returnonmycapital

I've come back to this thread. As someone with a young child, I'm going to have to deal with a lot of what was discussed here (and, maybe, in the thread about retail) in the coming years. I was raised in a family that (over) prized academic outcomes versus both general sports results and "learning" and doing what you love. I won't say it failed for me. But, I didn't enjoy it. I was pretty good at sports and didn't mind losing. I liked teams much better than individual (I think for the right reasons). In any case, that was not prized in my family. I did well in school but I'd say I never figured out what I really enjoyed as the goal (the edict from above) was to get the grade. I didn't like to lose but I don't think I was a sore loser. The quote of me from above had to do, in my mind, not with Buffett (or yours truly) wanting to beat Michael Jordan. I feel the quote assumes you can't beat Michael Jordan (that's why he's a useful example) -- it's not about him, per se, but about something you might want to play (or do) but are facing a situation where you cannot win and would prefer not to simply be a lamb leading himself to slaughter but rather to fight on and try to win in another way or at another point in time. I agree with what rkbabang wrote in the rest of the missive. This is a succinct way of getting across the idea of "never giving up." In fact, eventually, you do often have to give up (or lose) but before that you will have achieved what Emerson thinks is useful about a hard-earned loss. It does make sense to play those games even if losing is certain. It might make sense to reward kids for participating in these situations. Some kids get better but won't if they give up because there are no rewards. I guess what I'm asking is: How do other fathers of young children feel on these matters -- both sports and academic? I know the way it was done when I was a child and I don't think much of that method. But perhaps I'm too quick to throw it away without some education on the alternatives. What do others feel they "should" do irrespective of what they (may) hope their child achieves? Or, are those things always aligned for most of you? I simply want my kid to figure out what he likes and pursue it. But, I don't want a sore loser or someone who quits before they have a chance to figure out whether they might like the activity. Thoughts appreciated but none expected :) -- Note: Edited for clarity We are all different, and our areas of giftedness become manifest in early childhood. What toughened up Emerson might defeat or destroy others. He was an "Invictus" kind of guy. Discover your children's tropisms, what they like to do and do very well. Then, you'll see how to facilitate the exercise and development of those gifts. :) I would agree with that. I like how I was raised and try to do the same for my kids. I was never pushed into anything. My parents didn't care if I wanted to participate in any activity or not, and never tried to dissuade me when I decided to quit and try something else (or even nothing). They let me know that they thought education was important (my dad never went to school at all and never learned to read or write), but I was never fearful of being punished or disciplined in any way for bad grades. They pretty much let me choose my own path and let me know that what I did was in the end up to me. My wife and I have tried to use a similar philosophy which our children and (so far) it seems to be working out well. Congratulations. You are right minded and your children will greatly appreciate your efforts. They won't just love you, they will also like you.

It's well known that parents ruin everything.

+1 Unfortunately, this is much easier said than done: this world changes ever more quickly and business models and brands seldom benefit from changes. Great entrepreneurs, instead, adapt. :) giofranchi But we are talking about insurance companies and as such we are talking about underwriting and investing. In FFH's case, investing. The quote was interesting because it made me think how much better off and how much easier the last few years would have been for FFH and its owners if Prem had bought only first-class assets while they were clearly on sale. First-class assets typically depend on their business model and maintaining their "brand", not so much on individuals (although the right ones certainly do help). Instead, Prem decided to wrestle with macro hedges/speculations and second-class assets. That is hard work. He's now got to figure out how to blow some wind into the sails of the faltering assets in order to dispose of them. Meanwhile, BRK doesn't have to do anything but concentrate on the acquisition of ever more first-class assets because it concentrates on them exclusively. I would argue that the difference between the two approaches favours BRK over FFH over time.

+1

How about this one: If you and/or your family (as a group) own 10% or more of an investment fund, you may not invest your RRSP, RRIF, or TFSA in that investment fund. I have read the tax law, I have read CRA's arguments with regard to its implementation and I still don't understand its logic.

Try http://www.spindices.com/ Go to Index Family. Under Equity, choose U.S. Then click on S&P 500. On the left you will see a box called Additional Info. Under that, choose Index Earnings. An excel file will download and you can browse the worksheet for data like earnings, sales, dividends, and book value which you can then compare to the index price to come up with p/e, p/s, p/bv, ROE, dividend yield. Useful and free.

