thefatbaboon

Hi All, Can anyone point me to a detailed Primer, introduction etc for the IT Industry? I have no IT background and I've found researching this space a nightmare because of the disparate sources, technical jargon and marketing hyperbole. I'd like to understand where all the big companies fit and how they compete. Thanks!

That's nice. But it still might be good to know something about the companies we invest in!

loganc, Buffett bid speculation aside…have you managed to get any good sources on the litigation? Most of it doesn't bother me except for the big case(s) that are stemming from their joint venture structures. There is very little detail in the Qs and Ks - and in particular what I'd like to know is whether this issue extends beyond Colorado. My fear is that if this stems from JV structure, and this JV structure has been used elsewhere, then we might see a few more multi-hundred million dollar charges. Any info you have on this greatly appreciated.

Any thoughts on the deterioration in the HCP business? Operating flat is flat this year, even with various small tucking acquisitions, and next year they are projecting a 20% decline. Also, as far as I can tell, regarding the dialysis business, CMS has just taken the 12% downward adjustment and said that instead of slapping it all on next year, they'll simply stretch it out. So, 2014 nets to 0%, 2015 nets to 0% - with the implication that the downward adjustment will completely offset upward inflation adjustments for around 4 years. I guess the hope is that the industry has won some time to influence Congress but still the ugly number is still out there for the moment, just spread out over the next 4 years instead of all hitting in 2014. I'm midway through researching this industry so any help would be appreciated. twacowfca, you mentioned that Weschler had recently bought shares for his family, but I haven't been able to find this documented. As far as I can see Weschler, and his kids, have owned these shares for a long time. Can you point me to what you're looking at? Thanks

I understand the advantages of hedging using indexes! But I don't like the bet - even if one takes as given that China is going to have a bust at some point - and I especially don't like it at 2010 price levels. To go and short Indexes in 2010 when the timing of China's bust is uncertain and interest rates are zero and the Indexes are dominated by reasonably priced companies with low leverage…I don't like it. The FFH equity portfolio is not so massive - why not take more focused short positions against truly China-vulnerable companies/countries? That way, if the timing is off, and it takes 6 years for China's bubble to burst you're not stuck effectively shorting XOM, AAPL, MSFT, GOOG, JPM, WFC, JNJ, WFC….against long positions in JNJ, WFC…for 6 years!

Thank you for the detailed reply. I guess I'm trying to understand what makes the China situation a massive deflationary risk for the West. Don't get me wrong - it's not that I have confidence in China - but I struggle to see why the aftermath of a bust is more than a nasty bust (Nasdaq, Sub prime, Euro periphery) - which, with a certain amount of political will, the central banks are able to deal with. America's late 1920s collapse had major and lasting ramifications for Europe. But America was already the world's biggest market; Britain had massive outright exposures to America's equity and debt markets; and Germany, post-Versailles, and Europe post WWI generally, were seriously weakened. When I go through the West's main stores of value today, their property, their finance, their IP, I see China contributing cheap government and GSE finance, a fair amount of corporate growth delta, either directly or indirectly, but I also see China on the COGS side of many corporate income statements, overall I don't see why the possibility of a China crash (indeed, certainty at some point) would lead to the desire to hedge 2010 asset prices as done by FFH. To hedge 2010 seems like hedging the 1930 bounce in preparation for 1932-37. Wouldn't it make more sense to short a few commodity/heavy construction countries and companies if "China crash" is the thesis? Rather than the West's general equity indexes in a world full of politicians and fiat currencies?

SD, What is the West's counterparty exposure to China? (I don't mean potential effects on the countries that export raw materials into China.).

