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constructive

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    Why Hold Cash?

    in General Discussion

    Posted

    Alice Schroeder talked about how Buffett thinks of cash as a call option with no expiration, and no strike on any asset class.

    The cost is the opportunity cost of holding cash.  I am still trying to fully understand it.

     

    http://www.portfoliomanagement.ca/warren-buffett-article.html

     

    A couple of times when Buffett went largely to cash:

    1.  1969 - he closed his partnership because he could not find anything.  I think the Dow was down about 30% after that.

    2.  1987 - He sold a lot of stocks into the bull market before the crash.

     

     

    I think Bernard Baruch and Joseph Kennedy had a lot of cash going into the Great Depression. 

    Howard Marks had a fund ready with cash for the 2008 crash.

     

    I don't think I can time the market, but if almost everything is overvalued I will just wait it out in cash.

     

    I have usually been able to find new ideas on average within 2 years so base my calculations off that time frame. 

    I would rather sit in cash earning 0% for 1 year, then deploy it in an idea with an expected IRR of 20%+ for a few years rather than buying something with an expected return of 10%.

     

     

     

    I think to read stuff that brings new ideas... and this is a great one!

     

    I think what Buffett means when he says cash is like call options is:

     

    - a call option with strike price $10 will expire if it doesn't move, and will net $10 if it goes to $20

    - if you hold cash and a stock is $20, it will do nothing if it stays at $20, but you will net $10 in VALUE if it drops to $10

     

     

     

    i think schroeder explained it pretty well. option price of cash is opportunitiy cost less interest earned on cash holdings. underlying security is EVERY sercurity. strike price is whatever you want it to be. term is forever.

     

    cash has been a very expensive option for a couple years now.

     

    Schroeder completely mangled Buffett's point. Cash is like a put, not like a call.

    The perils of timing the market

    in General Discussion

    Posted

    There's a clear psychological benefit from ideological purity (other value investors agree with you, dopamines flood your system). But there's no performance benefit.

     

    Again, there is definitely a performance benefit. Look at all the value investors who suffer during bull markets and make it back and then some on a relative basis during bear markets.

     

    To put it another way, your performance depends on the investment decisions you make, nothing more, nothing less. It doesn't depend on the strategies you exclude.

     

    On average value investing is the most profitable set of mental models I have found, but that doesn't mean every situation classified as value investing is more likely to be profitable than every situation classified as market timing or speculation. If you are deciding between two investments do you choose the one which falls under value investing or do you evaluate both using the mental models at your disposal and choose the one which offers greater risk adjusted return?

     

    So what? If Buffett flipped directions and became a market timer it wouldn't make any difference. It's a statement of fact that his being ideologically pure allowed him to miss the destructive effects of the dot com bubble. Again, I don't care to argue whether Buffett is completely principled or not. Point is, his purity DID help him even when it appeared that value investing had stopped working.

     

    I find it hard to believe that Buffett would not have been successful at tech investing if he had applied himself to it.  After all he has been successful at metals, currency and interest rate speculation. I would argue he is "completely principled" in the sense of using rational mental models, but his mental models are not an exact match for value investing.

    The perils of timing the market

    in General Discussion

    Posted

    There's no performance benefit from ideological purity, i.e. "Market timing is bad and never works".

     

    Lots of investing strategies work sometimes and fail sometimes. Market timing is no exception.

     

    The way you use the term ideological purity makes it sound like a bad thing. It's definitely not a bad thing to believe in principles and follow them. When Buffett refused to invest in dot com stocks he was being ideologically pure even though the value strategy was not producing results. Yet in the long run he absolutely did get a performance benefit from being principled.

     

    Around the same time Buffett bought 4000 tons of silver. His whole career he has argued against investing in precious metals (which don't generate any cash flows) and for investing in productive businesses. Does that seem ideologically pure to you? And he has clearly adjusted his asset mix based on interest  rates and valuations. Watch what he does, not just what he says.

     

    Buffett is a great example of multiple mental models giving his approach hybrid vigor. If he only invested in one kind of situation (NCAV, arbitrage, cyclical, high ROIC, etc) he wouldn't be one of the wealthiest men on the planet.

     

    There's a clear psychological benefit from ideological purity (other value investors agree with you, dopamines flood your system). But there's no performance benefit. If you have reason to believe a certain investment strategy will work, it doesn't matter whether other people classify it as value or not.

    The perils of timing the market

    in General Discussion

    Posted

    There's no performance benefit from ideological purity, i.e. "Market timing is bad and never works".

     

    Lots of investing strategies work sometimes and fail sometimes. Market timing is no exception.

