link01

From my post I said Here is the big stuff ... I purposely showed nothing below $100m in value as of 9/30 which left off many many holdings. They amount to another $1B of holdings, including ~$60m in XCO. My point was actually to exemplify the point that the US holdings are way overemphasized by investors. Owning 6.4% or whatever of XCO sounds like a big bet, but in the context of FFH's $8B+ portfolio of equities, it doesn't even register as relevant (especially after continued depreciation). I think this point is really missed by a lot of investors. We talk 10x more about XCO in the context of FFH than we do about Thomas Cook even though TC is 10x more relevant to FFH. As far as I can tell, it's because this is a North American focused board, and the 13F doesn't report foreign holdings (generally). Ben Ben, you're right, of course. Mea culpa. the problem sometimes with making brief, hasty comments is that what you omitted to say is latched onto more than what you did say. Its just that when I saw SD on your list I had a sort of reflex reaction that immediately tied XCO together with SD as being co.'s not only more or less in the same industry, but sharing similar risk profiles. I've always instinctively performed a bit a shorthand & mentally lumped them together. I am also aware that both these co.'s were purchased at much higher prices & probably averaged down on over time. Its what FFH has done many times historically. And they'll continue that pattern, generally. Maybe even with SD or XCO or both. Given that possibility perhaps it would be equally instructive to not only think in terms of the current value of FFH's largest known holdings above some threshold but also the cost of holdings at that threshold. Anyone that's been keeping a spreadsheet of updated portfolio values over time probably also has a decent estimate of portfolio holding costs.

thx for the list, ben but we know ffh is also a 6.41% owner of exco resources (xco) as of 9-30-14 it amazes how much cheaper 'cheap' stocks can get when they are in tough industries or when their mngts are questionable

thx, farnamstreet. that was a kind of a bittersweet trip down memory lane for me, I have to say. I still see the exceptionally talented business & investor side of him that I saw then, but most Buffett-like qualities of character that I 'imagined' back then have unfortunately morphed into something else with the passage of 6 yrs time, success, & the resultant tempting opportunity-sets that came his way seemingly for the grabbing.

when you cite a significantly larger asset base, are you comparing them on an inflation adjusted basis? if not then its still apples to oranges.

on 2nd thought, from one of parsads comments I think its much more likely to be a small cap, else there wouldn't be a concern about keeping mum for now in case it experiences another significant price decline from here & bringing it up to a 25% position hmmmm. back to the guess- it drawing board

You want us to figure it out. Why else would you have posted this?! Yes, I do want you to figure it out...but I can't make it a "gimme". The only clue is that some of you are on the right track and some of you aren't. Cheers! I've been lucky once. lets try for twice: microsoft

non event? yea, that's the question du jour. all bad news vis a vie the market seems to be a non event. suppose it all depends whether the bond rout has legs & continues to defy logic in the face of a weak global economy still struggling mightily under the auspices of scared central banks to throw off the specter of deflation. but its certainly been a non media event thus far for equities of the financial persuasion. seems to me that this is an area where losses hide in plain sight at first but is dismissed & rationalized away, so that it might grow & fester til its ready to unleash full-out contagion. bond gurus like gross & gundlach have had to eat some humble pie. could their stock market counter parts be next? or can Bernanke & co ratchet up QE-ternity to an even higher level & save the day of reckoning for yet another day? liquidity still flows in abundance as evidenced by growth in the monetary base, so we can still rest assured the fed is on our side ;) https://research.stlouisfed.org/fred2/graph/?id=WSBASE is the monetary base losing its allure for you, twa? haven't seen you post on it for a while.

Interesting observation. I agree. I enjoy gio's posts very much. I hope he continues to kick the tires of ffh & his stalwart belief in its mngt every which way from sunday for as long as it remains controversial & polarizing in the current frothy investment regime. its not like he's having a conversation with only himself, belching out stillborn musings into the silent void. there's a whole lot of different opinions piping up at every turn. in a public forum an engaging thread is likely a long thread.

