vinod1
-
Posts
1,667 -
Joined
-
Last visited
-
Days Won
4
Content Type
Profiles
Forums
Events
Posts posted by vinod1
-
-
Practical-side observations/thoughts of masks:
I and my wife wear masks to stores and anywhere we have to interact closely with people. We wear masks at home when someone comes from outside - e.g. we had a chimney sweep come recently.
Since mask wearing sucks (I cannot wear a mask and eyeglasses - they fog over), and IMO the infection risk outdoors is very low, we don't wear masks outdoors when we go for walks. I guess this is being bad role model though. ::)
It would be nice to be able to buy N95 masks for store visits, but AFAIK they are not reliably available. (Feel free to post pointers if you think they are).
I thought about buying face shields for going to stores, but still not sure it's worth it. It's additional hassle, you still have to wear mask underneath and supply is unreliable. (Feel free to post pointers if you have pointers for good supply.)
It sucks when a neighbor comes over without a mask and starts talking to you. First, no mask - bad. Second, talking - also bad (worse than just walking by or standing closely and not talking). I don't have a good way to tell them not to do it without them being offended. ::)
Most asian stores (Chinese or Indian) have KN95 masks, which I am told are quite similar if not same as N95. Bought a few myself. There are kids versions of those masks too. That one I do not trust as much but still likely better than cloth I think.
This also has the added benefit that you are not taking away N95 masks from the front line workers.
Vinod
-
fareastwarriors - it is a upper middle class neighborhood. I pick pennies all the time too. Just the virus makes us a bit more cautious.
Midas79 - We had a good laugh as well.
Jurgis - I was thinking the same. How can I call myself value investor if I do not even pick dollar bills from the street.
Vinod
-
Retail is still - price, selection, convenience.
Those that are doing well, Costco, Walmart, Target, TJ Maxx, Ross Stores, Burlington, Five Below all provide goods at very low prices for those particular segments.
Amazon wins on all three respects on many items.
Macy's, JCP, Bed Bath and Beyond, J Crew, Abercrombie, are not doing well in any one these respects. Previously for some mid-quality brands these used to offer a good combination of price and selection in a reasonable convenient way (mall). Now all that is gone.
Employee pay, ambiance, etc I think are more of secondary effects.
Vinod
-
The size of the Fed balance sheet is irrelevant - we're already at zero rates.
The Fed typically owns ~10-20% of the net debt issued to the public by the US Treasury (BTW this is a normal range for the Fed). Per the May 6th Fed H.4.1 report, the Fed owns $4t of US Treasury debt out of $19.2t total US Treasury debt o/s. (you can find this number on the US Treasury Daily Report for May 6th).
But even if it bought 100% of all the US Treasury debt outstanding that it didn't already own (19.3t - 4.0t = $15.2t), the only impact would be to increase the size of reserves held by the banking sector. Essentially the Fed would buy $15.2t of Treasury debt in exchange for $15.2t of new bank reserves via the US banks as intermediaries (as it must - since only federally-chartered banks, a few other financial companies and the US Treasury have accounts at the Fed). Those bank reserves are deposits in accounts at F.R banks and can't circulate outside the Federal inter-bank clearing system. They are really check and e-payment clearing accounts.
So the net effect would be to consume the balance sheets of US banks with reserves and drive all interest rates to whatever the Fed pays on excess reserves (currently zero). US bank reserves on May 6th were $3.2t which corresponds to "Cash Assets" of $3.2t in the Fed's H8 report - "Assets and Liabilities of Commercial Banks in the United States".
US banks total assets on May 6th were $20.3t. Thus the Fed would force US banking sector cash balances to go to $3.T + $15.3t = $18.3t This would essentially liquidate the entire US banking sector and turn it into a huge cash box ($18.3t/20.3t = 90% of bank assets would turn into cash on deposit at F.R. banks).
I think in this hypothetical environment, what would the economy look like with a zombified banking sector and no available US Treasuries for anyone, anywhere? It basically demonstrates that the Fed can buy anything it wants, but its only currency is a very specific one that you and I can't access. Therefore, it is taking out liquid assets (Treasuries, IG bonds, stocks?, baseball cards?) and replacing them with illiquid assets that must sit as a cash asset in the banking sector via a contra-liability account at the Fed. The more the Fed balance sheet grows, the less safe, liquid assets exist for the rest of us. I don't see how that helps the private sector and I think it actually hurts it.
