benhacker
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Posts posted by benhacker
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I think the idea that you can avoid companies that present the risk of permanent loss of capital merely by selecting stocks carefully is wrong.
Some quick examples:
(1) Volkswagen. There was no way for an outside investor to know about the emissions issue.
(2) Lumber Liquidators. 60 Minutes?
(3) VRX. I know there was a lot of skepticism about the stock before it fell, but a lot of intelligent investors were shareholders.
(4) Theranos. Not public, but again a lot of smart investors drawn in.
Stevie,
I don't actually (necessarily) dispute your thesis, but your examples here are ... no good.
#1 - Emissions details were out there >1 year before the stock tanked. Many didn't see it, but if you had >25% of your net worth in VW, I think you could have / would have done the work.
#2 - I didn't follow this one closely, but weren't the negatives about this company outed by short sellers many months in advance?
#3 - This is clearly a terrible example. The burden of proof was on VRX longs... anyone concentrated in this name was simply believing in ferries. there is clearly a difference in believing something may be a game changer and owning a 3% position, vs. betting that it is in fact most certainly a game changer and betting huge. Anyone betting huge on VRX was clearly wrong on many levels as it was a high debt company, with GAAP losses, and shady characters all over. This isn't even hind sight.
#4 - Hard to say, but did anyone other E Holmes actually make a concentrated bet? They only raised $700m I think in total. I get that it was valued at like $10B, but no one made this a concentrated position to my knowledge except for maybe some employees.
I would also add, "lot of smart people" getting pulled into a story isn't a good rationale to say why concentrated investing doesn't work. It's a good way to say:
1) Many people who seem smart, aren't
2) For most mere mortals, investing is really hard, betting big is dangerous, and you better do your own work - and not be wrong.
My 2 cents.
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Thought this was interesting.
I had read the Napolean Hill book... and this is an interesting insight into the ... colorful ... life of Napolean Hill and his many fabrications...
http://paleofuture.gizmodo.com/the-untold-story-of-napoleon-hill-the-greatest-self-he-1789385645
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If he shorted commodity indexes then he would have made a killing no?
They had large short positions in commodity producers... including RIO, BHP, and others.
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Just to keep everyone cautious, tangible book is actually closer to ~$300 / sh as there is a lot of goodwill on the balance sheet.
Just FYI...
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If I ran a company with employees in his field, i would offer the kid a job. Pretty mentally tough to do what he did.
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Vinod, here is a stale discussion of the composition of what Fairfax terms "equity" portfolio which covers a wide range of stuff... 18 months old but perhaps helpful for you.
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More likely getting they are getting grouped in with the rest of the insurance industry who are getting killed on their long bonds.
Insurance stocks up much > market in last few days... I don't think what you said is a thing. KIE as a proxy is up 5+%
No insight on why Fairfax is down other than the obvious that it trades at a premium valuation to book, and is perceived as a deflation and market hedge... neither of which is valuable (opposite actually) in the last few days.
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Benhacker I seem to remember seeing your moniker a few times on other message boards prior to this one.
Yeah, i think we were on maybe some Motley Fool boards a dozen years back.... maybe. Fuzzy memory.
Don't forget the CDSI figured folks hadn't forgotten that one yet. ;-)
Jurgis,
TLT down 2+% pre-market.
We will see....
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I second TCC and bsilly. Seems like an ok move to blow out duration; timing does seem odd.
Honestly though, given how long Brian and Prem have run with this lower rate / duration bet, and essentially it has been out of consensus most of the time, I can't really fault them for stepping back. Maybe just liquidate, breathe for a few days and decide. Maybe fear of Trump-flation was just a good excuse.
Frankly, I used to worry about rates rising, but I'm not so concerned anymore. The math is so bad on the the wealth destruction to institutions / pensions for a sudden rate rise that I believe it won't be allowed to happen (we could get a late 40's / early 50's style "rate cap" by the FED). I basically think inflation is now guaranteed sometime and rates will normalize slowly. Not sure how much and when, but I like that Fairfax is starting to change their stripes a bit... long bonds just scare me so I'm kind of happy to see them change.
As to comment above in the thread about Fairfax being a single and double hitter that is now swinging for the fences... I think that [edit] does not jive with history.
Fairfax is a company that has done the following:
0) Founded as Prem bought/took over an insurer struggling to survive
1) Bet heavily against Japanese stock market in late 80's
2) early 90's bought back >20% of their shares at a discount to book
3) Issued tremendous amounts of shares way above book to make some terrible acquisitions during the second half of the 90's and into the 2000's
4) Bet heavily against the tech / US equity markets in 2000 (and bought OOM call options as well...)
