Viking

I am happy the Liberals got a majority (not sure how long this feeling will last). I hate minority governments where the three parties make promise ($) after promise (more $) to build a large enough base to form the next government. After 10 years governing the Conservatives needed the boot; too arrogant, mean spirited and divisive (coming from a conservative). The NDP results (or lack of) were also a shocker. Interesting times...

So 3 of his top 5 holdings blew up. And the problem is concentration? Sounds like the real problem is picking the wrong stocks. If you are a poor investor and you concentrate, yes, you will lose your shirt. Concentration has made all the difference to my investment returns over the past 20 years. Sometimes that has meant 100% cash; 80% Fairfax; 80% Apple etc. I do not look to get concentrated; however, if Mr Market drives the price low enough I am happy to back up the truck for short periods of time.

Homestead, I just look for industry leaders that are out of favour. They may be out of favour for any number of reasons; some reasons are obvious and others are not. A good example are the large US banks. You can buy them right now for about 10 times 2015 earnings (Wells Fargo is 12 times) and 9 times 2016 earnings. Their 'temporary problem' is Mr. Market simply does not like the sector. This will correct itself over time; these stocks will be much higher the next couple of years. Another good example is Apple. A couple of weeks ago it was trading sub $105. The company will earn $9 this fiscal year and likely earn about $10 next fiscal year. The 'temporary problem?' Concerns over iPhone sales. My guess is iPhone sales will be fine and if I'm right the stock will be much higher in the coming years. My point is there are lots of different types of 'temporary problems', not just the type Volkswagon is currently experiencing that provide investors with opportunities to purchase industry leading companies at very good prices. I think Buffett would rather buy a great company at a fair price than a fair company at a great price (when your holding period is many years).

I am up about 13% year to date (in Canadian $). During this time my stocks are down about 2%. The gain is due solely to currency. All of my investments and cash are held in my US $ accounts. Starting about three years ago pretty much 100% of my portfolio has been held in my US$ account. When I sold US stocks I was happy to leave the cash in my US$ account until I found another good U.S. company to purchase. A year ago hen oil/commodity prices crated It was clear to me that economic growth in Canada would weaken (which it has) and the CAN $ has continued lower (versus the US$. At the same time the economic news out of the U.S. has been much better (compared to Canada). My guess is the current trend will hold for the next year or two so I am in no hurry to shift my cash to my CAN $ account). Needless to say, the currency gains the past three years have been very healthy. The crazy thing for me is I do not consider myself to be a currency investor. I am much more comfortable buying US companies; this year it has been Apple and the big U.S. banks (primarily JPM). I am not comfortable buying the commodity plays and, given I think Canada is in a housing bubble, I am not interested in Canadian financials. Those two sectors represent a big chunk of the Canadian market. I do really like some Canadian companies (CGI, Impact Financial, Saputo) but they are not 'cheap' enough yet for me to buy at current prices. The key learning for me over the years is to keep learning. Keep adding tools to your tool kit. One tool I have yet to add to my tool kit is buying leaps; if we get a big sell off in Sept or Oct I may buy some leaps in a few of my favourite large cap US stocks and start to figure out how it all works. :-)

I also read the calculated risk blog most days; great summaries and author is unbiased. Has a housing focus, which helped me a great deal in 2008-2009 (I have been reading it that long).

It looks to me like Mr Market is finally waking up to the end of QE in the U.S. and the Fed wanting to normalize interest rates. The first result, the past 18 months, was a rapid increase in the $US. This then lead to commodities tanking and economies of commodity producers tanking. The second result, China has now decided to unpeg their currency from the $US. Where does this take us? Currency wars and trade protectionism? Moving forward, I think the Fed and the China Central Bank are holding the keys as to where this goes from here (and how ugly it gets). Until we get further clarity from both parties we likely will see lots more volatility. Perhaps it is time to focus on return OF capital more than return ON capital.

