netnet

SD, What is an underwriting triangle?

Nice interview. Thanks Sanjeev! The full interview is at http://www.advisorperspectives.com/newsletters09/Au_revoir_Jean-Marie_Eveillard.html I find his comments on gold interesting: Our gold position is based on our belief that gold is a universal store of value. We believe a gold position of less than 5% of our assets is irrelevant and a position of more than 15% would be too painful if we are wrong... After World War I, during the great inflation of the Weimar Republic, the German government acted very shrewdly. They forbade German citizens from buying gold and from holding foreign currencies, and they taxed real estate very heavily. As a result, some rich farmers bought grand pianos. They did not want the paper currency being issued, because they knew it would be worthless the next day. Instead, they chose pianos as a hard asset that would hold its value. Today, we see gold as having these same characteristics. The current actions of the US and UK governments, through “quantitative easing” – which is really just a code word for printing more money – will be rather good for common stocks. Initially, at least, these actions will be bad for cash and Treasury bonds. At some point, they will be good for real estate and fine art. However, these actions are very good for gold. The path of increased money supply leads to real assets, and gold is our asset of choice. Common stocks will also benefit, as they are representative of real assets. Remember, the opportunity cost of holding gold is near zero, because interest rates are so low.

So any updates on the preferred front? On my end, I have (intellectually) put the WFC-L and USB into the money good category along with ORH (both issues), I expect to get paid the divi and expect them to trade to 75% of par within 7 years. (This is a political as well as a balance sheet analysis.) Interestingly enough, one financial Armageddons are good, e.g. continued stagnating deflation, think Japan of the 90's, makes these issues look even better. On the other hand, rampant inflation hurts all but the floating rate issues. Netnet

Here is another thoroughly disagreeable article about Buffett in the the Toronto Star. (http://www.thestar.com/Business/article/604619 ). Now I read it, as I have heeded Charlie Munger's "command" to seek disconfirming evidence on things I believe. This article's only "hit" for me is that WEB (surely) knew of Moody's papering dodgy CDO's with AAA ratings. That is a bit of a dilemma. But that is really the only nugget amongst the horse crap in that barn. The reporter, if you can call him that, makes and uses all sorts of allegations and innuendos, most of which are either false or half truths.--calling Berkshire's businesses "motley", being too complex to understand, saying that Buffett violates his own governance stance and has "reneged" on name a replacement, calling WEB a "reckless punter". FYI, I have always had an idealized view of you guys, my northern neighbors; I have thought of Canada, as a home of civility and rationality, and decent heath care. Well the Star is doing its best to disabuse me ;) I debated even posting this claptrap, but I decided that nothing would be lost by supping with the devil so here it is: http://www.thestar.com/Business/article/604619

I must confess I haven't done a bit of work on this name, but the lender on the bridge is going to allow them to roll it into a term? What kind of rate are they paying on it. It must be ghastly expensive. Cursory inspection as to cash on hand seems as if they do not have the cash to cover, so then you have to figure how far down is there cash flow going to go?

My problem with PDS is the debt load, particularly in this environment.

PDS Regarding Precision, if it survives!!! it looks great, but that debt load could literally be a killer.

Now that the market has kicked everybody in the teeth, does anyone have any ideas for great growth stocks that are cheaply valued and have a moat, say like a young Microsoft or Walmart? (I hear the objections already, what moat did Walmart have then. Well I would say that their operational excellence made them damn hard to compete against, ever Costco is afraid of them!) Companies with good returns on capital that are inexpensive, if not down right cheap! I am thinking of smaller companies (50 mm to 1,000 mm market cap) that still have enough heft to survive in this environment. Photo Channel is interesting but a tad risky for my tastes. Of course I think that FFH may have another 10 to 15 year run compounding at 15 to 20%. Ideas anyone?

My greatest mistake was not reading the Intelligent Investor that was in my dad's study at 19. Buffett read it I didn't and our results showed. Now if I had read it and the introduction by you know who, my family might, just might have invested in BRK way back when. This however is more bad luck than a mistake per se. The following is not my greatest mistake, but one that I will remember all too well: Whoops bonds, were bonds issued by a nuclear utility, Washington Public Power System(WPPS). As I remember there were 5 types of bonds 1,2,3,4,5. Each bond was associated with a specific group of projects/power plants. The riskiest, with the greatest upside were #4 and 5. So that is where I bought. Of course Buffett,being wiser and smarter bought the safer bonds, I think the 1's which I think doubled. From memory the 1,2, and 3's were probable trading at 25 on the dollar the 4, and 5 were at .12 or so. WEB's safer bonds had Bonneville backing and one of the power plants was built. Mine had neither. I exited the position, licking my wounds and I think the ultimate recovery was .10 on the 4's. I learned the lesson: Remember to only shoot fish in a drained barrel.

That was a great interview. It's interesting how much "better" that interview was than the CNBC. It was way more insightful. Admittedly most crumbs from WEB are worth 10 times their weight in gold, so the CNBC interview was a good market commentary, but for deep thinking about markets etc, the session with students was way better. And the responses were generally a function of the questions, so obviously the kids did a way better job than the journalists--surprise, surprise!

Wow, Let me get this straight. These are the same guys (and gals) who rated the CDO and CDO squared paper AAA, the paper whose best use is in the financial outhouse.

But remember market timing is a bit of a fool's errand to quote Seth Klarman's annual letter "While it is always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up and competition from other buyers will be much greater when the markets settle down and the economy begins to recover. Moreover, the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better." Putting the hedges on was not market timing, it was (presumably) driven by the belief that the market was over priced. Once high quality stock were cheap Prem loaded up. Was that a bad thing to do? Remember the story of Buffett and Washington Post. He bought and down it went. But he was right to buy. Now, for us, we are still worried about the down-side and are willing to spend for a little insurance, but we are neither as smart or rich as Prem. Although, we are going to pull off the hedges if the market tanks 5% to 10% more.

