Parsad

With all the 'know thy client' rules out there now --- how does someone like this become a client without being aware of the risks. What is a 75-year old investor doing with his life savings exposed to the market -- particularly if he has a short term purpose for these funds. I own a small bit of Tims fund --- when I signed up there was something in the documents that said 'I could lose ALL my money' ---- it was not in small print either --- very bold. There was also some bolded out language that stated to 'read the document'. If after the fact this 75 year old still signs on what can you say --- he was prepared to take the risk just like anyone else. Informing the client of the risks before hand is very controllable. Not all investors have the same investment acumen or emotional constitution. The "Know Your Client Rules" are a joke! Virtually every questionnaire is standardized with a few simple questions, and millions of investors each year get into products they probably shouldn't. When I play hockey on Monday nights there are still a lot of guys that don't wear face shields - I don't know how informed they are but if they were --- they certainly are doing so at their own risk. And so am I by simply playing the game. You can't control all the hazards but you sure can control the information. If one of those guys playing with you gets hit in the eye with a puck, you're not going to tell him "you should have worn a visor" while he's lying on the ice writhing in pain, thinking he may lose his eyesight, right? There are alot of investment managers out there looking their clients in the face, many of whom are close to retirement, and telling them that eventually markets rebound. Sound advice, but probably not much help to those clients. The point I was making was with your theoretcial ten-year 20% note bought in the 1982 period and the 3x pe's available at the time that Buffett was also buying. I just pointed out that during this time he also bought or added to KO -- and I would guess that the return over 10 years probably beat the 20% total return on the theoretical note. 10 years later would have been around 1992 --- so the KO investment could have cumulated tax free for another 6 years before Buffett in hindsight would have sold it. He did. Well over 24% annualized till 1998 or so. Tell me how much it has grown since. :o How many investors, even die hard Buffett/Fisher acolytes, would hold for 11 years with a 50% loss, and then still hold another 5-6 years to get to breakeven...perhaps longer! Cheers!

The median home in California fell 41% year over year. http://www.bloomberg.com/apps/news?pid=20601213&sid=aUnHHxyqfsyA&refer=home Cheers!

I am sure it happened --- but for those that were loyal they would have been quite pleased by the end of '76 (and beyond) -- quite the oppositie of your worries at present. Ruane as leader and captain knew what was best for the clients. Would he retain them all? Of course not -- you never do. Could GM have retained all their clients over the years? No -- but they sure could have done a better job by developing products that were in the client's long term interest rather than the client's short sighted ones. Doing what is best for the client (even if they don't know it at the time) works -- even for money managers!! Doing what's best for the client is to not lose money. How do you explain to a 75-year old investor that his life savings is now diminished by 50%? Wait five years...you should have known better than to put so much with us...you've invested for the long-term...I feel really bad for you...I'm closing access to your money to protect you from it! Buffett did not sell Coca Cola in that early 1980 era --- in fact he added significantly. I would bet that his investment in KO outperformed the theoretical ten-year 20% return note. And the beauty was he avoided a lot of taxes compared to the gains that would have had to be claimed on the note. Look, I am not saying there is not a time to sell -- but investor's ought to have a long term core strategy. I am not saying to buy KO -- and in fact I have never owned it -- but I will say that over the 17 years of doing this, KO is certainly the best bargain I have seen it at. Buffett as recently as a few years ago said that he should have sold Coca-cola in 1998 when it was overvalued. He just sold JNJ after holding it for a short period of time. I'm not sure how this discussion has devolved into me being a buy & trade investor where I have no core holdings. I just said that at times I am willing to sell even my core holdings, if I find things significantly cheaper relative to their quality and after paying taxes. That is no different than what Buffett does. And per Berkshire's mandate not to ever sell a private business they buy, he cannot sell any of their businesses regardless of the price they are offered...otherwise you might see a different outcome. They lost great wealth because they focussed on wealth accumulation rather than what was important. They invested in risky ventures --- we know the result. I beg to differ. While AIG's CDS business was overly leveraged, many of their other businesses would have fit in nicely inside Berkshire, Fairfax or many other companies. Some of Citi's businesses are also of the utmost quality. What about the guy who built a terrific business over his lifetime, but lost it all because the investment bank he dealt with put his company's cash into AAA-rated credit obligations? He did what he thought was correct...yet he suffered! Are you going to simplify it and say that he was focused on wealth accumulation and not what was important? He got caught up in a mess that was not entirely of his own making. Everything he built from day one, was lost in a few months. Doesn't Buffett focus on the right things? Yet, he made a mistake buying COP early, as well as the amount of exposure they have in the S&P puts he sold. Berkshire's AAA-rating was the crown jewel of the company, yet there is a distinct possiblity they may now lose it. Focusing on the right things and the long-term reduces risk, but it never completely eliminates it. Cheers!

