vinod1

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

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 Hedging.pdf

Yes. I did post a couple of times before. Vinod

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

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

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

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

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

This sounds great. Vinod, do you mind sharing your template (or its generic version) ? Here it goes. Vinod XXX_Valuation_-_Vinod_MM-DD-YYYY_Version_1.2.docx

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

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

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

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! 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

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 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

Yes, that's pretty much my conclusion. It also does some other tests besides market timing (e.g., hypothetical and real investor testing to determine ideal amounts of cash for non-market portfolios). Thank you!

I haven't seen any. Can you show me a study that uses market cap to GNP to determine when to stay in the market and get out that outperforms? e.g., CAPE is predictive of future returns, but it does not appear to be usable, a priori to outperform the market. So my point is, if no one can show that whatever metric they are using to justify holding cash actually outperforms, then it is not a valid basis for holding cash. I'm happy to be proven wrong here, but I haven't seen any evidence to the contrary. Moreover, if it can be done based on something basic (e.g., GNP ratio, CAPE, P/E, etc.), then everyone should be doing it to outperform the market, right? That is just the sort of thing that would be arbitraged out of the market, because it is too easy to do. Basically, all these arguments come down to "timing the market" which is incredibly hard to do. I used Shiller's data from 1871-current, to avoid issues related to specific time period. For example, there are studies that I reproduced that worked in their sample period (e.g., 1970-2001), but not out of sample. I'm basing my statements on historical studies, not my personal history. I think if you read the essay you'll see what I'm saying. However, to answer your question directly, I've been investing since 2010, and I would fully agree that if my statements were based on that period, it should not be trusted, but that's not where I base my conclusions from. Is it safe to summarize your study as saying market timing does not work with the exception you mentioned as active investors with extreme volatility? I apologize for asking this question before reading your report in detail. I took a quick look and it is very impressive. Vinod

Then, please, answer the question I asked anders just a few posts ago... Gio The answer is obvious and he already gave it to you. The point is that your initial post and how it's written suggests that you positioned yourself for a crash by having a high cash allocation and limiting your spectrum of investments as opposed to allocating cash "naturally". I would argue that I have no idea whether we are in 1996 or 1999. For all I know the market could start a 30% slide tomorrow because [reasons that will be apparent only after the fact] or keep going for years. As long as there are compelling opportunities you should seize them and avoid forming a strong opinion about the market (à la Hussman) which can put a big part of your capital on the sidelines for a long time. I think there is a difference between having a strong view on market direction (like Hussman) and knowing where we are in the cycle (pendulum in Mark's words) and trying to adjust our portfolio accordingly. When valuations are unambiguously high, you might want to be a little bit more careful - avoiding marginal investments, selling closer to 90% of IV, invest in opportunities that benefit from a negative shocks, etc. If someone is a truly great investor, I am sure they would still find investments selling at 50% of IV even when the market is richly priced. If I can find opportunities like that, I would be buying all day long regardless of market valuations. But IMO, those kinds of opportunities are a mirage for most investors, they are most likely overlooking some risks, if they think they found deeply undervalued securities when market is very richly priced. For most, slightly better than average investor (hopefully), it is much easier to find opportunities when there is some dislocation or market is cheap overall. I would differentiate the above from holding off on making investments when the market is richly priced hoping for a crash. Vinod

Hussman not only prints graphs about stock market predictions and subsequent actual returns, he also give a numerical correlation. Does the blog point that out? If it doesn’t, I am already suspicious… ;) Gio Yes! He digs deep into the data, to point out the flaws. As I pointed out nearly everything written by Hussman is based on two things (1) profit margins mean revert to 6% (2) stocks normal returns are 10%. He thinks these are pretty much as certain as Planck's constant. He is 100% certain that these would hold true in future. If these do not hold in future, neither does any of his estimates. Vinod

On profit margins, this is worth reading: http://www.philosophicaleconomics.com/2014/05/profit-margins-dont-matter/ Businesses optimize for ROE, not for profit margins. I did read that and it was an eye opener for me. The blog is an absolute gem. Vinod

+1 Gio, What you state makes a lot of sense and I agree with you. That said, as original mungerville mentioned above, reading the blog might, just might make you a bit less certain about Hussman's research. There is an article where he exposes the limitations of Hussman's graphs - especially how the visual illustration makes them look more reliable then they really are. Hussman makes two assumptions basically in his conclusions (1) profit margins reliably mean revert around 6% (2) normal stock market returns should be 10%. Both these might change as economic conditions change. Vinod

Hi Vinod, please take a look at the slide in attachment. Of course, if you think SIRI is wildly overvalued, that won’t be of great help to you… Anyway, buybacks at SIRI just keep going on (share repurchases year-to-date at the end of 2014Q3 totalled nearly $2.1 billion), and Malone is not someone who likes buybacks if he thinks the price of the shares is overvalued! ;) Gio Hi Gio, Thank you! I agree, just do not have enough confidence in the extent of the undervaluation to increase the position size. I think as with Leucadia's previous owners, it would not be possible to predict the value created by looking at just the existing individual parts. Vinod

That’s why I hold lots of cash! ;) Anyway, I don’t know of anyone better than Malone at taking advantage of any market crash that might await us. I will be much more willing to double down in the Liberty family of businesses than in any other company, because I know Malone is working on some incredible bargain. And don’t forget LMCA today is almost debt free! In 2008 it was not so, and that could be a great advantage this time around. As far as Biglari is concerned, the fast food industry generally behaves much better than the general market in a downturn. Furthermore, he hold lots of cash, which could be deployed opportunistically. And he surely knows how to do that! Last but not least, both LMCA and BH are among the cheapest stocks I know today (at least in the North American stock market). Gio I have an investment in LMCA as well. This is a small investment for me at this time as I am quite not comfortable with the valuation primarily because this is not an industry that I spent time on. It is more of a smart owner operator/capital allocator in an industry with good economics that is undergoing change. Could you please share your thoughts on how you are valuing LMCA? Vinod

I read "Keynes Hayek : The Clash that Defined Modern Economics" and it has a pretty good summary of the key differences between the two approaches and their origins. I did not actively look to read about Austrian economics but I found this side by side comparision much more easy to understand. Vinod

Taking on a lease is the same as taking on debt. Instead of buying machinery that has a life of 10 years you take on amortizing debt for a term of 10 years and they are essentially the same. You would have incurred a contractual liability. Vinod