StevieV

Well, that is true. There is a price at which I would buy BH. But, as a practical matter, I think it is almost a certainty that I won't buy the stock. The discount at which BH would be attractive to me is so large, that I can't imagine the stock price would get there. In my mind, it is too hard for investors to succeed when management has their interests in mind, to invest in a one where they don't.

It seems to me as though true value should perform over a time period as long as 10 years. If I buy an undervalued stock, it may remain out of favor for a while. However, eventually, the growth of the company, dividends, buybacks, etc., should eventually lead the stock to outperform. That may not happen over 1 year, 2 years or perhaps even longer. It should happen over a 10-year time period. If they don't outperform over 10 years, the problem may be that Mr. Chou (or whoever) is not actually buying "value" stocks, at least as I would define the term. Someone above mentioned Sears and Valeant. I am not sure if Mr. Chou was invested in those stocks, but those certainly were not values (i.e., worth more than what investors paid for them). Rather the dreaded value trap.

I put WELL and KIM on my watchlist a month or two ago, near when this thread started. I am not convinced that REITs are SO cheap. At the end of the day, I think a simple yield + growth in yield formula gives you a reasonable idea of potential returns. I think retail real estate is going to be challenged for obvious reasons. Overbuild of retail, failing brick-and-mortar stores and, of course, interest rates. WELL I see as in a good industry. It still has to be sufficiently cheap to be attractive. I am having trouble quickly pulling up dividend history and growth rates because of the ticker change. However, they are yielding 6.7% now. To be attractive, I think they need to be growing the yield at least 4%. More than that to be "cheap." They are cheaper than when I first put them on my watchlist. Maybe they are getting into the attractive range, but I think not a screaming buy. KIM is more in the teeth of potential problems.

The earnings transcripts are still available and don’t disappear behind the paywall. That is the main thing that attracted me to the website in the place. I thought that they were starting to put old transcripts behind the paywall. Only the latest quarter available for free. I am also having different experiences on different platforms. If you can only access the latest articles, that greatly reduces the value of the site to the free user. As you mention, many articles are far from great. However, when you can go back a couple years and see all of the articles about a particular company, plus the transcripts, that adds up to some value. Think about the value of the threads here if you could only go back a week or month. Hope they reverse the decision. Not tempted to pay for a subscription at current pricing and quality.

Thanks petec and Cigarbutt. Those are very helpful thoughts about the insurance float. I would also expect changes to the investment leverage to be gradual (though perhaps lumpy). Meaning, Fairfax isn't going to go from 2x leverage to 1.5 or 3x leverage overnight. That would play out over a number of years. On the lumpiness side, it could go into a decline until a harder market, and then reverse.

