thepupil

"My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's. (VFINX)) I believe the trust's long-term results from this policy will be superior to those attained by most investors -- whether pension funds, institutions, or individuals -- who employ high-fee managers." Why not Berkshire?

http://www.amazon.com/gp/aw/d/0393061264 I bought this a an impulse purchase at penn station once (thought it's be cool to read about trains on a train). It was entertaining and informative. It went into great detail about how the early railroads ere built with the funneling of minority shareholders and bondholders money to management owned construction companies. These were the granddaddy of related party transactions and haven't totally gone away (for example CBL, the B mall REIT, has a captive construction company owned by the Leibovitz family).

He makes money being fully hedged By owning things that go up more than the market or are not correlated to the market, like a post reorg paper products company or a dying handset manufacturer with supposedly valuable stuff. Prem has basically taken on huge "basis risk" in hedge fund speak where his "hedges" are not overly related to his longs (Irish banks, Greece, resolute, blackberry etc.). I don't see how being short russell hedges out any of the risk involved in those longs. I think being short russell is not necessarily a bad thing and actually am myself, but I see it as a bet against the valuation of small us companies, not a hedge. I don't follow fairfax closely so I may be misinterpreting it. Does prem have a bunch of u.s small cap longs of which I am not aware?

Also, presumably over the next ten years he may get a bonus or raise that allows him to pay off the mortgage with money that is not from his 401k. Isn't it very conceivable for him to get a bonus of that size? He's been able to save $20k in a 401k by age 25 so I am assuming he must have a decent job, not much college debt and maybe his wife has income too. Just from the limited info we have he seems like the type that can handle a little mortgage debt and should keep growing his liquid wealth.

How likely is he to stay in the home for the next 10 years? Does anyone his age stay in the same place that long anymore? I'm 25 and most of my college friends have moved at least once in addition to their initial move from school. In my opinion the savings on interest are far less certain than the drawbacks of raiding the 401k. He will certainly pay the 10% penalty. He will certainly pay tax on the withdrawal. But it is not certain that he will save the full amount of interest. What if he gets promoted tomorrow and needs to move across the country? Or has twins and needs a bigger place? What if he gets laid off? There are many situations where it is plausible he will pay off the mortgage anyways. When was the mortgage originated? At what stage of amortization is it in? I just don't understand why you'd want to take away the foundation of your tax deferred retirement vehicle at this early stage in the game. That $20k will likely become $40k in ten years will become $80k in twenty, will become $160k in 30, all the while never incurring the friction of taxes. He can't say that about his home and he is losing out on that compounding and paying for all that interest savings upfront. Home equity is great and all and is another way of building tax deferred (tax free below a certain threshold) wealth but corporate equity is better. Does he have savings outside his 401k?

Your friend seems to be confusing a personal finance and asset allocation decision with a security selection decision. The wells 401k can be converted into other investments; even if he can't roll it over to an IRA now. I worked for a big bank for almost 2 years and was able to jam 3 full years contributions into company stock at a discount (stock was cheap too). I left And now that is my IRA and in other stocks. Your friend seems to think it is Wells Fargo stock or nothing else, which seems strange. I think your friend should just focus on whether or not he should pay off his mortgage and whether or not he should deplete his tax advantaged savings vehicle; the return projects of Wells Fargo vs other investments is a debate for another day. What is the rate? What is the rate after tax? What is his income? Does he have/want emergency funds? My gut is to say keep the mortgage (cheap tax deductible debt) and to keep as much money possible in tax advantaged accounts.

Is the reason your group is not doing as well cyclical or structural? You want to your group to do well (in terms of a cycle) when you are more senior and are receiving a greater percentage of the plunder. So if you like what you do, I would focus on doing your best and becoming a 1. If your group does better in a few years, the money will take care of itself. If you don't enjoy what you do, focus on doing a good job, becoming a 1, and then moving on with a good reputation and something else in hand.

