mattee2264

Re-opening is a series of steps. So the logical response to a rise in cases is to take a step back and see if cases stabilize and if they don't take a further step back. And if cases explode take a leap back. I think containment is the goal rather than expecting to achieve zero cases and I also think that in re-opening it is to be expected there will be a rise in cases. So agree that a few thousand cases a day isn't going to set off any alarm bells and watchful waiting is going to be the most likely response. And yeah so long as the virus is in circulation a lot of people are gonna continue to WFH if at all possible and it will be difficult for businesses to force them to come into work. Especially in a big city reliant on public transport I cannot expect people being willing to brave the rush hour. And WFH will probably depress productivity and discourage all but essential hiring. And yeah I think we are going to see risk-on/risk-off trading for a while. That isn't enough to cause a crash or a melt-up. But could create some good buying opportunities especially as while the S&P 500 may only correct 10-20% the more cyclical stuff such as energy, financials, travel related stocks etc are going to have much bigger moves.

I think the main similarity is the "New Economy" narrative. Technology companies are seen as unstoppable and immune to the economic cycle and deserving of very high valuations and make up a significant proportion of the indexes. In both cases an accommodating monetary policy helped to support high valuations and allowed the stock market to inflate to very high levels. But the main difference now is that part of the New Economy narrative is belief in the Fed's omnipotence. That is the biggest wild card here.

https://www.marketwatch.com/story/warren-buffett-is-an-idiot-says-investor-who-claims-daytrading-is-the-easiest-game-ive-ever-played-2020-06-09?mod=home-page Echoes of 1999?

https://www.theguardian.com/commentisfree/2020/may/28/coronavirus-infection-rate-too-high-second-wave Beautiful quote from Harvard epidemiology professor Bill Hanage “A fire burns fast at first but the embers take a long time to die down.” I think that is a real risk of re-opening economies too soon. An uptick of cases is to be expected but will probably stabilize at a fairly low level that governments may see as an acceptable trade-off vs the economic cost of lockdown. But that stabilization means that the virus will continue to circulate throughout the population ready to flare up in the winter. Maybe the hot weather and some degree of social distancing and build up of immunity will be enough to kill it off over the summer so this risk does not materialize. But the scary thing is that people and governments could get lulled into a false sense of security in the meantime-socializing more freely, going back to work, taking holidays, losing the masks etc-increasing the likelihood of a second wave.

I'd agree that value investors don't deal with it well. Buffett looks for sure things and no brainers. That is fine up to a point but requires amazing powers of judgement and results in a very limited opportunity set especially as markets are a lot more competitive these days. It can also result in thumb sucking as lingering doubts can prevent him from pulling the trigger. Pabrai looks for limited downside (heads I win, tails I don't lose much) but this can often lead to judgement error because if a stock truly had virtually zero risk of loss (and some chance of gain) it would be trading at a bond-like multiple. And if upside is fairly limited then your winners can't offset your losers so you are very vulnerable to bad luck or mistakes in judgement. Other concentrated value investors fall into confirmation bias and overconfidence traps and get burnt when they miss something in their analysis or get unlucky. The Graham approach is to treat investing as an insurance operation. Provided the overall underwriting is good you will do pretty well even if quite a lot of the individual investments do not work out. But there is a lot of adverse selection going on these days so a lot of the low P/E stocks and low P/B stocks that in yesteryear would have mostly turned out pretty well these days more often than not end up being value traps. Most value investors try to be more selective and try to filter out potential value traps but this is no easy task.

Controlling the spread is not the same as herd immunity. I think the argument these scientists are making is that there may now exist some level of immunity in the population that will allow containment of the virus even as we re-open economies and societies. This level of immunity may vary by community due to factors such as demographics, general health of the population, climate, patterns of social behaviour etc. Of course the hard evidence is not really there as mass antibody testing hasn't been done and the tests have their limitations. But compliance with lockdowns has been far from perfect and even those following the rules have still had some exposure to the virus as a lot of interpretations of lockdown still allow people to leave their houses so I think the theory that quite a lot of people have already had exposure/developed immunity has some merit. Also helping matters is the biggest rule breakers tend to be healthy young people who are among the least vulnerable and therefore best suited to a de facto partial herd immunity type approach. They are also probably the least likely to volunteer for antibody tests which might lead to some sampling error in the test data. There has been an increase in cases/deaths in some of the countries as they have eased lockdowns. But this is to be expected in the same way that there are going to be more car accidents now that more people are taking to the roads. So long as the case rates/death rates stabilize at a low level and then resume a natural decline rate then re-openings can still be considered to be successful. That is still compatible with containment.

