Hielko

What the correct answer is depends on your return expectations of the underlying assets. If you would for example expect a 10% return a 25% discount would be fair since a 2.5% expense ratio would eat up 25% of the return. I think that in the current environment expecting 10%/year is kinda optimistic, so I would say that it should have a discount of at least 25%. But probably not a whole lot more, because if they buy back 5% of shares back a year with a 25% discount they will be generating 1.25% in NAV growth (effectively reducing the expense ratio by 50%). You will probably do alright if you buy a fund like this at a 30%+ discount.

I don't target a certain size, but do often find myself investing in (very) small companies. The amount of money that I manage is relative small so low liquidity isn't an issue, and the biggest reason is that's simply often just way more obvious that a certain company is undervalued. For bigger companies you often have to answer difficult questions about their competitive advantage and the industry dynamics. The analysis required to conclude that a profitable company that's trading for less than NCAV is cheap is a whole lot easier.

Welcome to the board! Just wondering, since you describe yourself as "not much of an "online guy", what made you join?

For you: http://www.forbes.com/sites/chrisbarth/2011/09/26/new-study-old-news-stock-traders-are-psychopaths/

I'm sorry I don't understand your point - but I've heard similar things from many people smarter than me so there must be something there. My naieve thinking is that, if over the course of one's life one's standard of living will be paid for 90%+ in USD (living in the US, buying services in the US, etc.), wouldn't one want to be very concentrated in USD? I've spent 10 or 20k euros in my life, a couple 100k yen, a handful of pounds, loonies, kroners, francs, and some Afghanis. And waaaay more USD. Figure my currency concentration should match the spend profile. Just because you are using USD to pay doesn't mean that those costs are true USD liabilities. If the oil price remains constant in euro's but the dollar loses value compared to the euro the cost of putting fuel in your car goes up if you are living in the USA. That you are paying these costs in USD doesn't really matter. Same king of logic applies to a lot of products. So many things use inputs from global markets. You could for example probably see having some renminbi exposure as a hedge against increasing electronic prices.

I don't see it as a risk. When you hedge your foreign currency exposure you are basically betting it all on your domestic currency. Is that smart? I think it's preferable to be diversified in your currency holdings.

One aspect that I'm missing a bit in this discussion a bit is that the amount of concentration should imo for a large part be a function of the idiosyncratic risk in a certain investment. You could have an awesome investment that still has a 50% probability of going to zero. Wouldn't make sense to put all your money in your best idea, if this is your best idea, no matter how big the upside. If you have on the other hand a super solid and safe business it might make sense to put a lot of money in it even though it's going to return a lot less on average than the business with binary outcomes. I personally buy a lot of ugly businesses where the market does have some questions about the future of the industry. While I all think that they are a a good bets I think it would be a terrible idea from a risk management perspective to take an outsized position. They are not all going to work out. If someone on the other hand would be willing to sell me BRK tomorrow for $50/share I would probably buy as much as I could. But there are very few companies where I would be willing to bet it all on, and when BRK would actually trade for $50/share there probably is a decent reason/risk to not bet it all...

To calculate a CAGR you should multiply the returns for every year and take the result to the power of 1/8. Otherwise you will be overstating the CAGR if you don't have identical returns every year.

Think my IRR is around 14% since starting investing in individual stocks since 2H2010. Depends on what you want to calculate how hard it is. If you just want to figure out your IRR you could calculate it based on just the timing of your cash in- and outflows (assuming that's also in your list of transactions). Anything more complicated is probably going to require a complicated excel sheet and lots of manual editing for dividends/splits/delistings...

Up ~20% this year. Think I would describe my portfolio as something between quite diversified and concentrated. I don't have positions that make up 20%+ of my portfolio, but with around 20/30 positions every single position could impact returns in a meaningful way. The biggest contributor to my performance was SALM (+100%), think Packer16 recognizes the name ;)

I hope WB follows this path!

I'm currently reading "The Prize: The Epic Quest for Oil, Money & Power": So far it's quite good and interesting, certainly would recommend it!

