Viking

The trick is what is everyone doing with their money. Currently, I am still 30% invested (largely US large cap) and 70% cash. So I am being very cautious right now. Yes, well run companies look cheap but that does not mean they will not get cheaper. Regarding earnings, if you looked simply at NET EARNINGS I am not so sure that the overall market is as cheap as it looks. And with unemployment as high as it is I am not sure where future net earnings are going to come from. I do like to look at the macro. I also have learned to stay focussed on being disciplined: buy well run companies trading at a great price. That continues to be my focus now.... read, read, read and wait for price to cooperate...

I find Hoisington's argument appealing simply because most people do not agree with it. The market rarely does what everyone is expecting. The chance that the US enters a Japanese type deflation are larger than 'the market' thinks. Having said this, I WILL NOT be buying long dated US treasuries; cash will be good enough for me (until Buying Opportunity Of A Lifetime The Sequel comes to a theatre near me! :-)

David Rosenberg has mentioned many times that government bond bears focus only on supply. David's view is demand for all bonds is outstripping supply as Boomers are beginning to rebalance portfolios shifting holdings from stocks to bonds. I also see this on a personal level as many of the Boomers I know have been told by their advisers to increase bonds holdings and they are doing so (with gov't bonds getting their fair share). Should equities sell off again (reasonable chance this will happen) the appeal of bonds will only increase (and yields will continue lower to levels we never thought possible). This is also the trade no one is expecting....

Stubble, I am looking forward to seeing what changes Fairfax has made to their portfolios in Q2. They have been very good at being in the right asset class the past few years. In Q4 and Q1 they were net sellers of stocks; the correct move should the current sell off get more aggressive.

I do not think the overall market is anywhere as expensive as it was in 2000 or 2007. I also do not think it is cheap as it was in March of 2009. Cetain sectors have been pretty beat up at look to me to offer pretty good value (big pharma, big oil etc). As a result, I am now 33% invested in equities with the remainder in cash. Should markets go sideways I am happy with what I have. Should markets correct in the coming months I will get more aggressive (i.e. should the general market fall 15% from current levels perhaps I will move to 60% invested and should markets fall 30% from current levels I will look to go to 80% equities).

After reviewing the sector my top pick is Abbott Labs (ABT): well respected, good management, excellent long term track record, good capital allocators, very profitable (should earn over $4.00 in 2010 and over $4.50 in 2011), cheap (trading at a 2010 PE=11). What really separates them from the pack is their growth prospects (low double digit). Their business is also fairly diversified and they do not appear to be facing the patent cliff that others are, such as Pfizer. My second pick is JNJ. I could say much of the same as ABT. The big difference is JNJ will likely grow mid to high single digits (due to its size). My more speculative purchases are BAX, Pfizer and GILD. Bax has had some recent issues but I like its growth prospects looking out. Pfizer is cheap, facing a patent cliff and I am hoping it has something in its pipeline (stock price is saying no). Gilead is cheap, has no patent cliff issues and looks to be buying back lots of stock at current prices. ABT, JNJ, BAX & GILD all have lots of cash and low debt. Should the markets continue to sell off I will look to grow my position in ABT.

Sanj, I hope you are right. My guess is once FFH proves to investors that its reserving practices are in the same league as the industry leaders we will see multiple expansion. BV growth + multiple expansion = investing nirvanna

Here is the bear case for not buying P/C insurers right now... appears some have been swimming naked and the tide is starting to go out. http://www.insurancejournal.com/news/national/2010/06/03/110422.htm

