Viking

Happy New Year to everyone; hope you all have a healthy and profitable 2018! Special thanks to Parsad for starting and continuing to run this board. :-) My current financial position and lifestyle has benefitted in a material way from the ideas posted on this board over the past 15 years; many thanks to all those who have taken the time to post their ideas and thoughts. Like Bsilly and his posts back in the dark days of 2003-5.

30% total return; stock picks were up 38% and currency was -8% (as Can$ was up about 8% versus US$). Big US bank stocks were the gift that kept on giving all year; I continue ie to like US banks as we start 2018: 1.) tax reform will materially increase reported earnings (after sizeable one time charges are taken in Q4 2017) 2.) US and Global GDP growth will fuel revenue growth; growth may accelerate in US 3.) Fed tightening in Dec 2017 and 2018 (consensus is 3 increases) will increase net interest income 4.) regulatory environment in US continues to improve; changes in how the rules are interpreted will be beneficial to banks and increase their profitability 5.) all big US banks will likely be approved to return 100% of earnings when CCAR results are announced in June; dividends will also increase materially (there is some talk the Fed may approve dividend payout ratios of 40% Down the road) and buybacks will continue to be large (removing 5-7% of shares outstanding depending on the bank).

Yes, have a very Merry Christmas everyone :-)

My portfolio is large enough that I do not have a day job (I tell people that I am a financial planner with just one client). As my portfolio grows in total value my thinking is starting to shift a little from total return to preservation of capital.

Thanks to everyone who have shared their thoughts... great to get lots of different perspectives. My experience is every couple of years I will get an opportunity that, from my perspective, is very high probability (80%) of going up 50-100% in a couple of years. These ideas are typically very big companies. One example was Apple when it fell to $60 about 4 or 5 years ago. A second example was the big US banks starting about two years ago. I am comfortable going with a very high concentration (sometimes 100% for 6-12 months). People tell me I need to diversify my portfolio. The problem is I do not have other ideas I feel will come close to making the same high probability return. I did the same thing with FFH (high concentration) a number of times in 2003-2010 back when its price was being driven all over the place when it was listed on the NYSE. I am trying to reconcile in my mind how being 100% invested in Apple or BAC for 12-36 months (buying when they are out of favour and the stock is selling dirt cheap) is more risky than the many people whose net worth is tied up in a small business.

I have been thinking about portfolio concentration for many years. On the one side of the fence is the investment industry that requires/advises a portfolio to be diversified in 15 or more stocks, bonds etc. On the other side of the fence are many small business owners who may have their entire net worth tied up in one business (the business they own). There is also the middle ground; Buffett has talked about how 6 decisions over a lifetime can make an inverstor very successful; once you find a great opportunity ‘back up the truck’ (concentrate your portfolio). Let’s take two scenarios: 1.) Small business owner who’s entire net worth is tied up in their business (let’s assume the business is the average business in the small business universe) 2.) Investor whose entire portfolio consists of Berkshire Hathaway Which choice carries more ‘risk’ to the investor?

Rb, I think Druckenmiller’s concerns with interest rates and QE is they are creating bubbles in many asset classes (or at a minimum very inefficient distortions). The best personal example I have is real estate pricing in Vancouver (clearly a bubble). People are blaming foreign buyers and calling for government help to allow young and low income people to buy which creates very poor public policy. My view is if you want to address housing affordability in Vancouver you need to start by normalizing interest rates (perhaps a 5 year fixed rate of 4 to 5%). Of course this cannot happen as it would crash the housing market and remove the only pillar of growth (for Canada). Crazy low interest rates are possibly creating the mother of all bubbles in many financial assets. Until the ECB and Japan end QE and get rates normalized the party will continue; all the money they are injecting into the system will be put to use. However, it does look like we are coming to the end of the game (or at least this chapter) possibly in the next 24 months. While it has been fun on the way up, it likely will be very uncomfortable on the way down.

Interesting comments. Thanks for posting the link to the video. Some of my takeaways (feel free to correct any errors as I watched the video earlier today): 1.) going back 700 years inflation averaged 1%; inflation was much higher in the 70’s but perhaps that is the outlier. Perhaps current rate of inflation is perfectly normal. 2.) current phase of innovation (greatest in over a century) is likely what is resulting in low inflation and this is not a bad thing. 3.) if current low rate of inflation is normal Fed policy of low rates and quantitative easing is wrong. He feels fed should normalize rates/Fed balance sheet as soon as possible. 4.) by June of 2018 we should start to see some impact of all the central banks reversing quantitative easing. 3.) current low global rates and global QE is creating bubles in all financial markets. Free money will tend to do that.

