WhoIsWarren

Yes great little story. Kind of like how the Romans forced engineers to sleep under a bridge once it was completed. I too will be adding the book to my reading list. Cheers.

That's probably a fair comment, especially in the US or Canada where I understand that the cost of setting up your own (hedge) fund is quite low. In other jurisdictions (Europe) the costs and regulatory hoops are prohibitive unless you have reasonable scale. Unfortunately there are too many spoofers (with and without track records) feeding from a small trough.....

Edit: You re right, he s not saying it s luck. What he is quantifying has price at it s heart and therefore does not resonate at all for me. Value is what you get, I think you're misinterpreting the nub of the issue. Yes I know that Taleb says some blasphemous things (like questioning Buffett's record!), but you've got to admit that luck plays a huge role in investment. Added to that, there are a huge amount of spoofers in the industry (whether they know it or not), so you are bound to have lots of randomly outstanding track records. So you think that over the long run luck evens out? Yes, but that's over the very long run. I've seen reference to the fact that it would take over 100 years of a track record to "prove" skill one way or another. Recently enough the book 100-to-1 in the stock market by Thomas Phelps was mentioned on this board. I'm halfway through reading it. Phelps has got a lovely quote in there from one of his mentors, a guy who set up the research lab at Du Pont. The quote goes something like: "The problem with finance and economics is that we are always working with dirty test tubes." This is the truth of it and I've got to say that the value fraternity are sometimes too zealous in their beliefs that they cannot accept alternative views or criticism. The easiest thing in the world is to talk about 50 cents for dollar bills. Just try prove it -- you can't!

I don't know if the board has seen this already, but this is an interesting (and depressing) 'thought experiment' by Taleb. It's quite maths-y but not too long. In summary (and correct me if I've got this wrong), in the highly random world of investment, where the outcomes are very likely to exhibit fat tails, the more investors there are, the greater the chance of finding stunning but nevertheless spurious, random results. Investment is a winner-takes-all type business, hence money is likely to gravitate towards those 'winners'. The bottom line is that the likelihood of someone with genuine skill succeeding in the investment business is very low. [it's also a fantastic reminder of why we should be slow to follow and believe in our investment heroes]. http://www.fooledbyrandomness.com/spurioustail.pdf

Unlike James East and Uccmal, I've only been a shareholder in Fairfax for a year or so. Like a few others on the board, it's a large enough part of my portfolio. I'm licking my lips: it trades at around book, management is talented, conservative and owns lots of stock -- right up my investment street. Back up the truck!! Like many / most / all of you, I've read all Fairfax's past shareholder letters and a good number of the annual reports. Of course I've seen how the share price has moved over time and I know all about the "seven lean years". However, it's all very easy to read a company's history and imagine how you would have stuck to your guns. The only way of knowing is by living through it yourself. Others on the board passed this test. They felt those two steps forward and one step back. In retrospect the attacks by the hedge funds looks an obvious case of wrongful opportunism, the Northridge consolidation a storm in a tea cup etc., but I am sure it all felt sickening and disorientating at the time. There's nothing worse than being in an investment and losing your sense of anchor, when a company's integrity is called into question, when you lose faith in your estimate of intrinsic value or earnings power. Fairfax is no Diageo or J&J. While I believe in Fairfax's ability to generate above average returns over the long run, mentally I am prepared to hold my nerve through what I think will be a prosperous but potentially volatile journey. Right now is certainly not one of those volatile times, which is why talk of impatience at the stock's lacklustre performance strikes me as far, far, far too premature. But what do I know, eh?

twacowfca, that's very interesting. Do you happen to have a link to those stats or know where I might find them?