GEICO has decided to enter the Massachusetts auto insurance market. Cheers! http://www.gurufocus.com/news.php?id=51765

OEC2000 It's hard to hold a conversation or debate a topic if people keep lobbing out non sequiturs and strawman arguments at you. Yours Jack River That's a two way street Jack. Generally, I find that everyone does a pretty good job of respecting others and debating a topic, while providing real arguments on subjects here. Best advice, engage if you find the discussion worthwhile, otherwise ignore it. Cheers!

Judd Bagley of Antisocialmedia did a terrific little documentary entitled "Short Selling Hedge Funds and The Global Economic Meltdown". Definitely worth a watch. Cheers! http://antisocialmedia.net/

Well, it looks like the rating agencies could not have gotten their timing any better. S&P may cut Berkshire's AAA-rating now that the markets have already tanked 50%, and Moody's cut WFC's preferreds into junk territory now that lending and deposit spreads are the widest in nearly 100 years! Cheers! http://www.marketwatch.com/news/story/sp-says-may-cut-berkshire/story.aspx?guid=%7B2C5C12BB%2DEE6A%2D4308%2D8430%2DF69251F111F1%7D&siteid=yhoof http://finance.yahoo.com/news/Moodys-cuts-key-ratings-of-apf-14744415.html

As a practical matter, am I correct to assume that you think that buy and trade will produce superior returns to buy and hold? If true, I'm curious to know how you arrive at this conclusion. I don't think either one necessarily provides better returns than the other. George Soros, Peter Lynch, James Simmons...Buffett, Schloss, Fisher...there are examples of both types that have provided great returns. My point is that you don't use a driver, when you are sitting in sand forty feet from the hole. More importantly, the overriding point I was trying to make was that instead of taking such an antagonistic approach, the two camps should try and empathise with each other's views. We do come from the same value school, after all, and the only difference seemed to me to be that Jack's camp was happy to accept higher volatility and Sanjeev's camp wanted to try and dampen volatility. Instead of each camp claiming "I'm right, you're wrong. Show me your returns and I'll prove that you are wrong," (which is the direction the discussion seemed to be headed), I was trying to get both sides to see the validity of the other's point of view. I agree with you on this point wholeheartedly! One should quit active management altogether if one cannot determine any approximate valuations when anticipating a purchase. Truth is, every day you hold the stock you carry the same risk as the person buying it from cash. Absolutely correct...outside of the issue of taxes. Sanjeev, this is rear view mirror thinking. I have mentioned this before -- one of the best/honest long term investor's was Bill Ruane. If we were having this discussion at the beginning of 1975 --- you would have been saying the same thing: that Ruane and other long term value types had 'gotten completely hammered'. After all a $10,000 investment in Sequoia on Dec 31/72 would have been worth $6,355 on Dec 31/74. The S&P 500 would have been worth about $6,270. Looking in the mirror, there was little evidence that Ruane's strategy was working at that point in time. However, two years later (Dec 31, 1976) that $6,270 turned into $17,730 ---- the S&P 500 had barely returned to it's value 4 years previous (it would have been worth about $10,675). Hi Uncommon, I'm not suggesting that what Ruane did, or any buy & hold investor does, is incorrect. Not in the slightest. I'm a buy & hold investor myself...through and through. But I bet you Ruane, like many investment managers today, lost a significant number of clients during that period. And that is not his fault, since he was adhering to the philosophy he completely subscribes to...partners be damned. The system works and it works very well over long periods of time. But there is nothing wrong with selling a position, paying the taxes and holding cash until you can find more undervalued investments. If the market is trading at six times earnings, why would you own a business that is valued at twelve times earnings? Buffett was selling investments trading at three times earnings to buy stuff trading at two times earnings in the early 80's. Recently he sold JNJ because he found more undervalued investments. If you want to mitigate portfolio risk, then it is pure folly to hold onto investments trading at a significantly higher valuation than other available investments. If you found a ten-year note selling at a discount that would give you a 20% return over the next ten years, and there was a high certainty of return on capital, why would you not sell Coca-cola to buy it? If you would do that, then why not an equity investment providing the same return? The bottom line is that all great wealth accumulators in this world did so by holding longer term. Some held longer than others --- but no one has proved to make a lot of money by doing quick flips. Yes, there are special situation plays that can be shorter term and have proved very profitable .... but the core strategy for the very successful has been thinking long term -- it's a common theme. I don't disagree with that at all. Although, there have been as many people who have lost great wealth by doing the same thing...think Hank Greenberg right now with his decimated investment in AIG, or anyone who held Citigroup stock like Prince Al-Walid. Those are just a couple of the larger, more glaring and recent examples. Sanj, This may have been said above already. I dont think it is appropriate to handicap yourself by taking the FFH options out of your pre-partnership investment results. They are an intrinsic part of what makes us better than average investors. We didn't just indentify an under priced company, we also leveraged via options to make those mouth-watering returns. If it hadn't worked out you wouldn't have been saying my past results aren't accurate because I lost 100% on my FFH investment. Al, you're correct but it depends on what you are comparing your results to. If you are comparing your numbers against any investor, then fine you can include it. But if you are comparing your results to mutual funds, where they are handicapped by how much they can put into any one idea, then it probably isn't fair. Apples to apples, oranges to oranges. Mark Sellers returned almost 25% a year since 2003, yet he put nearly 100% of his fund in Contago last year and look what happened. Risk of the portfolio go hand in hand with how results are achieved. Cheers!

