no_free_lunch

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.

Aberhound, thanks for the feedback, it is actually a little bit reassuring. :) I am certainly not looking to speculate on currencies, quite the opposite in fact. The main issue I face is that I am continually confronted with better investment opportunities in the US, simply due to more analyst converage and a larger selection of equities. My investment returns have been limited by the exchange rate over the past decade as it had slid from 1.5 CAD/USD to parity. I just want to see if there is a consensus that this slide will simply continue indefinitely. I would prefer a world where the exchange rates are fixed and I don't need to think about this complexity but if anything it seems likely the volatility will only increase.

Having been burned in the past on american investments as a result of the canadian dollar strengthening I wonder what people's thoughts are on the future of the USD/CAD rate? On the one hand the CAD is quite strong right now but perhaps mainly as a result of relatively high commodity prices. It is also strengthened by the lack of serious financial crises / budget constraints. Should resource prices crash that could revert the strong canadian dollar I would think. On the other hand, the US continues to run massive trade deficits / budget deficits and it has been speculated that this cannot be maintained in the long run without weakening the US dollar even further. I wonder if anyone has put any thoughts into this or is aware of any reference materials / studies on the long-term prospects for the two currencies?

MrB, You make some good points. I think we are in agreement then that the consumer market is going to dwindle but there will be some replacement by data centers for large corporations and cloud providers. Google, probably one of the biggest purchasers, uses commodity computers so I am fairly certain they are using seagate or western digital, at least in some cases. I am just not sure about the forecast of the demand growth for cloud storage, it is very hard to predict. I just know personally, and from my experiences in IT, we really are getting to a point where we just don't need significant storage past 1 or 2 TB. There are certainly some companies that can use it, oil and gas is frequently cited as a major consumer of "big data" but I am not sure it will fill the void. I just can't make a good call on this as I don't know the exact rate that storage demand will increase at and at what point it the growth rate starts to slow down. I do know that SSD GB / $ should keep growing at 40% per year. If storage demand grows at 25% a year then SSD will take over the cloud, if storage grows at 60% a year then then HDD will stay very much in demand. A bit of an oversimplification but that is what I am grappling with. I just don't like the odds and I still have a hard time seeing the average consumer needing 10's of TB of cloud storage so I think growth will slow down at some point. I would also say that your logic of looking at past results may not be valid in this case due to SSD just starting to get to a reasonable price point. You really need a 250 GB + hard drive for someone to use SSD as their primary drive and until the last few months it was just a little too expensive. We are not getting into the point where the uptake on those hard drives will really kick off.

MrB, " This fact is missed by many that say the price of SSD is going down. Correct, but so is the price of HDD" What I am saying is that even if we assume that the ratio of HDD being 1/10 the price of SSD on a GB level stays the same you are still in trouble. Right now, people still buy hard drives because for $100-$200 you just can't get the 500 GB to 1TB that you need. However, in 2-3 years as they come down in price SSDs will be offering that kind of storage in the $100-200 range. There is a certain point where people just don't need the extra storage that HDD has to offer. Now you might be thinking that people's storage requirements will just increase but I am not sure that that is the case. There is just nothing on the horizon that requires vast amounts of storage. HD video requires huge storage but it's been out for years already, I don't know what else there is for the average joe. I am not trying to say that 500 GB or 1 TB is the amount the average person needs but it's in the ballpark. For some people it might be 2 TB, others 5 or 10. There will be the odd person who wants 100 but I think that will be rare. The point is that in the next 10 years, SSD should be able to offer 5-10TB of storage for $100. Yes, HDD will offer 50 TB or 100 TB for $100 but most people just don't need it and I think would rather have the faster access times and shock resistance. Now in 10 years there will still be a market for HDD, I am not trying to dispute that. I just don't think it will be anywhere close to the 400 M units we have today. The financials and recoverability for the stock are another story. I am not sure how this all plays out. I looked at seagate and it is selling at a PE of 4 which I have to admit is promising. If all the competitors are very disciplined and play things perfectly, you could make some good money off of it. There could be a goldilocks scenario where the vendors keep price discipline and just keep reducing volumes as sales decline which could support the prices. If they keep buying back shares aggresively, paying out large dividends and minimizing capital investment you could make a decent return. I am just not sure I would bet on that happening human nature and random events being what they are. If you want to bet on the declining PC industry I think Intel is a better choice. It is more expensive but I can actually envision them being still relevant in a decade. They also currently don't have any serious competition as is evidenced in their margins. Their is also that side chance that they are able to break into the tablet market. If that happens the shares could soar. If not the PC market should exist long enough for investors to make a decent return. At any rate, if the PC industry does just keep crumbling an d everyone switches over to ARM well at least it's just Intel and AMD, there is a chance that they stay disciplined enough to milk it to the end.