They are using float. The holdco cash is probably going to be used to buy the OMERS stakes in Brit and Eurolife when those agreements come due. But I wouldn't necessarily differentiate between float and holdco cash. The point is that float levers your equity - you get to keep the investment returns on a far greater amount of money that what you invested in the business. Here's how I understand it: The leverage is derived from the fact that when you sell an insurance contract, the buyer effectively lends you money (premiums come in now, claims go out later, and you get to sit on the money in the meantime). The cost of the leverage is derived from the CR. The amount of the leverage is derived from the value of the premiums you write and the duration of the contracts. So for example, if you write $1bn in premiums every year on contracts that expire after a year (e.g. a typical house insurance contract) you'll have about $1bn in float, because you get to sit on one year's worth of premiums before the claims go out the door. If your CR is 100, then that leverage is cost free. Bit if you write $1bn in premiums every year on contracts that expire after 10 years, then (once the business is mature) you'll have about $10bn in float, because you get to sit on 10 years' worth of premiums. If the CR is 98%, then you're being paid to borrow that money. Of course, long tail is riskier than short tail - you can't predict the exposures so well and something you didn't foresee, like asbestos causing cancer, can come back to bite you - so you have to be very careful with underwriting. So, let's say you have $1bn in equity and you write $1bn in premiums every year on 3 year contracts. You'd have $4bn in investable assets ($1bn equity and $3bn float). If you can underwrite at 102% you're going to lose 2% of premiums a year in underwriting profit: $20m. If you can invest $4bn in a 7-year Seaspan debenture at 5.5% you're going to earn $220m in interest for a total of $200m in annual income, before holdco costs and tax. If you've also got warrants exercising at $6.50, and the Seaspan share price goes to $13, then towards the end of the debenture you're going to exercise the warrants for $8bn(!!), paying by forgiving the debenture. Not a bad return on your $1bn of equity. That's the impact of levering equity upside using float. A few points to note: - I have oversimplified the relationship between contract duration and float, but I think the basic principle holds. - Fairfax currently lever their equity about 2:1 using float, not 3:1. But they could probably double premiums in a hard insurance market. If you double premiums across the board it would take time for float to double, but logically you'd get there if the hard market lasted long enough. Unfortunately I suspect the regulator or the ratings agencies would panic long before they got to 4:1 levered, but there's scope for some growth. - underwriting profit in any given year is calculated off the $ of premiums, not float. That said, you can look at the float and know, if the average CR over all those contracts is 98%, that you're getting paid 2% to borrow. - float gives you huge investing leverage whether or not the CR is over 100% - it's just that the cost of that leverage is lower with a lower CR. That's why this model is so powerful for compounding if you can get both underwriting and investing right. - the debenture + warrant deals are great in theory because the downside is bondlike, so the regulator looks at these as bonds, but in most cases the warrant strike price is quite close to the share price at inception, and the shares look reasonably cheap, so there is near-full equity upside. That's powerful, if they can do it with a significant proportion of that big bond portfolio. If they can do $1bn a year on 5-7 year terms then they can basically convert $5-7bn of that bond portfolio into securities that have bond downside but equity upside. That more or less doubles their equity exposure but only on the upside. Get that right and lever it with float and the impact on shareholder's equity could be spectacular. I hope this helps but sorry if I am teaching grandma to suck eggs. petec, My only quibble is that I don't believe it is as easy to increase the leverage as your post may imply. They need to find profitable insurance to write (100% or less CR) or acquire. If Fairfax does increase book value by 15% (straight book value, not per share), it seems to me as though it will be a challenge to maintain the current leverage. If they grow 15%/share/year, and some of that is through share buybacks, that should be a little less difficult. That is one of the reasons why I like opportunistic buybacks. It helps alleviate some size/growth problems. I think I have that right. Any reason you think maintaining the leverage won't be an issue? StevieV

I see. My bad. Taxes, expenses, etc.

Vinod, Thanks for correcting my calculations. Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations). My earlier post on this should be ignored. I was reading and posting too fast. 7% for the equity portion of the portfolio and 7% for a blended portolio is much different. A 14-16% return for the equity portion isn't plausible. I need to look more closely at this later today. The numbers below are a little hasty. It looks to me as though the book value is about $12.5B US. A little under $10B CAD. (most I see are per share; so perhaps I have this total book value incorrect). If there are $40B in investments, at a 95% combined ratio, why would they need a 7% return to grow book at 15% (about 1.8B USD)? Anyway, I've gotten myself confused here and need to take a fresh look. I guess I need help here. Here is the quote from the letter. "With $40 billion in investments, a current run rate of $11.5 billion in net premiums written and $12.5 billion in common shareholders’ equity, we need an investment return of approximately 7% in order to achieve an annual 15% increase in book value per share, assuming a consolidated combined ratio of 95% at our insurance operations." 7% return on $40B is $2.8B. $2.8B would much greater than a 15% increase in the book value. It seems to me as though they are subtracting from the $40B in investments to get the 7% number, but I don't understand the steps. Some of the 40B is certainly necessary for claims, but they should keep the investment returns. That being said, they don't have a free hand on the entire 40B given the necessity to be able to pay out claims. Is that what they are taking out, or is there something else? Thanks in advance for any assistance.

Vinod, Thanks for correcting my calculations. Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations). My earlier post on this should be ignored. I was reading and posting too fast. 7% for the equity portion of the portfolio and 7% for a blended portolio is much different. A 14-16% return for the equity portion isn't plausible. I need to look more closely at this later today. The numbers below are a little hasty. It looks to me as though the book value is about $12.5B US. A little under $10B CAD. (most I see are per share; so perhaps I have this total book value incorrect). If there are $40B in investments, at a 95% combined ratio, why would they need a 7% return to grow book at 15% (about 1.8B USD)? Anyway, I've gotten myself confused here and need to take a fresh look.

Vinod, Thanks for correcting my calculations. Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations). My earlier post on this should be ignored. I was reading and posting too fast. 7% for the equity portion of the portfolio and 7% for a blended portolio is much different. A 14-16% return for the equity portion isn't plausible.