Why not just meet at BRK annual? I'll be there, anyways. Unfortunately, I won't be going to Omaha this year. Going to Toronto next month and Vegas in early June. The gathering here is more for people to just get to know one another, and for me to meet with several people who wanted to have lunch or coffee and things just haven't happened. I figured why not do a larger get together where everyone can meet, talk and network. Cheers!

Very good post Oec2000! I think you straddled both camps well. You should work for the U.N.! ;) What isn't clear is whether Sanjeev's camp is suggesting that buy and trade can actually provide better returns in the long run. To this, I would say we should look to the example of the succesful investors we admire (Watsa, McElvaine, Chou, Cundill, etc) - the evidence is overwhelmingly in favour of buy and hold, imo. To answer that question for you, three of the four are very good friends of mine and whom I consider my mentors. The fourth was a friend and mentor to one of them. Those three are the best investors I know...I would also dare to throw in Sardar and Mohnish in there (recent results notwithstanding). I can only hope to be as good as them one day! Of the first three, two are passive and one enjoys active investment management at times. While they mainly adhere to buy & hold (not unlike myself), they do swing into the buy & trade camp rather regularly. Who here is going to tell me that the CDS investment was a buy & hold, long-term investment idea? It was a pure macroeconomic event-based decision, and used to protect the portfolio while reaping stellar gains. That is more like Soros, than Buffett or Graham. All three adhere more to Graham than present day Buffett. Although when markets make it available, they do like to buy quality for cheap. Prem and Francis are very much old school Graham for the most part. Don't let the recent purchases of JNJ, KFT and WFC fool you. They really do prefer hard assets behind their purchases. Neither buy & hold, nor buy & trade are necessarily better than the other. Neither guarantees better long-term results than the other, as there are many great investors in both camps. It is completely based on execution and the emotional makeup of the investor. Is Tiger Wood's golfing philosophy better than Phil Mickelson's? Is his skill set any better? I would suggest execution and emotional constitution make virtually all the difference between 14 Major Championships and 3 Major Championships. Cheers!

Over the last few years, I've often had offers from people to get together here. Sometimes I try and meet people individually, but it becomes difficult. I was wondering how many boardmembers would like to meet here in Vancouver, BC. I know there is probably at least ten or more people in the area who have asked to get together before. It will probably be somewhere local in mid-May. Please let me know if you are interested. Cheers!

Stock, I'm guessing you were probably not down 50% like many other value managers in 2008. And if you weren't, did you achieve that result without hedging, shorting or market puts? Was it done simply by being long on quality businesses at great prices for the long-term? And having 50% in Fairfax doesn't count. ;D Cheers!

It all comes down to whether you are buying a stock, or a business. If you are confident of the business you are buying into, why worry about the vascillations above and below "intrinsic value" that will always occur as the business grows? You stand to make far more over a long time with very low taxes if you monitor the business, and not the tick by tick. It's just one way of doing things. This business allows any number of players to make a profit in any number of ways. Fisher's way worked for him(and continues to work for me), and others have their way of investing. I was just expanding on my comment about Fisher's method. You can do that with your own personal account, but not if you are managing other people's money. Take a look at all of the value investors who have gotten completely hammered in the last year. Many are complete Graham/Buffett/Fisher acolytes, who had impeccable track records and hold investments for the long term. Now they've done exactly what many of you are espousing (which I espouse as well...in theory), which would not have been a problem if they were looking after their own capital, since they can handle extreme volatility. But suddenly when half your fund is being redeemed and you have to generate liquidity, Buffett, Graham and Fisher go out the window because you are hooped...either close the fund, or liquidate and hurt remaining partners. So in theory, buying and holding quality businesses at great prices is efficient and ideal...but static behaviour is not as easily translated to pools of public capital in distressed periods like we witnessed. Investors don't care about management philosophy when they are panicking about their retirement funds. Cheers!