Using look-through metrics has been a huge help in managing a fund as well as reporting to owners of that fund. Using such metrics creates consistent and disciplined practice. In the fund's case, it is trading just over 1X book with a trailing earnings yield of 11.25% (before the deduction of fund expenses).

S&P 500 stats: 2011 reported earnings = $86.95 2012 reported earnings = $86.51 (expectations for most of 2012 were for earnings of more than $100) 2013 reported earnings = $107.18 expected (this too is probably high) 2011 sales = $1052.83 2012 sales = $1092.38 2013 sales = $1108.77 my estimate based on 1.5% yoy growth Net margins were historically high at 8% for 2011/12 and are now expected to increase to close to 10%. How likely is that with: a) bond yields beginning to increase b) taxes rates not declining c) wage rates not declining d) S&P offshore sales & profits (at least from Europe) not rising Assume 8% margins on sales of $1110 and you get $89 of reported earnings. The S&P 500 is priced at about 1660 presently; offering an "expected" earnings yield of 5.4% - not value territory. But then, there is no real competition for that yield today so up we go.

I bet that if you looked at his compounding performance since receiving his first millions, it would be total rubbish.

That is exemplary fidiciary responsibility on your part. And the candor of your post is remarkable. When the baby boomers retire (eventually, because most won't have enough to retire on at "normal" age) the impact of the fees collected from them over their working careers (30-40+ years) thru mutual funds included in their 401k's etc, when it becomes known to the larger public will likely be the scandal of our times! John Bogle of Vanguard has been warning of this for the past 20 years. Read his book "Enough". I have done, as well as his book Common Sense on Mutual Funds and his book Clash of the Cultures. I just can't get enough of Bogle. A real hero.

Yes, fees for active management - and some index-type funds - are too high, especially in Canada. I see it in my own fund. After 5 1/4 years, fund expenses have accounted for almost 25% of gross returns. After only 5 1/4 years! To correct for this, I plan to lower fees as soon as is feasible (meaning, when a certain level of capital is reached) and take a straight salary thereafter; even going so far as having the fund own the management company. The impact on net returns should be huge over time. It's not original (BRK, FFH, Vanguard) even if unusual.

Anyone notice the following "Letter" to the FT, printed in the paper right beside Schroeder's article? Clever. More important, you could probably bet dollars to doughnuts that Mr. Dadlani has a "handle" on this board. Buffett has not miscounted beans From Mr Rajiv Dadlani. Sir, I must take issue with Lex (“Attack of the killer tomatoes”, February 15), which argues: “Let us all give Warren Buffett a stern lecture about overpaying.” As Lex acknowledges, “Heinz is an excellent company”. Given this, and its shareholder base of predominantly value investors, it would be difficult, if not impossible, to execute a take-private transaction at anything less than a full price. And a full price it is – a premium of 20 per cent plus – whether to Heinz’s price/earnings multiple over the past decade or to its ebitda multiple over the past decade or to its undisturbed share price. Anything less than a full price would also run the risk of a board wary to engage and third-party nuisance lawsuits. But a full price does not mean Berkshire Hathaway is overpaying. The reason the deal math works is because Berkshire is an insurance company. As such, Berkshire has a float that has an estimated negative funding cost of between 2 and 4 per cent. In option terms, think of Berkshire as a seller of put options, with the premium it collects being the float, and the exercise price being the event it insures. As Lex points out, Berkshire’s full $12bn investment carries a yield of approximately 6 per cent. Add the estimated negative funding cost, and you get a total return (funding return plus investment return) of between 8 and 10 per cent. An unkind person might quibble, but I would call that a solid, if unspectacular, equity return, with a reasonable safety margin, and some scope for upside. It should be no surprise that Berkshire shares closed up 1 per cent on news of the deal. The real bet Mr Buffett is making is that 10 years from now more ketchup and baked beans will be consumed and that consumers will pay a premium for the Heinz brand (moat). That’s pretty much the same bet he’s making on Coca-Cola. Rajiv Dadlani, San Francisco, CA, US

Great find.

Have you factored in the increase in government spending during the time period?

The management fee is 1% for both funds. Until recently, the MER for the funds was running at 1.5% due to admin. expenses with low AUM. The actual MER was higher than 1.5% but has been capped at that rate by Francis. The most recent MER on the Opportunity Fund is less than 1.5%.