     

     

    You can certainly see in hindsight that it worked for some, but can you use it looking forward and win more than you lose? I think that's the crux of the matter.

     

    Quite true. There are studies showing market timing strategies that worked. Whether you think they will continue to work is a judgement call.

     

    http://www.kc.frb.org/publicat/reswkpap/pdf/rwp02-01.pdf

    http://wpfau.blogspot.com/2011/01/valuation-informed-indexing-preliminary.html

    http://mpra.ub.uni-muenchen.de/35006/

    http://philosophicaleconomics.wordpress.com/2013/12/20/the-single-greatest-predictor-of-future-stock-market-returns/

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2302218

    http://www.frankfurt-school.de/clicnetclm/fileDownload.do?goid=000000311260AB4

    http://www.marketwatch.com/story/wisdom-of-richard-fabians-system-emerges-in-hindsight

    http://www.marketwatch.com/story/maybe-the-best-market-timing-system-ever-2011-07-12

    Borrow rates lookup please

    in General Discussion

    Posted

    Cool. You can bring them into excel using a | delimited format.

     

    I was surprised to see many preferred shares with borrow/rebate over 20%. (DD, PRE, AGO, AIV, FRC, KIM, etc.) Why is that? Is it just that people who buy preferred don't like to lend them out?

    Watsa vs. Buffett

    in General Discussion

    Posted

    Yet, I see people endlessly discussing the likes of Apple on the investment ideas, and think "whats the point"?  Does the average person really have an edge on Apple.  Is it really going to be mis priced by the market?

     

    No, the average person doesn't have an edge on any stock, small or large. The average person should buy index funds.

    What are you buying today?

    in General Discussion

    Posted

    On a cash flow basis, Facebook doesn't look overvalued at all.

     

    If you annualize the last quarter they trade at 36x cash flow and 59x free cash flow. Then add another 9% dilution from Whatsapp.

     

    Not crazy, but clearly there is significant growth baked into the price.

    FNMA and FMCC preferreds. In search of the elusive 10 bagger.

    in General Discussion

    Posted

    This decline is phenomenal - I've been wanting to add more.

     

    Given the likelihood the preferreds are paid off in full (as TWA has said multiple times on this thread, how bad does it look that regulators strongly encouraged banks to hold the preferreds as capital, but then pulled the rug out from under them...) but the extreme uncertainty in the common, I like a 2/1 allocation to FNMAS/FNMA. Say a 1% FNMA position goes to $0, but a 2% FNMAS position doubles, you're still up 50% on the pair.

     

    What evidence is there that preferred are in much better position than common? Yes they are senior, but in a downside legal scenario they are worth $0 and in an upside legal scenario they are both worth a lot more. What is the middle scenario (and the likelihood of it) where they don't live and die together?

     

    Fairholme's preferred spinoff idea was a middle scenario, but it was dead on arrival, no real legislative interest.

    401k: what percent of portfolio?

    in General Discussion

    Posted

    I actually just typed a little table up this weekend for my wife to show her boss.  The approx. 50 employee company uses The Hartford.  Awful fees and selection, but they 50% match up to 5%, so we do that.  Why would a company not chose the optimal plan.  I think Wells Fargo gave them a loan, and is the administrator of the plan.  Does anyone know what the company's incentives are when choosing a plan?

     

    Employees only see one side of the cost equation - the fund fees. The company also has to pay administration fees. By offering plans with expensive funds, and by doing business with their bank, insurer, or payroll processor they can reduce the admin fees. (Some of those expensive funds kick back money to the administrator.)

     

    The best way to look at it is a total fee basis. Fidelity often comes out the winner, or Vanguard for larger companies.

     

    I volunteered for my company's 401k committee and we chose to switch to Fidelity.

    Klarman Holding 50 Percent Cash

    in General Discussion

    Posted

     

    I think if you look carefully, you may be surprised by how many public companies these days are unprofitable compared to past periods (other than the dot-com bubble). Pre 1990s it was rare to IPO unprofitable or heavily indebted companies - now it is normal.

     

    My sense is that the action in penny stock pump and dumps is up a huge amount in the last year.

     

    Many growth darlings are also performing worse rather than better the past year or two - look at AMZN, CRM, etc. A few years ago they were growing income/free cash flow - now in order to grow, they need to lose money.

     

    My opinion is that it's hard to compare today's market to pre 90's as there were no software companies back then. If I look at today's market, the cloud/mobile/big data companies are overvalued as they have to execute perfectly to deserve their current valuations. However, if you look at traditional brick and mortar businesses, I don't see overvaluation.