Date night in Milan - I'm jealous!! I laid out the generational deflationary thesis - rather tediously, sorry! But I did this because I think that that deflationary argument has some reasonable support. But my conclusion is that if we've been able to offset it for the two decades when it was most intense then why not for the next decade? I think we're agreeing in a way: that this bet of FFH's is on a 5-10 year boom/bust cycle and not on some generational deflationary thesis. I just think it's crazy. Not because we won't have a bust - I think it's guaranteed that we will - but counting from the '09 low it was never clear whether the next bust would come in 3, 4, 5, 6, 7, 8 years. This interest rate policy - Greenspan 9/11, Bernanke 08- - is pretty much guaranteed to stimulate bubbles. But the other uncertainty is where. So the when and the where is unpredictable. Why hedge the equity index when you don't know when and you don't know where? Personally - if the central banks stay with low interest rates (and why wouldn't they) - I don't see over valuation today. Are Apple, Exxon, BP, Microsoft, BRK, JP Morgan, Pfizer, Sanofi, Total, Wells Fargo expensive? I find it very hard to come up with big cap equities that are at anything resembling bubble valuations. Are bank balance sheets over extended? No. The bond market? Well that depends on the central banks. The bonds spreads aren't too tight. The absolute yields are low of course but you can't say it's overvalued without basing your belief on central banks raising rates (which I simply do not see). So where is the bubble? The only place I see potential overvaluation is in rich man stuff: Art, London, NY, HK, etc property. But rich man stuff has been booming for years, and has nothing to do with sub prime or it's aftermath, it's because rich people have been and continue to be getting richer at a hell of a clip. Is that going to stop? Well that comes back to the macro generational thing - the rich are getting richer because they control marvelously profitable Capital. It will stop when Labor has a better bargaining position to negotiate more of the incremental prosperity away from Capital. Until then billionaires and millionaires will compound and the prices of their toys with it. Honestly I don't get it. I would love to understand more because i think of myself as a careful and conservative person and it makes me uncomfortable to see asset-price bearishness among smart people and to not see it myself.

Gio, I understand the imbalances - although I'd say that their main causes are the post-communist labor pool and the various free trade agreements still being worked through 20 years on. The often uneasy but mutually dependent Labor & Capital partnership in the various developed countries changed with post-communism globalization. This has been exacerbated by tax inequities: it's much better to be capital than a wage-earner. We are 20 years into digesting this imbalance, a worker of the post communist labour pool started out earning more than twenty times less than developed country labour. For 20+ years developed labor wages have flatlined, while developing has been inflating nicely. I think labor and capital will fall into a better balance in 5 - 15 years when the global labor cost discrepancies are better balanced. (obviously technology is a bit of a wildcard here). It's true that developed country labor has participated in economic prosperity a lot less than it's historic share, but let's not therefore say that there hasn't been prosperity. Indeed, I would even argue that one of the reasons that these decades have gone by with so little voter rage is because while labor's wage has gone nowhere the costs of many of their goods and services have also gone nowhere. Their car costs, phone costs, TV and entertainment costs - many of these have seen minimal price changes over the past decades - and we have also seen the availability of many free goods develop. This has softened the inequity - and is probably the reason we haven't seen real voter reaction. But obviously the lions share has gone to capital, has gone to profit margins, has gone to the so called 1%. We have been living in the midst of massive and unprecedented deflationary forces for two decades. Of course we have bubbles - humans always have bubbles - Nasdaq, Property, and now I'm sure there will be something else as Einhorn intimates. But so what? Why try and time this? The overall trajectory even in the context of a massive 20 year, +1bn labor pool deflationary force has been tremendous overall prosperity and asset growth (with typical bubble formation and crash cycles). I would also question your statement that the central banks have already gone "all in". Early in 19th century England their central bank took debt to GDP up to 240%, like the Japanese have today, and in the decades after England's wealth grew massively. I cannot look at the Eurozone or America today and agree that they are anywhere near "maxed out". Indeed, I would go even as far as suggesting that America's borrowing power, should they wish to use it, is nowhere near exhausted. Now whether there is the willingness (see Germany) - is another question. But my guess is that faced with the prospect of price deflation - as in the past - there will be the willingness. No voter elected politician allows price deflation without a fight to the death. To me this bet on deflation wining the day just looks like a cyclical bet on the next boom/bust cycle. Structurally speaking, nothing looks different to me here than at any other time in the last 20 years we have been working through the deflationary effects of the the global workforce rebalancing.