Randomep, I included the old post on purpose... now I am not sure how accuarate my notes were or how representative they were of his overall discussion... but I think you want to be careful about putting too much stock in any final forecasts (or summaries provided by posters like me :-) I have been wondering lately where the US is in the current economic cycle. Gundlach provides lots of great detail on this. It appears to me that the US should start 2018 in very good shape.

Well, I am back with another post on Gundlach. He continues to be one of my favourite commentators. What I really like is all of the detail he provides and discusses in his sessions. I do not listen to trade off of his guesses as to what may happen moving forward. Rather, I really like listening to his logic. Some stuff I use and other stuff I do not. - Dec 5 Total Return webcast: https://doublelinefunds.com/webcast-schedule/ He also has a second conference call in January focussed on what will happen in 2018 (this webcast is on a different web site as it is not Doubleline fund related) - Jan 9 Just Markets: https://doubleline.com/latest-webcasts/ A couple of take aways from the call last week: 1.) the US 10 year yield is being held down by continued QE in Europe and Japan. Until this changes US rates will be held down (from where the market might take them on its own). He still feels the yield on 10 year US treasuries could hit 5 or 6% in 4 years time. As a general rule he said it is not unreasonable to see the 10 year yield match nominal GDP growth. 2.) he likes commodities (as a longer term investment); expects the US$ to continue to weaken (nothing too crazy) 3.) leading indicators in the US are running hot; with tax reform, US GDP growth may pick up in 2018

I have given up trying to understand what is going on with Vancouver (and Toronto) real estate. It looks and feels like a bubble to me. But I said the same thing 7 years ago. First time home buyers have some really difficult decisions to make. The money from Asia (mostly China) continues to pour in. Interest rates are still very low. The economy in BC continues to perform well, lead by the housing market. In a few more years, once my kids are out of the house, I would be happy to sell and rent. I would love to get my hands on my equity and invest it in stocks for the long run.

John, thanks for providing the information and link. Much appreciated. :-)

Dr. Malone; thanks for posting. I really like the following quote "your 6 best investment ideas in life will do better than all the other ones". It speaks to the fact that in a lifetime most investors will get only a handful of crazy good (life changing) investment opportunities. The key is to take advantage of them when they come (through concentration). At the same time you also need to make sure that you are not wrong (and that said concentration does not blow up your portfolio). Very simple. Very difficult to execute over time.

My (limited) read is China is the key. North Korea exists because it is in China's national interest that is exist (as a buffer to the West). At the start of the Trump administration there was much talk about how terrible China was, how unfair the trade deals were and how China would shortly be labelled a currency manipulator. Then North Korea started ramping up their nuclear program. I know the timing was just a fluke. All the negative talk we heard from Trump regarding China has largely stopped. My guess is China has told the US that if it wants help from China to deal with North Korea then the US had better stop the insults, bashing and threat to label China a currency manipulator. Not sure where it all goes from here. I will be watching China. PS: I think Trump's Russian friends are also a player in this game. Trump plays checkers and both China and Russia play chess.... This conflict has been around for 70 years and is all shades of grey and Trump seems to want to paint in black and white.

Cardboard, I agree with your post. My concern with Fairfax is I am not convinced they have 'learned' the lessons from the past 7 years. Prem talks a lot about 'no ego'. I also see empire building and little concern for improving shareholder returns. Having said that, I will invest in Fairfax with my eyes wide open. I think the stock is cheap. Their underwriting is much improved. I will closely monitor what they do with their investment portfolio over time and this will determine how much stock I hold. This was the approach I took with FFH in the past and it has served me well (I have not held a meaningful positioning he company for the past 7 years primarily because I did not like how the investment portfolio was positioned). Dalzel, I am also hopeful that FFH starts to repurchase shares in a meaningful way. Prem used Teledyne as an example. We will see in the coming year if he walks the talk. Here is the quote from page 21 of his shareholder letter in the 2016 Annual Report: "Having said that, we are raising our threshold for acquisitions now so as to benefit from the ones we have already made – and to buy back our stock. Our hero, Henry Singleton, whom I have mentioned before in our Annual Reports, built Teledyne by taking shares outstanding from seven million in 1960 to 88 million in 1972 and then down to 12 million in 1987 – an 87% drop in shares outstanding. Our long term focus is clear."

