Packer16

Are there any material cost savings associated with keeping Freddie and Fannie alive versus transferring thier functions to new entities which can raise equity capital to act as a buffer for gov't support? Packer

Value Line is another resource that is worth the price in my opinion. Between the two you can get a pretty good view of the cash flows and valuations of the major sectors of the US market. Packer

I use them for their FV estimates as reasonableness check and they also have nice 10 year data on FCF and other parameters I finf useful. I also us thier bond and option information. Packer

I think you can tell if the industry in question is becoming obsolete. I think of coal versus nat gas, oil and other forms of energy. For telecom, I think although there is replacement (high speed internet and mobile for phone) some the firms providing the obsolete services are also providing the replacement. For defense, there always be a need the question is how much at a given time so I think of it as more of cyclical depending upon the threat. If I though the threat was going away then it would be secular. Paper is interesting because it has components of both. Cyclical coming from housing and secular from migration away from paper to electronic media. Packer

You are correct. It was based upon his 10 criteria from the II so it is not directly applicable but does illustrate the effectiveness (or lack thereof) of using a raw screen to manage money. Packer

Another example of underperformance was Jim Rea's mutual fund based upon Ben Graham's net-net approach. Part of the issue may be timing (when the market rewrards these bargains versus when they go broke or remain zombies). Packer

In regards to using an F-score that may help but my primary issue is the issue of hostile management for which the F-score will not help. A good unlevered cheap business run by an abusive management team would get through your screen but you may have to wait 5, 10 or 20 years to get a reasonable return if management is funneling money to themselves. This is a not uncommon situation in some of these net-net situation. That is part of the reason they are a net-net. I think using the F-score as a screen for stock to further study makes more sense as you can then screen out the hostile management ones. An interesting article you may want to read is Jeremy Grantham's memo on the potential disadvantage of Graham and Dodd-type investing Part I and II (April 2012 and Jan 2011). He describes that the value excess return is due to the twice in a century event (think Great Depression) when a number of these firms will go out of business. The premium appears to be greater after these events and eventually as this strategy gains more followers leads to average performance versus larger more quality names. It something interesting to think about as the only way to out perform is to do something someone else cannot or will not do. I am not sure where we are in the net-net cycle but given the lack of a large number of these available today a good portion of the excess return may already be realized. Packer

You bring up a good point about obsolescence. It is important recognize a secular decline (coal) versus a cyclical decline (telecom and defense). The telecom area of growth is broadband connectivity and for defense it is the next TBD threat. With coal you have a secular declining portion (coal) in a cyclical industry (energy). Packer

In one of Marty Whitman's book he describes the current condition (since WW II) as one where there are rolling recessions amongst industries versus an economy wide recession. 2008 was probably the exception so we are probably back to industry recession model. Two industries that I think are in that state and have firms priced that way are defense and telecom. From what I see, I think autos and banks are coming out of their recessions and have a way to go. What are your thoughts? Packer

Happy Birthday and thanks for late night discussion about our favorite Movie company. I am approaching the mid century point next year but am hopefully young at heart. All the best. Packer

Gio, You bring up a good point but I think many of the folks who are warning of an eminent decline are using historical average pricing ratios that use long periods of time when interest rates are much higher than today and much higher than expected interest rates. I agree with the idea of the reversion to the mean but you need to make sure you are using the correct mean which I think is heavily influenced by interest rates. With low interest rates and expectation of low rates should lead to higher multiples as the equity multiples are just suborindated claims of firm cash flows. For example, if a firm can borrow at 3 to 4% why would a PE of 15 not be reasonable for even flat earnings (as this is a 7% yield). If you add growth you can easily get fair value multiples of in the high teen and low 20s. When folks are calling for a decline are they not making a call on interest rates (saying they will increase)? Just my 2 cents. Packer