The vast majority of people who have been involved with Herbalife have lost money. The company claims that anyone who loses money is really a customer (not a distributor), but the truth is there are millions of failed distributors. They lose money because they did not execute on the distribution...an actual effort has to be made on the system package material provided to new distributors. A similar argument could be made that some universities are ponzi schemes...students pay fees to attend the university and receive their degree. What if the student has paid fees for four years, fails some of their courses and does not receive a degree? Should the educational institution be categorized as a "ponzi scheme" because the student lost money? Ironically, what about failed hedge fund managers...should their businesses be deemed ponzi schemes? As they charge 2&20 fees on other people's money, run aground, and then close their funds after realizing they will be a long ways from receiving another incentive fee. But they are at the top of the pyramid and run away with all of the fees they've generated over the years. I like Ackman some of the time, but his hypocrisy stinks big time on this one...that Target fund was one of the stupidest things any hedge fund manager has done in some time and his investors lost a bundle. Cheers! Excellent commentary on hedge fund managers... and Ackman.

If I mistake in my own portfolio, I live with it and no one can fire me. Even if I institute a lock-up, if I screw up with a big position, when that lock-up comes due...those partners will leave regardless. So, while I may be able to take a slightly bigger position than I currently do now (our max is 25% right now in a single idea), it won't really make a huge difference because I'll be inclined to still not go to 50% or better with other people's money. The obligation, if you are honest and ethical, is to do them no wrong. So you do no wrong because you want to be able to live with the worst case decision. To put it as simply as I can...I would feel ten times worse losing someone else's money than my own! Alot of people don't feel that way. Cheers! You could always have a separate public fund that is more concentrated -- Berkowitz does something like that. You could claim it's your "single best idea" fund and that it would be concentrated in a single stock. This puts it up to your fund's investors to decide if they are comfortable putting a sizable amount into just one position. Takes all of the pressure off of you -- the ball is in their court to appropriately manage their exposure. I guess the time will come when I'll put some money into the funds of a few different managers and I'd actually prefer if they offered something like that. I feel like I'd rather get the best out of each manager, and spread the risk by putting money with more managers. Good idea, why haven't you done it? I suspect you wouldn't have too much trouble finding partners. Heck, my fund might even be interested (I don't have a PA).

Parsad is right, it is probably only useful to keep track of your own account(s)' results for your own purposes. It would be very hard to understand why anyone would be attracted to someone's PA results. The best thing to do is exactly what he (and Prem) said: just do it, start a fund. Racemize's discipline of writing an annual letter is a very good idea. It will improve his results, especially if he has to show them to his spouse. Nothing worse than family & friends as clients. For those thinking of starting a fund, the weight of start-up expenses and the thought of the continuing annual administration costs will be enough to get you marketing your services. The thought of expenses weighing down your returns will get you out of bed in the morning. I would argue that the only thing you will ever be really proud of is your track record. As far as the difficulty of registration, there are always going to be hoops to jump through to get started. They will not decrease in the future. If you want to attract OPM, I would be hard pressed to believe that you could do it with your PA results. It's just not the same thing and no one you talk to will believe that it is. Where is MooreCapital when you need him?

Healthcare spending is 17% of GDP in the US. Just about every other 1st world country with universal healthcare (most even have public/private) spend only as much as 10% of GDP. This is going to sound nuts but shouldn't the discussion in the US be about how to regulate the healthcare industry? If healthcare is as much a right as economically affordable electricity, education, transportation infrastructure, should it not be on the table? The argument that the pharmaceutical industry will not innovate if drug prices are regulated is likely not fair. This is akin to the argument that "I will not try if my taxes rise." Europe's pharma industry does very well, even with most of its sales from outside the US. Doctors' pay: in Canada, my GP (general practitioner) makes $450,000 per year. A specialist/surgeon does close to $1 million. And still we allocate only 10% of GDP to healthcare. My argument is not a general comment about the irresponsibility of government and its spending. This group is no doubt leaps and bounds more responsible than the average American/Canadian. But the average, which is by definition the majority, chooses who is in charge and the majority will always accept a handout if the cost is a simple tick-mark on a ballot. Like Benjamin Franklin said: "Would you persuade, speak of interest not of reason."

I think Buffett is also making a statement with regard to management compensation practices today. Not long ago, CEO compensation was 20-30 times the average wage. Today it is closer to 200-300 times. Perhaps some of the minimum tax rates for the "management" bracket will correct for this outsized increase in compensation relative to the average wage. Do not think that a strong and perhaps even growing middle class doesn't matter. Social unrest comes at times of wide disparity. And social unrest is the real danger.