@MrB: Let me make it clear first that I haven't really looked at the financials of WDC, nor do I exactly know how big the enterprise market is compared to the consumer market, and how much hdd's will be used in cloud based storage. But one prediction that I do want to make: the relative number of hdd's (or gb's provided by hdd's) for consumer applications is probably insignificant in the year 2020 compared to the percentages today. The combination of consumers moving increasingly towards mobile hardware, and a superior product that is exponentially getting cheaper is really strong. I also wouldn't put much weight in the paper about the bleak future for ssd's. There is almost always some kind of big issue that could become a problem some number of years down road in tech: so far these kind of problems are always solved. I also think that the fact that sdd's are technically more related to regular computer memory and processors is a plus. Some of the multibillion dollars of R&D that is done in those industries will provide a tailwind for the technological advancements in flash memory as well.

You wouldn't have a problem if someone puts the stock to you before expiration: you still have your own puts with a lower strike price to protect you in case the stock drops below 75. The odds of early exercise for put options is by the way low: it only makes sense when the option is deep in the money, and the lower the interest rate the lower the possible advantage of exercising early.

Most likely! And a nice public advertisement to any other large blocks of stock who now know they can lock in a 15% rate on a lifetime's worth of appreciation at 13x,000/share with a call to Omaha. I hope there are more in the next few weeks. this is a one off imo. in fact the media is going to roast buffett for doing this to help a friend avoid paying higher taxes. he doesn't want to buy back a lot of stock at these levels. this is a token amount. The optics don't look particularly good, but at the same time, if he can't find better investments than his own company, then you can't fault him. I just think the timing wasn't great. He could have bought the same 9,200 shares on the market for less...no reporting, nothing. The fact that there is tax savings for a long-time investor, after Buffett so adamantly stated that taxes for the super-rich should rise, is kind of hypocritical. Cheers! I almost never disagree with you Parsad. With this I do. It is highly unlikely Warren could have purchased 9000 a shares at a lower price. This is one months volume for the A shares. The optics are fine he is signalling to the mkt he thinks his company is cheap so cheap he is willing to retire shares. I think every one wins here. Even the Warren haters because they can now say he is a hipocite. LOL Sure he could have. Take a look at the NYSE chart for BRK-A in the last month. Thousands and thousands of shares traded below $132K: http://www.nyse.com/about/listed/lcddata.html?ticker=brka&fq=D&ezd=1M&index=3 Also, the economic interest is the same whether he buys A's or B's. He could have bought hundreds of thousands of B's in the open market for less than the equivalent of $89 each, retiring tons of shares in the process. I almost never disagree with Buffett...this time I think he was doing a shareholder a favor, as well as other remaining shareholders, and the optics and timing weren't appropriate relative to his comments about taxation. Cheers! Just because shares traded below that value doesn't mean that WB would have been able to buy them at that price. Before he could execute transactions on the public market he would have to communicate the change in the buy back policy, just as BRK did yesterday, and shares almost directly jumped to a higher level. That goes back to what I said earlier that the buyback policy was silly to begin with, because it set the floor and also set the fact they would have to publically declare any changes in the policy. I know Buffett doesn't want to take advantage of any shareholders, but he is doing exactly that when he's buying large investments in public companies at discount prices...why should Berkshire be any different. If shareholders sell, then Berkshire should be able to buy stock at the right price on the open market without having to worry. For God's sake, the man's done enough over the years to enlighten his shareholder base. There's not much more he can do. It would also prevent situations like this were the optics become fuzzy because of his political views as well. Cheers! I kinda agree with you that the buyback policy is a bit silly, but on the other hand: it's never easy. If you have a discretionary program it's often difficult to buy stock back since then you have to worry about blackout periods, and if you have an automated program you can't stop and resume it without communicating this to the market (creating basically the same problem). PS If you are against naked short selling: you should have lended out your shares in Fairfax or Overstock! Naked short selling is the act of selling a security short without borrowing it first!

HDD's are not going away, but I think you are completely wrong about where flash is going to compete. It's going to be a threat on every front since it's a superior product in almost every single way except price/GB, and that statistic is improving exponentially fast. Almost every decent laptop today is sold with an ssd. With ssd's getting cheaper and cheaper I don't think it's going to take long before hdd's are a thing of the past for notebooks. Not only do you have the speed advantage, but the size and power consumption advantage is huge for mobile devices. And this trend is combined with the trend of people using more and more mobile devices (laptops, but also tablets and smartphones). So I think there is a powerful force at work that is going to make hdd's a thing of the past for a large number of consumers. For desktop pc's I think hdd's will remain relevant a bit longer, but you also see here that they are getting demoted to a secondary role: part of their job is replaced by a small sdd as a boot disk, or some kind of hybrid solution (a nice example is the latest iMac). And don't underestimate how fast the ssd market is developing. Three years ago I was probably one of the first to buy an ssd for my desktop-pc: that cost me ~E2.4/GB. Today you buy a faster model for ~E0.6/GB. Looking at some historical prices for hdd's: it seems that some models today are even more expensive than three years ago. That's obviously good for the profit margins of WDC and other hdd manufactures today: but that's not a situation that can last.

