Graham Osborn

I think the trouble you run into with a question like this is that the financial media really just functions like a moving average. The indices really come to drive the fundamentals although there is a reflexive loop for sure. So I think you either need to believe that markets do trend/ TA can be predictive over the longer term or throw in the towel. If you look at the SMA 50/200 with weekly periods for the last 25 years it would be very unusual for the S&P to break into a new bull phase rather than break to the downside later in the year. What's been interesting for me is how strong and persistent the rallies have been - much longer hugging of the SMA50 with each rally than in 00 or 08. Frankly I didn't think the rally would make it this far. Now that we have in fact breached the SMA200 the interesting question will be whether we churn along the moving average for the next 6 months before the next break or whether we will see a much quicker move to new lows. I'm not expecting any real fireworks until around election time, but who knows - this bull is bleeding so slowly the 50 may not cross the 200 (weekly periods) until next year. To be clear, I don't bet against indices. The vast majority of the stocks I'm short are already in a bear market. When I bought my first round of put options the mistake I made was buying 2017 expiries, which is probably too soon to hit my individual price targets based on the action we've been seeing. As a result I will probably lose money on many of these positions unless volatility goes through the roof. The big lesson of this rally was that I needed to be buying 2018 puts to be more confident of capturing the greater part of the price move for the stocks I follow. Now that I have built that second cohort of positions I feel better prepared for both early and late scenarios. I know that most value investors prefer to ignore the market, but I personally feel quite comfortable picking out long-term multiyear trends. You just have to realize the utility of charting tends to vary proportionately to the duration of the period analyzed.

Allan gives you his answer for free in his 13F Yes, he is still heavy on consumer defensives. Do they still look technically robust? Sure, a lot of them do. Would I consider any of these value buys now? Probably not. The stock with such a moat that it deserves a defensive PE of 25 is pretty darn rare IMO even during Buffett's "haystacks of gold" period. Assuming Allan's portfolio still looks like this now - which would not be inconsistent with his low turnover strategy - I would expect him to beat the S&P this year. He might even come out positive. But if I'd been coasting the past 7 years and was sitting atop that portfolio I'd probably be doing a lot of incremental selling on a value basis. And I'll bet he is. Which makes these disclosures not that useful for prospective buyers.

Nice article and seems like a smart guy who realizes that the real way to make money is through a secular trend along with a willingness to emphasize holding period over leverage. That said, I find this article not that useful from an idea perspective. Maybe in 2008-2009 you could navigate your way into consumer defensive sectors which as it happened were on there way to round out a bubble of their own in the strain for yield. Even Burry had to go beyond stock picking for returns in that interval. But where does the stock picker turn now? I've been looking long enough to feel substantiated that there is not a single undervalued sector right now outside of commodities/ commodity businesses. And after reading Hot Commodities I've decided commodities are in for quite a long winter before we hit the kind of under capacity that drives a secular bull market - barring some kind of shock. So what strategy is the stock picker going to use to weather the next downturn? Maybe real estate would carry you over a little while but that doesn't seem like much of a risk-averse or long-term strategy. It will be interesting to see whether this fellow steps outside of equities over the next few years, given that he's seemingly not willing to buy the dips.

2000, 2008, 2016 October - no wonder people are superstitious about elections.

Given that this thread has moved from the original topic to basically asking whether "value" or "macro" is better, I challenge anyone to define the two terms. My opinion is value is a subset of macro so they overlap and you won't be able to, but if someone has a clear cut definition it would give some substance to an otherwise circular argument.