We are in for some very interesting times. This kind of reminds me of a very public messy celebrity divorce. Both sides will lose. Greece's political culture is too far from Germany's and a majority of Greeks are not going to change that much that fast. At the same time Northern Europe is also not going to change and allow a Euro member to default. There is no middle ground on this one. The next couple of days and weeks will be very interesting as I expect the Greek government to continue to be very belligerent. How will markets react? We had a small sell off this past week. Now that No has won perhaps we get another small sell off. What would it take to get a larger sell off? I wonder if the crashing Shanghai stock market might impact world markets the next week or two more than Greece (should Shanghai continue to crash). I have largely ignored macro event the past 2.5 years or so and this has helped my investment returns in a big way. Paying attention to macro has also helped me at other times (I only owed FFH when the Great Recession hit the U.S. in 2009).

Personally, l love the fact that many (most?) people feel value investing is a mistake. This simply ensures a nice selection of securities over time for small investors to nibble on and earn better than market returns.

These is a great deal of noise right now when trying to understand the mega banks. What will litigation costs normalize to and when? What will the final regulations look like? How much capital will they be required to hold? The more interesting questions to me are: Will banks completely exit certain business lines? What banks will exit what business lines? For those who are left in a segment how will pricing change? Will we be left will oligopolies and if so will pricing decisions be rational? How will individual banks and the industry respond to the final capital requirements? Capital return is also a great unknown. Yes, the mega banks are not able to grow. So instead of using earnings to fund acquisitions they will instead have to return it to shareholders. This is not a bad thing in my mind as many large acquisitions are often not good for existing shareholders. In two years, JPM will likely be earning $27+ billion per year (and growing). They will need to build no more capital. They will not be allowed to make large acquisitions. They likely will pay out 75% to shareholders in regular dividends, share buyback so and perhaps a special dividend ($5 to $6 per share is possible). Over the next two years the narrative with the big banks is going to change in a major way; as people come to understand the size of how much capital is going to be returned to shareholders sentiment is going to shift (greed is a beautiful think to get interests aligned). The big banks are cash machines. All of the regulation is creating huge barriers to entry. The big banks are looking more and more like a regulated utility to me... with a yield (looking out 2 years) of better than 10% and growing. the risk of owning US large cap banks is likely the lowest it has been in decades. Low risk and high return... Not many opportunities like this available in the market today. My read is in the current environment (lots of important strategic decisions to be made) quality of management is going to be more important than normal. Banks that have been making and continue to make the best decisions are going to come through this period in very good shape: less competition, larger moat, more stable and predictable business results. The key for owners of bank shares is to simply do nothing...

I don't follow the regional chains in the U.S.; my understanding is the regional banks currently trade at a higher multiple than the large cap banks. My guess is the entire sector will do well. Regarding ranking the large U.S. banks currently I like JPM the best. I think they have the best management group. And each of their 4 businesses are solid franchises that will only get stronger from here. JPM looks like they are a few years ahead of Citi and especially BAC in executing their strategy to prosper in the current environment. If I had to own one name for the next 10 years I would pick JPM in a heartbeat. Looking a possible returns over the next 6-12 months it is really difficult to pick a clear favourite as each company offers something different. Citi looks quite cheap given earnings projections the next couple of years and they will be returning lots of excess capital (as they utilize their tax loss carry forwards). BAC looks the cheapest but it also looks like it has the most legacy issues to still work through and I have the least confidence in its leadership group. Bottom line, it looks like the headwinds are diminishing and the tailwinds are picking up some speed.

It looks like sentiment is slowly getting more positive in U.S. large cap banks, especially BAC, Citi and JPM. My thesis with large cap US bank stocks is over the next couple of years we are going to get 1.) increased earnings 2.) lower share count (as excess capital is used to buy back stock) 3.) sentiment change resulting in Mr Market paying higher PE multiple When these 3 things happen at the same time stocks often move 30-50% over 24-36 months. My guess is we are still in the early days in the increase in stock prices of companies in this sector. Over the past 8 years the vast majority of the coverage has focussed on issues: capital issues, credit losses, litigation losses and/or regulatory burden. All of these issues caused earnings to suffer, muted growth rates (top and bottom line) and this resulted in Mr Market valuing the sector with a below market PE multiple. Mike Mayo: "more positive on bank stocks than anytime in the past 16 years" A: asset quality is stronger than its been in the last decade B: balance sheets are stronger than they have been in two decades C: capital is stronger than it has been in 5 decades Litigation: in 8th or 9th inning Regulation: has hurt earnings growth but has also dramatically reduced risk; not a terrible trade off Earnings stability: much, much better than the past