The reality is that the Fed isn't the major factor in money creation since it can only lend via swapping assets for bank reserves. It is the US treasury and its deficit spending that is the major money creator. All of the attention on the Federal Reserve is misdirected.
It also shows how disjointed monetary operations are when you have two players (the Fed and the US Treasury) that often work at cross-purposes and neutralize each other.
wabuffo
I quite did not follow how the last statement (in bold) follows from the rest of your message. Could you please eloborate?
To me it looks like Fed and Treasury seems to be working very well together. Fed is indirectly funding the Treasury. Since Treasury cannot all the bonds that it wants to sell without higher yields, Fed is buying them.
My understanding is quite limited, so please excuse my ignorance if something I say above makes no sense.
Vinod
-
We go on long walks in the evenings and today I thought of an experiment.
I put two one dollar bills prominently on the grass right beside the walking path that is frequented by a lot of people. The dollar bills are quite visible to anyone walking on the path.
I wanted to check if people would pick up the dollar bills or are worried enough that it might have coronavirus and leave them alone. After putting them at the start of my walk and returned about an hour and half later.
Both bills are still on the ground. I would think atleast about 30-40 people must have passed by.
Just as I was about pick them back up, I thought what if someone has sneezed or handled it somehow and just left them where they are.
Same size of one, so does not really mean much, but might point to the level of risk tolerance at least in the local community.
Vinod
-
Good luck with your new job! Learned a lot from your posts and hope you do visit the board occasionally.
Vinod
-
At the current prices it is pretty cheap and I see no reason why it should not be worth say at least 0.8x adjusted book value. So pretty decent upside from $230. Forget the stock price, look at what the business is likely to generate.
Pre-covid I used to buy this at 0.95x and sell at 1.05x.
Now, low rates are likely to last a long time reducing the investment portfolio return big time. In addition, it is exposed to tail risks. I sold out at $455 and it is very very tempting to buy. If I buy I would have a strict position limit.
I think it is good to remember what Buffett mentioned:
When I look at worst case possibilities, I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.
Yes, Fairfax has a lot of levers to pull, but it needs a bit of luck.
Vinod
-
Kaegi2011,
I think you have identified the key problems. I do not think I would be comfortable putting up an excel to model the vast majority of these companies.
The main thing for me would be to nail down the competitive advantage. So it is a case by case basis. Why it it sticky? What are the switching costs? What is the alternative?
I am still learning about many of these and filling in the missing pieces. So for some I have someone I know who works at the company or works at company that uses this product and that is the only way I am able to make progress. So it is slow going.
So it is easier for me atleast if the company had a software license or some legacy background that is transitioning to SaaS. These which have a longer history are a good starting point. Adobe being the canonical example.
So a firm like Guidewire is a good example. The company provides software for P&C companies. So pretty niche. Leader in the space by a smallish amount. A couple of competitors. If you read up it is not too difficult to see the competitive advantages.
So you are really talking about what % of market it can capture and what normalized operating margins would be at some time x in the future. That is the extent of my modelling to see if it makes sense. I get a wide range and even in this case not really actionable most of the time.
Vinod
-
I am getting Buffett flashbacks reading this letter.
In general, our experience with a commodity business that has virtually no pricing power is to be
cautious when management talks about investing in new equipment or upgrades that would
significantly lower the cost structure compared to its competitors. That may be true for six
months to a couple of years, but in time, competitors will have a new cost structure that is as
competitive if not superior to the company. It is the same treadmill where hardly anyone in the
industry can make a decent return on the assets invested in the company.
Chou
Over the years, we had the option of making large capital
expenditures in the textile operation that would have allowed us
to somewhat reduce variable costs. Each proposal to do so looked
like an immediate winner. Measured by standard return-on-
investment tests, in fact, these proposals usually promised
greater economic benefits than would have resulted from
comparable expenditures in our highly-profitable candy and
newspaper businesses.
But the promised benefits from these textile investments
were illusory. Many of our competitors, both domestic and
foreign, were stepping up to the same kind of expenditures and,
once enough companies did so, their reduced costs became the
baseline for reduced prices industrywide. Viewed individually,
each company’s capital investment decision appeared cost-
effective and rational; viewed collectively, the decisions
neutralized each other and were irrational (just as happens when
each person watching a parade decides he can see a little better
if he stands on tiptoes). After each round of investment, all
the players had more money in the game and returns remained
anemic. -Berkshire, 1985 Annual Letter
-
We believe the intrinsic values of airline stocks have been worsened by roughly 30%, but the stock prices have dived by more than 50%.
