vinod1

Good point. I am shooting from the hip here, based on vague recollection. I stand corrected. Thanks Vinod

If you think Fairholme would be able to beat S&P 500 by 10% going forward over the next 10 years, I would gladly take up an offer to bet otherwise. Vinod

Graham had a wonderful paragraph that I am unable to find now. It goes something like this: Investing is a business undertaking and should be carried out as such. It is incorrect to think that with just a little effort one can achieve results substantially better than the market as a whole. It requires a level of intensity that a businessman would employ in the conduct of his business. Nevertheless a great majority of the people seem to have this belief. No one would think that can achieve great wealth in a business if they spend just a little effort but this same reasoning does not seem to apply when investing in stocks. I probably butchered what he wrote but that I think is what he said. All the funds you mentioned are good. The question is, can an average Joe - who would never every read or even understand the Intelligent Investor at least to the degree that is required to select good managers - been able to find these managers 10-20 years before they had this performance? I would not name a message board that I had participated in a long while back about indexing, but we had people with several years of experience who ran trading floor and have written books on investing (pretty good too) argue about the riskiness of a 3% allocation between two funds one of which had 600 stocks and the other had 2000 stocks. Here they are worrying about a 3% portfolio allocation that is spread over 600 stocks as being too risky and that the 2000 stocks fund is better. My point here is just because someone reads Intelligent Investor (many of these guys did), it would make them good value investors. Let me say that the first time I read the Int Investor, I liked it but did not really get it. You could count me in as one of the basket cases at that time :-) Vinod Vinod

I would look at 20 year returns for a better idea of what returns can be achieved. I posted longleaf's and they are not all that impressive. Also, most value funds and incorrectly measured against the overall market rather than to the type of stocks that generally are populated in their funds. Take Pabrai for example, he loads the funds mostly with small and value stocks (per the academic definition, of low price/book), so I do not think it would be correct to measure his performance aganist S&P 500 but rather aganist say Russell 2000 value or some combination thereof. I know measuring performance this way is a can of worms, but this is something I found most good value investors have done a bad job off, as a result of insufficient attention/thinking on this topic. Mairs and Powers, yes it out performed by 4% over 20 years, but if you had instead looked at in comparision to small value index, it probably outpermed by a smaller percentage over this period. Yes, we have a few mutual funds that have outperformed by a little (1-3%) over 20 years, but I do not think it would have been easy to pick the succesful funds ahead of time. I am not saying someone who is well immersed in value investing like folks on this board, cannot pick good value managers who can outperform the market by a little bit. For the average investor, it is practically impossible. If you really want to look at Sequoia performance under current manager's take out BRK and look at the performanc of the rest of the portfolio. You know they have BRK due to their predecessor's inclusion, so this would give you a good idea of current manager's capabilities. It is not very impressive. Vinod

SJ, I am talking about the average Joe, not the members of this message board. If I had a pick of several investors on this message board especially the majority of those who post with some frequency, I have no doubt in my mind they (yourself included) would outperform the market. Value Investing (a la Buffett/Graham) is so counter-intutive and unlike how the work is accomplished/success is achieved in other fields. I do not think it can be practiced successfully say by 80 to 90% of the overall general population. That and only that is my point. Vinod

Chairman Warren Buffett reiterated his view that for most small investors who don't have time to research individual companies, cheap index funds are the best way to invest in the stock market. "The best way in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you'll be buying into a wonderful industry, which in effect is all of American industry," Buffett told CNBC anchor Liz Claman. "If you buy it over time, you won't buy at the bottom, but you won't buy it all at the top either," the billionaire investor said. http://www.marketwatch.com/story/warren-buffett-backs-index-mutual-funds-over-etfs When a shareholder asked for the single best specific investment idea Buffett could recommend to an individual in his 30s, Buffett said: "I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform ... and I could just go back and get on with my work." http://seekingalpha.com/article/75563-buffett-s-advice-to-the-berkshire-faithful-buy-index-funds Vinod

If you take a look at some of the best value mutual funds, they have only added a very modest (1-2% ) after-tax out-performance over the broad stock market. Take longleaf partners fund, they outperformed before-tax by about 2.6% over S&P 500 index. If you really benchmark this over say Russell 1000 value which I think is the most appropriate and that investors could own this fund (though not over the same period), then it turns into insignificant out-performance to downright underperformance (I really dont have the numbers for 1000v but know it outpermed S&P by a little bit). I posted the performance records of about 20 pre-selected group of value investors mutual funds in the old MSN message board wondering why they have not really shown any good performance compared to the stock market. It seems it should be so easy to beat the market but it is not in practice. A lot of this is due to (1) behavior of investors themself which force managers to worry about short term performance and make subobtimal choices (2) drag due to asset size that does now allow many opportunities to be expolited (3) compensation more aligned with getting more AUM. Vinod