I agree with Innerscorecard. I think the key factor for a lack of ideas is we have had a 5 year bull market (in U.S. Stocks anyways). While there are pockets of cheapness most sectors are fully valued to expensive. Really comes down to your perspective on interest rates. If US rates are headed materially higher then stocks are expensive and bonds are in a bubble about to pop. When the next correction in stocks comes (10-30%) I guarantee there will be many more more value investment ideas posted on the board. There is just not much that is out of favour. Earlier this year I thought the large cap US banks were pretty cheap; you could have purchased JPM in the $55-$58 range. With JPM now trading at $66 it is still on the cheap side but not as much as 3 months ago. There simply are not a lot of sectors or companies that are in a bear market right now. Circle of competence is also an important factor. Personally, I have had the best results buying best in class, large cap US stocks when they are out of favour. I have dabbled in Russian stocks, oil and gas stocks etc but I have learned that there are lots of other people who have a much better handle on currency markets and oil prices than me. I am happy to simply wait until the next bloodbath so I can find companies I understand trading crazy cheap. Not many of these around today.

If US interest rates are key then inflation expectations will be a good thing to monitor. Oil falling from $110 to $60 is very disinflationary as input costs fall. The U.S. dollar increasing 20% is also disinflationary as import costs fall. The U.S. is going to have very weak headline inflation numbers for another 6 months or so. However, as these two events calendarize then we should start to see an uptick in inflation. Another key will be if the U.S. labour market continues to tighten further. Labour costs have been increasing the past 4 years but the increase Has been small. Later this year or early next year we could see a scenario where the inflation rate starts to tick up. Should inflation expectations surprise to the upside we could see a bloodbath in the bond market. This fear will also hit the stock market and things would likely get ugly there as well. To me the bond market is the real risk right now. If things get ugly, cash will be king and those with cash will likely get another buying opportunity of a lifetime... Interesting how these 'buying opportunities of a lifetime' seem to be happening about every 8-10 years! To follow what is going on in the U.S. economy, with a focus on the housing market, I read the calculatedrisk blog, which is first class in its analysis.

Uccmal, I think interest rates are the key moving forward. If Mr. Market gets confident that the Fed is going to increase interest rates meaningfully then I think we will get a big sell off in all asset classes; bonds will get hit the hardest but the panic will hit all asset classes. Even if the Fed only tightens once or twice I think this will spook everyone and we could see a 20% correction in stocks and bonds. Perhaps this happens in Aug/Sept/Oct (if the data in the U.S. is decent over the summer and expectations of Fed tightening increases for the fall). What gives me confidence today is the U.S. economy continues to heal itself, but not too fast. My guess is interest rates in the U.S. continue to stay low for the rest of this year and perhaps next year too. The U.S. cannot increase rates as long as Europe is weak (another point made by Buffett). There is an old saying that the stock market does best when everyone is worried (it climbs a wall of worry).

I remember going into a Starbucks in Toronto on a Saturday morning in 1999 to read the Financial Post. On the front page (the lead story) was a graph showing the rise in the stock price of Nortel Networks from few dollars to over $120. Many, many companies were trading for billions of dollars and they had no little in the way of earnings. At the other end of the spectrum, government bonds were yielding 7% and Canadian bank stocks were hated (everything old economy was on sale, including Berkshire Hathaway). I remember going home that day and saying to my wife that we were living in a stock market bubble. My sales people were making more money off of their internet stocks than they were making in salary. The daily conversation in the office revolved around what hot stock they were currently riding. I do not see the comparisons to today; some sectors may be in nosebleed territory but not to the same extent as 1996-1999; back then tech stocks ruled the market. The subsequent correction killed tech but the old economy stocks that were cheap in 1999 weathered the storm fairly well. Today you can buy JPM for $65. It will earn about $5.85 this year, giving it a current year PE of about 11. Next year the bank will earn about $6.50. Dividend yield is just below 3% and growing nicely. It is buying back about $1.25 billion in shares per quarter. I am using JPM as an example of a stock that I think is valued very fairly today. I think Buffett has provided the best summary of the current situation. If interest rates stay at current levels for the next 5 years then stock averages are cheap today. If interest rates normalize in the next 5 years then stock averages are likely mildly expensive. The asset class that is in a clear bubble today are bonds; this is the asset class Buffett would like to short.

