thefatbaboon

…and, tadaa, you're long again! ::) Obviously. But we were discussing a hedging but with some length. To guard against what has been significant upward bias over the years. The money spent on the calls are also "length" that is lost in the event of a decline just like the net of the put premium received, the value of the underlying and the strike. The value to considering some combination of the two is that one is not always long optionality/volatility but also a seller. Clearly, given the goals and opinions of the bearish market timer who started the post, both the call buying and or the put selling would be small. But the general upward bias is a historical fact, as is the dubious record of macro market timing theses, so cardboards idea probably deserves consideration even for the bear.

Also, what about adding short puts into the mix. If one doesn't want to be a net buyer of optionality. short some puts and use premium for calls. Obviously sizing important as the whole point of the cash I would imagine is to have it there to spend in a decline. And not to have to spend it all when put to.

Agreed, its brilliant. If you must hedge. I have been greater than 100% invested for nearly 20 years. Me too, always +100% invested. There's always a load of stuff better than cash. And for most of the last 15 years there hasn't been much, if any, competition from rates or bonds.

I like cardboard's idea. If I was the cash holding or hedging type I'd seriously consider.

It's probably worth saying that a mistake is not the same as an investment that ends up losing money. Just as we all agree that a venture that made money doesn't automatically mean it was a good investment. Furthermore, don't we need to be careful not to create a hindsight-based certainty around our analysis of mistakes? For example, even in the case of the much loved Berkshire Hathaway. Couldn't we all make an amazing "what a mistake" analysis if for some reason it plummeted tomorrow? Buffets getting old. The PCP buy was a bad sign. I knew nothing about their black box reinsurance. I had a far too big position. Almost none of his common stock investments of the last two decades have done well. Etc etc. So what is a mistake? It's not simply losing money. I have lost money in situations that I don't think were or are mistakes. I have even profited from what I think are mistakes where I've just gotten lucky. It's not merely lists of various risks and shortcomings. All investments have risks and shortcomings. And I do think it completely possible for a non-mistake investment to be a right off. Personally I'm not sure exactly what is a mistake. I have certain notions and emotions that surface to indicate one. But I'm not sure I can give a sound objective definition. My best guess at defining a mistake is: ending up in a position that one doesn't want to be in as a result of my acting of data where I either knew better or should have known better. There is never so much conviction and confidence On this board than in postmorteming an idea. But I'm not sure it's merited. Take two examples currently doing the rounds: outerwall and valeant. I think everyone knew a lot of what are now being held up as "signs of the mistake". We knew that valeant was aggressive (hyper acquisitive), immoral (ackman/allerga front running & price gouging), expensive, leveraged, speculative (addyi). We knew what meecham is now talking about that outerwall had very questionable capital allocation (Eco anyone???). So what do we gain trotting these platitudes out now as if they categorically make these investments mistakes? I mean every non-idiot investor knew all this very well. None of it was secret. So is the board implying that a mistake is when one acts contrary to facts that were obvious? I shall give my personal view here for what it is worth. Valeant I don't like investing in healthcare becaus I don't like reading about fungus and those bizarre unpronounceable names. Also I don't like high priced roll ups unless I have some love for the operator and some basic feeling for the industry. Valeant failed on both these so I never bothered. But the reasons I did not go in are quite idiosyncratic. for someone else maybe valeant is an opportunity that has just gotten much cheaper? Outerwall I am long and somewhat down in outerwall. Furhermore I added recently. I'm really not at all sure I agree that this is a mistake just because it is down NOR because the decline dvd rate unfolded faster than I expected NOR because I have had to reduce my estimate of IV. I mean life and investing are uncertain. I have done analysis at all stages and remain of the view that I bought at substantial margins of safety. I just don't know the future perfectly and I have had to make various reductions to my estimates of IV. I don't think outerwall is/was a mistake. Sandridge I was long a small position and i think it is a total loss. I regretted it almost immediately. And instead of selling at a loss I kept holding out for a slightly better price. I have disliked every moment of owning it. But I think that again my reasons are idiosyncratic. I don't enjoy owning assets that live in holes in the ground and are valued by commodity markets. But every now and again, thankfully very rarely, I succumb to a small stupidity where I forget this. But perhaps for someone else these holes in the ground are opportunities? Of course they must size and act accepting their inability to predict energy prices. But with that said there must be some guys happy to write off their old equity as the facts change and take positions in secured or unsecured or in a better company or whatever. But for me I definitely think sandridge was a clear mistake.

Prem! Stop using so many exclamation marks!

