rb

Doing nothing is one of the hardest things to do in investing. I suggest picking up a book or picking a hobby. It's summer... go outside. Most importantly DO NOT watch money TV like CNBC and Bloomberg. They're full of it and don't know much of anything.

I think you're right. If this continues (if history is any guide, there is a long way to go) the public is going to start looking for someone to blame. The articles are already coming out about the "greedy realtors" and alleged fraud they conducted. When that happens, I hope government will be able to grow a backbone and push back to make the real estate market more transparent. There will be other people sought out to blame for this. We have already seen "foreigners" being named as one of the parties. Another would be the banks-- I am sure banks are already working on their defence. Another party to blame would be the government policies themselves, especially the CMHC; where the taxpayer directly insures the mortgage lenders. That time will likely come in the next couple years. Sadly, everyone who has participated in this mania had a role to play. But human beings being who they are, would rather look for a scape goat than take a cold hard look at their own actions. Oh course in the future months and years you'll have whole bunches of smug "investors?"/homeowners who were swaggering around like masters of the universe turn up and yell at the sky "GOD?! Why me?" Yes.. they'll blame everyone but themselves. Just like other great bubble, there will a lot of blame to go around as everyone was feeding at the trough. Banks.... sure probably they deserve some. When the lawsuits start coming in we'll see how solid those mortgage applications really were. The government? Sure some there too for continuously increasing CMHC limits. But that's on the political side. CMHC itself actually looks very well reserved. It may come out the other side looking like despite it all it behaved the way an insurance company should. But if the government would have stepped in to do stuff you can imagine the screams: REGULATION! FREEDOM! blah, blah, blah Realtors? Hell yea... they're greedy and they're majour sleazeballs. But everyone knows that realtors are sleazeballs. They went along with it because they could taste the mirage. Yes they will be hard breaking stories. Nobody feels good when the young family with 2 kids looses their home. But yea most of these people brought it on themselves. But what really gets me amped up that a lot of innocent people are gonna pay for this. The factory worker, living responsibly, no HELOC and saving 15% of his salary is gonna loose his job because of this. That is infuriating.

Well yea the reporting is pretty shit because any information that comes in is from the real estate boards which hoard data like crazy. See the lawsuits between the government and real estate board about making data public. The boards are fighting tooth and nail to prevent it. Also media organizations have become conditioned to copy and paste RE board press releases because for such a long time there was only one direction -up. So happy days. Who cares about details. If the lump goes on (I think it will) and shit gets real - foreclosures, tears, etc - I think coverage will change dramatically. As in the big short - right now it's just a gully.

6% month over month drop in the benchmark. 19% off from April. Pretty brutal.

Why is it interesting?

Your right it is. So let me correct what I said. Brand's whose reputation is largely based on image will have a much harder time than they used to. I am thinking here of a brand like Coke. Why is Coke superior to other Colas? Brands will only have value if they actually do provide higher quality and greater value. Google is an example. Their brand reputation is not the result of advertising. Continually providing higher quality and greater value than all other competitors is in my opinion a lot more difficult than controlling distribution channels and spending large amounts on advertising. This implies the durability and value of good brands cannot be taken for granted. Each brand is only as good as their latest product. Ok, if I'm understanding your post right is that the detergent category doesn't count because it provides adequate value to consumers. So we should move on to Coke which in your view doesn't and they only buy it because of bullshit TV advertising and because of its massive prowess in distribution. So let's unpack that. Firstly, the thing about marketing is that you message to consumers, and then the consumers make up their minds what the value of your product is. If messaging can continue, then how are people's attitudes gonna change? Advertising happens in many forms and it follows eyeballs. There was a lot in TV because that's where the eyeballs were. When TV declines it'll move somewhere else. If messaging can't continue, then internet advertising really is shit and Alphabet and Facebook aren't really worth that much. Secondly, yes distribution matters, but mostly in setting up new markets, winning new minds, etc. If we're talking Coke vs generic, the internet really only affects Coke's grocery channel. Every grocery store I've walked into in North America and most of the world really carried generic cola alongside Coke. So it's not like people didn't have access to generic cola. People had access to generic cola and still chose coke. Amazon isn't gonna change that.

