thepupil

I wouldn’t call something where a significant part of the return comes from closing the gap to intrinsic value a compounder though. A compounder for me is a stock that grows intrinsic value at a high and fairly consistent rate. In order to do so, they will need to earn high returns on capital, Because over the long run, the returns from you stock investment should about equal the returns of invested capital of the business you are invested in. I doubt that a bank (ITAU) in a volatile economy like a Brazil can be a compounder in that sense. Actually most companies in EM won’t work either, because their ROIC isn’t high enough, despite being located in high growth countries. I respectfully disagree that EM banks (and EM companies in general) can't be "compounders". EM Banks are some of the most sought after franchises in the world. it's a slow day before thanksgiving so just giving the old Bloomberg a spin, based on some random cherry picked EM banks. Itau has returned 16% / year since 1994 (in USD), 6% over the past 10, 8% over the past 5, 11.5% over the past one. It made a 15% ROE in 2008 (that's the trough), was in the 30's in the early 2000's, and has averaged 18-20% over the past 5 years. Credicorp has returned 13.6% / year since 1997 (in USD), 14.5% over the past 10, 9% over the past 5, -1% over the past year. It had a low ROE in the early 2000's (2-6%) but has averaged mid to high teens in every year since. HDFC Bank has returned 23.3% / year since 1995 (in USD), 18.3% over the past 10, 19% over the past 5, 35% over the past 1. Its ROE has consistently been in the high teens to 20%. there's a reason it trades at 4.5x book!!! BDO Bank in the Phillipines has returned 14.7% since 2002 (in USD), 18.6% over the past 10, 9% over the past 5. it has a more pedestrian historical ROE in the low double digits. Bank Mandiri in Indonesia has made 20% a year since 2003 (in USD), 10% over the past 10, 5.6% over the past 5. high historical ROE's Now we get a little crazy Guaranty Trust Bank in Nigeria has made 22.1% / year (in USD) since 2002, 8% in the past 10, -7.4% / year in the past 5. It made a 13% ROE in 2009, otherwise 20-30's. It trades for 4.5x and a 10% divvy yield plus the currency has sucked, so the last few yhears have been very bad. Sberbank has made a 16% annualized return since 1998 (in USD), 8% in the past 10, 24% / year in the past 5. Its ROE dropped to 3% in 2009 and 10% in 2015, otherwise low 20's for 2+ decades. There are examples in those where one could point to "see they went through tough times so it's not a consistent compounder", but they also have been through massive economic turmoil without catastrophic dilution and long term returns for all of them are very high. Not saying the future will be like the past, just saying that there are examples of companies who TVBVPS, dividends, and ROE's have shown consistent growth/resiliency/etc. in EM banks.

I don't want to hijack the thread with my "look to emerging markets" bluster, but to the extent anyone beleives in mean reversion... Stolen from a friend on LinkedIn 1988-1993: EM 545%, US: 129% 1993-1998: EM: -38%, US: 191% 1999-2007: EM: +420%, US:+38% 2008-today: EM: 11%, US: 160%