It would be unfair to the index funds right? Because they started at a much higher valuation than BRK relative to today? http://www.multpl.com/table S&P PE ratio was ~30 in 1999. It is now 19.6. So the returns have to fight that multiple contraction. This was interesting imo. One could argue that it would be more unfair to Berkshire Hathaway. This is pre Mid-American, Marmon, and BNSF, when Berkshire was much more dependent upon insurance leverage of its equity holdings. By trading at a much higher multiple of book (which was comprised of very expensive stocks) Berkshire has had to fight the multiple contraction doubly. Here's an article from 1997 explaining the phenomenon of the "double premium" http://money.cnn.com/magazines/moneymag/moneymag_archive/1997/12/01/234603/index.htm Although purchasing Berkshire gives you the world's best investor and a portfolio of great companies, many of those firms are overpriced and you're paying extra for the privilege of buying them. Using the May 2013 Tilson presentation for a quick look, Berkshire's per share pre-tax earnings were a mere $918.66 in 2000. Now you could argue my point is moot because Buffett should have perhaps sold Coca Cola at 50X PE or whatever, but I think Buffett did effectively do that by buying a boring utility that year. He diluted his positions in high fliers like KO and DIS and such with his purchase of MidAmerican. Maybe I'm being too kind too Buffett. But the underperformance of his shares from one day 15 years ago to today or 5 years ago to today does not make me question his record. The outperformance in all 5 year rolling periods except the last one and the tremendous growth in earnings power are more fitting testaments of his record.

Sellside fixed Income trading (1.75yrs)--> asset manager (0.5yr)

I think BAMSEC is still pretty undiscovered. I love it. Bamsec.com

AAMC HCI NGVC ONVO PII SFM TFM TSLA UVE VJET Hurricanes , groceries, 3D printing , and those cool ATV's on steroids are the keys to my basket

Despite whatever predictive power it may have, I don't think it is a good indicator. The big companies that move the indices all have operations in many countries and are not entirely dependent on the size of the US economy.

Given the terms he's described, I think the rate he proposed (TSY + 1%) is insanely low. Just to be clear, I agree this would be a disaster. But not because I think it's a bad deal economically, but because of the inevitable conflict with the relatives. ah yes, didn't read that carefully enough (a good reason to probably not take my opinion too seriously). But I definitely think with where were are at in the business cycle, plus BRK's size and the risk with Buffett's age, investing ANY borrowed money in BRK at the present moment is dangerous. Much less money from a relative. If one is going to invest in BRK, I think people must be ready for the unfortunate day when Buffett dies, the stock gaps down, and the massive ship that is Berkshire floats through bumpy waters for a while. It is going to take a lot of patience and confidence to hold through that, not something I would want to have to go through if I had a family member's $ invested. And that day is not a matter of if, but when. I don't really see this as that risky from a financial standpoint, for you. Short of a great depression, I see very little risks to levering up berkshire with long term low cost leverage. Over the long term the trend in corporate earnings power is up and Berkshire takes more than its share of that each year and will likely do so after Mr. Buffett kicks the bucket. The problem is that the very thing that makes it appealing (long term low cost leverage with favorable terms and callability/extension) make it a bad deal for the lender (your family member). It's tough to come up with an appropriate "market rate" for this type of transaction. Too high an interest rate and you must assume a very aggressive growth rate in book value per share of Berkshire in order to break even. Too low and you are basically taking advantage of your family member who has access to low cost indices of corporate bonds. I am going to go out on a limb and say that many corporations represent a superior credit risk. Berkshire's own 10 yr bonds yield 3.63% (t+70). Are you (at the proposed t+100) 30 bps riskier than Berkshire Hathaway? Are you offering shorter duration? Rather than propose something of this nature, why not take the opportunity to educate your relative about the capital markets and the investment opportunities that exist besides intrafamily loans at below market rates As a side note, if this is being proposed as a method of intergenerational wealth transfer, then now is a good time to do it because you can take advantage of low rates in order to avoid gift tax stuff, but that wasn't mentioned.

See attached analyzing_and_investing_in_community_bank_stocks1.pdf

Haha, guilty...But I must say this board is spectacular. I think the newbies get so excited that something like this exists after they emerge from the purgatory of yahoo message boards and motley fool and seeking alpha comments and have an urge to participate. I know I do. The debates are almost always very civil and both sides generally are trying to seek the truth, rather than just scream at each other and make ad hominem attacks. It's truly something special. Even the ever exclusive VIC comment streams can be worse than here. So who wants to debate the value of Jim Chanos and alpha generating shortsellers? LOL *Smiles*

Land's End???

Eric, I explored doing that with the expensive BAC Warrants, but the cost of borrow was prohibitive, indicating many already are shorting the warrants.

