Viking

European leaders must now make some decisions as it is apparent that the Greece can has been kicked about as far as it can be. The problem is the choices that they must pick from are all very bad. Politicians will pick one of the very bad options ONLY when a gun is placed to their head. And that is the rational decision if you are a politician. The challenge with this strategy is we have a political crises (future of Euro, inability to make fast decisions), an economic crisis (world falls back into recession) and a bank crisis (Euro banks are insolvent) and if one piece blows up it threatens the other two... Europe may announce something this weekend and markets may applaud next week. I just do not understand how, in the coming months, we do not get more bad news. I know we are supposed to be value investors and not market timers. Sorry, until I see blood in the steets I will remain cautious. There is only a whif of panic in the air right now. People are still complacent (stocks for the long haul). A previous posted commented rightly so that those sitting in cash today will likely still be sitting in cash when the market bottoms and will still likely be in cash during the next bull market run. This is actually something that I think about and struggle with a fair bit.

I liked reading Grantham's comments posted yesterday; I also re-read his last quarterly letter. He suggest most investors are not ready for the fireworks ahead (he references the bear market of the early '70's). We frame future expectations from past experience. In 2007 & 2008 this was a terrible strategy. As stated many times before it looks to me that Sept 2011 is shaping up to be another of those inflection points where it is highly likely we will see things we have NEVER experienced before. I am not trying to be melodramatic. I am just trying to stay true to my first and second rule (capital preservation). Time to buy? I will get more interested when the S&P falls below 1,000.

BRK is trading today at around book value. Why pay anything close to BV for TRH? Instead, spend that money buying back BRK stock.

The longer these guys have to work with Buffett and learn the better I will feel about the investing function at BRK going forward; time also gives BRK an opportunity to ensure the right candidates were picked.

Governments will not make the final necessary changes (as they will be VERY unpopular) until they feel they have a gun to their head. The markets are focussed on Greece at present and it is pretty apparent that default is coming. After Greece is savaged, and similar to 2008, markets will then focus on the next weak link (pick one... Ireland, Portugal perhaps Spain). Bond yields will spike and another will likely default. And then they will relentlessly move on to the next weak victim like a pack of hyenas tooking for the next kill. What made 2008 very scary was that it played out for so long and one domino knocked over the next domino and so forth. It was not predictable HOW bad things were going to happen or even WHICH companies would be the losers or the survivors. At a marco level it was clear that bad things were likely going to happen.

Sanj, I do agree with what you are saying. The key is understanding what constitutes 'cheap'. Since 2000 US stocks in aggregate have been going sideways. Companies are growing earnings. The multiple that the market is willing to pay for those earnings has been dropping. I just wonder if what we think is cheap (based on benchmarks based on the past) does not continue to get driven lower. After all, something is only worth what soneone else is willing to pay for it. I am trying to find that balance between being a value investor, preserving my capital and being respectful of what the future may hold. We certainly live in interesting times!

It looks like Greece is in an unsustainable situation. Europe does does remind me of how things were in 2008 with US banks. In 2008 we knew trouble lie ahead we just didn't know how it would all play out. The US political situation is a mess; with the election coming next year the two parties WILL NOT work together (unless markets go into free fall and the economic situation gets even worse); the markets understand this. Bernanke also is trying to stay neutral. My read is the downside risk to equities is quite high and the probability of it happening is also quite high (more than one would normally expect). I think there is a reasonable chance that the 'smart money' decides that the US Congress and Bernanke need a stock market sell off to get more stimulus approved. Throw into the US mess the mess in Europe and we have an especially wicked situation. In response, I have been getting more cautious. I am now at 20% stocks (mostly BRK but also MSFT & BMO) and 80% cash. I will not be upset if I miss a bull market rally. Right now my focus is on capital preservation.

misterstockwell, I agree. I actually sold a few things the past week to lock in some smallish short term gains. Back to about 65% cash, 20% BRK and 15% MSFT, BMO, TEVA & GLW. I expect the coming week to be very interesting; with people returning from holidays, volume and volatility should increase. I will be happy to pick up more BRK under $68. S&P below 1,000 will get me even more aggressive. Having the kids back in school will also make it easier to focus, think and do research. My wife still doesn't understand why I can't multitask better (research an investment and be a dad at the same time). :-) I know... problems, problems!! :)

I have not been following FFH closely for the last year or two. I think they still hold some CDS positions... the kicker would be if they were for European banks. Does anyone have any insight?