I would echo others sentiment that it could be more fruitful to look at the hated and potentially misperceived than the already successful with a huge TAM and wonderful management. For example, in 2011, you could buy Lockheed Martin for 7-8x earnings (I know because I did*). The bear case simple then "sequestration/decrease in defense spending as we came off the wars, huge pension deficit, F-35 delays". The bull case was simple too: pension is 80-90% covered in cost plus contracts, the f-35 is a like a katrillion dollars of future revenue, US will still buy a lot of defense stuff, it's buying back 10% / year. Fast forward to today (8 years, not quite 10 years). Revenue has gone from $47 billion to $58 billion (not huge growth but no decline). Net income has increased from $2.7 billion to $6 billion (more or less doubled). Earnings per share has gone from $8-->$21 (buybacks!) and the multiple has gone from 8x to 18.6x. Over the past 8 years, Lockheed Martin without really growing much, without really requiring any crazy insight beyond (they are buying back shares, it yields 5.5%, and it's the biggest defense contractor responsible for the biggest defense project ever) made 26% / year and 576% with dividend re-invested. Now Salesforce.com has returned 25.5% a year in that time frame too, but at least to me, it was a different (and potentially easier) analysis that Lockheed Martin was cheap in 2011 than Salesforce was. In other words, it may be more accessible to the layman, to make a prediction that lockheed will be around and profitable and earnings won't go down toooo much (they ended up going up) than Salesforce will multiply its sales by 7x and its EBITDA by 25x over the next 7 years, so even if I'm paying 7x sales and 100x EBITDA, I'll make money (which is what happened). All that said I don't have many ideas that are hated and priced to potentially deliver 4x returns and definitely not in the US. Very big picture, if I had to pick somewhere to look, it would be Asia and emerging markets (it's not a coincidence my previous recco's are discounted holdco's of fast growing asian tech companies), not US based beloved compounders. Buy something that is cheap, has gotten hurt by currency and/or multiple compression, that has long term tailwinds. I wrote up Jardine Strategic recently. Just to take something I haven't really done a lot of work on, Jardine Cycle and Carriage for example, has compounded at 18% / year since 2000. Its 5 year return is -3.3% / year. It trades at a reasonable multiple (12-15x). It owns lots of businesses which will benefit from ASEAN's growth. It'll probably be earning more in 10 years than today and people may like non-USD and EM more so than today. you don't have to go too wacky with the growth and multiple to get to 15% / year. All the EM guys I speak to say that Ayala Corp is the best governed company in the Phillipines. I don't know much about it, but tangible book/share has gone from 190-->506 since 2012. the stock has made 2% a year in dollar terms for the past 5 years. it appears to trade for 12x earnings and has a $9 billion market cap. Or to go a completely different direction, again in a very contrarian way just for shits and gigs. What can be more hated than European banks. Let's take Credit Agricole. 0.58x book, <10x earnings, 5.5% yield. Can you get to a 15% / year owning freaking credit agricole. Maybe. I mean it has 28% deposit share of a large economy. it owns Amundi which is Europe's largest asset manager. they say they're going to make 5 billion euro in 2022, so 7x out year earnings. I have no idea if that happens, just saying that if europe doesn't end up completely blowing up or if the environment changes (10 years is a long time) maybe you make 4x. maybe they'll make 7 billion in 2029 and it trades for 15x (that'd be a 3x) and share count reduction / divvies get you the rest of the way. *I also sold waaaaay too early at $140-$150 IIRC

here's a fun contrarian one (I don't own). Softbank. It trades for a 60% discount to NAV. Let's say in 10 years sentiment changes and it trades for a mere 25% discount or even (gasp!) a 0% discount. This would add 600-950 bps of return/year from discount narrowing. So can Softbank grow its value by 6-9% from here? Many would shudder and say "it will decline in value from here, not grow". Well, let's see about that: 47% of assets are in the largest Chinese e-commerce company, growing revenue 30% across a variety of inititatives (core e-comm, cloud, payments, etc). 20% of assets is a large japanese telecom (myeh) 13-14% ish each in leveraged exposure to the Vision Fund (whoa nelly!), ARM, and Sprint then those in themselves are levered. with 17% holdco level debt. While certainly not without risk, I think it's important to consider the upside tail. Softbank is only an $80 billion company. Its stake in AliBaba alone is worth $125 billion. Many credible market participants think Alibaba is cheap and has a very long runway (some also think anything from china is automatically not to be trusted). You can do similar, less extreme math with Prosus / NAspers as more pure plays on Tencent.

haha, I bought a lot in June*, and am reducing today as well. I don't think I'll ever love SPB so I got rid of that and sold my remaining JEF down to a still big position, but no longer supersized (from ~14%--->10% ish) any JEF shareholder of recent years has learned to fade the hard rallies given the stock likes to randomly go down 30%+ whenever the market so much as sneezes, so when you make 25% in a few months and get distributed a little bit of your cost in SPB, you do the same. *proof! https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/luk-leucadia/msg373322/#msg373322

what I see as the two most straightforward warren hedges: Long term oil/natural gas futures call options. I refuse to believe she could do it, but a fracking ban can only do one thing to prices. Alternatively call options on highly levered traditional production companies like CalRes or offshore drillers or canadian/Russian/wherever E&P. Potentially even something like BTU, fracking kills coal. Killing fracking prolongs coal. XLV puts/risk reversals/put spreads. I like this in that i’d Be comfortable cheapening the cost by selling calls on a basket of US blue chip healthcare stocks. They don’t seem to discount the disruption potential or seem undervalued /coiled springy, Ultimately I just think warren is potentially terrible for US and global corporate earnings power, so broad based hedges may be the best solution.