I want to apologize to non Canadian readers... In the note below I get into a fair bit of detail of investment accounts allowed by the Canadian government over the years; hard enough for a Canadian investor to follow.... Uccmal, most of my investable assets are in RRSP's and LIRA's. yes, this is a direct result of my past decisions. I do love the (relatively new) Tax Free Savings Accounts. I think they are a fantastic vehicle, especially for young people. TFSA was not an option for me when I was younger. Today I am drawing down my RRSP and taking the subsequent tax hit. I am not too concerned; when I made my RRSP contributions I was in a very high tax bracket (around 50%) so my tax rebate was quite large. At the time I understood tax brackets and made sure my RRSP contributions did not drop me into a lower tax bracket (where the savings would have been less). I find investing within an RRSP to be very straight forward. One key reason is I do not have to think about taxes when making an investment decision and I find this helps enormously; this has likely helped me get better returns over the years. I also made large spousal RRSP contributions when I was younger. My wife's RRSP today is actually larger than mine. This also has turned out to be a good long term decision as this has given us additional flexibility. Currently, I am trying to grow my TFSA. My best investment ideas go into these funds and they have been growing nicely over the years. For a few years I actually took extra $ out of my RRSP and used the proceeds to max out my TFSA contributions. My balancing act is I am currently drawing down my RRSP's to live. I cannot access my LIRA until I am 55 and 60 (one is domiciled in BC and one is in Ontario and the two provinces have very different rules); I do need to learn more about my two LIRA accounts and what the exact rules are regarding when and how much I can withdraw. My TFSA are not large enough yet that I want to withdraw funds to live. There is some complexity to managing this. I also have a group RESP for my three kids (one account). I made one contribution of $2,000 for each kid about 12 years ago (so a total of $6,000) when my youngest was born and I opened up the account. The government added 20% so I started with $7,200. This account is now approaching $60,000. I think I will be able to pay for about half of my kids university education down the road out of this fund. Pretty crazy given the starting point (what investing $6,000 can get you years later...pay for a large portion of 3 kids university education). Just goes to demonstrate the power of starting early and compounding. The key decision here was, once again, opening an account that I controlled and could invest myself. As an aside, all of my and my wife's accounts (RRSP, LIRA, TFSA, RESP and cash) are held with one of the big banks. Investing/managing/tracking them is very simple and low cost. Canadian investors today are in a very good situation when it comes to managing their finances; much better than when I started down this road about 25 years ago.

I was in a similar situation twice and both times I chose option 3.) transfer $ to a LIRA. This decision was the best financial decision I have ever made. One immediate benefit was I was allowed some very large RRSP contribution room (the difference between what my allowable RRSP room was each year and the value of the LIRA I transferred for each working year with the company). The Canadian government sent me a notice with the amount that had been added to my RRSP contribution room for income tax purposes that I could claim in future years. I promptly then made large RRSP contributions to use up this contribution room (as I was in a very high tax bracket when still working). So my starting point was the LIRA that I received from my previous company and the subsequent large RRSP contributions that I made. This happened twice over the years. Here is the crazy thing. Each time I changed companies the reason was to build my skills; I did not chase cash or do this so I could get my hands on my pension $. As my skills grew the $ employers wanted to pay me increased. So changing companies was a great decision in terms of growing my skill set and earning more $. However, the fact that changing companies also allowed me to get my hands on my pension was, in hindsight, the best part of me changing companies. I have been able to compound these investments at about 15% per year (for many years). This put me in a financial position where I was able to quit my day job; this was 10 years ago. If I had stayed with one company I have no doubt that I would still be working full time. Yes, I would have some investments and they would be growing OK. Getting my LIRA and making some large RRSP contributions (I rarely had room to make RRSP contributions when I worked given the estimated value of my pension benefit) gave me a large and critical mass of savings when I was still relatively young (in my 30's) that I was then able to grow nicely over the years. A key to this decision is how good of an investor you will be in the next 10 to 20 or 30 years. Only you can answer that question.

