vinod1

Included in realized losses in 2016 was a loss of $2,663.9 million realized in the fourth quarter when the company, recognizing fundamental changes in the U.S. which obviated the need for defensive equity hedges, discontinued its economic equity hedging strategy, closing all of its short positions in the Russell 2000, S&P 500 and S&P/TSX 60 equity indexes effected through total return swaps. Donald Trump wins, Tails risks, 1 in 100 year storms, all vanish!! Debt deleveraging? All done. "worried about the speculation in financial markets and the potential for a 50-100 year financial storm"? No more. "However, we have warned you many times in our Annual Reports of the many risks that we see and the great disconnect between the markets and the economic fundamentals." No more. "Most investors consider the 2008/2009 recession and crash to be a once in a generation event – and it’s over! We differ because we think we escaped the serious adverse consequences of that recession as a result of huge fiscal stimulus from the U.S., even greater fiscal stimulus from China and the reduction in interest rates to 0% with massive monetary stimulus in the U.S., Europe and Japan through QE programs. There is nothing to fall back on now if the U.S. and Europe slip back into recession." Now we have Trump! "The potential for unintended consequences, and therefore of pain, is huge." There can be no pain with Trump as president. Vinod

If the goal is diversification, then making sure that he has all the right asset classes like large cap, small cap, developed markets, emerging markets, REIT's, etc. have a much larger impact than selecting a single stock to add to an already diversified portfolio. Also this suggests that he is likely not too interested or inclined to put in the effort to study inddividual stocks, so it would be far better to avoid picking stocks. A single stock exposes him to many risks that I think he might not be prepared for - a temporary downturn in its prospects, or some such factor that depresses its price, not knowing the rationale for the stock, he is likely to panic or make a poor decision. Just adding one stock, does not add much to returns but exposes him to all the other psychological issues associated with owning an individual company. If he wants to invest in individual stocks, let him do it in a more systematic way with a group of stocks. The very best thing he can do is to focus on expenses which is likely to do a lot more than any individual stock can. Vinod

Lots of good questions. I have been trying to assess and improve my investment decision making over the last 5 years in a little bit more systematic way. Here are some thoughts: I think it is better to focus on longer term business performance and your ability to assess that correctly. So looking at your own expectations of key business drivers of the business - loan growth, loss provisions, efficiency ratio, etc for a bank over a 3 to 5 year period and comparing them to the actual outcome. Forget about stock prices completely and just measure yourself on the ability to assess a business and how it would perform over the long term. That is unless your strategy is based on predicting short term price movements. Even here over a horizon of 3 to 5 years the reasons for the business drivers turning out the way they did might not because of the reasons you have identified and it might just be your luck. Or two errors might cancel each other out and the end result might be deceptively accurate. I got WFC and a few other banks final earnings to the first decimal point and cannot stop patting myself on the back until I realized that I overestimated two factors one on revenue and one of expense that cancelled each other out. But if you do this over many industries and many stocks over say a couple of business cycles you might get a better feedback on your performance. All this of course must be backed up by actual outperformance over the broad stock market. It would no good being 100% right on all the drivers and still underperforming the market. But it might point to other errors like portfolio sizing or psychological traps. Having an investment journal that documents your psychological state and why you made a buy or sell decision to go along with individual stock assessment would help. I have been tracking 3 to 5 year expectations since 2011 and it had been really helpful in pointing out systematic biases that frequently show up. Vinod

I looked at TPRE way back in 2014 and it might have changed now, but the strategy seems to carry a lot of risks. He is investing majority of the assets into stocks and using shorting to reduce risks, instead of matching liabilities with bonds. In case long and short strategies both underperform, there is a risk of permanent loss of capital since assets need to be liquidated at an inopportune time. In addition, incentives are completely misaligned between management and shareholders as I think he is going to get 2 and 20 and TPRE is going to be a funding source for his fund. Vinod

