Viking

I'm sorry for double posting here in this topic. Now back to Viking's starting post here, ref. the quote above. I think it's important here to distinguish with regard to geographical areas. [For my part : Between US banks and European banks - I own both.] US Banks : There seem to be a general sentiment as of now, that US interest rates will be lowered [also here on CoBF - at least partially] - perhaps even so the steering interest rates may end up near zero, or even negative. With regard to that, I'm in the same camp as Jurgis [posted by Jurgis somewhere else here on CoBF recently] : Why should the FED lower interest rates, when USA is running at low, but still a fairly steady & positive clip, combined with a public deficit? [i don't get it, but then again : What do I know.] European Banks: I can here only speak as Danish citizen, what I can say is that the pressure on Net Interest Margin in Danish banks is very real, and as a Danish bank customer, I can feel & see it as being very real. The consequences are already here and visible : The reach for non-interest earnings in Danish banks has become more aggressive, and to me it has already crossed the line of sound, healthy, prudent & most of all : honest banking. [To me "honest banking" is in the interest the customer, not the bank.] I'll document it here, with anecdotal stuff, based on personal experiences and documentation. Stuff about Danske Bank however will go to the topic I started about Danske Bank A/S in the Investment Ideas forum today. - - - o 0 o - - - This naturally matters for investing in both US Banks & European Banks. I may be wrong about the future development of US interest rates, and what's going here may be relevant for a judgement about what will happen with the behavior of the US Banks. “There seem to be a general sentiment as of now, that US interest rates will be lowered [also here on CoBF - at least partially] - perhaps even so the steering interest rates may end up near zero, or even negative. With regard to that, I'm in the same camp as Jurgis [posted by Jurgis somewhere else here on CoBF recently] : Why should the FED lower interest rates, when USA is running at low, but still a fairly steady & positive clip, combined with a public deficit? [i don't get it, but then again : What do I know.]” John, i really enjoyed reading your post, especially the part i quoted above. It looks to me like the globe might be slowly slipping into a deflationary spiral. What will stop the slow spiral we are seeing? China seems more constrained in options than in 2010. Japan to the rescue? No. How about Europe? They look to be following down Japan’s path. US? Trump has already slashed taxes and is running very large deficits so spending more (and running even bigger deficits) is likely not an option. The Fed can cut rates. Which is wherevwe are at. I am watching to see if the global slowdown continues or if it improves in Q3/Q4. If we actually get a recession in the US in 2020 we will be in unchartered waters in terms of what central banks will do and the impact those actions will have on the larger economy over time. I think we also could see a shift from Trump from a focus on tarriff war to currency war. It this happens we will get a brand new layer of instability. Interesting times :-)

Is this where North America is headed. Do we care if negative rates are here to stay? How does this change the investment process? https://www.ft.com/content/09360f2e-98b4-11e9-9573-ee5cbb98ed36?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev&yptr=yahoo Beginning of article: “This summer, Germany’s housing market has turned into Alice in Wonderland: the yield on five-year bonds issued by mortgage banks slid to minus 0.2 per cent, compared to a level of plus 5 per cent a decade ago. That means investors are essentially paying for the privilege of lending money into Europe’s largest property sector. Economic logic — or gravity — has been turned on its head. If that were not bizarre enough, consider this: in Denmark, some financial institutions are offering borrowers “negative” mortgages that pay interest; treasurers of major German companies are muttering about their bonds trading with negative yields; and yields on 10-year government bonds in France and Sweden have fallen into negative territory too, joining Germany and Japan. Overall, the global pile of negative yielding debt has swelled above $12.5tn, breaking the record set in 2016. Even in America, the yield on 10-year Treasuries recently fell below 2 per cent. That might not look dramatic since it is still positive in nominal terms. But when adjusted for core inflation (about 2 per cent) it equates to a near-negative real rate. This is remarkable given that the US just notched up an economic growth rate of 3.1 per cent in the first quarter.”

