Graham Osborn

Somewhere I read that 4B or so of Trump's net worth was goodwill attribute to his name. Of course there is at least some original grain of truth to this in that the name is licensed to 3rd-party developers etc, but please. No wonder he doesn't want to disclose his tax returns - then he'd have to reconcile some of it. I have to hedge an earlier post where I claimed Trump's election would be bearish for the market. Hillary's election would be perhaps more bearish in some sectors particularly pharma. I guess that's fairly obvious given what her Tweet did to Valeant. But my guess is the market has already priced this in relative to her nominal probability of winning. What was important was rather that Trump actually moved towards her in his attitudes toward that sector. Trump has possibly less loyalty to partisan principles than any candidate I have recently witnessed, making him a threat not only to Hilary but to the parties themselves. People have historically adopted a heaven-vs-hell mentality on election outcomes, but this time I think many realize that we are in for some very challenging times regardless of who gets elected.

+1. I'm embarrassed to say I didn't even think of that ;). And my enlightened self-interest is perhaps even more blatant as my investments consist mostly of LEAP puts..

Hi DH, I think from a policy perspective - per the Fed's mandate, which I don't necessarily agree with - the most logical thing to do is gradually raise rates. Lowering rates will not do much to expand sound credit at this point, and higher rates would strengthen legitimate (as opposed to speculative eg LC) lending institutions. Higher rates would also stave off inflation, which despite newsflow is an avalanche waiting to happen at some point. The Fed risks take a reactive rather than proactive approach to this issue, which could result in a rapid series of hikes later on. Of course, the timing on any of this is impossible to guess at. I'm not sure I fully understand your question, but I think an important note is that aggregate and newly issued debt are highly dependent on the path of rates and so you can't hope to achieve a given credit state just by setting interest rates at a given level.

I had an interesting thought about the meaning of negative rates this morning while reading about the battle between banks and mortgage holders in Spain. Think of negative rates as like discount retailing with price controls. Buyers and sellers can't choose the price of goods, only whether or not they participate in the market. When prices are high, retailers are looking to sell but consumers are reticent to buy -> low volume. As you lower the price, consumers become more and more eager to buy while retailers can boost efficiency up to a point -> volume goes up. But at some level above zero, retailers can no longer make money relative to costs and investory risk hence their willingness to sell collapses. At some level above zero, volume peaks and starts to decline. When applied to banks, this analogy implies that peak credit actually resides somewhere above zero and below that you enter deleveraging. There is a kinetics to this which is perhaps even more important. If retailers could be induced to sell apples for $0.01 for a period of time but consumers were told the situation would not last, consumers would hoard apples (let's ignore the perishability factor here and think home loans etc). But suppose after an extended period the price control authority decided to reduce prices to $0.005. Would consumers buy even more apples? Maybe, but since they already bought so many at $0.01 they might have limited capacity (eg storage space, desire to eat more apples, etc). This implies that if rates have been very low for very long, lowering rates further may have a limited effect to boost volume even from the consumer standpoint. This matters because credit levels are a reflexive (non static) function. Credit tends to rise or fall rapidly. If credit cannot rise, it might hover but should fall rapidly after not too long. If correct, the theory on the valuation of risk assets relative to high-grade corporate bonds becomes bogus at current levels. Risk assets do not rise to infinite levels, but fall off rapidly as rates continue to fall with limited demand or willingness to lend.

Thanks, and I think this points out (again) that Buffett invested very differently as a young man from the way he did in his later years at Berkshire. He was very much a special situations investor back then. A lot of people seek to emulate Buffett because he has a high net worth, but they're shooting at where the bird is now rather than where it was at their stage in the game. Hence they fail. The corollary to this is that US economic conditions were very different when Buffett got started than they are now. I don't think that means one can't achieve his returns, but you can't expect to do it in the same way any more than he could have expected to achieve Vanderbilt or Gould's success by emulating them. Although he means it a bit differently, that what I really take as his meaning by the claim "I won the ovarian lottery." Look at Rockefeller - I think he would have been rich regardless, but if you copied his strategy of going head over heels into the oil business you'd be unlikely to achieve comparable returns. There is no such thing as a timeless strategy in investing, although I do believe there are certain timeless truths.

