niels12think
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Posts posted by niels12think
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folks
was wondering what everyone thought the next potential bubble might be and how would you profit from it.
It's a good question to be concerned about, but I think investor's energies are probably better spent looking for undervalued businesses and profiting from them.
When you look for bubbles, you are generally looking for irrationality in a specific area, but as we all know, irrationality can often persist longer than our bank accounts can continue pouring money into hedges. Unless you can find something where the capital outlay is minimal, while the probabilities of a triggering event occuring over a reasonable timeframe is acceptable, you may be aiming for a lame duck investment. Cheers!
knowing this has nothing to do with value investing, isn't the rational thing to do the opposite?
(if you can see an asset entering a bubble, and knowing that when a bubble evolve, the irrationality often persist for a long time, then the logical behavior would seem to be buy the assset in order to benefit from the irrational and exuberant increases)
additionally, if the logical thing to do is to pour money into the asset creating the bubble, then isn't it logical that bubbles will keep appearing and that the irrationality will persist for a long time and that the risk in participating is actually quite low ( - at least until the burst, that is)?
even people realising that it is a bubble and who choose not to participate, might refrain from taking the opposite side of the trade because they know that the irrationality might persist for longer than their bank accounts. And when people refrain from taking the other side of the trade - then this also helps forming the bubble.
reflexivity at work?
cheers
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Can you please explain how did you calculate your numbers?
sorry, I can see that I had an error in my calculation of the Ginis [i used A/B instead of A/(A+B)].
I now get the corrected values for the Ginis of the first 24 years as
BRK 0.23
FFH 0.35
FFH (excluding highest return) 0.27
therefore, BRK had somewhat lower lumpyness in book value growth than FFH.
thanks shalab, for pointing me to this :)
cheers
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Can you please explain how did you calculate your numbers?
In computing the Gini coefficents...
also, the Ginis were indexed to make them immediately useful for comparison.
Cheers
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Can you please explain how did you calculate your numbers?
Nothing fancy:
For Berkshire, the annual change in book value per share is available on page 4 in the 2008 annual report. link: http://www.berkshirehathaway.com/2008ar/2008ar.pdf
For Fairfax, the different book values per common share are available in the annual reports. From these, I add in the dividend paid per common share and calculate the change.
I used the numbers in CAD for the first period and then switched into USD. Restated numbers where used where available.
The 2009 numbers includes only the first nine months and is calculated based on the actual number of shares outstanding at the end of Q3 - not the average number of shares effectively outstanding.
All the different annual reports and the 2009Q3 report are available here: http://www.fairfax.ca/financial.htm
I get the following numbers for the annual percentage change in book value per share including dividends (Fairfax):
1986 183.17
1987 41.26
1988 21.75
1989 22.51
1990 39.32
1991 23.83
1992 10.98
1993 47.85
1994 24.59
1995 21.73
1996 63.38
1997 44.03
1998 47.18
1999 25.71
2000 0.84
2001 -18.17
2002 13.09
2003 29.13
2004 -7.77
2005 -14.66
2006 10.23
2007 54.11
2008 22.18
2009 37.24
In computing the Gini coefficents, the level is moved up if necessary (to eliminate negative numbers which would give misleading results) - and I used 24 and 25 buckets, respectively. Neither "smoothing" nor interpolation was used.
I know we would normally like to have a lot more measurements and that Ginis are not normally used in these situations, but I'm of the opinion that in spite of these things, the calculated Gini coefficents make sense,
although smaller differences may be due to chance and not really indicative of any difference in the real "lumpyness".
Gini coefficents - including formulas - are explained in great detail here: http://en.wikipedia.org/wiki/Gini_coefficient
In computing the annualized return, I calculated as though dividends could have been re-deployed without taxes and at the same rate of return as the remaining book value.
I know this is generally unrealistic as there would generally be taxes to pay on dividends and generally it's not possible to redeploy dividends at book value.
However, in the case of Fairfax, it has - and still is - possible to redeploy money at or below book.
The first nine months of 2009 was included in the annualized return calculation as 0.75 year.
Comments and questions are welcome as always :-)
Cheers
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To be fair you need to remove the first year of FFHs operation (180%) and call it a fluke.
If you replace the best result (the first year) with an average result of the rest, then the extra lumpyness of Fairfax cancels out and the Gini coefficient is reduced to 0.35, i.e. meaning that Fairfax have had the same (or slightly lower) lumpyness in earnings as Bershire during the first years.
