vinod1
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Posts posted by vinod1
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7 hours ago, AzCactus said:
Thanks all for the advice. She partially raised me so this hits home hard.
@Saluki-I appreciate your guidance and this seems to be a pretty safe strategy.
@vinod1-Will need to research annuities a bit more but if the return is around what you indicated that seems like it would reduce stress significantly.
Let me change my suggestion a little. I was focusing entirely on monthly needs without considering any lump sum needs for unexpected contingencies.
1. If she needs long term care, do you have a plan to fund that? That is a significant risk. Might want to keep aside $150k to $200k for that kind of situation, if you are not able to get a cost effective long term care insurance. Plus you need something like $50-$100k for emergencies. You might want to use laddered individual TIPS (1 year, 2 year and 3 year should be enough) for this to protect from unexpected inflation. A sudden one time inflation of any significant amount would be a killer to nominal bonds.
2. No matter what, an annuity is a no brainer in this case. Only question is how much and who to get it from.
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14 hours ago, Viking said:
@Dinar If Fairfax has performed so poorly on the investment side, how did they compound book value at 18.4% over 38 years? Insurance/underwriting?I ran the numbers a whole while back, but if they have indexed their bond and stock portfolio, they would have pretty much achieved close to that without that really stunning first year. The main thing is the model.
Run an efficient P&C company -> Gather long term float -> Invest that float in stocks and bonds
You dont have to be spectacular in underwriting and if you can just get the index returns for stocks and bonds, especially when interest rates are normal, you get outstanding results.
Attributing performance is not straightforward. And take Fairfax claims of bond and stock performance with a grain of salt. It is basically an example of "How to Lie with Statistics". But I do not attribute that to any attempt to mislead, just plain enthusiasm.
I would give Fairfax one thing, they did the right thing in sticking with cash when bond yields are low, resisting the institutional imperative (as many many investors on this board must have done as well), and invested in bonds when they normalized. Not easy, but they did that really well.
Vinod
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You did an outstanding job of asset allocation. Just great!
Buy an annuity with a small portion of the portfolio. It would be perfect for someone like your grandma.
If you buy a $150,000 annuity, she would get about $2700 per month payout for rest of her life. This should pretty much cover her remaining expenses after SS. Keep in mind this is not inflation adjusted, but she has 75% of the portfolio for growth and income. Use the cash portion to buy this.
You should be getting $9000 in dividends from VOO, SCHD and FZILX which would be growing.
So total you have $3450 in cash coming in per month and you have not touched about $90,000 that is still in money market.
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6 hours ago, petec said:
Unlike you, I don't see that as super cheap. It is certainly good value, and allows for solid compounding from here, but insurance companies don't generally sustain multiples *much* higher than this. I mean, it's not like they trade at 2x or 3x book long term. 1.4-1.5x, maybe.
For me it's just because FFH has gone from a deep, deep value to a compounder-type value. As the share price has closed on IV, so my position size has doubled, despite the rest of the portfolio doing well. So it is now less good value and a much bigger position. That warrants action so long as there I have other good ideas. But I emphasise that I am not selling much. I am topping the position on share price spikes but I retain most of what I owned at the low in 2020, because I DO see strong performance from here. I am a *very* long term holder of this stock (16 years so far and hoping for I'm only a quarter of the way through).
BTW one area where you and I slightly differ, as we have discussed before, is on how much execution has improved. It definitely HAS improved, and there was a big focus on this after years of investment underperformance. But the things that have really moved the needle are outside management's control: higher interest rates (drives earnings on float and Eurobank's NIM), lower combined ratio (which is clearly and I think mostly driven by higher interest rates because rates have impacted BV at most other insurers and because capital is no longer flooding into the industry in sidecars etc.), and higher commodity prices (which helps a lot of the investment book). All of these things were valuable options 4 years ago; today they are realities and are increasingly (but not fully) priced in. But improved execution hasn't affected these things. In fact, the *really* good execution was *before* these changes happened, when FFH kept the bond portfolio short, kept their underwriting discipline in the soft market, invested in undervalued commodity stocks (much to the chagrin of many here), and waited while Eurobank slowly dealt with their NPLs. Their patience *then* is what is driving today's earnings, more than their execution *now*, it's just that they didn't get credit *then*, but now they do because the market can see the benefits. I see much greater continuity in management's decision-making than you do, and I think this affects how we think about the stock today: you see great execution as something that is likely to continue, whereas I saw FFH *partly* as a bundle of undervalued macro options 4 years ago, and those options are less undervalued now.