It seems like a trap to me. PE of 6 is fantastic but the future of HDD is not good. I was looking at upgrading my computer the other month and SSD drive prices are down aroung $0.50 / GB. That is not good enough for a primary drive but the price per GB will just continue to come down. If I could get a 400 GB drive for $99 there would be no question about it, I'd get SSD and that would be it. Look at it this way, SSD have 2-4 x the performance, they are more shock resistant, they are much better at handling random access which will continue to come our way with parallel processing, tech people just consider them better all around. The price right now is $0.50 per GB, with Moore's law doubling capacity every 2 years, in 10 years it will be $0.50 / 32 GB or $1 / 64GB. So $99 is a 6 TB SSD. Now yes, you could probably get a 50-100 TB HDD for that price but at some point people just don't need the capacity anymore. Over the past decade we had first audio, and then video drive hard drive space requirements. Audio is already not an issue for most SSD drives and certainly within a decade video won't be much of an issue. With 6 TB you can store 1200 HD movies. For backing up your files you can already get 64GB usb sticks for like $40, in 10 years they will be 1 TB sticks for $40. For personal files what more do you really need? Sure, there will be the odd person who just has to have every episode of every tv show or movie they will ever watch, plus 200 -300 games and needs 50 TB storage but I just don't think that's the norm. There will also be corporations with huge data requirements but even then there are are only so many of them and I don't know that they would replace the home market. At the same time, I am an IT guy and the current generation of servers is the last that I want without SSD, the next one it just won't be an issue. We already are not using up the HDD space and when I can get 1TB SSD, with the performance advantage it's a non issue. Basically in the future I see HDD being used by hobbyists and businesses and while there will still be large numbers sold it just won't compare to what we have right now in terms of volume. Right now they are selling ballpark 300-400 M HDD drives based on a quick google search. The forecasts I saw called for that number to drop in half over the next few years, who knows where it will be in a decade. If my thesis is correct and the industry erodes over the next decade I just don't see how you make money on the stock. If everything went perfect for 10 years, you made the PE of 6 each year and every penny went back to shareholders you would get a 66% return over a decade + liquidation value which isn't even that great. However there are bound to be ups and down over the decade that hit profits and as this plays out there could be a lot of down periods with sales dropping followed by industry members losing their self-control and trying to grab market share from the dwindling pot. I could just see it getting really ugly. Sorry for the pessimism, feel free to rip my argument to shreds. :P

I don't know the company at all, just started researching them after reading your post. The one thing that I noticed more or less off the bat is that while their long-term results are good, they haven't been performing well more recently. http://www.onex.com/Onex_Share_Performance.aspx If you look at their performance they slightly outperformed the S&P500 over the past 5 years (8% vs 5%), and underperformed over the last 10 (113 vs 116). Their very high growth rate was the preceding decade. It makes me wonder if they won't have yet another sub-par decade. Now of course maybe they just had a bad decade and I'm being too short-sighted but a decade is a decent chunk of time. It is also possible that the business has changed or maybe they have grown too large. I think it is this 113% over a decade (8% per year) that the market is pricing at.