Also, if you back out the best result of Fairfax, but doesn't do the same with Berkshire, then the annualized returns remain comparable: Fairfax 22.8% and Berkshire 23.3%.
Both results are exceptionally good in my opinion - and to answer Crip1' question: Yes - I would want both Buffet and Watsa on my team :)
Cheers !
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Actually, if we look at the last almost 24 years, then the book value per common share of Fairfax has increased 26% annually (taking dividends into account). For comparison, Berkshire has increased book per share by 20% annually over the 25 year period from 1984-2008.
As for the lumpyness, Berkshires change in book value from year to year have a Gini coefficient of 0.42 from 1984-2008, where the Gini Coefficient for Fairfax' book increase is 0.50 for the period 1985-2009´Q3.
So yes, the returns for Fairfax is more lumpy - but not that much.
In fact, the lumpyness in Fairfax' return on book might be thought of as additional return when compared with Berkshire.
24 years is pretty long duration - but for obvious reasons it is smaller than Berkshire' full history.
>>> Actually, you probably would want to compare the first 24 years of BRK vs the first 24 years of FFH. Otherwise, FFH has a huge size advantage (being so much smaller makes it easier to get good returns).
I was comparing the same period in order to factor out the different economical environments of the periods.
If we look at the first 24 years of Berkshire book value per share growth, then we have annualized returns of 23.3%, distributed as follows
Year %-change
1965 23.8 1966 20.3 1967 11 1968 19 1969 16.2 1970 12 1971 16.4 1972 21.7 1973 4.7 1974 5.5 1975 21.9 1976 59.3 1977 31.9 1978 24 1979 35.7 1980 19.3 1981 31.4 1982 40 1983 32.3 1984 13.6 1985 48.2 1986 26.1 1987 19.5 1988 20.1 source: page 4 in the 2008 annual report; link: http://www.berkshirehathaway.com/2008ar/2008ar.pdf
Ie. Berkshires returns during their first 24 years were almost 3 percentage points a year lower than what Fairfax produced.
During both Berkshires first 24 years and during Fairfax's first 24 years, the S&P500 returned approx. 9% per year including dividends, but before taxes.
For both Berkshire and Fairfax, the results are after corporate tax.
However, it is true that during the first 24 years of Berkshire, the lumpyness of the results were lower: Gini coefficient of 0.37.
But please keep in mind, that Berkshires results are calculated based on restated numbers (similar accounting principles throughout the period), whereas Fairfax' results have some artificial lumpyness because there have been changes in accounting principles and changes in the base currency - both of which adds to the apparent lumpyness, but not to the intrinsic lumpyness.
Cheers :)
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1) Performance. The BVPS of FFH has gone similarly to BRK but 1) in a much more lumpy way (FFH was in no great shape some years back and things could have taken a turn for the worse fairly easily) 2) on a much smaller duration and 3) with much more leverage (compare the equity/assets ratio even now of BRK vs FFH).
So yes, the returns for Fairfax is more lumpy - but not that much.
In fact, the lumpyness in Fairfax' return on book might be thought of as additional return when compared with Berkshire.
Actually, we can't really know that the returns of Fairfax are more lumpy than Berkshires - it just looks that way.
But it may be due to chance.
Or it may be due to some bad aquisitions - which may not be repeated going forward; for the simple reason that the persons involved may have learned from the lessons.
Cheers
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1) Performance. The BVPS of FFH has gone similarly to BRK but 1) in a much more lumpy way (FFH was in no great shape some years back and things could have taken a turn for the worse fairly easily) 2) on a much smaller duration and 3) with much more leverage (compare the equity/assets ratio even now of BRK vs FFH).
Actually, if we look at the last almost 24 years, then the book value per common share of Fairfax has increased 26% annually (taking dividends into account). For comparison, Berkshire has increased book per share by 20% annually over the 25 year period from 1984-2008.
As for the lumpyness, Berkshires change in book value from year to year have a Gini coefficient of 0.42 from 1984-2008, where the Gini Coefficient for Fairfax' book increase is 0.50 for the period 1985-2009´Q3.
So yes, the returns for Fairfax is more lumpy - but not that much.
In fact, the lumpyness in Fairfax' return on book might be thought of as additional return when compared with Berkshire.
24 years is pretty long duration - but for obvious reasons it is smaller than Berkshire' full history.
True, the leverage is higher for Fairfax, but there's another thing to consider: Risk management.
