jay21

The fees as a % haven't changed right? You just have a larger notional and are more sensitive to the fees because it looks like a larger number? If you are happy with the funds process, managers, and results and the fees haven't changed as a %, why do you want to switch your allocation? Do you think you will be able to do better than funds returns net of fees? These are personal questions and ultimately you will have to do what is comfortable. I think that quite a few of the companies mentioned are compelling values and I continue to buy more.

Where are your numbers from? MKL's definitely looks off. Also, better to look at change in BV than ROE for most insurers due to securities gains being in OCI.

Same with me. And their 33% cash seems amazingly high for mutual fund to me. I'll continue to watch these guys and maybe invest with them.

Plan tweeted this link, which I thought was really good: https://www.aar.org/keyissues/Documents/Background-Papers/A-Short-History-of-US-Freight.pdf "Between 1970 and 1979, the rail industry’s return on investment never exceeded 2.9 percent and averaged just 2.0 percent. The rate of return had been falling for decades: it averaged 4.1 percent in the 1940s, 3.7 percent in the 1950s, and 2.8 percent in the 1960s." "Railroads are stronger financially. Return on net investment, which had been falling for decades, rose to 4.4 percent in the 1980s, 7.0 percent in the 1990s, and 8.5 percent from 2000 to 2011. Improved rail earnings are a positive development because they allow railroads to more readily justify and afford the massive investments needed to keep their track and equipment in top condition, improve service, and add the new rail capacity that America will need in the years ahead." I think I have seen some railroads like UNP and CNI say their ROICs are in excess of 10%. Now that ROICs are much higher than previously we are seeing record capital invested (as opposed to no capital invested) and a much better rail system.

What type of clients do business valuation analysts have and why do they need your services? Eg. Is for MTM accounting or advisory, or something else? I am familiar with the Big 4 groups and as I understand it the primary service is external audit support (i.e. testing reasonableness of client's MTM valuations). Not as familiar with non-Big 4 groups.

I started looking into LUK a little more and I am wondering about National Beef. It is a self described spread based business whose inputs and outputs are both commodities. I would expect a commodity producer to earn near average returns on capital so I do not get what makes this a good business/acquisition. The two ways I can see profits expanding are through increased turnover and spread widening. 1. Increased turnover - Could be a result of more demand for the end product. This seems to consistent with LUK's thesis that developing markets will demand more high grade American beef. However, if this happens, won't more plants be added, which would increase capacity and thus reduce any abnormal profitability? Right now, the industry is pretty consolidated. So will this be more of a function of how competitive the 3 or 4 participants are and how they react to more demand? 2. Spread widening - Not sure how this could happen. Any thoughts? I do not want to restrict this to beef processors. I am sure this applies to other commodity producers (I don't know much about energy, but maybe refiners share a similar business model). So, how can/do companies whose inputs and outputs are commodities earn an above average return on capital?

Pre-determinism is a straw man. It is not a requirement for singular intrinsic value per universe. I have mentioned that each universe has but one past. And each will have but one eventual future. Just because it will have but one eventual future does not mean that it is predetermined. It's just the way things actually are. You go through life and at the end (looking back) you have a singular history. Therefore, when you were born there was but one not yet determined path that you would travel (out of many that you could have potentially travelled). Now, after travelling whatever path you travelled through your life, there was only one of them that you actually travelled on a per-universe basis. At birth, you have but one not yet determined future path per universe (out of many possible paths per universe). The concept of the omniscient being is just an instructional aid. You compared the instructional aid to predeterminism, and then threw it all out together under "predeterminism". Perhaps somebody can help me correctly label what logical fallacy that is filed under. Is it guilt by association, or red herring, straw man, or what? Or a combo? Ok, so you are saying that time will pass and a set of cash flows will be experienced (I agree here). And that those set of cash flows are what should have been used when determining the correct IV?