... And Why This Is Just The Beginning (from zerohedge): canary in the coalmine? or just a oneoff, cause it cant happen in the major developed countries there's a great study by BCG (boston consulting group) attached at the end http://www.zerohedge.com/news/2013-03-16/everyone-shocked-what-just-happened-and-why-just-beginning

this, much more than the competition argument, expains why corp profit margins will/must mean revert, imo. without a healthy middle class w/ real income growth, i dont see how business can continue to thrive. how much more can they cut costs? how many more employees can they cut from their payrolls? jeff gundlach has some great slides & graphs pertaining to this issue in his investor cc presentations

<<But, IF those conditions can be met, insurance 'float liability' that delivers underwriting profits IS BETTER than having the same amount of money in equity.>> I agree with most of what you’re saying but I wouldn’t go that far. Lets remember that an insurance co’s equity that affects its claims paying ability, after all. Float is still ultimately a liability, although its one that comes with benefits, like deposits do for a bank. It’s a prime source of earnings, along with equity via investments, & underwriting. If you think about it, it’s a lucky thing for consumers of insurance too. If it were ever mandated by regulatory govt agencies for instance that insurance co’s could only invest the float portion of their investments portfolio in 30 day treasuries then premiums would have to be jacked up pretty substantially in order for insurance co’s to just earn their cost of capital.

Yes, however price performance of Y wasn't what I was referring to. I was referring to whether management is beating themselves up for nothing when instead they could play golf. The Alleghany management could have wound up it's operations ten years ago and instead put all of it's equity into Berkshire stock. BV at Alleghany would have compounded at 8% annualized (Berkshire's stock price performance). This despite the contraction of P/BV for Berkshire over the same period. The "look through" performance of Alleghany would be far superior of course -- not only because the "look through" BV would have grown at 10%, but because IV grew even more. This was even during a period when Berkshire's equities did relatively poorly (high valuations for the big blue chips). This isn't to say that Y can't do better, but if their goal is 7% to 10% and they merely achieve that, I'll reassert that they are wasting their efforts. y has had a policy of paying out a 10% stock dividend for yrs, so an adjustment is needed there. also,going from admittedly hazy memory i believe they spun out chicago title yrs ago. and they may have spun out a portion of darwin insurance more recently as well before it was bought out in its entirety. y's long term return on their investment portfolio has been comparable to that of mkl. this is not to argue that y has been much more than a solid if sleepy stock over the yrs. but there is a chance that y might have a much different looking future after their acquisition of transatlantic (big, maybe transformative) & the hire of joe brandon as pres of all their insurance co subs.

Alleghany was actually founded in 1929, 1 year before Markel. I recommend reading the annual letters which are short: http://www.alleghany.com/annual-letters/ Here's a link to the 2012 annual letter: http://www.alleghany.com/annual-letters/2012/02/22/.pdf Regarding their investment returns, they have both beaten the S&P and the investment returns of Alleghany are quite similar to Markel. Markel has a diversified portfolio (>50 stocks?), while Alleghany seems to like a very concentrated portfolio (XOM, BNSF). That's not the only difference. Anyway, also note the following: Y P/B: ~0.9 MKL P/B: ~1.2 Tangible book value (according to Gurufocus): Y: $374 MKL: $291 Investments per share are basically the same for Y and MKL. I own both MKL and Y. the 1 wildcard for me is the recent hiring of joe brandon as pres of alleghany holdings (the insurance group). if he's as good as WEB seemed to think, at least from his praises of brandon (along with tad montross who stayed on at gen re, it should be noted), then Y's underwriting stands to benefit, possibly alot. and thats on on greatly enlarged insurance op over all.