This goes to the core of the problem. Take a look at his stocks and see how many times this situation played out.
Nokia, MBIA, Sears, Blackberry, Valeant, Posco, Endo, Teva...
The majority of the time if you have to cut down IV estimate but it still looks attractive, you are just fooling yourself into rationalizing the error.
Vinod
-
It is tough to value these companies even accounting for growth and come up with a price. So I create more of an upper bound, lower bound and a more realistic one based on my expectations of what operating margins such a business is likely to generate, what its addressable market would be and what it might expand into, likely dilution, etc.
A huge amount of value is being created by this industry and it would be good to keep an eye out even if you do not end up buying something right away.
Vinod
-
Kaegi2011,
So much has changed in software with rise of cloud computing and SaaS.
1. In the past, packaged software sales era, companies used to get paid a lump sum right up front when they sold the software. SaaS companies get paid over a long period. When there is rapid growth it can obscure profitability.
2. Costs also were different in the past when companies used to do a big waterfall releases. Also for many SaaS companies costs are much more incremental than in the past due to use of cloud.
So I would not use 1980s or 90s earnings multiples, operating metrics to compare with SaaS.
Also you would want to differentiate between consumer based SaaS provides with enterprise focused SaaS providers. They have different types of moats. Enterprise SaaS is lot more sticky for reasons mentioned in the thread.
Just pick 30-40 SaaS companies and go through the AR's and presentations. You would pick up from the links. I used to work in enterprise software so it is a bit easier for me or not (tough to get rid of biases).
Vinod
-
I read the Q1 Transcript to hear what Trump of the North has to say.
- Bleach could be effective antidote to Covid. We expect to generate a 15% return for our shareholders over time.
- One day it would go poof and we would have a big celebration. The best is yet to come.
- We are doing a fantastic job at the federal level to respond to Covid. Our investment team operating in a stock pickers market.
-
Still getting an error. Uploaded here.
http://vinodp.com/documents/investing/BRK%20Key%20Questions.pdf
Vinod
-
I have never been to Woodstock for Capitalists and now I know why. Wasted 4 hours of my life watching the AGM this morning. Great for non-shareholders (all the stuff about betting on America and index funds) and grandstanders (all the questions about how do we change society) but very few insightful questions (and therefore answers) about the business.
Not Warren's fault, and I don't really think he can do anything else given how high profile he is, but a great shame in my view. There is far more of long term value in the average quarterly call, which is saying something.
Edit: oops. Wrong thread.
I went through the Berkshire meeting transcripts from 1994 to 2019. Copied the most interesting ones into the attached document. Getting an error. Will try later.
Should go some way towards mitigating your 4 hour loss :)
Vinod
-
I respect WEB greatly, so no quibbles on the airlines sale. not sure he would do it if he had an OXY-like pref in them, but no matter...but why does he continue with the larger investment in Kraft Heinz if he sells loser airlines as a matter of discipline? which you might recall he did not discuss in his last annual letter
He discussed this in his CNBC interview on Feb 25, 2019. It has a fantastic discussion on consumer goods industry. I am clipping a small part of his answer. He commented further in the same or a later interview, something to the effect that it would very difficult to exit without moving the prices.
BECKY QUICK: But if you see better places to deploy money, why don’t you sell?
WARREN BUFFETT: We-- well, A) we can’t as a practical matter move around tens of billions of dollars that easily. But beyond that I mean, if we’re working with a million dollars or $10 million, would I have a position in it? No. You can move around with a million or $10 million. And Ted and Todd can move around reasonably well with $13 billion. But that can be difficult. $173 billion, I mean, you dance like an elephant. Not like some guy on Dancing With the Stars.
Vinod
-
Transcript of the Annual Meeting.
Vinod
-
Its not so much the underperformance, thats part of investing. Ive typically been critical of some of the decision making, or lack thereof, but can live with it because his is still pretty damn sharp and when he talks he seems consistent and often is in the right place. IE stocks are cheap if rates stay low. Big tech is where the future is, etc. Berkshire is loaded with world class people as well. But there also gets to be a point where you have to question what one is saying/doing and what they are doing/saying.