That said, I also see FFH *partly* as an excellent management team which I want to compound with forever. And I do recognise that in certain key areas execution has transformed, most notably eschewing broad hedging and finding ways out of losing investments rather than holding them forever (although even here, few things have actually been monetised - the bigger thing has simply been positions getting smaller as the portfolio grows).
Sorry - longer post than I intended.
Terrific post.
Jerome Powell should get nearly as much credit as anyone else for Fairfax improved performance.
Board members are very thoughtful and intelligent and I am not suggesting they fall for these things but there a terrific book that shines light on some of these things.
Vinod
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A Shiller P/E of 34 (as of March 1st) is in the top 1% of history. Total profits (as a percent of almost anything) are at near-record levels as well. Remember, if margins and multiples are both at record levels at the same time, it really is double counting and double jeopardy – for waiting somewhere in the future is another July 1982 or March 2009 with simultaneous record low multiples and badly depressed margins. Jeremy Grantham
So he is telling us somewhere in the future there would be a bear market?
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I remember "law of large numbers" being thrown about when Apple, Microsoft, Facebook, Google were all in the $100 billion range. The reasoning was, trees dont grow to the sky; companies cannot possible be worth $500 billion which would be insane; competition would increase once companies get to $100 billion market cap; etc.
Here we are.
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6 minutes ago, rohitc99 said:
if you read the book : The Beginning of Infinity: Explanations That Transform the World, it just shows why all these malthusians have been wrong. Its a great book and in the begining chapter itself, david makes a great argument, there is no shortage of any resource as such. its all a matter of knowledge
Thanks for the recommendation. Ordered it.
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I have been reading Grantham since 2001. Except for calling for Value, Small Value, International and Emerging markets in 2000-2001 time frame and standing up to buy at 2009 bottom, he has been dead wrong on every single thing.
What happened to mean reversion? "If corporate profit margins are not mean reverting then capitalism is dead", "profit margins are the most mean reverting of all economic data", etc. Mean reversion in PE?
He has been Malthusian for quite a while. Not even a refinement of that. I mean it is good to care about climate but can he not do it in at least an intelligent way?
Yes there are finite quantities of many resources, but technology keeps improving and we are able to extract more. Sure at some point we may run out, but it can be 20, 200 or 2000 years from now. There is no convincing argument being made why current time is when we are running out of resources.
He is just mentally not fit anymore.
Vinod
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7 hours ago, Jaygo said:
I really like this framework.
I do the same type of thing by putting my long termers in taxable accounts so i'm less likely to sell to early. My riskiest stuff goes in the rrsp as I might as well take the gov down with me. The RRSP also holds dividend paying US equities. My TFSA is full of the middle ground made up mostly of Canadian equities and reits.
If I see a company where i want to hold for a long time and but am still sorting out the valuation its a taxable account thing. If i get a loss over a few years I can bank the loss and buy back lower for the long term.
It doesn't always work as i sold SSD, GGG and builders first Source seemingly too early. Maybe i need a new account where i forget the password.
Just use one brokerage account for long term holds. One for more active holdings. You would hardly ever need to login into that account, mostly to reinvest the dividends. But not seeing them, you end up not even thinking about them much and even if you login into that account, it is easier to avoid tinkering.
Maybe that is the way I am, but that helped for me.
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50 minutes ago, ValueArb said:
There is no flaw, other than self interested actors incented to profit seek at the expense of everyone else by inducing politicians to return to mercantilism.
Ok
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12 hours ago, ValueArb said:
Outsourcing to China is one of the few drivers of higher wages the US has. Because of chinese labor Apple gets to sell iPhones at lower prices, which means they sell more iPhones, which means they generate more sales of services and IOS developers (mostly american) sell more apps and iPhone accessory makers (mostly american) sell more accessories. That means Apple and third party developers create more high paying developer, designer, engineer, testing, marketing, and sales jobs. All for sending what we consider the worst, lowest paying jobs to China, where they are considered such great high paying jobs compared to the brutal rural farm work many Chinese do that Chinese stand in line for days in order to get one.
Or we could build a massive infrastructure of low paying assembly jobs in the US to make iPhones in order to make Samsung's phones even cheaper relative to the iPhone so Samsung can take even more of the market.
This is exactly what I believed for 20 years. I know the theory. Pretty basic. If you read the economist magazine this is hammered into you all the time.
There is a major flaw in this line of thinking. Absolutely massive mistake. Try to find it, it was now well known.
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3 hours ago, ValueArb said:
People blaming automation for slow wage growth are missing the forest for a tree. Government spending as a percentage of GDP has increased massively since the great depression, especially over the last twenty years. That leads to less investment in productivity increases and slower growth, ultimately giving us the tepid wage growth of today.
Automation helps, not hurts, but it can't help as much if a third of our economy is government directed spending.