Giofranchi -- now you are embarrassing me! And while we're on the subject, I enjoy your posts a lot. Perhaps that's because I can most identify with your style of investing and I'm desperately seeking out others to confirm my innate bias! Hopefully not.... And as for my infrequent posts, may I just say that I look at the amount of posts that you and some other very regular contributors make and I think -- how do they do it, where do they get the time?? I can barely keep up with what's been written, viewing videos posted up etc. that by the time I'm finished it's late and time for bed. I must be seriously slow! I think what my friend was referring to was that the most successful and well-known of the owner-operator companies are likely to be close to the end of their lives and that somebody else -- an inferior owner-manager if you like -- will be running the company in the not too distant future. He likened it to buying great companies after they've already been great. As you say giofranchi, what we should ideally be doing is hitching a ride from those owner-operators who likely have a couple of decades of their working lives ahead of them. You bring up another crucial point in my opinion. I don't believe it's enough to buy any old owner operator -- some of them are complete plums and have become very wealthy despite themselves. You've got to feel confident that the owner-operators "get it". They systematically look for bargains, try to buy the proverbial 50 cent on the dollar. My thesis is that this attitude (combined with a great work ethic) at the top permeates down through the organisation and invariably this culture gets ingrained into DNA long after the father figure has departed. Think about Berkshire or Leucadia or Fairfax or Markel. Will the culture there change after Buffett / Munger / Steinberg / Cummings / Watsa / Markel (x2) retire? Perhaps they won't have the same drive or same genius, but even at that I believe they'll be more equipped to grow value for OPMIs than the vast majority of agent managers. Anyone disagree with my thesis?

Gio thanks for posting these quotes -- I’m sure I’ll be using them again somewhere. The idea of siding up with owner-operators really appeals to me, a powerful concept that I only begun to fully appreciate in the last couple of years. Even in those businesses that 'your idiot uncle could run', agent managements can do a tremendous amount of damage due to goals and aims not being aligned with shareholders. Hellsten thanks for posting the wealth-index material, I hadn't seen it before and I certainly think it’s a good initial screen for looking at good owner-operators in good industries. Funny though, I sent the wealth-index website around to some colleagues, thinking they might find it useful, if not interesting. One guy replied (tongue-in-cheek) that for choice he would short these wealth indices! Why is it inevitable that the culture these men built over a career will continue to drive outperformance when scale, mortality and succession all conspire against them? Warren Buffett, Carlos Slim, John Malone, Amancio Ortega, Paul Desmarais, Sheldon Aldelson etc. are all getting on in years and it is debatable whether their drive and culture will survive the transition to the next generation. Moreover he said, all of these guys, paraphrasing an argument made about Steve Jobs & Edwin Land of Polaroid, "shared a creative gift that gave the world products it had to have. Call it genius or call it magic. You can't replace that." I still don't fully agree with him, but there’s some truth in his argument. Interesting. Ericopoly, like Gio, I also am invested in Fairfax. To be honest, I don't really like that Watsa has invested in WFC, but context is needed -- it's small (around $60m). If it goes to zero Fairfax will be fine. Meanwhile I’m as confident as I can be that Watsa is smart, motivated and will always do his best to grow the intrinsic value of the company. I'm also in Leucadia, who as you know recently agreed to merge with investment bank Jefferies. Would I have bought Jefferies stand-alone? Unlikely. What gives me a lot of confidence is that Steinberg and Cummings have known and worked with Jefferies management for around a decade. They’ve been on the board for around 4 or 5 years. They’ve seen the inside of the bank, like what they see and are prepared to put an enormous chunk of their personal wealth on the line. Theirs is an insight that is very different from what a OPMI (Outside Passive Minority Interest) sees, which in the case of many banks is a complicated, undecipherable mess. Each to their own, but this is the way I feel best suits my thought process and personality.

Here's a recent Chanos interview. I rate him and his approach very highly. I especially find it interesting how he finds such great short ideas in the very places where "value investors" are long (e.g. HP). Enjoy. http://www.reuters.com/video/2013/01/17/reuters-tv-chanos-on-chinas-debt-and-pc-makers-fail?videoId=240556062&videoChannel=118066

Watsa owned 259,808 shares as at March 30th 2012, which is the last updated filing that I can see. That's around 1.31% of total shares outstanding

Good call eggbriar! Arden indeed paid a special towards the end of November -- $20 a share on a stock trading at around $100. Particularly pleasing for me as I own some stock ;) Any other holders out there?