So if stocks are cheap if rates stay low, why arent you buying stocks? And if rates are low why do you continue to be massively overweight banks? If you admit "missing" Google, Amazon, etc...years ago, what prevents you from starting to buy them now(or years ago)? If you are incredibly bearish, why do you continue to hold the most economically sensitive companies? If $135B is "not all that much" under certain scenarios, what implications does that have on the rest of the portfolio? And yea, with that comment, you can guarantee the "hoard" is only going to continue to grow. If nothing was attractive back in March, but all the companies in need of capital found it and on better terms, is this not another acknowledgement that maybe the landscape is changing and that there is currently a surplus of cheap capital still waiting to be put to work? Look at the bond market in April; holy fuck.
I mean its cool and great and all to have this idea of being a pay day lender or loan shark to the biggest companies in the world, but at the same time, what company in their right mind is dying to do a deal with Berkshire when by now I think both his words and his actions clearly indicate that Berkshire will only do a deal with you if they are ripping you off. Sure you will get desperate companies like Occidental, or Seritage, but for the most part I think he's too anchored to the past here. 08 happened and the playbook changed. Now, if quality companies have liquidity problems, the Fed is there. Greatly eliminating Berkshire's pool of potential deals and muddying what remains in the pool. And then even for that, there's a massive supply of PE firms and whatnot, with tons of cheap capital too.
If Google can take some of its cash and make a few hires, and start a PE arm, there is no reason Berkshire cant. Not in any crazy speculative sort of way but in a way that brings in people to scour the horizon for new and exciting businesses. This is how you get into tech and biomedical fields. Every interesting biotech Ive looked at the past half decade...."early investors"...Gates Foundation, Google Ventures. It seems Berkshire is and has been very much in denial about the continued erosion of their advantages and relevance. Warren, more than anybody should know that you have to invest to grow. And instead he's hoarding and banking on businesses in secular decline.
But at the same time, I get that, regardless of what he does, people will do mental gymnastics to justify it. My favorite is still "its too small to move the needle for Berkshire"...Like "oh yea, awesome. What a great business"..."Yea, but its too small. Fuck it"...This is an appropriate attitude from a capital allocator? Or the other side of that...He has to buy in size. So take the field of "big enough" companies. Then eliminate ALL of tech. Anything having any relation to ANYONE he's been friendly with because we're scared of the appearance of insider trading or whatever the absurd excuse was with Gates... then look at what's left? Well not very much and hardly anything attractive. No wonder we are where we are.
This is a much better critique than saying the old man is getting scared. Good points and many are valid.
It seems Berkshire is and has been very much in denial about the continued erosion of their advantages and relevance. Warren, more than anybody should know that you have to invest to grow. And instead he's hoarding and banking on businesses in secular decline.
If you look at the critique and negative case for Kraft, the most incisive and best bear case came from...
wait for it...
Buffett!
No one put the competitive challenges it is facing better than Buffett. Also read his explanation on why he would not be exciting it.
Or look at the airlines and see how quickly he changed his mind. On the other hand, I can imagine Bill Miller loading up on them as we speak.
So I do not think he is in denial. Far from it.
Vinod
-
Regarding buybacks he also mentioned the option value of the cash is now higher (if I heard it right).
Vinod
-
I dont think you can blame Buffett but I also think in hind site there may be some ego preservation in order. If activity stopped on March 10 and on March 21 or whenever he capitulated on airlines... Not that airlines are investment worthy, but broadly speaking when one, according to the timeline, should have been backing up the truck, Warren already had packed up his belongings and was speeding away....that has to be embarrassing as a professional investor, regardless of how seasoned or successful you are. Add doubly to the problem, the businesses he and most of us know and love well were completely decimated by this and still look shoddy, meanwhile the ones he doesnt know or understand well hold up tremendously and even rebound right back to highs. For these reasons I think there is good likelihood he gives a materially negative market outlook that may in the short term move markets a little bit. At least this is how I read the tealeaves and positioned myself going into the weekend.
How can you value an airline at this point? So much of the value is dependent on the kindness of Government & Politics.
So the fact that he sold them, to me shows how good he is. How many investors have we seen, where the stock goes down 50%, they say oh, IV only went down 20% and I am going to buy more.
