Viking

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.

This new program sounds complicated to me. They will have to create a whole new bureaucracy to manage the program. There must be a more cost effective way to achieve their objective. “Under the $1.25-billion incentive program, prospective buyers who have the minimum down payment for a home can apply to finance between five and 10 per cent of their mortgage via a shared equity program administered by Canada Mortgage and Housing Corporation (CMHC). The 10 per cent cap applies to newly constructed homes.” The real answer to deal with sky high housing prices (and affordability issues for young people) is to normalize interest rates. We have learned that free money creates asset bubbles. However, normalizing interest rates would be hard medicine and clearly the Liberals are not interested in going down that path. Hard to see how taking on more debt than one can afford will end well...

This sounds like an insurance business in runoff... can be profitable if handled the right way. Perhaps Berkshire should create a ‘runoff’ packaged goods operation to give legacy brands a home :-)

Vinod, for me what a company does with its retained earnings is a super important part of the decision to own shares. Berkshire carrying +$100 billion in cash (more than 20% of its market cap) every year is simply not an effective use of cash and Buffett has said as much. I would love for them to demonstrate they are serious about using meaningful amounts of cash to buy back shares (not all the time but certainly at times when the shares get cheap and they are sitting on too much cash with few opportunities in sight... like perhaps now). If this process starts when Buffett is still around then we should be able to safely assume it will continue when Buffett is gone. In my mind this also makes the decision easier to be a long term shareholder (post Buffett).

He then goes on to say this about buybacks: Call me crazy, but that sounds to me like reluctance to buy back in size when he was providing investors with per-share book value as the metric to be used to calculate intrinsic value. I think this is him telegraphing that he is now open to large buybacks, now that potential sellers have been "warned". Wisowis, i think you have nailed it. In the past Berkshire has pretty much NEVER bought back much stock; even when the shares were dirt cheap. However, i think this will now change in the future. More importantly, i think Buffett finally is ok with Berkshire making significant purchases of shares. But for this to happen, Buffett first felt he needed to do a couple of things: 1.) remove the handcuffs he has self imposed: In the past Buffett has said BRK might buy back stock when it trades at a certain price level to book value (1.2 then 1.4). In this letter he shreds this commitment. He says BV is no longer a good measure to use when valuing BRK; this is a massive change for Buffett and BRK. Now Berkshire will buy shares when they feel they are cheap and shareholders will find out when quarterly results are published; no longer being constrained to only re-purchase when the stock drops below a pre-specified price to book amount is a big benefit to BRK. And what is cheap? Whatever Berkshire decides. 2.) provide current shareholders with an updated way to properly value the company: he spends a great deal of the current letter doing this and he lays it out quitewell. I am sure there is a reason for this. Buffett did not repurchase in Q4 because he first wanted to communicate Berkshire’s new philosophy in the Feb shareholder letter, which was probably written before the Dec meltdown. Buffett always looks longterm; the stock will get cheap again and now he will have no self imposed constraints on when to buy back shares. And, perhaps most importantly, Buffett has now gone out of his way to ‘warn’ or ‘inform’ investors. If they sell and Berkshire subsequently buys back a big amount of shares and this leads to a higher share price they cannot blame Berkshire for not being transparent.

A key take-away for me was Buffett’s summary of lower taxes and the impact on BRK. This was a major one time boost to BRK value and looks to me to have been largely shrugged off by Mr Market. This also may mean that Buffett’s current intrinsic value calculation is much higher than people estimate. From Page 7: “Begin with an economic reality: Like it or not, the U.S. Government “owns” an interest in Berkshire’s earnings of a size determined by Congress. In effect, our country’s Treasury Department holds a special class of our stock – call this holding the AA shares – that receives large “dividends” (that is, tax payments) from Berkshire. In 2017, as in many years before, the corporate tax rate was 35%, which meant that the Treasury was doing very well with its AA shares. Indeed, the Treasury’s “stock,” which was paying nothing when we took over in 1965, had evolved into a holding that delivered billions of dollars annually to the federal government. Last year, however, 40% of the government’s “ownership” (14/35ths) was returned to Berkshire – free of charge – when the corporate tax rate was reduced to 21%. Consequently, our “A” and “B” shareholders received a major boost in the earnings attributable to their shares. This happening materially increased the intrinsic value of the Berkshire shares you and I own. The same dynamic, moreover, enhanced the intrinsic value of almost all of the stocks Berkshire holds.”

True. But FFH growing book value in a meaningful way (which will then drive the stock price) is tied to them being positioned correctly with their investment portfolio. The company recently completely reversed their investment orientation and expressed a great deal of optomism in the future with Trump as President. They are not short term thinkers so they must have thought stocks had many years of solid returns ahead. 2018 was not a good year for financial markets. With the global economy slowing, including the US, 2019 might be another tough year for financial markets. If so, this will be a continuing headwind for FFH.

“Book value per basic share at December 31, 2018 was $432.46 compared to $449.55 at December 31, 2017 (a decrease of 1.5% adjusted for the $10 per common share dividend paid in the first quarter of 2018).” Investment results continue to drag on results. I wonder if they remain as bullish on Trump and still expect great things from equities the next couple of years.

Holding period is a key. If you are planning on living in the same area for the next 10 or more years then buying at historically high prices might make sense. However, if you might want to move then buying today does carry risks. If you buy in Vancouver or Toronto today and prices fall 10 or 15% over the next couple of years (certainly possible) and then you are offered a promotion at work but have to change cities then you will need to sell your place and realize your loss. This happened to some people in the late 80’s.

I am pretty sure that Canada’s population grow rate has actually been slowing every decade since confederation in 1867. We have had a housing boom since 2000. Something has happened in the past +18 years to drive this. Has population growth spiked? No. What then? 1.) mortgage rates: went as high as 20% in the early 80’s and have fallen steadily to about 2.5% today. Inflation is running about 2%. When you have free money it normally results in asset bubbles (financial assets and housing). 2.) China factor: wealthy Chinese looking to get part of their net worth out of China (Huawei COO owns a house in Vancouver); given current chill in relations with China and Canada this may slow for a while. Bottom line, housing is not affordable for average family in Vancouver or Toronto. And, yes, there is a chance that this is the new normal (permanently higher pricing). Time will tell.

It seems the BC and Federal gov'ts have done what needs to be done to end this bubble. I hope they have the guts to let it die. I expect the boomers will be agitating soon... Right now all the policy dicussion is around how to make housing more affordable. The flip side of this is people who currently own homes do not want to see them go down in value (boomers) as they likely see their home equity as their retirement nest egg. Vancouver real estate is in a wickedly difficult situation and it is going to be very interesting to see how it plays out in 2019. Interest rates look headed lower; my read is global deflationary forces are starting to overwhelm the strength of the US economy. Lower interest rates and a resumption of QE will likely allow governments to kick the can down the road a little longer. I am wondering if all the talk about much higher US rates last year (Gundlach and others) was just not a head fake and we have seen the peak in interest rates for this cycle. Not good if true.