Packer16

I see risk comes from 2 sources in any assets. There is fundamental/business risk which is intrinsic to the business. This is what most investors think about when you say risk. It includes the uncertainty of future cash flows or asset values and everything that causes that uncertainty. The second (probably more important but less recognized) is price/value risk. It comes from what price the market puts on an asset, is extrinsic to the asset and is based upon the facts and emotions. Value investors typically focus on the second source of risk and minimize it by paying a discount to value for assets. Most people try to minimize both sources of risk. This leads to "crowded" trades in low uncertainty value names from value investors. This can work well when there is a panic but that is not most of the time. But if you decide to minimize pricing/value risk but maximize uncertainty risk, then you get some interesting assets. This is what Mohnish Pabrai calls "low risk/high uncertainty" situations. Packer

Sanjeev, You bring up a good point about funds. For survival they need to have a cash buffer for redemptions if they have no lock-up. But another question is given the disadvantage of this structure why is it used so much? In a panic it is very unstable. Look at Third Avenue for example. They have bleeding assets for awhile so as a value investor you are forced to sell in the market the past few years. How can you run a fund like that? You have the tail waging the dog. Even if you have bought bargains you are forced to sell because the actions of others. Isn't forced sellers a situation value investors are supposed to take advantage of? I am surprised there are not more independent advisers developing programs that would divide capital into permanent and not and then giving managers the ability to deploy permanent capital. This creates a value advantage for clients. Packer

In practice, Kraven's comment is right on. I am finding 50 to 60 cent stocks versus 20 to 30 cent stocks a few years ago. So I will keep on buying until all I can find is 80 cent dollars. This is an interesting intellectual conversation but I hope folks don't use it too much in their portfolios or they may be disappointed because there are so many unknowns that go into future returns that even the most plausible ideas will probably be wrong. I think one of the most dangerous places to be is to have a correct macro prediction as it may lead to think you can do it again. Packer

Another data point is Gary Schilling thinks we are halfway there (5 years into a 10 year delevering). Packer

My question is why do they have to withdraw until they see inflation? With all the deleveraging to go we may not see inflation for 5 years+? If that is the case then how are these portfolios filled with cash going to do? I would be concerned if I say reckless behavior in stock or lending markets (which I do not) or inflation (which I do not). Am I missing something? I am not finding 20 and 30 cent dollars (like I found a few years ago) but I am finding 50 to 60 cent ones with an occasional 20 center thrown in. Packer

This is another source should TTM earnings closer to 110 in the source below: http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_8.2.13 I think the difference is in operating earnings closer to 110 and reported earnings closer to 88. I think the difference is reported includes non-recurring costs while operating does not. Packer

There may be a tide (such as letting zombie companies stay alive, not clearing the system and poor governance - that in my mind is Japan's biggest issue and what makes the US and the UK different than Japan). The premise of value investing is the market will realize the value of assets held but if those assets are used for other purposes (enriching management or others in control) then the market is correct for not valuing them at their actual value thus leading to a permanent discount. The other danger value investing cannot save you from is expropriation. Packer

You are correct. An inconsistency I find in both Schillings and FFH's scenarios is they both seem to include low interest rates, low inflation and lower stock prices. The lower P/Es are in times of high inflation which required high interest rates to cure. If Schilling is predicting lower interest rates why is he using a P/E from higher interest rate times?? In addition, he appears to be predicting a 50% decline in earnings (current S&P 500 earnings are 120). For comparison in 2008 to 2009, earnings declined from 100 to 65 or 35%. So by implication, his scenario has a worse crash than 2008 in terms of earnings and P/Es associated with high inflation. What is going to cause this??? Packer

I think you need to put in context the losses of Mr. Keynes. 1936 was the top of the market for the UK in 1920s and 1930s and 1940 was the evacuation of Dunkirk and it was not unreasonable to think the Germany would have taken over the UK, like it had done France in 1940. If that happened many of the UK cos would have been 0s. Packer

Another consideration is what is the normal level of prices compared to cash flows in the low inflation world we are in now. I think we all agree that there is still more debt to work through that we be deflationary and it has been so far successfully offset by increasing the money supply. According to Gary Schilling we are about 50% through this, so we have another 5 years to go. If this continues for another 5 years, then I think asset prices are not expensive but cheap compared to other assets. In addition sentiment, is not crazy for stocks this is shown in where the money has gone is: its bonds ($1.4 trillion since 2000 versus $0 to stocks). In my mind equity valuation begins with inflation. If we expect inflation, then both stocks and LT bonds will do terrible. If we expect deflation, bonds due well and stocks poorly. If little or no inflation, then stocks will do well (except in times of high enthusiasm). The one question you need to ask is what would you invest in today if conditions are going to stay the same way for 5 years. I would say equities. Now that would change if sentiment and a prolonged shift of funds into stocks occurred but we are not there yet. As a historical analog we can look at the UK during the 1930s. The stock market at its high was 33% higher in 1936 than it was in 1929. In real pounds it was up 45%. If we apply this to 2007 values (45% real increase with 10% inflation since 2007) we get 2,426 on the S&P. Cheap stocks are becoming harder to fins but this bull may have a few more stampedes left before it get mauled by the bears. Packer

