vinod1

That's a little harsh. Anyways I can think of examples, I was just hoping DYOW would give me more of them. Related party transactions comes to mind...where they give some loan to an executive with overly generous terms. Stock option grants where they lower the exercise price because the stock does badly. This all gives an indication that management is not to be trusted. In the Multibagger speculative thread, valcont brought up the fact that the fulcrum debt on Bri-Chem had an interest rate of 21%. I probably would not have caught that. So my checklist would be: 1) Check terms of the debt, interest rate, maturity, convenants, currency of debt vs currency of revenue 2) Compensation, option grants and related party transactions. Anyways to dyow I would say that if you are going to read all the disclosures you should be investing a great deal of time/money/effort into XBRL and much better visualizations. A good XBRL tool could show you all the related party transactions by date side by side or the MD&A by year on a single page. This would be order of magnitude more powerful than reading the disclosures as documents. The disclosures will be much more powerful if you can compare them across multiple years and you have a search engine that can quickly find information. Technology is your friend. Come on! I was just trying to prod dyow to post an example to prove me wrong. Thank you for the examples. dyow - I sincerely apologize. I am very curious to see any examples. Hope you can share some. Vinod

I mostly do this. Great. Do you have examples...more is better. No. Examples or evidence won't change your mind, you will block it out and look for evidence that aligns with your view. A bunch of bullshit. You do not have an example to share.

Many differences with the Great Depression. The dividend yield on Dow I think is in double digits at its lows at that time. So at a 4% withdrawal at that time you are actually investing more into the market at its lows. Vinod

I think that's excessive. 1.5 M for just living? A 4% return on 1.5M will give you 60K a year without touching principle. Social Security will kick in another 30k. Maybe in some cases one would also get some sort of pension from the employer. Assuming you have your house paid off, 90k per year just for living expenses excluding healthcare? Then on top of that 1-1.5M for healthcare? I don't know exactly how expensive services are in the US but again it the amount seems large considering that you have Medicare and Medicare-D coverage. I'm sure some people do use the amounts you've stated but that's definitely not how much you would "need". Further proof is that few people in the US have those kinds of amounts when they retire and somehow they manage to live. I'm not gonna argue with you or Liberty. I fully expected the responses (especially the one from Liberty). Have fun. Just couple notes: - 4% is risky as I said - Social security is nearly BK. I would not expect anything from it - There are no pensions from employers - Medicare is mostly a joke, does not cover a lot of things, and also possibly BK 50M is a good goal. Might not cover all basics though. Gotta go start working on it, you guys can continue the thread. ::) +1 I tend to agree with Jurgis, but there is no mention of the age at which retirement is being planned. A $1 million portfolio at age 70 is going to be quite different from $1 million at age 40. - There is a thing called "Volatility Drag". Which means that you cannot withdraw at your expected rate of return. So if your portfolio returns 5% annually, you cannot withdraw 5% without eating into your principal. This drag depends upon the volatility experienced and ranges from 1% for a 60/40 stock/bond portfolio to nearly 2% for an all stock portfolio. - We are exposed to very asymmetrical risk in retirement. Running out of money at age 80 is so much more horrible than working a few more years in your 30s or 40s. So it makes sense to have a very large margin of safety in your portfolio. - You are more likely to underestimate your actual costs for several reasons - anyone who has run a business or overseen projects would know this. So you need some buffer beyond what you think you need. Any surprises to expenses are likely to be negative rather than positive. Vinod

SD, You have a wonderful way of looking at the broader picture. Invariably I have to re-read your posts - because they are packed with wisdom. Vinod

Really terrific posts BG. Really appreciate sharing all the details. Very informative and eye opening for me. Thank you! Vinod

I think the dominant factor is the increase in number and size of competitively advantaged companies. If there were no competitively advantaged firms, lower interest rates would not have much impact on profit margins, because they would be competed away and the benefits passed on to consumers. Think retailers as an example. Profit margins have been high even before the 2008 crisis, when the economy is robust and employment levels are very high. So your argument that a stagnating economy leading to employees not demanding high wages contributing to higher margins does not hold water. Vinod

http://www.berkshirehathaway.com/letters/2016ltr.pdf

You say, Trump's policies might cause a depression. A depression!! But somehow a depression would only cause a garden variety stock market correction of 20-30%. I do not think depression means what you think it means. Vinod Perhaps I did not write clearly enough. A depression - causing a 90% drawdown - is what they have been hedging against. Trump's deregulatory policies reduce this risk. However they still see clear risks. One is that Trump's protectionist policies cause a depression. Another is a 20-30% drawdown in the normal course of business (i.e. not in a depression). This is my reading of what they said on the call. This comment was in response to the idea that since Trump they do not see risks. They do. That is why they are at high cash levels and duration down to 1. With that positioning, they no longer need the hedges. I am just dumbfounded. I had a rule before: Never debate with a Trump supporter. Now I am going to add one more: Never debate with a Fairfax diehard. Vinod

No it is not. There is difference between "hedging" and "insurance". Vinod

You say, Trump's policies might cause a depression. A depression!! But somehow a depression would only cause a garden variety stock market correction of 20-30%. I do not think depression means what you think it means. Vinod

Prem is a genuinely nice guy. I like him. I learned a lot from him and Fairfax has been a very profitable investment for me. So I am rooting for him and Fairfax. I have been critical of him but that is because I hold him in higher regard that the vast majority of the other CEO's. All I am asking is a bit of consistency and respect for the intelligence of its shareholder base. I understand that Fairfax had much success in the past by taking a point of view about the future, presenting pretty good reasons for that and optimizing the portfolio to take advantage of it. Just admit that this time it did not work out. That is the nature of macro bets. This inability to admit to mistakes has been a recurring theme the past few years on other things as well. Vinod

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