We buy some kind of no-name detergent that costs 50% of what Tide costs and washes as well as Tide from what I see. But clearly a lot of people believe in what rb wrote and (continue to) buy Tide. 8) Its not the cost that I think is the issue. Its the advertising. Go to any supermarket and you will see Tide. Watching tv you were used to seeing Tide commercials. If you never saw a Tide commercials why buy Tide specifically? Rb talks about an agreement but he never explains how the agreement got initiated. Why Tide? There are only a few possibilities: 1) advertising 2) he tried every single brand of detergent and Tide was best 3) word of mouth. My view is that most brands today were built on 1). Google's brand was mostly based on 3) The way I buy currently on Amazon is to do a search and then look at most popular and highest rated product. Right now Tide is pretty highly rated but so is Persil...whatever the fuck that detergent is. Who knows I might buy Persil. Well messaging... Brands broadcast their value prop. What you're effectively saying is that with the decline of broadcast TV brands will not be able to communicate with consumers. That is a really big statement to make. ... And the highly rated Persil is a premium brand detergent from Europe made by Henkel (a major European CPG), essentially the main competitor to P&G in premium detergent segment (Tide is not P&G's premium brand in Europe). So the 2 highly rated detergents on Amazon are 2 giant premium brands.

We buy some kind of no-name detergent that costs 50% of what Tide costs and washes as well as Tide from what I see. But clearly a lot of people believe in what rb wrote and (continue to) buy Tide. 8) I'm sure what you say is 100% correct. I'm also sure that there is one or more likely several detergents that wash just as good or nearly as good as Tide that sell for less. However at the point I am in my life it's not worth it for me to spent the energy/time/money/brain bandwidth to find it. So part of my agreement with Tide is you keep washing cloths really well and I won't look for others. But different people are at different points or have different views and different agreements with their brands. Such as I was pretty much as good as tide and save you a bunch of money. Then that's your agreement with your brand. The range of agreements it's endless, but they're there. That's how brands work and that's why they're powerful. Even the "Angel Feathers" detergent has an agreement with its customers. I don't exactly know what it is but it's there. I imagine it goes something along the lines of you give us a lot of money and we'll enable you to be obnoxious and fit in with your obnoxious friends.

Can you tell my wife? We make our own soap and cleaning products at 2-3x what it would cost and for a lesser product but it makes my wife feel good. The % of people who actually do this are still tiny. Looking back the only thing that I worked out easy and saved money was cloth diapers and actually found that was way better than disposable. We spend a large amount upfront ($300 - 20 @ $12-15/diaper) and then a second batch a few months later when we needed more. So $600 all in. My understanding is the average family goes thru $1-1.5k in diapers per kid. For the first 2 months we did disposable and we did disposable at night so they would sleep thru the night. All day was cloth, every few days we would do a load of diapers and then we had a drying rack where we would hang up the covers to try overnight to the next night and normally dried the diaper inserts in the dryer. Then the next night take 20 minutes and stuff the inserts into the cover so that they were ready to be used. Best part was that all 3 kids were potty trained (daytime) by 2 -2.25 years. Disposables do such a good job of wicking water away it doesn't bother them. They hate this and wanted to be done at 2. Easy. Nights were different. It seems that maybe you guys are a somewhat different family with the soap making and all. Yes the disposable diapers are more expensive than the cloth diapers. Their value prop is that you don't have to do the work of washing, drying and inserting. This is under the assumption that new parents are so tired from all the work that comes with a new kid that the last thing they want is an extra chore to deal with the cloth diapers. So you're paying the extra $800 per kid not to deal with that. All in all the price seems reasonable. In terms of conversations about disposable vs reusable, propose to your wife that she switch from disposable tampons to cloth ones... See how that conversation goes. 8) << this site does not have a devil emoji>>

I second LC the demise of CPGs and brands is overblown. A brand is essentially a promise/agreement between a company and a customer about a product. I don't really see how the internet changes that essence in a dramatic way. Yes, companies have to communicate their promise in different ways, and yes the gob got harder because you have all these extra communication streams but that changes the essence of the brand. Since we were talking about tide, let's look at that because I am a customer. Tide is a premium detergent and it costs a couple of bucks extra than the other ones. I don't buy Tide because I saw an ad on TV or because Wal-Mart stocks it. I buy Tide because we have an agreement - I pay the extra couple of bucks and then drop my clothes in the washer with a bit of their product and a little while later my clothes come out clean. No muss no fuss. Up to now Tide has kept it's end of the bargain. So i keep buying Tide. If Wal-Mart stops stocking it I'll buy it somewhere else. If Tide breaks it's promise I'll check out other products. OddBall has mentioned the "Angel Feather Detergent" that costs 3x more and that appears to have a market today especially with a certain demographic. However this is a fairly recent development and I'd be careful about extrapolating that too much. I don't know why it's happening. Maybe it's because Millennials haven't been baby making machines (yet?) and some have extra money to throw around like drunken sailors. If that's the case this will reverse quickly when/if they start having kids and have less money to spend on shit like that. However I don't really know why it's happening and I don't think anybody really does. What I do know is that history has proven that value for money has won time and time again. Let me give you another anecdote: 2 weeks ago I was down in Niagara peninsula visiting some friends I haven't seen in a while. Niagara is an agricultural region that produces a lot of stuff, but mainly wine and fruit. It also gets lots of tourists (Toronto is next door) and has a lot of restaurants. In the past couple of years they've gone hard into the whole locally produced/locally sourced. So I take my friends out to dinner and at the restaurant the waiter gives me this great obnoxious spiel about their locally brewed beer and locally distilled spirits - as if that's any indication of quality. So now I have to unhappily shell out $15 for a pint of beer that some dude brewed in his basement for all I know. As if there was anything wrong with a $6 pint of Heineken that I was sure I was going to enjoy due to our brand agreement.