If this works it will actually bring old-line telcos back to life. Packer

Two related observations. Cars are becoming nicer than (in terms of features) than in the past. So they are becoming more aesthetic and more reliable. Even GM has blockbuster cars when they used make disposable cars. I think the transportation convenience factor is hard to give up. If you are in a city you can get used to it and even then there is a later train. Some cities also have clustering points (where folks work, play or eat) where trains can be used effectively (NYC is an example) other do not (LA). The other long term factor is will be people move to the clustering cities or not. I think not because of the higher cost of living (especially with a family). Just compare NYC to a place like Rochester, NY. Packer

He had mentioned Lukoil and Gazprom as being 0.10 dollars. I remember when this was the case in the early 00s. In the mid 00s I purchased a Russian oil company called Tatneft which turned out pretty good. Right now both Gazprom and Lukoil are about 44% of value of Exxon Mobil per mcdep.com. The discount is for political issues which I think are greater with Gazprom then Lukoil. Lukoil also has a 5% dividend and sells for less than 3x FCF. Packer

This may not be the norm but it has been done before. From 1820 to 1858, in the US the money supply increased 5x but prices declined by 33%. From 1875 to 1900, the money supply doubled but prices again declined by 33%. From what I see price increases are caused by wars in the 1800's and early to mid 1900's and lack of productive capacity in the late 1900's via communism. Packer

Over the LT, the business results will drive returns. My approach is to combine both business results and sentiment via valuation. I think both Ben Graham and Phillip Fisher have stated the largest gains come from changes in sentiment. That is why I don't hold LRE now. If it approached BV, I would. Based upon historical RoE, BV and recent dividend distribution (BV of $7.19 per share), my estimated return on LRE is closer to 11%. If we get to BV, the return approaches 20% (closer to my interest level). I am just more price sensitive and that drives my approach. Packer

Gio, I think you have to be careful in comparing LRE and FFH in 2007 to toady and how much better they can whether a downturn. For LRE, in 2007 they were selling at a nice discount to book (20% at the low price you quoted) and now it trades a 50% premium to book. Quite a difference. This does not mean LRE is not a good company. It is probably the best but the market has realized this and its incorporated into the price today versus in 2007. For FFH, they had the CDS options doing their thing. I don't see a similar counter cyclical bet that can payoff in the same way. You have the same issue with FFH. In 2007, the market was not giving them credit for the CDS bet, thus the increase. I think both will do well in a storm but the I think the out performance will be nothing like 2008. Packer

I agree with you about bubbles that is why I am listening intently to H. Marks. His latest on sentiment is below. I am seeing some signs of a start in the triple net real estate market. If you look at the last time we have repression in the US 1945 to 1980, it took 13 to 15 years before a bubble was formed and busted. If the repression started in 2009, the analogy would be 2022 to 2024. Another way to look at is how far are through deleveraging. G. Schilling thinks we are about 50% done, so another 5 years. If you look at the 1945 to the mid 1950s, you had poor equity sentiment like today and low interest rates. http://www.morningstar.com/cover/videocenter.aspx?id=603377 This is an interesting discussion but as Kraven has said I focus in "cheap" stock (aka the garbage man or bottom feeder) and my reflections on history do not effect my portfolio. Packer

I think the answer to your question is in the latest GMO letter. The low fixed income and other returns assume that interest rates and equity return to "normal" in 7 years. If there is still financial repression then the FI returns will go up by the change in yield curve portion of the return. The message I take away is that if financial repression is expected to continue overweighting stocks is not an unreasonable alternative. Packer

I think Tilson co-managed the Focus fund and the dividend was managed by a third-party. Packer

I think it also is statement about portfolio concentration. Buffet has always had at least 40% of his portfolio in his top 2 names. With that much concentration your mind get pretty focused. Packer

A major consideration versus WWI is the length that democracy and free market capitalism has been in place around the world and the number of totalitarian states versus today. At the outbreak of WWI, Russia has little or no experience with democracy as did China and Japan, the most powerful part of Germany (Prussia), Italy and Japan had gained status and wealth not by trade but by war. Today you get isolated if you want to go the route (Iran, Syria and N. Korea). Communism fell 30 years ago and every year that does not emerge, the lower the probability of conflict. Packer

As trade and interaction has increased it has hopefully reduced the probability of war in these regions of the world. The economic losses in the event of war are huge. I think that is a major factor of why the US has eclipsed Europe in the 20th century. However, human nature being what it is, there are no guarantees. The other major killers in the past, famine and disease, have been reduced significantly. Packer

MTM is a part of it. Larger funds typically have their larger Level 3 assets appraised by a third-party and reviewed by their own valuation teams. There is also purchase accounting, where third-parties per form purchase price allocations and impairment tests. Then there is derivative accounting (option and other derivative valuation). These 2 types of analyses are also reviewed by their valuation team. There are tax valuations for gift and estate purposes. There lending collateral valuations. There are ESOP valuations for plan participants and there also valuations/fairness opinions for various corporate transactions. The clients include refferal sources like lawyers and accountants. Firms also directly engage firms but it is typically by refferal. Packer

Yes finance. It is probably the closest job to an academic finance curriculum you can find. Packer

The main reason in my book is lifestyle. BV is not quite as intense in terms of hours (occasional 50 to 55 hours per week) versus continuous 60+ hours per week. Packer