I won't belabor my points, but two responses. (Although I agree with some of your general points.) (1) The fact that the math suggest the biggest risk is missing it is because you're cherry-picking a successful company in hindsight. If you applied the "twice book value is just as good as once book value" mentality in general, on a go-forward basis, I think you'd find you wished you had more margin of safety in lots of situations that didn't work out as well as Berkshire. (2) The difference between 5.6% and 7% per annum over 50 years on a $50,000 investment is having $1.5 million versus $760,000. I would argue ending up with twice as much money is worth figuring out how to achieve. Anyways, good discussion, thanks for your points. 1. I thought I'd just done it prospectively on brk using 7% and the full range of the last few years from 1.1 to 1.6. Dont think that is cherry picking in hindsight. 2. Of course it's nice to have made twice as much money! And I spend a lot of time figuring on how to add (or not lose) small increments. But the main thing is to have not missed the ride from 50,000 to 760,000. Missing that boat because one waited for 1.2 which never came. Or perhaps it took 10 years and a lost double to arrive. Defending against this risk is more important than the defence afforded by an extra 20% discount to BV for the lifelong investor. Thank you too for the interesting ideas.

I don't know if Berkshire grows to that level or not. It sounds outlandish but then again us gdp in 1965 was 744bn. So a single company having a 700bn mkt cap would have sounded pretty wild to the hippies back then. Either way the point is not that important. What I'm trying to get across is that over long periods of time it is about rates of growth much more than it is about ratio to book value (within reason). So use 7% if you prefer. That's 5 doubles over 50 years. Book goes to 3360. And if bought and sold at book that's 7%. And if bought at 2 book and sold at book that's 5.6%. I'd say that's not so terribly important. Further I'd point out that we've been looking at a abnormally wide range. If one just dealt with the range of the last few years there's a spread from 1.1 to 1.6. Buying at either of these extremes would be irrelevant with 7% growth over 50 years. And margin of safety...surely the maths clearly suggests that the main risk is to have missed the ride? this decimal to book value stuff is just a silly kind of market timing wearing a different set of clothes. If someone likes Berkshires prospects and has a long term horizon they should just buy and pay no attention to where it is between 1.1 and 1.6 I don't advocate buying anything at 10 times! Just looking at the range that Berkshire had always traded in between 1 and 2. Which people always make a big deal about (myself too at various points in my life!) The risks to predicting growth into the future is of course real. As a result I sometimes find it difficult to argue against getting 120% long the s&p as being the optimum investment strategy. Risk adjusted perhaps better than BRK or looking for new brks.

Coc, I think pretty much everyone agrees that tenths are irrelevant and that a top opportunity such as a young Buffett must be seized. But I think I'm trying to say something more than that. let's take your example but imagine an investing lifetime instead of 15 years. Say book per b is 105 today. Say it grows at 10% for 49 years. That's 7 doubles. So book goes to 13,120. In the "steal" scenario we pay book and make 10%. In the "grossly overpay" scenario we pay 2 times book and make about 9%. i would therefore argue that 1x or 2x book should be rendered irrelevant over an investors lifetime. It is this kind of long term compounding effect that I was trying to get at in my previous comment.

The reason I think this is wrong is that you're looking at a historical process in hindsight. There is a huge, huge difference looking forward: History looks clear but it's a fog going forward. At any point, Buffett could have died, the insurance companies could have had a major fraud, the markets could have done something wacky that would have made it hard to redeploy capital, Buffett could have made a mistake, and on and on. If you had paid 4x book value, there were a number of things that could have wiped out a lot of your investment. This is whole reason for the margin of safety principle, and why Buffett doesn't encourage people to think the way you're saying. In hindsight, yes, it was clearly the right decision to almost "pay any price" for Buffett up until about 1998. But in the moment, that would have been a mistake. Buffett only goes as far as to say "A dollar of retained earnings in the hands of Sam Walton was worth far more than in the hands of the then-managers of Sears Roebuck." So you're right, but only to an extent. To give you a concrete counter-example, many investors in Fairfax Financial did exactly what you're talking about in the late 1990's -- they saw an extremely valuable and successful team compounding earnings like crazy and bid up the stock to 3-5x book value, far above any reasonable intrinsic value in the "point in time" sense. The argument went, I'm sure that it was worth it to "pay any price" for a team as good as Prem Watsa & Co., because even if they slowed down a bit, they were still pretty small and could continue compounding fast. Then the company made a bunch of unforced errors. The stock went from 3-5x book to half of book value, and today sits at a modest premium. You would have had to withstand a major, emotion-testing reversal of business fortune (the price didn't just drop due to irrationality, although maybe it went too low at the bottom ticks) -- and even now, your return would be pretty mediocre for the period. Which is all to say, while no reasonable person could disagree that you'd ascribe more value to the right jockeys and right assets than otherwise, the future is foggy and the best defense I can see is to use tools that leave me with some margin for error. Thanks for the discussion - again hope to be helpful. I agree when we talk about 5 times or 10 times. This is dangerous stuff because one is paying for quite a few years "up front" so to speak. And as you point out jockeys are mortal, and even the best assets are not invulnerable. But within the usual range? 1.1, 1.3, 1.8 times BV? I think this is a painfully false precision when one has studied and developed conviction in the three elements. The variation between the top of the range and the bottom is not an accurate reflection of risk of death, fraud etc. For the long term investor the margin of safety is nearly the same at 1 times book as 2 times book. Buffett has encouraged this nitpicking. And of course he has his reasons. As you point out many platforms, people and assets have over the years undeservingly been ascribed high multiples. But on the flip side the mathematics of compound interest are not properly appreciated. Neither broadly in society nor even among the value investing community. It's always mentioned sort of as an aside. Of course everyone can do the arithmetic. But it has a brutal power and we should, like Einstein, honor it as the eighth wonder of the world. Instead we protect ourselves with various liquidation-type valuations as if our investment outcomes were going to be measured after a year or two and plus or minus 20% was the defining factor. But for all the young people starting out the real risk towering over all others is not participating.