In Haiku Form: Half of NAV Pays a Growing Div Dead Money In Institutional Money Manager Form: Contributing to our YTD underperformance relative to indices is our longtime position in Closed-End-Fund X, which we have held since 2013. Since its poorly timed 2007 IPO, CEF X has delivered an 11.5% annualized total net asset value per share growth and currently sports a sustainable low double digit ROE, despite having consistently had a large percentage of NAV in cash over the past three five and ten years. Despite this solid investment performance, CEF X trades for approximately half of its stated net asset value, much of which consists of third-party audited interest in insitutional alternative investment funds. Additionally, the Fund pays a dividend equal to 20-30% of recurring earnings, which on the depressed share price is equivalent to a 6% yield. Fund management, which owns close to one third of the fund's shares, has further returned to cash shareholders by purchasing over one-third of shares outstanding over the past decade. We blame the lack of market enthusiasm on poor liquidity in the name, an unfavorable external management structure, as well as concerns over the fund's exposure to high-risk structured credit/CLO equity, which comprises 14% of net asset value. We view all of these risks as more than priced in and are happy to continue to be paid to wait for a potential re-rating over the next few years. Catalysts include the forecasted IPO of the company's largest asset and continued diversification and growth of the Fund's investments.

https://www.google.com/amp/s/www.independent.co.uk/news/business/news/regus-valued-at-up-to-pound16bn-in-second-attempt-at-flotation-700023.html%3famp

If I’m the founder of a fast growing business, I know Masoyoshi will take care of me if things go south. Have a little vision guys! Extend your time horizon to 300 years!

they are including the equity portfolio, fixed income portfolio and cash, as part of the insurance operations. Since the end of 2007, we estimate that Berkshire has averaged a nearly 7% annual rate of return on its insurance investment portfolio while holding an average of 20% of its portfolio in cash. Berkshire has been able to produce investment returns that significantly exceed its insurance company peers as the combination of the company’s long-duration float and significant shareholders’ equity allow it to invest the substantial majority of its insurance assets in publicly traded equities, while its peers are limited to invest primarily in fixed-income securities. We believe these structural competitive advantages of Berkshire’s insurance business are enduring and will likely further expand.

I would value BNSF and BE separately and not have to deal with this issue outside of that. I value them at UNP and XLU multiples (earnings/revenue/tangible book/book etc.) and multiply by 0.5x and 0.75x for scary bear case and bear case. 1.0x for "the market's assessment for what this type of business is worth". Throughout my ownership of Berkshire (about 8 years) Berkshire has traded at a discount to NAV (when I mark up BE and BNSF) and been growing earnings faster than the market. I piggy back off others work for thoughts on the quantum of that discount. I discount the DTL related to securities almost completely. KO and WFC won't be sold. losses from new stock picks can be realized to realize other winners). Berkshire is my and my family's largest postition, so I care a lot about the company, but I jsut don't spend time on figuring this type of stuff out (25% tax rate or 18% tax rate or 10% tax rate. Sorry. the US corp rate is 21%, so I'd just take that and apply some haircut. valuation is a range, not a point, as are earnings.

thinking about it some more, the key is actually can each of those (BE and BNSF) outspend their tax depreciation, not their accounting depreciation....I think. Anyways, I know why the difference exists, but am not rigorous enough to project how that will change over time, because I more or less choose to value those subs on comps at market value in base case NAV and haircut them in the bear case NAV.

The delta between the cash paid for taxes and income tax expense relates to the increase in the deferred tax liability. the deferred tax liability has 2 major components: 1. Increase in DTL related to unrealized gains on investments: To the extent that Berkshire defers realization of gains indefinitely on large positions (I think this applies to some, but not all of the material equity positions), we can assume that this tax expense has very low present value. 2. Increase in DTL related to the companies, primarily Burlington Northern and Berkshire Energy. Page 96 of the most recent 10-K shows the breakdown between the two (obviously things will change in the subsequent quarters, but it gives you a feel). $18 billion of the $60 billion DTL ( about 30% again as of 12/2018) is related to unrealized gains on the equity portfolio. About 50% ($28/$60 billion) relates to property plant and equipment. This is associated with Berkshire Energy and Burlington Northern. This is helpful https://ftalphaville.ft.com/2016/04/29/2160510/warren-buffett-a-dream-deferred/ Essentially, the key input for determining the "correct" cash tax rate for the railroad and utility is if they are able to keep increasing their ability to re-invest. Will they keep the asset base high such that they keep running on the treadmill of outspending depreciation expense. Burlington Northern's D&A is about $2.3 billion / year. It's capex has been $2.6B (2010) - $5.6B (2015) and averaged above $3B or so, so a delta between the cash tax rate and income tax expense rate appears sustainable for now. Berkshire Energy's depreciation is running at about $3 billion. It's capex is running at $6 billion (2010: $2.5 billion, 2014: $6.5 billion, LTM: $6 billion). Again there appears to be a sustainable difference between capex and depreciation. I think that explains the high level, but I could be wrong on the exact particulars. Honestly, I don't pay a whole lot of attention to it. I just use what the market values class 1 railroads and large high quality utilities as proxies for value for each of those and assume that Berkshire doesn't sell all of its unrealized investments at a gain very quickly. My rang of intrinsic value is squishy and my sizing is non-binary so being super precise on that hasn't been an emphasis for me.

