vinod1
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Posts posted by vinod1
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I believe there is a tremendous body of evidence that clearly states that aggregate market PER-SHARE, PRE-TAX, REAL, TOTAL returns (at the country level) are not *at all* correlated with long term GDP growth. I think they are certainly correlated (in certain ways, maybe with a lead or lag) with changes in GDP growth from expectations.
There is a good book that has data that provides a very compelling case for inverse correlation between GDP growth rate and stock market returns.
Triumph of the Optimists: 101 Years of Global Investment Returns
Vinod
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From the Fairholme AR:
Few have the inclination to dig very deep, let alone the willingness to devote a full time analyst – supported by three additional
researchers and a small army of third-party consultants with expertise in topics such as advertising and marketing, defined benefit plans, distribution and logistics, real estate valuation and redevelopment, and reinsurance – to cover a single company day in and day out.
Now we know why he drank Sears kool aid. Munger's warning on incentives comes to mind. What else does Berkowitz expect to hear from the full time analyst and consultants other than something like "Bruce, Sears has the greatest margin of safety in the history of investments ever".
Hiring a full time associate to research one particular stock and nothing else where it is already one of your largest positions? I just cannot comprehend this. Every damn behavioral bias got to be working against you.
Vinod
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Yeah, I know it didn't include everything. Even the Morningstar chart is pretty close considering what most people would expect one of the smartest value investors to be able to do in 10 years. I'm not saying he won't overperform over time, and that his holdings aren't much cheaper and lower risk than the average company in the SP500 or anything like that. Just pointing out that this is still a close race even when measured in the decade+ scale.
I think the best way to evaluate a fund manager is over one of more full market cycles. If you look at closer to bull market peak or a bear market bottom, you get quite different results. Or a second best way would be to look at multiple independent multi-year periods. Otherwise performance is too sensitive to starting and end point levels.
Vinod
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People are foolish to believe that the steep oil price decline won`t hurt America. The shale boom was a huge driver of economic growth over the last 5 years and not just for oil producing States. Go ask GE or Caterpilar for example. These were all high paying jobs impacting a myriad of other businesses.
Moreover, the oil decline was accompanied by a very sharp move up in the USD which will hurt multi-nationals earnings. This is now very apparent in the earnings that were published today. Also, how are these companies going to be able to predict their earnings with any kind of certainty when you have such fast and unpredictable moves in currencies as we have had lately?
Expect sharp revisions downward to S&P earnings and potentially lower targets or with a lower multiple since they will be much hard to predict than they were.
Cardboard
Cardboard,
When a key input cost to the economy declines, I would think the benefits would far outweigh the loss to the oil producers. In the short run (6 months or so), I can see your point but not over the long run, when the benefits of lower prices start translating into more jobs.
Stephen Roach (when he was at Morgan Stanley) used to pound the table in the early 2000's that oil going above $50 would cause a recession as it always did.
I keep thinking of this essay, anytime, I see arguments to the contrary.
http://bastiat.org/en/petition.html
Vinod
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Good points but give Gio a break. He is a thoughtful, accomplished businessman and investor. So he does understand that such short term performance is meaningless, just look at the title "I know this doesn’t mean anything, and is absolutely not repeatable, but…". It is not like these thoughts do not cross our minds once in a while. Gio just thought it out loud.
Vinod
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My timing is piss poor, but my point is its silly to totally dismiss the macro - especially after the market has more than tripled off its bottom, 5-6 years later. As time marches on and the market continues to rise and get more and more frothy, the more you want to start at least partially hedging.
And let me be clear, I think we ultimately move to a new monetary system. By Dalio's remarks, it seems he is thinking 2 years out its going to get really really rough. So a fully hedged portfolio for me would be 100% long deployed into value stocks, put options on the market for 100% of notional, and then minimum 10% into precious metals (I like gold miners and silver). So my neutral position is not $100 cash, its $90 cash (or less) and $10 (or more) precious metals - as I believe we ultimately get a huge debt deflation or a new monetary system (and the later seems more probable to me).
original mungerville,
I did a little analysis on hedging, it seems to me that buying puts is very expensive and the payoff does not seem all that attractive. I would love to hear your opinion on a short half page analysis that I am attaching below.