the fact that the musical is based on a great classic novel doesnt hurt. read it many moons ago & it still burns bright in memory. tom hooper also directed a fabulous version of queen elizabeth I starring helen mirren a few yrs ago. the man's got good taste in source matl as well as faithfull screenplay adaptations & great acotors that fit like a glove

so, how does each co's op earnings plus amortization of goodwill charges added back in compare to growth of book over the same period look? not having done these comps myself (yet) my guess is brk trumps all of them tho, qualitatively, y has possibly increased its per share earnings potential going forward alot as a result of its acquisition of tansatlantic combined with getting joe brandon into the bargain as president of alleghany holdings

i'm no expert but i think the put/call parity you speak of exists not to ensure put & call trade at equal value- thus it does very much matter whether you buy calls or puts- but rather to arbitrage out the riskless profit opportunities that would otherwise exist because of things like skew & volatility smiles. and yes, you could turn your long put into a synthetic call of sorts by buying an equal weighting of the stock but it gets messy quick & expensive even quicker

I thought the original comment about what "price to book" they would buy was silly too. Why tell everyone that you are willing to buy back stock at 110% of book? He's never blatantly given away his intrinsic value for Berkshire, so why do it now and handicap yourself to that specific buyback price? If it's a mandate for the board, so they don't even have to think about what to do with capital when he's gone, then fine...but keep it internal so quick adjustments to the threshold don't look silly like this one because they are discussed publically. All he had to do is tell shareholders at the annual meeting or in the letter that we've got a certain threshold that changes over time where we will buy back shares in Berkshire. Simple...just like he stated back in 2000. Cheers! i think WEB is very sensitive-even hyper-sensitive- to to abusing any informational advantage he might have as ceo to filch shares on the cheap from less informed, not to mention, less sophisticated shareholders. overly so, imo. but thats WEB... i also think he has a stronger preference for buying co's in his twilight yrs than he does for increasing intrinsic value per share at the cost of shrinking brk's equity & putting his decreased equity at risk should things go to hell in a handbasket, particularly with regard to his large insurance CAT exposures or the ability to swoop down fast & decisively to write tons of insurance in a panic. these are times where panic & opportunity are no more than a flutter of butterfly wings away.

i think the investments per share question misses the point gio was trying to make. which is simply that, ex the short hedges & the associated short term unrealized losses & ex the rimm losses fairfaxes long only equity portfolio has appreciaTED ABOUT 20 ANNUALIZED FOR THE 9 MONTHS ENDED 9-30-12. not too shabby on the long side. timing on the short side has obviously hurt. ( and my kitten just stepped on my CAPS key, which i'm not inclined to edit... :-\

price to book val growth is a good way to measure mkl & ffh value growth. but starting about 10 yrs ago brk's earnings power & intrinsic val growth has accelerated sharply over its growth in mere book thanks to its acquisitions of strong operating businesses at attractive prices utilizing cash but of course brk has the gravity of size to contend with as well as webs own mortality which causes a the inevitable compression of the value multiples the market is willing to afford it

i think some quant types have: mebane faber & the folks at market folly come to mind as offering something along those lines. but they probably include too many trigger finger, hedge fund cowboy types with +100 % avg portfolio turnover which has got to undermine their efforts to effectively ride the coat-tails of the best of the best. which begs the question: are they able to judge consistently high quality risk vs reward return managers from those with 5-10 yr excess return records who benefitted from a lucky macro themed call or a temporarily in vogue style box growth or momentum orientaion during that time? john paulsen may be the prototypical example here....