Believe it or not, investing in Index funds has nothing to do with efficient markets (though they tend to go together in peoples minds). It is simple math and logic. People investing in Index funds for the very long term (DCA over 30-40 year period for example) would earn the business returns i.e. about 6% real returns. Since all the active investments involve much higher costs, nearing about 1.5% to 2% of the real returns every year, active investors as a group earn about 4% real returns. Thus on aggregate, indexers outperform something like 80-90% of all investors over say a 30 year period. It makes a lot of sense to just invest in an index fund and outperform 80-90% of the people over a 30 year period. If you disagree, you need to answer one question: Do you believe that all the investors in aggregate can outperform the market? and Do you think all the investors in aggregate earn return higher than what the business generates over the long term? Now efficient marketeers take this to an extreme and say no one can outperform the market expect by luck. We know that is not true. However, this does not take away from the fact that for the vast majority of the people, by definition, index funds are the most suitable option. I spent several years immersed in efficient markets and their study before finding home in Graham and Buffett. "It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits." - Ben Graham Vinod

I would not buy anymore because I have as much as I want at the current discount to IV. If I did not have any then maybe my answer would be different. Vinod

For those of you who are interested in old annual reports here is site that has WFC old reports from 1967 onwards http://www.wellsfargohistory.com/archives/annualreports/index.htm Vinod

The teacher's method reminds me of a cartoon, "I recommend this stock which is outperforming the market since 1 PM today". Vinod

Thanks for flagging this out. Vinod

I think each has different risk/reward characteristics. 1. More scalable but much lower returns. You get what the business earns and nothing more, other than a one time boost from price/value convergence. So would not expect more than 10% over the long term from these kinds of investments, which would be pretty good if funding source is low cost float. Risk is arguably lower as management has full control over the affiliate. 2. Much less scalable but with higher returns. 3. I think this would be good for those investor-owners (Tisch's) who are reasonably competent but not super-investors. Otherwise if you are really good, you do not need Mr Market to validate your investments for you by keeping some of it public. Vinod

Rick and Myth - Thanks for bringing this up. This is a good lesson for me not to dismiss a company outright without any examination because of the seemingly obvious reasons. Vinod

Good idea but I think it might not be all that informative if the poll is for our board members. Most board members would disproportionately be concentrated on the upper 1-10% of wealth and earning measures, so the economic situation would not have made much difference to spending. Another issue is if we had any changes in family situations like children the expenses would increase quite a bit which would make the data less useful. Vinod

Good work! Thanks for sharing. A little tidbit on the extent of the Japanese stock bubble: the dividend yield on the Nikkei was at 5.0% in 1970 and at the bubble peak in late 1989 it had a dividend yield of only 0.45% and is currently a tad above 2.0%. Even at its peak in 2000, S&P 500 yield dipped only to 1.0%. Vinod

:)

I think all this servers is for the alarmist to be even more alarmed and get themselves needlessly riled up. But I think that is what an alarmist wants. I do not think this distinction makes any sense. Hyperinflation as commonly understood is sustained annual inflation in the hundreds and thousands of percent. Vinod

valuegeek - Thank you. You bring a really fresh perspective to valuing SHLD and it is very helpful. Vinod

A more appropriate measure would be "portfolio value" to "annual expenses". Shows how many times your expenses are covered. Expenses are much more stable compared to salary although they are very closely related. This might not be for everyone, but it is how I tend to think of wealth. Vinod

I think the way to think about this is to ask yourself "Is this problem is solvable?" Vinod

Intel's acquisition reminds me of The Bladder Theory of Corporate Finance in action (idea proposed by Sanjay Bakshi). The more earnings you retain the greater the tendency to piss it off. Vinod

Thank you. I just ordered this book. Vinod

What I do not get about macro worries if say Inflation/deflation/double dip is that none of these events can be predicted with even say a confidence level of 50%. We can have far greater confidence in the business values of several companies and if they are selling at a discount to their IV, why make a low confidence macro bet instead of a higher confidence micro bet on individual companies? I probably need to get my head handed to me on a plate for ignoring macro, but cannot really see why macro worries should take precedence over individual stock valuation. We can incorporate macro factors in valuing individual stocks by not in terms of timing the market. I see this as one of the intellectual foundations of Graham and Buffett's approach to investing. Vinod

Perhaps a bit of Buffett comments might help "We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%. But, surprise - none of these blockbuster events made the slightest dent in Ben Graham's investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist. A different set of major shocks is sure to occur in the next 30 years. We will neither try to predict these nor to profit from them. If we can identify businesses similar to those we have purchased in the past, external surprises will have little effect on our long-term results." http://www.berkshirehathaway.com/letters/1994.html Vinod