https://www.ft.com/content/5ff6469a-6dd8-11ea-89df-41bea055720b https://www.standard.co.uk/news/uk/pubs-restaurants-safely-reopen-oxford-scientist-says-a4447841.html Interesting minority opinion from an Oxford progressor called Sunetra Gupta. Her basic argument is that there is way more immunity out there than people think (not just in the form of antibodies but also innate immunity either due to genetics or because of exposure to similar viruses) and the virus has been around for some time and is on the way out and the fatality rate is less than 0.1% and probably closer to 0.01% and therefore we can probably accelerate the exit from lockdown.

My understanding is that the lockdowns have been pretty effective in getting the R rate well below 1 so even with relaxation of lockdowns and mass protests there is not going to be a deluge of new cases.

https://www.spiked-online.com/2020/05/22/nothing-can-justify-this-destruction-of-peoples-lives/ Interesting take on the virus.

https://www.researchsquare.com/article/rs-21211/v1 Ensuring adequate vitamin D levels also seems to be helpful. A vitamin D deficiency would also help to explain why the elderly and those in care homes and nursing homes are suffering so much. And more anecdotally in the UK where I'm from we've had a massive heatwave and true to form Brits have ignored lockdown regulations and flocked to the parks and beaches and getting as much sun as they can and cases have continued to drop.

https://www.newscientist.com/article/mg24632804-000-why-itll-still-be-a-long-time-before-we-get-a-coronavirus-vaccine/ Interesting article pouring a bit of cold water on all the vaccine hype. Pretty easy money for pharma companies if governments are willing to expedite from early trials to scaled up manufacturing pouring billions into producing vaccines only to find out they don't work or they aren't safe.

I think training/supervision will be the main stumbling block. That has been less of an issue during coronavirus because companies have been able to lay off or furlough staff most in need of training or supervision to be productive. And similar to a war effort the staff that are left are willing to pick up the slack without too much complaint (in part because massive unemployment makes them feel lucky to still have a job). A lot of people slack off a good deal at work already. But having other colleagues and managers around creates social pressure that curbs this tendency to some extent. Remote monitoring is unlikely to be as effective and productivity is not always easy to measure. And especially when people start out they like some hand holding until they build confidence and competence and that is less effective remotely...in the same way you can't parent remotely. Also I am not sure WFH all the time is psychologically healthy. It is a pain commuting to the office but it gives some work-life separation. You can leave your life problems at home and your work problems in the office (to some extent). I agree it is difficult to create a good working environment at home-not everyone has the luxury of a home study. And while some workplaces are toxic generally people like the social support that comes from working around people and feeling like part of a team. And especially in creative industries it helps having people around to bounce ideas off. WFH might also create downward pressure on wages because if someone is working remotely they can be from anywhere in the world and the trend of outsourcing back office type jobs to low wage developing countries might accelerate. But even within a country as WFH allows workers to drive down living expenses by not having to live in big cities with expensive rents employers could take advantage and offer lower salaries.

The way I think about Berkshire is that it will probably earn no more than its cost of capital over the cycle. So say a 10% ROE. So if you buy around book value you can expect 10% returns. I think the main risk is that a conglomerate discount could emerge although I would expect aggressive share repurchases should temper that risk. I also think that if a conglomerate discount did emerge then steps would be taken to spin off divisions to unlock value. So I think that you'd probably end up with 7-10% shareholder returns with a reasonable degree of certainty which is quite attractive. Another attractive feature is that rising interest rates will hurt returns a lot less than they would for the S&P 500. S&P 500 returns are a lot less certain. You could get double digit returns if a) there is some multiple expansion because of low interest rates, confidence in growth prospects and less perceived risk because of supportive monetary and fiscal policy b) the winner takes all scenario in tech continues to play out for some time allowing S&P 500 earnings to grow appreciably faster than GDP c) The economy recovers pretty well and gets back to a Goldilocks scenario of non-inflationary growth You could get zero returns or even negative returns if a) there is multiple contraction because of rising interest rates, stagflation etc b) tech companies run into difficulties as their markets become saturated and they start competing with each other or start to get disrupted by new upstarts c) The economy does badly and you either get deflation or stagflation and it becomes apparent monetary and fiscal policy is either powerless or painful Or of course something in the middle. So I can see if you are investing for capital preservation or are a conservative investor happy with moderate returns Berkshire remains an attractive vehicle.