Basically, you need to put nearly 16% of your portfolio into put options to be able to hedge your portfolio completely against a 40% loss. That means we can invest only 84% into stocks. I might be missing something and any feedback would be most welcome.
Thank you!
Vinod
Vinod, I am sure your analysis is reasonable. Just to be clear, I am advocating the following:
1. My neutral position is no longer 100% cash, its something like 90% cash (or less) and 10% (or more) precious metals. This is because of the global monetary debasement and its irrespective of whether we get deflation or inflation coming. Its just about the debasement.
2. I advocate being at least partially hedged after a 5 to 6 year run. The alternative is reduce value picks and move to cash. But if you are a really good value investor, then some hedging allows you to benefit from your Alpha without incurring market risk.
3. I advocate asymmetrical hedges. They are more expensive, but they can't kill you like symmetric ones which go the wrong way. After all, with money printing, the stock market's potential return is very very high - so you can get killed on a symmetric hedge. Asymmetrically hedging your entire portfolio is extremely expensive - I agree. And it would not permit you to invest the entire portfolio unless you use some margin for the hedge.
4. After over ten years at this, I have come to the conclusion that diversifying your hedge is intelligent. So buy some puts, but also be fearful when others are greedy (and the reverse) by moving to cash (and vice-versa), and also consider using long govt bonds as a third and less expensive option. (But in this environment with bond yields already so low I am less inclined). The point is don't put all your hedging eggs in one basket, and don't necessarily hedge 100% of your portfolio.
So, for example, after a 6 year bull market, maybe instead of hedging 100% of your portfolio, something like the following:
Neglecting my point #1 above for simplicity:
A) 25% cash, 75% value picks (ie discard your worst 25% of ideas to get from 100% down to 75%), hedge with puts say 35% of your entire portfolio. So net you would be long equities 40% and effectively be 60% cash.
B) IF we were in a more normal environment for govt bonds, you could instead invest the 25% cash in long govt bonds which earns a better yield and is roughly the equivalent of say an extra 15 % hedge on your equities (at least according to Ray Dalio of Bridgewater - and I am talking in very rough terms), so effectively you would then be 25% unhedged equities (instead of 40%) and effectively 75% cash. In reality, you would have 25% long bonds, 75% equities and 35% of notional covered by puts you bought on margin.
C) You might want to split A) and B) if you do not feel comfortable relying on the inverse correlation between the long-bond and equities. I would either do A) or C). The idea is to diversify the hedge.
D) Also, if a major holding is a large cap, you could consider buying the LEAPs instead of the common. Its more costly, but they act as a floor on what you can lose. So if you are really really scared of the environment and 25% to 40% long equities is still too long, you might consider a bit of this (should you have this type of security in your portfolio). Diversify the hedge into 3 or 4 strategies (all of them asymmetric) so you can't get killed by things working against you for some time and also the cost won't kill you because you limit your maximum notional your puts reference to 35% of your entire portfolio's notional
Now, having said all the above - given the monetary debasement going on, cash is probably going to ultimately be trash. So how does one stay conservative (ie how does one not be forced to hold equities as central banks debase and force everyone into equities?) as equity valuations go sky-high - at a time that cash is likely to be debased? I think its really important for everyone to hold at least 10% of their portfolio in physical precious metals. I am not going to get into how that should fit into a hedged value portfolio in this thread, but basically with A through D above, and combining that with #1, each person can figure it out for themselves.
original mungerville,
Thank you for the detailed and very insightful reply. It looks like you have put a great deal of thought into this issue.
My portfolio since late 2011 has been mostly in LEAPS. It is partly due to the concerns you mentioned, partly due to valuations and partly because the opportunity set (BAC, AIG, et al.) of deep value + Tail risk lent itself to LEAPS.
I also have about 2% in precious metal equities (GDX) because they are attractive on their own due to valuations (mean reversion) while also serving as a hedge.
