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netnet

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    mother of all carry trades

    in General Discussion

    Posted

    It seems to me that his (Roubini's) argument is totally reasonable. Certainly, according to Marc Faber, for example, we are in an overbought in many, many markets and the dollar is over sold in the near term.

     

    It sounds to me as if you guys are saying you don't like the message so shoot the messenger.

     

    I'd have a lot more respect for Roubini if he would have called this carry trade 8 months back

    8 months ago the carry trade was not happening.  Now that it (presumably) is happening you should be prepared for the unwind.  Yes that was also the case with the yen-carry trade that went on for far far longer than certainly many, including me expected.  Were you expecting him to tell you to execute the trade 8 months ago?

     

    Remember he is just the weather forecaster, it's up to you to build the ark!  Now of course he could be totally wrong and for the general outline of how other crises have played out, you can do worse than read the new book by Rogoff. it is a heavy slog,though.  For a shortened version try the World Bank paper on crises or Kindleberger.  To mix the metaphor-- djust because we bounced off the bottom doesn't mean we are out of the woods.  So look to what asset prices have done after other severe downturns.

    Business that can pass inflation

    in General Discussion

    Posted

    Let's suggest that long-term nominal ROE has been 14%/yr for the S&P 500.  In a period of inflation/deflation/stability, that nominal rate will typically not change (this statement taken from one of the 1970s BRK annual letters you mentioned).  Real ROE declines by whatever the rate of inflation, it eats away at the real value of that return on capital.  The higher inflation, the lower real ROE (and this doesn't stop at 0% real ROE, it can go negative).  So, as I state, for every increase in the rate of inflation, real value is lost on business as a whole.

     

    Not to quibble or go on at length, but by your the terms you use  the nominal ROE on the S&P your argument holds.  But you said  ALL businesses lose value.  Ericopoly shows that a pipeline company, that has "tolling" i.e. pricing power will gain in value in a high inflation.  Are you saying that BRK lost value in the 70's?

     

    Ericopoly, I don't know the pipeline business, but a business with pricing power, here a toll for distillates instead of cars, should be fine in an inflationary environment, given your assumptions--longterm debt at fixed rate and pricing flexibility.

     

    SD--Did the stock price of the U.K. exporters and investment manager go up in response to the devaluation?

    Business that can pass inflation

    in General Discussion

    Posted

    Some general ideas on businesses and inflation.  You could do worse than look to Buffett's deeds and words, i.e. the annuals, during the inflationary pre-Volker US economy( 70's).  He refuted the general notion of asset heavy companies being the place to be during inflation; companies with pricing power was the place to be.

     

    Comments on the discussion so far:

    Semiconductors/tech 1 The thriving software and tech companies have far, far outpaced inflation--that said you still have to pick the next winner, good luck on that.  A mature tech company is a different animal than a young Intel or Microsoft.

     

    Utilities in regulated industries:  Pipeline companies such as Enbridge, TCP in Canada. The asset heavy companies did not protect your money during the last inflationary era.  See above. (Geez, quoting myself, that's kind of pompous ;)

     

    I would suggest that in periods of high inflation all businesses lose real value. Really? That is kind of a blanket statement.  In a terrible environment, Zimbabwe or Wiemar Germany, I would have to agree.  Still, if your business is not expropriated, it is still a better bet to protect to your net worth than the average job or any bank account.  The last time I looked, this is not Zimbabwe so do you think your statement is true in all cases in North America with say 12% inflation?  Suppose you have some kind of asset light, toll business that has pricing power?  And then of course you have the sterling example of BRK; it didn't lose value during the 70's.

     

    yellow pages income trust(ylo.un)

    in General Discussion

    Posted

    I would second the comments above.  This is a cigar butt at a cigarillo price.

     

    Depending on cash flow, indebtedness, and good management, buggy whip businesses can be great--Blue chip stamps comes to mind or even BRK itself. But mediocre capital allocators in that kind of business is a killer.  If you give me a barge pole, I promise not to touch it!

