WneverLOSE

Ya it was part joke part true criticism, they actually did prove the theory when they bought 1.7m shares just above the price they issues the shares (add the friction costs and it becomes material)

Selling shares at 11.75$ and buying them back just a few months later for 18$. This will surely create a ton of value.

I would be actually thrilled, the less time he spends on doing dumb things with my money the better the performance will be. 8)

Most of the customers of IB are more of a traders than buy and hold investors so for them execution is important since buying at 10 and selling at 10.01 at the end of the day makes you about 44% in a year, if you bought at 10.001 and sold at 10.009 you would make an annualized return of 33.8%. basically the more you trade the better you have great execution. if you invest like me and buy or sell only a few times a year this won't matter much but for some types of investors / traders it does. IB greatest edge is its wide array of markets, low commissions, very good execution VERY LOW rates to borrow money and from a business side they plan on becoming the underlying infrastructure for most other brokers. I like them, they don't mess around with you, no hidden fees for reports, support , order change and stuff like that that used to cost me thousands of dollars with my previous broker.

https://www.reuters.com/article/us-buffett-forbes/buffett-calls-pessimists-about-united-states-out-of-their-mind-idUSKCN1BV0A3 That's all ? While the raw figure may sound nice it's actually only 3.9% nominal annual return (maybe even negative real returns). Any thoughts on this ?

Not sure how you got it that I compare the two people, Just said the strategy is not smart and gave an example. Do you think that the things I write effect billions of dollar movements ? I bet the total holding value of all the people who read my comments is less than say a few million dollars. not enough to move to stock even 0.1% if I was able to scare everyone.

Would you seed money to bernie madoff when everyone started hating him ? Investing only because something is hated doesn't make any sense, the only thing that will determine future returns is what you pay and what will happen. If we are into Buffett quotes

As I said I got that date "randomly" by pressing the "Max" length in google finance, I don't want to talk about performance since inception because I'm trying to argue that the performance was good at the beginning and stunk from their. Since 1989 (4 years after inception) book value compounded at 14% till 2016. and this is me trying to pick the best combination of long time frame and good performances. (during the first 4 years book value compounded at 52.6% so yeah...) I 100% agree that this is the best theoretical way but how can it be done when the insurance operations generate 6.4B in earnings and 4.4B is thrown out of the window ? How much will be spend on betting aginst global worming ? :P

Well, you are picking the absolute worse beginning point for FFH, and when it was selling for nearly 3x book. So... If they are great capital allocators wouldn't it make sense they would understand the situation and issue stock at such high valuation and create shareholder value this way ? Using your stock as currency is a major strength that a smart management team should know how to do.

Ok let's forget about the last 6 years. Since 1999 (The max range google finance gives on BRK.A and FFH) Berkshire Created 273% of value to it's shareholders while Fairfax produced 38% to it's shareholders, far from spectacular. (the s&p did 83%). Where is the value creation ?

Why investing returns should be better going forward ? what changed ? Will they stop making macro calls or if they see something 2 years from now they will take a 5B position in it ? Book value is a proxy to business value since usually a decent return is achieved on that equity but unless they can do it why do they deserve a premium ? Until recently most insurers traded well bellow book value since the returns on equity are bad. With the hedging losses it is really bad and without it its above the average but nothing like the long term results or the states goal of 15%, if they do 12% best case and 4% in the real world why is it worth book ? Why do you expect investment returns to improve going forward and not deteriorate ? If Rates will go higher it will hurt current fixed income investments (I know they are on the short maturity side at FFH but still) and equity prices will go down to reflect a higher future returns. If rates don't go up FFH stays again holding cash while everyone is riding the train towards richtown. I feel that it's hard to determine if FFH is cheap or expensive, if you believe rates will go up fast in the near term and that prem hasn't lost his touch it's cheep, if you don't know about rates it's kind of a bet that can go either way and if you think rates will stay low / go up slowly it's probably expensive to you. Would you pay 1.25 book value for another insurance company that had 4% ROE for the last 6 years ? that's not a short amount of time so there is a big difference between current results to long term results and it's very much about the return to the mean thesis, this takes some belief that I don't have. Maybe the financial gods will punish me for my disbelief.