Parsad sorry I'm going to take these out of order. * You are kind of all over the place and at the same time talking right through my points. Look, I'm trying to make the case that you should never sell an excellent business purchased at a cheap price even if offered a rich price for it. My assertion does not imply that an excellent business is the only way to make money or beat the market, it's not, but I am asserting that an investor would be foolish to give up this excellent business to attempt some other investment operation. Not saying that I would necessarily sell every business I own for any rich price, but why would this be foolish? Summed up, an excellent business that has been purchased at a cheap price is the most optimal investment operation an investor can achieve in the long run. I'm not debating whether it's easy or hard to find an excellent business at a cheap price and besides, you only need to find one in your investment career, the sooner the better . Not necessarily optimal. Perhaps more efficient, but not necessarily more optimal. Peter Lynch had 1500 stocks in the Magellan Fund at one point. We don't invest like that...we don't hold more than 10-12 ideas maximum. But optimal is not the appropriate word for what you are describing. * Now, with regards to my comments about an index. The point I was trying to make was that one could argue that if given a sufficient premium price on your excellent business, that those proceeds could then be channeled into an index. Point being that both the index and an excellent business will allow for a consistent long run operation. Any investment operation short of replacing your excellent business with an index will give rise to questions pertaining to longevity of the that alternative operation. Remember my point is that an excellent business purchased at a cheap price will provide you both longevity and high returns per year (i'm sorry i used 10 to 12 percent, I thought I was being conservative. One would hope the excellent business purchased at a cheap price would imply higher than that, but it's relative anyway, that is, if the excellent business purchased at a cheap price produces 10% per year then that implies that the average business will offer less.) If you are aiming for 10-12 percent, then your method of looking for quality businesses at undervalued prices will hit your mark over the long-term. Unfortunately, or perhaps fortunately, we aren't aiming for 10-12 percent. * You say generally stocks become undervalued due to fear or manipulation. I disagree, stocks become undervalued mainly due to fixations on short term issues at the expense of longer term dynamics. That's what I said...short-term issues result in the fear. Many stocks are also manipulated. * What are Fairfax's durable competitive advantages. Higher than average returns over a long period is a necessary result of durable competitive advantages, but high returns, exclusively, does not necessarily point to durable competitive advantages. I think this is semantics. Some would argue the same thing about Buffett, but I believe anyone would be a fool to do that. * You say, "Buying quality businesses and holding them for long periods of time while beating the markets, is actually significantly harder than buying modest or poor businesses at a significant discount to their underlying asset value. Other than many of the firms we always hear about, time tests the metal of virtually any business. There are only a handful that will exist for any young investor's investment horizon." I disagree. Unless you have the ability to actually purchase enough shares without driving the price up on yourself and resting control of the business in the hopes of liquidating the assets at a sufficient price to those with a more efficient use or making use yourself of the assets more efficiently, then buying businesses in todays world at discounts to underlying assets is a recipe to suffer the ills of managements that will suck out whatever value remains in those assets (before you get a chance to salvage them). If you don't have enough money to buy control, its a dangerous operation. Also, your point is somewhat limited in that you are talking about liquidation value and turn arounds. I'm sure as you say there are ample opportunities to do this, but I again get back to my point, I would not give up an excellent business purchased at a cheap price to partake in this. But this is exactly the way Buffett made his fortune. The competitive advantages at the Washington Post are only apparent to investors like you or me, because it had Katherine Graham at the helm. Otherwise the Washington Post would have been a has-been. Geico's apparently easily discernable competitive advantages are only visible because Jack Byrne saved it, and then Tony Nicely and Lou Simpson grew it. If I asked you to find me fifteen great businesses with durable competitive advantages twenty years ago, you would have almost certainly included Kodak, Boeing, AT&T, Bethlehem Steel, GM, Goodyear, Phillip Morris & Sears. Yet the world has changed enormously in that span, and the competitive advantages of these businesses have been decimated. Or the costs related to their operations destroyed shareholder value like Phillip Morris. Those are just some of the hugely successful businesses that had their world turned upside down over the last decade or two. America thrives because it's citizens are terrific at destroying competitive advantages of other businesses. Why do you think both Google and Microsoft came from the U.S.? Or Amazon and Ebay. Nothing is impossible in the U.S. * I'm not sure about your Geico and WPO examples nor am I sure about their relevance to my points. As to investors identifying their completive advantages, I think some would and some wouldn't, but as you suggest, most would not buy. They would have fixated on the then more recent troubles at the expense of the long term. Buffett even suggest that others where fully aware of the value of WPO, but there belief that the market was going lower kept them out. Well that's exactly right. I would say that perhaps one investor in a hundred would have recognized any durable competitive advantage in those two businesses when they were in turmoil. And only one in 250 would have actually acted on their instincts and invested. Roughly the same ratio as those that actually attach themselves to the value investing fraternity. * You say, "For example, much of the Wells Fargo we bought at $9.50 two weeks ago, we sold out at $17. That cash is sitting there and will be deployed into something we think will be under the same sort of pressure or more likely deeply distressed. Markets don't go up linearly. They bob and weave! Our partners do not have the stomach when volatility hits the way it did last year or early this year. We have to temper that volatility by buying cheap and selling dear. A 50% drop doesn't even make us blink twice in our corporate portfolio, but it does for some of our investment partners, so we have to manage the funds with market risk as a consideration." Again, not relevant to the points I was making, but also, this doesn't even make sense. As you say, once you deploy the money (buy a stock) how is it that you control the other shareholders to guarantee the avoidance of a 50% drop? Forgive me if this sounds a bit like "channeling stocks to win." I know you've read Bill Miller's piece on buying at the bottom and selling at the top (and let's stick to his point and overlook his results) and I wrote something along those lines in another thread (post), so does it not in the least seem to you that this is what you are trying to do? What's the value of Wells Fargo? From your post you seem to imply it's somewhere in between 9.50 and 17, is that so? A 50% drop does not make you blink twice, that sounds like something Buffett would say. If he's the best, are you suggesting you are as confident in your abilities as he, or that some level of willful ignorance is bliss? I think I'm as smart as the next guy and luckily i've never had a 50% drop in a position, but 20% and I'm back at the drawing table checking that I didn't miss something. I blink. Twice. Why do you presume that I would even entertain such a thought of comparing myself to Buffett. I think when people do this, they actually create an antagonistic environment for posts, because you are automatically putting people on the defensive. Probably better to approach it differently. I've had quite a few stocks drop 50% or more on me. Hell, Fairfax in 2003 dropped 70% on me! If our analysis continues to make sense, we continue to buy and average down. If we think we made a mistake, we sell and take the loss. To your last point, okay on the liquidation value, I partially addressed that above and am not objecting to it but mainly it has nothing to do with my previous posts, but as for your notions of intrinsic value, that's a little problematic. What you think a business is worth is not the same as intrinsic value. What you think intrinsic value is is not the same as the real intrinsic value. If you follow what I'm saying then you'll realize that your notions of intrinsic value must by default be a guess. It may be a good thoughtful guess, but a guess implies imprecision and imprecision implies a range that gets summed up by its midpoint in the context of intrinsic value estimates by investors. Short of short term risk free securities, intrinsic value estimates are always a range and the longer you go out the wider that range tends to get. Other aspects of the investment will vary that range as well, but there is always a range from the standpoint of the analyst/investor. He/she after all can not predict the future exactly, but they can make an educated/probabilistic guess. My point is that your probability of sustaining exceptional returns long term using the methods you describe are low. Not to say you can't do it. Just that the probability is low. You are practicing a masked form of market timing, and their are too many variables that, as they have worked in your favor, can also as easily work against you. How can you be so sure? How can you say that with such exactitude and certainty? Or is it that is just what you believe, and anything else is not possible. Keep an open mind. BTW, why did you get into Wells Fargo at 9.50? Why not 10.50? Or 11.50? We've bought WFC on several occasions. This time we happened to choose $9.50 as our execution price. We bought WFC $20 2011 call options at higher prices (around the $15 range down to $11)...which we still hold. We decided that the stock at $9.50 was one of the silliest valuations we had seen in this era and the odds were in our favor that this was an inefficiency. So we bought a considerable amount of stock. We have WFC's intrinsic value pegged significantly higher than what we sold the shares at. But we don't get greedy. We average in and we average out. During the same discussion a couple of weeks ago, we also mentioned that we thought GE's price was equally ludicrous. We bought a ton of GE 2011 call options and some equity. We continue to hold those. As the price rises to intrinsic value, we will average out. If it drops further, we will buy alot more. It's not nearly as complicated as you make it seem. Sorry for the long post, it's just that here I am describing why one should not leave there wife if they think she's as close to perfect for them as they can find, and out come replies to my post that there are other fish in the sea. As if I didn't know that and besides it's missing the point. Jack, if I owned all of See's Candy (or at least 51%), I wouldn't ever sell it for any amount of money. But I don't. If I can't own a controlling interest in any public equity, then there is no guarantee that any excess future cash flows will be allocated in the fashion I would like to see. As much as I love Warren Buffett, Prem Watsa or Sardar Biglari, they are always going to do things that aren't exactly what I would have done. On most occasions, their result will be far better than mine. But there is always the possibility that one event or investment that I don't agree with could take down the ship...think GenRe (derivatives exposure), TIG & C&F, or nearly 100% of capital into SNS. All three are exceptional investors that are far better than I could ever be, but each did something that jeopardized the entire business. Whether you like it or not, unless you control the business, you will always be at the whim and mercy of a manager. If you are fortunate, they will be quality managers like the three I described above or many others out there. If you are unfortunate, then you are done...competitive advantages be damned! We average out of investment positions to prevent that possibility. We aren't going to let an investment run and account for 40-50% of the fund, which would be completely devastating to our partners if that manager makes a horrible mistake. Look at the catastrophes we've seen last year...many people thought AIG and Bear Stearns were impenetratable. As lovely as "buy and hold quality businesses at cheap prices" sounds, the average investor cannot handle the volatility. And forget about the average investor. I bet only perhaps ten out of 100 diehard Buffett disciples can handle it. Take a look at how so many value investors were panicking in the last year. You said yourself that you've never had a stock fall 50%...well Berkshire fell almost 50% in the last year. For many hardened Berkshire shareholders that is too much, and they've been immersed in the Buffett culture. Cheers!

