no_free_lunch

At least the market is rejecting the whole concept of this type of "bailout". I'm sure policy makers will learn a lesson from this and go back to the old, dependable printing press.

Last I checked on him, he made a fortune in the 90's by betting on AOL & DELL. Betting on them and holding. However I remember reading that in the last decade he gave up all of the overperformance. Basically there is no statistical proof, that I'm aware of, that he's superior. You just like him because he's buying Apple.

The problem is that it's not that weird. The same thing is happening every day in every developed countries with interest rates so low. My saving account pays, I think, 1.2% for instance. With inflation at 2% and 40% income tax, let me do the math ... yep I'm getting hosed. It's just happening at a glacial pace but this is becoming the new normal. Make the savers pay for the recklessness of others. Sure somebody had to pay but why the savers? Why not steal a stake in the banks? Why not stuff it to borrowers, everyone's debts are now increased by 10% for example. Without the bank bailout if they stepped out of the EU, interest rates would jack up and the borrowers would be fubar'd no? Why shouldn't the pay?

http://www.irishexaminer.com/breakingnews/world/cyprus-savers-lose-10-of-money-after-shock-bailout-588134.html Scary stuff. Developed work governments are now raiding people's bank accounts. One more reason I am scared to be in cash.

I'm a bit late on this one but I saw splunk in the list. I would just say, for what it's worth, that the people I know who use it really like their software. It is for doing enterprise search. Sort of like a google but for your IT department's log files and such. I don't mean to justify it's valuation, I fully agree it's extreme, just wanted to add my experience with it.

Lookingstill, I think what you are doing is a VERY good idea. The future of the stock market is uncertain and you have major players betting that a significant decline could be had. In the 30's the market went down what 89%? Who's to say we couldn't see a 70%+ decline given the monstrous debt loads today. It is smart in this scenario to be diversified. The one thing is though, have you considered upkeep in your 5.5% return? Property upgrades & maintenance are not cheap unless you have time to DIY. If you can get 5%+ after all expenses from the rent + match inflation on price appreciation then you are about matching the long-term return of equities. If you can do this plus have a sizable stock portfolio I think you will do just fine. I would just keep in mind that property appreciates roughly at inflation so plan to exit when you see RE prices well ahead of inflation.

I see a $1B loss on the hedges in 2012 but where are you seeing that it is unrealized? It looks to me like there is a $238M liability related to the hedges on the balance sheet. If you look at page 13, section 7, it breaks out the assets and liabilities of the hedges. $238M liabilities (which is what shows up on the balance sheet), $207M assets. I think they true up every month or quarter. I'm not an accountant though, so let me know if you read it differently.

There is a note in the statement that book value is underreported due to investments in associates: That's an extra $21 / share, I realize that due to GAAP they can't include it, but would you guys include it in your analysis?

I certainly can understand the reason for being cautious here. I consider myself cautious despite being 0% cash. I just implement my caution mainly via well-priced stocks with moats. I disagree though with some of the arguments presented here based on metrics. I had a look at the shiller PE ratio and I don't really think it is particularly meaningful as far as a gauge of future returns. If you use 10 year returns, I will admit that at high PE levels the returns are poor. However, if you use 5 year returns, with a PE of 23 you actually get very good returns. Below are the occasions that the market first hit shiller PE of 23, along with subsequent aggregate 5 year returns (dividends reinvested): Sept 1928 : -30% Jan 1964 : 56% July 1995 : 187% Nov 2002 : 75% Feb 2011 : 16% (period to date) I would also note that the VIX levels in july 95 were in the 11-13 range, similar to how they are today. Does this mean that the odds are that the market will go up? NO! Who knows? It just goes to show that you have to be very careful in interpreting these numbers. Much of the negative analysis of high shiller PEs uses all of the PE values above a certain point. Why would you lump in results where the PE is in the 30's with a value of 23? There is also the fact that we are not really comparing apples to apples as there are recessionary earnings in '03,'08,'09 without which the PE would probably be in the high teens. Most of the preceding periods did not have these huge dips in their preceding earnings. I would also note that while hedge funds are increasing their exposure to stocks, pension allocations to equities have been substantially reduced. My two cents.