Thanks. Interesting read, the volatility stuff especially. Current levels are indeed low and mystifying. Consider this: Every crash or crisis in modern times carried with it higher levels of volatility than the one before it. We'll see what the next one brings, but in my opinion it is foolish to underestimate volatility.

So apparently Goldman is starting an online lending platform against securities collateral. Link: http://www.reuters.com/article/us-goldman-sachs-lending-idUSKBN1AC0B4?il=0 What are they actually doing here? Are they moving into the margin business? Doesn't seem much like a Goldman business? Do you guys figure there's some brilliant masterstroke here or are they just grasping at straws in a sign of desperation?

Well isn't this how it always was? Back in 2012 I took for myself a huge helping of BRK around 80. It was a screaming buy. It begged you to buy it. But what were people debating then? They were wondering whether it was a good time to buy BRK. They were thinking it may be left behind because WEB wasn't buying gold which was tipping upwards (does anyone remember gold?). Now at a significantly higher multiple people are convinced BRK is cheap. Now you have comments from people saying that well some pockets may be overvalued but overall market is well priced with S&P at 2,477. At about the same time I was gorging on BRK the S&P was somewhat below 1400. BRK was cheap but so were most other things. Where these people "pockets of overvaluation" people vacuuming up stocks back then? After all they were a bargain compared to what we see today. The answer is no. They were debating risk on, risk off back then. So give me a break with the "pockets theory" or the extended Goldilocks stuff or the indexing... this is version 2.0 of the great moderation. How did that work out? Remember late 2015? The S&P had a 10% freakout because China essentially passed a fart. Earnings are not in a much better place today than they were back then. If we were to revisit the early 2016 lows we're looking at a 25% drop in the S&P. But we're ok because what? Trump's gonna save us? Not much has changes since then. You have massive instability in the US. The EU is off the ledge because they've had a couple of better prints, but they're not far off. And China is not in such a great post either, definitely not much has changed since the 2015 fart. So where is this great confidence coming from? I get back to my original question on this thread that nobody bothered to answer... what is a bubble? 20% overpriced? 30? or are we ok deluding ourselves until we go to 50% overvaluation?

Can you please elaborate on how you get GE at 15.6 P/E.

If you could get better GIC rates from big 5 better than Gov't Canada bonds you may as well go for it in excess of CDIC limits. Believe me, if one of the big 5 goes tits up you'll have much bigger problems than a haircut on your 10 mil. The problem is whether you can get the GICs. They're basically a retail product and don't take in 10 mil deposits.

You're disagreeing strongly with Buffett (among many others here). Of course, interest rates are not the *only* factor, but they're a big one. Lower P/E's elsewhere also have to do with other kind of risks (ie. political, demographic, or just the opportunity cost between markets with different prospects), so that worse markets need higher equity-risk premiums over the risk-free rates (or if the local interest rates are even risk free -- don't trust Venezuela's central bank!), but there's not doubt in my mind that all else equal, as Buffett says, interest rates "act like gravity" on stocks. Well TwoCities is right but perhaps for different reasons. Yes, the level of interest rates affect asset prices. That is the basic tenet of finance. But look further. Why did you get low interest rates? To compensate for a shitty economy. So the shitty economy has a negative effect on asset prices and the lower interest rate a positive one. These two factors negate themselves to a degree, and correlations get murky. To go on further on rates, higher rates don't just happen out of the blue. Higher rates arise to cool down an overheating economy. Overheating economy good for asset prices, higher rates bad. Again some negating effects that blur correlations. All of this stuff is ceteris paribus. So overall stock prices aren't that much correlated to rates because of other effects. Now if we move a little past ceteris paribus and introduce another variable, namely corporate profits profits as a % of GDP. This has expanded a lot since the GFC and has contributed greatly to the stock prices we see today. Basically since GFC you've had shitty economy (bad), low rates (good) and margin expansion (really good!). Going forward if you have higher rates (bad) you'll have good economy (good) all of this is pretty standard model that we know well and we know it won't affect stock prices much. The question is what happens to margins? Let's that you have an overheating economy that leads to higher rates. Overheating economies lead to tight labour markets. If you get tight labour markets that lead to higher wages and margin compression that will really bonk stock prices. And the labour market is really the million dollar question. We really have no idea about the status of the labour market and that's a big driver of risk.

