twacowfca

As a publisher, I can't give it an A as a literary work, but there are some practical take aways that make it worthwhile. His fortune maker was Carlin Gold which was a very large but low grade deposit. They took a royalty interest in it, and when the price was strong they were able to find a lot more economical areas to mine. That's a lot better than speculating on something new that might not pan out or if it does pan out might be behind the price curve before it can become a large producer. :)

S&P500 Shiller P/E at 23, with all the western world engulfed in debt, just because Central Banks are printing money as never before… I think that, if we go back in history, very few times the markets had been less efficient than they are today. Time will tell. giofranchi By efficient I meant tighter spreads between all sorts of trades and strategies. The profit margins of hedge funds have been narrowing in recent years. For example, the sweet spot of Thorp's trades was convertible bond arbitrage. That trade is far less profitable now than then. Even the risk of a catastrophic crash may be less than in earlier decades because of central bank intervention. In my opinion, the US market would have been on track to a loss of 90% of its market value as happened in the 1930's except for massive intervention by the Feds. Never the less, a loss of 57% of market value by the S&P 500 hardly could be called efficient. I'm not saying that markets are efficient, merely that they seem to me to be somewhat less inefficient than they used to be. There should always be opportunities however because of the herding tendency, short term focus and aversion to volatility that we all have. :) A Schiller PE of 23 isn't inefficient by the Fed Model of pricing for equities. But I hope we all know where this will lead. At some point the worm will turn, inflation will kick in with a vengeance, interest rates will increase a lot, and the stock market will tank. That may happen a lot sooner than Mr. Market thinks.

You are preaching to the choir. However, the assumption that the average normalized loss is equal to the averaged normalized gain is not well founded. At one time Thorp levered up and got into a position arbitraging AT&T stock against the when issued stock of the baby bells when AT&T was broken up. That trade was the biggest ever that had taken place on the NYSE. The probability of that not going through was not zero, although very low. If the government had changed it's mind at the last minute, the fund would have been wiped out. Even so, his results do not support the efficient markets theory strong or weak form as stated. What actually has been happening is that markets generally are becoming increasingly efficient as information access improves.

Ditto, it's a treasure trove. Especially appropos for us now are his remarks on and about page 75 about how it's prudent and better for a foundation to invest in as few as one to three well chosen equities than to think wrongly that they should be diversified. I never understand these kinds of comments. That is, those that imply there is a better way to invest in terms of diversification or concentration. Schloss would take dozens of small positions. His performance over almost a 45 year period is better than most of those from the town of Graham and Doddsville (in fact possibly the best save for Buffett himself). I don't understand why it's "wrong" to think that one can take more than 1 to 3 positions. I am not saying doing that is wrong, it isn't obviously. If someone can do it, go ahead. I'd venture of course that very few people on this board who preach excessive concentration actually are at 1 to 3 positions. In my view, there are many ways to skin a cat. No way is right or wrong. There is no absolute truth to any one philosophy. The thing is though that it's those who preach concentration typically say that that is the best way and that any other way is protecting against ignorance. One never heard Schloss saying similar things about those who concentrate. In fact, he often was very self deprecating and said he wasn't very bright and that's why he took this approach. Not true obviously, but shows a different approach to describing stylistic differences. Walter was a lot more discerning than many realize. When he spotted a balance sheet bargain, he would go back and read 10 years of 10K's and satisfy himself that he was investing in a solid company with capable, ethical management. Then he might wait to see if that stock went down even more, perhaps with EOY tax loss and portfolio dressing before pulling the trigger. That method worked well overall for Walter, but Ben Graham said that buying secondary issues at a bargain price was not apt to lead to profits when the market was exuberant. We saw evidence of this big time in 98 and 99, which led up to a great time to buy all sorts of bargains after the market rolled over in 2000. Same after the crash in 08 & 09. Walter's strategy will beat anything else after a crash. Walter had enormous patience. He was interviewed not long after Y2K. The interviewer asked him if he thought Stanley Furniture was a bargain worth buying. It was a bargain that paid a high dividend. Walter took a look at it and expressed the opinion that they might pass their dividend. That's exactly what happened. When the market and that stock turned down, Walter bought that stock for 20 cents on the dollar compared to its price earlier. A couple of years later, Walter had a 4 bagger. :) Even Warren used the Schloss method successfully in recent years, picking up quite a few bargains in the Korean market after it crashed over a decade ago. :) I couldn't agree more with what you just said. I am not sure what it has to do with your earlier statement however. There is no requirement that in order to be discerning one must only hold a handful of stocks. I think Schloss was incredibly discerning. But this is a different discussion. You said "especially appropos for us ow are his remarks . . . about how it's prudent and better . . . to invest in as few as one to three well chosen equities than to think wrongly they should be diversified." That assertion mirrors others about how diversification is not a cure for ignorance and the like. So my point is that why does it matter? Schloss was diversified and did incredibly well. Munger was not diversified and did incredibly well. So what? And I don't believe for a second that Schloss thought he had to have dozens of positions, I think he found dozens of positions worth holding. It sounds though as if we are certainly in agreement on Schloss. Yes, I think we agree. Let me clarify that I meant to say diversification, merely for the sake of diversification, is only a good idea if one wants to spread his ignorance around and follow the herd as most fund managers do. There is a time for everything: a time to buy quality at a good price, and a time to buy balance sheet bargains. I like to have it both ways; that's tough in this market. BRK at < 1.2 times forward BV is one of the few that comes close to meeting that double standard, especially with the safety of the Buffett Put. My personal preference would be to have a lot of my eggs in that basket.