5) Made a huge rate bet in '04-'05 (?) by buying treasuries.
6) Did a very aggressive tax move with BAC to onboard ORH ownership for tax purposes around the same time.
7) No where in their history did they make money from holding minority stakes in "good" companies for years for years and years.
8) During the last couple decades they have progressively been acquiring many nickel and dime insurance companies in various emerging and frontier markets...
This is *not* Berkshire. Never has been. Maybe some day it will be... maybe not.
Cheers,
Ben
Bsilly, don't go for too long this time. I joined this board back in the day right when you were holding court... now I feel old.
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And the answer to the question is what then, Ben? And it isn't a rhetorical question.
The answer is that Fairfax has *never* been a buyer of "quality" in the Buffett terms (sure, after 2009 they kind of talked briefly about holding WFC / JNJ, but that's the only stretch I'm aware of, and they stopped that after only a couple of years). So your question is simply a misunderstanding of the business you supposedly own shares in. They have been buying beaten up, second tier equity and distressed debt forever. Shit Fairfax's origins are Prem buying a super struggling insurer...
So it's not like their strategy has changed, so your question doesn't make sense. "It seems like Fairfax is buying low quality speculative, etc etc." My answer, by your definition, "yes, yes they are."
If you do not like, that is fine, many don't like it and they are all very reasonable people. What isn't reasonable is for you to continue to ask the same question over and over expecting the response to be different. You can buy, sell or hold, but... your questions aren't furthering your understanding or changing anything.
Don't invest in a frog, and hope it turns magically into a princess. The answer to your question is that FFH isn't a 'princess' and likely won't ever be.
Hope that is clear. My frustration stems from the fact that I can't actually believe you don't get everything I said above, so I am actually curious why you post (only on Fairfax) over the last 3 years, and seem to continually forget that this has already been said before.
I just suggest you sell your shares if their strategy is so distressing... a few weeks back $580 was attainable which was a very rich price.
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Broofield is rumored to either join the bid, lend via DIP, or potentially walk away.
There is $400m+ of debt / ABL in front of equity here, so curious how FFH structures this deal. The business looks like it could be potentially interesting, but looks like some cost needs to come out as margins are not good.
Not sure, curious how they structure it if they are indeed bidding.
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Lucky,
Is it just me or does Fairfax always seem to be squandering the float on buying cigar butts? I too often get the impression they act like it's a craps table in Vegas. Maybe this'll work out and maybe it won't but shouldn't they be buying stuff with enduring quality and value with a more certain outcome instead of all these weird "fingers crossed" deals with hair all over it? It's like they're always swinging for the fences instead of just going for singles and doubles. SD has to be one of the worst investments I've ever seen.You seem to be continually asking the same rhetorical question about Fairfax every few months for the past few years on this board.
I'm guessing the answers / opinions of those responding to you, and also your own opinion won't be changed by whatever is said... so I'll refrain other than to ask you to go look back at your own posting history, you will likely find the same answers in responses that you do today.
Best,
Ben
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My view is quite similar to TCC's summary (both the response on doubling down, and views on valuation).
Thanks TCC for sharing your thoughts.
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Probably the wrong place for this, but open-ended funds can be designed well. Did you know that you can have (somewhat) of performance fees in open ended funds? You can also have redemption penalties for those who sell, and have those redemption penalties paid to other shareholders? The latter helps offset the cost of carry cash for redemption or not and just blowing out positions quickly and paying bid-ask spread.
What's shocking about open-ended funds isn't that they are dinosaurs, it's that features that could make them competitive aren't used by most fund manager.
I think Bridgeway and Tilson were one of the only ones to use performance fees (that I'm aware of) in the open ended space (Tilson's fees were so high as to not be relevant though), and Vanguard is one of the few to use redemption penalties intelligently.
Seems like both of these features when combined can promote long term mentality and behavior and also provide a more fair / reasonable fee structure.
I'm sure there are some reasons they aren't use more... but it's a bummer.
I like Chou, I can understand the pain though for those who highlight the lack of performance on the medium / long term. It does raise the question as to how much patience should one have, and what is truly the right benchmark. It's been a weird 5 or so years...
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is the reason they don't/won't do the fees after performance due to the 1940 investment act?