I was looking at a few stocks of well run, profitable companies and was surprised by how long they have been trading sideways: $ today KO $52.41; also traded at this price Nov 1996 = 13.5 years JNJ $59.73; also traded at this price Nov 2001 = 9.5 years MSFT$26.46; also traded at this level June 1998 = 12 years XOM $60.77; also traded at this level Feb 2005 = 5 years S&P 500 1,098; also traded at this level March 1998 = 12 years What does this mean? This tells me that many well run companies today offer much better value than they did in years past. We are also in a low interest rate environment which tells me stock averages will likely tend to sport a PE a little higher than average. When I put the two together I wonder if we are not entering a period where we will look back and say that this was a wonderful time to be a buyer (and long term holder) of well run, profitable companies. My style has been to buy low and sell high (normally in the same year). I am wondering now if a buy (sectors that get beat up like big pharma, big oil, insurance/re-insurance) and hold for years is going to be a more profitable and easier strategy to execute moving forward... A good example is FFH. The company is trading today at a decent valuation; I think there is a reasonable chance it will go lower in the short term due to 1.) risk assets selling off (happening) 2.) hurricanes this summer. My plan is to buy on weakness over the next 4 months. Now what happens if the stock does not sell off (perhaps FFH starts buying back shares, which I also expect to happen). Using short term thinking I may miss a great buying opportunity especially given that I am confident that FFH will compound BV growth annually at a 12% to 15% rate for the next few years. Just a little bit of a tug-a-war that has been going on back and forth in my head...

I have been watching BP for the past couple of weeks and almost bought last week just before 'top kill' was to happen (thinking that most of the bad news was built in and that given a 60 to 70% chance of success). And then 'top kill' failed and the bottom fell out of the stock again. My concern with BP is I just have no way of assessing the current situation as there is so much yet to be understood. I also expect the negative publicity and backlash to actually get worse in the coming weeks and months as the environmental damage begins to hit the region hard (reported 24/7). Having said all that, BP certainly has fallen in value a huge amount... I decided to go the safer route and today bought XOM & TOT. They are trading at multi-year lows, are very profitable at $70 oil, have solid balance sheets and sport good dividend yields (XOM = 2.9% and TOT = 5.6%). Being a Canadian investor, I also like the purchase with Can$ now trading back over US$0.96 and I also like getting a little exposure to the Euro given its dramatic fall the past few months (versus US and CAN$).

Big oil looks to be getting pretty beat up. XOM is trading at under $60 = about where it was 5 years ago (and down from +$90 mid 2008)... appears they do not like the XTO nat gas purchase. Somewhat surprising to me, COP has held up pretty well the past year and it is still well above its 52 week low = $38. TOT is down 33% since January and now sports a dividend yield of about 6%. Analysts seem to prefer CVX (likely due to its concentration on oil). With oil priced north of $70 earnings at all of these companies will be very good. While its looking like a major competitor is going up in smoke (BP) I have to think this is good for non-Gulf producers (like XOM). The key risk I see is if global demand for oil slows (we go back into recession); I give this perhaps a 25% chance of happening. Fortunately many of these companies have pretty clean balance sheets with lots of cash on hand, low or manageable debt. Bottom line is I like the risk reward and likely will establish a 5% position, likely in XOM and TOT. Would be interested in hearing what others think (I think some were following COP)???

It seems all are in agreement that in the short term (the next couple of years) the company will continue to earn lots of cash. The key to this company then becomes what they do with their excess cash: 1.) They have instituted, and grown, the dividend payment. 2.) They also have been buying back shares. I must admit that I am a little concerned that they may blow it on a large ill-conceived aquisition (classic empire built). Offsetting this concern is Gates link to Buffett/BRK, which one would hope would help ensure this does not happen. One area of opportunity is should stocks fall again and test the March lows from last year, companies with cash (MSFT) may get the (second) buying opportunity of a lifetime. In summary, from my perspective, the risks pretty much balance.

The sense I have is pharma used to be greatly overvalued (look at a 10 year chart for pretty much any of the large players and it is UGLY); the driver was potential. Today it is clear to me that most are fairly valued and they may be quite cheap (trading near long term lows and low PE's); the driver is concern over products losing patent protection. In the past, investors built castles to the sky (greed). Today they only see issues (fear). My guess is sentiment can't get much worse and we likely are near the low with valuations (for the sector). Today I purchased BAX (vinod1, thanks for the tip). I am out of town for the weekend but will post my rationale next week. As I dig, I do like this sector and I will continue to dig and hopefully find a few more names... Thanks to everyone for sharing their thoughts (on both sides of the fence; please keep them coming!

Sanj, I hear you on JNJ. I do like the company; it just does not look to me to be as cheap as some of the other big pharma's (and, yes, part of the reason JNJ is trading at a higher multiple is its business is more diversified and therefore revenue losses are less of an impact due to drugs losing patent protection). If JNJ was to fall closer to $55 (=4% div yield) I would likely be a buyer!