Vinod
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I remember when I first red the article made by WB "Americas growing trade deficit" in 2003. I revisited the article because there is a couple of words in that article that i never forget: "every time you hear that foreigners will start move out of the dollar, dismiss it".
When was the last time the US had a trade surplus ? Correct me if Im wrong but that hasnt happend since mid 70s and, with lower oil price the US trade deficit will most likely increase again. And with a stronger dollar, it will probably increase even more. So it continues, the US gradually giving away a part of their national net worth.
It easy to get lost in this credit jungle environment but it always comes down to the simple fact that credit is borrowing from the prosperity of the future. But at one point, someone will have to pay it back and, looking back at history its been through war.
Should the coming generations work harder days due to of our way of living ? should yellen inflate it all away by endless QE letting foreginers take the hit? or should treasury forgive the debt to the fed? what about taxpayers?
Simply, who will be standing left with the debt ?
Rgds,
Most of US investments overseas are ownership interests (equity, direct ownership of businesses, etc). Rest of the world owns mostly US debt. US earns very high returns on its investments and pays very little on its debt. Looking at the net returns, it is still mostly favorable to US.
Vinod
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Most of the concentrated investors had portfolios consisting of nearly iron clad moats or hard asset values. FFH should be fine, but I have no idea of the moatiness of the rest of your portfolio. Do you think the rest have solid moats?
Vinod
You can look up all my holdings in the Investment Idea section. NRW.AX and the japanese stocks are mainly asset plays (thats the reason that these stocks are all smaller holdings), the rest have something in place that protects the cashflows for the next years. PKX is the lowest cost steel producer (though i am not sure if the currency wars deteriorate that one).
When Buffett is doing concentrated investing he is finding deep values with a very large margin of safety:
1. Western Insurance - it earned $22 and $29 the previous two years and he is buying at something like $3 to $13 per share.
2. National American Fire Insurance - Good capital allocator at the helm, with book value of $135 and earning $29 and he is buying in the stock in the $30s.
That is margin of safety.
Or he is buying Coke and Amex with near impregnable moats.
In either case margin of safety is pretty high. That is when he concentrates his portfolio.
This kind of concentrated portfolio does not work if applied to marginal businesses. Being recession resistant is not really the key, as there are many ways to lose, it is not just to economic cycle.
Again, just a note of friendly caution to a fellow board member.
Vinod
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I think its a lot easier when you know what you own and have stress tested this beforehand. Most of my businesses are recession prove and SEC and FFH are diversified in itself. Overall i think that the correlation between these businesses is really small.
I am pretty sure that i will not be happy if i get those drawdowns, but i don`t think that more diversification is helping me to achieve my goals.
Most of the concentrated investors had portfolios consisting of nearly iron clad moats or hard asset values. FFH should be fine, but I have no idea of the moatiness of the rest of your portfolio. Do you think the rest have solid moats?
Vinod
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ni-co & CorpRaider,
Thanks!
Futures would be a lot more risky unless valuations reach truly absurd levels. At the current level, there are enough economic scenarios in which shorting could cause quite a bit of pain. So I am primarily exploring puts - it is not hedging as much as buying insurance.
Mungerville pointed the use of puts, but I am just not seeing them to be of much help unless one gets the timing right.
Vinod
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I spent the better part of 6 months way back in 2009 reading various editions of Security Analysis as I wanted to thoroughly understand and internalize what Ben Graham is saying. To help me with this, I created notes consisting of a concise summary of key points, important examples of each chapter. As a next step, using the notes, I then distilled the core into a three page summary.
This is by far the best education I had in value investing.
I do not have the three page summary available online, but here are my notes of each chapter.
http://vinodp.com/documents/investing/security_analysis_index.html
Vinod
This is tremendous - thanks.
Which editions did you use, and do you have a preference for any single one? Do you see yourself re-reading any particular edition in the future, or will you just refer to your notes? It might be interesting to see how your notes might be revised on a re-reading!
2nd and 3rd editions. I liked 2nd edition the best. I briefly went through 1st and 4th. I also read the 6th edition which is based on the 2nd.