The subject of moats is extremely complicated in my opinion. I think it's easy to kid yourself into thinking that a moat exists when in reality it doesn't, or it isn't wide. Disruptive technologies can render once strong moats useless against attack from new forms of competition. Even the use of the term "moat" is interesting -- the invention of the cannon and guns in the middle ages made the overlord's castle and moat a thing of the past. Famously, Munger once thought GM had a bulletproof franchise. Buffett thought at one stage that Eastman Kodak's moat was as wide as Coke's. So what am I saying? Well just be careful. Companies with moats or competitive barriers will tend to have high margins and returns and likely trade on high valuations. So if you misdiagnose the moat the stock has a long way to fall. I think true moats are quite rare and of these some likely own their position to large slices of luck along the way. All that said, I'll tentatively share an example of a company with a strong moat: Sysco, the food distribution company. By virtue of its size (it's twice the size of its nearest competitor), they've got a number of advantages over their peers -- buying power, better utilisation of its warehouses / trucks for example. As a result it generates three times the margins of peers. It has a very diverse customer and supplier base (the opposite can be risky) and customers purchase regularly from them. While there are no technical barriers to entry, it would be extremely difficult and expensive for a new start up to profitably replicate their network of trucks and warehouses. They're not dependent on favourable government regulation, nor I think will they be much affected by fads in diets. Finally and crucially, I believe Sysco faces low obsolescence risk: what will replace delivering food to restaurants etc. in the future? Will the stock shoot the lights out over a 10 or 20 year period? Probably not, but the valuation is not high, it generates good returns and management thinks long term. I hope to get rich slowly from Sysco. But hey, if Buffett and Munger can get it wrong..... Outside of moats and the pitfalls involved, I would side with giofranchi on getting into bed with smart capital allocators. Though of course what you're doing is betting on your ability to judge the abilities of others. For every Prem there's a BigLiar, eh? A long response, but this is an area of huge interest for me.

A great idea jay21 -- I will follow this thread with much interest. How much of a help I'll be to others though I'm not sure....

Along the same lines is Bezos saying he'd love to open physical Amazon stores (as long as they could could make them distinctive). http://news.cnet.com/8301-1023_3-57551081-93/jeff-bezos-we-would-love-to-open-amazon-retail-stores/ And the Toys R Us chief was quoted in the FT yesterday: "Established store retailers add more internet, and the internet-only guys add stores and other physicality. It's so clearly the future model that it almost seems ridiculous that we're debating it". http://www.ft.com/intl/cms/s/0/08f7169e-311d-11e2-a11a-00144feabdc0.html#axzz2Ckf3SXQu I don't know what it all means, but it's interesting! ???

Doh!!! Thanks for pointing this out glider.....that was very sloppy on our part, don't know what happened there. Yes AIG is 5 times levered. On the point of the loss triangle table, I just pulled up AIG's historic performance. In 2001 AIG had reserves of $27bn; 10 years later they had revised that estimate up to $55bn, a $28bn deficiency. Their equity in 2001 was $55bn. No doubt this is a material restatement. I'm sure there are host of other insurers who had a far worse experience than AIG in that period. Sure the industry was affected by increased asbestos claims, but these are the risks you take. Generally I find it hard to trust insurers as a group to reserve in the expectation of redundancies down the line (Fairfax, Markel, Berkshire being the obvious exceptions), but this is a personal cross that I bear that others might be prepared to risk. Really, the point of the article was not to make a case for or against AIG (or BAC). Actually I think you're right -- AIG probably is very cheap. As AAOI pointed out out, this is an issue of risks around a probability weighted outcome, position size within a portfolio and Berkowitz's presentation of the "facts" as a home run.

The argument over whether AIG and BAC are bargains or not could go on forever without reaching a conclusion. The point the article was trying to get across was that financial companies (AIG and BAC included) are difficult to analyse because of insufficient information, they are levered and therefore the variability of outcomes is quite wide. Would you disagree? Is this something that Berkowitz openly acknowledges? No. Berkowitz has put forward some of his arguments for owning his financials. I'm sure I haven't seen everything he's written on them, but the "case studies" on his website are pretty simplistic and could be picked apart with relative ease. I know there are many BAC and AIG lovers on this board. Out of interest, how many would say that their decision to hold AIG and / or BAC has been influenced by the fact that Berkowitz holds them? I know I've done it myself in the past -- buying stocks that other well-known value investors (perhaps even "superinvestors") have bought into. Trouble is, if you don't fully understand the investment case yourself you can be easily shaken out of the position if the share price falls sharply, or the "superinvestor" that got you in there in the first place decides to sell out. A dangerous way to invest in my opinion.