Ditto, it's a treasure trove. Especially appropos for us now are his remarks on and about page 75 about how it's prudent and better for a foundation to invest in as few as one to three well chosen equities than to think wrongly that they should be diversified. I never understand these kinds of comments. That is, those that imply there is a better way to invest in terms of diversification or concentration. Schloss would take dozens of small positions. His performance over almost a 45 year period is better than most of those from the town of Graham and Doddsville (in fact possibly the best save for Buffett himself). I don't understand why it's "wrong" to think that one can take more than 1 to 3 positions. I am not saying doing that is wrong, it isn't obviously. If someone can do it, go ahead. I'd venture of course that very few people on this board who preach excessive concentration actually are at 1 to 3 positions. In my view, there are many ways to skin a cat. No way is right or wrong. There is no absolute truth to any one philosophy. The thing is though that it's those who preach concentration typically say that that is the best way and that any other way is protecting against ignorance. One never heard Schloss saying similar things about those who concentrate. In fact, he often was very self deprecating and said he wasn't very bright and that's why he took this approach. Not true obviously, but shows a different approach to describing stylistic differences. Walter was a lot more discerning than many realize. When he spotted a balance sheet bargain, he would go back and read 10 years of 10K's and satisfy himself that he was investing in a solid company with capable, ethical management. Then he might wait to see if that stock went down even more, perhaps with EOY tax loss and portfolio dressing before pulling the trigger. That method worked well overall for Walter, but Ben Graham said that buying secondary issues at a bargain price was not apt to lead to profits when the market was exuberant. We saw evidence of this big time in 98 and 99, which led up to a great time to buy all sorts of bargains after the market rolled over in 2000. Same after the crash in 08 & 09. Walter's strategy will beat anything else after a crash. Walter had enormous patience. He was interviewed not long after Y2K. The interviewer asked him if he thought Stanley Furniture was a bargain worth buying. It paid a high dividend, a red flag for a company with mediocre returns in a cyclical industry. Walter took a look at it and expressed the opinion that they might pass their dividend. That's exactly what happened. When the market and that stock price turned down, Walter bought it for 20 cents on the dollar compared to its price earlier. A couple of years later, Walter had a 4 bagger. :) Even Warren used the Schloss method successfully in recent years, picking up quite a few bargains in the Korean market after it crashed over a decade ago. :)

+1 giofranchi Ah! Almost forgot! Mr. Keynes had expressed exactly the same thought in a letter to the Chairman of Provincial Insurance, dated February 6, 1942: “To suppose that safety-first consists in having a small gamble in a large number of different direction…, as compared with a substantial stake in a company where one’s information is adequate, strikes me as a travesty of investment policy.” "As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one's risk by spreading too much between enterprises about which one knows little and has no reason for special confidence." (emphasis mine) giofranchi I agree, but your success rate/strike rate should be considered. The person that gets 10 out of 10 picks right can concentrate more than the one that gets 6 out of 10 right. Buffett and Munger is rumoured to be in the high 90s If one has Warren's lifetime of experience, it would be unproductive to go outside one's area of confidence, but there is merit for most of us in trying new things on a relatively small scale while concentrating mostly on very high conviction ideas. Otherwise, we would never have invested in Lancashire because it would have been disqualified by our standards in 2006 as a recent IPO. One great idea can more than make up for a few failures.