Fair enough. I'm firmly in the "ignore macro" camp, but I think maybe it doesn't always mean what the "consider macro" camp thinks it means. Allow me to provide an example. For instance, Picasso mentioned GM, so let's use that as an example. On the one hand, you can take a look at General Motors and say, "Hey, it makes $152 billion in revenues a year and has a 7% EBIT margin on the full year. If it stays that way in perpetuity w/ a little bit of improvement on the EBIT margin, then maybe it's worth 10x earnings." Now, that's one way to go about it and "ignore macro." On the other hand, you can take a look at the exact same numbers, and then you can go one step further and ask the question of "where are we in the auto cycle?" That's an important question when you're assuming that the revenues will stay at $152 billion a year, right? And perhaps if auto sales are going to drop then perhaps you 10x earnings won't be fair value for an auto company. (FWIW, I think we still have almost 9 million units of lost demand/replacement to make up in the U.S., but that's a totally separate discussion.) Now, I would still consider this "ignore macro," but in some sense, you are incorporating macro-type information through the revenue line. But I'm not necessarily trying to think through the implications of negative interest rates in Europe and the transmission mechanism through which that reaches and affects auto sales. Primarily because I don't know that (A) it matters and (B) it is knowable. In general, my sense is that without some form of contagion effect, we don't get (A). And then in trying to figure out whether you'll get a contagion effect, you run into the problem of (B). I guess my way of looking at it is value investing got its start as kind of a shorthand macro where Graham was trying to say "look, this macro stuff is complicated, let's just develop some shorthand rules for helping people buy in the right macro conditions." Value investors forget that a PE of 10 means nothing intrinsically - it's just a number that causes you to think "hey that's a reasonably priced stock." And those normative ratios fluctuate based on the world in which the company lives. Graham started in the wake of an earthquake, whereas ours is just starting. Another thing is a think Graham-type value investing has formed its own sort of bubble. By that I mean that the ape-following of Graham's favorite ratios has become so prevalent that companies have figured out ways to manipulate them. Graham himself was a gifted analyst and didn't let much slip by, but retail investors (and many professionals) tend to take things like P/ B and EV/ EBITDA at face value. This of course has happened many times before. The problem is people always think they were smarter than the last wave because they're using "objective" measures of valuation. Reflexive fundamentals are one reason technical analysis remains useful after all these centuries.

Honestly, I think Continental and some of the other shale producers are bluffing about their breakeven costs. Before they said they could make money at 80, now 6-9 months later they suddenly can make money at 40-50. Is shale technology likely to have lowered operating costs by that much in such a short period? Unlikely. I bet they are just trying to keep the bankers happy. Talk about a perversion of the inverted production curve - producers continuing to pump and claiming to cover marginal costs just to maintain their covenants. I think these guys are going to be in trouble even if Brent rebounds to 60 and just sits there. There are two things about the rally (apart from the technical) that made me put money on it: (1) the absence of news apart from an olive branch from the shales which most probably recognized as a lame attempt to induce some bullish acts by the Saudis (2) the dissociation of crude/ commodities from the equity/ bond indices. They were moving together for a while. As some of you know I think that the major indices will lose a good hunk of their value this year and that will be preamble to a commodities boom. As we get farther into a bear market I would imagine this counter action will increase. Taken conversely, I think the dissociation is bearish for equities. That pretty much sums up my long/ short position currently.

They also seem to assume that just because someone is bearish on the S&P that there is no purchasing going on anywhere else and we're wasting our lives away just discussing this...like this guy below Just as a follow up to your comments, you can be bearish and still be making money by being long other things in the other opportunities that you assume we're missing for some reason. My portfolio was about 15-17% in oil stocks the past two weeks - I made a lot of money across multiple names I added significantly to Altius at $5.60 & and $6.30 - I made a good bit of money I added to FCAU at $5.85 - I made a good bit of money I added to PDER at $150 - I made money I rolled 40% of my 401k into emerging market stocks and 10% into HY debt at 10% yields - I made money The S&P rose a few percentage points - I lost a little money, but still in the green for my total short position. Please excuse me while I continue to discuss the macro and the overall expensiveness of the U.S. while making money on both sides of that trade. Smart guy. I'm about half short and half long oil. I'd like to diversify into aluminum and some other commodities. I'm not good at counter trends but I feel there is some secular floor here. Good luck all.

Did anyone see the WSJ article this morning on the Fed and MP3? I thought it was interesting that the last/ most extreme proposal was a simultaneous tax hike/ debt monetization. I was actually impressed by that scenario - no better way to pull the wool over the taxpayer's eyes.

Does anyone think this might be the secular shift? I don't really care - once Brent broke the resistance line Thurs or Fri I bought in after a few false starts. Today it's just up and up with a series of tight consolidative rallies. The Houston shale accord and the Saudi-Russian deal don't seem to drive or explain this price action, which makes it all the more interesting to me. I think the thing that sets me apart from the Street's thinking on this point is I am utterly without bias on the price implied by the fundamentals. So I'm perfectly happy to trade Brent on technicals - and sooner or later the secular shift should transition this from scalping to the pyramid trade of a lifetime.. whenever.