It seems to me that Fairfax hedges risk more carefully than Berkshire.
Take for instance the recent period with shorting of the S&P500 - during this time, Fairfax did maintain call options to put a cap on the potential loss, along with some equities.
Or the CDS' and the reinsurance recoverables and other stuff.
It seems to me, that Fairfax typically have two legs in the deals, where one leg might go wrong but then the other leg will compensate.
Berkshire on the other hand, seems to make more pure one-way deals. For instance that equities will increase.
Consider what will happen if the more pure one-way deals go against Berkshire.
cheers :)
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if you look at this on an earnings basis, it seems extremely cheap, or am i missing something.
mranski, do you have a penchant for understatement or what?
- PE = 6 x;
- p/b =0.95;
- debt to equity either 20% or zero (debt so far out as to be equity);
- a fortress of cash
- growing at > 15% per year.
- gauranteed interest and dividend income of 700 M per year.
- and now stock portfolio is partially hedged above where the market closed today.
They are being priced as a Deep Value stock. If this were three, or twelve years ago this would have been in the 800s - 1000 US range.
In reality, P/E<3 when taking into account the full earnings:
book value increase per share Jan-Sep incl. $8 dividend: (7,650M - 4,969M - 1B) / 20.3M + 8 = $90.8
book value increase per share extrapolated linearly to full year: $121
conclusion
current price per share of $354 seems to represent a severe mispricing, especially if the Fairfax track record is taken into account :o
Cheers
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Book is now $371/share. Cheers!
$371/share at end of Q3.
If October was similar to July-September, then book is now approx. $390/share ;)
Beautiful !
Cheers
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it can be very misleading to look merely at reported P/B;
the Buffet concept of "look through" apply not only to earnings, but also to both book value and growth and intrinsic value.
example:
one stock, A trades at P/B of 0.5 with P/E of 8 and annual growth of 10% and 5% dividend yield
another stock, B trades at P/B of 1.0 with P/E of 16 and annual growth of 7.5% and no dividend yield
And there is similar underlying risk in the two stocks.
you might think the first stock is the better buy?
now, suppose that the assets of the second company consist of a million shares in the first company.
For the second stock,
look through P/B is 0.5
look through P/E is 8
look through growth is eg. 13.2% (dividend is used to buy up own stock, thereby boosting look through growth, but assuming no tax)
Fairly obvious if there is only one underlying stock, but also applicable to a company with a portfolio of stocks and bonds.
And though at first sight, it appear that A is the best buy due to reported lower P/B, lower P/E, higher annual growth and higher dividend yield,
then in fact it is the second company, which in this case is just as good or better (ignoring taxes).
On top of this, if B is an insurance company then also the insurance operations should add to the value in the form of extra earnings due to CR below 100 and interest income from the float, although this comes with some additional risk from the insurance operations.
Neither future value of CR below 100 nor future income from the float is part of the book (except for goodwill).
In this situation, it seems much preferable to buy B at P/B of 1.0 instead of the many stocks and other stuff that the insurer owned.
This is true even if the reported valuation ratios of those other stocks and stuff were seemingly more favorable.
Indeed, you would have to be *a lot* better at managing investments than the investment managers of the insurance company, in order for you to earn more by investing directly in other companies and stuff, than in the insurance company.
Knowing how cleaver the team at Fairfax has been at managing investments, then it seems that an investment in Fairfax at 1.0 of book would be *very* hard to beat, at least without taking extraordinary risks.
And if anyone could invest so much better, then that guy might belong on the HWIC...
And let's not forget that book value might have increased further during October.
Btw, I think the P/B ratio should expand over time in order to lessen or remove the above inefficiency.
Cheers
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Even if the business looses real value, then the nominal market price per share might rise with inflation, catapulting far out of the money leap call options;
For some companies, the price of out-of-the-money leap call options seems to include only extremely low probability of share price increases due to high inflation and/or devalued USD.
I.e. it seems to me, that while underlying common stocks may increase in price only to keep pace with inflation and USD devaluation, then the leap calls might at the same time increase very significantly both in price and in real value in the case of significant inflation and/or devaluation of USD...
Therefore such leap calls could serve as a hedge not only for the return of exuberant times, but also against inflation and USD devaluation.
cheers
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Is it fair to jack the price up to the moon for Warren Buffett as a buyer, or HWIC, just because they will be good allocators? I don't think so.
