vinod1

I am invested in big banks and smaller positions that span the spectrum - but hardly the owner operator type you are looking. Even these I am slowly reducing my positions as they appreciated, so not super attractive right now. Vinod

Hi Vinod, Imo those are the things anyone can plainly see and agree on. As I have already told you, I think FFH’s overall strategy might be a little less evident: as asset prices will probably deflate at one time during the next 3-5 years, FFH will be best positioned to purchase productive assets very cheaply. Better positioned than anyone else I know of, actually! That might be the beginning of a transformation into a much more diversified conglomerate of high quality businesses, which will more closely resemble what Berkshire is today. If successful, certainly FFH’s stock price doesn’t reflect such a scenario. And personally I don’t know of many businesses with higher opportunities of compounding capital over the next 5-10 years (if the scenario I have described comes to pass, the best case for FFH), nor with a lower risk of permanent loss of capital (if the scenario I have described never materializes, the worst case for FFH). But, please, let me know which businesses you are investing in! So that I might look at them, and better understand what you mean! If I like them, as I have always said, I might decide to sell some FFH to buy those businesses. ;) Cheers, Gio Hi Gio, It could be we differ in our expectations. In a deflation/stock market crash scenario, I fully agree that Fairfax would be a tremendous beneficiary. This seems to be your base case. But what if this does not take place? In such a case, Fairfax would not even be compounding at high single digits. This is my base case since I do not have any particular view of the future. Vinod

It is not a chore at all. I absolutely love reading these books. Just that my interest in them does not seem to correlate very well with how much I retain and how much I actually put into practice. I think we probably differ in how we learn. For me, when I try so summarize when putting it down on paper, it forces me think through more deeply and that is how I learn most effectively. The very act of writing seems to focus my mind much more. Even if I do not read what I have written, I pretty much retain the gist of it when I write. I too assume that even if I do not remember all the details, it is somewhere in the back of my mind and that somehow my thinking improved as a result of reading those books somehow. Vinod

Vinod, I am curious to know the names of the 10 other books. For me, nothing has worked better than interspersed repetition and recall. smd123, My mention of 10 books is not really a fixed set of books. I usually write a short summary, it might even be as little as a one sentence for books that I find there is something that I should incorporate into my thinking or habits. It is on a continuum, "Security Analysis" being at one end where I spent 6 months to drill down the lessons of that book deeply into my day to day practice to "Black Swan" being at sort of the other end where I think the lesson is quite simple and direct ("random, unknownable, and unpredictable shit happens more often than we realize") so not much re-reading required. I would put "The Most Important Thing" by Howard Marks as somewhere in between. With that caveat, here are some books on which I spent quite some time trying to practice what they say 1. Seven habits of highly effective people - lot of it is fluff but it has a few things that have a big impact on me. For example, "begin with the end in mind" is something that I found very useful in making big impact decisions. 2. How to win friends and influence people. 3. Dont sweat the small stuff. 4. Investment Valuation by Damodharan. I think this is absolutely the wrong way to approach investing, but I think knowing the theory really cold and then rejecting it based on specific reasons that you believe in, goes a long way in being a better investor. 5. Understanding Michael Porter. Perhaps the best approach to understanding moats and a companies strategy that I came across. 6. A bunch of books and literature on children's eduction, emotional well being, etc. 7. Value Investing from Graham to Buffett and beyond I think these are the main ones that I spent the most time on. Vinod

Thanks for all the feedback. I am broadly in agreement with most of you and have been practicing many of the suggestions. So it looks like there are no shortcuts. Vinod

I read quite a few books and sometimes I come across a book that I really want to internalize. It could be learning a new skill, incorporating something into a habit, etc. I found that after reading a book, I would remember or practice what it says for maybe a week or two and then it is out of my mind. Even re-reading a few times, does not really seem to make it stick in my mind. The only effective way for me seems to be to prepare a high level summary and just review it daily for a week, then weekly for a little while and after that a couple of times a year. This is quite an intensive process that takes up a bit of time. So I was able to do this only for a few topics (1) Ben Graham Security Analysis - a six month effort (2) Buffett's annual letters and interviews - another 6 month effort (3) Influence and about another 10 books. Some of the books, like "How to read a book" are quite simple to retain since it is just knowing a method and being aware of it. Some like "How to win friends and influence people" are much harder since it involves changing deep rooted habits. I am constantly battling the urge to read a new book versus just re-reading books that I already have or notes that I prepared. How do you internalize books that you find helpful? What did you find most helpful? Vinod