"I will gladly pay you tuesday for a hamburger today!" wimpy

here's a little more color on the historical trend earnings model which jim espouses & has provided some interesting commentary on over the years on another board: <<I'm well aware that random functions can give the appearance of reversion to the mean. In this case I don't assume reversion, I observe that the appropriate mathematical functions demonstrate evidence of mean reversion with very high confidence. There is a big difference between assuming a function will mean revert and depending on the metrics which demonstrate mean reversion. But I'm also aware a priori that the growth of earnings of US companies is not a random series. It isn't a constant growth rate either, but it correlates strongly with aggregate financial output, which can be thought of as population growth combined with output per capita. Both of those trend pretty smoothly, so the combined function itself trends smoothly. Output varies with the business cycle, but neither function is random. Do we think the US economy will never grow again? It seems unlikely. Do we think it will grow at 10% a year forever? No, it seems unlikely. Do we think trend real corporate earnings will grow at 5% in the next decade? Possibly, but pretty unlikely, since it has never exceeded even 4% in the past. So, some sort of central slope estimate in the 0-4%/year range seems a good starting guess. Even ignoring all that, my starting point remains valid even if the series were truly random, provided you merely accept merely that the BIG factors change slowly after taking out the short-run business cycle. Once you smooth it enough to take out the business cycle, the remaining function is very stiff and seems likely to remain so. In other words, even if earnings trend at a very low rate from here, or trend at an historically very high rate, they will still only change on trend at a finite speed, and will still have a central function around which the business cycle oscillations occur. Unless you think there will never be another recession, we will see earnings lower than today's earnings in real terms soon enough. Unless you think the central trend of an irregular oscillating function passes through peaks, today's level is pretty certainly above the trend. What's the trend earnings level in Dec 2011 dollars for the S&P 500? Build an estimator from the data and let me know what you think*. $55? $60? $70? $80? 85!? I'm sure you'll come up with a number somewhere around there. They all lead to the same conclusion, just to varying degrees. If one merely accepts that the concept of cyclically smoothed trend earnings represent a meaningful concept, one can't argue with the conclusion that today's market level represents an historically typical valuation level if and only if on-trend real earnings were ~$100 right now, which they ain't. Conversely if you think aggregate earnings are not trending, nor cyclical, nor even subject to an upper limit on growth rate, then fuggedaboudit. Just go with Cramer's calls ; ) Of course, if it's random, then this following can be ignored. Here are the historical average 3-year-forward real total returns since 1871 based on the ratio of initial price-to-trend-earnings ratio. -2.51%/year compounded after dividends and inflation 2.85% 4.89% 4.84% 6.48% 7.07% 7.09% 7.55% 12.91% 14.60% Here are the forward real total returns by decile after 10 years: -0.21% 1.40% 4.45% 5.14% 5.32% 5.04% 5.24% 6.83% 9.20% 11.30% Right now I estimate we're at about the 10th percentile, but certainly bottom quartile. Certainly earnings could do anything in the next ten years, but when you hear hoofbeats it's usually better to expect horses than zebras. Either (a) we're at an unusually high valuation level compared to history and history will be a useful guide to the fugure meaning returns in the next 5-10+ years will be lacklustre, or (b) it's really different this time. Jim * I can post the monthly real earnings series from three different data sources if you like. Trailing "earnings in time interval" known only after the fact from Mr Shiller, trailing "last four quarters as known at the time" as reported by Dow Jones News, and national accounts data from the Fed. They all give very similar conclusions. They start in 1871, 1942, and 1947 respectively. The first two are fairly up to date, the Fed data set ends about 8 months ago>>