They have over the last many many years been macro investors. You can see it in their annual letters and conference calls. Instead of "Macro" they call it differently, 1 in 100 year storm, etc, etc. They have a macro point of view and make a bet that pays out really well if that scenario plays out. Otherwise not so much. Nothing has changed. They had many successes in the past with macro calls but they called the last couple wrong. Just what one can expect on macro calls. I sold out way back in late 2011 when I realized they have a snowball chance in hell of increasing IV by 15%. There are some concerns with Fairfax since then and it is no longer a business that I would feel comfortable buying and holding for the long term. I bought a little last week. Prem is a nice guy and I think he has nothing but the best of intentions for the shareholders. I have no doubt about his intent. But he has been less than forthcoming about some things and the way he approaches some of the investments is not conducive to acting rationally. 1. Look at Blackberry investment carefully at prices and increasing position sizing. It is classic martingale strategy. I sort of do this too but not with a tech company in a rapidly changing industry with little competitive advantages. I do not fault him for making any one bad investment. I think they said something to the effect that if 3 in 5 workout they would do great. It is just how the whole thesis evolved in a completely different manner and they made progressively larger bets. 2. Comments around taking Blackberry private. I simply do not believe they are telling it the truth. Come on, do you really need to have a consultant come and tell you that the company cannot afford LBO debt? This is bizarre. Just imagine Buffett making an offer to a company and hiring an investment banker and backing out because they said it is too expensive. 3. Look at SD and how they have bought into Tom Ward's pitch and the whole saga. Again I can understand making mistakes in investments. It is part and parcel of investing. 4. Reducing hedges because of Trump? We do not face 1 in 100 year storm because Trump became president? There are a lot more such things that reduced my confidence in Fairfax. Vinod

If I had to guess, I would say that the bottom 20% in US by family income would be in the top 5% in India by PPP. Vinod

Tim you are absolutely correct. There are a few mentally ill people living on the streets because they refuse to go to the homeless shelters and get help, but for the most part no one in America is poor by historical or even current 3rd world standards. It is quite extraordinary that there are 350M people and no one is starving, even if they refuse to lift a finger to be productive or help themselves. In fact the poorest among us regularly consume too many calories not too few, while playing video games on their large screen TVs in their temperature controlled homes. We have such phenomenal abundance of wealth that it is insane what seems poor to us. I'm sure a truly poor child in Haiti would be quite amazed at the wealth of those "47 million Americans living in poverty" that rb talks of. +1 I generally in agreement with rb on most political/economic issues, but not this one. Poor or those in poverty in say a country like India, is an entirely different thing than what it is in USA. You cannot compare a family whose 9 year old daughter works at another family home cleaning dishes and many many other such chores to "poverty" in USA. Do you think that the kid gets play time? or even food in the morning? This is a very benign example. If you do not see it in person I do not think one can even comprehend what poverty looks like in a country like India. Vinod

benhacker, Thank you very much. Exactly what I am looking for. Vinod

Bought some more at $437. Still a smallish position. Vinod

Fairfax reports a portfolio of around $4 billion dollars. It shows Canadian stocks of about $0.7 billion, US stocks of $1.1 billion and other of $2.4 billion. If I look at Dataroma it has a total value of $1.1 billion and I can see the portfolio composition for that part. With insurance subsidiaries in many countries the portfolio positions are likely held in different countries and there is probably no single insurance filing that has the composition of the $4 billion portfolio. Does anyone know if this is specified anywhere other than looking at the insurance filings of each of the subs? Just wanted to get a rough idea of the portfolio composition. Thanks Vinod

I took a small position today at $442. It could be that people who thought this would have downside protection and see it as a "cash equivalent" are reducing their exposure now that the hedges are reduced. From the press statement, they mention that they could eliminate the hedges completely. Vinod

I do not understand this logic relating equity hedges and going from bonds to cash. A P&C company has investment capital from (a) its own equity capital that serves as "statutory surplus", in effect the money it put down to get permission to write insurance policies and (b) float from money collected from its policy holders that is paid out later on as claims are made. Most companies invest the vast majority of both (a) and (b) in bonds and cash. Some companies (Like Berkshire, Markel, Fairfax) have figured out that investing (a) in stocks is a much more profitable endeavor. They really cannot invest (b) also in stocks, since they need to be absolutely certain that they can payout the claims as they come due. So these funds are primarily invested in bonds and cash. Now, Fairfax has followed this pattern as well. It has historically on average allocated very roughly about 25% to cash, 50% to bond and 25% to stocks. The 25% allocation to stocks is essentially shareholder capital supporting the insurance business - part (a). Fairfax had hedged its stocks i.e. part (a), from 1 in 100 year storm or Great Depression kind of risks. I can understand that. But the reason it has sold its long bonds is because of inflationary risks from recent political events. This is essentially moving money within part (b). That is money that needs to be paid out to policy holders. If there is a risk of inflation, it makes sense to keep more money in cash. That is what they did. What has reducing bond risk in portfolio part (b) got to do with reducing equity risks in part (a), I do not see the logic at all. Granted the portfolio is fungible but risks remain distinct and one does not offset the other. Vinod