Yeah, that's what I am kind of getting as well. Here's how I am summarizing the conversation in my head. Please let me know if I am misunderstanding the major thoughts. Eric: An omniscient person would know all the cash flows a business will generate. These cash flows determine the singular IV of the company. Me: Omniscience implies a fixed future. The future is not fixed. Therefore, the company's cash flows are not fixed and a singular IV cannot be determined.

Intrinsic value is the number that if you were all knowing about the future, and could predict all the cash that a business would give you between now and judgement day, discounted at the proper discount rate- that number is what intrinsic value is. - Buffett speaking to UGA students Intrinsic value is the number that if you were all knowing about the future, and could predict all the cash that a crap table wager would give you between now and judgement day, discounted at the proper discount rate- that number is what intrinsic value is. +1 The key word: omniscient. Advance knowledge of all future events and risk free interest rates will produce a singular real IV. The idea that an omniscient being is going to engage in a range of potential outcomes or probabilities is ludicrous. Why do you think the omniscient being will spend any time predicting what he already knows? Hence my first comment: "Only if you are a stout determinist could this possibly be true. I.e. If it is possible that the future only has one potential outcome and that outcome is knowable, then there could only be one IV. Since the second condition is undoubtedly false, it is much better to assume a range of IVs. Additionally, even if you knew the CFs the company will generate, you still could make the argument that there are multiple IVs based upon different discount rates." Quantum indeterminacy casts doubt about fixed futures and therefore knowable futures.

We would get an expected value of $.50 cents. I agree there. But does someone ever calculate the IV of something but using its expected value? Usually people discount the expected cash flows ("ECFs") in order to arrive at IV. The discount rate is never the risk free, it is the risk free plus something (a premium). The premium used compensates you for the variance in ECFs. If the ECFs are guaranteed to be one value, you should probably use the risk free rate (even this is a debatable assumption). If the ECFs are not guaranteed, you will require a premium. In our example, the toss is pretty much instantaneous, so for all intents and purposes we can set the risk free to zero. But there's a variance in outcomes. Isn't the value of the proposition lower because of the variance? I.e. shouldn't you demand a premium or discount factor?

Yeah me too (that's why I thought of it ;D). Then I realized it was much more nuanced than I intended. When we think of a business selling at IV, wouldn't we still expect to see a profit by purchasing the company at IV? Why would you/what investor would pay the expected cash flow? You would always require a profit. Therefore, the IV needs to exclude $.50. Now, what is the right amount to pay? There is a large variance in the outcomes, so what price is appropriate to subject your capital to the variance? The Kelly Criterion comes into play here. The larger your bankroll, the closer to $.50 you should pay. The smaller your bankroll, you should pay closer to $.00. So here the value depends. I am not sure how this applies to share structures though so that's why I said we might be getting off topic.

IV estimates can and do change. Unless you are all knowing about the future, you have only estimates (guesses). Surely this we can agree on. How have you witnessed the movement of IV itself? You do not have perfect enough knowledge of the future to know what IV actually is, let alone any illogical change in it's value. Going back to the coin flipping example ($1 if we win, $0 if we lose). To buy this asset (ability to participate) we would pay no more than $0.50. If it turns out that we win, we now have a $1 asset. Had we paid $0.75 before the toss, we cannot claim this was a good decision on the basis of being less than the ex-post $1 "intrinsic value" (instead of $0.50 or less). So in my view the intrinsic value changed from $0.50 before the toss to $1 after the toss. I agree with racemize. I think folks are saying the same thing, just some are looking through the rear view mirror, others the windshield. This doesn't really have much to do with the main argument, but as it relates to IV: Are you sure the IV was $.50?

"I disagree. IV doesn't change. Your perception of IV changes along the turbulent path of discovery. You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing. No." - Eric Doesn't Eric's comment "IV doesn't change" imply that IV couldn't have been another value? I have issue with that. IV can and does change. No, I don't think "IV doesn't change" implies that. IV is the some of all future cash flows, discounted. Those future cash flows will be certain values, and they will not be others. Putting aside my other comments, I posed another question earlier. What discount rate is the right one? If you use different discount rates, you will have different IVs.