You should start a thread for OnDeck. My take after looking through over 200 bank statements is that whenever the provision ratio goes down, it doesn't smell good. The reserve can remain high merely because they haven't charged off the losses from the reserves. It doesn't mean anything. Another problem is that when a bank is growing too fast, the growth can hide the delinquency problems. For example if your bank is growing loans at 20% a year, and if the loans usually perform for two years before they default, then you can look really good for the first 3-4 years. The growth of the new loans in year 3 will hide the delinquency problems for loans made in year 1. And if they find this problem, they can lower the underwriting standards to accelerate loan growth, so the problem will be hidden for even longer. Eventually it will be a grand bust. I am not saying OnDeck is sentenced to this game. But I have concerns that I don't know how to dig further to fully understand. Uh oh! Better luck next time Khrom..

Oh, and if buying 1 B-share to attend the meeting sounds pathetic, here's an extract from an actual conversation I had at the Borsheim's reception: Me: Hi there Guy in suit: Hi! Me: [brave stab at conversation] So what brings you to the meeting? GIS: Oh, well I'm a student at Creighton College. Me: Oh really, so why do you own Berkshire? GIS: I don't, they sell the tickets on campus for $5 so we just come for the free drinks. Me: Oh really, so is that - er - popular? GIS: Oh yeah, most of the people here are in college. Me: [politely] Don't you have anything better to do than gate-crash the annual meeting for a top-10 insurer? GIS: Not really. There's not much to do in Omaha. He was NOT lying. Most of the people I talked with were Omaha natives and seemed about as happy to talk about Berkshire as the local temperance society. Rather than the world's largest congregation of value investors, it felt like Omaha's largest frat party.

OK guys, let's move this worthy discussion over to the KO thread. And if BRK starts making payday loans to crack dealers, I'll happily double my current holdings (1 B-share) :)

If you believe this, does this mean that you're constantly short LEAPS straddles on a bunch of indices? (I believe excluding friction, a widely diversified application of LEAPS--long or short--will be break-even on average.) Well, the short answer is no I've never gone short vega. I think it boils down to what "average" is taken to mean, and how it relates to the outcome experienced by the individual investor. Obviously with zero volatility a diversified put-call balanced LEAPS portfolio will go to zero if held to maturity. As you increase volatility you would reach some point where you would breakeven for the portfolio, and increasing further you should earn a profit at maturity. The volatility/ P&L curve would be inverted for the short-vega strategy. The finite duration of LEAPS implies a different definition of average from that for a non-wasting underlying. So I don't think there can be a generalized conclusion unless you are using some sort of ascetic DCA strategy over a period of decades. So to revise my original comment, "I don't know whether a diversified put-call balanced LEAPS portfolio - long or short - will be profitable or not on average." That's why I think, having made many mistakes in this area, that LEAPS are best restricted to situations where the investor has an incredibly asymmetric fundamental view on the underlying and a set of catalysts well within the expiry. This is the Greenblatt philosophy which contrasts starkly with what most professional option traders do. These traders include the sellers of OTM options based on the law of averages. As a value investor I prefer infrequent, large profits over frequent, small profits. The nature of the seller is that since the profits of each trade are small he has limited motivation to delve deeply into a given underlying. With MMs it's even worse. This creates an inefficiency which the value investor can exploit by allowing very few eggs into his basket.

Where do you get no capex? They spend huge amounts and I don't think they would ever spend less than they need. Despite that, cash keeps piling up quickly. Makes total sense to return it if you can't spend it. It was a joke. If Apple decided to spend most of the cash pile on iCar, for example, would you complain as shareholder? If they spent over 150bn (growing every quarter) on a car, yeah, because I don't think they could get a good ROIC on that amount. Might just as well buy Tesla for 45bn ;) 150b for the iCar? Hell no. 150b for the iWoman? Hell yeah.

Thanks, it seemed like some sorta weird disconnect. I'll go back and listen b/c I was in fact curious about the positions referenced. And yes, the amount of marketing going on among the questioners this year was epic