US bond yields have fallen precipitously so far in 2019. Some are now forcasting a move in the 10 year to 1.5% in short bond yields are cratering. Today the bond market is forcasting the Fed will be cutting 3 times this year with the first cut coming in July. The bond market is freaking out about something. The stock market is hitting all time highs. One of the reasons is because the Fed will be cutting and many times. The elephant in the room is the US economy. Are bond yields cratering because the bond market sees economic growth in the US slowing dramatically (below current expectations)? What will cause the Fed to cut 3 times in 2019? What does the stock market see that is pushing averages to all time highs? Bad news has now become good news. And the badder the better! I really do not understand what is going on :-)

I was likely one of the people who voted back in 2009 :-) The lesson for me is as follows: - you make decisions (and projections) based on the facts you have on hand at the time - when the facts change you may need to change your mind After 2009 FFH made some very big bets with the investment portfolio that proved to be flat out wrong. These bets were plain for all investors to see. The lesson for me is not that projections often do not work out as expected (this is kind of obvious). The lesson for me is the important over time of processing new information and acting on it (if it is important). The opposite of thumb sucking.

In my household, I would say that 99% of circulating photos, clicks, likes, searches, videos watched (the number of which has been growing sequentially and quasi-exponentially) should NOT be counted in GDP. Unless we made it to the leisure society but I think the economic possibilities are not quite there yet. I like the anecdote (which seems reasonable for him) when he decided to sell all long exposure and buy treasuries instead, on the spot, while playing golf. He says it was a tweet and I guess he felt the wind change. That's a good point. So, let's say you don't have these free services anymore. Are you not going to print pictures and would it not cost money? How much information are you getting now free that would have cost you money before? How many times have you looked up some info and used it, instead of relying on paid experts? How many free youtube videos? Email? What would be the alternatives and would they be free? etc. Even if you somehow not spend any money if all of these are turned off tomorrow (unlikely) it would not negate the fact that they added value and increase productivity, for free. Transportation: much, much more efficent with Google maps; how is this economic and life improvement captured in GDP data? Education: much, much better with the internet; how is this economic and life improvement captured in GDP data? Software is transforming every aspect of life. Banking is a great example of this transformation. Not that long ago i used to get paid with a paper check that i would then have to go to the bank, stand in line and deposit. Need cash to buy something? Go to the bank, stand in line and withdraw cash. I would write a check to pay someone (who would then go to the bank, stand in line and make a deposit). Need to pay your utility bills? Go to the bank, stand in line and pay. Want a second account? Go to the bank stand in line and open. Investing was pretty much impossible for most people; so they bought Canada Saving Bonds or left their money in a savings account at their bank (my monther-in-law still does this). If you did have investment accounts, most people paid big fees. This was life a few short years ago. Today everything is done electronically. Much, much quicker. Much more accurate. Much, much cheaper. Much more selection. Quality of life is much, much better. How are all of these improvements captured in GDP data (maybe they are .... not sure)? And for banks, their cost structure has to be way, way lower. All the people they no longer need must be a big drag on GDP (layoffs or separation or someone leaves and are not replaced). And we are just getting started with software improving pretty much every aspect of ones life...

Sold my BAC that i just bought (big position and up over 4% in less than a week). Happy to lock in the gain. Also sold most of the smaller positions i just bought on the big pop today. I have been very defensive this year. Capital preservation is my focus. I am happy if i can hit a couple of singles this year :-) The economic news is getting worse. Happy to get back in cash and wait for the next down draft.

Reestablished a position in BAC. Bought more BRK. Also started very small positions in West Fraser Timber and GM.

Imo this is a common misconception. Perpetual lower bond yields/growth lead to HIGHER stock multiples. I guess one could argue over whether growth will be perpetually lower or just temporarily lower. I think with the low inflation target, and lower population growth going forward, that we indeed will have lower (nominal) growth going forward and that stock multiples with therefore be higher than they've been in the past. As Buffett said: "if you had zero interest rates and you knew you were going to have them forever, stocks should trade at 100 or 200 times earnings". Lower interest rates = Higher P/E ratios Would also add that, in general, QE leads to higher interest rates not lower interest rates. Europe has low rates because they haven't done enough money printing...ECB monetary policy has been much tighter than US, hence Europe has lower rates Jim, i agree that generally speaking lower bond yields should support higher PE multiples. Given the abrupt and large move lower in US yields i am wondering if the bond market is forcasting slower global growth moving forward; this will result in lower earnings for companies and usually leads to lower equity prices. I am just surprised at the abrupt pivot in the thinking of bond investors. 12 months ago all the talk was how 10 year yields in the US would be pushing 3.5% and perhaps even 4%). Today we have 10 year rates below 2.3% with some saying they may fall below 2%. I am just trying to understand what is driving the pivot. The stock market looks oblivious to what has been going on in the stock market and i find this interesting.