I'll consider selling S&Ps if the rally makes it above the SMA200. Short of that there would be too much risk of a further rally - as we have seen. I don't think anyone would have the temerity to hold on through a choppy bear market for a full 50% drop - anyone who is trading index futures is unlikely to hang on for that big a stretch in a choppy bull market. Plus if you trade it you can make money even if it turned out to be an intermediate term correction provided you recognized the fact and didn't fight it. As you might imagine offsetting the liquidity and leverage requirements. I am not a heavy futures trader but it's less of a racket than leveraged ETFs. For me I bought 2017 > 2018 OOM puts on various leveraged stocks. What a mistake! For one thing, I should have contented myself with futures or shorts where I have greater control, if I had the need to be bearish. But even if I'm right and the market does tank in the period I described, the volatility will be unlikely to offset the decline in time value for the puts. I'm hanging onto those puts because they are basically a pile of paper after this rally and should likely be worth more at some point during the year. Never again - worst trade of my life.

Even if I knew it wouldn't be useful. Humans make mistakes. The key is not being right but always having a plan for being wrong. The rules I've picked up as a naive young trader over the past year are: Most trades don't work. You're wrong unless you're right at the right time. It's more important to make money than to be right. It's more important to have peace of mind than to make money. The keys to peace of mind are: (1) margin of safety (2) ample liquidity (3) minimal leverage. If your mind is not at peace, get the hell out of the market before you blow yourself up. Soros' son often joked that Soros' market prognostications were mostly hogwash and he was simply great at following a trend and flip-flopping on a dime. I have never known a flakier trader than Soros - or one better at trading his way out of a bind.

If I could answer that I'd have a mansion and a turkey farm instead of a 1BR and a day job :)

I like making predictions, but have come to realize even if my prediction is the most probable outcome the real question is what is the absolute probability of that outcome - the essential piece of information in order to make money. That said, I think the most probable outcome is: 1. This rally stalls quicker than the last one. If it doesn't reach the SMA200, sooner. If it does, later. But within 6 months. 2. The S&P will have lost over half its value by year end, most likely 1/3+ by November. 3. Commodities will rally sharply by Jan 2018. FWIW, I think Jim Rogers is not a good market timer. PTJ is a good one. WSJ is a terrible one. If you believed the rhetoric recently you'd think Black Monday was right around the corner. As some here have noted, this is not a good question for COBAF. Most here are value investors and the whole point of the craft is to obviate the need for market timing. The only reason I care is because I am more macro than value. The other thing to realize is that being almost right on a call like that is almost as bad as being completely wrong. You'll unfailingly trade too early on what you know or read into things where you shouldn't, and you'll lose money 9 times out of ten. So my advice is: sell what you can when you like, but don't go short. There is no faster path to the madhouse than shorting too early.

We've been having a similar discussion on the BRK discussion board about how BRK's float relates to debt, and whether it should be considered leverage in the ordinary sense. Essentially float (assuming a well-run insurer - no mean feat) is like LT debt that can be refi'd indefinitely and has low or negative coupons. You can't borrow money on those terms for the most part. And better yet, a retail insurance business (eg car insurance) won't experience greater pressure from claimants during a financial meltdown - although reinsurance is a different kettle of fish. The point that WEB often glosses over a bit is than insurance is a tricky tricky business - perhaps even more so than banking. Particularly with reinsurance, it might be 20, 30, or 50 years before you determine the true cost of carry. There's a reason he refers to derivatives as "financial WMDs" - a few of those almost ripped into the hull of the unsinkable pre-08. There are few living who understand the insurance business as well as B does and know how to exploit it for exceptionally low-cost capital through financial economies of scale - and that's what worries me. If Buffett died today and Berkshire made a stupid insurance purchase tomorrow, it might take ten years for the bomb to go off. That's the main advantage of debt - you know when the claims will come due and how big they will be.

Can't help myself - still picking around for a bottom in various beaten down commodity plays. Let's just assume if commodities plunge again they will do so more or less as a group. Has anyone been buying in aluminum recently? I won't cite an plays just yet since I've just started looking. For commodity plays I like minimal balance sheet leverage and low "down time" operating costs. Good luck, Graham

One fairly obvious point I missed - as BRK owns more of the market their beta will naturally converge to 1. Warren wants that other 98% of Fortune 500 - if he does beta will be redefined as asset/ BRK ;)

TGA sans Brent rally. Still short ETP.

Yes, pardon my misuse of terminology. Beta is covariance of asset/ market return whereas volatility is an absolute quantity independent of the market. Volatility is lower now than in years past because market volatility has been lower since 09 with a recent uptrend. The relative volatility calculation above would be more useful I guess. Anyway, BRK/ market beta has been on the rise and seems remarkably correlated with the D/E (I'm just plotting the two in Ycharts going back to 2000 or so). Unfortunately the institutional ownership % in Ycharts doesn't run back that far so I can't say whether there is any pattern. I wonder how big an effect that has on beta compared with the D/E? I see some anecdotal comments online but am not familiar the research on this. It does give me an idea for another parameter to add to my screens though so thanks.