I use S&P 500 Index data provided by Standard & Poors. It is comprehensive for valuation purposes. The link below should work. When there, click on "Download Index Data" and click on "Index Earnings". That will open up an Excel file. On the various pages of the Excel file you will find index earnings, dividends, sales, book value as well as a breakdown per index sector. I find it useful and it's free. http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

YES I would.. irregardless of what class of asset it is.. 15% after that many years is tremendous I guess you wouldn't include Walter Schloss as a 'superinvestor' then even though Buffett calls him one It's not the return achieved but the combination of return resulting from individual efforts to obtain that return. Schloss is clearly a superinvestor. It's by virtue of the fact that he selected various securities to achieve that return. Someone invested in his fund or an index fund is not a superinvestor. By your definition, hiring an architect and contractor who build a beautiful home makes one a great homebuilder as well. Or, by choosing a good fantasy football team makes one a great football player. So, if someone works 100 hours a week vs 1 hour per month, yet have the same returns - the 100 hour per week guy is more super than the other? Now, if the 100 hour per week guy is a lot "less risky" whatever that means, then, yeah, I can buy that, but not just returns and work ethic combined. By the way, Buffett called guys that were "superinvestors" did not beat an index by a couple points. These guys crushed it. You should beat it by at least 5% to be "super". anything else is good or great, etc. What is average, good and great to you guys??? This doesn't look too super. :P http://quote.morningstar.com/fund/f.aspx?t=CMAFX That's exactly what I said above Paul: If you beat the market long-term by 3% annually, especially if you run a fund because you have a significant amount of limitations (redemptions, investment limits, client concerns, frictional costs, regulatory hurdles, etc), then you would be considered in the great category of investment managers...as only about 2% of fund managers get in that category! If you beat it by more than that, then you could be considered in the superinvestor category. Schloss and Van Den Berg are both superinvestors. Cheers! In terms of working 100 hours versus 1 hour. If you go to the dentist and get your tooth pulled out in one hour, does that suggest you should be pulling teeth versus the guy who has worked at it for thousands, if not tens of thousands of hours? The argument just doesn't jive. I'm the first to criticize how awful the investment industry is, but I have to tell you that there are plenty of clients who haven't got a clue what it takes to be a good investor, after being on both sides of the coin. Some of the finer details of the traits of these types of clients: - If you aren't beating the market every year by five percent, they ask you what is wrong with you? - They pull money right at the bottom almost every time! - They ALWAYS second guess your decisions...cannot emphasize enough! - They don't realize the difference between looking after personal capital (no restrictions, totally temperament based, captive capital) and public capital (redemptions - not captive, restrictions, multiple-temperaments). - We cannot make mistakes, but the destruction of their own wealth can be without precedent! That being said, I love the business. I love what I do. And I'm more than happy to put up with the gripes, since we are serving them...but the irony in client behavior is quite perverse...and in the general investing public too, including those on here that manage their own personal capital! Cheers! I love it when they pull the money out at the bottom. Almost as much as being second guessed. Which is why I follow the Walter Schloss school of client disclosure: " Never tell a client what they own."

I sure as heck wouldn't buy either today. I agree, they are both priced for perfection. I chose ITX over HM, which had similar valuations in 08/09, for two main reasons: 1) ITX doesn't use advertising 2) ITX's client demographic is wider (cradle to grave). HM both advertises and appeals to a narrower demographic. Also, HM has issued staff warrants that share dividend payouts with the common, kinda like LRE. And with a very high payout ratio, the earnings transfer is not immaterial. Then there is the production/distribution chain which ITX has been better at controlling. In short, there is more to like about ITX. And I see ITX being quite capable of handling competitive pressures today and in the future. Their range of concepts to current store count gives them decent future expansion opportunity. But, as you say, neither is good value for purchase today.

Yeah, I'd like to really see how they valued this, and then compare it on an apple-to-apple comparison in terms of Inditex's normalized P/E, cash flows, etc relative to Berkshire's. Cheers! Sure, Inditex has always been expensive (the lowest P/E in the last 5 years was ~15) and right now I'd much rather own BRK. But it is an impressive achievement nonetheless for the son of a railway worker born just before the Spanish Civil War and who had to leave school when he was 14. You'll agree that being the son of a US Congressman and attending Ben Graham's classes at Columbia is a much better starting position. I paid just over 12X earnings for Inditex shares in 2008/9, which are still owned. That was EUR 75 ago.

Price to sales ratio.