The price should be fair and friendly to all parties - indeed it would not be fair to Fairfax holders to pay a blue sky price for ORH.
But neither is a low ball offer fair to ORH holders.
Cheers
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Minority shareholders are not well-served in these situations, but they do have the choice to enter these positions or look at other 'fat pitches'.
Yes, a majority partner behaving unfair and unfriendly can do harm to minority partners.
However, isn't Fairfax meant to be Fair and Friendly?
I believe it is of long term value to Fairfax to be fair and friendly.
Indeed, the holders of the common in Fairfax are mere minority partners when it boils down to voting power - should they really start to look at other 'fat pitches' ::)
Generally, why would you like to be a partner with someone not fair and friendly - in a sub, in a parent or in ... ?
Cheers
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ORH is just canvas on which HWIC paints. I think some of you are trying to sell blank canvas to Picasso at the price of a completed masterpiece.
If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ?
(assuming Picasso was still alive and expected to continue painting for many years ;) )
Cheers
That's what Fairfax shareholders own. Not ORH shareholders who merely contract Picasso to paint their canvas. Picasso changed his mind and doesn't want to work under contract anymore -- this is decidedly different from the relationship that ORH has with it's IN HOUSE underwriters.
I beg to disagree; Fairfax' value is to a large extend that it owns a huge chunk of ORH - effectively this is your guarantee that the contract will not be cancelled.
Fairfax would loose a lot of money if they cancelled the contract with ORH.
Unless, maybe, that a much higher offer was presented by a third party - in which case the $60 offer in comparison would be way to low...
I am playing the Devil's Advocate here. Put yourself in Prem's shoes. Why the hell should he have to pay up for his own performance? I mean, really.
...to expect a premium from Fairfax for it's own stock picking seems unjust... I like the analogy of selling the blank canvas to Picasso at an extreme premium on the basis of speculation that it will soon be worth a mint simply because he has produced past masterpieces.
Well, playing the devils advocate, then the persons constituting the HWIC could quit tomorrow and then Fairfax shareholders would also be aware that they only held a contract.
But this is beside the point.
At $60, the price cover approx the current book value, but does not take into account the value which is not stated in the books, for instance ICICI and conservative reserving.
and it does not take into account the profitable underwriting, nor a hardening market nor the end of the hurricane season.
and it certainly does not take into account any above average investment returns.
To be fair, I believe the offer should use the same P/B factor as fairfax itself and then add a small premium. Obviously it should be current book.
This would allow ORH holders to sell and buy into the parent - except possibly for the tax hit for some holders.
A premium is needed to pursuade ORH holders that they will be net equal or better off to sell ORH and buy FFH, than to hold onto ORH.
Cheers
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ORH is just canvas on which HWIC paints. I think some of you are trying to sell blank canvas to Picasso at the price of a completed masterpiece.
The point is that HWIC do run the investments for the present holders.
If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ?
(assuming Picasso was still alive and expected to continue painting for many years ;) )
The decision to buy or sell @ 60 seems easy to me ::)
Cheers
Unlikely, but suppose Fairfax were to sell off it's majority stake? Overnight you'd learn the value of ORH without HWIC.
That's really all there is to ORH... the underwriting and an average return on investments -- Fairfax owns the rest already (HWIC)... they're just offering a price for the underwriting and average return on investments, which is fair given that they own the rest already.
If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ?
That's what Fairfax shareholders own. Not ORH shareholders who merely contract Picasso to paint their canvas. Picasso changed his mind and doesn't want to work under contract anymore -- this is decidedly different from the relationship that ORH has with it's IN HOUSE underwriters.
I beg to disagree; Fairfax' value is to a large extend that it owns a huge chunk of ORH - effectively this is your guarantee that the contract will not be cancelled.
Fairfax would loose a lot of money if they cancelled the contract with ORH.
Unless, maybe, that a much higher offer was presented by a third party - in which case the $60 offer in comparison would be way to low...
Cheers
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Ericopoly: HWIC as ORH's investment managers, are as tied into ORH as its own underwriters are.
ORH is only worth 20% ROE if you have HWIC managing the show. So how common is it for an insurance company to have HWIC's numbers? I think any independent buyer should be assuming average investment returns.
It's only a 20% hindsight grower if HWIC runs the investments. This implies that HWIC is worth a massive chunk of that 20% ROE, but then Fairfax already owns HWIC and need not pay for it twice. So it's not in the ORH sale.