I didn't mean to imply that I didn't understand why he uses a liquidation type IV. But I think it is a mistake. Obviously the mathematic approach reverse engineering shouldn't be viewed as a holy writ. But Three elements are far more important than ratios to book value. 1. Time. 2. right jockeys 3. right assets. Whether Berkshire was bought "cheap" at say 0.8 or "expensive" at say 2, pales into total insignificance in comparison. Most investors need to spend much more time pondering this. I'm only trying to be helpful. And I find it strange because it would really help Buffett get his usual "buy and hold" message across. Historically anyone intending to own Berkshire for the long term should have paid absolutely zero attention to book value multiple. Now coming back to today and to the three elements...I control time, the assets are above average, and I think the Buffett managers are also above average. I'd therefore argue that The intrinsic value to book value multiple in the usual range between 1 and 2 times is totally irrelevant. As in zero relevance.

I feel I'm arguing with someone about whether 2+2 = 4. To my mind it isn't a point of view. How can you straight faced say that Berkshire IV in 1965 was close to book? What do you understand by intrinsic value?

Longinvestor, try not to be dimwitted. it must be one of the most erroneous comments in all of investing history that the the Intrinsic value of Berkshire 50 years ago was close to its book. I could have bought Berkshire at TEN times book value in 1965 and still have beaten the market return by TEN fold.

I find it strange that Buffett always opens his letter with an obvious error. "During the first half of those years Berkshires net worth was roughly equal to the number that really counts: the intrinsic value of the business. " Given that Berkshire returned 20.8% for 50 years, more than double the market, clearly the intrinsic value all those years ago was WELL above book value. Probably significantly more so than it is today.

I feel bad for this guy and have no interest in kicking him at all. For what it's worth, I think he made a mistake valuing midstream assets. Very simply one needed to make a quick valuation using simple Ev/ebitda ratios and then check history where these assets can trade. I'm no expert on this area at all but I can find many historical transactions occurring between 8 and 10 times. I don't know why therefore anyone would be so surprised to see valuations come into these zones. Having now finally arrived into historical cheap zones my guess is that he is making a mistake to sell.

Thanks for the links scorpion. Interesting. Particularly his Australian co focuses analysis on quirks of insurance float valuation. Although Isnt the author wrong to make people think deferred tax "float" is comparable to insurance float? The utility/rr tax deferral adds pv cash yield on capex projects - that is all. Good Insurance float adds cash yield on opm but with essentially what amounts to minus Capex. Going to have to puzzle on this a bit.

there are a few things I don't like though. The big unrealised metals loss sitting in inventory without getting marked. The consistent inability to get close to guidance (for the most recent example look at the last 10q) - they're miles under the guidance they put out in the summer. The aquisition strategy without a consistent split out of organic or aquisition based contribution. I find it very difficult to see the actual underlying performance of the business. No split out of metal pricing effect on revenue. The nearly half a year of inventory on the books. It's possible that all these questions have good explanations. And for Buffett to pay in excess of 32Bn I feel that all the questions need to be answered very well. It is one hell of a price.