i find it difficult to view the investment landscape from a glass half full perspective right now. not necessarily because of all the problems with debts, deficits, deleveragings, the worsening plight of the poor, the disenfranchised middle class, the broken promise of upward mobility & rising tides that lift all boats big & small economically, the tragic degradation of political leadership every where....and too many more to mention. not because of all those problems, but because i believe market valuations today are too high compared to historical trend earnings, just as bmichaud points out above. another poster from another board puts it very well, i think: I think I've asked this question before, but is there a readily (freely accessible) location I can access this data to construct my own models and graphs? If I may interject--- There are much better valuation metrics that are almost as easy to calculate. So why bother looking it up? I suspect this is not Mr Buffett's favourite valuation metric, only his favourite from among those so simple they only use two numbers. That's assuming that he cares much about such things at all. Some of the things that change a lot over time that are not covered in the market-cap-to-GDP ratio: - The fraction of US economic activity which is accomplished by US-listed public firms - The fraction of US-listed corporate profits coming from economic activity within the US - The fraction of national economic activity ending up sustainably as corporate profits - The ratio of GDP to cyclically adjusted GDP Some of these are absolutely enormous factors! Fifty or a hundred years ago it might have been a useful approximation that the profits of US listed firms came from US economic activity and vice versa, but it just isn't even close any more. Around 46% of aggregate S&P 500 profits come from outside the US--up 16% in just the last decade--as well of around half of production and sales. Ultimately the value of any given collection of equities comes from real future net profits of that same specific set of companies and nowhere else. Since aggregate net profits grow at only a finite rate over time, any reasonable measure of current cyclically adjusted trend earnings will give a pretty good guess of what the trajectory of future net earnings will be. The estimate will be flawed, but it's the best one possible unless you think you can predict really big macro trends accurately. The ratio of current price to current on-trend real earnings will work (does work) a heck of a lot better than market cap to GDP. The advantage is that you can use the aggregate earnings of some set of companies (the S&P 500 or whatever) and compare that to the price of the exact same set of companies no matter where they or their economic activity are based. Market cap to GDP doesn't manage that. The easiest good-enough very simple model is Mr Shiller's CAPE: (a) Download the history of earnings and prices from here http://www.econ.yale.edu/~shiller/data.htm (first link second paragraph) (b) Convert all the prices and earnings into inflation-adjusted values by dividing each by the then-current CPI figure in the file. © Calculate the 10 year trailing average of real earnings for each month (d) Look at the ratio of current on-trend real earnings to current price. Anybody who can use Excel should find this pretty easy. These are the average compound annual total return 3 and 10 years forward from each valuation decile, after counting dividends and inflation: 3 years 10 years -0.67% 0.40% most expensive decile based on lowest initial trend earnings yield using real E10 4.36% 2.01% 5.21% 4.20% 4.18% 4.80% 4.53% 5.70% 6.24% 5.13% 9.58% 5.86% 7.59% 7.37% 12.59% 8.57% 12.30% 10.12% least expensive decile based on highest initial trend earnings yield using real E10 [the 9 cutoffs to pick the current decile would be <=4.27% 4.89% 5.47% 5.94% 6.51% 7.27% 8.38% 9.09% >=10.91%] We've been running around the 18th percentile lately (second row in the table). Expect below-average returns from the broad US market in the next few years. You can do this for the S&P 500 or all US firms and you reach the same conclusion. It would not be smart to expect above-average broad US market returns going forward until the trend earnings yield gets above its long run median or average. In round numbers, a >25% drop in prices, a very long wait for trend real earnings to catch up to current real prices, or a mix of the two. Jim

ditto, thx for posting. that was a unique take on markets & investing

ditto that. and the recent experience of a very high profile, gun-slinging hedge funf mngr short japan bonds illlustrates the point in sharp relief: kyle bass is the founder of Hayman Capital. He is famous now for buying Greek Sovereign Credit Default swaps at $1,000 for $1 million of the price. He Supposedly made a 650x return for each swap which he bought. He was also early in the subprime game and shorted that successfully, as well. Bass is a known bear. He owns physical gold and even has a sheltered stocked up and ready for doomsday. Bass has been in the media recently for his bearish views on Japan. We have disagreed strongly as noted here. Bass compared Japan’s method of financing its debt to the massive ponzi scheme by Bernie Madoff in a recent interview stating: “You can make promises for a long time as long as you don`t have to live up to them.” “Japan is in the crosshairs of the market… I`ve never seen more mispriced optionality in my entire life.” He has purchased Credit default swaps and shorted Japanese Government bonds, according to statements and people familiar with the matter. So far the trade has been going in the opposite direction. According to our source, Bass’ Macro Opportunities Master Fund is down 32% in April alone. January performance was -8%, February 7% and March 2%, and year to date -29%. Since inception in July, 2010 the fund is down 61%. We were unable to confirm assets under management or percentages of each security in the fund. The Japan trade has not played out yet, but Bass made the above comments only several days ago. He clearly thinks that eventually he will be proven correct. http://www.valuewalk.com/2012/05/kyle-bass-japan-macro-fund-down-29-for-april/