Rulenumberone, how does QE explain the rapid decline in long bond we have seen in the past 8 months? My guess is the Fed is pretty predictable over time with its actions. Are non government players are responsible for driving yields much lower recently? It looks to me like the stock market is getting the message a little later than the bond market.

Does anyone have any thoughts on what the bond market and the stock market are currently telling investors? In the US long bond yields have been coming down for the last eight months. They certainly seem to be forecasting much lower growth moving forward. The stock market on the other hand is 5% from its highs and seems to see solid economic growth moving forward. The two perspectives do not seem to line up. My view is the bond market tends to give investors better information than the stock market over the short to medium term.

BRK. Buy below $200 and sell at $208-$210. Rinse and repeat. 1.3xBV = $195. Below $200 looks like good value to me. Especially with its heavy focus on US economy; limited trade war exposure (compared to most large multinational companies).

If anyone really understands what is going on with the trade war and how it will play out please enlighten us all :-) A couple of my key take aways: - nobody has much of a handle as to what is going on today, this week, this month, the next 6 months, the next year or the next 3, 5 or 10 years (regarding trade and Trump) - the bond market is quite pessimistic with yields on 10 year treasuries under 2.35% - the stock market seems to be completelty asleep at the wheel; the averages are down only a little over the past 2 weeks. Do they expect a deal?

The reason i invest is i absolutely love it. And i always have. As a kid i used to roam the neighbourhood looking for empty bottles so i could turn them in for $. Today i love everything about investing... the intellect, learning the eternal truths, the change, the challenge, the wins, the hard lessons (usually only many years after the fact), the emotional challenges, the camraderie, this board... and the financial payoff (my investment success has allowed me to live a much more rewarding life).

The challenge i have with Berkshire as a long term hold is if the stock trades below intrinsic value when Buffett is alive will this gap not get worse when he is no longer around? Are people thinking Berkshire will trade at a higher (average) valuation when Buffett is no longer abound? It is a conglomerate. Do these not typically trade at a fairly steep discount to the value of the underlying assets? Especially when breaking the company up is not an option.

Aberhound, perhaps it is crazy low interest rates in the coming years. With the Fed indicating it is done tightening and likely to stop negative QE and to cut rates as a next move we llok to be returning to the free money paradigm. This likely means asset prices will resume their upward path. Good for stocks and real estate.

Thanks for posting. The author has other interesting posts :-)

My view is 5 years is a solid time frame for shareholders to evaluate management (and i do not view this time frame as ‘short term’). I also question the usefulness of including FFH returns from their first 10 years of existence given how different the company is (much larger) and all the changes with the people working at the company and with the economy (10 year bond yields at 2.5% and stocks trading at high end of historical PE multiple etc). Yes, Prem hit the ball out of the park back then but its usefulness in helping investors understand where FFH is going over the next 5 years is minimal from my perspective. My view is FFH keeps on buying textile mill type investments year after year. They do not seem to be learning and adjusting their investment style over time. Over many years Buffett learned and slowly adjusted his investing style in a way that was fairly predictable for investors. I have little ability to explain what FFH is doing with its investments and little confidence that FFH will do well moving forward. As i have said before, i do like what FFH has done in building out its insurance businesses and underwriting looks solid. In the past this was investors primary concern with investing in FFH. But unfortunately what they are doing on the investing side is now the primary problem. I also get the feeling that there is some empire building going on at FFH with shareholders (and shareholder returns) being a lower priority. Prem seems focussed on building a company that will be here in 100 years. He does not seemed focussed on making decisions that will grow shareholder value over the next one, two or three years. So the company continues to get bigger and shareholders continue to earn poor returns. I wish Prem would focus more on growing book value (which would benefit shareholders) and focus less on getting bigger ‘and being here in 100 years’.

John, thanks for providing your perspective :-). Do you have a feel for how Danes view the scandal? More importantly (from an investment perspective), are they moving their business away from the bank? Or does it look like will give Danske a chance to get it right (like, pehaps, WFC customers who look to have been very patient with that bank)?