Ditto, it's a treasure trove. Especially appropos for us now are his remarks on and about page 75 about how it's prudent and better for a foundation to invest in as few as one to three well chosen equities than to think wrongly that they should be diversified.

Would you invest in the property if it didn't have a tenant? If the answer is no, then the quality of the tenant is crucial to making your decision

Warren gave an interesting talk in1999. One of the things he pointed out was that there were over 3000 US manufactures of automobiles in the early 20th century. They had all gone bankrupt or been adsorbed by the three survivors by 1999. (Anybody remember the DeLorean, the Tesla of its day?). High tech pure battery powered cars require a lot of high tech people to design and build them and service them. These people often drive two or more regular cars. They hop on airplanes frequently and sometimes fly on private jets. They work in air conditioned offices. The high tech batteries require exotic materials that have to be scraped or blasted out of far away places that require cutting down a lot of trees to bulldoze roads to collect the ore and transport it to a refinery that belches smoke that warms the planet. Oh, by the way, where does the electricity come from that is used to charge the vehicle? It may be possible to build a pure battery powered car that has sufficient range to cover commuter distances. But there is another limitation: battery life. I luv my Prius. It's interesting why Toyota didn't design the Prius in the first 10 years of its existence to be capable of being recharged. It seems that that would have put more stress on the batteries and cut the life in half. High tech batteries aren't cheap when they have to be replaced.

There are lots of factors.. For example, you don't need as much energy as is contained in gasoline because ICEs are only 30-40% efficient in the best scenarios (top of that range for diesels, low for gasoline) while electric motors are much more efficient.. For everyday driving, you don't need as much total range in an EV because you always leave your driveway with a fully charged battery, while with liquid fuels you can't refuel at home and you don't want to go to the gas station everyday. Etc etc etc. Right now EVs are in the same phase that cell phones were in the 1990s. Kind of expensive and clunky and don't do everything you need yet, and some people think they'll always be like that, but a few more years of incremental improvement and it'll be another story. I express my opinion about the economics of pure battery powered cars with sadness as the delighted owner of two hybrid cars. The Chevy Volt is so popular that GM reportedly is offering a deal on a lease with a payment of less than $300/month to move them to meet California requirements for renewable energy.

The article says you can charge the car with "100 kilowatts good for three hours" of running. But kilowatts is a measurement of power, not the capacity to store energy. Perhaps the author is confused and meant to say something like kilowatt hours ??? In any case, the idea of saving energy or emissions with exclusively battery powered cars flies in the face of the limits of battery technology. It takes hundreds of pounds of the highest tech batteries to store the energy equivalent of one gallon of gasoline. That's hundreds of pounds of batteries that the driver has to haul around to the next charging station. It would take a reinforced hummer to haul around the equivalent weight in batteries of the energy in a half full tank of gas of a small car. A technological challenge like this can't be forced. It awaits a breakthrough that may never come in a lifetime. Plus, I suspect that an inventory of all the energy it takes to make a high tech, battery powered car would reveal a carbon footprint bigger than Al Gore's house. :)

Well, to a point--it isn't as strong as most of companies Buffett would get involved with, as technological change can greatly change the evaluation. In this area, that change may come somewhat faster than in transportation (railroads), for example. Even railroads are at the potential mercy to long-term technological change. Nope. The basic technology has been around for more than 40 years. It requires monitoring. Skilled staff is superior to do it yourself. Improvements will be incremental. One disruptive development would be default negative option kidney donor transplants. But this is not on the hot burner.

It appears that Ted has indeed been cloned or has been given wider responsibility for investing BRK's pension plans' assets. About 40% of the holdings of DaVita are in some of BRK's pension plans. In the past, the pension plan investments have been controlled by Warren.