I have been spending a fair bit of time reading up on big pharma. Most of these companies trade at a PE under 10 and have healthy dividend yields. Some have little debt, some have lots. Some have solid drug pipelines, some less so. Most will see revenue hits at some point in the next few years due to patent losses. Demographic trends are very favourable. Not sure how changes in the US impacts all this. I like the idea of buying someone in Europe/UK given the dramatic fall in the Euro/GBP. Buffett owns a little Sanofi-Aventis (French) and the stock looks to be a very reasonable value. I am less excited by JNJ; not as cheap, much larger and not likely to grow any faster. There are a bunch of others: GlaxoSmithKline (GSK), Astra Zeneca (AZN), Novartis (NVS), Novo-Nordisk (NVD) and also in the US: Eli Lilly (LLY), Merck (MRK), Pfizer (PFE) and Forect Labs (FRX). Given current valuations I like the idea of allocation 5% of portfolio to the top 2 or three players. Does anyone have an opinion of who the leaders are in this field? I am looking for suggestions on who to research further...

Sanj, I think your article is from 2008. The stock dropped $1.00 yesterday because Steve Ballmer expressed concerns about lack of property rights protections in China and suggested Microsoft may need to shift some production to India (I think). The stock went up $1.00 today due to 4 different brokerages reiterating their buy rating on the stock (which made me think a little as I normally am not on the same page as analysts). 20ppy, I think you very nicely summarized what the stock trades at a PE = 12.5 despite what look to be pretty good financial picture and near term outlook. MVP, the growing cash hoard also has me mystified. Does anyone know what they are going to do with the $40 billion in cash (and growing)? Yes, they are buying back stock and, yes, I would expect they will increase the dividend. But even after that they will still be growing their total cash holdings. Given the strong link to Buffett I would hope they do not blow it on a bad aquisition...

I established an initial position in MSFT today. I think it has become a very boring stock... Price = $26.00 2010 Earnings = $2.05 to $2.10 (lets say $2.07); PE = 12.5 2011 Earnings = $2.20 (could easily come in higher should the economy continue to stabilize) Dividend = $0.52 = 2% Cash on hand = $5.00 per share; No debt to speak of. With earnings buying back meaningful amounts of shares and I would expect the dividend to continue to increase. Can$ = $0.95 (relatively high, which is important for a Canadian investor) Shares were trading at $31.38 in April; down almost 18% in a month. Here are a few more good points from controlledgreed.com: April 19, 2010 More on Microsoft from Fred Hickey in Barron's Microsoft (MSFT) is a major holding in my portfolio. So Alan Abelson's column in Barron's (scroll down) caught my eye when he wrote about Fred Hickey (of The High-Tech Strategist newsletter) and Hickey's continuing bullish view of the company: Not only has the company's Widows 7 proved a big winner (in contrast to its predecessor, Vista, which was a disappointment for sure and even a borderline bust), but Fred has high hopes for the new operating system that he confidently expects to enjoy a wave of demand from business buyers. He also believes the upgrade of what he calls Microsoft's other cash cow, Office, shipments of which are slated to start in June, will meet a warm reception. Moreover, he is quite enthusiastic about relatively recent and promising new additions to the product line, like the SharePoint server, Bing search engine and Microsoft's "Project Natal" for the Xbox 360 game console, scheduled for unveiling June 13. He contends that the stock (ticker: MSFT) is still something of a steal at 16 times depressed trailing earnings. Fiscal third-quarter profits, you might take note, are due to be released Thursday. As Fred points out, Microsoft's software is firmly entrenched in most large business enterprises and its sundry software offerings are "complex and interoperable," while Google's comparable products just aren't in the same league. "In this overpriced, dangerous stock market," he says, "I regard Microsoft as a great gift." Despite his usual aversion to hyperbole, he calls it "the most valuable tech stock in the universe." And, he waxes on, "Microsoft generates huge cash flows, pays a nearly 2% dividend, has a stock price upside of, say, 50% if the bull market continues to run, and limited downside if it does not." I agree this is an overpriced and dangerous market. But an upside for MSFT of 50%? I don't know about that, yet would love to see it come about.

