Packer16

Depends upon where you look. If you are trying to deploy the billions these guys you are correct. But most of us have much smaller pools of capital that can buy things these guys cannot touch. Packer

I am assuming the 20.5% in the prospectus is for a fund with no carry after fees. In the footnotes it states that 2.2% of the performance is due to securities from other countries so India performance is 18.3%. Less a carry of about 2.5% gets us to 15.8% versus an index of 9.0%. Now this 4.7% less than the stated performance. So for 10-yr and 5-yr periods the illustrative investment would have lagged the index for the 3-yr it is about breakeven and exceeds clearly only over the life of fund. Another consideration is the size of the fund throughout the period versus the size of Fairfax India. If in the earlier periods the fund was smaller than Fairfax India then I think replicating these returns will be difficult. Most of the return was generated from 2001 to 2007. Packer

In running the numbers the impact of the carry is only about 3% plus 2% for the other investment gets an adjustment of 5% assuming the fund has a 1.5% asset management fee. From the table then the illustrative fund would only outperform on a life and 1-yr basis. Good performance but not one I am willing to pay a premium to NAV for. Packer

Fairfax India pays a carry of 20% of the return above 6% to Fairfax in addition to a 1.5% asset management fee. If the HWIC Asia fund does not have this carry, then the net return to Fairfax India may be materially less the HWIC Asia fund. The fees for the HWIC Asia fund are not disclosed in the prospectus so I was wondering what these fee were so a comparison could be made. Packer

The reason I ask is the carry reduces the rate of return significantly even to the point of making the investment less than the index over almost all time periods if the investment fund returns have no carry associated with them. Packer

One question I have is what are the fees on the illustrative India fund returns they include in the prospectus? Packers

The real question you have to ask with the RE is there a higher a better use that someone is willing to pay for that will not degrade the existing business. Then you need to able to see a catalyst or the RE will remain trapped in the firm. You also need to see what assumptions are being used to value the RE. If you are using sub 5% cap rates then the RE value may too aggressive. If these conditions are met then you may have an investable thesis. Alot of business have owned RE but they need it to generate the CFs they are producing. An example of a RE non-operating asset company is GenCorp (Rocket Engine firm) who has a large piece of RE in Northern CA. Packer

What is really needed is a GSE to facilitate loans to creditworthy borrowers. I helped a relative look for homes in Arkansas and was really surprised at the difference in borrowing rates for great creditworthy folks in terms of buying manufactured versus stick built homes. Packer

Does anyone know what event Zweig is referring to next week (Bogle vs. Grant)? Packer

Has anyone invested in any of these situations? There are two that I know of now (Hercules Cement in Greece and Telefonica del Peru in Peru) that are cheap but when or if the remaining shares will be purchased at a reasonable price is the risk. Packer

It depends upon what portion of cap-ex is one-time versus for recurring. For the cement business, there is an investment in a plant so EBITDA may be used or EBITDA - recurring cap ex may be a batter metric. In most cases, a cheap EBITDA multiple will also have a cheap EBITDA - recurring cap ex. Packer

I was thinking about industries that have good characteristics but some relatively cheap players and cement/aggregates came to mind. Although there are some commodity players out there, most companies have good margins. Most of these businesses trade at 8x EBITDA+ and for good reasons of local duopolies and transport costs. Some the cheaper ones I have come across are: Sumitomo Osaka (4.6x), Nozawa (2.8x) and Yoshicon (1.1x) in Japan, Seo San (3.1x) and Busan Industrial (4.8x) in Korea and Buzzi (savings shares) (6.1x) in Italy. Has anyone looked at this sector or found good research sources. TIA. Packer

You may not be willing to invest in yen bonds but the aging population of Japan will more than make up for all those who do not want to invest. As folks get older their asset allocations move more toward fixed income investments they consume in. So again the alternatives to yen for the Japanese are pretty limited. If they save in another currency they will not have a stable source of value in the currency they consume in due to fx changes. I disagree about misallocation vs. war. War destroys accumulated wealth of societies along with central planning but misallocation is for the most part in a portion of the economy, the market will correct most misallocations and permanent loss of large amounts of capital is rare for most income producing assets. There are exceptions but they a far less numerous than the fairly valued/allocated markets. Packer

But both currencies were backed by gold until 1971, and since then (it seems to me) we have had a slow loosening of monetary policy. Confidence is a funny thing: it's there until it's not. I don’t know exactly why we are talking about this… but here I agree with Packer: I don’t see any plausible substitute for the USD in the foreseeable future. Gio I brought it up because of Packer's comment about huge demand for fixed interest securities, which is something that could change overnight (I am not predicting that it will). And I suspect we'd have said the same in the UK until relatively shortly before the pound ceased to be the reserve currency. Again, not a prediction, but it's always useful to think about unexpected things that could genuinely shake the world. My broader point is that QE may destroy capital and be deflationary. The demand for fixed income is driven by the amount of savings being generated versus destroyed via wars, famine, ect. I don't see this slowing down but increasing as the we are adding to a large stock with new savings flows every day from all around the world including emerging markets. Packer

For the past 200 to 300 years the reserve currency has been either the pound or the US dollar so unless you are talking about the real long term, it has been pretty stable. Packer