Mostly yes, but also it's a terrible feast / famine business (the RIA) if it's 100% performance based. I think most rational investors wouldn't generally support a pure performance fee if they want longevity in their investment manager (some will of course).
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Excellent post Mpf.
A final thing I would note is to look at the size of the ETFs for vol in question. They are on the order of $1B AUM (VXX, XIV). The underlying futures are not that liquid so these funds are automated trading a relatively illiquid market (given their size) and this means the friction they have is high... so again, going "long" any of these products I think is problematic even ignoring roll yield, VIX movements, etc.
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Sunrider,
Let's see if we can bridge the communication divide, I think we are close.
Thanks - I think we're all talking slightly different things here and are now on the topic of path dependent returns - and I think the simple (non leveraged) inverse and a short in the underlying (absent fees and the other good things you mentioned) should produce the same cumulative returnKeep in mind, a "-1x" ETF is something you BUY... you go long it... to say it replicates the performance of a short is to me something you would need to quantify with an example, because as someone who shorts a lot, I don't actually understand how they could be the same.
To use your example, replace the -1x ETF with a short position - you get the same result as in your example, correct?I strongly disagree. One is an ETF you buy, and one is a variable rate of interest loan (with which I can use the proceeds to buy something, or hold in cash)... I do not see the equivalence. I get that by calling them "short ETFs" or whatever, folks seem to think there is, but they are like cats and dogs to me.
Shorting a funding source, not an investment.
As you put it, there's path dependence and one doesn't end up with same price level for symmetrical moves of a short and a long position, i.e. your returns of 90% and -50%, cumulatively, work out to either -5% or -95% in a long and a short position (your 0.2 should be 0.15). Am I understanding your correctly?Again, I would ask you to provide an example. If I short something, I sell it and I get the proceeds. Then you need to make an assumption about those proceeds (what are they used to purchase, does that ever change, etc). A naked short exposes one to unlimited loss... a -1x ETF does not... so I don't see how then could they ever be equivalent?
So the inverse etf does the same as the short position -- which was sort of my starting point ... again, unless I've completely gotten this wrong?I don't mean to annoying (at all!), but just try to create an example where the payoff from shorting is like that of buying a -1x fund. They are simply not the same... at all. They are directionally similar, and that is how the marketing pitches them to investors, but they are not what folks think they are.
I think what you will see as you noodle on this (or I may be wrong) is that you can construct a long/short *portfolio* that looks like a -1x ETF... but if you model what that portfolio will have to do on a day to day basis to meet it's investment mandate it turns out that the portfolio needs to be adjusted daily to bring it back to a -100% ratio... but I don't have to adjust a short position by itself... so how are they the same?
So if you want to say that a -1x ETF is just a short portfolio with the funds from shorts held in cash and rebalanced daily in the direction of market movements to ensure 100% exposure is maintained... well, then I would probably agree that's what (to a rough approximation) a -1x ETF is. But that isn't equivalent to a short position at all... and it has some seriously interesting behavior based on the path of the underlying.
I think of leveraged and short ETFs as basically a long short algo that is momentum driven... buy on the way up, sell on the way down.
That's all they do... with huge friction.
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Sorry - I may be really daft after a long day at work (or generally), but if I understand the product correctly at -1x gearing, it should produce the same percentage return each day as the underlying, correct?
Yes.
If so, this should mean that the cumulative return is the same for this product and for the underlying (well the cumulative negative, to be precise).No.
Exaggerated case.
Day 1 (both start at $1):
Underlying up 90%.
-1x ETF down 90%.
Day 2:
Underlying (now at $1.9) down 50% to $0.95
-1x ETF (now at $0.10) up 50% to $0.20
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This isn't an example intended to show the -1x ETF is worse or bad... just showing path dependence. Run your own numbers. Effects are small for low vol, monotonic movements in price (or actually improved)... but for short term whip saw vol, that is high, both inverse and leveraged (inverse / normal) funds decay.
Not to mention fees, and exactly how a inverse fund attains it's goal which isn't so simple.
Hope i answered the question you were getting at.
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AI,
Right. But i meant given you can't buy the VIX directly, and the VIX options are already pricing large volatility in the coming months (you're paying a large premium), and VXX isn't a good option as previous discussed, what would be the best option to express this view?Do you disagree with the future path of VIX as predicted by the VIX futures?
If yes, you can buy / sell at will.
If no, move along.
Because "VIX" is this thing that has a number associated with it, many smart folks get involved "how do I make money money off of it going up?"... but you can't. Simple. It doesn't exist.
