Rabbitisrich

I'm still up in the low teens due to a concentration of insurance, media, and commodity stocks plus some fortuitous selling. I took a couple of retail hits, particularly with SPLS. In June, I made a big move into large cap financials, so if China weakens precipitously, or the Euro problem is bigger than it appears, this move will not look so good.

I'm ambivalent on his ethics, but I don't see a reason for stockpickers to purchase the stock at this price. The restaurant operations are not particularly cheap, and BH's cost of capital isn't particularly low.

Yeah, it's interesting that so much regulatory focus is on capital adequacy. That's fine if a "TBTF" bank collapses due to idiosyncratic problems, but the extra percentages will evaporate in a financial crisis. 10+ years from now, the capital requirements might actually increase the odds of another crisis by encouraging banks to get "creative" to keep up with rising market ROEs. Txlaw, that distinction is important. Fairfax shorts circa '03-'05 conveniently painted all finite transactions under the same brush, but that is about as analytically sound as measuring a bank by the dollar amount of its commercial real estate loans. In fact, AIG recently purchased finite coverage for asbestos claims from Berkshire.

A bemoated company can stay small due to limited reinvestment opportunities. Strong moats also tend to attract mediocre management. Avalon Holdings is a good example.

Have to completely disagree; it's a terrible letter where the author contradicts himself completely. Block's short thesis also consisted of refutable, or at least disputable, arguments. Compare his report on Sino-Forest to John Gwynn's claim of massive under-reserving at Fairfax.

Agreed with all the statements regarding Berg's ability. However, I do wonder how someone who appears to be so thorough in process maintains such a modest spread over the S&P. Presumably he requires a valuation haircut and conservatively assesses business results, so is he simply making a lot of errors to erode the margin of safety? Or demanding too little in the way of discount?

Interesting article. I wonder why we don't hear more similar stories of corporations laundering money that is subject to unrepatriated income tax. The parent could guarantee the subsidiary debt and dividend the amount borrowed.

I assumed that would be treated as a taxable repatriation. Otherwise, why aren't they all doing this? Company can then issue shares on the US exchange. Buy back on one, issue on the other. Repatriated cash. No, this must be taxable, that's too much of a scam. I think that you are right because when the repatriated income tax was temporarily lifted in 2004, most of the money went into stock buybacks and dividends, and 15 multinationals repatriated over half of the cash.

What is the dirt on him? I feel like I should know. His biography (per Microsoft): http://www.microsoft.com/presspass/bod/rgilmartin/ He was the CEO of Merck when salesmen were given special tactics to avoid discussing the cardiovascular side effects of Vioxx. It took four years after a study in 2000 pointed to heart complications for Vioxx to be pulled off the market.

What about Raymond Gilmartin's board membership?

Maybe you are recalling an interview with Jonathan Dash of Dash acquisitions: http://classic.cnbc.com/id/15840232?video=1497317094&play=1

Todd Sullivan put forth a similar argument for Sears Automotive and Autozone about three years ago. It's possible that redemptions or the like interrupted those plans, but it could also be that Lampert recognized a stable business model run by a profit focused team. Perhaps the GAP investment is similar in that he is focused upon management's handling of margins and cash allocation rather than the revenue trend. EDIT: Oops, I basically repeated JSArbitrage's comment.

http://www.theglobeandmail.com/report-on-business/economy/housing/canadians-putting-more-cash-toward-homes-rbc/article2029516/ The problem is especially pronounced in Vancouver, where [Royal Bank of Canada] estimated families must now dedicate 72 per cent of their household income to pay the mortgage, property taxes and utilities on a bungalow. That's much higher than Toronto, where it would take 47.5 per cent. Good lord!

Gross ratio of execs to prostitutes.

Is there anyone in Vancouver who doesn't think that home prices are excessive? One family I know purchased a home, not a mansion, for $1100 per square foot! But then why does TD Economics report average British Columbian debt to income at 160%? One would think that the lenders at least would be more cautious.

If I recall correctly, Buffett was asked about the possibility of pulling a Philip Anschutz but said that he didn't see any major monetization projects. He went on to say that the BNSF purchase was about BNSF.

It's only if you would have paid the rent anyway, that this "rent" should be included in the equation for the owner occupied home. But then we are not really looking at real estate as an investment, but rather as a place to live. Beyond this point, the "rent" should be disregarded. If you purchased a home and it has appreciated to the point that you wouldn't hypothetically repurchase it, then you would underrate the property to ignore the "excess" rent that you are receiving and paying simultaneously. If you decide to rent or to sell the house, then the market will compensate you for the "excess" + base rent recieved, but your paid rent drops to whatever you are comfortable purchasing. This is just a long winded way of saying that you sell high and buy low. But the point is that you have to include the entire rent, or you risk underestimating your opportunity cost.