As I believe Buffett said; it all depends on interest rates. The Fed seems to really want higher rates. And if rates do go higher then, yes, stock averages likely are high. However, if interest rates stay low then stocks likely are not too expensive.

Wow. What a stunning result. Alberta is as right wing as any province in Canada. The NDP (left wing) is being given a gift. Crazy Canadian politics!

Not good to see BAC ranked dead last in customer satisfaction in U.S. Citi was ranked second worst. JPM looks to be performing much better. I wonder if all the cuts Moynihan had to make the past couple of years to get costs in line have impacted customer service at the retail branches. These sorts of trends, once established, are also very hard to change. Quotes from article: "As consumer sentiment toward the industry improved, Bank of America fell further behind competitors, according to the survey released Thursday." "Bank of America’s customer satisfaction was below the average for each region, failing to rank better than third-worst, which is how it fared in Texas, the second-most populous state after California. Citigroup Inc., based in New York, was second-worst in California, Florida and Texas. JPMorgan Chase & Co., the biggest U.S. bank, was ranked highest in Florida and never scored below the industry average. J.D. Power measured satisfaction in categories including problem resolution, products and fees and surveyed more than 80,000 bank customers. Bank of America’s consumer and business division is its largest by revenue and profit, earning $7.1 billion last year, a 6.8 percent improvement from 2013." http://www.bloomberg.com/news/articles/2015-04-30/bank-of-america-is-least-loved-in-places-where-it-s-best-known

For news on US economics and housing calculated risk is a great blog. The author is unbiased and very good.

treasurehunt, I have not followed Goldman very closely. My learning is to go with the best in class and Goldman is very well respected. I was overweight BAC and underweight JPM; I am now way overweight JPM and still hold a much smaller amount of BAC that I will likely sell over time. I think all of the big U.S. banks are cheap at current prices. Sentiment is just starting to shift for the large banks from deeply hated to neutral. In another 12 to 18 months hopefully everyone will be in love with them. Earnings growth + multiple expansion + lower share count = outsized returns. Decent dividend is icing on the cake (get paid to wait). A final comment on BAC. Given how much work they still have to do moving forward to right the ship I found it very challenging mentally to be invested in BAC the last 6 months (I tend to have pretty high weightings). Q4 earnings missed expectations. CCAR was disappointing. The annual report was disappointing with little communication from Moynihan to give investors hope. Q1 results were OK but not great; Moynihan's comments were also ho hum. Now i do not expect or want a cheer leader; however, given what Bank of America still has to get done to right the ship I do expect the leader to provide leadership for investors as to what (specifically) the bank is going to do and by when. JP Morgan had its investor day in Feb where they laid out their plans in great detail for investors. Buying the best in class also provides a lot of psychological satisfaction. Perhaps a similar (but not great) comparison was a few years ago (three?) when I owned RIMM; every earnings report felt like I was being tortured; fortunately I sold out after a couple of earnings reports once I learned that Basilie was a dummy so my loss was small. The good is I learned a lot about the cell phone industry. Two years ago I took what I learned when invested in RIMM and loaded up on Apple (best in class and dirt cheap) and did very well. I also really enjoyed following Apple for 21 months on its journey and reading an enormous amount. Hopefully being invested in BAC is like tuition and the learnings (buy the best in the industry, like JPM and others) pays off down the road. Fortunately, my BAC shares are close to where I purchased them soselling and increasing my exposure to JPM has not cost me too much. Life is full of lessons....