in the Maryland burbs of DC, it's highly segmented. the further out and higher price point you go, the less appreciation. Close to DC and red hot Amazon'd Arlington and under $1mm is moving nicely. for arlington, from what I hear, anything under $1.5 mm moves quickly Any single family home that's close to the city and/or walkable to a metro/retail and under say $1.3 million moves within 4-5 days of listing. We lost out on 2 bidding wars before buying a house 3 days after it listed above ask with almost no contingencies (we paid for a pre-inspection). low rates, low inventory, high incomes = high prices and high competition. It's not clear to me that a recession would change this. there are more millionaires and households making >$200K in relatively recession resistant fields (healthcare, non-profit managment, lobbying, defense, tech) than single family homes in desirable areas. There is virtually no rental inventory of SFH in the close-in neighborhoods, so if you have anything like a 5+ year time horizon, want to live in a SFH with a yard in good school district, you're buying. Plenty of rental multi-family available, of course (and new supply being created). Median income in our zip is $150K and in our cencus tract is $250K+. Even if rates go up a bit, that still buys the median home (~$900K-$1.1 million), so it all feels "affordable" and sustainable to me at the "entry level" pricing, but I could be wrong. the $2mm homes are much more luxurious, have a big builder/renovator margin built in and are more vulnerable to economic conditions, in my opinion. Basically this https://www.wsj.com/articles/buying-a-home-no-matter-the-market-11565885850?mod=searchresults&page=1&pos=3 DC burbs has 2/5 "seller's markets" in the country by county (Montgomery MD and Loudon VA) All that said outside of Arlington/Amazon area, actual appreciation for established neighborhoods seems to be at reasonable rates (we bought at an implied 2-3% / year above last 2010 sale price) , it's rather the speed and degree of risky behavior that makes it feel hot. Gentrifying hoods are higher beta and have done better/appreciated more quickly. They also have a different level of crime/school quality.

To be clear I actually think berkshire is very undervalued, just saying that berkshires relative outperformance probably increases in a downmarket so I think people piling in now is potentially a bit of market timing

I agree. Being long berkshire is kind of shorting the market, it’s the anti-valeant which was a glorious bull market vehicle. With respect to Ackman, the guys up 50% and in the process of rebuilding his reputation and track record. PSH trades for a 30% discount. In addition to genuinely thinking its undervalued, I imagine that buying Berkshire and simultaneously repurchasing PSH shares is a pretty sure fire way to crystallize and de risk gains and make money in the intermediate term. Buying Berkshire through PSH at a 30% discount is really attractive to me. He should go 100% BRK lol.

here's some heresy for ya. forget about adding any more managerial responsibility to the home office, even if Berkshire is famously decentralized. Berkshire should buy Berkshire, and not mess around. IPO 10% of BNSF and Berkshire Energy to increase the "public" portfolio by $130-$140 billion and put a more verifiable value on these. Blow out of KHC at a 50% discount and lose $16 billion for tax purposes Blow out of AAPL at market Cash +$15 billion (IPO) + $4 billion (KHC) +$51 Billion = $70 billion $122 billion at quarter end plus $70 billion from selling KHC, AAPL, and taking minority stakes in BNSF and BE public. = $190 billion pro-forma cash. Tender for 27% of company ($150 billion) of stock at a 10% premium and highlight how freaking cheap and overcapitalized the company is, then we can talk about bringing more companies under the umbrella. Use all cash flow to retire stock until the market assigns a proper value to Berkshire.

Looking at the bonds the fund holds, don't see a bias toward december pay bonds at all. the yield to maturity was 0.7% as of 6/30, which is stale because prices have gone up and yields going down. I think the yield to maturity is somewhere between 0.4% and 0.7%, perhaps, 0.6 or something. The overall point stands. If you index in the bond market outside the US, you're buying negative yielding debt. This is a problem with Target Retirement funds, in my view.