NY Times has a useful cash flow calculator that models the payback period given various assumptions: http://www.nytimes.com/interactive/business/buy-rent-calculator.html

Sorry, when I said first mover, I made an assumption that Google reached a point where incremental improvements in search minimally affect market share. If Microsoft's market share growth, as defined by Comscore, has come largely at Yahoo's expense then Google's flat share isn't strong evidence of competitive pressure. I don't think that Pew has updated their estimates of daily search engine users, but in 2008 it was only 49% of users. If the daily internet usage penetration has improved, and we know that internet user penetration has increased from '08, then a flat market share may simply reflect a mature division of usage. How would one tell the difference? In any case, until Bing starts to shrink Google, it's simply a guessing game.

I thought this was a hypothetical question? Do these instruments exist?

It's difficult to say how much Bing affects Google... using Val9000's analysis as an example, there are a lot of assumptions in terms of spend and opportunity cost. It's worth noting that Google carried ~57% of "core search", as defined by Comscore, in 2007 vs. ~65% in 2011. There is a huge first-mover advantage in "core search". One study tracked the eyeball movements of searchers and found that people pretty much only pay attention to the first lines of the first page. If a search engine provides satisfactory results in those lines, there isn't much room to compete on a result vs. result basis. Baidu offered better speed, local results, and illegal download links but those issues were related to political circumstances rather than a true moat.

How important do you all think that modeling skills are? Or should I say, how advanced should modeling skills be? The advice that I have gotten from several value investors that I highly respect is that the modeling is probably where I should focus the least amount of my time. The majority of my time should be spent reading (both books and financials) and getting a better understanding of businesses. I'm under the impression that the "valuation" should be a fairly simple process and most of the folks that I talk to don't put a lot of weight on complex dcf models. I have a Wall Street Prep program but didn't finish as I felt my time was better spent elsewhere. What are the thoughts around here? It's a good idea to know your way around excel, as well as to have a good understanding of the logic behind different DCF methods. But the investment industry is still sort of like an apprenticeship system (on the buyside, I don't know much about the sell side), where your employer will prefer that you don't have any "bad" habits. It's a good idea to tailor your resume to the firm, which is yet another reason why networking is the most important tool in your job hunt. Nothing else comes close. A multiple is no less specific than DCF. It also produces a single number. DCF simply forces you to acknowledge some of the pathways to the number. It's just a tool.

I say again that if this is standing still and BING only adds minimal or nothing more from here anyone looking at these would not say this is a dying company. Or if you took out the name Microsoft and just looked at what this company has been doing money wise "Most" value investors including Warren Buffett recently, in an interview recently with Reuters which I posted previously, would say this looks undervalued. I don't want to start a new debate, but it's obvious from those numbers that higher EPS doesn't contribute to shareholder value. Instead of wasting time with capital destroying actions like buybacks and earnings growth, MSFT should pay out 100% FCF immediately.

Sorry to quote myself. But lets say the offer is only $1 for every $2 of goodwill. Should the still take the deal? Of course! Or how about only $1 for every $5 of goodwill. Should they still take the deal? Of course! Even at $1 of cash for every $100 of goodwill. Does it still make good economic sense to make the deal? Of course! So that's why it's worth practically nothing -- compared to the other components of book value, such as CASH!!! Goodwill is the equity stake in assets above the tangible BV of the asset. So when you say $1 of goodwill you are saying 1% of an asset composed of $50 of widget and $50 of goodwill. This makes sense when you consider that goodwill is a function of an asset's going concern value, which may be different from its saleable value. Going back to my original point, the legitimacy of the goodwill will be proven or disproven by the earnings power of the asset under the acquirer's operations. The going concern value can be seen by considering $100 million sitting in a bank account, available for sale. The sale price will likely be $100 million. Now consider a sum of money attached to Warren Buffett's investment management (at a flat fee for simplicity) discounted so that the present value TBV of the combination is $100 million. You might then be willing to pay above TBV so long as you meet your personal bogie. But if you liquidate your TBV, then the goodwill would fade away, unless Warren Buffett went with the cash, in which case you may recover some, all, or above your goodwill depending on the purchaser's expectations and return requirements.

If the target were simply an investment manager utilizing your investment activities, then you could simply replicate the portfolio (for the purposes of this hypothetical) and recieve a higher return than the target's ask. If the company is an insurance operation whose growing float you manage, then you would compare the "replicability" of the business + portfolio--either purchasing or creating a similarly sized operation with comparable management, relationships, data, and so forth--to ask of the target. In this case, you may well pay a premium. Instead of an investment manager comparison, imagine being a CEO of a target insurance company with good insurance operations but mediocre investment results. Fairfax signals its interest and Watsa bluntly tells you that he will replace your investment team post-acquisition. You read the annual report and notice the 15% BV bogie. So now you know that if the math works out you might receive above TBV as long as the purchase price return meets the bogie. The above situation is similar to the ORH logic, because in both cases FRFHF is purchasing future earnings which include HWIC results.