Trying hard not to be an ass here, but can we agree that the Chanos added value? Even after fees. Play around with the spreadsheet for a bit. If you were given the choice in 1985 to invest in 100% SPY, or add some Ursus Partners to the mix. You would have made more money if you added Ursus up to around 130% allocation, after which the short bias kills you, and before which drawdowns/volatility are intolerable because of too much gross exposure. 0-50% is quite reasonable though. A typical long short fund runs 40-80% net, so it's not like this is some unrealistic hypothetical. At 50% allocation to Chanos, you end up with 40% more in NAV and your lowest yearly return was 12.3% (inputs: 100% SPY, 50% Chanos, 0% withdrawal, result: 1398 vs 1047 for 100% SPY). In your worst year you would've lost 12.3% and you wouldve lost a touch more than that 2001-2003. The losses are far worse for 100% SPY or a levered SPY (of course you make more money being levered SPY) When viewed in isolation, Ursus, lost 25% of it's value over the time period after fees. But no one invests in short only funds in isolation. It's not only about smoothing returns and reducing drawdowns, it's also about making more money. This is not intuitive. How can a fund with a negative expected value strategy (shorting) and one that produced negative after fee returns, help out a portfolio? How can adding gross exposure (levering) to a negative return strategy increase returns? The answer lies in the fact that Chanos generated very real alpha via negatively correlated gains. It muted drawdowns and preserved capital, which allowed for increased participation in the general upswing of the market. You can dismiss this as academic finance mumbo jumbo worthy of a 200 grand worthless MBA, but I don't think those lucky enough to have invested in this fund at the outset would agree with you; they are better off in dollar terms for having made the decision to invest. The question of leverage and capital usage is an obvious hole in my argument, as is the increased tail risk of shorting (A Volkswagen even blowing you up) as is the real world challenge of rebalancing amongst long funds and short (my model assumes a kind of perfectly constant net exposure, which is not realistic) But think about it on the fund level. If a fund can find a Chanos that can smooth returns, and make more money, why on earth would it not hire him? the problem is not with Chanos, it is that there are not enough Chanos's. this type of track record is RARE and to be envied and arguably not replicable.

even after putting in a -20% allocation to cash in the 100% SPY, 20% Chanos scenario to account for the fact that most people would have to commit capital to chanos to get access to his return, the ending NAV and average NAV are higher. The returns are more "robust" and are arguably more likely to sustain the institution and less likely to experience permanent impairment. There are some problems with the simulation (it assumes constant exposure to each and rebalancing), of course, and thinking about asset allocation this way may seem foreign or stupid or make you gag. But to completely dismiss it, is wrong in my opinion. To think alpha is dumb or that no short sellers and hedge funds add value is, in my opinion, close-minded. Short selling alpha is hard to find and valuable; I probably haven't convinced any unbelievers though.

To illustrate the utility of Chanos returns, I've built a very crude model where one can input allocations to Chanos (with net returns and no high watermark), cash, and SPY. This relates to my job but I don't have time to proofread or improve this, so feedback is appreciated. You can draw your own conclusions. For me, the numbers are compelling. One ends up better off by including Chanos's fund in the picture. If i have erred in my assumptions or building the spreadsheet, let me know. I included 120% SPY, -20% cash , which is the best result because some would see 100% SPY 20% Chanos as utilizing leverage rather than reducing market risk. There will be no end to this debate. But I hope this is helpful. Ursus.xlsx

So, this is all about being a better lemming? Twenty years is a long time for everyone to be wrong because they all read the wrong book and now we want to add to the wrong book collection. Swell! No, it's not about being a better lemming. It's about not being a lemming and thinking for oneself about the very interesting potential of someone who can consistently identify stocks that materially underperform the market, about the potential of someone that can provide capital (either within a fund, or if done through a separate account platform, within a portfolio of other managers) at a negative cost. Am I the lemming? Or are you? Am I seriously the only one here impressed by that track record and think that it has some function, that finding 10 Chanos's would be a worthwhile activity?