I think that is a fair concern, but if forward returns for the market are low, that could still mean significant outperformance for Fairfax. Let's say they add and subtract no value in their investing. If the market returns 7% CAGR over the next 5 years (and Fairfax matches the market), Fairfax thinks they can grow at 15%. I don't think 7% is unreasonable, but the market may very well fall short of that. Let's say the market returns 3% (and, again, Fairfax matches). Fairfax wouldn't hit 15%, but could do very well on a relative performance basis against the 3% market. Lots of assumptions baked in. Just saying that Fairfax might be a good relative performer in a challenged equity market.

If they get the 15%, I would expect some multiple expansion. That would give shareholders a somewhat better than 15% return. Certainly could double in 3-4 years if they get 15% BVPS growth over that time. Of course, actually achieving the 15% is the key.

I think that’s a fallacy. Having a huge fleet of cars is going to be expensive to set and expensive to mantain - It’s today and it will always be. Having a real and huge network of cars/drivers on demand an the digital ecosystem supporting that network is the most valuable thing here. As mentioned in my post, I think car companies themselves and rental car companies are natural competitors. Car manufacturers should have some advantage by making the cars and rental car companies do maintain a large fleet of cars. Uber/Lyft don't maintain any fleet of cars today. Just as anybody can replicate the ITunes’ model (but in reality is not just that easy!), anybody would be able to replicate Uber’s model but it’s not going to be that easy! I don't think Uber's current model is easy to replicate, but I think the AV one will be easier. At least because the two-sided network mentioned above, will become one sided. ------------------------------- In any event, I don't think the margins will be there. As I understand it, right now, Uber loses a ton of money, and that is without a very good deal for drivers. I think the question/proposition above was that the company or investors or someone says that they can make money with a shift to AV. So, AV has to be not be better than the human driver model. It may be better from a customer standpoint, but I think it will be easier to replicate and, so, a tougher business for Uber. Could be wrong for a lot of reasons. Uber could be under-earning during its growth phase and it could be profitable today. Perhaps they will have a subscription model that will reach such scale that it will be difficult to compete. Perhaps other competitors won't enter the market. Lots of other things I could be missing. But, if I had to guess, I'll stick with my original answer.

The "let's use our drivers as guinea pigs to prove the platform can work then undercut them with our own fleet of AVs" model has always struck me as funny. Good point. I don't see the driver network as a defensible moat for them ,.... Where I see Uber and Lyft currently having a moat relative to taxi companies is in the platform used to hail drivers. I am not sure we understand each other here. IMO, the reason why you or I would have difficulty starting a ride-sharing company today, among others, is scale. People use Uber and Lyft because they are well-known and available. I can go to many cities and be confident it has Uber and there are a reasonable number of Uber drivers around, so that I can get a ride. Drivers want to be with Uber or Lyft because they have the customers. I called that the driver network, but perhaps network effects or scale would be more appropriate.

Yes, I think they do have a defective business model. They don't make money now. I don't know when AVs will come, but when they do, I agree that they won't have a competitive advantage there. The current MOAT is the driver network. When there are AVs, why won't the car companies directly win that business. Or rental car companies. Or folks signal their own car to pick them up. I think that will be a tough business and I don't see that Uber will have a big advantage.

I mentioned upthread that I believe Tilson was stating 6% IV growth without counting the cash build, which he put at 10,000/A share. He also later used a 6-8% IV number. So, that implies a higher IV number. I am not sure I am correct here, but I believe that is how Tilson is putting things. I think it is a little confusing, as the IV growth should include the value of any cash build. I think 8-10% IV growth/year over the next 10 years is a good estimate. If you buy at a good price, I think that you can boost the 10-yr CAGR you'll get as an investor a percentage point or so.

I joined you jokers by initiating a small position this morning. Looking forward to some good returns, and continued interesting posts on this board.

Tilson calculates the intrinsic value growth and the cash pile growth separately? Slide 13 shows 6% IV growth + $10,000 in cash build/A-share. It seems to me as though the cash build would normally be included in the growth of IV. Putting in the growth in cash, the IV growth projection bumps up a few percent. That makes more sense to me. Even if BRK is very safe, 6% growth in a stock isn't something to get excited about. On slide 22 it states an IV growth of 6-8%. If that is ex-cash, and cash adds a few percent, then that makes more sense. High single to low double digit growth in IV in a safe stock is a different story.