Taleb has a good approach of how we should think about climate change: THE POLICY DEBATE with respect to anthropogenic climate-change typically revolves around the accuracy of models. Those who contend that models make accurate predictions argue for specific policies to stem the foreseen damaging effects; those who doubt their accuracy cite a lack of reliable evidence of harm to warrant policy action. These two alternatives are not exhaustive. One can sidestep the "skepticism" of those who question existing climate-models, by framing risk in the most straight- forward possible terms, at the global scale. That is, we should ask "what would the correct policy be if we had no reliable models?" We have only one planet. This fact radically constrains the kinds of risks that are appropriate to take at a large scale. Even a risk with a very low probability becomes unacceptable when it affects all of us – there is no reversing mistakes of that magnitude. Without any precise models, we can still reason that polluting or altering our environment significantly could put us in uncharted territory, with no statistical track- record and potentially large consequences. It is at the core of both scientific decision making and ancestral wisdom to take seriously absence of evidence when the consequences of an action can be large. And it is standard textbook decision theory that a policy should depend at least as much on uncertainty concerning the adverse consequences as it does on the known effects. Further, it has been shown that in any system fraught with opacity, harm is in the dose rather than in the nature of the offending substance: it increases nonlinearly to the quantities at stake. Everything fragile has such property. While some amount of pollution is inevitable, high quantities of any pollutant put us at a rapidly increasing risk of destabilizing the climate, a system that is integral to the biosphere. Ergo, we should build down CO2 emissions, even regardless of what climate-models tell us. This leads to the following asymmetry in climate policy. The scale of the effect must be demonstrated to be large enough to have impact. Once this is shown, and it has been, the burden of proof of absence of harm is on those who would deny it. It is the degree of opacity and uncertainty in a system, as well as asymmetry in effect, rather than specific model predictions, that should drive the precautionary mea- sures. Push a complex system too far and it will not come back. The popular belief that uncertainty undermines the case for taking seriously the ’climate crisis’ that scientists tell us we face is the opposite of the truth. Properly understood, as driving the case for precaution, uncertainty radically underscores that case, and may even constitute it. http://fooledbyrandomness.com/climateletter.pdf Vinod

Come on. A prominent investor has a few positive things to say about your point of view and suddenly you find him admirable and attribute to him qualities that successful people have. Ross Sorkin, a left leaning ideologue. Ann Coulter & Sean Hannity are fair and balanced :) I voted for Hillary holding my nose, just because I find Trump behavior unacceptable. If you are the kind of person who looks at an 8 year old girl and think in 10 years I am going to be dating her, you would be perfectly fine with Trump. If you have assaulted women in the past, you would be saying "What is the big deal". Many find that offensive and that by itself rule him out as POTUS. If you find all his past behavior closer to how you yourself have behaved, you would just be fine with him. No, not all of his supporters are like that of course. A decent proportion of his supporters are like that. Now you can find equally offensive people on the democratic side. But when your leader is exactly like that, these are the kind of people you are going to attract. So that is why you see many people (remember less people voted for him than Hillary) who find him and many of his supporters so offensive. As Liberty put it so eloquently "Human Garbage". Now, I see a lot of positives also with Trump. 1. He put an end to two dynasties (Bush and Clinton). So he gave democracy a push and a blow to crony capitalism. This by itself is a big achievement. 2. He is talking about the issues that are directly impacting the low income workers but which are completely being ignored by both the parties - not being smart about what Chinese are doing trade wise (not just about currency) and acknowledging that immigration is a big problem. These are not going to magically solve all the problems with wage stagnation among low income workers but it is a step in the right direction. 3. He is likely to reduce regulation on businesses which I think went to the other extreme. 4. He seemed less driven by ideology and a bit more practical stuff. He might be a mediocre businessman but that is better than policy wonks who lost touch with the common man and women. I would guess that I am a lot closer to many of his likely policy positions than Hillary's - because it is not clear what his policy positions are going to be. I knew all this but still voted for Hillary just because of his behavior. I can understand people who held their nose and voted for him for various reasons. There are also people who admire him and are his very enthusiastic supporters. I do not have much respect for them. Nothing changed just because he won. Vinod