Your point was that in the largest companies don't need capital to grow. It works very nicely if you cherry pick a couple of companies that don't need capital and which make up a small part of the economy and then extrapolate. The rest of the companies still need to employ capital to grow. Plus it's always been thus. Go back 30 years and lo and behold ABC, CBS and Washington Post did not really need capital to grow and generate huge shareholder returns. They were the Google and Facebook of their days. The existence of those companies did not negate the need for capital. The guard has simply changed. Interest rates may be low, but it's not because of Google and Facebook, and it's not because the economy doesn't need capital to grow (it does). The roots of the problem lie elsewhere.

Looking at market cap is not a very good way to measure contribution to economic activity. Revenue is the way to do that. Looking from the prism of economic activity a company like Facebook is actually quite small. Aggregate all social media and it's actually quite a small part of economic activity. Despite their value caps Barkshire generates more than 2.5x economic activity than Apple. Also keep in mind that capital comes in debt as well as equity terms. Moreover a company like Berkshire requires large amounts of capital to grow. Just because it gets its capital from FCF doesn't mean that it doesn't need it. Oh, and it also uses quite a bit of external capital, just look at BHE and BNSF borrowings. In addition, most large companies historically have made enough FCF that they didn't have to raise equity. That's nothing new. Regarding manufacturing, while manufacturing % of GDP declined some over the past couple of decades, American manufacturing has been employing ever increasing amounts of capital. That's why you have more machines, less people.

Which are these biggest companies in the world than need no capital to grow?

What's a bubble?

No, we were talking just about the liability side of float. In the model the securities portfolio (which includes the asset side of float) was already counted. The underwriting profits were capitalized, so already added to value. What was left is the liability side of float. So the discussion is about what is the fair value of the liability side of the float.

Thanks for asking John. Summer here in Toronto is lovely :). It makes you feel guilty about time you spend inside. The time to read annual reports is in the winter damn it! I'm actually still adjusting back to Toronto. I recently returned from a 3 week holiday in Italy. Posting has been more limited during that time. Now onto the more serious things. Regarding SlowAppreciation's piece. As I've said it's pretty well written. He did miss the float liability, but we've beat on that enough. The other thing i would do different is doing a much deeper dive into the subs, not just group all the op-cos together and then slap a generic multiple on them. BNSF is very different from Sees Candy, which is very different from Clayton. This is how I would go about it. A valuation for BNSF, one for BHE, one for Manufacturing, Services, & Retailing (hey you have to use a bucket somewhere), one for financial products and one for underwriting. If you want to be really through I would also split the insurance group into Geico, reinsurance ops, and other primary. Yes that's a gigantic pain in the ass. But Geico is valuable as hell (at least 3x book) and as a shareholder you want to understand that value and the dynamics of it. - - - o 0 o - - - (I love your use of dividers) Ok. Enough about the blog post. Let's talk about about float discounting. My thoughts are along Vinod1's. Basically the moment you capitalize the underwriting profit, the float liability just becomes zero-coupon debt. Yes it's a revolving fund and all that. But so is most corporate debt - through refinancing. So now that we see it as zero-coupon debt we can go ahead and calculate the discount. The discount will be equal to the capitalized value of the coupon BRK would have to pay to borrow the equivalent of its float. So the formula is D=F*c*(1-t)/r where D=Discount to float face value F=Float face value c=coupon BRK would have to pay on debt t=BRK tax rate r= hurdle rate So, let's calculate it. We know F=106B, c would probably be between 3-4%, let's go with 4 to be conservative, t is 36%, r is maybe 9%. Then D=106*.04*(1-.36)/.09=30.15. So the discount to float is about 30 billion. From this amount you would have to subtract the goodwill carried by the insurance cos in order to get to valuation. I know this is a bit long.... but you asked for it. Cheers

OMG, we're only talking we're only talking only about float liability here. You can't invest any of that. That's just money going out. The thing you can invest are the securities which were only counted. What we're talking about is the fair value of the float liability, aka the NPV of money that has to be paid out.

Nobody buys just float. When an insurance company buys float they also get a whole bunch of assets along with it. Think of the Lloyds deal as a good example. Not even an insane person would pay to take over a in insurance company's liabilities.

Well that's the million dollar question isn't it? Btw, I don't think accounting has anything to do with it. Let me propose another thought experiment. Because i think the underwriting profit murks the waters a lot. Let's put BRK in an underwriting loss. So I'll give BRK a 2 billion underwriting loss as opposed to 2 billion profit. Through my newfound powers I'll also increase the return of the securities portfolio by 4 billion a year. Ignore the tax effects and all other peculiarities. In this case basically the profitability of BRK doesn't change. So it's value doesn't not change. Should make analysis easier though.