To me it seems like only the part where Government spends directly on goods and services would lead to inefficiency. Say Govt collects 40% of GDP in taxes, gives 25% directly to people for Social Security, medicare, etc. That 25% is still efficiently spend by the people as they are the ones making purchases in an informed way on private goods and services. The other 15% where govt hires and manages things, like IRS agents, Social Security administration employees, direct procurement, etc. This is the part that is inefficient.
Wage growth has been impacted mostly due to outsourcing/China which is fed by CEO incentives/stock options.
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What killing? It barely kept up with S&P 500 over the last 20 years! An index fund is a better holding especially at size for holding periods measured in decades.
I sold BRK in 2012 timeframe to buy BAC and other financials and again during Covid to free up cash to buy other things including BRK calls. So I did not make a lot of money in BRK but the alternatives ended up giving higher returns. Definitely paid lot of taxes.
With Fairfax, I actually segregated it into accounts where I have long term holdings like index funds. I think selling Fairfax in the next 10 years would be a mistake. Forget about valuation, keep holding it. There are enough good things in the pipeline that positive surprises are likely to outnumber the negatives. If nothing else should give decent results comparable to market. So why mess with that?
Of course, this assumes Prem does not again start "Protecting the shareholders from economic headwinds...."
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39 minutes ago, gfp said:
I wonder what is holding it up behind the scenes.
Somebody in the chain did not get paid.
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A different take on "If there is one cockroach..." is "if you find a few gold nuggets, you have probably run into a gold mine".
I think the more likely mistake we are likely to make is sell too soon. If it goes up to 1.5x tomorrow, selling out I think would likely be a mistake.
The slower it revalues upward the better off we might be. I firewalled off a big portion of FFH into accounts just with very long hold periods that I would not need to touch. Active part with shorter hold periods moved to different account.
Vinod
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China could very well say "Have 3 kids or you are not eligible for .... services/benefits". Sure it would be slow but in 20 years, they can make up for that shortfall. Have only one kid? Just one hour internet for you in a day.
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Take this as: God loves you and want you to be rich
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1 minute ago, LC said:
One further question - when you do sell individual stocks, do you immediately reposition into the index?
Yes. I use several index funds - US Total Stock market, International Index, US Value Index (Vanguard) and US Small Value Index (Avantis). I keep track of their valuation levels and buy ones that I find cheapest. Although I have been pretty wrong on which of them is cheapest for a while. But that is not a whole lot of value add or value destructive either way. Not very scientific either but I like to keep a little bit in International and US Small value. Most of index portion in US Total and US Value.
Vinod
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Just now, backtothebeach said:
What was your main takeaway? Are you indexing (part of) your portfolio?Yes and no because it varies based on opportunity set. Sometimes I am able to find enough to fill out my whole portfolio with stocks I like.
So my approach is this.
I assume I have no ideas and there is not much value I can add unless I can make compelling case otherwise.
So I start with a 100% index portfolio.
If I find a really compelling investment, I would invest upto my position sizing limit for that specific investment risk that I tolerate. I would sell that much of index fund to fund this investment.
The more stocks I find, the less I have in index funds.
Starting with 100% cash instead of 100% in index funds has many disadvantages.
- It puts pressure on you to find ideas. Many many ideas and really really quick. Not a recipe for patience and acting only when you have overwhelming evidence in your favor.
- If you do not have many ideas, you do not end up making crappy investments. No "I like this, seems pretty good, let me take a 1% stab at this".
- You do not have cash drag
- You are not tempted to market time or reduce allocation because "markets seems rich" and I cannot find anything in my competence. This is actually the bane of many value investment managers.
Vinod
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If you believe in addition, subtraction, multiplication and division, indexing is going to beat the vast majority of the investors over long periods of time. Using elementary math you can deduce that.
Assume companies make $2 trillion of profits per year. These are at the end of the day what investors return would be in the long term. Index investors get their proportion of profits without any costs. But there are about $300 billion to $400 billion in costs incurred by active investors and their share of the profits would be after this and would in aggregate would always be less than index investors.
Do this math over 20 years and it is no surprise index beats 95-99% of investors.
Markets can be utterly inefficient and still the above holds true.
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Read "Four Pillars of Investing" by William Bernstein.
I spent ungodly amount of time from 2001 to 2006 reading up on indexing, including the vast majority of the academic finance papers and every single book published on indexing upto that point in time. This is by far the best book you would find that appeals to the common man and provides the right level of information.