Over the past 8 weeks in have listened to JP Morgan's investor day, and (for both JPM and BAC) read the CEO letters in 2014 Annual Reports, read Q1 earnings report and and listened to Q1 earnings conference calls. I have also been following the companies pretty closely for about the past 6 months. I have decided that today JPM is the better investment (for me). I continue to like BAC and feel it should do well for those with a 24-36 month time horizon. It looks to me that the big litigation bills are behind BAC which is great. Future earnings will finally drop to the bottom line. However, given all the earnings that have been drained from the company over the past 5 years due to litigation it appears BAC will need a couple of years of earnings to get its capital levels up to those of Citi or JPM. I just get the sense that BAC is at least one year behind Citi and perhaps two years behind JPM in terms of cleaning up legacy issues and being able to move forward in a quality way. BAC also looks to be slow to adjust their business model given the new regulatory framework. As a result, moving forward, BAC will show nice earnings growth and the business will improve from here. However, there is a great deal of execution risk. Add in the fact that Moynihan is a poor communicator (just compare his comments in the BAC 2014 Annual Report to Jamie Dimon's comments in the JPM AR) and the execution risk gets even bigger. The wild card for BAC is interest rates. If interest rates increase the stock will pop as it is highly leveraged to movements in interest rates. Should interest rates stay low then earnings for BAC will be hurt as NIM continues to be compressed. JPM really looks to be firing on all cylinders right now. All of its business units are doing good to great. Legacy issues, which are already quite small, should be behind the bank in about another 12 months (for the most part). Most importantly the company is totally dialled into the current regulatory reality and are managing each of the businesses to optimize on this. The dividend yield is about 2.7% ($0.44/share/quarter). The share buyback is good, although stock issuance each year offsets about half of this benefit. The stock is cheap, trading at less than 11 times 2015 estimated earnings. Earnings are expected to grow better than 10% per year over the next couple of years. Should interest rates normalize JPM will also benefit (just not as much as BAC). My key takeaway is JPM looks to be a best in class company (large U.S. bank). I am not sure how good the new BAC will be; might be great or might be terrible (likely will be somewhere in between). We likely won't know the answer for BAC for another couple of years. BAC is much cheaper. For me, today, JPM is the better investment. Better quality. Better management. Better plan. Better results.

Right now most people are looking at the big bank and all they see are the challenges: large legal payouts, worsening regulation, shrinking NIM, all pointing to lower rates of return than those earned pre-2008. People are not looking at the other side of the equation: the big banks have been given time to earn their way out of the mess they created. Looking at the past 10 years, yes, there are many bad things that happened and shareholders have not been rewarded (long term shareholders). The big US banks are like coiled springs right now. As people come to appreciate how they will each adjust their business models and grow earnings in the future we will get a nice jump in the share price. It reminds me of Apple 18 months ago. Everyone was overemphasizing the negatives and underemphasizing the positives. Over the next 18 months I expect the big banks to earn some crazy amounts of money; this will be spent increasingly on dividends and share repurchases. A virtuous circle. At some point the the big banks will be where the hot money will go and everyone will love them again. Crazy how the pendulum swings back and forth over time.

JPM held their investor day two days ago and exceeded expectations. They basically said they can continue to grow earnings despite the regulatory overhang. They communicated $30 billion in 'normalized' earnings by 2017 which = about $8.00 per share. Add a 12 PE and you get a share price of $96; with the stock trading just over $61 this would result in more than 50% gain in under 3 years... Not too shabby for what is now essentially a regulated/utility type business. Dimon also stated we could see a dividend payout ratio = 50% of earnings; this would provide a yields greater than 4% ($8 in earnings and the stock trading at $96). The regulations are resulting in the big banks significantly de risking their balance sheet. And every year that passes allows the banks to clean up their legacy real estate issues. With house prices in the US rising nicely the past few years this also must be helping to clean up legacy issues. I am hopeful that BAC is able to articulate their 'plan' as well as JPM has just done. BAC trades today at $16.00. TBV (Dec 31) = $14.40. Let's assume BAC pays $0.30/share in dividends and earns $1.30/share in 2015. In early 2016 a buyer today would see their cost base fall to $15.70. At the end of 2015 TBV will likely be about $15.70. If you buy the stock today there is a good chance your cost base will be = TBV in 10 months time. The key for BAC moving forward will be if they can have a (relatively) clean year of earnings so investors can get comfortable with what it can actually earn moving forward. Time should reward the patient investor quite well when it comes to BAC. JPM earnings are more predictable right now and they have articulated their near term plan very well. The shares are increasing nicely as a result. bottom line is the large US banks are crazy cheap; perhaps the JPM presentation will be viewed as an inflection point (in hindsight) in investor sentiment.