Stubble, I hear you on the call for a hard market. It likely will not happen until a catalyst comes along. In 2008 and early 2009 falling asset values would have done the trick but risk assets came roaring back so fast capital was not permanently removed. I do believe that underwriting has deteriorated to the point that companies now rely on reserve releases to make their CR. Clearly this game cannot go on indefinitely. When you look at accident year combined ratio's (over 100) and low bond yields we have an accident waiting to happen. Should we get an above normal accident year things should accelerate. Should we get another below average accident year the hard market will be delayed. Bottom line, most companies are driven by hitting quarterly and annual numbers = raise, promotion and big bonus payout. And as we all know these things can be fudged for a time... My guess is Berkley's call on hardening in Q4 to be optomistic (i.e. I am not counting on it to make my investment decision). I do think a hard market is coming sooner rather than later.. I am also quite surprised by the number of companies who are buying back an enormous amount of stock. This does suggest that perhaps capital is plentiful. But this action is also taking it our of the system.

ok22, we can all agree that underwriting results for FFH will be poor (with a CR over 100). Interest and dividend income will be quite good. At this point in time, realized and unrealized investment gains are likely quite ugly (with the portfolio dropping in value more than it was up in Q1). And hurricane season starts June 1 (and the forecasts I read call for an above average number of hurricanes). When I weave it all together I get lots of near term risks (looking out 3 to 6 months) and as a result I am not surprised FFH has sold off; I am actually surprised that it has not sold off more. As I have said before, I expect FFH to not be as volatile as in the past now that it is no longer listed on NYSE. Unless the stock gets crazy cheap, I will wait to see what happens to equity markets before buying. Crazy cheap to me is trading at 90% of BV. My guess is BV today is about US$360. If the price dropped below US$330 I would be interested. I also expect that FFH has been active in the markets since reporting Q1 results (either selling or hedging further).

Goldman Sachs currently looks to me to be a solid buy today. Shares are trading at $136 (down $53 = 29% from recent high). Should earn +$20 in 2010; PE = 6.8; Div = $1.40 or 1%. Notwithstanding the current noise from the justice department, the company is in much, much better shape than when Buffett made his investment 0n Sept 23, 2008 (when the stock was trading at $125.05). Its profitability has rebounded. Its competitive position is better as a few of its competitors are gone. Its capitalization is also much better. And Buffet, who did not hesitate to throw Kraft under the buss (in the press and by selling shares) and has extensive experience with the Solomon fiasco has actually come out in support of GS. Oh, and S&P has a sell recommendation on GS. And I also expect that most of the 'smart money' are busy selling shares so GS does not show up on any list of equity holdings (that they then have to justify). What am I missing? Sept 24, 2008: “Goldman Sachs is an exceptional institution,” he explained yesterday. “It has an unrivalled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.” May 2010 OMAHA, Nebraska (BH Annual Meeting) — Berkshire Hathaway CEO Warren Buffett said Saturday he has no plans to sell his company’s stake in Goldman Sachs Group Inc. as the investment bank fights civil fraud charges. Buffett and Berkshire’s vice chairman Charlie Munger both praised Goldman Saturday as Berkshire held its annual meeting. Both executives said they’re happy with Goldman CEO Lloyd Blankfein’s leadership. And they don’t view the Securities and Exchange Commission’s charges against Goldman as a reflection against Blankfein. Buffett has been one of Goldman’s biggest supporters before and after the SEC filed its civil lawsuit against the bank on April 16. It charged the investment bank with misleading investors about a deal involving complex mortgage-related investments that later plunged in value. During an expected five hours of questions from shareholders, Munger noted that the SEC vote to file the charges was 3 to 2. He said that if he had been a member of the SEC, he would have voted against the suit. On Friday, Goldman stock plunged 9 percent on reports that the Justice Department had opened a criminal investigation of Goldman. Buffett told shareholders that Berkshire’s $5 billion of preferred stock in Goldman is a good investment because it generates 10 percent interest a year. He said the investment includes warrants that can convert the preferred shares into regular stock at $115 a share, a discount from Goldman’s current price of $145.20.