This is the latest article from the Value Investment Institute (disclosure - I'm involved). Most fund managers don't have the luxury of permanent capital and are therefore in the game of portraying a very positive image of themselves and their investment abilities, particularly in times of poor performance. This article focuses in on Bruce Berkowitz of Fairholme Capital, who was interviewed on Wealthtrack in October 2012. While he might perform very well, it appears to us that Bruce Almighty has downplayed risks to his concentrated and currently financially-heavy investment portfolio. I know there are many fans of Berkowitz on the site, so I'd be interested to know what people think.... http://www.valueinstitute.org/viewarticle.asp?idIssue=1&idStory=123

I'm going to head over to the Fairfax AGM / Corner dinner this coming April -- looking forward to seeing you all there! I was also thinking of looking up a couple of companies, while I'm in the area. Does anyone know of any really interesting companies that are HQ'd in Toronto? Ideally I'm looking for higher quality companies exhibiting good returns, a good attitude to capital allocation and shareholders, a long-term vision etc etc. Thanks

Don't know if you found it already, but is this the MIT paper you were looking for? (In case that link doesn't work you can Google "Future Characteristics of Offshore Support Vessels" by Robin Rose of MIT) http://www.google.ie/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB8QFjAA&url=http%3A%2F%2Fdspace.mit.edu%2Fbitstream%2Fhandle%2F1721.1%2F64580%2F727052552.pdf%3F...1&ei=gTGJUKz2B4rQhAfysoCoCA&usg=AFQjCNHyXBJWfHwLonVVfVlERVE4Hv6usA

It's interesting that a number of posts relating to this story mention or hint that if only the author of the article had bought more stock after it had fallen he would have made out a huge winner. Well I thought I'd offer my perspective on the Readymix story. I'm the "fellow member of the Value Investment Institute" mentioned at the beginning of the article. I was invested in Readymix over the same period as the author of the article. I should stress at the outset that these are my views and not necessarily the author’s. In my view, the outcome of this investment -- I got my money back, plus a little -- was pretty much irrelevant. More important was -- and this only came with hindsight -- that my ability to understand / analyse Readymix and the industry within which it operated was limited. It made me think about how well investors typically understand their investments, that the lack of knowledge only tends to come to light when the investment goes wrong (i.e. when investments go up we are blissfully unaware of our deficiencies). Let me highlight some of the issues as they pertained to Readymix: -- There was (is) massive over-capacity in the Irish cement market. Operators are not willing to cut capacity because of the high fixed cost nature of the business as well as the full loss of carbon credits that would result from cutting capacity below 50% capacity utilisation. Moreover, the cement operators in Ireland are vertically integrated, so they dumped cement into their block operations, meaning Readymix couldn't compete on price. Furthermore, one of the cement operators has been in administration for the last few years and reportedly was extending credit to downstream companies (Readymix competitors) of questionable viability, in an effort to keep the business looking sweet for a sale. -- Illegal quarrying for aggregates is also a big problem in Ireland and the authorities appear to turn a blind eye to this. This puts compliant operators, such as Readymix, at a price / competitive disadvantage. -- Another reported issue was the fact that sole traders frequently closed operations, leaving their debts behind them, only to reopen the following week in the name of a brother / wife / son etc. In these ways, capacity didn't exit the industry as one might have expected. This led to sustained losses and the racking up of debt, provided by the parent, Cemex. Towards the end of 2011, when the share price was at its lows, it was not obvious at all that the company would survive. It was perhaps years away from becoming profitable. It was reliant on debt financing from its parent and it wasn't clear that the debt agreement was watertight. A concern was that Cemex might have been able to put the company into administration, cherry-pick the best assets and leave equity holders with nothing. This also meant that when eventual Cemex bid came, shareholders were not in a good negotiating position to push for a higher price. Of course, these details I've highlighted above are unique to Readymix, but I believe the 'story' is a recurrent theme. I got suckered in by a 'cheap' valuation and a nice narrative about depressed profitability. For me, the wrong take-away from the Readymix example is not "I should have bought more after it fell", but rather "I got lucky in the end and should never have invested in this stock". I read this morning in the Bloomberg article on Ted Weschler that he spends 500 hours analysing an investment. That’s probably the real answer…..