0% cash. Got about 2% in deep OTM puts that will pay off enormously in event of systemic failure. On the other hand if there is a 10-20% drop they're probably worthless. This is not greed but fear of price inflation. There is till a lot of money on the sidelines. Stocks look expensive when you look at their charts and everything is up 50%+. If you ignore the chart and look at the valuation there are still a lot of deals out there.

I am a little unclear on how they came up with the expected yield for equities. They claim it is based on the inverse of the PE but I am not sure which market they are basing this on. If you use the S&P, it has a PE of 15 or so, that would give you an expected yield of 6.7% as opposed to the 10-11% on the graph.

Matjone, If the assets are some type of hard commodity then you are absolutely correct, you stand to benefit from a yen depreciation. However, if the assets are cash/bonds/japanese real estate, anything valued in yen that doesn't have a market outside the country, you could get hit. If you come across any real bargains that meet the first criteria, please share them with the group.

Japan has been printing for almost 25 years, maybe it all falls apart this year and maybe it doesn't. Just keep in mind that people have been calling for this for years. If you look up Kyle Bass apparently he took some big losses betting against Japan a few years back.

I spent some time on this one a month ago and also found the valuations extreme. The case seems to rest on converting the real estate to high-rises. If they already had the high-rises then it would be a bargain. It seems to me that building these things when the real estate market is overheated is going to be expensive to the point of removing much of the value added. I gave up and threw it in the too expensive category.

I have spent a bit of time on micro-caps but without much luck. While they are certainly easier to understand, you really need to buy baskets of them as they have so little diversification. So this requires researching more stocks and kills the benefit of having a simpler story to understand. I also prefer the way bigger companies tend to have more reviews, this allows you to quickly learn the basic story and decide if you want to get into the annual reports. I find around the $1B market cap to be the ideal space but with obviously many exceptions. I think it was touched on here but in addition to scams you really need to watch executive compensation on micro-caps (say the under $50M ones). I have seen companies in this range where exec compensation is in the $1M range, given the size of the company that just takes too much out of margins.

I was thinking about this as well. As I am sure everyone heard there is a discussion within the Fed members as to when to end QE3. Were they to stop purchasing bonds, would the price not rise? The article suggested they were buying $500B a year, every for the States that has to have an impact, no?

Since September 2003, I have averaged about 8% per year including dividends. The S&P500 has done around 6% with dividends over that time period. AUM was roughly 1 years salary at the time.

That is really encouraging to hear hyten1! Personally I am around 2% / year over the S&P for the past decade, not great but enough to keep on slugging. Even then, there are 2 stocks which make up the entire outperformance so I am not sure if it is luck or not. I do wonder what the impact is of trying to manage these large funds, seems a lot of these guys get fantastic returns and then switch over to mediocre at some point. Makes me think I should be exclusively focusing on small caps.

Just to play devil's advocate for a minute, how many people are really profiting substantially from value investing these days? By profiting I mean achieving results over long periods of time (say 10+ years) that are say 5%+ over the S&P 500. Don't get me a wrong, I believe in it and practice it myself but I often think the value crowd gives it more credit than it is worth and when I approach it scientifically I find the evidence is a little weak that value investing (obviously this is a very broad term so excuse my generalizing) gives you a large advantage. I tend to think it gives an advantage but a small one. Looking on the website guru focus there are a large number of guru's who only beat the market by ~2% a year over long stretches. For instance, tweedy brown who I believe are value investors, have beat the market by 5.3% cumulatively over the past decade, or 0.5% annually. Obviously these are still good results especially when you consider that they have taken expenses out already. Believe me I am not trying to knock these guys at all. I will be quite happy if I beat the market by 1% per year over my investing career. I just wonder if we don't give ourselves a little too much credit with value investing and this concept that going against the herd produces crazy results. I also wonder if the market isn't becoming more efficient and making it harder to find these dollars for 50 cents.

I can see how private investors might sit on the sidelines awhile longer but the pensions are going to be forced back into the game. I am not an expert by any means, but the few pension plans I have seen are expecting returns in the 6-8% per year range. These expectations run up against the reality of 30 year fed bonds yielding sub 3% and 10 years at sub 2%. As they roll their bond portfolio over, the bond market is just not going to deliver for these pensions. I just don't see what alternative they have to equities.