I wouldn't say it's extremely cheap. I'd say it is priced at a level where you can compound nicely (7-10% over the long term with little risk) and you have real optionality on a higher rate of compounding if the investments do well. With bond interest plus underwriting at 95% less holdco costs and tax, Fairfax can probably do a 7% roe, meaning that if it holds its multiple it matches the market's long run return. With a tailwind from equities, or outperformance in bonds, you can get past 10% fairly easily and towards 15%, which is their target. Re: AW, a 12% roe at 1.4% book is an 8.6% return on your purchase price, effectively in perpetuity. That's not amazing, but it's not bad in a context of 7% long run returns from stocks and sweet FA on bonds today. If you can juice the ROE with some nice investments, it gets exciting. BTW while you're right that you can pick and choose what you include in ROE for any company, the difference here is that the hedges were a (bad) choice that has been changed. Most companies can't do that so easily. Ford can't suddenly decide that carmaking is a low ROE business and switch into pharma. Fairfax, effectively, can (on the investment side). So I'd argue that looking at their longer term investment and ROE record is legitimate, rather than just 5y. Again, it is not extremely cheap. But it is a very fair value for what has become a really powerful underwriting/investing/operating platform with a superb culture. It ought to compound nicely. Thanks for the reply, I seem to agree with everything, the hedges will only affect if they try to constantly predict macroeconomics situations, I guess they learned their lesson ?

I'm looking at fairfax at the moment but let me play devil advocate for a minute. During the last 6 years the average ROE is about 4% (12.7% if you ignore the hedging losses, But I'm not sure you really wanna do that since every company in the world earns at least 15% ROE if you just pick the good use of that equity). FFH is selling at about 1.2 book value if I understand the adjustments correctly regarding the Allied World acquisition and the India investments. What returns do we realistically can expect FFH to make at such low interest rate, high prices and large influx of money going into insurance and reinsurance environment ? Why Allied World that had 12% ROE is worth 1.4 book value ? can they really boost ROE by investments that much that paying 1.4 book will lead to 15% ROI ? (by my math ROE should go up to 19% starting today to make that 15% ROI) When you guys say it is extremely cheap, what returns range do you expect ?

Hi, I'm gonna start this valuation Q&A topic so I can ask everything I want in the same place, maybe someone will find this helpful. The first thing I wanna ask is about growth and ROIC. Let's say company XYZ can earn a 30% ROIC if they don't invest for future growth. Let's assume they see huge opportunity to grow and dominate the market so they reinvest all of their "earnings" into more inventory/systems and so on. Let's assume that they grow this way at 30%. Now this company earnings are 0 since all of it is invested for growth, why isn't it that such a company is worth 0 ? (0 money is availably for distribution to the owners and 0 dollars growing at 30% is still 0) How does somebody value a company that grows by investing all the money that otherwise would have been considered as distributable earnings ?

Do you mind if I ask why are you looking for them ? what information is on that manual that you can't find on the companies website/SEC filings ? I'm just curious cause I have no idea what's those manuals are. EDIT : OK did a quick google search, found out what those manuals are, I guess people try to contact those companies and get the current financials ? and how do you find a seller ?

I very much appreciate your thoughts, thanks for answering my question. I guess that the tricky part is understanding vs understanding. I agree with you 100% that he understands the structure or the products but does he understand how will they perform ? does he have an ability to make a determination on macroeconomics subjects like that ? I guess not since he says so, in his testimony about the credit rating agencies he says it was a big bubble that nobody was able to see beside a few people like Michael Burry, he didn't saw it (and he adds, would I hold Moody's at 60$ if I knew what was coming ?) Secondly regarding his performance I can't really share specifics but I know that his personal returns are WAY above the market, sorry I'm not able to be a bit more specific but you can get a feeling by looking at things that he publicly stated he did such as the Korean net nets, SRG, LEE and other private holdings he had during the years. One thing i'm interest to hear is your opinion on future returns of major indices, interest rates levels and inflation. I don't think people think about this enough when evaluating potential investments, sure 10% may sound good but it may be a horrible investment if the market will return 15%.

Since I don't understand 95% of the things discussed here my question will be more about your point of view then any specific experience or product. Warren Buffett is widely regarded as the greatest investor ever. In your opinion does he really doesn't understand anything about those products and doesn't even bother with them or he is just playing dumb and he must have seen it coming from a mile away ? I think it's interesting to think about it since if the answer is that he really doesn't understand such products what does it mean about other people in the field, do they really understand them and are able to find alpha by doing those complex analysis ? or are they betting after convincing themselves they did the work so they must be right. After all, if they are so smart to understand such complex products why can't they see the same golden nuggets laying on the street that Buffett sees and make huge returns on ? Thank you very much for sharing and answering questions :)

After sleeping about it I am convinced this is true, as long as ROE will stay constant the investor should make the same return the company underlying returns on equity are. Think about it this way, If I buy a company at 5 times book value with 100% ROE the "instant yield" I have on my investment is 20% (1$ NI/5$ Price). All retained earnings are invested at book value and not at the 5 times the market ascribe. that's the key point, retained earnings are reinvested at book value thus being much more valuable to investors than paying the money as dividends and then reinvesting them manually at the market rate (5 P/B). If the company would distribute the money as dividends I would make 20% on my incremental investment but as long as the company retains earnings I should make the same ROE on those earnings as the company does since they are invested at book value. for the beginning 1$ of equity I invested 5$, but for the added 1$ of equity that I earned during the year I was able to invest it at a "cost" of 1$ (book value), thus making me pay 6$ for 2$ of equity and earnings (now my weighted cost is 3 P/B and the yield i'm getting is 33.333%) the following year I will earn 2 extra dollars on my holding and the company reinvests the earnings so my position cost was raised by 2 more bucks and I hold 4$ of equity. so 8$ weighted cost for 4$ equity (for a yield of 50%). you see how if I keep going the returns I will make will approach the company ROE of 100%.

