vinod1

scorpioncapital - Thank you.

scorpioncapital, I see that you follow LUK. If possible, could you please share your thoughts on LUK’s IV? The way I see valuing LUK is via summing the IV of the individual investments. Mining companies are no where near my circle of competence, so I took a short cut in terms of estimating IV of individual investments at 1.5X-2X of the price paid by LUK for mining interests and using Book Value/Earnings multiple for others. Taking YE 2008 BV of $11 per share and adjusting in this manner I get IV in the $30-35 range. Any thoughts on valuing Fortescue Equity and royalty note would be most welcome. Thanks Vinod

Hard/Soft insurance markets have always been discussed in terms of the supply side i.e. funds available to the insurance companies. I have never seen a discussion in terms of the demand side. How does the demand for insurance vary with economic cycle? Is it fairly immune to economic cycle or would it be possible to have a sharp drop in demand in a depression type scenario? In this case would we not have a soft market if we assume that the supply remains constant or falls lower than the demand side? Thanks Vinod

Thanks for the writeup Mungerville. Hard/Soft insurance markets have always been discussed in terms of the supply side i.e. funds available to the insurance companies. I have never seen a discussion in terms of the demand side. How does the demand for insurance vary with economic cycle? Is it fairly immune to economic cycle or would it be possible to have a sharp drop in demand in a depression type scenario? In this case would we not have a soft market if we assume that the supply remains constant or falls lower than the demand side? Thanks Vinod

One of my favorite investment books is Triumph of the Optimists: 101 Years of Global Investment Returns. The authors did a truly outstanding study of returns from 16 countries for the years 1900-2001 and it gives a lot of food for thought. The data shows, for example, that economic growth rate is weakly negatively correlated with stock market returns. The faster the economic growth, the poorer the stock market returns. This is pretty much supports what Benhacker says above. The best predictor for stock market returns is the starting dividend yield - in other words, valuation. This admittedly crude measure of valuation is in fact the best predictor of the measures studied. An academic paper that deals with this exclusively is Jay Ritter's "Economic Growth and Equity Returns" for anyone interested in this. Vinod

I cannot recollect who said this, but using DCF is like looking through the telescope. If you move it a tiny bit, you are in a different galaxy. Changing the growth or discount rates a tiny bit can alter the values dramatically. It is best used in a negative sort of way, to try to figure out what growth rates and discount rates are being factored into current prices. Vinod

After reading the debates of several economists on various topics the conclusion I reached a few years back is this: For every economist there is an equal and opposite economist. Each is equally convinced that all the facts support only his position and does not give the least bit of credence to the other view. What this tells me is that economics as a profession is not yet mature enough and progressed far enough at this point to offer unambiguous guidance. Vinod

I have invested in the 3.6% real and 3.0% real series of I-Bonds, currently yielding in the 8-9% range. I consider them to be the gold-standard in terms of the lowest risk investment that is possible. This is a protection aganist "Risk's that I dont know that I dont know" or "Black Swans" or "Hedge" or just plan something really bad happening. I had this allocation right from the day I started investing and plan to have in future regardless of current economic events. Vinod

The simplest and most direct inflation hedge for a USD investor in a tax-deferred account would be on the run TIPS or off the run TIPS close to par (below par would be even better in a deflationary environment). For a taxable investor, I-Bonds would do the same, but not at the current rate. You would only be getting a real return of 2-3%, but as long as you are looking for a hedge, I cannot think of a better one that gives the same level of certainity (as long as you believe the CPU measurement is not being fudged). Vinod

Capitulation occurs when people start calling for death penality for Greenspan. For Ben I would just settle for cutting his beard off. ;D Vinod

Omagh - Thanks! Nodnub - I wonder if this is FFH's attempt at going green :) oec2000 - Can we read other documents besides books on Kindle? If I can read annual reports, I am going to buy one. Vinod

Anyone know why printing the AR is not being allowed from Adobe?

Mungerville, Fed model has been pretty discredited. Asness paper "Fight the fed model" (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=381480) does a pretty good job of systematically taking out its rationale. Are you sure Grantham has said that? I would be surprised if he said that. The rationale is that stocks are a claim on real assets so the earnings yield on stocks gives you the real yield vs nominal yield provided by bonds. This point is disagreed by Buffett who pointed out that despite the level of inflation the ROE of firms has consistently been in the 12% range. If inflation is purely pass through, then ROE should jump when inflation increases, yet we have not seen this in the 70s. Thanks Vinod

IMHO, it is possible to come up with a rough idea of fair value for a broad stock market. Starting with the assumption that economy is going to survive and would continue to grow at more or less as in the 20th century, we can get a rough idea of the IV of the stock market. Earnings are cyclical, they go up and down quite a bit year to year but in the long term it tends to go up at roughly the nominal growth rate of the economy. In an open free market capitalist economy, various economic, social and political forces would ensure this. Total earnings of all the companies fluctuate within a narrow range as a percentage of the economy. Smoothing out the earnings, by whatever mechanism (Shiller 10 yr avg, etc), you can find the normal sustainable earnings power. The way I define "fair value" for the stock market as a whole or a proxy like S&P 500 is the value at which the expected return over the very long term approximates the historial stock market real return of 6.5%. My calculated normal earnings power for S&P 500 is $65 in 2008. An earnings yield of 7% has historically delivered a return of 6.5% due to leakage - transaction costs, etc. This gives a fair value of somewhere in the 900-950 region for S&P 500. This tells nothing of what is going to happen in the near term but it gives a pretty good idea of your expected returns over the long term. Vinod

It looks like the letter would be out after market close this Friday. I think last year it was around 5:00 PM. Vinod

E, Passed my L1 in Dec 2006 and L3 in 2008. I found end of chapter questions in CFA curriculum texts to be very helpful. End of chapter questions in Schweser are too easy to be of much use. L1 is more about bring able to answer the basic concepts quickly. So when you are doing practice tests pay particular attention to time, as you would be able to get much higher scores if there is no time constraint. You might find, analystforum to be helpful as it has a number of serious candidates participating. Best of luck with your exam. Vinod

Thank you. I have not heard of this guy until this post. It is quite a good letter. Vinod

I think SEC does not allow Buffett to release the annual letter on a Saturday anymore. Vinod

Does anyone know of when Buffet's annual letter for 2008 would be out? I assume it would be along with 4Q results, but not able to find the date of 4Q results. On Berkshire's website, it says at the end of Feb but does not have any specific date. Thanks Vinod

Great letter from Grantham. Has a nice commentary on value traps. https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIBfJXb8ASd8%2bfe6xTnek30r%2fSsfGLZdf%2fgBjNfDjVKz9zThOLvkRsKhCrA75IOunbYH67DqkHW1HaCjxjHwbd85PrEXLTAGW%2fU%3d Vinod

This is fantastic! Great job Sanjeev! Vinod