Gio, To me the question is, is the business becoming so much better that the past does not provide a good guide to the future? To me, the answer is no. Fairfax is moving in the right direction to a better more profitable niches of the insurance market and their India investment fund is a good move, but are likely to add 1% to 2% to their ROE. As you mentioned we are looking at different things. I am looking for businesses that are likely to compound at attractive rates over the next 5 to 10 years in the base case with a low chance of permanent loss of capital. Vinod

The way Prem talks about The Great Depression, about being cautious in 1925 and waiting through 1932, suggests he is going to wait a whole lot longer than 2 or 3 years. So I think he is going to stick to deflation camp for a very long time. A couple of years of inflation would seem similar to the way he had to wait for CDS bets to come through. Vinod

bluedevil, It is strange addressing politely with a "devil" tag. :) I did think about this and agree with you to an extent, but the time frame for this to happen might be very far off. Look at the P&C industry history. The industry as a whole generates low ROE. They know they need to underwrite profitably to generate good ROE, but they do not. Industry average CR's have been above 100 for a long time. So why did the industry continue to underwrite at CR above 100 when ROE is poor? Industry structure and incentives pretty much explain why. Buffett has written about this a zillion times. I do agree CR and investment returns are not independent, but it going to take many years before you see some change in underwriting results. Vinod

Vinod was calculating the rate of book value growth. His estimate is 5-12%, with a base case of, call it, 7%. His base case calls for stock market returns of 5% (not unreasonable by any measure). His base case says Fairfax will grow at a greater rate than the market and is therefore "worth" at least book to "the market". What it is worth to frommi or Jurgis or vinod is an entirely different story. What something is worth to the market under reasonable assumptions under today's conditions is different than what something is worth to any one of us with an XX% hurdle. My takeaway from Vinod's thorough analysis is in order to own FFH today, you either must have higher compounding rate expectations (like Gio does, not trying to argue with you Gio, I just know you expect greater things from FFH than 5 or 7%) or pretty low return requirements. I have no strong opinions either way and have never owned FFH. This is exactly what I meant. Thanks for explaining it better than I could. Vinod

Agree. Investment returns are really what would drive book value growth for Fairfax. So you have to ask what rate did they earn in the past? What was their return compared to the relevant benchmark i.e. the value add? What are the benchmarks likely to yield in future? Is the value add likely to be less, more or about same as in the past? This is what I tried to do in this blog post. http://vinodp.com/blog/?p=34 Vinod So following your logic, FFH is worth ~0.7*bv? And every insurance company is worth a lot less than bookvalue because stock and bond returns are lower going forward? :) Assuming stock market returns are going to be 5% and FFH returns 7%, even adjusting for risk, why would it be worth less than book value? Vinod

Agree. Investment returns are really what would drive book value growth for Fairfax. So you have to ask what rate did they earn in the past? What was their return compared to the relevant benchmark i.e. the value add? What are the benchmarks likely to yield in future? Is the value add likely to be less, more or about same as in the past? This is what I tried to do in this blog post. http://vinodp.com/blog/?p=34 Vinod

Got it a while back. You can write a letter to Omaha and they would mail out a copy. I had to do this once in the past when I did not get mine in mail. Vinod

We have a 1-year-old son. Over the past year, and the years before as we observed the many people around us who had kids, it became quite clear that kids can be as expensive or inexpensive as you want. And a lot of what people spend on kids isn't actually things that make them happier and better people. In fact, the best thing for most kids would be to spend more time with their parents, and to see those parents be stress-free and happy. Most people spend all their time away from their kids to earn enough to buy a bunch of crap that the kids don't even notice and that they would gladly trade for more time with their parents (do they care if you drive a BMW instead of a Honda or that you have granite countertops instead of wood?). Between me and my wife having taken about a 7 digit aggregate pay cut over a 4-5 year period, to spend more time with kids, I cannot agree with you more. I stopped going to office from the day my son was born, working from home for 7 years that offered a lot of flexibility. Finally I quit my job entirely when my wife was pregnant with our second. I used to take frequent unpaid 3 month time off as well. Main motive was time with kids. A good school district brings a lot of intangible benefits that I did not realize before my son started going to school. Moving to a good school district though increased our housing costs quite a bit. Vinod