Jurgis, investors move from love to hate and back again; as a result stock prices make massive moves. The interesting thing to me is these developments take years to play out. I think most investors miss them because they are too short term focussed. In April 2013 Apple traded below $60; two years later it traded just below $150. In Feb 2016 C stock traded below $40; today it is approaching $70 with lots more upside in the coming years. FFH has had a very challenging 7 years with investments and there is lots of hate out there. With shares recently trading below CAN$550 I wonder if we have seen the bottom. For the first time in many years I have also established a decent position in Fairfax (just today). If Fairfax can get its investing mojo back in the coming years the stock will do very, very well. From my perspective the 'love cycle' has not even started for Fairfax; its share price has been falling like a stone (until just recently). It will take years for Fairfax to hit the 'love cycle'. At that point I will be happy to sell my shares and shift into another opportunity. :-)

Langley, BC (greater Vancouver, Canada) :-)

Racemize, I do not have my copy of 'One Up on Wall Street' handy buy my guess is I got it from there. Here is a second quote from the Investopedia article: "Lynch has said that "absent a lot of surprises, stocks are relatively predictable over 10-20 years. As to whether they're going to be higher or lower in two or three years, you might as well flip a coin to decide." It may seem surprising to hear such words from a Wall Street legend, but it serves to highlight how fully he believed in his philosophies. He kept up his knowledge of the companies he owned, and as long as the story hadn't changed, he didn't sell. Lynch did not try to market time or predict the direction of the overall economy."

Racemize, I did a quick internet search; here is a quote from investopedia that helps: "Lynch coined the term "tenbagger" to describe a stock that goes up in value ten-fold, or 1000%. These are the stocks that he was looking for when running the Magellan fund. Rule No.1 to finding a tenbagger is not selling the stock when it has gone up 40% or even 100%. Many fund managers these days look to trim or sell their winning stocks while adding to their losing positions. Peter Lynch felt that this amounted to "pulling the flowers and watering the weeds"." Read more: Pick Stocks Like Peter Lynch http://www.investopedia.com/articles/stocks/06/peterlynch.asp#ixzz4lifZFstp

Lopo, over the years I have tried to modify my sell strategy. I found that I was pretty good with the buy decision: buying well run companies when they were out of favour (due to company specific or industry issues). Sometimes they would run up 10, 20 or even 30% shortly after purchase and I would be happy to sell and book some nice decent sized profits; often the fundamentals were also improving. Sometimes the stock I sold would keep on going, rising 100 or 150% over a couple of years as the fundamentals were improving and/or the market fell back in love with it and gave it a higher PE ratio. I like Peter Lynch's advice that you sell when the 'story' changes for the worse (not because you can book a quick profit). I tend to run a fairly concentrated portfolio; this is because I can only find a few stocks (or industries) that i really like and find cheap enough to invest in; selling my few good ideas early meant I was sitting in cash lots (earning nothing). The change I have been making (starting with my Apple purchase 4 or so years ago) is if fundamentals are improving to not focus so much on my immediate % gain and instead let the story play out; as long as fundamentals are improving be patient and let the stock run higher. Time will tell if this is the right approach. I have not done a detailed my sell decisions like you have. :-)

Shalab, thanks for posting the article. Since it was posted on the Fool web site on May 30 Fairfax has fallen another $44/share (7.2%) from $609 on May 30 to $565 on June 16.

It really is amazing to see the change that has taken place in the past 12 months. 12 short months ago 10 year Treasuries yielded 1.5%, there was lots of pessimism regarding the economy and Fed rate hikes were considered taboo (and financial markets were laser focussed on the Fed). This year the Fed has already increase rates twice. They just communicated a 3rd increase this year and three more next year and also communicated plans for QE unwind. The financial markets seem ok with everything the Fed wants to do. My point is look how wrong consensus opinion was 12 months ago. We may be equally 'wrong' today and 10 year Treasuries could be yielding 3% in 12 months. It looks to me like we are at an inflexion point and the lows in bond yields is behind us. At inflexion points most people will remain stuck in the past. I like listening to Gundlach to understand where we may be going; he is not perfect but he provides lots of details so an investor can make an informed decision.

I read lots of newspapers and I think it does help me with investing (hard to say exactly how). :-) I read the Globe and Mail, New York Times and some others depending on what is going on (Der Spiegel English edition). For US economics I read Calculated Risk blog etc.

Chesko, given quantitative easing resulted in higher stock prices and lower bond yields can we assume that as the Fed does the opposite (shrinks its balance sheet) that this will result in higher bond yields and be a headwind to the stock market? Gundlach of Doubline feels yields on 10 year US Treasuries may go as high as 6% in the next 4 years and I wonder if the Fed shrinking its balance sheet is part of his thesis; he is calling for a choppy summer market with yields on 10 year treasuries moving higher in the fall and increasing to as high as 2.75% by year end (based on commentary on his conference call yesterday).

As the Fed continues to increase interest rates we will likely see more speculation regarding plans to shrink its balance sheet. Quantitative easing proved to be a huge benefit for financial assets (bonds and stocks). As the Fed shrinks its balance sheet will this be negative for financial markets? https://www.brookings.edu/blog/ben-bernanke/2017/01/26/shrinking-the-feds-balance-sheet/