Packer16

I hope you are right about the hedges. I guess because I am a glass half full guy, I have a hard time buying into apocolyptic scenarios and it looks like today FFH's portfolio is structured for this type of scenario. Once they change this bias I will feel more comfortable with a 15% BV growth number. HWIC are great investors, I just think it is a shame they are hedging away their advantage. However, if it is only for a few years, they should do fine in the long-term. Packer

Thanks for your assumptions. I just do not see how they get a 7% return with the hedges and the only enhancer is the deflation swaps. Over the past 3 years (returns excluding the CDS), the investment portfolio grew by only 4.9% (losing a whole point to hedging). Over 5 years it was 6.5%. How do you think they will get to a 7% return again with the hedges and high current bond prices? A good part of the 5 and 10-yr investment growth is due to CDS. They really need insurance to step up to the plate and/or remove the hedges to reach the 7% target. The other issue that I think is at odds with Marks is was 2008 a once in 50-year event or will reoccur in the near future. FFH appears to think it will re-occur while Marks does not and thinks putting a portfolio together to withstand a 2008 event does not make sense. Packer

An interesting paper that describes Keynes philosophy and returns: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2023011 Packer

I am primarily referring the corporate sector primarily in US which has more cash then ever and this is the sector where we invest (equities). I don't trust China and wouldn't invest there. I would not be an investor in governments at this point and individuals appear to be able to service their debts so I think they will be OK. I agree that there will be subdued inflation so the there is no spark for interest rates to rise and thus increase personal debt service ability. Just look at the write-offs for credit card companies, mortgages and auto finance. These have been coming down and are within historic ranges. If were in such dire straights we would see these continue to remain high but they are not. I think personal income growth again is growth measure and not a standard of living measure (which I think has increased significantly due to technology pushing prices down for the same product). As to the personal savings rate, do we need to save 10% or higher like the Japanese? I think not. Much of the growth is obtained via IP which is not capital intensive. The additional savings just sits around earning nothing so the market says we have too much savings worldwide. If we did not have enough, interest rates would surely be higher and the capital would flow that way. I think market is at an all time high due to it being the best alternative for capital. Is there a better place with lots of excess cash in the corporate sector, reasonable valuations and the alternatives providing no return. The returns may be less than we have seen in the past but we have to invest today not yesterday. I agree that expected returns have declined but they have declined more in the equity alternatives than in equities. I think the debt over the long term will be monetized via financial repression just like after WWII in the US. Under this scenario, real assets with cash flows will be priced higher in deflating currency. In essence when you are holding cash you are holding currency so I would rather hold asset than currency. Just my 2 cents. BTW I am investing in cheap stocks just like Keynes and have not let the macro change my approach. Packer

I think there is a tremendous difference between the 1930s and today. In the 1930s you had mass of people in developed world poor as could be. Now even our poor were middle class by the 1930s standards and have access to medicines and products only the rich had or could even dream of in the 1930s. I think focusing on GDP growth is misleading. It is metric economic progress not economic standing. I agree that economic growth may be equivalent to the 1930s but overall health of the economy is much better. The overall economic health is what is reflected in stock prices and to think there is a disconnect based upon GDP growth doesn't make sense. The other question I have is where is the money going to go? The wealth is accumulated where is it going to go? Into mattresses? gold? bonds? In the 1920s there was alot of wealth created through leveraged structures that collapsed in the early 1930s. Many of the large US enterprises were levered via holding companies (utilities are an example). There are many example in "The Crash and its Aftermath". Are there such leveraged structures today? I have not seen many. Much of decline in the early 1930s was due to the collapse of leveraged structures. Also remember that you could buy stocks on 5 to 10% margin. Lets look at the 1930s in terms of stock prices. Once prices hit bottom 1932 (and many of the leveraged structures were wiped out) prices increased from 50 to 175 in 1937 (up 250%) then fell back to 125-150 (still up over 200% from bottom in 1932). Today the S&P has rallied by about 130% from the bottom in 2009. Also look at the record and approach of an investor that did well in the 1930s John Maynard Keynes: http://www.lsgifund.com/LSGIRMK/Keynes.pdf Even with slow GDP growth I don't think the gains are excessive due to the relative cheapness of equities. The one upside we have versus the 1930s is as the 30s progressed you had facsist regimes in Italy and Germany and WWII which destroyed tons of wealth. Given you don't have that today, the question is if we don't have high leverage and there are no destroyers of wealth (wars), where will the money go? I think stocks and if that is the case then FFH has hedged away its greatest competitive advantage. Packer

I wonder if Fairfax realizes the huge opportunity cost the hedges have been. I also wonder if they think their excellent timing of the last crash (hedges going in and removing near the bottom) can be repeated? Fairfax's sweet spot is in investments so the hedges have wiped out a majority of their advantage. I read a good quote from Howard Marks that you can't structure your portfolio to live through another 2008 because it was worse than worse case and you won't have much of a portfolio. I think this is what Fairfax has done and I hope that upon careful reflection they will change. I think the analogy to the 1930s or Japan in the 1990s is a stretch to say the least as the evidence since 2008 shows that this is a different situation. Isn't the historical growth due in a large part to a growing investment portfolio that has reasonable returns? With the hedges you have removed a large portion of the returns and thus the historical BV growth as FFH's underwriting results are not the best. To quantify this over the past 3 years that the hedges have been on it has reduced investment returns by 1% per year. To get to a 15% BV growth, FFH will have to earn $1.6 billion (.15 * BV /(1-tax rate)) or 6.2% pre-tax return on investments assuming they can generate a 100% combined ratio. Over the past 3 years they have earned 4.9% on their investments implying a BV growth of 11.4%. If you don't have the hedges you are at 14.3%. The other potential upside asset they have is the deflation hedges. Although they purchased at a great price and they have nice option characteristics, I think unless a major economic collapse happens they will expire worthless as the world governments will not let deflation happen (see the Fed and even the current ECB actions). Packer