Parsad Let me ask you this, what's your average annual return over the past 5 years. I only ask because when I read your post it sounds like you are compounding money at a very high rate yet at the same time you say "allowed us to keep our lead on the markets," but the markets are down big and if your strategy was really working as flawlessly as you suggest you should be easily trouncing the markets. Jack, if I provide you any numbers, would that actually change your mind? Of course not! Buying quality businesses and holding them for long periods of time while beating the markets, is actually significantly harder than buying modest or poor businesses at a significant discount to their underlying asset value. Other than many of the firms we always hear about, time tests the metal of virtually any business. There are only a handful that will exist for any young investor's investment horizon. Now, the above and your reply to me is a mute point. Well, that's what I figured. I'm debating what's the best logical strategy once you have identified an excellent business at a cheap price, and you counter argue with a few deft trades over a relatively short time span. In addition to that, I'm not sure if Fairfax should be considered an excellent business. And again, I don't think you can apply the point of my previous posts to an average business or poor business. Individually, the poor or average business and even just a good business does not lend themselves to a long enough run which is needed to prove out my points. Meaning the lack of durable competitive advantages is non existent or little existent in these types of businesses and therefore the high rates of returns over decades has a much lower probability of playing out. With the excellent business at a cheap price decades of high average annual returns is a given (assumed). I think it would have been better if you had countered me with an index. At least with an index like the S&P 500 you get the high probability of longevity that is required. If my intention was to match the index, then you are correct. I would simply buy and hold the index. My goal isn't to match the index, but surpass it. In regards to quality businesses, how can you propose that Fairfax is not one or that Coca-cola is? Isn't Fairfax's compounded return since inception on par, if not better than Coca-cola's first 23 years? Your subset of quality businesses that have durable competitive advantages becomes incredibly small using the characteristics you describe. There is a whole other world outside of those businesses where significant inefficiencies can be exploited. Also, you are making the mistake of not only using a small data set, but also during a period of generally lower prices with massive volatility. I suspect that if you were confronted with a moderately rising market for a long stretch, the results would have been very different. Though I will acknowledge that individually stocks are usually pretty volatile over a 12 month period. Actually the data that supports the Graham philosophy is significantly longer than Fisher's. In fact, Buffett's greatest returns came from his partnership days and early Berkshire when he was buying entire businesses utilizing insurance float. While the Washington Post and Geico had certain competitive advantages that would last for a long time, I bet you virtually any investor today (including Buffett acolytes) would not have been able to say that for certain. Especially during the period when Buffett bought them and they were under tremendous pressure and turmoil. Both businesses almost went under at the time. Also, Fairfax and Overstock where or are two heavily manipulated stocks. Instinctively I want to say that they aren't good test for what you are advocating. I'll give that some more thought. Generally, stocks become undervalued due to fear or manipulation. What about WFC and BRK that I mentioned? Are they being manipulated. What about all the distressed debt I've bought in the last few months? Their yield is around 25-28% till maturity. In fact, two tranches mature in another month and a half, where the annualized yield would be about 24% over four months. These businesses have enough cash to pay off all their 2009 and 2010 maturities and the certainty of recouping our investment is probably about 99.9%. Their competitive advantages play no part in the analysis. Lastly, you say, "something cheaper always comes along with investing." I don't know what that means. You've got to define that better. I want to say it's a flawed assertion, but I don't know what you're trying to say. Your statement is a relative statement and it will take many many decades to prove it out. Let me clarify that. I assume an excellent business will be one that will continue as such for many many decades. You say you can always find something cheaper, but if it is "not" an excellent business you can't, within a high probability, even hold out that it will be around 10 years from now let alone decades. But to prove out your notion of a cheaper price you need it to run as long as the excellent business, and as I've defined an excellent business there is a very low probability that your cheaper priced business can make the same long run. For example, much of the Wells Fargo we bought at $9.50 two weeks ago, we sold out at $17. That cash is sitting there and will be deployed into something we think will be under the same sort of pressure or more likely deeply distressed. Markets don't go up linearly. They bob and weave! Our partners do not have the stomach when volatility hits the way it did last year or early this year. We have to temper that volatility by buying cheap and selling dear. A 50% drop doesn't even make us blink twice in our corporate portfolio, but it does for some of our investment partners, so we have to manage the funds with market risk as a consideration. Sorry, one last thing, if you are not dealing with an excellent business or even a good business, it is not at all easy to say I know what it's worth therefore I can trade around that value. You can't do that. It's impossible to use this strategy successfully long term with poor or average businesses. The reality is is that nobody knows what a poor or average business is worth. It's unknowable, therefore you don't have an advantage over other market participants. Unless your telling me you have a device to figure out the average price "guesses" of the other market participants. Jack, it's not about some sort of trading range. Often we'll look at a business' current liquidity relative to their total debt...a net-net. We love those things and have been able to find several in this environment. It's easy to buy a business (good or bad) when you subtract all their debt from their cash and receivables and it is still trading at half that value. We buy things we like when people are panicking, and then we are out by the time they start to get giddy about it. Sometimes we aren't out completely. We average in and we'll average out, so we may hold a little or alot of any one business at any given time. But it is completely predicated on their valuation...getting in cheap below liquidation value/intrinsic value and selling out as prices rise close to liquidation value/intrinsic value. Cheers!