"For instance, what’s the difference between goodwill (if the acquirer has paid too much) and an investment in an overvalued stock?" You have a very good point with that argument. Perhaps my reliance on tangible book value is too simplistic for holding companies. I had a look at Berkshire and they have about 1/3 of the book value in goodwill/intangibles so this is certainly not unique to Markel. I think either way it really just becomes an input into the valuation metric. As long as you are conscious when valuing the company that the goodwill portion of the book value represents business characteristics, you could subtract that from your calculations and still come up with the same number. I guess I am just very dubious of goodwill as I have invested in cases where the company was trading below "book" and the goodwill subsequently was written down due to an underperforming business. In one case this resulted in the company shifting from a share price below book to an infinite price / book multiplier as tangible book was negative. The stock went on to lose ~95% of it's value before staging a weak comeback. After that experience I have a very hard time looking at anything other than tangible. Not that I won't buy stocks above tangible, I just keep in mind that I don't have the same safeguard when goodwill and intangibles are included and it becomes all about evaluating the business characteristics. In regards to the original question of the post.. GRLE ran combined ratios in the 97-98 range for the first few years and the last few years has been writing in the low 100's. They posted a 114 combined ratio in the most recent quarter but I think that was a one time thing.

giofranchi, I don't mean to say that the book value is worthless. Clearly it has value as the market is valuing Markel at a premium to tangible book. Markel has an excellent long term record of growing the companies tangible and book value per share so that is definitely worth something. If you want to say that Market is worth 1.6x tbook then that is fine, it probably is :). But the evaluation of what sort of premium to assign is best left up to you based on it's business characteristics. When we start talking about a company trading at book, to me that means it is at it's true net asset value, irregardless of how the business does. When we talk about book with goodwill, we are including the business characteristics in the book which is a confusing thing. I would say start with the tangible book, and from there determine how much of a premium to pay.

Markel is a great company and probably a great investment too but this thing about it trading at book is very misleading. It's "Book" value includes $1B of goodwill which really should not be considered when you are trying to value a company as it's just an accounting placeholder. There tangible book is about $270 / share based on yahoo finance. So based on that it is around 1.6x book. Not sure what the value will be after the acquisition goes through.

Thanks for the post Mark. You seem to have your head on straight so I respect your opinion. I like the part in your article about the dollar collapsing and how life just moves on. That is exactly what scares me about my US based holdings. If you had asked me in 2000 what would happen if the exchange rate to parity I would have given some drivel about how it couldn't happen because this would basically crash the Canadian economy which would cause the Canadian dollar to weaken again. Nope! Turns out economies can handle a lot more stress than people give them credit for. Just out of curiosity, you said that you had predicted the dollar would hit parity a decade ago. Care to hazard a guess where the exchange rate will be in another 10 years? Also, Canada has a number of problems of it's own. I think we have been blessed with high commodity prices in the western parts of the country and that coupled with low interest rates has kept the economy going. Long term, however, this can reverse itself. Do you not see the potential for similar budgetary problems in Canada as well?

Many, many good ideas on this board. I would second google. If you have done online advertising, people continually say that they don't get good ROI with Bing. So in addition to being the more popular search engine for consumers, they seem to be the more effective advertiser as well. With android being completely geared around google services they have a very strong grip on the mobile market as well. If mobile morphs into a desktop replacement then they basically just own computing. What about harley davidson? Certainly not an unbreakable moat, but such a strong brand has to count for something. I figure when the brand is that old and still very cool that has to have some staying power. Oracle has a decent little moat. Not unbreachable but for the time being strong. There are many software applications which just require Oracle and for those that don't it is a pain in the butt to switch. You also have the advantage of just far more DBA's knowing Oracle, or at least that is my experience. Once these guys learn the product they become Oracle's biggest sales people as it is in their best interest not to have to learn a new product. IBM has a very strong moat based purely on reputation. I have seen numerous times where their products were chosen simply because the competitors weren't far enough ahead of them. If there is an grey area as to which product to use, companies will generally choose the biggest company. Even when given the choice between Microsoft and IBM, I think IBM would win as there is such a strong stigmatism against Microsoft. IBM is perceived as large, competent and safe. What CIO doesn't want that? On top of that, they can overpay for smaller vendors, plug them into their sales lineup and immediately increase the profitability of those products.