Uccmal

You can instead take the approach of Buffett. The vast majority of the businesses that Buffett bought, are resilient to all three items you mentioned above. A CEO having an affair or worse do not impact the valuation of most of the businesses in Buffett's portfolio. I do not think Buffett knows the in's and out's of Wells Fargo's or Bank of America's each operation in depth at the division level, and I do not think such knowledge is needed or necessary to invest successfully. Look at his definition of understanding a business and it tells a lot about what he focuses on: "It's a question of being able to identify businesses that you understand and you are very certain about. When I say understand–my definition of understand is that you have to have a pretty good idea of where it's going to be in ten years. I just can't get that conviction with a lot of businesses, whereas I can get them with relatively few. But I only need a few–six or eight, or something like that." or look at his definition of risk "We think first in terms of business risk. Business risk can arise in various ways. It can arise from the capital structure. When somebody sticks a ton of debt into a business, if there's a hiccup in the business, then the lenders foreclose. It can come about by their nature –there are just certain businesses that are very risky. We tend to go into businesses that are inherently low risk and are capitalized in a way that that low risk of the business is transformed into a low risk for the enterprise. The risk beyond that is that even though you identify such businesses, you pay too much for them. That risk is usually a risk of time rather than principal, unless you get into a really extravagant situation. Then the risk becomes the risk of you yourself –whether you can retain your belief in the real fundamentals of the business and not get too concerned about the stock market." I think it is better for us also to focus on such businesses where we are less exposed to risks you mentioned. Sorry for tossing Buffett quotes, you probably know most of these by heart, but they covey the message better. Vinod I actually didn't know these ones. The concept of being able to visualize where a business will be in ten years is very valuable, even if you have no intention of holding it ten years. Would have saved me from botch ups like Yellow pages, sfk, and RIMM. This seems really important in this era of creative destruction.

I noticed in the employment/training survey a few months back that some 50% of the membership were engineers. My observation is that engineers need to know everything, and experience discomfort with uncertainty. uccmal, I strongly disagree with that statement. Engineers (and I am one) have the task of making something work, they do that well. If something works well, their job is done, they don't stop and ponder, oh why does it work? my formula says its shouldn't! Case in point is flying, the wright brothers made planes that flew, yet to this day there is argument as to whether it is the shape of the wings that makes planes fly, but boeing and airbus keep cranking out better and better planes, because it doesn't matter what is the physics behind it! The people who have to understand everything are scientists and there it gets dangerous in investing, the best example is derivatives and the black-scholes formula. I think engineers make good investors because they have good understanding of probabilty, probability theory is requirement in all undergrad engineering courses Your spoiling my fun.... I have spent my life razzing engineers and their models. I once sat in a construction trailer for hours with a group of engineers who were debating the operation and construction of a unit 50 feet away. Eventually, a pipe fitter/plumber suggested they go out and actually look at the process. I agree on the academics though. Black-Scholes is an abomination but others use it, therefore understanding it helps us get better deals. Same with technical analysis.

I noticed in the employment/training survey a few months back that some 50% of the membership were engineers. My observation is that engineers need to know everything, and experience discomfort with uncertainty. As outside passive minority investors we know barely more than nothing. And thats all we will ever know regardless of the amount we read. Take any financial institution. The CEOs and CFOs of most of these companies dont know the entirety of their operations, let alone on a daily basis, and they have worked there 12 hours a day for decades, often: Ie. Jamie Dimon. But he, and I understand that in aggregate, if JPM keeps doing what its doing and incrementally adapting to new situations the stock will do well, if bought at a low price. Even really simple businesses like pulp and paper, or lumber, have enormous amounts of moving parts these days, hedges, currency issues, cyclicality, supply/demand imbalances, technology costs and issues. It is more art than science in the end. Walter Schloss was successful because he stuck to a system that worked, at that time. His system was light on research but tough on inclusion criteria. My best investments have been those I have held for awhile. I get to know them over time. Obviously, the less successful ones I give up on. Now, I deliberately try to hold onto those I have held because I have some basic understanding of the company, and some comfort with management (really critical).