Parsad That's unfortunate that you would sell Fairfax at 2x book considering you have such a low cost basis. I presume that after selling you would look to buy back at a lower multiple of book, but what multiple? 1.5x? 1x? And if it's 1x what if it never gets back there, or what if it gets back to 1x but book value has grown so that it is at a value greater than when you sold at 2x? I've probably done that at least ten times in the last seven years...both in my own portfolio, CMC's corporate portfolio and in MPIC's portfolios. Not necessarily selling the whole investment, but certainly portions at higher prices only to buy it back cheaper. And not even at 2 times book. The last time we did that was just in November when we sold all of our Fairfax only to buy other investments at dirt cheap prices. We purchased in the money call options on the shares we sold for a 3% premium, which was paid back by the dividend in January when we exercised them and got our shares back. Our partners may have paid LT capital gains on that investment, but we made considerably more on that capital when we invested it and it allowed us to keep our lead on the markets. If we had stayed pat, we would have lost ground as Fairfax shares finally fell this year after the 1st Q report. We ended up buying back more of our shares at cheaper prices. We've done that with Overstock on several occasions. With Wells Fargo three times over the last year and a half. As well as Berkshire Hathaway. Each time, we've made anywhere from 20-30% to 300-400%. As much as we love Prem, Warren, etc., we don't fall in love with the stock. I'm assuming an excellent business so I don't want to give people the impression that I'm suggesting these notions be applied to any and all stocks. I firmly believe it's an outright fools folly to sell an excellent business just because you are offered a rich price, and I think Buffett and Munger would agree with me. I think selling an excellent business at a rich price with the belief that you can pick up another excellent business at a cheap price is a very slippery slope fraught with problems. Actually it does apply to all stocks. The stock market gives you this opportunity. For many investors, it is pure folly because they treat it with a casino mentality. We don't do that, but we operate within a fairly strict mandate of buying below our estimate of intrinsic value and then averaging out as we approach it or go over. Sometimes we even take into consideration the economic environment and make a calculated decision to sell...as we did with Wells Fargo. Generally though, the investments we do make, we are content to hold the stock for the long-run. It's just that we don't necessarily have to. The point is that something cheaper always comes along with investing...always! Cheers!