It's like if I created an "index" of whether today was Thanksgiving or not. The index is 1 today. But futures for a specific date in late November suggest the index will be 2. How can I exploit the change from 1 to 2, I'll be zillionaire?
VIX is like this. You can't buy a synthetic thing, you can only buy cash settled futures / derivatives, and thus you only care about what those derivative markets are pricing; you can only profit from a divergent view. VIX rising is not divergent (of course, if you thought it was going to 25 tomorrow, that would be divergent).
If you believe vol is specifically cheap, you can buy options directly of course... but again, options (generally) are going to be pricing their vol off other derivative markets (not just today's vol) + the underlying...
VXX is an amazing ETF, despite mind-blowingly bad under performance in all markets over even fairly short periods of time, much worse than any concept of the underlying, it continues to attract big $$ which encourages added friction for the roll costs.
It's stunning. These volatility products should have never been approved by the SEC if they are intent on regulating these, these were obvious "do not pass" securities...
</rant>
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Hey Lance, I just hope you understand that buying "VXX" isn't even remotely close to buying "VIX". There is extreme contango which costs you as a holder of VXX roughly 8-12% / month... more currently. This is because the futures curve of VIX is currently already predicting a large rise in VIX over time.
You can't buy VIX since it's synthetic... so the futures curve is what you care about, not spot VIX.
My 2 cents, also short.
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VXX (iPath S&P 500 VIX ST Futures ETN)
Thanks
Lance
Lance, what view are you trying to express with this bet?
You betting that vol is going to rise faster than 12-14% in the coming month? Something else?
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Daily Journal seems very timely.
It's portfolio has been under pressure, and the market is valuing their other businesses which generate little EBITDA and are unproven at a truly amazing multiple. Portfolio is easy to hedge. Somewhat illiquid.
Still like FXCM short.
Many REITs seem worth a look - they seem to be trading like they are treasury substitutes these days. Low vol funds must be throwing caution to the wind or something. O for example is impressive in this regard. 3.3% yield... but it's "the monthly dividend" company, so there's that...
Think CVX also an interesting short here. If you asked someone 2 years ago to predict CVX share price if you gave them the now current forward oil curve, I think you would get spit up on.
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I think Nate will perhaps have a more eloquent response, but to me, I would not consider deposits as liabilities - at least for the reasons you normally calculate enterprise value (ie, they aren't getting paid off in an acquisition, you aren't splitting cash flows with depositors, generally).
For a financial, I would think more about the economics of the overall business, take out value, the stability of the "capital structure" however you define it (equity + PFD + debt), and the incentives and protections both implied and real of various folks providing funding (including depositors of various kinds) and stress test how the economics of the business can change.
Short answer though, I would not, and do not, consider enterprise value in financials, debt + equity matters, and if liabilities need to include deposits, you have a problem. :)
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Mostly just wanted it all in one pool so I wasn't worried about doing different things in different accounts. I just wanted to do the same thing I was doing for myself, but for a group of people.
Also, clients can look at positions and leave a lot easier (at least I think) with the separate accounts. Tracking performance sounded annoying, e.g., if there were different fee structures/entry points/fund additions, etc.
And probably, I just liked the idea of a fund better.
These are all good reasons Race mentions. A single tax situation is a big deal too. In separate accounts, my clients need to do their own taxes, vs. just get a K-1. Also, transparency cuts two ways - it's easy to pitch transparency as a benefit to the client for separate accounts, but also I think Race is right that it may allow folks to login / check their account too often or get scared by what you own.
Also, measuring performance is easier with a fund, and also statement generation for clients (if you do that) is easier. There are some other benefits of a fund too, activism is more simple since you are custodian and vote the shares, super illiquid positions, or positions with super high dollar values can be acquired for a fund in blocks where in separate accounts might not balance them equally / simply across clients.
The main downsides of the fund structure are cost, transparency, and added regulation (since you are a custodian) assuming you are registered as an advisor.
FYI, separate account setup all in is <$2k to start, and <$1k / year ongoing (for me at least)... so you can kind of walk through a table to figure out the pros/cons.
Also, final note, there is a misperception that performance fees can't be charged in separate accounts, but only in a fund... that is not true, but you have similar requirements for Qualified Investor, etc. (I am not a lawyer).
What is a concentrated portfolio?
in General Discussion
Posted
LOLz... I'm going to leave my typo because I like the image. :)
"I don't believe in ferries, only tug boats..."