Vinod
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14 hours ago, Thrifty3000 said:
A trick that has been incredibly helpful for me… I created a spreadsheet where I track MY portion of the look through earnings from my equity investments. So, for example, If I have 100 shares of Fairfax and I estimate the normal earnings to be $150 per share then in my spreadsheet I would show MY total Fairfax earnings as $15,000. If I have 1,000 shares of BRK and assume $25 per share of look through earnings then I would add $25,000 to my spreadsheet. With Fairfax and BRK combined I would have $40,000 of earnings. (I look at those earnings almost like my salary. I want my “salary” to be big, steady and growing over time.) Notice I haven’t mentioned stock price, because my number one priority is the quality and growth potential of MY earnings. With that mentality, if I can at anytime sell all my Fairfax and BRK shares to buy assets producing significantly more than that $40,000 of look through earnings then I am happy to do it. I treat that like getting a pay raise - which is fun and motivating. This approach helps ensure that the only way I can confidently sell one asset for another is if I’m confident in my analysis and able to transact at attractive prices.
This is exactly what I do. Buffett talked about this several times as well but very few people seem to have paid attention to it.
In addition, I have a 10 year expected earnings number as well. While I look at current earnings as my salary, I try to put together a portfolio that gives me the highest 10 year salary possible. If I had only current normalized earnings, there is a psychological pressure to juice it via a tendency to buy cheap stocks with high earnings yield like GM or banks.
This forces me 1) to avoid melting ice cubes 2) focus on business quality 3) reduces impact of stock price fluctuations - I worry less about why isnt it going up? As long as earnings keep growing up I am happy.
Vinod
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I would think the natural tendency of market would be slightly overvalued. People who are bearish would avoid stocks most of the time anyway. So we have a market which ordinarily would be dominated by optimists (bulls, else they would not be investing) and that should lead to higher than what a totally unemotional investor would pay. So market and many stocks would be perpetually be slightly higher than what we as valuation sensitive investors would be willing to pay. If this causes us to keep a lower allocation to stocks it would undo any stock picking skills we might accidentally exhibit
This is just a wild thought that I have been thinking for a while and I might be entirely mistaken.
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Historical comparisons are not valid for a lots of reasons. Valuation levels need to reflect that. A few of the most important changes
1. In the past say 1880 or 1900 or 1920 or 1940... no one can put together a diversified portfolio of stocks at a cost less than 2% per year in expenses. That is direct expenses. Then you have insufficient information, risk with paper stock certificates, fraud, etc in buying stocks. Even if you ignore these indirect expenses, at a minimum you are paying 2% fees annually (brokerage costs, bid ask spreads, over the typical holding period) and unit trusts had loads and annual fees that averaged these as well. So if stocks returned 6.5% real, you still ended up with 4.5% returns and at best not in a very diversified way.
Now an investor can buy total stock market fund at 3 bps. To get the same returns as in the past in a much more convenient way, investors can pay a lot more due to lower costs.
2. As much as many look down at economists and central bankers, they did learn a lot. The great depression - the bogeyman for many stock investors, is not going to happen again. We had a good practice run in COVID. Should something really bad happen short of a worldwide annihilation event (when your portfolio would be of little value/use anyway) you can predict what Fed would do. No points for guessing. You should be able to guess what politicians would do (Trump to Biden and everyone in between) - spend and spend some more. And they wont be wrong.
This takes away the greatest risk to stock markets - that aggregate spending would fall i.e. consumers would not be able to spend money. Thus companies revenues are protected. This is a dramatic change from the past.
If risk is lower, it is only natural to expect higher valuations and lower returns in future.
3. People also have wised up. They are not stupid. They do have 150 years of data that shows, every single time the stocks crashed, it was a buying opportunity. Short of a revolution (Russia, Germany, Japan...) when it does not matter what you hold (ok gold to some extent) everything is going to be worthless. Short of that, it is clear to anyone and their dog, that buying when stocks are down is a no-brainer.
4. In the past people worked until they dropped dead. Now people spend several years in retirement. For that they save (not everyone, but anyone who has wealth) and invest in the stock market. 401k, ira, etc. Everyone paycheck vast sums get deposited into these and they are automatically invested in markets.
To expect stocks to get to a PE of 7 or 10 is stupid. Not going to happen except for very very brief amount of time - a few days at most. So valuations are going to average much higher in future.
Vinod
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What is your approach?
in General Discussion
Posted · Edited by vinod1
The very fact that you ask questions means you are on the right track.
I read several posts where you are missing something very fundamental.
If interested read this book end to end, make notes, read it again, give it a few months, read your notes again. I spent 6 months on this book after completing all three levels of CFA and it was an eye opener.
https://www.amazon.com/Investment-Valuation-Techniques-Determining-Second/dp/0471414883
The point is to understand the fundamentals very thoroughly. Saves you so much time the rest of your investment life.
Good luck.
Vinod