Liberty, I wish you the very best of luck! Look forward to more of your wonderful posts if you do decide to retire. FYI - I do not know if you have kids, but expenses have dramatically increased for me kids. This is partly due to housing, as after kids we realized there are lots of benefits to being in a better school district even though school ratings are mostly junk since they are just correlated to demographic profile. And houses in good school districts are 2x to 2.5x of average school districts in our area. Vinod

I have mostly used book value since it is so hard to improve upon. At a high level we know that depreciation may not reflect what is really happening to the asset. Inflation can distort the actual value. A new firm seeking to enter the market would not duplicate the same PPE as newer equipment would have higher productivity. So you need to know quite a bit about the industry production methods to be able to improve upon book value. A rough approach to get around the above is to use price per unit of production times capacity. Example, find the market price of a plant per ton of aluminum produced and use this to find the reproduction value for the aluminum plant. Use comparable companies data. Also if my investment case is going to be dependent upon getting this number with precision, it is probably not worth bothering about. Vinod

It's quite simple. You usually just want to do an automated customer account transfer service (I think that's the acronym?) aka ACATS transfer. It takes maybe 7-10 days. As mentioned above, if you close out completely, Fido will charge you maybe $25-50 (I can't remember). All positions will be transfered in kind, and the basis (if properly reported / known at Fidelity) will be transferred accurately to IB within maybe 1-2 months (usually works well). Note, if you have some mutual funds at Fidelity, IB will need you to liquidate those if they aren't in their list of funds they can hold... but other securities should be just fine to move. It's really quite easy and seamless in my experience (I fund most new accounts for my clients this way and that is where I am speaking from). Also, even if you had a margin account, it's simple to transfer over, you just need to let IB know you have a loan at the other broker I believe. Two small notes: 1) If you have $0 cash at Fidelity when you transfer, the account closing fee will be considered "margin" and thus you can't transfer, so just a heads up to have net-cash after the closing fee. 2) On joint accounts, make sure you speak with IB support and title your new IB account *exactly* how they want given your Fidelity account... middle initials and other somewhat minor titling things matter to IB. 3) Also note to understand IB's joint account withdrawal rules... generally (I think it's still like this) they say that you can deposit from a bank titled under your name, or wifes name, but they will only let you withdrawal into a jointly titled account. Hope that helps, glad to see IB getting more business! :) Thank you very much! That was really helpful! I'll give IB a call and hopefully they can help me with the transfer. Thanks again! :) berkshire101, I transferred to IB from Vanguard Brokerage Account a long while back and the only issue I had is that the cost basis did not transfer correctly. But you would be able to correct this manually yourself. So just make sure you have accurate cost basis information in case you need it. Vinod

Looks like it skips around a bit: Thank you!!! I have spent a bit of time trying to find these reports and had no luck. I cannot thank you enough. Vinod

Gamecock-YT, Wow!! Thank you! By any chance do you have Coke annual reports for late 1970s or early 1980s? Thanks Vinod

They give this out in the AR, page 99. Change in earnings at 1% and 2% change in rates is about -$700 million and -$1.3 billion. This assumes a parallel rise in rates. Vinod

GMO forcast attached. Vinod GMO.pdf

I have been following GMO very closely since around 2001. They used to issue a much more detailed forecasts by sub-asset classes at that time. Even one of the foremost efficient market gurus and who I respect a great deal, William Bernstein, studied GMO methodology and commented that GMO does these forecasts in just about the best way that is humanely possible. My own experience also supports this. In 1999, they issued a 10 year forecast for 11 different asset classes (small value, large cap value, REIT, etc.) and they nearly got everything right. Vinod