I think one commonality amongst Japan and the US in the 1930s is constipation in the banking/finance system. From my readings of the 1930s, the banking system was badly broken, you had currency shortages in places around the US. In Japan, you had still have a system where old debts are not cleared from the system. This leads to money being trapped in zombie companies with no recirculation to other better uses of capital. This may be a cause or magnifier of the deflation. In the US and Europe now we have less constipation which will reduce the chance of a deflationary spiral. As to currency confidence issue, I don't see any alternatives to holding the reserve currencies so although in theory QE may cause issues in practice there may be no way to have those issue come to fruition. Packer

There is another reason for low interest rates: excess capital. Historically capital has been destroyed in wars and with disease and famines. These have not happened on scale since WWII so with the falling of the communist system and the development of wealth by most countries around the world, you have a large amount of capital generation with little destruction. You also have a turbocharge of the developed world having a safe haven for wealth created in the developing world. The last time this happened was between the Napoleonic Wars and WWI. This was a time of low inflation and deflation. I agree that there will be real deflation but the question for the CPI hedges is will there be nominal deflation. If we were on a gold standard or had stable currency regime (like Switzerland), there would be deflation but we are not. The only time we observed CPI inflation was when commodity priced collapsed but the core chugged along at 1.5% per year. Some say wait and you will see deflation but we have been waiting since 2008. My question is how much longer do we have to wait for core CPI inflation or under what conditions will the deflation theory be disproved? Sweden is the only example we have of QE in a deflationary spiral in history that actually worked to stop deflation. You can quibble with the applicability but I know of no other examples of QEs application in history, do you? Packer

To tell the truth I think Prem is wrong on deflation at the CPI level and the data has and will continue to show this. At the same time after bubbles bursting in the US in the 1930s and Japan, both were in deflationary spirals and this has not happened due to the monetary QEs. This is how Sweden was able to blunt the effects of the depression on itself. There is no incentive to increase interest rates (which would usher in Prem's scenario - i.e. high real rates) until inflation occurs. I just do not see how (absent a war or some other event which will permanently destroy large amounts of capital) that interest rates will go up when there is a huge demand for fixed income securities. Look what happened when the last QE was stopped: LT interest rates went up then back down again to where they were when QE was going on. The only reason we have deflation so far at the CPI level is due to commodity (energy) deflation which I think is more of a one-time versus recurring event. Just my view. Packer

The one disconnect I see with FFH thesis is low inflation to slight deflation and stock multiples of low to mid teens. This would imply and ERP of 7% (very high by historical standards). If they are right about low inflation lets say 1% (which I agree with), a 1.5% LT bond premium and a more normal ERP of 4 to 5% and a 2% earnings growth rate, it implies a normal stock multiples of 17 to 20 of next years earnings. We are in that range now. It is not expensive under FFH's scenario but is expensive for an inflationary environment. The one difference between now and all of the other stock rallies are the low bond yields. In 2000 and 2007 bond yields were providing reasonable returns versus 0 or negative now. Packer

I think the big weakness in the commodity decline leading to deflation argument is how little commodity prices influence CPI. When the commodities where inflating like crazy there was little inflation so why would not the opposite be true? If you look closely at the January CPI release, the only reason there was deflation was falling energy prices. The CPI ex food and energy is still going up at 1.5% per year. In addition, you have some companies increasing wages (Walmart and others). So unless you expect a sustained decline in energy and food prices that can overcome the core inflation of 1.5%, I just do not see how deflation happens with the US CPI. I think if the measure is Swiss Francs or Danish Kroner then you will see deflation but not the US$ or Euro where QE will ensure deflation will not happen in $ or Euros. Packer

I was also pleased by the Asian growth. The one note I did have was on the hedges. The equity hedges since 2010 have now cost $3.7 billion in BV which represents about 40% of BV. The CPI hedges have cost about 5% of BV (about half the losses of the CDS hedges before they went up). The other note on the CPI hedges is they are tied to an index which includes food and energy and it has only turned negative with the large decline in oil prices in the past 6 months. If you look at the CPI excluding food and energy it is still increasing at a rate of 1.5% per year. So unless the CPI excluding food and energy starts to decline, the CPI should start to increase. Packer

Marty Whitman also has a written a good book called Distressed Investing. The technique is primarily to value the business then decide where in the capital structure you want to invest. You can value each piece of the capital structure and determine which piece has the best risk reward. Francis has a good presentation from a few years ago at the Ivey investment conference about some distressed ideas. The Third Avenue High Yield Fund reports also has some current examples they are invested in and there is also a webcast from there conference last year that was pretty good. The Third Avenue guys are also good distressed investors. Packer

That was my initial thought but on the Japanese balance sheets I am looking at there is no deferred revenues. Packer

I have been looking at Japanese C&E firms and have found quite a few cheap ones that have decent RoEs and some are net-nets, however, I have some reservations on subtracting out the cash as some or all of it may be deposits from customers. Has any one see or developed a rule of thumb for C&E firms and required cash? Alternatively, a way to divide the cash between deposits and actual cash? TIA. Packer

This IMO thus is an excuse for underperforming an index. They also do not point out that most mutual fund value investors are looking for the same thing a undervalued good business and most of these businesses are fairly efficiently priced due to the large number of players competing in this space. Over the past year the leveraged type of firms have been hit hard and these guys are still underperforming on average by the amount of there fees. The mutual fund format and approach to investing is a dinosaur with investors paying high fees regardless of performance as mutual funds are marketed as consumer products versus investment vehicles. Packer