I have been primarily been referring to the notes, but would re-read at some point.
Vinod
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My timing is piss poor, but my point is its silly to totally dismiss the macro - especially after the market has more than tripled off its bottom, 5-6 years later. As time marches on and the market continues to rise and get more and more frothy, the more you want to start at least partially hedging.
And let me be clear, I think we ultimately move to a new monetary system. By Dalio's remarks, it seems he is thinking 2 years out its going to get really really rough. So a fully hedged portfolio for me would be 100% long deployed into value stocks, put options on the market for 100% of notional, and then minimum 10% into precious metals (I like gold miners and silver). So my neutral position is not $100 cash, its $90 cash (or less) and $10 (or more) precious metals - as I believe we ultimately get a huge debt deflation or a new monetary system (and the later seems more probable to me).
original mungerville,
I did a little analysis on hedging, it seems to me that buying puts is very expensive and the payoff does not seem all that attractive. I would love to hear your opinion on a short half page analysis that I am attaching below.
Basically, you need to put nearly 16% of your portfolio into put options to be able to hedge your portfolio completely against a 40% loss. That means we can invest only 84% into stocks. I might be missing something and any feedback would be most welcome.
Thank you!
Vinod
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I think you posted them before and I downloaded them.
I forgot I had your notes.
Thank you again though. :)
Yes. I did post a couple of times before.
Vinod
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I spent the better part of 6 months way back in 2009 reading various editions of Security Analysis as I wanted to thoroughly understand and internalize what Ben Graham is saying. To help me with this, I created notes consisting of a concise summary of key points, important examples of each chapter. As a next step, using the notes, I then distilled the core into a three page summary.
This is by far the best education I had in value investing.
I do not have the three page summary available online, but here are my notes of each chapter.
http://vinodp.com/documents/investing/security_analysis_index.html
Vinod
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What are examples of stocks that you would own and sleep well at night without the need to heavily research? The only one that I have that fits this criteria is BRK, for my parents, but I want to add a few more.
Second part to the question is, what is the appropriate measure of value for such stocks. Again with Berkshire, I stick with Price/Book.
I know very little about Fairfax or Merkel, but it seems that many here would recommend them. Are they also valued on price/book?
If there aren't too many stocks that fit this criteria, I don't even mind looking into solid value mutual fund managers.
Thanks.
For the first part, why not look at Berkshire's portfolio itself?
For the second part, why not look at the price Berkshire paid? If it was not recently purchased or added to, then you can adjust for a few years of 6-7% compounding to get at the adjusted price paid.
Vinod
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Stahl is talking his book. The wealth index is showing little outperformance versus S&P 500 equal weight which would be the closest comparable index that he lists and the entire outperformance over this period can be explained by any one of two years - 1999 or 2009. A slightly better index would have been S&P 400 mid cap index. Even this small outperformance is achieved via much higher volatility.
So if you adjust for just one factor (size) nearly all of the outperformance disappears.
Vinod
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Just a thought, but maybe it might be better to focus on a few funds that you already have and have confidence in. If you invest in a dozen funds, then your performance would pretty much track the broad market.
Vinod
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About a couple of years back, I realized that the performance of my retirement account over 5 years is about 10% better than the taxable account. I hold the same stocks in both portfolios and the main difference is that I am much more active in the retirement account actively trimming positions if there is a substantial run up and buying back on any subsequent dips. So I figured I would come out ahead even if I had to pay taxes and I am now little bit more active in the taxable account.
Vinod
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Another thing I started since mid 2011 is to write out a fairly detailed report on each business that I am researching whether I buy or not. I created a standard template that I use that has business description in my own words, competitive advantages, risks, valuation, a three year outlook and recommendation.
This sounds great. Vinod, do you mind sharing your template (or its generic version) ?
Here it goes.
Vinod
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Why do you guys typically put in your investing journal? Is it to write down your investment thesis for a particular investment, or just general investment thoughts?
I have been maintaining an investment diary since mid 2011. I try to capture my thought process - why I bought or sold a stock, what else I have researched, what I am thinking about the macro, why I sized the position at the level that I did, my own mental state as to how I am viewing the markets, stocks that I researched and did not buy and why, etc.