I think it is a case of this too shall pass. At some point demand for companies will pick up enough that they will invest in projects rather than their own stock. At the moment capital is going where it is doing the most benefit to each company. Maybe its short sighted. If the government was concerned it could tax buybacks the same as dividends, or higher. Or, like in Canada dividends could be tax advantages, somewhat.

I agree on every point. Especially on the idiotic idea of buying a company because it pays a dividend! Only exception I would say to holding stocks that pay dividends are companies that are fairly valued but are not capable of re-investing 100% of their disposable earnings at sufficient ROIC hurdles. I'm thinking of KO or something similar. Any other reason for paying dividends is inefficient capital allocation. I'm going to disagree on dividends. I like buying cheap companies that pay me (the owner) part of the profits back as dividends each year. My thesis doesn't usually rest on earnings, sometimes it does, but it's usually assets or acquisition value. I'm essentially paid to wait for IV to be realized. I own a number of illiquid stocks that never appreciate, but I get a dividend on them. I'd rather get a steady dividend for years while waiting for the 'one day' when the stock jumps at once. This way I get two types of returns, the continuing dividend return plus the eventual appreciation. Dividends are something I'm starting to appreciate as I grow older as well. Extremely successful investors who have been at this for decades all seem to favor a dividend of some sort. I believe there's a reason for that. Even Buffett likes to own companies that pay him dividends. I concur. There is tons of empirical data that shows that dividend paying companies grow faster than non- dividend payers. In fact, in cyclical industries I will not buy a company that doesn't pay a dividend. There are of course, exceptions to every rule. Fast growing companies in tech are excused, for awhile.

You do have a point Nick. I (we) may be getting jaded by recent events that make bad press.

Very well said. I have some JPM shares, but much more exposure to BAC. JPM strikes me as an organization that is always going to have special "events". There is alot of hubris at JPM. BAC and Moynihan seem less likely, now, to get into the doo doo. WFC is the standard bearer and I have a significant investment in it as well. I like that BAC is tending toward WFC's type of business. BAc is slowly getting Buffetted.

To the original point I have had a shift in sentiment. I think index funds are good for non experienced investors. On the other hand we watched the markets do nothing for ten years from 2000-2010. You still get your dividends and dividend increases but until the tax situation is made more favourable to dividends in the US this is a lower return than historically. I dont know what people will do with the advice I may give. So, with markets more fairly valued versus earnings and earnings potential I am more inclined to advise them to Pay Down Their Mortgage, and all other debts. Most people will be way further ahead doing it the old fashioned way. If they have more incomes than outgoes, and no debt, then they dont need my help.

Are you sure about that???? I must be misunderstanding you. You can't add the % dividend increase to the stock price change. It is total dividend plus stock price change. And you calculate the dividend increase as a percentage of the stock price not the prior dividend level. http://performance.morningstar.com/stock/performance-return.action?region=USA&t=KO&stocktab=returns&culture=en-US My estimates were too high. I mentioned this above. The quick and dirty way works better: Get the CAGR on the stock price and add the dividend yield to it. Fairly close. Coke wasn't the best example I could have pulled.

He showed the opposite. During the four years he ran both, he averaged 31.9% annual returns in the fund versus 18.5% with Berkshire. During the 12 years he ran the partnership, he beat the market by 15.5% annually, versus 11.9% for the first 12 years at Berkshire Hathaway. And those are net numbers, gross returns are even more in favor of the fund structure. My original point is lost in all the cutting and pasting. Beyond a certain size, fund companies attract more "nervous" capital. The first few partners may be solid but eventually you get people who are less committed. I have not seen a fund not get killed at exactly the wrong time, which screws the long term investors every time. Buffett avoided this by going the company route, and giving himself more or less permanent capital. His genius was in knowing his partnerships may eventually blow apart. Also, to your point. It took awhile for the Berkshire compounding machine to get going. The better question might be: How would the partnerships have performed into the mid 70s? Neither Munger, nor Sequoia faired well.