Most likely! And a nice public advertisement to any other large blocks of stock who now know they can lock in a 15% rate on a lifetime's worth of appreciation at 13x,000/share with a call to Omaha. I hope there are more in the next few weeks. this is a one off imo. in fact the media is going to roast buffett for doing this to help a friend avoid paying higher taxes. he doesn't want to buy back a lot of stock at these levels. this is a token amount. The optics don't look particularly good, but at the same time, if he can't find better investments than his own company, then you can't fault him. I just think the timing wasn't great. He could have bought the same 9,200 shares on the market for less...no reporting, nothing. The fact that there is tax savings for a long-time investor, after Buffett so adamantly stated that taxes for the super-rich should rise, is kind of hypocritical. Cheers! I almost never disagree with you Parsad. With this I do. It is highly unlikely Warren could have purchased 9000 a shares at a lower price. This is one months volume for the A shares. The optics are fine he is signalling to the mkt he thinks his company is cheap so cheap he is willing to retire shares. I think every one wins here. Even the Warren haters because they can now say he is a hipocite. LOL Sure he could have. Take a look at the NYSE chart for BRK-A in the last month. Thousands and thousands of shares traded below $132K: http://www.nyse.com/about/listed/lcddata.html?ticker=brka&fq=D&ezd=1M&index=3 Also, the economic interest is the same whether he buys A's or B's. He could have bought hundreds of thousands of B's in the open market for less than the equivalent of $89 each, retiring tons of shares in the process. I almost never disagree with Buffett...this time I think he was doing a shareholder a favor, as well as other remaining shareholders, and the optics and timing weren't appropriate relative to his comments about taxation. Cheers! Just because shares traded below that value doesn't mean that WB would have been able to buy them at that price. Before he could execute transactions on the public market he would have to communicate the change in the buy back policy, just as BRK did yesterday, and shares almost directly jumped to a higher level.

Had the same thought... but I like this news :)

I appreciate your comments Packer. I understand your position w.r.t. how hard it is to value the LE's. And if the returns on this investment would be bad if the LE would not be 4.7 (management assumption) but 5.3 (2008 CDC tables) I would absolutely not invest. But I think that even if the average LE would not be 5.3 years, but for example 8.3 years (adding 3 full years to the LE based on the CDC tables!) returns are still going to be alright. And no matter how healthy you are living when you are 89 years old: it's not going to add 3 full years to your LE. You don't have to be a medical expert for that prediction. Sloppy valuation based on a 8.3 year LE: 8.3 years * ($8.4M premiums + 1$M fund overhead) = $78M face value policies: $165M future value: 165-78 = $87M present value 5% discount rate: 87/(1.05^8.3)=$58M per share in pence: (58/72)*0.6236=> 50.2p/share current share price: 47.2p I would consider getting a >5% return on an investment that has almost no systematic risk pretty decent, and adding 3 full years to the LE based on the CDC tables is more than generous. And there is obviously a lot of upside if LE's are closer to the CDC tables. I think the reason is mostly related to the age of the insured group. Positive improvements in LE have mostly been made at lower ages. The 2008 tables give a 4.8 year LE when you are 89 year old while the 2004 tables gave a 5.3 year LE, and the 2000 tables gave a 5.0 LE. So at this age there isn't really a positive trend. I get what you are saying, but wouldn't it be really weird to have a negative NPV policy in the pool at this point in time? If a policy has a negative value today it would have been massively minus NPV 6 years ago. It's not like they bought viatical policies where medical developments can radially improve LE's (and thus change the NPV in a big way).