That is reassuring and should create an opportunity if the market tars all insurers with the same brush. How are Markel and Fairfax positioned in terms of their exposure?

Interesting. I guess the difference with natural catastrophes is that most businesses probably have grossly inadequate coverage. For example most property insurance policies only allow claims in the event of damage to the property. But it is a shame no one properly questioned Buffett about the impact of coronavirus on the insurance operations. That would have been quite illuminating.

Lloyds' of London is projecting 2020 underwriting losses of $107BN and falls in investment portfolios of an estimated $96BN bringing total projected losses to $203B for the industry. These sound like pretty big numbers but I am struggling to put them into context and assess the implication for the valuation of my insurance holdings such as Berkshire, Markel and Fairfax and AIG. Where are the underwriting losses coming from? Loss of rent and business interruption and health insurance and life insurance payouts are the most obvious examples that come to mind. But I would have thought for most P&C insurers these are not a large chunk of their business. 9/11 triggered a bad year for the insurance industry as well. What was the scale of the losses then and what was the impact on Berkshire, Fairfax and Markel's stocks and how quickly did they recover?

I think it is easy to forget that Buffett is primarily an owner-operator rather than an investor. Most businesses out there are exercising caution. Even the ones with strong financial positions. Also Buffett is opportunistic and I think he is right in saying there aren't really that many attractive opportunities at the moment within his circle of competence that offer the mixture of quality and certainty and reasonableness of price that he looks for. Most of the stuff which looks cheap is justifiably so given the future uncertainty e.g. financials, energy, media, real estate Most of the stuff which looks bulletproof and likely to prosper is either expensive and/or outside his circle of competence and/or doesn't offer the long term certainty he looks for e.g. consumer staples, healthcare, technology And just as most homeowners aren't selling their houses until the situation becomes a bit clearer I cannot imagine many businesses are putting themselves up for sale either.

Yup I think it is the conglomerate discount and perhaps also the "key men" risk and the unwillingness to court Wall Street resulting in a lack of analyst coverage. And yeah taking losses on the airlines and refusing to buy the dips or buyback shares isn't helping at the moment either. Not to mention insurance is a large part of the business and insurers are out of favour because of lower interest rates and policy losses. If anything it is a wonder that Berkshire is not trading even more cheaply and I also think there is the prospect in the future of a true conglomerate discount. I am not familiar with US politics but I think generally governments can do whatever they like especially when they can justify their actions by reference to the virus. And with QEI they have the Fed as a willing buyer for any additional debt they issue.

I can foresee a scenario where you get mild deflation followed by moderate to high inflation. Initially a combination of excess capacity and weak demand not to mention low energy and commodity prices is pretty deflationary. But demand will recover faster than supply and I think that there are likely to be supply constraints in the future as resilience will take precedence over efficiency and companies are too busy deleveraging to invest in new capacity etc and government is also budget constrained so unable to invest in necessary infrastructure etc. Also energy prices will probably go up after the shakedown because some production will be permanently lost or require much higher prospective returns to get back online.

I think Greg is a safe pair of hands and a humble guy who won't go on an ego trip if he became #1. Given the size of the empire that Buffett has assembled that isn't the worst thing in the world. He will probably make sure the businesses continue to run well and make sensible bolt-on acquisitions. But it is difficult to imagine him stepping into Warren's shoes and making transformative acquisitions that really move the needle for Berkshire. I assume that is where Ted and Todd are expected to contribute more but it is a big step up from being hedge fund investors. Perhaps the idea is the three of them work together?