     

    I'm not just talking about social media and cloud/mobile/big data. There are many areas of the market with very high multiples: biotech, green energy, healthcare IT, internet retail, semiconductors, 3d printing, etc.

    Grandparent's Retirement

    in General Discussion

    Posted

    I would start by making a full budget - not just the cost of assisted living, but all other expenses and taxes too. Then based on that, you have an annual withdrawal target from the portfolio. I'm guessing it will be around 5-6%? A little higher than recommended, but for most people it works out fine.

     

    If they are comfortable with it, I would weight conservative, dividend paying stocks (either individually or in ETFs) a little heavier than bonds / cash. Most retirement financial advice emphasizing bonds is the product of an era when interest rates were substantially higher than they are now.

    Klarman Holding 50 Percent Cash

    in General Discussion

    Posted

    +100 very insightful.  I completely agree.  Yes maybe Twitter and Facebook and LinkedIn are overvalued, but they have real users and have a viable business model.  They are providing value to users and making money themselves.

     

    Everyone is so quick to make a comparison to the dot-com bubble, why is that?  Why is it bad if we're in a plain old bull market?  Why is everyone always so quick to call everything a bubble?

     

    I think if you look carefully, you may be surprised by how many public companies these days are unprofitable compared to past periods (other than the dot-com bubble). Pre 1990s it was rare to IPO unprofitable or heavily indebted companies - now it is normal.

     

    My sense is that the action in penny stock pump and dumps is up a huge amount in the last year.

     

    Many growth darlings are also performing worse rather than better the past year or two - look at AMZN, CRM, etc. A few years ago they were growing income/free cash flow - now in order to grow, they need to lose money.

    Mohnish Pabrai

    in General Discussion

    Posted

    Buffett has stated himself that float adds 6-7% to the returns

     

    Insurance also requires large cash and fixed income allocation, which drags the returns down compared to an equity heavy portfolio.

     

    If he has historically earned ~20% on equities, ~5% on fixed income and insurance adds ~7%, the total still worked out to 20%.

    Do you think Bitcoin is a safe store of value?

    in General Discussion

    Posted

    Its been very clear to anyone following bitcoin that they were at the very least having issues.  No one doing even a minimal amount of research should've been investing with Mt Gox.  My personal feeling is that the Gox CEO lost/had stolen 200K+ bitcoins in 2011.  Since then he has been running a sort of fractional reserve system with the gox coins...trying to makeup for the 200K lost coins via fees.  In theory he could've pulled this off but it would've required much more price stability and deposit withdraw stability than actually occurred.

     

    Interesting how nobody in this thread said a word against Mt Gox until 2 weeks ago. Hindsight bias is a powerful thing.

    Ukraine?

    in General Discussion

    Posted

    ^Why does it matter? The US' goal should be to defend US interests, not to worry about whether it is hypocritical or not...

     

    My point isn't hypocrisy, it's just having a sense of perspective. Putin isn't history's greatest monster any more than Obama deserves the Nobel Peace Prize.

    Ukraine?

    in General Discussion

    Posted

    I don't advocate sending in troops. I do think the rest of the world needs to take strong measures to let Putin know that his game is up. Some ideas: boycott Russian goods, deny visas to Russians, and suspend financial dealings with Russia. I am disappointed that some people are suggesting that now might be a good time to buy shares in Russian companies.

     

    Do you think other countries should have suspended financial dealings with the US when we invaded Iraq? Our military has killed a lot more people in the past decade than Russia has.

    Todd and Ted

    in General Discussion

    Posted

    Bancroft runs Makaira, a $540M fund.

     

    WAIR Wesco Aircraft Holdings          18.07%

    LINTA Liberty Media Interactive      15.82%

    CDW Cdw Corp                                14.35%

    IRM Iron Mountain Inc                      11.33%

    CVA Covanta Holding Corp              11.03%

    VRSN Verisign Inc                            8.96%

    CPLA Capella Education                  8.41%

    CXW Corrections Corp of America    7.72%

    TWC Time Warner Cable Inc.          4.32%

     

    I think value investors generally underestimate Tepper. Like Soros he's a great value investor, plus he has an incredible intuition.

    Ukraine?

    in General Discussion

    Posted

    A thought I've been entertaining lately: Putin is the 21st century's version of Hitler, vilifying and jailing minorities, looking for some "lebensraum" and protecting the "volk" from dastardly foreigners. Not as crazy but perhaps only slightly less sinister.

     

    In terms of violence Putin doesn't compare to Hitler at all. He's mild compared to Khrushchev or Brezhnev.

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