I am also in the camp of buying back shares. However, at least for now, it seems as though Buffett isn't interested in a buyback. But what about the buyback threshold? Well, the buyback threshold hasn't resulted in much of an actual buyback. It is more of a stock price support plan than a buyback plan. I doubt changing the threshold to 1.25 or 1.27 will do much to change that. I am sure Mr. Buffett knows that as well. If he wanted to spend significant cash buying back shares, he would have done so. So, I have to assume, he doesn't want to. I don't see BRK avoiding a significant capital return plan at some point. If you buy-back 3% of your shares and pay a 3% dividend, you don't need huge outside opportunities. If you retain all the cash, you do need huge acquisitions.

DIS. Somewhere just under $200B. How large of a bond offering could BRK pull off? Largest ever is Verizon at $49B.

I've mentioned elsewhere that I own Peyto and Pony. They are relatively recent positions. The risk is that the Canadian natural gas sector is just a bad place to invest. That risk is not insubstantial. On the other hand, I think both Peyto and Pony could double from where I bought them in relatively short order, certainly within a year or two.

On GNW, my relatively uninformed guess is that the takeover is not going to go through. Obviously, given the spread, the market doesn't believe it will go through. I am not sure about management. Two big questions: (1) Will they handle the buyout well? To gurpaul88's question, would they accept a lower price from China Oceanwide? There has been some chatter, but I don't particularly see that happening. I think the bigger risk to the buyout is from not getting approvals rather than selling to China Oceanwide at a lower price. (2) Is management preparing in case the buyout doesn't go through? As alluded to by Patmo, operations seem to be going better, but management's comments have been all-in on the buyout. Not sure if they are properly preparing for the possibility it is not approved.

In general I agree with your post, StevieV, What I was trying to express, was that it has has been hard for me to suppress my mental propensity to buy the techs. It is that propensity, that I personally find hard to cope with. I like them all [the techs], and what they do for us all, it's just too much GARP investing for me. Makes sense. I tend to think BRK shouldn't be part of a great individual investor's portfolio. It is not the type of company Mr. Buffett himself would buy at low capital levels. It is not something I would expect Packer to buy, or that I would probably want him to buy if I was investing with him. Owning stocks like BRK over a longer term and without leverage is a drag on the 25%+ CAGR returns that someone like Packer is achieving (or Pabrai aspires to). Given my current allocation and strategy, it would be very tough to have those type lalapalooza type returns. I have not proven that I am a great investor and, for various reasons, want some more conservative companies. I am generally fine with that. I do however, sometimes wonder whether I should follow a strategy where sustained higher returns of the lalapalooza type are at least possible.

"The real problem" here is, what's going on in ones brain with regard to "opportunity cost" - the techs have been smoking BRK dearly for quite some time. It's just so increadibly hard to cope with, mentally. Surprised that you would say that. BRK doesn't seem like a particularly hard hold to me. It does not face any clear existential threats. The intrinsic value marches steadily upwards and the stock price has moved up reasonably as well. If you hold a retailer in today's environment, you may have real concerns about the business model. Restaurants are hard to hold - something like KONA mentioned here. A high flyer like Tesla. As I understand it, Tesla loses money on every car. Will that turn around at some point? Will government incentives be reduced and hit adoption? Will Tesla be the winner? If you are looking for 20% CAGR returns over the longer term, you don't hold BRK. There will most certainly be stocks that outperform BRK over the next 2, 5 and 10 years. Some stocks will double over the next 2 years. I hold some that I think have that potential. BRK stock will not double. On the other hand, BRK is reasonably predictable. It will not only likely survive, but would likely become more valuable if the economy hits the skids (through deals, stock purchases and acquisitions). Very likely to trade materially higher than today in 5 and 10 years.

How can one be sure that Mr. Buffett is not suggesting that 1.2 book is a 50 cent dollar? Below is what he had to say in the 2014 letter (published in early 2015). This cheery prediction comes, however, with an important caution: If an investor’s entry point into Berkshire stock is unusually high – at a price, say, approaching double book value, which Berkshire shares have occasionally reached – it may well be many years before the investor can realize a profit. In other words, a sound investment can morph into a rash speculation if it is bought at an elevated price. Berkshire is not exempt from this truth. That at least certainly implies that 2.4x book value would not be fair value and, thus, that 1.2 book would not be a 50 cent dollar. IV may have moved more away from book value in the last 2 years, but not significantly enough to change that. Also, IMHO, all valuation methods point to 1.2 book not being a 50 cent dollar. For example, SlowAppreciation's solid write-up does not arrive at a conclusion that BRK is worth anything near 2.4x book. Anyway, I think that BRK is a solid company and may be a good investment here. However, when I say a good investment, I am talking about 8-11% growth in IV/year plus, perhaps, a little multiple expansion depending upon when you sell.