This is not necessarily true, because of rebalancing. The performance of a combined performance that is rebalanced periodically can exceed the performance of the individual components. e.g. Suppose that you have two investments, and you put $100 in each. Investment A falls 50%. Investment B goes up 50%. You'd still have $200. Supposed you then rebalance, putting $100 in to A, and $100 into B. If A then doubles, and B falls 33%, then both investments are back where they started. Someone who had just bought and held each investment would have a 0% return. However, because of the rebalancing, your investment in A is now worth $200, and your investment in B is now worth $66. Your return of 33% is better than either investment A or investment B. Thank you Richard! That's part of my point. I said I wouldn't continue arguing but I can't resist. It really bothers me when someone's excellent track record is dismissed out of context. A 20 year track record, like that is an accomplishment deserving of respect. Saying Chanos adds no value is like saying Ajit Jain or Berkshire's insurance operations add no value because they don't make a high absolute returns when viewed in isolation. The insurance operations provide capital at a negative cost to Berkshire, just like a short book that can squeeze out positive absolute returns and high alpha provides capital to a portfolio or a hedge fund. I am not arguing that short selling in aggregate is not a negative return proposition. It absolutely is! Thankfully, the long term trend in prosperity and corporate profits is constantly providing a headwind to shortsellers. But the idea that Chanos returns are not spectacular ignores the potential of combining that return stream and the capital it provides with more lucrative activities. Remember, short selling provides cash, rather than consumes it. If you put 100% of your money into SPY (better yet, 100% in managers that can outperform on the long side) and some percentage allocation to Chanos and his fellow short sellers, you'd be better off in terms of volatility AND $ actual money made because Chanos eked out a positive return. This is true even ignoring the potential for "strategic" or "tactical" rebalancing based on market valuations, mean reversion, or whatever. I'm sure I'll get hated on for that last one, or maybe compared to Whitney Tilson, or make Parsad gag again : ) Now the argument can be made that you are taking on more risk by running gross exposure over 100%, or that short selling is an inferior form of leverage because of its strange risks (forced buy-ins, squeezes, recourse, Volkswagen October 2008, etc. ), or that you shouldn't care about volatility, or that finding the Chanos's of the world is incredibly difficult (it is!) or that cash is an asset class and a better hedge for those who care about volatility. But those arguments are beyond the scope of the questions at hand, which in my view are 1) is chanos a good short seller? 2) does he provide value to those who hired him? No evidence has been provided to refute the fact that Chanos made money when the passive alternative lost 900%. No evidence has been provided that Chanos returns are not spectacular when compared to hedge funds' short books or other dedicated shortsellers. I'm not saying people should be satisfied with 2% annualized or that one should put an undue amount of capital in a very low-return strategy. But to me it is indisputable that Chanos has done an amazing job.

I'm all for an absolute return orientation, but I think expecting someone's short book to underperform the market so dramatically may be unrealistic. How good of a stock picker would he have to be to have put up 8% per annum in that time period? Fairholme made 14% more than the market for a decade and was deemed mutual fund of the decade. Chanos beat the inverse market by 14% for two decades (I'm ignoring the returns from cash which I should include in benchmarking chanos which makes his performance less impressive; I'm also ignoring some mathematical issues with comparing the two) Maybe someone has done it, but do you know of any dedicated short sellers who have posted compelling long term absolute returns? Maybe Einhorn's short part of his book in his early days? I remember in the allied capital presentation he talks about greenlights' shorts doing very well over time It's tough to make any real arguments here without more info about how exactly the fund was run. I maintain that chanos did an amazing job if he was 100% short in that fund and that he is in the top 1% of short sellers based upon that record. But I'm just repeating myself and belaboring the same points so I'm moving on. It's a debate that can't be won and I like this board way too much to keep arguing with the big kahuna himself!

And the reason you would've paid Chanos do "what swaps and other cheaper products could achieve" is because the index multiplied by 10X. If you were short index via swaps or other products, you would have lost 9X your money instead of basically coming out flat after fees. There is huge value creation here relative to the passive alternative. In 1985 if I decided I wanted to short $100 of SPX, I'd have lost $900 over 20 years. If I decided I wanted to put on short exposure via Chanos' fund, I'd have made $50 and then paid 1+20 off that (I'm not going to do the math, but I can say with a reasonable amount of certainty that the net returns are better than -$900). I don't really like the whole reduce vol, increase diversification, diversify among securities and asset classes and blah blah blah corporate finance mumbo jumbo thing myself, but how can you not be impressed by Chanos returns and feel that he did not add value.

So basically you don't think anyone should ever engage in short selling because it is a low return proposition over long periods of time? That is a very fair belief and I won't argue against it. It is not fair to say that Chanos did not add any value when he produced a return of 2% and the index did 12.7% over a period of 20 years! I'm assuming he is short only because the paper says those results are for a short only fund. Your argument is one that should be had with asset allocators. But you can't present amazing results and say the guy adds no value. If a long only made 0% in Japan when the index lost a huge amount of money over a long period of time, wouldn't we all be praising him?