With less than three weeks to go, we have 40 guests coming to the dinner this year. To date, the list of attendees includes: - Sanjeev P. - Alnesh M. - Andrew C. - Paul R. - Eric A. - Jim B. - Brian B. - Stephen C. - Stephen C. (Crip) - Jordan C. - Marc C. - James E. - Gregory F. - Stuart F. - Stephane G. - Leon G. - David H. - Simon H. - Gary H. - Tom J. - Charles K. - Stephen K. - William M. (possibly a guest) - Stefaan M. (possibly a guest) - Mark M. - Eng-Chuan O. - John P. - Norm R. - Al R. - Keith S. - Brian S. (possibly a guest) - Jeff S. - Nicholas S. - Martin Van B. - Jack W. - Ilya Z. If you haven't already given me your RSVP for the shareholder's dinner, then please do so. Details about the dinner are below. Cheers! For the fourth year in a row, we will be holding a Fairfax Financial Shareholder's Dinner in Toronto. About nine people showed up the first year, and last year we had about 30 shareholders attend. For the last three years, Sam Mitchell and Francis Chou have graciously attended, where they have entertained questions from shareholders for over an hour. Many attendees left with sage advice that served them well through the volatility of 2008! Fairfax Financial Shareholder's Dinner Tuesday April 14, 2009 Joe Badali's 156 Front Street West Toronto, Ontario (416)977-3064 Drinks: 6:30pm-7:00pm Dinner: 7:00pm-9:00pm RSVP: sanjeevparsad@shaw.ca