This guy is pretty consistent. Cannot estimate IV. Do not buy. If bought, sell. Always keep an eye on risk/reward.
Add doubly to the problem, the businesses he and most of us know and love well were completely decimated by this and still look shoddy, meanwhile the ones he doesnt know or understand well hold up tremendously and even rebound right back to highs. For these reasons I think there is good likelihood he gives a materially negative market outlook that may in the short term move markets a little bit. At least this is how I read the tealeaves and positioned myself going into the weekend.
Yes the stocks that are in his circle of competence got impacted a lot and those that are out had not been impacted. The guy is super rational. So that would not have an impact. When is the last time you saw him act or say anything irrational?
Vinod
-
Assume instead that the S&P 500 slowly fell down to say 2000 from late February till today. Would that change your view of how Buffett acted the past couple of months?
Vinod
If Buffett thought that Intrinsic value of BRK dropped a lot and stop doing buybacks at 160-170-180 when he was willing to do it at 220, then it's fine otherwise S&P level makes no difference.
Sorry, I was not clear. My point is that some of us could be evaluating Buffett based on what the market has done. I am saying if instead the market kept going down, it is possible that we would be applauding him on patiently waiting for the pitch. Just a thought.
Coming to buybacks. It is instructive to look at his purchase of Mid-Continent Tab Card Company. He really wants proof that he is not going to lose money before doing anything. During the sharp drawdown in March, and before Government came up with the $2 trillion relief (and I would argue even now), the economy could have been severely hurt with many companies going bankrupt. To someone like Buffett being 100% certain that Berkshire is safe is vastly more important than say increasing IV by 2% with a quick buyback.
Vinod
-
Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.
No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.
How are you getting 15% with portfolio investments returning 2.5%?
I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.
Vinod
For a shorthand analysis like this, it would not be entirely unreasonable to net underwriting profits against head office costs (incl interest) and simply look at investment return/stock price.
I think we are looking at nearly $650 million in these other expenses and underwriting could cover half of it. So it has a material impact. I get a 7-8% return on capital under those assumptions. Not 15%.
Vinod
-
Buffett is behaving just like as had in the past. He is pretty consistent in that respect. Did not buy in 2008/9 nor in any of the dips. From where he sits, putting a few billion here and there during a dip, does not move the needle and he does not even bother.
Assume instead that the S&P 500 slowly fell down to say 2000 from late February till today. Would that change your view of how Buffett acted the past couple of months?
Vinod
-
You are right. I misread it. Too early in the morning. Looked at the negative sign in CFI and mentally filed it away as sales. :)
Vinod
Coronavirus
in General Discussion
Posted
I hope you really do not believe what you are writing. You are far too thoughtful and intelligent person for that.
I am sure they are nut jobs on both left and the right, but the vast majority of the people of either party just want to do what is best for economy. They are just coming from different angles and I can see the logic in both. For these vast majority if you give them an option of getting rid of the virus and economy getting back to normal on the condition that the party they oppose would win the elections for President, Congress and Senate, they would take that option in a heartbeat.
I was in the camp of leaning to vote for Trump (60/40) by end of January. Because on the whole, despite so many negative things, he did get one major critical priority right: confronting China, trying to get back some of the manufacturing back to US, etc.
To me his actions since start of March are absolutely unacceptable. I can see both views of keeping an economy open and shutting down. And neither is a simple obvious choice. Pros and cons to both. But once you make a decision, you should proceed forward with that.
Look at what Trump has done. He is both for and against lockdowns. What kind of message does that send to people?
Fed should have been the primary entity in trying to get PPE and other medical equipment and then distributing to the states. It makes so much sense.
We should have had a massive program like the Apollo mission to try to produce PPE in massive quantities once he declared an emergency on March 13. Say being able to deliver a bunch of masks for every family every week. Sanitizing stations every street corner, testing at a massive scale, etc.
He defanged CDC and drug approvals at FDA are politicized.
It is not that Trump is evil, he is just plain incompetent for this situation. Almost any past President of either party would have done so much better. Just look at Amazon. Read the annual letter if you have not. That is how competent people with power would behave.
There are lots of things which are shades of grey and it is difficult to say right or wrong except in hindsight. This is not the case with Trump's actions during the Covid period. They are simply idiotic. People who cannot see that are being blinded by hate towards the other party. It is precisely what you are complaining about with TDS.
Vinod