Your history is revisionist. People weren't touching banks until the tarp warrants started coming out. Spring 2009 was bad. I was investing, and its recorded on this board somewhere, at the very bottom. Were you? Much later, It was actually Francis Chou who got me interested in the Warrants. Of course is a normal commodity cycle. And very possibly right now anyone investing in oil company stocks will be handed their heads. Oil cycles can take months or possibly years to turn. Its too early. Did u sell all your Pennwest? I remember you were pretty bullish last year on it. Yeah well. Sold almost all the common. Biggest hit I had in years. The thing is their turnaround would have worked really well, but for the commodity price collapse. I think its a work in progress. If they get some flexibility on their covenants they should be fine, and I see no reason they wont get that flexibility. They will be required to cut the dividend, perhaps issue convertibles to the bond holders. The assets and ability are there. I still cant decide if I made a mistake with it or not. Had oil prices stayed high I would have been a genius. They dropped, now I am an idiot. The hazards of value investing. I still hold 2017 Leaps. They are mostly in the $1.50, 2 and $3.00 range, and a few $4s. I will hang on to them to the end to see the outcome, pending my need for tax losses, which right now is minimal. Wellmount, This is why I am hesitant to touch O&G in the midst of the storm. I have been in this place too many times, trying to predict a bottom. It is impossible to tell the value of any of these companies right now. Denial is still a real big part of the companies in Western Canada. A number haven't even cut their dividends, even though they will quickly become unsustainable. As OMungerville has indicated this will take a while to work out. Right now it is unpredictable, non? Perhaps, when I see Harold Hamm suing his ex wife for support then we will know we are at capitulation...

Your history is revisionist. People weren't touching banks until the tarp warrants started coming out. Spring 2009 was bad. I was investing, and its recorded on this board somewhere, at the very bottom. Were you? Much later, It was actually Francis Chou who got me interested in the Warrants. Of course is a normal commodity cycle. And very possibly right now anyone investing in oil company stocks will be handed their heads. Oil cycles can take months or possibly years to turn. Its too early.

I am going to turn this around on you Wellmount. If you are so certain name some that will survive where you wont lose 50% of your capital along the way. And Who says oil cannot be produced for under $70. It was done for most of producing history (inflation adjusted). I am not willing to wade into this scrum right now. Too much is based on speculation.

Peter, couldn't one also make the argument that there wouldn't be a shock to the system with a subprime bust? I don't know of too many people who saw the bank fallout coming either. true nobody saw it coming. but by October of 2008 they had TARP and had totally backstopped the financial system. At that point they understood the gravity of the issue. they knew who was swimming naked. The commodity bust really took hold in late 2014. by early this year oil had fallen 50%. It's not a matter of predicting any more. It's here. We know we are in a bust. At this point, the doomsayers should be able to go down the list and start crossing names off the list. Start at the top of a list of biggest market cap names and they should be able to tell us who is swimming naked. the bust is here. time to start naming names and being Specific. I think the market has done the Specific for you already. Just go down a list of those whose stock prices have been cut to a fraction of where they were. I will re-iterate that no one on this board was buying banks in any significant amount until very late 2010/11. When we started the thread for BAC - there is one earlier than the BAC warrants thread - enthusiasm was muted including outright disdain for the idea. Do you think that wont happen again with oil stocks.

Of the price comes back quickly most will be fine. If it stays down or drops further a bust will happen. Capital will dry up for years, especially in the "New" shale arena. The bigger, better capitalized companies will be taking this respite to get hedges in place at the new lower price. The ones who are now negative cash flow, and have no cash left to hedge, will die. Its too early. That being said, I have one small new/old position - Arx - T. They just did a private placement last week. Very small position in a company that has weathered two busts at least.