I'm not aware of many (any?) fund managers buying negative yielding debt. It's all institutions that have non-economic motivations (central banks, banks for regulatory reasons, etc). A notable instance of economically minded investors owning negative interest rate debt is anyone who owns an international bond index fund. https://investor.vanguard.com/mutual-funds/profile/overview/vtabx For example, VTABX has an SEC yield of 0.45%, a maturity of 9.7 years, and duration of around 9 ish as well, that's because it owns a bunch of JGB's, bunds, etc. So there's an example of $130 billion of folks retirement money that is investing in this stuff.

BRK/B FRPH VNO MAND SP

there are 437 companies in the S&P 500 ex financials. Those companies have a median and average net debt to EBITDA of 2.2x and 3.0x (the average only counts levered companies). Of the top 100, which comprise 70% of the market cap, the median is 1.6x. The weighted average of all 437 companies is 1.2x, again because the big market caps like MSFT, AAPL, AMZN, Alphabet, Facebook, Visa, Johnson and Johnson, Walmart Exxon, PF, and Mastercard (literally the top companies in order, all of which are less then 2x or net cash companies) are either net cash or low debt. In my humble opinion, top down concerns regarding corporate leverage don't apply to most people's portfolios. PE portco's are where all the leverage is. That's not to say there won't be knock on effects, but the public equity universe just doesn't seem to have many junk borrowers. IIRC, about 3% of the S&P 500 are junk credits. I wish I could do it for the Russell 2000, but I don't have access to a quick excel of the Russell 2000 ex financials and am not going to do anything that takes much time. I'm not saying that buybacks are necessarily the best use of capital for all companies, but corporate publicly traded america isn't exactly levering to the hilt to take in shares. Banks also appear to me to be very well capitalized.

Quick glance using bloomberg: 12/2010 to 9/2018: Net Debt to EBITDA increased from 1.5x to 2.1x EBITDA - Capex to Interest expense went from 7x to 7x Long Term Debt to Assets went from 16% to 27% Cash interest: $636mm to $848mm ($1.1 billion if you annualize Q3) One could make the argument that the through the cycle leverage has increased, but I'd hardly call it a PE-like levering up of the business. Part of the analysis of the investment was a monopolistic's railroad's ability to carry debt and extract cash, right? I think you have to give them credit for the "dividend recaps" as they'd be called in PE land. Capacity increase = capex = more rate base = more EBITDA = more extremely low cost debt capacity = cash extraction, no?

So does the portfolio close out flat at the end of each trading day? If not, then what happens if these stocks open more than 10% down? Does it automatically sell and thus realize a loss greater than 10%? Or does it hold and thus lead to a single name drawdown potential >10%. I think the idea of being able to mechanically exit after a 10% drawdown has technical limitations and that you could get destroyed in a single name or market like flash crash (we all know how the whole "portfolio insurance" thing worked).

muscleman, have you considered changing your asset allocation to reflect your (apparently high) drawdown sensitivity? It seems that you want to invest in risk assets (no matter the strategy, value/technical/etc.) without significant drawdowns. Therefore, I'd consider the following: a) recognizing that you're 33 have a long runway of net savings ahead of you and can in most scenarios handle a drawdown but if that doesn't work then b) including cash/bonds/i-bonds/TIPs etc. in your asset allocation to mitigate volatility. c) potentially even buying insurance on your risk assets or investing in something like TIAA traditional. Based on your post you have the ability (you are employed and young) to bear downside risk but not the willingness. Therefore some type of low-risk (and suboptimal and potentially expensive over the long term) investment should perhaps be in the mix. I think you are receiving a lot of (warranted) criticism because it sounds like you stopped value investing because of your low tolerance of drawdowns, but I'm not sure if your new method really solves the problem of keeping your emotions in check or your apparent goal of making equity or above equity returns without major drawdowns. I just think that's wanting your cake and to eat it too. In other words, I don't think it's really possible to do sustainably and that you should realize you have to save more and make a lower return if you can't handle the drawdowns. Also, there is such a thing as low octane value investing where one invests in relatively low risk overcapitalized enterprises that (in general) also have experienced low volatility, in part because their intrinsic value is less volatile, but I think that's beside the point. Go Che It just feels like the your cure doesn't really fit the disease Note: I edited out some stock specific stuff I deemed not relevant

I think divining reasons for very short term out/underperformance is hard. If I had to put a reason to it, it would be that Berkshire outperformed in 4Q 2018, so some short term mean reversion is potentially at work. 4Q2018 Outperformance Against SPX +9% S&P Financials +9% AAPL +25% BAC +11% Union Pacific +10% (BNSF) Progressive +10% (Geico) YTD 2019 Against SPX -7-8% Financials -9% AAPL -1% BAC -19% Union Pac -14% Progressive -6-7%