I don't think it was well-written or well-organized BUT there is a tremendous amount of insight hidden in the jargon in this report. I certainly don't think the takeaway should be simply buying cheap. His definition of cheap would not be a low-multiple stock. My definition for cheap is also not low multiple stock, it is just as Buffett defines it - cheap as compared to IV, which incorporates growth, quality, etc. The concept of outside view - just having base rates in mind is something I imagine every value investor incorporates when making an investment decision, it certainly is something that is very central to my own approach. Mean reversion which is what data indicates is the very essence of Graham's 1934 book. What I did not see in this report is anything new that adds to what Graham and Buffett had already covered. I have a written investment approach - nothing fancy, pretty much what Buffett, Graham, Munger, Greenwald, Fisher, etc. have repeated over and over again and a checklist - my own mistakes and few pointers from the same gang. So when I read an investment book or article, I am primarily looking for something new to add or modify in either the investment approach or checklist. After reading this report, I did not find one thing that I can add to either of these. What I find mildly useful are the two pages of base rate data on earnings growth. Nothing new, pretty much in line with my understanding but I did not have this data before. See after all that is written, he gives examples, where quality is high and stock is cheap and returns are good. But the main thing is stock is cheap. Is that really a surprise? This is before even going into such things as expected returns over 90 day period. Vinod

After reading all of the 158 pages here is what I ended up learning: Buying cheap and quality leads to good returns. He talks about inside view, outside view, HOLT.... and on and on. When it comes finally to examples it is really simply buying cheap. I think someone has written about it all the way back n 1934. Netnet - Please do continue to share interesting research. Nothing against you. I am disappointed with Mauboussin. That he had to write so much to convey so little. Vinod

Sorry for the OT. But to support what Liberty is saying here is a short story. I read this a long while back but I keep thinking about this often. Vinod Mexican Fisherman Meets Harvard MBA An American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large yellowfin tuna. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them. The Mexican replied, “only a little while. The American then asked why didn’t he stay out longer and catch more fish? The Mexican said he had enough to support his family’s immediate needs. The American then asked, “but what do you do with the rest of your time?” The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siestas with my wife, Maria, stroll into the village each evening where I sip wine, and play guitar with my amigos. I have a full and busy life.” The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat, you could buy several boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually New York City, where you will run your expanding enterprise.” The Mexican fisherman asked, “But, how long will this all take?” To which the American replied, “15 – 20 years.” “But what then?” Asked the Mexican. The American laughed and said, “That’s the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions!” “Millions – then what?” The American said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siestas with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

I have sold IBM earlier this year - a wash with no gains. That said, I agree with KCLarkin. I disagree with the whole premise: "So, the companies that don't understand IT and therefore hire IBM will frequently lose to companies that do IT in-house. It's hard to win long-term when your business model self-selects the customers who are more likely to lose long term." Visa for example is heavily into IBM products and it is not because it does not understand IT. It is not an isolated example, you look at many examples in the financial sector. Vinod

My understanding and belief is that Buffett did not mean this literally. It is a general approach that 1. Promotes long term thinking. This way you are forced to look at the earnings power 10 years or more down the lane. Those are good businesses with moats. Businesses you can understand, etc. 2. Restricts investments to things that are less likely to blow up. If you can have confidence in something to hold long term, it must be in businesses that are not likely to undergo rapid change. 3. Forces you to really research the idea in detail. 4. Reduces tax drag. And many other such good investing qualities. As long as you are really doing that, it does not matter if it is 20 punchcard or 100 punchcard. Are we not reading too literally his comments? Just like the 500 page a day reading habit. :) If you are literally trying to implement this 20 punch card type portfolio, you need to know the like rate at which opportunities arise, how long your investment career is likely to last, etc. It really does not make a lot of sense. Sometimes the opportunities may be in a group operation like Buffett did in Korean stocks or arbitrage opportunities. Contrast this with the alternative approach, where you research an idea a little bit, price looks ok and you take a 0.5% or 1% position. Soon you have a portfolio of stocks that all look interesting and you have no conviction. Any stock that goes down, maybe you average down once or twice, it goes further down you sell out. Vinod