twacowfca, great analysis of BRK! AmEx, Wells Fargo, Coke… a 7% earnings yield, add the benefit of float and you get a 10% earnings yield, pick up occasionally some unusual bargain and you compound at 11% to 12%… It looks easy! So why isn’t it copied more often? You know that I am thinking hard about LRE: why an outstanding (unique, I daresay!) underwriter like LRE keeps the large part of its investments in short-term bonds, instead of just copying what Mr. Buffett has shown works so well? I don’t understand: Mr. Brindle could very well go on concentrating exclusively on the underwriting business - as he should do, because that is clearly what he does best -… but why don’t hire YOU??!! ;) If only with the goal to replicate what you have written about BRK’s way of investing! It doesn’t take Mr. Buffett to do that! If the reason is: it works for BRK, because of Mr. Buffett’s skills; well, then I don’t agree. I just don’t see how Mr. Buffett’s unique investing skills should be required, to achieve good results the way you have so clearly described. giofranchi Giofranchi, you ask a great question: Why doesn't Brindle, who is arguably the best property underwriter in the Bermuda / Lloyds markets invest his float in great businesses the way Buffett does? The short answer is that he has had a top tier record investing in equities in the past, but what he does now is much better for LRE's business. BRK had a AAA rating until Warren's put derivatives went against him in 2008 and led to a downgrade as the market value of BRK's stocks also declined. However, this had little downside because BRK was still one of the most solid companies in the world. LRE liquidated their equity portfolio in mid 2008 before the stock market tanked to avoid such a possible consequence, because the prospect of a downgrade from A - to below investment grade would have been disagreeable to say the least. LRE was one of the few insurers to have positive investment returns in 2008, and in every quarter of their existence except one. Lancashire is a short tail property insurer. This necessitates carrying mostly high quality, short duration liquid assets to be able to pay claims quickly if there should be a large claim. This limits investment returns, but it also gives them the huge optionality that goes with carrying a lot of cash and near cash. For example, they were able to buy back about 25% of their stock a few years ago at a price that averaged less than book value. That's the gift that keeps on giving. Recently, their extra cash has enabled them to leverage their sterling reputation to goose returns through sidecars. Here's how the economics of a sidecar works for them: their long term return on equity at LRE has averaged 19%+. Brindle's returns for the syndicates that he and Charmin managed at Lloyds also returned 19%+ on average. All of these returns have been without a single down year, quite low volatility considering that their peers had a very rough time at Lloyd's in the 80's and 90's. Therefore, it's reasonable to assume that the central value of LRE's returns will continue to be about 19%+ per annum or perhaps a little better with the way they get more upside with less downside in the sidecars. LRE puts a relatively small amount of capital into a sidecar and other investors fund the rest. LRE gets a commission and a management fee for managing the sidecar. This attenuates the downside to their investment in the sidecar if there is a loss. They also cede some of their most catastrophe exposed business to the sidecar. This also attenuated the downside from a large catastrophe to their regular business. Then, if the loss experience of the sidecar is low, LRE will be entitled to a percentage of the profit of the entire sidecar above the profit of their investment in it. Lets assume that the long term expectation of LRE's investment in the risk assumed by the sidecar sidecar would be greater than their long term average return of 19%+ because sidecars are are only set up when rates in a particular sector are exceptionally high. However, Lancashire limits how much catastrophe exposure it is willing to take on even though their expectation is that the return would be great if they took on more risk. Let's assume that the long term average expectation of the annual profit of the sidecar is about 20% for the outside investors. LRE's expected return on the sidecar may be perhaps 30%+ because of their overrides. Plus the risk is far less than if they had retained a higher level of catastrophe exposed business. :) That return on extra cash not needed in their core business is a lot more than what Lancashire would expect to get from an investment in common stocks. However BRK's business is much more long tail. There is a long time available to invest the float until claims have to be paid. That's why having substantial investments in common stocks makes sense for BRK much more than for Lancashire. twacowfca, your knowledge of the insurance/reinsurance business is clearly deep and all-comprehensive. I really hope we all on this board could go on benefiting from it! :) giofranchi Thank you for the compliment, but without any false modesty, I can't accept it. If I have any insight about insurance businesses it is to realize how little I know. That's why who's in charge is so important. It's like the saying, "If you don't know diamonds, know your jeweler". For example, a few years ago, I was trying to understand the adequacy of FFH's asbestos reserves. Prem had taken initiative to strengthen those reserves which had proven to be inadequate in some of the companies he had bought. This reflected badly on the strength of the balance sheet, but very highly on Prem and his team as those strengthened reserves were better than most other insurers had reserved based on years of future estimated claims. The character of Prem and his team was much more important in my mind than the technical issue. Then, I looked at a letter Warren had sent to the SEC in response to an inquiry about how they approached the same reserving issue. It turned out that BRK had already reserved about 75% more than anyone else in the P&C universe for asbestos claims. In truth, I have no expertise in adequacy for such claims, but I do know that BRK and FFH are on my short list of companies I want to be a part owner of. :)