The interesting thing is the beta trend since 2004 mirrors the quoted D/E - up about 340% vs 250% (beta was around 0.2 then vs 0.8 now). So BRK is in fact quite a bit more volatile relative to the market than it was historically - at record highs in fact. I haven't gone through all the subs for that whole period yet. But from my personal investing perspective whether a sub's operations are consolidated or not is irrelevant to the fact that that piece of the business has a certain amount of debt associated. The market isn't stupid - if I owned BRK and 50% of BRK was AXP, you can bet BRK would be tanking too. Whether you prefer to say that is because BRK's portfolio notched losses or because BRK was levered through its minority owned subs is more about who you choose to blame :)

For better or worse, I think you'll have a tough time finding a Berkshire shareholder who makes a "levered beta calculation". I'm in the "for better" camp. The trouble is it does matter. D/E is a good predictor of how much a stock will "crump" when the general market tanks. This has nothing to do with cost of capital per say, it just reflects the fact that for a given change in EV the MC takes a bigger hit. If BRK is more levered than it was in 08-09, it will crump harder. If so, that will give some of us better buy prices. And the stock will be spring loaded for heftier gains afterward.

This seems like an interesting point. Berkshire's float certainly would seem to be more optimally structured than typical debt in the sense that coupons are low or potentially even negative depending on how well the insurance businesses are run (less advantage than usual with rates this low). And the principal is repaid in increments rather than as a lump sum (the reinsurance businesses may be an exception here since the insured events may be correlated and the claims large). But even if it is well-structured debt it should be still considered leverage no? If you can't pay out claims your insurer becomes insolvent or needs a bailout. I would definitely think is should still be used in the D/E and levered beta calculation. Assuming BRK's can be considered just a advantageous form of debt, I don't see any reason to give BRK preferential treatment relative to any other conglomerate. Berkshire was a conglomerate capitalized partly through insurers 20 years ago and it still is. If the relative dependence on float vs FCF from the non-insurance businesses has changed, that should be no different than a "typical" conglomerate making investments with debt vs FCF at different times. I'm quite prepared to acknowledge I probably understand the intricacies of the insurance empire less well than many here. But I just have a hard time putting BRK on a pedestal as this unicorn that can magically defy the laws of cost of capital by using float. There has to be a catch somewhere. Maybe the reinsurance businesses have more claims during times of financial tightening?

I was just looking at BRK's growth both in revs and tbook these past 20 years and they were good - almost too good. BRK may be run by a slightly ossified genius, but the businesses themselves are solid at best - we're not talking about an industrial steamroller like Google, Microsoft, or Standard Oil here. So how is he doing it? I've asked myself the same question for one too many a business since 2009, so one first looks to the balance sheet trend. Since 2000 BRK's tbook had grown about 380% while LT debt has grown around 4000%. D/E is off 2011 highs but still over 0.25. The industrialist in me knows this is probably prudent use of cash given the cost of capital. But it still leaves BRK "atypically" levered until they tighten their belt a bit. More significantly, I wonder whether BRK can keep up the pace of rev and tbook growth once their cost of capital goes up. That would be a continuation of a secular reversal in a 15-year D/E trend. I could see us down in EV/ Rev 1.3 territory. Of course with the leverage PSR < 1 possible. The interesting thing is if they deployed the cash at PBR < 1.2 and borrowed more the D/E would be back up with is a cyclical predictor of a depressed MC - somewhat counterintuitive.

You may be right, but just throwing it out there as I am searching. I find charting essential to macro and there are some decent macro minds on the forum..

Has anyone tried lining up the last 10-20 years with a previous Elliot Wave? I have a massive short position on levered equities right now so I am obviously very interested in market-timing (if you don't believe in market-timing - Jurgis - you may save yourself a few hours and brain cells by now posting here ;)). I was just watching Trader and PTJ lined up the 80s with the 20s and managed to predict the gap down to within about 6 months. I think any technician wouldn't need rocket science to say that based on the past 2 bear markets we have a potential to erode multiyear support levels this year, but I'm looking for the widowmaker - a 5-10% preferably gap down day in the S&P. I was just curious if anyone had the tools to line up where we are with the 70s (those three waves look like they might line up) and try to nail down a date. We all know it'll be wrong, but what the hell. I don't have any easy way to do this in Ycharts.