Hi Vinod - do you know in what year Buffett made this quote? I ask as I'm interested in tracking Buffett's public comments on discount rates, to see how they compare to prevailing inflation/US bond rates of the time period. Hoping to calibrate the equation somewhat to see what there is to learn. You would not find much on discount rates from Buffett because he is on record as saying that he does not use discount rates. Charlie talked a little bit more on this and he adds an interesting twist, that of comparing to the best alternative you have. Vinod

Hi Vinod - do you know in what year Buffett made this quote? I ask as I'm interested in tracking Buffett's public comments on discount rates, to see how they compare to prevailing inflation/US bond rates of the time period. Hoping to calibrate the equation somewhat to see what there is to learn. Sorry, I do not remember the exact source or date of this quote. He is giving an example and that is not the rate that he is actually using. Munger said something around the fact that they would not be using a much lower discount rate than 10% - even if treasury rates go much lower. My understanding is that Buffett/Munger use something like 10% as the discount rate and adjust it upward if long term rates are much higher than 10% but they do not want to adjust it much below 10% even if rates are very low. As Buffett says they have margin of safety at every step of the way when valuing a business. Vinod

Sure. But assuming your investment analysis is accurate, the optimal investments at an 11% discount rate are the same as the optimal investments at an 8% discount rate. You have more options to choose from at an 8% discount rate, but they are suboptimal. If you are using the same discount rate for all companies, then yes, it's clearly just a matter of "how low are you willing to go?" to find opportunities, and I guess the rate you choose becomes more about the macro environment than anything else (clearly the rate you use to discount cash flows must be lower today than in the 1980s). But using the same discount rate for all companies is a bit of a stretch. Personally, I may be happy to invest in a stock like KO if, based on my best projections of future cash flows, I expect a return of 8% per year. Given that even 30-yr treasuries are sub-3%, earning an expected 8% return on a "safe" stock like Coke would be highly attractive. On the other hand, if based on my best projections of future cash flows, I expected an 8% return from investing in Facebook, I wouldn't do it. The risk of those cash flows that I project being far off the mark is too high relative to an 8% rate of return. I would want a much higher expected rate of return, maybe closer to 15%. So I guess it comes down to how you handle risk in your valuation. Perhaps you use a low discount rate for all companies, but devise different scenarios and probability-weight them in order to come up with a valuation. Or, you come up with expected cash flows and discount them at a rate in line with the level of risk to achieving them, depending on the company. The difference a discount rate makes is huge. For Fastenal, at an 8% discount rate, my model says I should be willing to pay $65-70 for the stock. At an 11% discount rate, I should pay no more than ~$35. There are some times that the opportunity and the business are so obvious that you don't even need to project cash flows or think about a discount rate (AAPL at $380 per share is the best recent example I can think of). But it seems to me that with situations like Fastenal, you can't avoid thinking about future cash flows and a proper discount rate. Looking at the current multiple on earnings or cash flow and "eye-balling it" isn't much help in that kind of scenario. Philly, I hear you and understand your point. It is a valid concern, but using different rates makes comparing different investments very difficult. I just use 10% for everything and adjust the required margin of safety by using a probabilistic approach. Buffett's comments on this make a lot of sense: When we look at the future of businesses we look at riskiness as being sort of a go/no-go valve. In other words, if we think that we simply don't know what's going to happen in the future, that doesn't mean it's risky for everyone. It means we don't know – that it's risky for us. It may not be risky for someone else who understands the business. However, in that case, we just give up. We don't try to predict those things. We don't say, "Well, we don't know what's going to happen." Therefore, we'll discount some cash flows that we don't even know at 9% instead of 7%. That is not our way to approach it. Once it passes a threshold test of being something about which we feel quite certain we tend to apply the same discount factor to everything. And we try to only buy businesses about which we're quite certain. But we think it's also nonsense to get into situations – or to try and evaluate situations – where we don't have any conviction to speak of as to what the future is going to look-like. I don't think that you can compensate for that by having a higher discount rate and saying, "Well, it's riskier. And I don't really know what's going to happen. Therefore, I'll apply a higher discount rate." Vinod