Yeah, the classic error of confusing correlation with causality. The R squared may appear to be high when looking at the market, but the correlation drops prospectively. The commonsensical explanation is that businesses with stable and moderately growing cash flows often are low beta, but that does not necessarily mean that low beta stocks are mostly great businesses. In fact, as Bruce Greenwald and others have pointed out, there is a powerful tendency for high ROE businesses to regress to mean returns. Buffett's genius is in ferreting out the ones that don't. ( At least not for a very long time. ) :)

Good idea. Do you have a short list of Icelandic companies for possible investment?

twacowfca, great analysis of BRK! AmEx, Wells Fargo, Coke… a 7% earnings yield, add the benefit of float and you get a 10% earnings yield, pick up occasionally some unusual bargain and you compound at 11% to 12%… It looks easy! So why isn’t it copied more often? You know that I am thinking hard about LRE: why an outstanding (unique, I daresay!) underwriter like LRE keeps the large part of its investments in short-term bonds, instead of just copying what Mr. Buffett has shown works so well? I don’t understand: Mr. Brindle could very well go on concentrating exclusively on the underwriting business - as he should do, because that is clearly what he does best -… but why don’t hire YOU??!! ;) If only with the goal to replicate what you have written about BRK’s way of investing! It doesn’t take Mr. Buffett to do that! If the reason is: it works for BRK, because of Mr. Buffett’s skills; well, then I don’t agree. I just don’t see how Mr. Buffett’s unique investing skills should be required, to achieve good results the way you have so clearly described. giofranchi Giofranchi, you ask a great question: Why doesn't Brindle, who is arguably the best property underwriter in the Bermuda / Lloyds markets invest his float in great businesses the way Buffett does? The short answer is that he has had a top tier record investing in equities in the past, but what he does now is much better for LRE's business. BRK had a AAA rating until Warren's put derivatives went against him in 2008 and led to a downgrade as the market value of BRK's stocks also declined. However, this had little downside because BRK was still one of the most solid companies in the world. LRE liquidated their equity portfolio in mid 2008 before the stock market tanked to avoid such a possible consequence, because the prospect of a downgrade from A - to below investment grade would have been disagreeable to say the least. LRE was one of the few insurers to have positive investment returns in 2008, and in every quarter of their existence except one. Lancashire is a short tail property insurer. This necessitates carrying mostly high quality, short duration liquid assets to be able to pay claims quickly if there should be a large claim. This limits investment returns, but it also gives them the huge optionality that goes with carrying a lot of cash and near cash. For example, they were able to buy back about 25% of their stock a few years ago at a price that averaged less than book value. That's the gift that keeps on giving. Recently, their extra cash has enabled them to leverage their sterling reputation to goose returns through sidecars. Here's how the economics of a sidecar works for them: their long term return on equity at LRE has averaged 19%+. Brindle's returns for the syndicates that he and Charmin managed at Lloyds also returned 19%+ on average. All of these returns have been without a single down year, quite low volatility considering that their peers had a very rough time at Lloyd's in the 80's and 90's. Therefore, it's reasonable to assume that the central value of LRE's returns will continue to be about 19%+ per annum or perhaps a little better with the way they get more upside with less downside in the sidecars. LRE puts a relatively small amount of capital into a sidecar and other investors fund the rest. LRE gets a commission and a management fee for managing the sidecar. This attenuates the downside to their investment in the sidecar if there is a loss. They also cede some of their most catastrophe exposed business to the sidecar. This also attenuated the downside from a large catastrophe to their regular business. Then, if the loss experience of the sidecar is low, LRE will be entitled to a percentage of the profit of the entire sidecar above the profit of their investment in it. Lets assume that the long term expectation of LRE's investment in the risk assumed by the sidecar sidecar would be greater than their long term average return of 19%+ because sidecars are are only set up when rates in a particular sector are exceptionally high. However, Lancashire limits how much catastrophe exposure it is willing to take on even though their expectation is that the return would be great if they took on more risk. Let's assume that the long term average expectation of the annual profit of the sidecar is about 20% for the outside investors. LRE's expected return on the sidecar may be perhaps 30%+ because of their overrides. Plus the risk is far less than if they had retained a higher level of catastrophe exposed business. :) That return on extra cash not needed in their core business is a lot more than what Lancashire would expect to get from an investment in common stocks. However BRK's business is much more long tail. There is a long time available to invest the float until claims have to be paid. That's why having substantial investments in common stocks makes sense for BRK much more than for Lancashire.