Another thing I started since mid 2011 is to write out a fairly detailed report on each business that I am researching whether I buy or not. I created a standard template that I use that has business description in my own words, competitive advantages, risks, valuation, a three year outlook and recommendation. In the three year outlook I try to quantitatively put my expectations on the key drivers for the investment. Then I try to come up with either a book value or earnings 3 years out and the relevant multiple to come up with a price expectation. This has been incredibly useful in the sense of deliberate practice by providing input on where my expectations differ from reality. It tells you if you are systematically biased either optimistically or pessimistically so you can make the necessary corrections.
Vinod
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Stick to boring quality businesses for the first few years as you are earning your stripes. Those businesses that are providing substantially the same products and services for 20 years or more and have a history of good profitability and make sure that you are not paying crazy multiples.
Alternatively, a much more simpler option is to stick to businesses in Buffett's portfolio. If you are adventuresome you might consider Longleaf and Sequoia portfolio's as well. That gives you a lot of businesses to understand and practice valuing businesses.
Vinod
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Who said it should be static? Sometimes you seem to argue against things that were never said...
Well, I think it was Vinod who asked how my cash reserve would change if FFH, LMCA, and BH were at certain price levels…
Anyway, let may ask you a question: how many times in the last 10 years have you held a significant amount of cash for an extended period of time?
My point is: the problem is not to hold or not to hold cash, the problem is those who hold cash tend to always hold it, while those who are fully invested tend to always be fully invested. ;)
Gio
Gio,
I was just trying to get you to answer this question: If the stocks you like are very attractively priced (the price at which you would go to your max allocation for that stock) but the stock market itself seems very overvalued, would you buy the stocks you like or would you hold off due to your concerns about market valuation.
It seems you would buy the stocks you like regardless of market valuations - both from your actions via buying OAK and to my question earlier on buying FFH, BH and LMCA at various prices. Earlier in the thread you seem to indicate otherwise.
Vinod
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Would you be willing to say put near 100% of the portfolio when you have say only 3-4 ideas that are say around 75% of IV? Would love to hear your perspective on this.
That’s the very same question I had already asked! And let me tell you what I think: if I were to decide the level of cash I hold only on the basis of “very cheap” opportunities, I would always be 100% invested. In fact, right now I would be 100% invested.
Following the pendulum is nothing but to heed Buffett’s warning:
And of course also the opposite is true. And imo the level of cash plays a big role!The less prudence with which others conduct their affairs, the more prudence with which we should conduct ours.Gio
If say your favorite stocks, FFH, LMCA and BH close today at $380, $25 and $250 and S&P 500 at 2500, would that change your allocation?
I have come to peace with the fact that there are a few things I would not know in this world: The meaning of life; If there is God; Your investment in BH.
But I would love to understand how the above would change your allocation.
Vinod
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The question is what is "very cheap"? A couple of years ago, the weighted average of my portfolio (just a rough estimate) price/IV would have been below 50%. Right now it is likely above 70%. This is even if you ignore the much higher quality of the investments available a couple of years ago.
In addition, the number of ideas that meet the criteria are below the level that would provide adequate diversification for putting 100% of the portfolio.
Would you be willing to say put near 100% of the portfolio when you have say only 3-4 ideas that are say around 75% of IV? Would love to hear your perspective on this.
Vinod
That's for each investor to determine. Some have very high hurdles, some are looking for 10%.. But whatever your target is, you have to ask if holding lots of cash helps you get closer to that target over long periods of time or if it holds you back.
Thanks Liberty!
The index fund 6.5% myth
in General Discussion
Posted
Dont take it too literally. It just means it would be a a bad idea to expect higher equity returns just because it has a higher growth rate.
The data if you care to look in the book, shows that countries that have higher growth rate are priced higher. So equity returns tended to disappoint investors who naively investing in high growth countries. Does this remind you of value investing?
Part of the explanation is also that to fund additional growth you need to make additional investments via debt and stock market issues which dilute existing shareholders.
Vinod