"I disagree. IV doesn't change. Your perception of IV changes along the turbulent path of discovery. You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing. No." - Eric Doesn't Eric's comment "IV doesn't change" imply that IV couldn't have been another value? I have issue with that. IV can and does change.

FYP

I guess this is the assumption we are debating. I am saying this is not true. This is exactly my point. Instead of thinking using the word probability, think of the phrase claim on future outcome. A claim is clearly worth something. Returning to a coin flipping example, what would you pay for a coin flip where heads returns $100 and tails $0? What you would pay and its inherent/intrinsic value does not depend on the outcome. Eric's and your stance is incredibly biased. "This is what happened, therefore it is the only thing that could have happened, therefore the value of the business was $X." This is being results oriented. How does thinking in terms of ranges of potential outcomes relate to "lack of control"? I don't believe anyone asserted that they have control over which outcome is ultimately realized.

Perhaps you read my first post too fast. There are a huge range of theoretical outcomes for IV, but only one eventual outcome. Without oracular vision, that outcome is not knowable. We're all somewhat clueless about the future, so we estimate a probability-weighted range of IV. I stand by what I said. Your statement of theoretical outcomes implies that the IV can be different depending upon the path. Eric's statement implies a singular IV. For example, say a company is facing life threatening litigation that will put it out of business. It will make 10 dollars forever. The true odds of winning are 50% and the date the judgement will be read is one year from now. The market uses a fixed equity rate of 10%. Your probability weighted IV would come up with a current IV of $50. Eric's statement implies that the IV will only be known after the judgement is read (i.e it will either be $100 or $0 depending on what time reveals.) Therefore, I stand by my conditional statement above. I hate to sound like a broken record, but if I could have seen the future I'd have known the IV. Right, if the future is fixed and knowable, then there is only one IV. If the future is unknowable, then it is better to assume a range of IVs. If the future is not fixed and unknowable, then there exists a range of IVs. This is what the first quote says.

Perhaps you read my first post too fast. There are a huge range of theoretical outcomes for IV, but only one eventual outcome. Without oracular vision, that outcome is not knowable. We're all somewhat clueless about the future, so we estimate a probability-weighted range of IV. I stand by what I said. Your statement of theoretical outcomes implies that the IV can be different depending upon the path. Eric's statement implies a singular IV. For example, say a company is facing life threatening litigation that will put it out of business. It will make 10 dollars forever. The true odds of winning are 50% and the date the judgement will be read is one year from now. The market uses a fixed equity rate of 10%. Your probability weighted IV would come up with a current IV of $50. Eric's statement implies that the IV will only be known after the judgement is read (i.e it will either be $100 or $0 depending on what time reveals.) Therefore, I stand by my conditional statement above.

I disagree. IV doesn't change. Your perception of IV changes along the turbulent path of discovery. You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing. No. But isn't the concept of intrinsic value a "perception"? It is always an estimate, not a quantifiable, or verifiable property like say mass. There is only one intrinsic value. Time will reveal it to us. We have only prediction to rely on divining it's value. I disagreed with Eric when he wrote that. But I'm the fool; he is right and I was wrong. If you were all knowing about the future economics of a business you could discount its earnings from the apocalypse back to today using the appropriate interest rate. That's the IV and that eventuality doesn't change. Despite the fact that time only reveals one outcome for intrinsic value, we know there are a huge range of theoretical outcomes. So we're forced to make educated estimates, and update those estimates as circumstances change. I doubt this is a useful thread, but what the hell. Only if you are a stout determinist could this possibly be true. I.e. If it is possible that the future only has one potential outcome and that outcome is knowable, then there could only be one IV. Since the second condition is undoubtedly false, it is much better to assume a range of IVs. Additionally, even if you knew the CFs the company will generate, you still could make the argument that there are multiple IVs based upon different discount rates.