I took a toehold position in OIBR. I could not resist the cheap price and the PT CEO taking the helm. Packer

I also find interesting his comment on diversification versus "cheapness" as tools of risk reduction. He ranks cheapness fisrt and then diversification if enough cheap stocks can be found. He also states the lesson of 2008 is not to have a portfolio that can withstand a 2008-type event. Packer

You can reaserch an area were there is distress to look for bargains and become adept at understanding those types of firms. Two areas now are natural gas and telecom. Packer

Thanks for clarification. Packer

WMW I believe changes companies every year. Sequoia in my mind is similar in that you are not going to see that much change in apply a quality value strategy. WMW is probably the best screen best fund I have seen out there. Even better the Greenblatt's US Formula fund (with less fees also). Sequoia does have the human advantage (incorporating factors not included in MS valuation and concentration in certain stocks) but the cash disadvantage. It looks like the decline depends upon your starting point (Jan 2008 versus Jun 2008). I do have Sequoia in my 401(k) along with Fairholme. Maybe I can see if we can get one of these ETFs included also. Packer

If you look at 2008 however, the cash a SEQUX did not prevent it from falling more than WMW. SEQUX fell by 27% while WMW fell by only 20%. In my book, I look at downward volatility (loss) as more important than a deviation from the mean. WMW had more lumpy returns but had less loss when a negative event occurred. I think that is what skewing the risk adjusted return of SEQUX vs. WMW. Packer

A good primer on high yield debt is "How to Make Money with Junk Bonds" by Robert Levine. It is written in the style of Greenblatt's "You Can Be a Stock Market Genius" so it is a easy read and provides some great insights and top level theory into a value investing approach to high yield bonds. Packer

I have been looking at the Morningstar moat index ETFs (WMW and MOAT) as alternatives to the BRK and FFH default options for my funds. The funds are based upon the highest rated (cheapest to FV) high moat stocks in the Morningstar universe. They appear to outperform the market by about 900 bp over the past five years better than most funds (even SEQUX). Has anyone invested in these? Packer

Yes they do and Fairfax owns a nice block of some the high yielding converts. Symbol - SDRXP If I was to put more money into SD it would be via these preferreds. Packer

High yield has slim pickings now. In addition to the MTR Gaming bond there is the broken ALSK telecom convert that is yielding 12%. I have found much better picking in common or preferred stocks. The preferred for either SSW or SD have good yields. Packer

The Money Masters has a nice write-up on these. Interestingly enough at the time Sequoia held LIN TV and Tweedy Browne Gray Communications. At the time, TB used a 10x EBITDA PMV metric about the same that TV stations are being taken-out today. Packer

Thanks for the response. One theory I wanted to test was Grantham's contention that a cheap BV approach was driven primarily by out performance between 1973 and 1984 and since then the cheap BV approach appears to have stopped out performance. In addition, I wanted to see from your current experience if outperformance by the amounts Schloss and TB did historically are still possible. Thx. Packer

Oddballsotck & Kraven, Just curious if you have been able to obtain the returns Schloss and TB have gotten. Both of their performance records are old (circa 1984). TIA Packer

You are correct the 2 folks who followed the more diversified approach (Schloss & Tweedy Brown) outperformed the market on average 13% (before fees) and about 9% (after fees). Packer

I am reading "The Art of Value Investing", re-reading "Benjamin Graham on Investing" and "Coolidge" by Amity Shlaes. Packer

I was looking through VL and noticed the high yielding combination of BV and dividends for some of the large O&G firms. For example, BP, Royal Dutch or Total have BV growth of about 5 to 8% with dividend yields of 5 to 6%. Implying a total return of 10 to 14%. LT RoE are in the 13 to 15% with each selling at a slight premium to BV. Packer

Although the auto industry is not misunderstood Fiat is. It is trading at nice discount to other auto @2.5x EBITDA versus 4x for GM. In addition, 50% of Fiat's sales are in US and 25% in Brazil and only 25% in Europe. As for tailwinds, there is a pent-up demand of over 13 m units in the US market assuming a normal demand of 15m units. So I think it could be Fiat. As for my %s TVL 25.2% AIQ 24.8% ATSG 6.6% ALSK 5.4% GM-WTB 4.9% BAC 4.8% FFH 4.6% GNCMA 3.9% FIATY 3.2% HCOM 3.0% SD 2.6% Other 11% Packer

I am assuming you want high risk adjusted performance. If so, then I would look at how they value companies and how comfortable they are in concentrating positions. The only way to outperform is be different and of the manager is reluctant to be different then what is the point. The more diversified they are the less likely they are going to out perform enough to pay their fees. Another way to increase concentration is via LEAPs and warrants. If you require diversification, then I would use value tilted index funds to keep the fees down. Does the managers circle of competence include a number of sectors/industries? What has been the managers biggest mistake and how did they fix it going forward? Finally, you can look at performance numbers. Another approach that probably requires less research is but into owner operators discussed on this board as they are doing the same thing as mutual funds. Packer

When this book first arrived it was not what I was expecting but as I read into it was much better. The book's format took a little getting used to in that there are topics and many investors take on each topic. This format lends itself to providing the raw data of ideas where you have put together the ideas into your own narrative or story about each investor or groups of investors. It also provided me with which investors follow my style of investing so I found a few more folks to copy investment ideas/industries from. Packer