FYI: the latest annual report: http://www.fundtoolkit.com/FundPages/RCM/Documents/ReportandAccounts/TLI_Annual30.06.12.pdf What I would look at is the table showing policy maturities and premiums paid. Cash flow is lagging a bit because policies are not immediately paid. Interest expense is not really relevant anymore since TLI is now basically debt free, and cash flow positive. See for management fees note 5 of the annual report. Fee is 0.4% of NAV + costs (I assumed ~$1M in total expenses/year). You really need to look forward here, and not too much at the past since the average age of the portfolio is going up, LE's are going down, and premium payments should also go down with more and more investments reaching 'maturity'. And the past also contains an expensive currency hedge, interest costs and a rights offering that diluted NAV/share. They also provide a portfolio LE based on a no underwriting assumption (simply using the 2008 tables). I'm also not particularly comfortablewith the shorter LEs - I have used the 2008 curves in my valuation - but at the same time I don't think there is a particular reason to distrust the fund manager. They have used a third party to update the LE's of 66% of the portfolio since 2011 on a policy by policy basis, and there isn't a particular big incentive for them to cheat here since the fund is in liquidation mode and policies are hold till maturity (sold a few earlier this year to tackle the debt). Why do you think that there are low/negative NPV policies in the portfolio? Shouldn't it be that the older the portfolio the lower the probability that a policy has a negative NPV? The average LE is going down, so the # of premium payments needed before maturity are also going down while the face value of the policy remains constant. So NPV should go up in time. They have updated a significant amount of policies since 2011, but not yet everything. That's why they also provide a +10% and +20% LE for policies that have no recent assessment. The +10% adjustment is in line with the adjustments made to policies that have been reassessed recently.

Packer, They are certainly not CF negative. They build up debt because initially premiums paid > face value of the policies collected (and they had an expensive GBP/USD hedge, now cancelled). Because their lender wasn't particularly flexible they had to pay back their debt, and they sold some policies earlier this year and they did a rights issue to raise cash. Liquidity isn't an issue anymore. They have no debt now, and they have a loan facility for 3 years of premium payments, and for the past 4 years face value of policies collected > premiums paid. This can only get better with the average age going up. I don't think you need a good inside look to get comfortable with the modelling assumptions in the NAV calcs: you can simply do your own modelling based on the CDC life tables. Again: the higher the age, the less uncertainty there is. Check figure 1 in this report: http://www.cdc.gov/nchs/data/lifetables/life89_1_3.pdf The probability of dying when you are old hasn't changed a lot the past 100 years. Positive changes in LE's are mostly made at a younger age. You can also check the LE for 89 years old in the life tables for the past decade. You see that there is absolutely no positive trend there! You probably do have some negative self selection bias in the sample here, since the insured group is wealthy, and wealthy people life longer than the average. But at the same time when you get the complete group of 89 years olds you have to figure that a big part of the survivors are already part of the wealthy group that had a higher than average LE, so this should not impact the LE of people that are 89 year old and wealthy in a significant way compared to the 89 year old and not necessarily wealthy group. And we do have a huge margin of safety here. You can add 20~40% to the average LE and you still get a very good risk adjusted return! You can also take a look at policy maturities for the past year. About the NPV: they use a 12% discount rate in their NPV calcs. I don't agree with that discount rate given the low correlation with the market, but if it's +NPV with a 12% discount rate it money well spend on the premiums imo (and you currently can buy TLI at a discount to NAV).

I know. Think that's probably why the opportunity is there in the first place. The case for TLI: - No debt (rights offering completed last month): collections > premium payments past 4 years - Average age insured: 89 years (LE ~4.7 years, and most LE's have been reassessed recently) - Higher age => LE more certain (LE's for people aged 89 are actually not really improving) - You can easily add 1 or 2 years to the average LE (that's HUGE at that age) and still get excellent returns - Successful history of collecting (and selling) policies - Fund is liquidating: no risk of management doing something stupid with your money - No correlation between the cash flows from policy maturities and the market is a huge plus

Totally agree. If you want to sound smart you should explain something complicated and make it look easy. Not the other way around.

If you give me 100% cash I would probably replicate my current portfolio mostly, but to throw some names on this board that I really like, and aren't mentioned so far: - TLI.L (Traded life interests. Almost no market correlation, yet offering a 10%~20% IRR) - ASFI (~Market cap in cash. Strong positive cash flow and buying back a lot of shares) - DSWL (Chinese manufacturer. Also market cap in cash, long history of paying dividends and profitable)

IB is way cheaper than $7/trade. Flat rate is $1/trade and if you go for variable pricing it can be even cheaper if you are willing to provide liquidity.