As I remember what really got Graham into trouble during the Crash was leverage. Like a good value investor he sold too soon and bought too early but the combination of modest use of leverage and an unprecedented further decline in the market wiped him out. I like the idea of doubling the high grade interest rates to get to a multiplier. It is a lot more conservative than the Fed model especially as Treasury rates have been very distorted by monetary manipulation. And it also builds in a margin of safety because I don't think the current AA bond yield of just under 2% adequately reflects the risks in corporate credits. On the other hand at very low interest rates it translates into a very low absolute risk premium of only 200 basis points. I would probably want at least a 500 basis point premium to the risk free rate (which is currently close to zero) so would be more comfortable with a 20 x multiple. Also difficult to figure out what earnings number to use. The Shiller 10 year past average is just over 100 while the 2019 trailing number is 140. Probably the correct number is something in between. Slap a 20 x multiple on 120 and you get to 2400 for a fair value. That feels about right. Of course usually bear markets bottom well below fair value. But I think at 2400 you could expect decent long term returns.

I am curious to what extent price increases can offset to some extent the decline in passenger volumes. If the industry has become more rational it makes sense to charge very high prices to take advantage of the fact that it is mostly going to be essential travel taking place over the next few years.

Good summary Nomad. I think it was very significant that Buffett referred to the option value of money and it ties in which his earlier comment that there was still a very wide range of economic outcomes. My interpretation is he feels the option value of having cash has gone up significantly. I think that is a very interesting way of thinking especially as most investors assume that cash has a static value and therefore whenever stocks decline 20% they assume that stocks have automatically become a lot more attractive relative to holding cash.

On the 2nd of March the S&P 500 was at 3,000 so I do not think Buffett was alone in thinking this would just end up being like the other pandemics and blow over pretty quickly without a major economic impact. It is a shame that Charlie wasn't in attendance as he is a lot more plain spoken. But I think you can usefully combine his comments last month with those of Buffett to make a reasonably good guess at their collective thinking. I think it is pretty clear that they think that stock prices (including BRK) have not fallen enough to adequately reflect the heightened risks and uncertainties. I am pretty pleased he hasn't followed Ackman and Tilson's advice to do massive buybacks. The upside from buying Berkshire stock at these levels is pretty limited while the downside is still pretty high. I think that what they are really hoping for is the chance to do a big acquisition. But as Charlie says the phones are not ringing. However it says something about their discipline that even at their advanced age they would rather be patient and wait for a fat pitch. I do not know what to make of the history lesson. I don't think he thinks a depression is on the cards. But I think he believes that it could take some time for consumer and business confidence to return and therefore a V shaped economic recovery is far from guaranteed. In that scenario having a lot of cash on hand is going to be incredibly useful and putting it to work will set Berkshire up for very good prospective returns. In the event that there is a V shaped economic recovery then shareholders have not really lost anything. The share price will recover to pre-Covid levels.

I think that it makes much more sense to allow them to postpone mortgage payments. I can understand the argument for payroll grants to hotels because you are preserving jobs which makes a return to normalcy smoother and it is basically just a pass through. But Airbnb for most people is a side gig rather than their sole source of income. Also people losing their homes is a regular occurrence in recessions and is why it is a good idea to have an emergency fund and any prudent landlord factors in vacancies and other unforeseen expenses. I understand that this is unprecedented and the government does not have much time to think and is having to be reactionary. But there is a lot of social injustice. The sensible thing would be for any funding to be on commercial terms. You get a loan to help you through these tough times. But the loan has a high interest rate so you do not enjoy as high profits when the economy recovers and learn your lesson and in future make sure you have rainy day funds and lots of debt capacity. Or you get to postpone your mortgage payments but get charged penalty interest that accrues and is added to your outstanding loan balance. I still cannot quite see inflation on the horizon. Unemployment is going to remain elevated for some time so wage inflation is not on the cards. Monetary inflation only seems to get reflected in asset prices. We are service economies so less reliant on raw material inputs and in any case commodity prices remain muted. I think we are just going to continue to see financial repression. Very low interest rates will remain for some time to allow governments and corporations to service huge debt loads.