ORH is just canvas on which HWIC paints. I think some of you are trying to sell blank canvas to Picasso at the price of a completed masterpiece.
The point is that HWIC do run the investments for the present holders.
If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ?
(assuming Picasso was still alive and expected to continue painting for many years ;) )
The decision to buy or sell @ 60 seems easy to me ::)
Cheers
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Given the BV @ 6/30, and given the FV adjustments for equity holdings such as ICICI, with the adjustments for market performance of stocks since 6/30 my estimate of BV today is $350.
as an aside, BV@Q2 was $368 under US GAAP - mainly because non-controlling interests are included in total equity $6,442.
actually, I was a little surprised to learn how misleading the US GAAP can be :o
cheers
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- It's ok to buy at a price higher than value, because you can always sell to a price even higher (you plan to sell to a greater fool).
- It's ok to sell at a price lower than value, because you can always buy to a price even lower (you plan to buy from a greater fool).
Really, these statements seems to me to simply disregard value?
They are not the same! When you buy at a discount to IV, you have a margin of safety. You would do fine selling it a lower discount to IV. Say you buy at 50% discount to IV, you can choose to sell it when it is only at a 30% discount to IV and still do fine, but would not do as well as when you sell it close to IV.
When you buy at a premium to IV, there is no margin of safety. You are just hoping for a greater fool to show up.
Vinod
I'm not saying that you won't do fine selling at a lower discount to IV. But if you plan to load up again at a greater discount to IV, then you are in reality speculating to buy from a greater fool?
This is also true if you buy another issue immediately - indeed, in this case you believe your own estimate of IV is more accurate than the "greater fool".
Instead, why not opt for a greater margin of safety by selling (possibly short) an issue trading (much) higher than IV instead of selling the issue trading at a small discount to IV ?
Shouldn't this improve either your odds and/or your gains compared to selling issues below IV?
But we're moving further away from the point: isn't a market call in reality just a Mr. Market call, trying to estimate the odds for the behavior of Mr. Market?
Cheers
- It's ok to buy at a price higher than value, because you can always sell to a price even higher (you plan to sell to a greater fool).
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Which weaknesses do you guys see in the following?
My thinking is that Market calls and the greater fool theory is different sides of the same coin..
Consider the following statements
- It's ok to buy at a price higher than value, because you can always sell to a price even higher (you plan to sell to a greater fool).
- It's ok to sell at a price lower than value, because you can always buy to a price even lower (you plan to buy from a greater fool).
Really, these statements seems to me to simply disregard value?
The statements can be transformed into a broader form:
- It's ok to buy at a high price, because you can always sell to a price even higher (you intend to sell to a greater fool).
- It's ok to sell at a low price, because you can always buy to a price even lower (you intend to buy from a greater fool).
In the broader form, it seems increasingly visible that the actions has little to do with value investing, and more to do with a belief in you being able to second-guess Mr. Market's behavior in the future (i.e. a "Mr. Market call" or just a market call ;) ).
Of course, this is not to say that the action won't be (very) profitable.
Cheers
- It's ok to buy at a price higher than value, because you can always sell to a price even higher (you plan to sell to a greater fool).
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Or maybe it can be seen as an inflation hedge - in case inflation should run wild some time down the road
Wide moat businesses that can pass the cost increases to their customers are more efficient as inflation hedges in my opinion. A business that has overcapacity in it's industry and secular declining demand don't basicaly have time on it's side.
My thinking is that high inflation will in reality wipe out all debt while preserving the real value of hard assets. When the debt is wiped out, then the operational risks are also lowered and valuation increases further. Having heavy debt inside the investments shields the owner from the downside risk of the debt. Using convertible debt provides high interest income in the interim until conversion and makes sure you will not yourself be wiped out by the inflation.
Cheers
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One possibility I've considered is that they felt that they wanted to balance out their very bearish portfolio positioning last year with some stocks that would have done very well if the economy had turned out to be less depressed than they had predicted - a form of insurance, if you like.
Or maybe it can be seen as an inflation hedge - in case inflation should run wild some time down the road
Cheers
FFH delisting from NYSE
in Fairfax Financial
Posted
hmm, I definitely don't like the tax consequenses of higher dividends, but then again the applicable tax rate is up to 43% in my country :(
This means that it's very easily a disadvantage to pay out dividends even if the stock is trading below book and it is not possible to get high returns on retained money. When the tax to be paid is up to 43% of the dividends it's a not a very nice deal.
cheers