BeerBaron, I think the answer for insurance comapanies and reserving is do you trust management. That is why I stick to BRK, FFH. I like what I hear from WRB. PRE has a new CEO and they have struggled recently so I am not sure.

What makes things interesting is some are suggesting that there is a high degree of variability among companies (some have excess capital and others have none) meaning another large catastrophe hit and will likely start to see who has been swimming naked. Berkley says the hard market will happen when CEO's start to fear they do not have enough capital and suddenly begin to cut back on business and raise prices (one of those 'whocoodanode'? moments).

What are people thinking about insurance / re-insurance stocks? Looks to me like we are near the cycle low. Time to buy and hold on for the ride. 1.) BRK: trading at BV (near historic low), this is my favourite no brainer pick. I just need to decide how concentrated I want to get (currently 30% of portfolio). Should stock continue lower I will not hesitate to move to 40%. 2.) WRB: despite arrogance, like Bill (not sure why). Looking to get back in at or below BV (sub $28). 3.) FFH: need to review and understand all the puts and takes (hedges etc). Looking to get back in at 0.8 or 0.9 x BV. Spoiled in past years by stock swings. I have been following PRE for years and they are dirt cheap P/BV = 0.65. My concerns are how good the new management team are and possible exposure to Europe. Ace is a company that looks intersting to me. Management looks quite arrogant but they look pretty savvy and stock has not sold off like PRE. Looks cheap not crazy cheap.

Perspective is a beautiful thing; this is a key strength of Buffett's.

Here is a great summary of the issues in Europe with a potential solution (split Euro into two zones). Hard to see how things in Europe do not get worse before they get better. The key challenge is the uncertainty as hard decisions will not be made in advance (not politically possible). It will take a crisis to hit, for people to feel like therre is no other option, for the tough decisions to be made. Hard to see how financial markets don't get even more ugly as Europe burns. seekingalpha.com/article/287823-going-dutch-one-possible-solution-to-the-euro-debt-crisis As an example, I was looking at the re-insurers (Partner RE, Munich Re etc). They are trading at historic lows which would suggest a decent margin of safety. However, when I overlay the European debt markets and the Euro I have no way of understanding the puts and takes. Bottom line I am not looking to buy companies tied to Europe.

Makes one appreciate one of Buffett's comments in the recent AR about how to value BRK: how well retained earnings are re-invested over time. Makes BRK look even better. Watching HPQ makes one wonder how to value all that cash that many tech companies are holding. MSFT and GOOG recent purchases also gives one pause.

DELL is in the process of trying to reinventing itself. Will they succeed? Is anyone drinking the Kool-Aid? It has net cash in excess of $4.00 per share. Earnings this year are expected to be $2.00/share; RBC is forcasting similar earnings next year. Cash flow is huge and they continue to buy back stock. Expenses are increasing and revenue WE ARE TOLD will follow with a lag; services with deferred revenue. TRUST ME! They are exiting lower profit businesses and this will hit their top line for two more quarters. I like Michael Dell (not sure why). Do we trust management? Perhaps this is the key question to answer. I got interested when it fell below $14.00. Looks like decent margin of safety at that level. Perhaps we will get another leg down as we move into September as sentiment looks to be pretty poor.