Crip, thanks for the kind words. Regarding my spreadsheet, there are a number of flaws. Regarding the US holdings, the largest flaw is we do not know what changes they have made to the portfolio since March 31. I also only track common stock holdings and they do report other securities (such as the new CITI purchase). The summary of Canadian holdings is even more flawed as purchases and sales of these stocks are not updated quarterly; the details in this list were obtained from news releases from the past year. As time passes we can expect the Canadian list to become less and less accurate. So I will leave the Canadian stuff on the list and may continue to update the prices but I do not like to include them in the changes section because the information is too innacurate. Board members can then decide how they want to use the information provided. The bottom line is my plan is to continue to update the US list as it provides pretty accurate information. Just as important, I also like to have a summary of past transactions (so I have not deleted prior quarter updates) to see what FFH has done to the portfolio over time. If we get confirmation of changes to the Canadian portfolio I will update as well but likely will not add to the US stuff as it is too inaccurate. I also need to update the dividend section to the right as this has not been done since last year...

Currently I am going over my list of favourite companies and re-reading quarterly and analyst reports so I am ready should markets continue lower. Many of the companies I like are US based; I am Canadian. One thing I am noticing is in troubled times (like now, and over the past year) is the CAN$ falls (versus US$) about as much as the US stocks I like = in CAN$ terms I am in the same place as before the fireworks started. And then when markets improve the opposite happens... my US$ purchases increase nicely but the gain is offset by the CAN$ appreciating versus the US$. One solution is to focus more on Canadian stocks. A second is to try and find a hedge for my US purchases.... something I have been resistant to do up til now. My view is I do not want to start speculating on currency movements. But I am beginning to wonder if doing nothing (not hedging in some way) is not actually speculating in the end...???

nonub, my previous post was not very clear... by selling the equities I held in my portfolio I was able to realize a 5% return on my total portfolio for YTD 2010. With 93% in cash, my return over the final 7 months of the year may be tiny, which I am just fine with; with my cash I park it only in cashable GIC's (CDIC insured) as I am not after return but rather something safe. It makes me laugh when I hear 'you have to put your cash to work'. All this approach does is put pressure on the holder of cash to buy some risk asset. Rather, people should be told to 'put their cash to work when quality is dirt cheap'... if not, holding cash is the most intelligent thing to do (even for a year or longer)!

I have updated my spreadsheet and here is my take (I only track common stocks): 1.) total sales in Q1 = $825 mill = 21% reduction 2.) total purchases in Q1 = $15 mill = 0.5% (this does not include CITI purchase = $49 mill) FFH has realized a large chunk of the gains in their equity portfolio which we saw in Q1 results. I estimate the equity portfolio was up about $280 million in Q1 (assume all sales happened Jan 1, which is not accurate). Specifically: 1.) partial sales: Dell = $167; WFC = $161; GE = $139; USB = $102 2.) 100% sales: MGA = $242; LUK = $10 3.) partial purchases: no positions were added to 4.) new purchases: SPMD = $15; CITI (preferred?) = $49 At May 19, the portfolio is valued at $2,925 = -$140 million = -4.6% (compared to March 31). Given the deterioration in the market since FFH conference call the end of April I would expect that FFH has sold more securities or hedged more of the portfolio. I like the fact that they are actively managing the equity portfolio and realizing gains.

Cardboard, in times like these (when stocks have had a great run) I think about Buffett's rule #1 = don't lose what you have. Over the years, I likely have been WAY too cautious. Yes, I have missed lots of potential gains. However, I also have missed pretty much every major sell off since the mid 90's. My portfolio has compounded at just over 20% per year. Currently, I do not like risk/reward trade off. Stocks and risk assets have had a simply amazing run. However, the amount of debt out there, which is causing the problems, is not really going down (simply shifting from the private sector to the public). Economic growth is low. Unemplyment is crazy high (in the US). I have ordered the Reinhart/Rogoff book (It's Different This Time)... my understanding is they say that history teaches that debt binges always end ugly and take many years (not 18 months) to be rectified. Bottom line is history has taught me there are times when it pays to be in cash. As I said in an earlier post, I am currently 93% cash and 7% equity (one position - GVC). If I am wrong (and risk continues in a bull market) I will have to be happy with a 5% return this year. If I am right (and we get a strong market correction in the mext 6 months) I will be in the perfect position to buy low... I also find it instructive to see FFH selling as material amount of equities and maintaining a 30% hedge (in Q1); who knows what they are doing in Q2 but my guess is they are likely net sellers of risk assets.