Right. He needs to put a value on them (prediction is necessary) so they must first be predictable. Therefore... not very volatile as shareholders sleep well sitting on something predictable. Yeah. The simplist model for BRK would be leverage from float and DTA and a modest amount of debt used to buy high quality businesses with predictable cash flows. It used to puzzle me how WEB is attracted to the purchase of a great business that had been around 100 years with modest growth prospects at a not so wonderful price that might have an earnings yield of 7% or so. However, with BRK's internal leverage, that modest earnings yield then increases to 10% or so. Then, BRK earns a compound rate of maybe 4% per annum above what the great businesses in its stable earn. Then, the large cash holdings and regular generation of float enable BRK to occasionally pick up unusual bargains like BAC pref + warrants. Result: now the compounding machine's normalized earnings are perhaps compounding at 11% to 12% per annum, much more than the earnings of the other great businesses it owns. Think about it. Here is this mega cap company, selling for less than 1.2 times Q3 BV that is still a machine that compounds earnings and BV at a much higher rate than some of the very best S&P 500 companies that sell at perhaps more than 4 times BV. We're talking about a company that has compounded BV/SH at the highest rate of all for the last 47 years! Plus, BRK does another neat thing. A few years ago I puzzled over BRK's SEC filings that Warren himself had apparently personally signed. These listed at the time $8B or so "best of best" holdings like AmEx, Wells Fargo, Coke etc. I think these were the majority of BRK's pension plan holdings, things that appropriately would have a growing earnings yield of 7 % or so with enormous compounding potential by the time the pensions had to be paid out. Contrast that to the bond heavy assets of the typical pension plan that will probably earn about half that rate. :)

In my view, the key to Schloss's success was patience. Embedded in that is ignoring the noise, keeping his head, etc. His genius wasn't in technical skills or superior analysis. I say this as one of the world's biggest fans of his. I owe him a tremendous intellectual debt. But he would be the first to admit that he wasn't a better securities analyst than many others. In a too self-deprecating way he often said he wasn't "too bright", which of course is ridiculous, but I think it reflected his view of what he did. His true genius was in patience, time arbitrage to the extreme. As Oddball mentioned above in a great post, Graham and Schloss advocated fishing in a pre-selected pond with large, slow fish. I know that many value folks believe that past pricing means nothing. Ironically, Graham, Schloss, Cundill, etc all mentioned past pricing as providing certain guidance. I think that people miss the point. It's not that a past price determines a future price, but past multiples will demonstrate what the market might be willing to pay in the future. I have never ceased to be amazed at how much prices truly do move from one extreme to the other on almost a yearly basis. Allan Meachum had a great line about this in an article a while back. He said that each year the price of most stocks will move about 80% from high to low. I have no idea whether 80% is an accurate number or not, but the gist is very true. So the point is that if you fish in the right pond, buy cheap and have patience, at some point you will have a positive outcome. That is Schloss's genius. He fished correctly and was willing to wait for a good result, whether that was 1 year, 4 years or more. He has said after about 4 years he would think about selling, but he really didn't like to sell. Most of the selling was probably forced by Edwin. Walter liked to hold on. He knew that in the real world (and Graham says this in Security Analysis) there are very few public businesses that actually disappear. Most survive if not thrive and so long as the future looks something like the past, the stock will do ok. Holding longer than a year hurts the performance in the backtesters, but probably not that much in practice, because of friction every time you sell and buy a stock (which may be a high as 5% with micro caps). Another very good idea is looking at deviations from the long term averages of the company. That's better (but more difficult to implement) than setting an overall threshold in P/B or P/E like Graham did in his screens. That makes sense. Also, a certain low P/B of a company in a crappy industry would not be as meaningful as a similar P/B of a company in a better industry, ceteris paribus.

Intrinsic value related to what a private buyer would pay for Wesco (BRK was the only possible buyer then) would not assign much of of a premium to BV for things such as some value in the deferred taxes. However for BRK, Warren has stated that float should be worth more than equity if it is perpetual ( or very long term defacto without declining ). The same argument would apply to a certain percentage of deferred taxes that could be considered very long term. These balance sheet valuations still miss the most important consideration: that Warren and his successors and the managers of the wonderful businesses he has acquired will very likely continue to employ BRK's assets and certain "liabilities" at high rates of return.