Interesting meeting. The following struck me: - The whole renewables focus seems a bit quixotic to me. We are at the end of a commodity cycle and these are declining margin businesses. The age of carbon has come - even with a carbon tax. And he seems a bit in denial about the implications of this for BRK's railroad holdings. I would expect to see those earnings in decline for the next 5 years at least. - Would anyone in their right mind buy a megabank (including BOA) without looking very hard at their derivatives book? The AAA CDOs were listed in the same account as treasuries by many banks before the last collapse. I hope really meant he just didn't want to talk BOA's book, which I'd understand :) - Can anyone explain to me what the German fixed income manager was asking? I couldn't properly hear the question and Buffett was giving one of his tap-dancing answers. Gotta go back to the recording.. - Munger seems badly in need of retirement, lol. Watching him sit there eating peanut brittle or whatever just cracked me up. Buffett kept apologizing for him as though he were perpetually passing flatus. - Buffett seemed a bit darker than I've seen him in recent years. His whole "CNBC" digression. Then he mentioned how he did not think the next financial dislocation would be in housing, but somewhere else. That he took the time to watch the VRX hearings was interesting. I get the sense that he smells something. He's trailing Soros but definitely getting there from where he stood last December. He was a macro wizard back in his 30s-40s although he might not admit it - just as sharp as PTJ. I think he realizes that as a reinsurer it takes all of 2 seconds to go from acting incredibly smart to acting incredibly stupid a la AIG, something that could happen if an idiot someday runs his company. - Succession plan? The problem everyone forgets is WEB has 99% of his net worth in the company. He spends every minute of his waking life monitoring his baby. For his successor it will be just a job with good incentive pay that comes after spouse/ kids/ next job opportunity. Look at Walmart which had exceptionally strong family ownership - even they are losing it 20 years after founder's death (amazing run by the way). Buffett doesn't have a strong family governance in place, so I don't see Berkshire's core advantage of intelligent long-term capital allocation and intelligent reinsurance outlasting his life. His collection of wonderful managers bear him a strong personal loyalty, but that goodwill is unlikely to be transferable to a successor. - GEICO ad with the dog during the company movie? I nearly inhaled my tie laughing. High point of the meeting for me :) - VRX and Theranos comments? Talk about a smack down. Monday could be dicey for healthcare shares now that God has spoken, but what do I know :)

Just throwing this out there - what's the point of buying LEAPS on an index? I get maybe if it's an ETF you might expect greater movement than the underlying basket for structural reasons, but when I think of LEAPS I think of an underlying you expect to go to infinity (long) or zero (short). I guess that seems necessary to me to provide an adequate MOS to offset wasting. As we know, a widely diversified application of LEAPS is likely to be a losing trade on average. Cheers from the Berkshire meeting!

I'll have a look, but it seems like the larger point is how useful a metric might be if the metric only applies uniquely to that company. If the metric improves or worsens, that will tell you whether the company is doing "better" or "worse" according to its own definition. But this information won't give you a sense of opportunity cost - whether it might be better to sell the position or invest in a competitor eg. I am generally a bit leery of adjusted metrics even if they are industry standard. If they aren't industry standard that sets off more alarm bells.

Well "fraud" is such a strong word. My image of fraud is some company tossing the blood specimen into the garbage and randomly generating a result. I doubt anyone here suggests they are doing that. However, I do believe that $9B just went poof. I doubt any other company would want their technology or patents. I definitely believe they cannot make a profit, now the question is, what can the investors recover from the hundreds of millions that they've invested. I imagine background to this story is probably similar to the big short. Who chose this startup for investment? Someone who says I don't take the risk in this (like Wing Chau in the movie). Who paid for the investment? Maybe some pension fund in California or Germany. (Lipperman always answers some dumb bank in Germany is taking the other side of the trade). They are the product of the push for alternative investments and yield. When there is such a supply of easy money, they will attract smart people pretending to be the next Steve jobs like flies to sh*t. Steve jobs had to prove himself toiling in a garage in Palo Alto. Now to get hundreds of millions of dollars you don't have to have a proven product, you just have to do a sell job. So the game changes from showing substance to who has the greatest appearance of substance. In this environment, such investors will definitely suffer with below average yield. This cycles repeats over and over. I think you're right that when VC gets bubbly you get kind of a pyramiding misalignment of incentives the way you got with MBS/ CDOs and the megabanks, although the size of the anomaly is orders of magnitude smaller and the ecosystem much simpler. Nonetheless there is still kind of a hierarchy of early-stage/ mid-stage/ late-stage VC firms feeding off deals to mutual funds, hedge funds and Wall Street banks. Every assumes the next guy in the chain is always going to be there. Being a revenue-generating company trying to scale under VC pressure is bad enough - trying to do product development under such conditions (which is most biotech until the product is approved) is far worse. The problem is this scandal is paralyzing the later stages of the market in biotech/ medtech/ tech generally. The pace of hiring in Silly Valley has slowed considerably. When that happens you get more direct strategic acquisitions with fewer middlemen - which means fewer markups and generally lower valuations.

This story just blows my mind. I wonder what the secondary market share value is now? With 2 execs potentially banned from the industry for 2 years, considerably less than 9B I would think..