Does anyone have any thoughts on the investability of the Nordic Banks currently caught up in the money laundering in the Baltic states? Their share prices have been cut in half. The news flow the next year or two will likely be ugly. However, i think they have very strong franshises in their home markets that should help them weather the storm. John, given you live in Denmark and your understanding Bank stocks in general, do you have any thoughts? Sorry to put you on the spot :-) most importantly to me, is if there is a risk their home governements are going to be very punitive (possibly put them out of business)? I have made my best investments buying solid companies when they face an ugly issue (resulting in shares trading very cheaply). The key is the issue was not one that would put them out of business; it just resulted in a year or two of poor earnings and some reputational damage (both of which reversed a couple of years later). So i am trying to understand if this is a sector that i should start to learn more about. 1.) Danske Bank: “Since the scandal surfaced last year the bank has replaced its CEO and the chairman, pulled out of Russia and the Baltics, boosted its compliance efforts and promised to donate 1.5 billion Danish crowns (£172 million) to fighting financial fraud.” - https://finance.yahoo.com/news/2018-low-point-turning-point-145654322.html 2.) Swedbank 3.) Nordea Bank Financial Times Summary Article: The Russian shadow over banking’s Nordic noir https://www.ft.com/content/86b9d520-5791-11e9-91f9-b6515a54c5b1?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev&yptr=yahoo

Cigar, i am not a real estate expert but it looks like Greater Vancouver is experiencing a correction in housing prices, with prices down 7-8% year over year. Inventory is up 40-50% depending on the area and type of residence. If inventory continues to grow and prices continue to come down the risk is does it start to impact consumer confidence and consumer spending amd the broader economy? Or do bargain hunters jump in and we see prices stabilize? I have been so wrong on real estate for so many years (bubble) i have little confidence in my ability to provide a reasonable assessment of where we are going in 2019 and 2020 :-)

I was very impressed with Francis’ explanation as to why the fund has underperformed the past few years. They invested in the wrong stocks; they overvalued troubled companies (overinvested and underperformed) and undervalued quality companies (underinvested and missed their outperformance). It has been said Munger is the person who convinced Buffett to focus on quality. I am hopeful that Francis moves in this direction; and given his close relationship with Fairfax hopefully they also move towards investing in quality value plays. From page 6 of the Annual Report: “Does Value Investing Work? With the lackluster returns by value funds in recent years compared to growth and index funds, there is some doubt as to whether value investing can still work in the current market. We hold the view that value investing certainly works, but only when executed properly. Sometimes it is easier to blame the market environment than to admit our own faults. Although factors such as low interest rates, the popularity of passive investing, and elevated market valuations played a role in blunting returns for value investors, we also accentuated the problem. The key to value investing is appraisal. If that is not precise enough, everything falls apart. We tend to fish in troubled waters, and what caused the biggest problem in recent years was that our appraisal of troubled companies was off the mark. When we thought a company was worth 100 cents, it was actually worth closer to 60 cents. We tended to give much higher weight to asset values and not enough weight to the value of the operating company. We used the asset value as a huge security blanket and became blind to the deterioration of the worth of the operating company. A case in point is Sears Holdings. We were correct that the real estate plus the value of brand names would afford some cushion against losses. However, we were inaccurate in our assumption that Eddie Lampert would maximize returns for the shareholders based on the real estate assets, and the value of the retail company Sears had at the time of purchase. Instead, he tried to re-invent the company, suffered huge losses along the way and almost completely eroded the value of the considerable real estate assets that Sears held. Although the value of downside protection is important, most of the returns from an investment comes from the increase in the intrinsic value of the company, or the closing of the gap between the discounted purchase price to the full intrinsic value. When neither of the two happens, then investors would like to see the assets and the brand names divested or sold, sooner rather than later, for the benefit of shareholders. We can proudly say that in Sears we lost an insignificant amount of money on a simple dollar basis (as one Republican suggested, it should be classified as “Trump change”). However, we did lose a tremendous amount of money in opportunity cost over that 10-year period. Trump change or not, it was still an unforced error. That was a mistake of commission. We also made a bundle of mistakes of omission. Over the last 30 years, roughly half our portfolio was in troubled companies and the other half was in good companies. So, we are well acquainted with investing in both types of companies. But what happened over the last few years was that we spent most of the time undervaluing the good companies. When our assessment showed the investments were worth 100 cents, they were more accurately close to 150 cents, thus causing us to miss most of those opportunities. These “omissions”, though they are unseen mistakes are nevertheless as real as mistakes of commission. In summary, although the markets have been less kind to value investing, we exacerbated the problem as practitioners.”

