compared to change in price, so in both cases the base price and the base IV are not considered, nor is there any consideration for the gap between price and IV. 

     

     

    So, in the case of KO, I started with the first year's price and the first year's earnings, then compared annual growth of price+div and earnings+div from that start point.

    New Essay: Price and Value

    in General Discussion

    Posted

    Nice analysis.

     

    I think that on reading it, I was at times a little unsure whether high was good or low was good, and indeed they could both be good.

     

    Well, I was looking for convergence, so neither high nor low is "good" per se.  That being said, the formula was price growth - IV growth, so most investors would want it to be positive (i.e., that the price went up more than value did)

     

     

    For example, say you buy XYZ Corp with $5 owner earnings per share per year, and you pay $70 thinking it's 30% undervalued and has an IV of $100 in 2019.

    In year 2021, maybe it has distributed $3 a year in dividends and grown owner earnings to $6 a year, a 20% increase and you now think its IV is $120 in 2021 (a 20% increase). This is a good performance having retained less than half of owner earnings to reinvest in the business.

     

    Scenario 1:

    If its price is $77 in 2021 it is going to be more undervalued (having risen 10% versus a 20% increase in IV), is your metric of convergence of price and value going to be positive or negative. My instinct says negative. In this scenario a value investor could use the opportunity of widening gap between price and IV to add more capital to the position.

     

    it would be negative in terms of the value that would be reported (price growth - IV growth).  This has nothing to do with whether that is a good outcome to the investor.  If the company is buying back shares or you are buying more shares, a wider discount is better for you.  It's an entirely different scenario if you are retiring and want to sell though.

     

     

    Scenario 2:

    If its price has risen to $96 in 2021 (a 37% rise versus a 20% rise in IV), it's then only 20% undervalued so price and value have converged. My instinct says convergence should be positive. In this scenario a value investor could optionally take advantage of the narrowing gap to IV to selling the company to buy something else that is more deeply undervalued, or she could stick to this company despite the narrowing gap because it has grown owner earnings by 20% in 2 years despite paying out over 50% of owner earnings as a dividend, demonstrating a good return on incremental invested capital at least over that short period.

     

    The value would be positive because over that time period price growth was higher than IV growth.  Same explanation as above as to whether it is good or bad for the investor.

    New Essay: Price and Value

    in General Discussion

    Posted

    Nice essay.  Are your changes intrinsic value based upon changes in BV plus dividends or is there some modification for situations above BV?

     

    Packer

     

    Hi Packer, the proxy for IV changes depend on the company in question.  For Berkshire, I used Book value and also added 1% per year to make up for IV changing from 1->1.7 over the entire time period (per Buffett's comments this year).  For KO/S&P I used earnings.  For Giverny, I used his internal OE projections.  (Dividends are added in all cases)

    KO annual history of earnings, dividends, and prices

    in General Discussion

    Posted

    Hi All, I'm working on an essay for calculating how it takes for price and value to converge, so far I've done it for the S&P back to 1871 and Berkshire since Buffett.  I thought another good one would be Coca Cola, but I am having trouble finding the data.  I need annual price, annual earnings, and annual dividends, ideally back to the early 20th century.  Does anyone have it or know where to get it?

     

    Warmly,

    Joel

    First Million

    in General Discussion

    Posted

    I hit that about the same time.  $2 million five years later.

     

    Nice, man. So what's stopping you from running your fund full time? Still doing that, right?

     

    I work a couple days a week now, and it doesn’t feel stressful anymore. I’m going to coast here for a while I think.  Fund is at $7 million and needs to get to $15 before it works as a business really.

    Fairfax2019

    in Fairfax Financial

    Posted

    I don't like the fees, which is why I haven't owned it previously, but the high water mark should ensure I have plenty of upside in the near-to-midterm without paying much for it.

     

    It's also a PFIC, which sucks for U.S. investors.

    Essay - Building Social Wealth

    in General Discussion

    Posted

    The essay has some nice aspirational goals.

     

    Couple thoughts though:

     

    If you ever think you may

    have encountered this person, you are going to probe and probe and test and test to

    make sure that they are real, that you’re not being fooled. And the paradox is that it

    looks like you’re probing for weakness, but you’re not. You’re probing for strength. And

    the worst day of your life is if instead of strength you get back weakness. And now you

    feel betrayed. You know why? You’ve got to start your search all over again.

     

    Maybe I should talk to Peter about what he meant, but IMO this is quite bad way to approach relationships with people.

    Nobody in the world is a saint who is

    trustworthy, ... principled, and courageous, and competent, and kind, and loyal, and understanding, and forgiving, and unselfish
    all the time.

    So if your attitude is to probe and probe and probe, you will hit a bad day or bad spot or whatever and become upset and disillusioned with the person.

    Instead, if you see that a person embodies a lot of qualities you are looking for, then you should accept that sometimes they won't. And ideally you'll be able to be with them at these times and perhaps help them to become a better person. And not just abandon them and go looking for some ideal that does not exist.

     

    Prune the takers, keep the matchers, and cultivate the givers.

     

    Just be aware that (commonly?) a lot of people are already hanging onto the givers. Can you support the giver?

     

    Another note is that the taker/matcher/giver categorization is incredibly simplified. There are people who are great givers within certain area of their life but not in other(s). There are people who are givers for some people but are indiferent-sers for others. And there's the perception issue too: what someone regards as giving another person may regard as nothing (I find the whole taker/matcher/giver categorization extremely limiting  8))

     

    Peace.

     

    I don’t think Peter is saying that is how you should act, he’s saying that is how people feel or do act most of the time.  His perspective is to be that person you want, not be the wanter.

     

    On the categorization—it can be as nuanced as you want, and I’m sure everyone views things differently. So, it’s fine for that categorization to be unique for each person or relationship I’d say. I know lots of people who accidentally surround themselves with people who take all the time and don’t give back, so that’s mostly for them.

     

    For supporting the giver, if you are doing what Peter recommends, then you would also be giving back.

    Looking for a quote

    in Berkshire Hathaway

    Posted

    I think it is this one, but those two are good too:

     

    "The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time." -Munger

    Looking for a quote

    in Berkshire Hathaway

    Posted

    I'm trying to find a quote that I think Buffett or Munger have said.  It goes something like:

     

    "We have generally found that a good relationship tends to consistently surprise on the upside whereas a bad relationship consistently produces problems."

     

    Anyone know it?

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