EV/ Rev and EV/ EBITDA are my favorites, but EBITDA can be inflated depending on how restructuring charges are categorized. Other good ones are ROA/ ROIC. Another one you won't find in most screeners is Rev/ Assets which I sometimes use to compare companies within an industry if I don't trust the accounting. +1 on your AGN comment, but do realize the market expects the debt to be offset by ~40B in cash from Teva. Teva still has to issue the bonds/ regulators need to give the green light/ etc etc so the probability-weighted present value is probably a good bit less than 40B. The EV/ Rev figure is cap neutral through such transactions.

I had the same issue except with Merrill Edge. I bought 1 share of Berkshire last year just so I could attend the meeting and never got mailed one! There may have been some fine print.. But I ended up just ordering one for $10 on EBay. I think my capital gain on the BRK share offset the loss on the ticket :))

This "adjusted ROIC" doesn't make much sense to me. For one thing, it doesn't make much sense to add a revenue figure to a net income figure. For another, organic vs inorganic revenue growth is almost impossible to determine in the cases where it would make a substantial difference. Just look at the debate over how much of Valeant/ Allergan's revenue growth was organic - it generally wasn't/ isn't disclosed in a useful manner. Off the cuff, it seems like a metric created for the same reason as most adjusted metrics - to flatter.

It's interesting.. I watched one interview of him probably within 12 months of selling his CDS positions and he seemed to be playing down the whole issue of bank capitalization. It seemed like maybe he was afraid of attracting too much attention to himself at a time when AIG/ others were being "bailed out" to pay off himself/ others. I assumed he was keeping his head down considering what happened to Ackman/ Einhorn/ Burry. But there is a part of me that wonders if he is a bit of a backseat analyst.

1) Is December 1928 that far off from October 1929? (This is an inappropriate analogy btw - 1929 ~ 2000.) 2) Do individual stocks exhibit the same phase as the averages? Do sectors exhibit the same phase as the averages? Is it even possible to recognize a stock/ sector/ index bear market from a chart except with a multi-year retrospectoscope? Have investors, historically, continued to buy each dip from the top until near the bottom? 3) Consider the pros and cons of a long/ short portfolio of stocks vs a long/ short portfolio of LEAPS in 1928. Then repeat for 1927 and 1926. How could certain bad outcomes have been avoided? Which were unavoidable? 4) What is your portfolio and why? Do you have a long or short bias? What is your cash position? What is your bond position? How likely do you think it is that your portfolio with be >15% up vs >15% down in 2 years. If you are not confident in your view, what are you going to do about it? Good luck, Graham

Interesting interview by Paulson : This was completed just as oil began its great slide from the 100s and the shale producers started to implode. Pharma took longer, with Valeant not crumbling until summer of last year or under a year from the time of the interview. Hard to believe this took place less than 2 years ago.

Notice how the common theme is either creating fictitious information or ascribing too much weight to certain existing information. The best situations to bet against (either over-bulled or over-beared securities) arise when the prevailing view contains strong assertions. Strong assertions include words like "definitely," "highly likely," "nearly impossible," "by X date," "for X amount," etc. People tend to adopt strong assertions in schooling situations, at which point they are most vulnerable to strong contrarian bets. Of course, an early contrarian is a trampled contrarian just as a late trend-follower is a trampled trend-follower.