The S&P500 traded as high as 1,134 in April 1998; today it is trading at 1,191. 13 years later the average is flat with inflation running 2 to 3% per year. Grantham says fair value for the S&P is 950; perhaps the bear market is not over yet. Does this mean most stocks in the S&P have been value traps for the past 13 years? Should the bear market continue for another 5 or 6 years (normal when looking at history) does this mean most stocks remain value traps? Clearly, the market multiple (what Mr Market is willing to pay) is coming down over time. Should this continue then most stocks will remain value traps. The key lesson in all this to me is the importance of margin of safety when investing. And patience. And the value of having cash.

The summary above may be viewed as flawed because it does not factor in the potential for BRK-B book value to fall in the coming quarters. In 2008-2009 BRK BV fell 15%. If the same happens in the next few months then the P/BV is not so compelling. So far BRK-B stock price has fallen a great deal from its highs (20% to 25%) while BV has likely not changed much, even with the recent stock market decline. So what happened in 2008/2009? During the 2008/2009 bloodbath BRK-B BV fell from $52 (2008YE) to $44.17 (Q1 2009) = 15% decline. The decline was driven largely by fall in market value of stock holdings. Three stocks make up 50% of stock holdings: Sept 30/08 Dec 31/08 Mch 31/09 KO $54.16 $45.27 $43.95 WFC $37.53 $29.48 $14.24 AXP $35.43 $18.55 $13.63 It is highly unlikely that these stocks will fall to the same degree that they did in 2008 & 2009 so I feel current P/BV relationship is telling us that BRK-B shares are a great buy especially under $70..

I spent the last few days reviewing BRK-B price and book value over the past few years to get some perspective on the valuation trend. How does current valuation compare to the lows from 2009? Price to BV Aug 10 2011: BRK-B = $67.50; Q2 2011 BV = $65 = 1.04 Price to BV low: March 5 2009 BRK-B = $46.00; Q1 2009 BV = $44.17; P/BV = 1.04 The kicker are exchange rates: March 2009 = 1.20 and Aug 2011 = 0.99 Before currency, BRK looks to be trading at historic lows for P/BV. For CAD investors BRK looks to be trading at the lowest in has ever traded BY FAR. avg price BV USD/CAD Oct 2006 to Aug 2007 $72 $47 1.12 Aug 2007 to Oct 2008 $85 $52 1.00 Jan to July 2009 $58 $44.19 Q1 1.20 $49.20 Q2 July 2009 to Jan 2010 $66 $55 1.08 Jan 2010 to May 2011 $80 $60 1.03 May 2011 to July 2011 $75 $65 1.01 Average Price = about what stock traded at during period BV = as reported (A share / 1,500) USD/CAD = average exchange rate during period

I like the comment about fear and greed: "Fear is instant, pervasive and intense. Greed is slower. Fear hits," he exclaims.

Bought a chunk of BRK today; up to 30% of portfolio; should BRK continue to fall I will continue to add. BV = $65 per B share; we are almost there. Cash is about 55%. As has been mentioned, the S&P is at 1,100; not a screaming buy. Should it fall below 1,000 I will get more interested in more names.

This is simply the next step resulting from downgrading US gov't. Hope it drives BRK-B to $68 (my next buying level). :-)

I agree that things are quite different than 2008 & 2009. I do not expect financials (i.e. WFC) to fall as much. Many of the large cap tech stocks we have discussed (i.e. MSFT) should hold up well. Resource plays/cyclicals likely will bear the brunt should the economy deteriorate further. Should panic hit... everything will likely get hit equally. That is when some real money will be made. I am thinking I need to get some low bids entered on the stuff I really like as it is too easy to miss the rapid downdrafts (and rebounds).

I have followed Hussman for years and do like him. If you like logic he certainly explains his view quite well. However, I find that he tries to get a little too cute in timing and he is very much a macro guy. Bottom line, I do not mind being early and do not mind buying when I find something cheap that I understand and like (regardless of market internals).

It will be interesting to see what he/Combs has been buying... my guess is more Mastercard. If correct, they are doing very well.