Thanks for posting this, looks like a good place to check for ideas. I have seen a lot of backtests that validate the Graham method. But it means more to me to see people who have done it with real money. It's easy to look at an investing strategy and think "I am going to set something like this up and just sit back and let the returns happen." There are a lot of things you don't think about when you look at a backtest. Are the stocks liquid enough that the returns would have been possible? And would you have really followed it even if it was possible? To achieve the results that are mentioned in this article you would have had to go all in on 4 stocks in fall '08 when all hell was breaking loose. Not all in on PG and WMT either, but in stuff like Methanex (MEOH). I can't see myself doing that. If anyone else on here has a decade or so experience with a diversified statistical approach like Graham advocated I would like to hear about your experience with it. Oh, it got worse than that. IIRC, the method picked out only 2 stocks in 2003. But, the - um - author frequently points out that the method does not result in a diversified portfolio. He fully expects people to hold more stocks. ;D However, there were more than 40 stocks that passed the test in the spring of 2009. So, some patience and a holding period of a few years instead of one would result in a more diversified portfolio. Many value strategies work well with 3-5+ year holding periods. But Graham's original defensive criteria were a little too strict, produced even fewer stocks, and IIRC had an uneven record in the U.S. soon after they were suggested. IIRC, a slightly different take on Graham's defensive method was applied with good results in the South African market. Again, it did suffer from a paucity of picks from time to time. I don't have the paper that described it close at hand. To the last question, yes, I've been using methods similar to Graham for many years now. I tend to be a little more quant than qual (at least compared to most posters here). But it has served me well. While we're on the topic of Walter, here's a recent article ... How to beat the market, with patience and ugly stocks. Apologies for the self promotion. You're too modest, Norm. Stingy Investor is great -- for novices and old hands. I ran through all the past and present Ben Graham screen picks and picked out two that I thought were better than average businesses. They have performed well above the market since their selection.:)

Yes. Jay Pritzker was the young CEO that sat on their family's shares, despite the obvious guaranteed profit in arbitrage. :)

Quick question: What do you mean by "shift investing to 'workouts'"? Primarily Arbitrage style deals. Some good examples for Buffett are the Rockwell & Co. Cocoa bean deal (pre partnerships) and the Arcata Timber deal (Berkshire), those two of my personal favorites. The Rockwell story is great IMO because of how he handled it vs how he handled it for the firm. Yeah. Graham Newman had a near perfect arbitrage buying Rockwell shares, shorting cocoa bean spot or near dated futures at the time of the share purchases to lock in their profit and then taking the Rockwell shares to Rockwell to exchange for cocoa bean warehouse slips that more than covered their short position. Warren noticed that the controlling shareholder was happy to skip the arbitrage and hold his shares as the book value per share of Rockwell went up up up as their share count went down down down. Warren went long Rockwell shares for his own account and made a killing many times the percentage gain of his mentor who was happy to get paid to dance to Rockwell's tune. That's the type of operation that could not take place without a certain amount of cash or credit. The young CEO of Rockwell was a member of a Chicago family that was among the first to push Barak Obama forward as a candidate for The US Senate and then for US President. Who was that young man, and what was the other important connection he had with Warren?

Quick question: What do you mean by "shift investing to 'workouts'"? Warren has gone through phases when he would buy generally undervalued companies and then sell them a few years later as they appreciated. This works when the investment climate is bullish. However, when there were few bargains to be found, Warren would stop buying these and invest the proceeds of their sales in recaps, reorganizations, merger arb, and other special situations that did not require a rising market to do well. :) These situations would provide cash as they "worked out" to pick up bargains if the market fell.

It's a profound concept, but simple to understand. When bargains are few the price (lost opportunity cost) of cash as a call option is cheap. When WEB's AUM were relatively small compared to now, he would shift investing to workouts and away from being exposed to market risk when he couldn't find good bargains. That was like a cash option, but with better returns if done very well. That was what Graham did after the rebound from the 1929 1932 crash. He stuck to workouts almost exclusively to earn steady returns for his investors no matter what the market level, althought he bought a gem, Geico, as a long term hold for his own account. Now, with BRK's being a mega cap, holding cash itself is mostly necessary.