My thoughts are in line with Al, Jurgis and Stevie. I think best way to address is is via some sort of change that make it truly market driven. Paid in stock, for performance over long term (say 10 year) and only for outperformance over sector/industry. Having a long vesting period with large holding requirements relative to net worth. Just as the 1990s change in tax code to make CEO pay above $1 million taxable and performance based pay (stock options) tax deductible likely contributed to the pay rise, I think something that acts in the opposite way would be right approach. I really wish Buffett had come up with a compensation plan for his own that reflects shareholder alignment and value created instead of taking just $100k annually. Of all he has the business acumen, knowledge of human behavior and the intellectual firepower to come up with something elegant. Not every CEO can afford to take only $100K given the effort involved. Vinod

Buffett is just playing by the rules. All he was saying is that the rules need to be changed (tax increases for the rich). He would be happy to pay the higher taxes when they get raised for everyone. Say you believe that oil price should be $100 and that it is low only because it is being manipulated by some players. As a result you get retail gasoline prices in in $2 a gallon range. Because you believe it should be closer to $4 a gallon, when you put gas in your car do you pay $4 per gallon even when the gas station is selling it at $2 per gallon? If not, your actions are no different then Buffett. Vinod

Do you (a) genuinely admire Trump and see him as the right sort of leader who would be a good POTUS or (b) are you supporting him holding your nose, because you dislike Mrs. Clinton? If (a), what do you admire about him? If (b), what are some things that he can do that would turn you off from voting for him? Not trying to make a point or anything of that sort, I am trying to understand your point of view. Vinod Vinod1: Before I respond, lets agree that there is zero chance either of us will change the others minds. OK? But since you asked: Generally (b), I draw the line at candidates who exhibit a strong inference of serious criminal behavior. Regarding Trump. He has negatives, but I find the positives things he can do on important matters to far outweigh them. He is far more likely to: respect the rule of law, deal with the threats to this country directly, understand the importance of the free enterprise system and the capitalists who simply want to operate without regulatory overburden, nominate supreme court justices that lean constitutionalist, secure the border, unhinge the corrosive PC culture, make other unpopular decisions as he is not corrupted by the donor class. Will he be the "right sort of leader"? Probably not in the traditional sense, but I'm more interested in getting things done than following a playbook. Thanks for your response. If you believe that way, I can see why you would prefer Trump. Vinod

http://www.wsj.com/articles/new-rough-patch-for-trump-campaign-roils-republicans-as-defections-grow-1470184353 Mr. Trump, speaking at a rally here Tuesday, said voters would stick with him over Mrs. Clinton because of his vow to appoint conservative justices to the Supreme Court. “They have no choice,” Mr. Trump said. “Even if you can’t stand Donald Trump, you think Donald Trump is the worst, you’re going to vote for me. You know why? Justices of the Supreme Court.” Unbelievable. Vinod

Do you (a) genuinely admire Trump and see him as the right sort of leader who would be a good POTUS or (b) are you supporting him holding your nose, because you dislike Mrs. Clinton? If (a), what do you admire about him? If (b), what are some things that he can do that would turn you off from voting for him? Not trying to make a point or anything of that sort, I am trying to understand your point of view. Vinod

Putin is trying to influence the election in favor of Trump. If I were Putin, I would do the same. The link below is not related to the election at all, it is a very interesting piece by itself. It shows how Russia uses Internet/Social Media and the vast network it employs. If you read it you can see how Putin could be playing this game. http://www.nytimes.com/2015/06/07/magazine/the-agency.html If Russia is not strongly in favor of Trump, why do you think they released the emails when they did? If you think this is all some elaborate manipulation by Mrs. Clinton into fooling us to think of Russian connection, I am dumbfounded. Vinod