But the ROE must be terrible right?

Agreed. It's insane that some of these are being priced above book. Now you have PE and HFs looking to buy pools of agencies, lever them up, and sell them above book. It's basically arbitrage. (This may have cooled due to the rate vol over the last month). However, there are some mREITs that invest in PL RMBS, which were not efficient and would justify a premium years ago as the market was shattered and even if you paid a premium you could still see an amazing return. I would probably only be interested in these vehicles in extreme environments, but even then there will probably be better things to buy. It could also be riskier. There's probably some basis risk in there and if rates shoot up, things might get ugly.

Deadly Train Derailment Fuels Crude-by-Rail Concerns http://online.wsj.com/article/SB10001424127887324867904578591932401897430.html?mod=ITP_pageone_0 "Traditionally, railroads are less attractive to oil companies because of higher shipping costs compared with pipelines. But the rapid development of new oil fields, from West Canada through North Dakota and into West Texas in the past five years, has production outpacing pipeline construction, leading many producers and refiners to turn to rail, initially as a temporary fix. But once seen as a temporary solution until new, permanent pipelines could be built, rail usage has proved to be so effective that many refiners have come to prefer the railroad. Even though pipelines are generally less expensive and less prone to leaks and spills, rail offers refiners the ability to bring in crude from different locations at different prices, instead of being stuck with a single source of oil. In fact, at least two pipeline projects—one to transport crude from North Dakota's Bakken shale to a storage hub in Oklahoma, and one to move West Texas oil to California—have been interrupted due to lack of interest from refiners already accessing rail shipments."

BRK - Holding co that deploys capital where it is most attractive. Partially funded by float. Consumer goods (Unilever, PG, MDLZ, DEO, KO) - Population growth plus wealth growth in developing markets plus inflation protection = highly predictable single digit earnings growth for the foreseeable future. Basically, the companies and industries WEB likes.

[amazonsearch]In The Plex: How Google Thinks, Works, and Shapes Our Lives[/amazonsearch] Few companies in history have ever been as successful and as admired as Google, the company that has transformed the Internet and become an indispensable part of our lives. How has Google done it? Veteran technology reporter Steven Levy was granted unprecedented access to the company, and in this revelatory book he takes readers inside Google headquarters—the Googleplex—to show how Google works. While they were still students at Stanford, Google cofounders Larry Page and Sergey Brin revolutionized Internet search. They followed this brilliant innovation with another, as two of Google’s earliest employees found a way to do what no one else had: make billions of dollars from Internet advertising. With this cash cow (until Google’s IPO nobody other than Google management had any idea how lucrative the company’s ad business was), Google was able to expand dramatically and take on other transformative projects: more efficient data centers, open-source cell phones, free Internet video (YouTube), cloud computing, digitizing books, and much more. The key to Google’s success in all these businesses, Levy reveals, is its engineering mind-set and adoption of such Internet values as speed, openness, experimentation, and risk taking. After its unapologetically elitist approach to hiring, Google pampers its engineers—free food and dry cleaning, on-site doctors and masseuses—and gives them all the resources they need to succeed. Even today, with a workforce of more than 23,000, Larry Page signs off on every hire. But has Google lost its innovative edge? It stumbled badly in China—Levy discloses what went wrong and how Brin disagreed with his peers on the China strategy—and now with its newest initiative, social networking, Google is chasing a successful competitor for the first time. Some employees are leaving the company for smaller, nimbler start-ups. Can the company that famously decided not to be evil still compete? No other book has ever turned Google inside out as Levy does with In the Plex. This book was terrific. I didn't know much about Google and this gave me a lot of good background. Highly recommend this book.

Just read through the fixed income presentation. What was your process for estimating maintenance capital? I forget exactly how I came up with that number, but slide 37 gives Maintenance Capex and Other Adjustments as 1.8B. That D&A to Maintenance Capex ratio surprised me as I thought it was going to be more unfavorable.