Peter, couldn't one also make the argument that there wouldn't be a shock to the system with a subprime bust? I don't know of too many people who saw the bank fallout coming either. Very few saw it coming. Fairfax, Michael Burry, the other guys in the Big Short. Most value investors got killed along with the rest.

You might be right. On the other hand, banking is not going to cease to exist, or even shrink as a business. Even Apple, Google, et al use existing partners. In oil, you also need to know who the survivors will be. And, We are no where near maximum pessimism yet. No one was buying banks on this board in any quantity until 2010/11.

Since Lets try this a little differently. The US uses 25 Million barrels per day of oil. Thats a daily savings from top to bottom of $60 per barrel * 25 m = 1.5 B per day or 550 B per year. 2.5% of GDP - not insignificant. The world uses 90 m B/d * $60 = 5.4 B/day = 2 Trillion per year. Not to mention the knock on effects of lower prices for other fuels. The cause of low or high oil prices is irrelevant. It is the effect low or high energy prices have on the economy. High relative energy costs are an economic drag, and a stock market drag. That is the situation we have been in since 2004/2005 excepting the brief period after the financial meltdown. The problem I have with these claims of huge savings is I don't think it can be so easily extrapolated as a net benefit to society. In the short-run it's certainly a net-benefit because companies will continue to operate and there are few defaults. If oil prices stay low for many months/years then there are a lot of projects that will have little-to-negative profit margins. Since most O&G companies are leveraged with limited diversity of projects, there will be a lot of defaults for banks (who spread losses to everyone) and lost jobs. Much like astronomy, I think diffused costs are easily underestimated with such large balances. If oil prices drop to where the industry is marginally profitable then we are transferring wealth from equity investors (since debt continues to be paid) to consumers. This would be a positive effect on the economy because consumers have a higher volatility with money (at least short-run; who knows what the effect on economic-potential opportunity costs would be). If oil prices drop so the industry has negative profit margins then some % of loans will default, jobs will be lost, borrowing costs up, lending down, governments cut costs, ect and there will be a large negative effect on the economy. If oil prices stay down for 1 year and we get $550b cost savings which equals $550b in lower revenue on the operating leverage part of the revenue curve. If profit margins are 12% for the industry with high fixed costs, let's assume the industry has 20%-25% for operating margins (probably higher). Than corporate profits are -$137.5B and if we assume 10x P/E multiples on those profits, then we have a $1.375T decrease in wealth. It's even worse if you considered the total decrease in qualified credit demand as that $1.375T in collateral could mean $3-5T in loans. Money generally flows to better capital allocators so although a 'robin hood effect' is great for the majority of consumers, I really think any positive-effect from increased volatility is small, short-lived, and a net-negative when the decreased economic-potential is considered. This drop in oil prices may end up severely hurting the US economy because of the volatility in the distribution of wealth. Except that is not the case. Historical precedence suggests that low relative energy costs are good for markets and the economy. Periods when the prices have gone up put a drag on the economy. Pull any oil chart and overlay recessions and booms, with fuel costs. Its pretty visible. I will concede that eventually low energy costs beget higher energy costs just like any other commodity. Lack of investment at lower prices leads to supply constraints. The argument that capital flows where it is best allocated does not hold true with energy. Excepting Canada, the US, and a few other places, capital flows to a select few who are terrible capital allocators and use the money to maintain their corrupt regimes. This wont go forever. We know that solar power is dropping in price every year and will soon be far cheaper than oil and nat. gas at any price. That is a paradigm shift where energy is no longer a bottleneck to society that it has been. I am guessing we are very near the end of the line for fossil fuels as a bellweather. To their credit the capital allocators of the mideast certainly know that solar is going to be a big part of the future. Dubai certainly knows this, as does Saudi. I think this is part of the thought process behind the price war. Sell the oil while it is still cheaper than alternates, and still makes money for us (the Saudis). I will be very clear that I dont see oil/nat. gas ceasing to exist overnight. I just think it is rapidly becoming less important. To that end, as per Al Naimi's comments, I dont see the price of oil ever going back up to where it has been. I am certainly not going to invest in it again, in a big way.