Hey, OEC, I noticed the commentary on the Citi arb Monday AM, and assumed that the profit had already been "arbed" away, so I did not go into the details. What precisely are the ratios on the trade and how is it fairing with current volatility. Also are you naked long on the other Citi preferred? For me I like the Wells and the ORH preferred, those two look like shooting fish in a drained barrel! (At some point, I'll move down to the Wells common.) Portfolio question: Don't you think that Odyssey Re looks money good; so that plus the Citi arb position really are conceptually different than the other positions. From an analytical or risk management perspective, shouldn't you treat these preferreds entirely differently and not put them in together? You were arbing those retractibles weren't you? How is that?

One of my kids tells me there is already pdf piracy of college textbooks (for students p--ed off that the books cost >$90 and are out of date in a year or two, which destroys the resale value, you have to really ticked to sit there and scan in 300 pages!)

What are the best hedges for a "calamity"? There are the inverse ETF's of course. They do worry me re: the constant leverage problem, i.e. the daily rebalancing can lead to horrid returns with volatility. And of course there are those who say it is time to take off the hedges, like Sir Watsa, as the majority of the downturn (markets that is) maybe over. We are slightly hedged, (I wish we had been more, but those are the breaks), but I expect that there is going to get a bounce up from here, so I want to be prepared to put in a better hedge in preparation for another leg down. So I am looking for any ideas out there. (By the way, I think BAC and C are potentially zero's but I don't like the risk reward.

Instead of the Power Shares, why not do it yourself. I don't know who the manager is but it seems to me that a concentrated portfolio of 5 great preferreds would do the trick.

Both are solid as enterprises, BRK would probably survive anything save the destruction of the US itself, FFH is not quite that solid. Fairfax does not have the mortality risk that Berk has, i.e. when WEB goes to the great stockmarket in the sky, (or whatever euphemism one chooses.) This risk is more on the market price. The company itself probably will be almost as solid for years to come, but the stock itself will probably trade down significantly. WEB is the best investor of the ______________(fill in the blank here) so Prem may prove to be as worthy but he has not yet. However, Fairfax has way, way more opportunities, e.g. a well placed 500 million (like the CDS investments) can really increase the value of the company. A 500 million that turns into a 10 bagger barely moves the needle for BRK! We are in an environment in which BRK will be able to place capital more advantageously than in the past few years, but it still needs to place large chunks into large businesses that inherently can not grow as fast as smaller businesses.

This guy is great. A true gem!

Snailslug, You've got it on the button: location, location, location. It's Rockridge, our little over priced enclave! but better there than Flint, MI.

I'm only familiar with CA, but many parts of CA have already bottomed (mostly the less-desirable neighborhoods), places like Riverside, Oakland, etc. Many houses in these neighborhoods are selling at 1995-1997 nominal pricing. You're not that familiar with CA either. We have been looking at a nice cosy little house in Oakland--3 bedrooms for one million. Tell me about undesirable!! I hope it hasn't bottomed out, my wife really wants that house!

The government forced them to buy merrill. BofA didn't have a choice. BofA would not have problems right now if it weren't for that acquisition. Wrong on that count Watsa, the Gov wouldn't let them out of the deal to which they already agreed; that is a completely different story. The gov did not force them into the deal to start. You can argue that they should have been allowed out of the deal, but by that time the Gov had already helped BAC. Presumably more generously given their acquisition of Merrill.

Great job and thanks Sanjeev! 1) There is not a trivial risk that Bank of America and Citi will be nationalized and their shareholder wiped out. What range of probabilities does he assign to this. Would invest in either anywhere in the capital structure? 2) Second order effect of the such a nationalization, how does he think that will affect strong banks? Wells Fargo seems to be a strong bank. What does he think of it? The preferreds versus the common. 3) Other than the usual suspects, American Banker, WSJ, Barrons, Fortune, Forbes, Newsweek, and the 10K's etc. what does he read currently. 4) What is his circle of competence and how did he establish and grow it. (I don't think he was ever a banker.) 5) What are the key ratios he uses to evaluate and compare banks? 6) Why does he want the additional conflict involved of active investing? 7) Could he illustrate his thought processes concerning specific investments? (previous positions are fine) 8) As an investor what was (were) his worst mistake(s)?

A continuation of portfolio strategy--What are people using for cash equivalents these days? Somewhere someone suggested ORH callable preferred as cash. But that presumes that ORH/FFH will call them in 2010, which is reasonable but not a cash equivalent in my book. It is a reasonable conservative investment but hardly cash! Now that the arb spreads have come down, are the purer arbs on the board doing fewer? Further parameters on our portfolio--patient capital, absolute return, (but should beat S&P) can show year to year losses and or underperformance, (probably not three year though.) No high water mark issues, no institutional imperatives, shorts and derivatives are used. SD your brickbat is acknowledged ;). Nevertheless, what I'm interested in is what others are doing.

Rather only talk about individual stocks or the overall market, I wanted to start a thread on the portfolio strategy. My object is to return at least15% per year. Here are some of my ideas for an aggressive portfolio and a conservative portfolio. Both portfolios are 25% to 35% in cash, both have a small put position on the overall market. Both portfolio have relatively small allocations to oil companies (Contago mostly) and Gold (bankers, junior miners, and Gold miners index). Conservative: 5% oil, 5% gold (mostly in the miner's index), market put, 10% in preferreds Well, Orh mostly; Luk; Brk; arbitrage positions; the rest in larger, balance sheet sound, statistically cheap companies. Aggressive: 8% oil; 8% gold; market put; LUK; arbitrage; positions is smaller companies. Any thoughts?