The reason for the higher multiple is a lower required yield due to the surplus of capital/savings. If we agree interest rates are low due to large supply of capital and will be that way for awhile (as has been the case in the past) then the higher multiples make sense since you are just discounting a different tranche of the same cash flow. The senior tranche goes to the bond holders the junior and growth option to the equity holders. I think the biggest threat to multiples is inflation and higher interest rates. I see both interest rates and multiples linked together. If you want to normalize a mean multiple for interest rates I think that makes sense and what you will see that the current multiples are not a stretch for the interest rates we currently have. If you look at the history of interest rates and inflation, you see inflation at times of war (due in part to the destruction and in part due to the debt incurred). In peace, you generally see low interest rates, disinflation or deflation. The surplus of capital in essence is a price taker and as the number of high expected return projects declines it has to finance the low return projects to get some return on investment. Packer

My point is what is the normal situation where the mean should revert? The wars and communism distorted the mean for which no one seems to be compensating. Unless of course you expect these to happen to the same degree they have in the past. Wars increased the profit margins of the victor but destroyed the wealth of the loser. Communism destroyed the wealth of the countries that implemented it and led to inefficiencies and lower profits for those countries firms. I am just questioning the underlying assumptions of the argument and how revelent is some of the historical data when captialism and democracy was not in place for a majority of the world (before 1990). After 1990, I agree that the assumptions were in place but most of the data that the mean reversion is based upon is pre-1990. The higher multiple is due to the larger amount of capital which is chasing fewer opportunuties which will lead to lower interest rates. Unless there is a trend to destroy capital, you would expect lower returns until an event happens that destroys the capital. As to bubbles destroying capital, they do on paper but they don't destroy the physcial and intellectual assets like wars do. Also as to emerging markets saving in the developed world, I think if given the choice (many are not) they would invest the West at anytime. If you talk to folks from emering markets, many of their markets are rigged (like ours were before the depression) and the main savings vehilcle is real estate or Western assets. Packer

It looks like the incentives are set up for these pfd to reach par with the opposing opinion based upon a "get even" government. I was one of the folks that bought at the high then sold after the crash based upon my view at the time that the gov't was going to hose the hedge funds holding the pfds. I ignored the incentives of the other players to my shagrin. Does there have to be giant recovery assumptions going forward for these pfd to reach par? TIA Packer

One point I think the "mean reversion" crowd is missing is what is the correct mean and is the mean being examined in a vacuum (like some science experiment)? If you look at the period shown on the graph you have 2 world wars and the rise of communism in the world post WWII. These 3 events destroyed large amounts of capital over the 80 years that these events took place. What if the situation we have now has none of these events. There has been alot of wealth created as a result. The wealth in the non-emerging West (US, UK & Western Europe) is being saved in the non-emerging West as it always has but in the rest of the world the wealth is being saved in the non-emerging West (as the probability of return and of wealth is more certain). This wealth has driven interest rates down and elevated asset prices in the West. What would reverse this trend to reversion to the mean would occur? Market reforms in the emerging markets. What is probability of that? Not very high in my estimation therefore I think a case can be made for higher asset prices until something changes. Packer

I think one thing you are missing with the basket approach is the ability to weight by how undervalued the security is. This I think is a key to many posters out performance on this board. If you equally weight a mechanical set of firms and have 20 or so you are implicitly using diversification (an I don't know strategy) when if you examined the economics of the businesses you maybe able to apply more of the I know strategy. The other issue with some of these net-nets is control. If the firm is controlled by a family that gets outsized benefits from ownership then the net-net may become a non net-net (by the insiders getting funneled cash) or the payout maybe delayed to the point where a large discount to net-net value may make sense. For example if you or an outsider cannot force either a distribution of cash or assets for 5 or 10 years then the value today is diminished significantly. I don't know how you screen for these issues unless you dive into the details of what is going on. I think what these screen show is that out performance can happen even for an I don't know strategy (index). However, if you apply some knowledge you should be able to do better than the I don't know index. Just my 2 cents. Packer