I think it is an untimely investment, as I see headwinds in the aircraft business for a couple of years. This is similar to buying ISCAR shortly before the Great Recession. I do think that the multiple will turn out to be a bit rich, given he near term performance. However, I think in the longer run, this is a good business, with the opportunity to bolt on more via acquisitions. I hope that's the only problem. I wish Buffett would deviate from his handshake deal on this and actually get a thorough audit done.

I remember 9bn each being the last figure mentioned. On a related matter, anyone worried about precision casparts being a big mistake?

Which companies does cale smith own?

If the Russians skirted a fraction of Alaska, the Canadians a fraction of North Dakota, or the Mexicans a fraction of Texas. For a few seconds. That we warned them and that within a few seconds they were out of our airspace....Yes, I would hope very much that we would not shoot a missile at them. If a Russian bomber flew all the way over the arctic or across the atlantic and entered airspace over Maine I would think it is ok to shoot a missile because it is hard to assume good intentions.

I was too strong, didn't mean to say that we had turned it into a quagmire. The chaos was there already. I should have said that what we have done seems to have exacerbated rather than improved the situation. I guess some of the warnings must have been issued on approach. Still I find I can make a fair inference that turkey wanted to do this. The plane posed no threat, the plane HAD heeded the warning and had returned to Syrian airspace. It was shot because the transgression gave them the cover to do so. Now Obama has gone on TV and said that Russia was asking for it because they are bombing moderate anti Assad Turkmen groups near the Turkish border as opposed to Isis. At the same time we have been treated to some horrible video of these Turkmen, that Obama (and the other western "leaders") says are moderate anti-Assad groups, shooting the parachuting Russian pilots while they dangle in the air, dancing around chanting allahu Akbat. And these are obama's "moderate" Syrian opposition fighters?! I don't understand what is going on. I can't believe that we are in this situation, running all these risks. I don't care about Assad, or Turkmen or Syria. As a westerner I care about a couple things. I do t want terrorists crawling all over the the place. And I don't want a refugee crisis. And even more than those two I don't want a conflict with Russia over bullshit. Other than that I don't really care who runs what country or does mean things to what people. That may sound callous but I'm yet to see a good, moderate majority in any of these countries. Egypt, probably the most civilised of all these stupid countries, had their moment to vote. And what did they do? They vote in Muslim brotherhood. So who are we helping? Of all the various Devils I think as westerners we were better off with the bastard dictators.

Can someone help me understand. Turks say Russian jet was in their territory for 17 seconds and ignored 10 warnings. And then was shot down once it had essentially returned into Syrian airspace. 1. How does one make 10 warnings in 17 seconds? 2. How quickly does one expect the plane to heed the warning and turn around? I mean 17 secs is pretty quick in my book. While I'm straying into things I don't understand... I don't understand our foreign policy in the Middle East. Why do we keep destabilising all the dictators? What has removing Mubarak, gaddafi, Hussein, Assad done for the region? Seems like all we've done is turn the whole region into a lunatic quagmire of vicious poverty and terrorism.

And their iPhone app is good too

Buffett started out concentrated, even as a boy when he had hardly any experience. As a teenager he happily put all his savings from paper route into a couple of names. He continued through most of his career to be a concentrated investor. As a more experienced investor after a few years with Graham he put most of his net worth into Geico. He also put a large percentage of Buffett Partnership money into Sandborn Maps and then Berkshire Hathaway. And then later into Amex and then later again into Coca Cola. For the last 20 years however I'd say he has been diversifying. I would say that he was concentrated at all stages of inexperience and experience and with his own and other peoples money until he had achieved massive wealth and size. My interpretation of this is that he adored investing and he did what came naturally to him at a young age when he could have afforded to lose his investment. Subsequently I think he was happy to concentrate because he knew a lot about investing and he was very confident in his abilities. Im skeptical of drawing lessons from Buffett to then apply to yourself. But some things I'd want to think about are: Are you are a very good investor? If so then probably concentration is the best way to go. If you are not then it is best to diversify. How relevant are these other factors to your situation? , age, job, responsibilities etc. If you are 70 with significant savings you are in a different situation to a 24 year old with small savings, even if you have the same investing experience and skill. There is a difference between extreme concentration, say 5 or fewer ideas. And concentration like Lou Simpson of around 10 ideas. The ten idea portfolio can take the occasional flop, if most of the time you're good. Also I think there is a difference between owning say an extreme concentration of: Berkshire, Exxon, Johnson&Johnson and Nestle. And a 10 stock portfolio, equal weighted, made up of say, the top ten ideas off the Investment Ideas page of this site. (I think the 4 company diversification is safer and in many important ways, more diversified). If you are in doubt then lean towards a diversified portfolio and/or large diversified businesses.