Lets try this a little differently. The US uses 25 Million barrels per day of oil. Thats a daily savings from top to bottom of $60 per barrel * 25 m = 1.5 B per day or 550 B per year. 2.5% of GDP - not insignificant. The world uses 90 m B/d * $60 = 5.4 B/day = 2 Trillion per year. Not to mention the knock on effects of lower prices for other fuels. The cause of low or high oil prices is irrelevant. It is the effect low or high energy prices have on the economy. High relative energy costs are an economic drag, and a stock market drag. That is the situation we have been in since 2004/2005 excepting the brief period after the financial meltdown.

Full transcript Very interesting. Thanks! The net effect may not be as positive as it seems since only a quarter of the savings is actually being spent. That spending is also offset by cuts in capex and spending in O&G.. One brief data point does not make a trend. My bet is that some debt gets paid down, and spending picks up. Can anyone provide me evidence that low fuel prices cause recession? I contend the exact opposite: the 1990s boom was aided by low fuel prices. The 2007/08 recession started, in part, due to high fuel costs. Also the mid 70s to early 80s doldrums, the late 80s/ early 90,s recession are all connected to fuel prices. Even in Canada.

Canadian dollar is now around 79 cents US. Yeah, I've been looking at USD to CAD for the past few months. I wonder how low it will go. It seems like a good idea to switch USD to CAD at some point. Any thoughts on this, guys? I have wondered the same. What I have been doing is selling some US common stock out of my RSPs,and TFSAs. AIG for the most part - Nothing against AIG - bought it substantially cheaper than today, when the currency was around par. I probably lose some upside but I can shift it into stocks that pay decent and rising dividends in Canada but not yet. I am not ready to pull the trigger on the currency in a big way yet. We reached 0.67 cents around 10'yrs ago.

http://business.financialpost.com/2015/01/26/the-natural-rate-of-interest/

That was a good interview. Francis is a smart character and doesn't pull punches. I am surprised the interviewer got him to speak as much as he did.

Didn't Frank play with the shares a few years ago to his benefit? Huge benefit? I don't remember specifics but I remember a controversy about him gaining on the class of shares he owns around that time. Now I remember why I stayed away. He was paying himself 70 m a year, every year. Have you ever seen their complex in Aurora. The family has the biggest castle in Canada. Yep, I drive past "Adena Meadows" about once a week. Their corporate HQ, gated community anchored by Frank's Canadian residence and Belinda's IIRC. I'm sure the son has one too. Adena Meadows stable for his passion for horses. And don't forget the 2nd most exclusive golf club in the country. (Second only to the Desmarais course near Montreal, played only by family and friends if I remember correctly.) I remember watching a bio of Frank and his story is fascinating from an empire building perspective. Starting as a machinist making visor clamps for Chrysler out of his garage and winding up with this billion dollar corporation. His story is amazing. I have heard that he doesn't even golf. I worked with a guy who was high up in Magna HR, around the turn of the millennium. You were expected to work 24/7. He would get calls to be somewhere in the Us to play golf (er: work) the next morning. My acquaintance quit when he had made lots of money and gotten burned out. He enjoyed it but couldn't keep up with the boss who was 30 years older.

Didn't Frank play with the shares a few years ago to his benefit? Huge benefit? I don't remember specifics but I remember a controversy about him gaining on the class of shares he owns around that time. Now I remember why I stayed away. He was paying himself 70 m a year, every year. Have you ever seen their complex in Aurora. The family has the biggest castle in Canada.