This guy is great. He has gotten the spending side down to a science. Packer

If she wants to be a RN there must be alternative ways for her to obtain the RN through community college and other programs? Can she first get a PA certificate then go out an do the job for a few years to see if this is what she wants to do before spending $100k on something she may not end up using. If she really likes it then she can get an RN with practical experience where she can really learn alot. Similar to MBA with work experience versus not. These kids are going to live to 80+ the one thing they have in abundance is time so why not use it to their advantage? I am in a similar experience with one of my kids. He was getting ready to do the college thing and me and wife said wait a minute. We all know (including him) that he needs to go to college but at this age he is not excited about any if the classes he has takes. So he is going to work and take a few courses at the local CC until he has a motivation and focus. I think a big part of the issue is some kids do not have focus until they are in their early 20s so why spend tons of money until they are ready? In other words, you are spending money to send an immature kid to a school and what do you get (the college experience). For some kids college out of high is the correct way to go but for most it is not. The resulting high debt with no way to pay it off is symptom of a problem that many have been told and are willfully ignoring (like buying homes in the housing boom). If this plays out like that what you will see is plummeting enrollment with some colleges going bankrupt or cutting back massively and cost declining. I think you will see less tolerance for party schools and more focus on return on the high investment (which is the way it should be). The marketplace is forcing folks to be rationale with what was a "free" good in the past. One area I think that does need to be changed is college loans. The loan amounts should be given based upon the ability to pay off the loans. If the gov't wants to give need based grants that is one thing but giving loans to folks who have a low probability of paying the debt back is dumb and adds stress to situation that should not exist in the first place. Packer

I think sentiment and asset allocation is what will keep the market from collapsing. Stocks are an underinvested asset class versus 2007 and sentiment towards them is negative despite their high FCF yields. The one consideration folks need to consider is that in the past there have been destructive wars every 20 or 30 years. Since WWII, this has not happened. The result is a massive amount of accumulated wealth that has not been destroyed and has been accumulating. The last period of this duration is the post Civil War era (which was 50 year vs. or current 70 years). These wars produced debts that were used to destroy wealth versus the debt today was used to generate wealth for someone who has is saved somewhere. The other major change was the former communist countries joining the wealth creation club about 20 years ago. This massive amount of wealth and search for a safe place for it is what is keeping interest rates down. I don't see this changing. These wars created inflation via the destruction of the labor force (disease in the past did this also) and printing of money which monetized the debt created during the war. This historical destruction is part of what caused PM to regress to the mean (as the cost of labor increased). Packer

I just started to read Max Olsen's compendium of Berkshire annual letters (its great). With that in mind what are other "must read" annual reports out there. I like reading the "Big 3" - Berkshire, Fairfax and Luecadia. Packer

Sanjeev, Congrats and thank you for the board and the your annual shindigs in Toronto. Are you still planning on a more focused fund? Packer

There are alot of these in biotech and in real estate development/land. A friend of mine used to be a biotech analyst and has successfully invested in these. He tries to find these where a trial has failed but has a fixable issue. I have not invested in these because I typically like to find a value stock with a free lottery ticket attached. Examples include Fiat (with the option to purchase Chrysler), FLL (an option to build a hotel by there latest casino purchase) or RDI (with its real estate portfolio). Packer

Eric, You are right in that in a delevering rates stay low for decades (See 1930s, 1870s, Japan 1990s/2000s). The only difference is with the massive QE how much is this period compressed and the delevering accelerated? Packer

But shorts can have a lareger effect if they have to be closed out at a large loss. Packer

Also for the most part, HW has bet on these idea with options so their loss are capped. This is the smart way to play the deflation/market overvaluation situations. The one exception is the equity hedges in which I think they should have purchased LT puts versus outright shorts. At this point, the outright short has lost much of the profits HW has made in the past. Packer