    Tilson's talk on Munger

    in Berkshire Hathaway

    Posted

    I don't particularly like tooting Whitney Tilson's horn--goodness knows he is good enough at self promotion, but he is a smart guy, who does occasionally have some interesting things to say.

     

    He gave a talk/conference call this week on Munger; it is actually pretty good, just skip the first 9 minutes or so. (It's about an hour long)

     

    (Side note: The sponsor of this talk is Phil Terry, who runs a company that is organizes peer meetings of CEO's etc.   I participate in a similar, but different one.  The one I belong to is the biggest and oldest such group in the country, (Vistage) and it has been really great.  I would suggest it anyone, and wish I had been in it years earlier.)

     

    http://showsupport.typepad.com/files/whitneytilson-9-8-2009.mp3

    20 years

    in General Discussion

    Posted

    Agree with initial suggestion for North American ideas.

    I would not be comfortable at all with SNS though.  Carlo Cannell had a slide several years back listing sectors destroying investors' capital and that therefore could be fertile stock shorting ideas (restaurants, airlines, seminconductors, and one or two others).  Sardar may be great, though his track record is based on minuscule assets the first years, but the restaurant business is very tough.  Would Warren answer SNS if asked your question.  I very highly doub it.

     

    To refute the above:

     

    Semiconductors--Intel

    Restaurants--McDonald's

     

    Now you could argue that these are special cases.  Well all investing is a special case.  So to get down into the specifics, Sadar's idea (developed in a time of overvaluation) is that take a strong restaurant brand with too many owned and operated stores and get them to start franchising, thus bring capital back to the company, as well as reducing capex.  That is a pretty good idea.  So you are not investing in SNS for a generalized bet on the restaurant business; it's a bet on Sadar pure and simple.  

     

    For the ultimate refutation of your argument-- BRK.  

     

    Textile manufacturers were the archetype of capital destroying businesses. They produce an undifferentiated commodity with necessary capital expenditures with all the benefits going to the customers, and for virtually every other textile manufacturer you would have been right.  BUT by the logic above you also would not have bought BRK!

    The next great capital allocator

    in General Discussion

    Posted

     

     

    I submit the next candidate will be relatively unknown until he is famous - at that point it will be too late to get in on the ground floor.

     

     

     

    It is almost always too late to get in on the ground floor, but to continue the metaphor, if he or she is obviously a great builder because you can see a that the first and second floors look great; you invest.  Before BRK you had 20 years of proof about Buffett.  Microsoft had proven itself as had Walmart.  (The last two were not capital allocators per se, but were great businessmen in great businesses.)

     

    To paraphrase Drucker and Munger--look out the window not to predict the future but see what is already there!

    What's your financial IQ?

    in General Discussion

    Posted

    the CRT was pretty easy.

     

    I found the article on the blog quite interesting.  Thanks for the link.  They call this test a kind of a "cognitive illusion".  Don't make snap judgments on questions that seem really easy.

     

    On the other hand the Monty Hall problem is a problem, and appears as such.  I was having a horrible time trying to explain it to my kids and guests over dinner the other day.  Nobody got it and my explanations almost convinced me that I was wrong to switch doors:-[  The 100 door example is a great intuitive aid.

     

     

    I Continue To See Green Poop, Not Green Shoots!

    in General Discussion

    Posted

     

    During the oil bust in the early 1980’s the Calgary (Alberta) housing market collapsed & most folks were effectively bankrupt - as to get a place they had to buy at boom prices with the maximum mortgage possible.

     

    The collective response was to screw the bank, & neighbors selling each other their houses for $1. When a bank did actually try to sell a foreclosed house, folks deliberately refused to counter-bid against the owners $1 offer. Depression style collective social intervention, less than 30 years ago.