Time for a Friday afternoon rant by a tired short. Since we're mostly discussing weddings and global warming rather than investing, I assume the average COBAFer hasn't been buying much recently. Being down with a mild case of walking pneumonia for part of the week I took the opportunity to reread The Big Short. I think the reason is to remind myself how emotionally draining it is to maintain a short position, particularly if that short involves (1) time premia (2) a thesis on credit markets that is too complex to be fully. I'll leave out the 3rd and most painful - investors - since I am lucky enough not to have those yet, unless you count my Dad who loaned me a bit last month. Between Jan 1 and Mar 1, I allocated about 30% of the portfolio to put positions on leveraged US companies. My general preferences were (1) the company should be once which should be disproportionately harmed by a dislocation of the investment grade market as the "nuclear cloud" from shale producers/ Valeant/ Allergan and other serial acquirers produced generalized malaise (2) the common should have taken a 50%++ hit in the last crisis for reasons not specifically related to the MBS/ CDO markets. I went in with the idea that technicals were less important since I was buying long-dated options, and I wasn't all that strong a hand at options-wasting scenarios. Consequently, I bought a number of positions with 2017 expiries and pretty bearish strikes. Later, during the rally (funny how that goes), I actually went back to the last 2 bear markets and looked at the time between the 200-day peaking and the 200-day crossing below the 50-day. I'd done this before, but in previous runs I'd used the 1-day averages. This time I used the 1-week averages, and the pattern generated was far more consistent/ useful. Unfortunately it also implied my trade was stupid - in the past 2 recessions the indices peaked around year-end and the WMA death cross (daily moving average doesn't mean much, but weekly moving average corresponds to the steepest component of the index plunge) comes around election time. 4 months is not much of a margin of safety. Between Mar 1 and Apr 1 I allocated another 30% according to the new thesis, which meant buying 2018 options, some on the companies I already selected and some on new ones. Of course, given the magnitude of the rally, the market values of these have mostly declined as well, but the declines concern me less since time and volatility are one my side. Of course, over the same period the first 30% of the portfolio has dropped drastically in value. Nor do I have any liquidity from the first 30% since now would be the worst possible time to sell those options. Between Apr 1 and the present I allocated the remaining 30% or so to 2018 puts on 2 securities - AGN and GRA. I've discussed the theses elsewhere, but I should mention the reasons why AGN is now by far my largest short position: ..As many of us expected, the PFE/ AGN merger blew up. I figured what would happen was the TEVA deal would blow up and that would nuke the PFE/ AGN deal. I'd thought less about the possibility the latter might happen first. When I saw the headline I felt immediately sick because which I did have a decent sized ATM 2018 short position it was not at all well positioned for what I thought would be a VRX-like fall. However, the market treated it like a couple arbs just jumped out (big drop but not huge). So since then I've been building out a large position in the 100-150 range (I won't say exactly where but it probably doesn't matter). I should explain why. First, I see the PFE/ AGN blowup as a historically analogous rollup event to the WCOM/ S blowup which arrested WCOM's appetite and unraveled the whole Raggedy Ann - serial acquirers have to keep acquiring because the accounting and financing benefits of being a serial acquirer are derived from the acquisition process itself. Second, I see the TEVA "cash rescue" as less likely than even bears believe. TEVA has secured bridge financing but has no credible plan to raise 22B in long-term financing for a deal that could well produce a downgrade on TEVA's remaining debt. Remember, my macro view says the stock/ debt market rally of the last few months will fail right around the time TEVA is planning to do the raise. Hell, Dell is paying like 10% to buy EMC. What's TEVA gonna do, pay 15% on 22B (3.3B) with all of its 4.8B in FCF? “Oh, we’ll use Actavis to pay it off.” Ha! Brent S isn't selling the business out of the goodness of his heart. He knows it's a sleepy-growth-piece-of-crap with accounting/ price-hike inflated numbers the same way Valeant's was. Back when I was analyzing things last year I actually went through the growth projections for each of AGN’s big aquirees and did an SOP growth rate calc - nothing close to what the last few 10Ks’ patchwork numbers would imply. That thing will be only “make money” after multiple restructurings and write-downs to rescue it from the netherworld of businesses run like Warburg Pincus. And of course, all that is ignoring that the regulators have to approve another deal by their least-favorite customer - Allergan - while TEVA has to convince them it won't have to ratchet up its generic pricing power after the acquisition to pay off that huge pile of debt - even though failing to do so would make the acquisition a stupid business decision. Oh yeah, and has anyone noticed AGN is still selling at 7.5 EV/ Rev - not a problem divestiture will fix - with no larger prospects for engineered growth? Oh yeah, and has anyone noticed how the price tends to inflect with Valeant even though they have nothing in common? I could go on, but I think you get the picture ;).. So here I am, feeling reasonably good about things but totally out of cash. So that's my main focus right now rather than investing. Hope to run into some of you in Omaha!

--Mr. Soros Mr. Watsa has been saying this all along, hasn't he? ;) Cheers, Gio I haven't studied all of Watsa's macro bets, but the 2 I know of don't really knock my socks off. (1) SDOC investment. Need I say more ;) (2) deflationary hedge. I've been arguing with everyone about this recently. Is the Fed really likely to sell off its mortgage-backed (etc) bond portfolio anytime soon, if ever? Unlikely. Is it likely to get most of that principal paid off? Unlikely. So we have monetization of private-sector debt which is likely to be followed by public-sector monetization if we make Dalio's MP3. Both policies are inflationary, but it takes time for that inflation filter down the food chain to measures that appear in CPI. Central banks are too smart nowadays not to take advantage of inflation IMO. The power to inflate is the power to tax, and there aren't many sovereigns right now that don't need more tax revenue.