Generally I don't much like end of world deflation bets. Statistically it isn't a bet I'm comfortable with - after all it's not like it happens very often! Also, in a world of fiat currencies one really has to wonder whether central banks would let a general price level deflation follow through. Septmenber/October 2008 would have resulted in a massive systemic price deflation but the Fed was able to step in with an enormous amount of repo and discount window transactions. Today the US banks are well funded, they sit on absurd amounts of Treasury and Agency paper, so even if the Fed was less energetic now I don't see price deflation coming through a bank run. Where do the FFH investors see deflation coming from?

I enjoy looking at comparisons in the market for BRK's companies: railroads, utilities, auto insurance, re, - it's fun to think what their market caps would be if separately listed. Then there's about $200bn of cash, fi and stocks (partly funded by a float that for 20 years has scarcely ever had an underwriting loss). It's incredible what lies underneath the umbrella. Also, really pleased with Weschler. Liberty, DTV, DVA - these investments over the last few years make a lot of sense. It's not just that they've done well, but they demonstrate clearly an investment philosophy that I understand. Not sure what the right words for it is: tautness or tightness perhaps. Where the string that links shareholder value to the underlying economy is kept taut! Competitive advantage > tax efficiency > capital return. I can't see Combs' recent work as clearly, because of the smaller size and more frequent trades, but getting long V and MA during 2008/9 is certainly a good sign. Can't describe how excited I am to see BRK develop! I'm sure it won't be all smooth sailing, but I'll be very surprised if BRK doesn't become the largest US company at some point in the next 10 -20 years.

My 2 cents I think value investing in some important ways has changed over the past 75 years. The theoretical fundamentals are the same - Burr Williams etc. - but much of the Graham/Dodd net-net and low PE approach is less useful today. For me the reasons are quite simple: 1. Over the last 75 years the world economy has changed and the nature of the average "asset" has changed. Most businesses do not carry their important assets on their balance sheets anymore. Receivables, inventory, plant...these things are simply not that relevant in an economy dominated by brands and intellectual property. Asset value is in the cash flows. 2. Graham and Dodd were not particularly sophisticated regarding the differences between Earnings and Distributable Free Cash Flow. Buffett (Fisher, Munger and others) have been very smart at looking at the essence of the Burr Williams model and developing refinements: High ROIC, management quality, tax, trading frictions, competitive advantage. In a funny way all these improvements are directed at closing the equity/longbond gap. Size of coupon, longevity of coupon, predictability of coupon; size of principal, longevity of principal, predictability of principal.

Can they obtain this permission even when adding to existing holdings, say when going from 1% of the shares to 10% or something, or is this only for new buys? I believe so, although i cant remember why i do... Been thinking about the missing disclosure(s) on the 13F, and i think there's a good chance it's IBM. 1.) He's bought more shares every quarter since initiating the position. So in this Q2 13F it's rather conspicuous that he didn't add a single share even though the price is under some of his prior quarter bids. 2.) The close of day transactions on IBM stock seem to be showing vwap settlements running a little over 10% of the days trade. IBM's buyback is good for about 6%-7%. 3.) IBM closed Q2 weak giving him a reason to ask the regulator for confidentiality. My guess would of been DVA for some of the same reasons. I am guessing they will buy DVA in the next year or two. They're over 10% in DVA so i don't think they can get confidentiality.

Can they obtain this permission even when adding to existing holdings, say when going from 1% of the shares to 10% or something, or is this only for new buys? I believe so, although i cant remember why i do... Been thinking about the missing disclosure(s) on the 13F, and i think there's a good chance it's IBM. 1.) He's bought more shares every quarter since initiating the position. So in this Q2 13F it's rather conspicuous that he didn't add a single share even though the price is under some of his prior quarter bids. 2.) The close of day transactions on IBM stock seem to be showing vwap settlements running a little over 10% of the days trade. IBM's buyback is good for about 6%-7%. 3.) IBM closed Q2 weak giving him a reason to ask the regulator for confidentiality.

Given the Q numbers there looks to be +$2bn in the "Commercial, Industrial, other" category missing off this 13F.