What i have come to dislike about many of the political discussions is the (apparent) negative impact it has on the relationships of some of the posters (driven by the lack of civil discourse). Since i have been on this board (+15 years) and counting :-) I have learned and benefited from the postings of so many different people. I really do not care what a posters political views are; what i do case about is it they are posting something that will help me and my portfolio. It is also import to me that posters communicate in a respectful manner. My fear is the politics section over time poisons the water by slowly destroying relationships among board members (who then leave). Hopefully this does not pick up steam as we enter election season in Canada later this year and the US next year. On a personal level, i will continie to shrink my involement in the politics posts :-) Thanks to Sanjeev for how he has handled over the years a very challenging topic... well done!

When people ask Buffett if the stock market is over valued his standard response is to start with long term US government bond yields. The US 10 year yield is currently at 2.4%. My read is stock averages are not crazy expensive. There is a chance the 10 year could go below 2% (if the Fed stops QE, cuts rates and starts QE3). This will support even higher stock prices. This is not to say this is what i expect to happen. However, i think the probability of the 10 year falling below 2% is higher than Mr Market thinks. Free money will likely result in asset prices (stocks and real estate) going much higher than people feel is rational or possible.

As has been mentioned previously, find some mentors and read/listen to everything you can from them. You need to figure out an investment process that fits your psychological makeup. My journey: 1.) Buffett - i liked Hagstrom’s book on Buffett for an overview - The Warren Buffett Way; i preferred the first edition over the second. 2.) Peter Lynch - One Up on Wall Street - best single book on investing for new investors who want to do more than invest only in index funds. Provides a very useful way to think about the investing process and is very practical and action oriented 3.) Malkiel - A Randon Walk Down Wall Street - this book is better than any entry level course on investing you will take in university. Provides a great academic overview of investing. 4.) Graham - Intelligent Investor - no not read this book from cover to cover. There is a reason Buffett singles out chapters 8 and 20; start with these 2; skim and read any others that look interesting. Life long learning. As you continue on your journey, keep learning. Your investing process will become a mix of those greats you feel are the best fit for you. You will take a piece or two or three from each and develop your very own style. Good artists borrow; great artists steal :-) Don’t lose faith! My first investment was Bre-X (went to zero and i lost everything). My first two years i posted single digit negative returns each year. From that point, i have averaged 15% per year (+15 years). Perseverance is important; often over many years. Learn from your mistakes (this is part of life long learning but I think it is important enough that it should also have its own header). My Bre-X loss pushed me to follow Buffett and the results have been stellar. I also bought Blackberry (RIM back in the day) when Fairfax was also just starting to buy; fortunately i figured out management was not good so i sold at a small loss (around 15% I think); however, what i learned about the cell phone industry prepared and allowed me to load up on Apple a year or two later (when it was out of favour); Apple turned into my biggest gain ever. My point is if you keep learning even what appears to be a bad decision in the short term can make you alot of money at a later date. Concentration; this has been a key to my outperformance over the years. Do not try this when you are learnings. As you get your investment process figured out you can get a little more concentrated with your portfolio. I think Buffett has said 4 or 5 stocks is good; my guess is ths is good after you have been actively investing (with above average results) for +5 years. Concentration is a killer if you are wrong :-) Peter Lynch is an example of the opposite approach; i think he held upwards of 1,000 shares in Magellan. If you think you have the time and ability to be more than just an index investor you need to actually buy individual securities. When you have money on the line your brain will focus better and you will be more motivated to follow and learn about the company. You cannot become a great investor simply be reading a bunch of books. At some point you need to put your money on the line and see how your brain and your emotions respond to price changes. One of my old bosses at Kraft had a great line “remember, with it comes to advice you tend to get what you pay for”. (Thank you Gary S for that :-) Good luck!

It really is surprising how quickly the economic data is turning compared to 3, 6, 9 and 12 months ago. Europe is slowing. Exports from China are slowing. And now US GDP is slowing, with expectations for Q1 now around 1%. GDP growth in Canada in Q4 was barely positive and expectations are Q1 GDP will be negative; on a blended (Q4+Q1) basis the expectation is we could see a negative number. The million dollar question: does this global slowdown continue in 2019? Or do we bottom in Q1 and see growth pick up in Q2 and rise into year end? As has been posted by Spekulatius, i am also hoping for some volatility to take advantage of panic selling.