     

     

     

    I would think this would be pretty hard to pull off here in the lower 48.  The sale does not extinguish the mortgage and there is a question of fraud if two sellers buy each other's houses.

     

    netnet

    Interesting video for Buffetologists

    in Berkshire Hathaway

    Posted

     

    Where did you get 300% gain?  27/9 = 3 = 200%.  Not 300%.  2x = 100%, 3x = 200%.  And if he sat on his gains for the next 3 years doing nothing, that would be 26% compounded.  Definitely not 50%.

     

    Besides, I believe Warren bought Wells Fargo at various prices, and bought even as high as $40/share.  I don't know what his exact cost basis is, but I've heard him buying it in his personal portfolio at near $20.  That's when I bought it, and subsequently sold at $30/sh, late last year.  I'm sure he didn't exactly go ALL IN at $9/sh.  He's probably averaged somewhere near $15.

     

    Minor point on this good discussion--on the math calculations.  Yes 9 to 27 makes a 200% gain, but it is way more than 26% per year return...It's not 50% either but it is closer to 50% per year than 26%, over three years, it's  about 45% per year. (1.45^3 is about 3).

     

     

    I definitely believe that WEB would go where ever the value would be, so he probably would be in very interesting exotica, except during times like last March, when he probably would have gone whole hog into Wells as he did with Amex years ago.

    Book recommendations, Part infinity...

    in General Discussion

    Posted

    what level of detail or expertise did you desire?  Of course the bible of security analysis is Security Analysis, by Graham.  Everything after that is an addendum if not derivative. (At least that's my opinion.)

     

    I like in no particular order: Quality of Earnings, Financial Shenanigans, and Fridson's book, Financial Statement Analysis.  (I am assuming that you already have a relatively thorough understanding of accounting.)  and if you can't make it through Security Analysis and the other books, then at least read Intelligent Investor and How to read a Financial Statementwhich you should read anyway!

     

    Netnet

    magic formula investing

    in General Discussion

    Posted

    I'd like to see how a screen would perform in various periods.  Alot of these backtests have happened during a period where equities were doing well.  Let's see how they did in the 70's, or how they go forward.  I dunno.  I have tracked Stingy's screen this year, and so far, it's doing fairly ok.  I've noticed one company in the screen, MEOH, also shows up in one of FFH's recent purchases.

     

    Backtests are fraught with problems, survivor bias and restatement earnings being particularly prominent.  If you believe Greenblatt, who said that he corrected for errors, the key number is outperformance with respect to whatever benchmark you use and the numbers are particularly striking.  The formula really does beat the market substantially.  Most people can not let a computer pick their stocks or tolerate the volatility, when they have such little "control" over their portfolio. 

     

    Now to go to Sanjeev's point,

    Screens also exclude other opportunities such as workouts, arbitrage, control positions or fixed income investments.
    I would say that you certainly can use the a mechanical formula as your base and also do the workouts, arbitrage, etc.  Basically this is what I do these days.  I can not realistically expect to do 20+ per year without "assistance" from mechanical screens.

     

     

    magic formula investing

    in General Discussion

    Posted

    I would like to put in a dissent here about the screens.  If for example, you take the Stingy-Graham screen or the Greenblatt's screen, you find that you beat 99.9% of money managers. More to the point, who among us has consistently gotten these kinds of returns?

     

    We humans have a generally flawed way of looking at things.  If you can find a screen method that gets you Warren Buffett like returns, albeit with way more volatility, then you might do well to get rid of the narrative fallacy and illusions of control and use the screen. Now, if you can't do that at least use the screen as a mark against which to measure your non-mechanical investment choices.  Note however in the situation we were in March of this year, you could clearly find investments that would beat the bogey of the screen(say 20% to 24%).  I would also argue that Fairfax at today's prices could beat the bogey, or at least has a chance of matching it.

     

    But the point remains it is damn hard to get to a 20 to 24% per year return, unless your name is Buffett or Watsa!

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