well I fully understand your answer but I probably didn't explain myself correctly. I understand that the equity doubles every year if ROE stays at 100%, the problem i'm having is the market assign a value to the equity, let's say on oil company has a land worth 1m on the books but it's the best land to dig oil from anywhere on the planet so the market assign a 100 P/B to that equity / assets (no liabilities so assets = equity), the company sell the oil by dusting the top soil with a small broom and the oil gushes out, so let's assume they earn 100% ROE. 12 months later the market that fully understand that such asset is worth 100 times it's book value should recognize that same value if the company is able to invest the earnings at the same price in a similar asset, so if they earn 1m during the year, they buy 1m of land and magically make it gush oil out the company is worth now 200m right ? the same would happen if we use different P/B ratio, actually ANY P/B I choose will work. let's take the case when they market recognize the assets are worth 1 trillion times the stated book value, if the company takes the earnings reinvest them and get a similar assets at a similar price the stock is no worth 2*T*1m. The same logic works for smaller numbers. let's assume a company is selling for 3 times book value. the earn 20% ROE. so I pay 300$ for 100$ of equity. at year end I own 120$ of equity (100$ starting equity + 20% ROE) and the market should value it at 3 times book (assuming the company reinvest the earnings at the same returns it get's on the starting equity) so my stake is worth now 120$ * 3 = 360% or a 20% IRR. The same will stay if I use any P/B ratio.

Ajit jain talks about Buffett recognizing the deference between getting the outcome right but actually being wrong vs getting things wrong but having the right decision

Hi, Let's say a car dealership company earns 100% ROE and since they are such a good and profitable company their stock is sold at 100 times price to book ratio. So I buy 1$ of equity for 100$ and by year end the company added 1$ to it's equity. since the market says the company is worth 100 P/B why isn't the stock worth now 200$ ? The way the math works here is that no matter the valuation the single thing that will determine the return at year end is the return on equity. I see how absurd such a claim is but I can't figure out whats wrong with the reasoning here. If I have bought the equity at par (1 P/B)and hold the equity forever I would still make 100% return the same as I would if I buy at 100 P/B or 100m P/B. (assume the company puts that 1 dollar to work at the same return)

Hi, I am trying really hard to find a way to source information to try and imitate the cigar butts approach but I'm having a really hard time doing so. I tried using online screeners such as yahoo finance, google finance, and finviz. the first two data is really bad and includes many companies that are no longer around (due to bankruptcy or going private) so lot's of false positives that really slow me down and makes the hole experience really bad. finviz data is much better but not all companies are on there for some reason so false negatives here (Probably the stocks that are not listed on finviz are the most interesting ones since the are literally "under the radar") and I also tried using the SEC latest reporting page (https://www.sec.gov/cgi-bin/browse-edgar?company=&CIK=&type=10-Q&owner=include&count=100&action=getcurrent) but it is also a bad experience since you can only see a max number of reports (100) it will also not always shows you all of them (selecting 100 listings today will only produce 43 of them) and if I happen to miss a day bad luck since it's history now. Any tips on how can I source information the way Buffett did with those moody's manuals ? Really appreciate any help guys :)

tbh it benefits dealerships, but Berkshire is suffering. I own a bit of AutoNation, I will be happy to take those dealerships off Warren's hands for a small wholesale discount :) (by the way those are the best dealerships out there, making more than 120m per location)

https://www.wsj.com/articles/berkshire-dealerships-and-rv-maker-broke-texas-law-regulator-says-1497379828?mod=nwsrl_heard_on_the_street There is no way in hell this will happen but the hole fiasco around it is kind of insane. nobody wants them to stop selling cars in Texas so why even bother with all the legal stuff ? just mail them "Hi, you broke the law but it ok, here is your permit to do so, have a good day Warren" and finish with it. I really hope Warren will not accept the stupid penalty and tell them he will close those dealerships and layoff 4,200 workers and that Texas will lose 220m a year of taxes. We will see how firm are they on those penalties.

"Warren Buffett's 31 Berkshire Hathaway Automotive dealerships in Texas face an uncertain future after the state Legislature failed to take action to make them legal." http://www.autonews.com/article/20170605/RETAIL07/170609924/1400 not that it will have any needle moving impact on anyone but maybe that's why some due diligence and lawyers may be useful ?