Old School Graham taught to think like an intelligent private business person in buying and selling publicly traded equities. The only downfall to the theory was that private business people put their businesses up for sale much less seldom than does a common stock operator. Buffett obviously converted himself to the business ownership aspect -- but with a major cavaet: that he would only buy outstanding franchises. Don't get me wrong, I have the utmost respect for Graham -- however, if people are buying sub-par businesses do so with eyes open (and perhaps 'trade often' would be good advice). Time is not necessarily a friend of the sub-par business as it is with the outstanding one -- tremendous margins of safety are of the essense. I don't disagree with you at all Uncommon. Though the operative word is "private" business when it comes to Berkshire. Public equities have a bid/ask on them every second, of every hour, on every day. Public businesses don't go on sale that often. Cheers!

Hi Jack, No there is nothing wrong with what you are proposing. What it does leave you open to though is market volatility such as what we are currently experiencing. Look at Wesco for example...COST, KO, AXP & WFC. That's pretty much it for the last ten years, and Wesco has done perfectly fine. But the portfolio naturally experiences tremendous volatility during that ten years. Buying well below intrinsic value and then selling when the investment is at or above mitigates that market risk. Yes, you may pay slightly more in taxes, but generally returns will be slightly better while volatility will be less. Even Buffett suggested that he should have sold Coca-cola when it was over $80/share back in 1998. If someone offered me two times book or better for Fairfax, I would be a seller, not a buyer. This is not present day Buffett, but old school Ben Graham. Cheers!

Yep, Another Buffett myth blown completely apart. He has always used economic analysis particularly at times of great flux in the economy. No, not really a myth. What Buffett does with Berkshire is very different than what he may have done in his partnership days, early stages of Berkshire, or currently in his own personal account. Berkshire for some time now, has to operate under the assumption that Buffett won't be here in a decade. Thus "buy & hold" is what has to be reinforced in shareholder's minds, because that is what the vehicle is now. It has to run autonomously because that is pretty much what will be happening when he's gone. It also happens to be a public trust in many ways, since virtually all of his stake will go to charity. It can't operate based on exploiting macroeconomic factors because that means someone has to actually make active decisions. Finally, the "buy & hold" philsophy is espoused for very obvious reasons in economic terms, because Berkshire is trying to acquire private businesses where the owners probably don't want to depart with their stake. The fact that Berkshire promises to never sell those businesses, is what gives these owners the comfort of selling to Buffett. Otherwise they would probably tell him to take a hike! So "buy & hold" has a very specific mandate, that probably doesn't apply to the investor with some ability. It really became the twisted mantra with which mutual fund and investment companies sold their wares. Buffett tried to turn that around by encouraging those without much aptitude for investing to buy and hold index funds instead. Cheers!

Yup, that's an important distinction Eric. I would propose that half that drop is also primarily related to financial stocks. There are alot of non-financial companies that were dragged down with the market, even though their earnings are down less than 10-15%. Investors should remember that they aren't buying the market, except those that jumped in with both feet and bought index funds or ETF's in the last few years! >:( Cheers!

Really? FFH's stock price is flat today. Maybe you should add a salad or fries to your sandwich...... Hey I think Prem should just buy shares back, rather than me carrying the load...literally carrying the load if I eat those fries! Cheers!

What are you guys holding right now? A sandwich in one hand, and a cup of coffee in the other. I'm typing with my toes! ;D Cheers!

Those that can...they do! Those that can't...they write! Let guys like Olive write what they want. I remember Fabrice Taylor writing often about how Prem couldn't run an insurance company, yet Taylor ran his magazine "Frank" into the ground in less than a year. Buffett is being treated about the same as when Jordan decided to take some time off and try his hand at baseball. To the press, you're only as good as your last game, and it was an off year for just about every investor out there. What did Jordan do when he came back after his stint in baseball? He went out and won three more championships! Cheers!

I have no problem with Congress trying to do anything to get the bonuses back. The U.S. government owns it, and they should treat it like they are the owner. I have a problem with the moral outrage that they show, in particular the shellacking Liddy took, when he's working for peanuts to turn this thing around after being brought in specifically to do so. How about each Congressman take a pay cut for missing the boat too, as well as Chris Cox, Alan Greenspan, Hank Paulson, Ben Bernanke, Sheila Bair, etc. I believe the taxpayers pay their salaries as well. What about Bush & Cheney? Cheers!