twacowfca

LRE is a company to buy and hold and for reinvesting the dividends they pay that are frequently large. The stock, including reinvested dividends is up more than 130% from when we first bought it in the summer of 2006. Yet they are still selling for less than 10% above their estimated October, 2010 FDBV. These remarkable returns merely equal their CEO's long term ROE record at Lloyds of London before he became LRE's CEO. Therefore, there is a high probability that Brindle and the proficient team he has built at LRE will continue to produce exceptional returns in the future. :)

AHL is a great company and a great buy. They've moved up a little more recently towards BV than MRH. They are not as much cat exposed as MRH and LRE. We are past the hurricane season now : advantage MRH and LRE. :)

When WEB takes a 10%+ position in the common stock of a company, the results going forward are awesome. Our biggest gain in total was tagging along after he bought USG. WE have taken most of our discretionary cash and recently bought MUV, MRH and more LRE. :)

Good insight, Fan. :)

Didn't he say one time that his best investment was the taking the Dale Carnegie course? :P Yup! :) Taking the course sure helped me get out of myself and showed me the importance of finding out whats important to others and how to communicate with them based on their interests. :)

I don't think the tabloid stuff on A Rod had come out when Warren first started helping him with investing. :)

Thanks onyx1. I agree. :)

Very interesting! I have an important question for board members. The (ex)vagabond uses a very simple method for estimating intrinsic value. First, he determines what the no BS tangible BV/SH is. This isn't exactly liquidation value with no worth given to the business, but close. Then, he looks at historical earnings and normalizes them going forward to get annual normalized earnings with no speculative allowance for growth beyond what he can reasonably estimate for a few years as with a cyclical company. Then, he capitalizes these normalized earnings at a conservative rate of, say, ten times. Finally, he adds the capitalized earnings to the tangible BV and presto! there's the IV. My question to board members is this: is this good enough for getting a rough idea of IV? It seems to me that he should assign no value to the BV because he's mixing a DCF method of computing IV with a balance sheet method. (although it still would be nice to have substantial tangible BV in case the business goes south or to make a more attractive acquisition).

Right on Uccmal. Failure is an amazingly powerful success force. :)

My guess is that yes, you knew it without looking it up. :D On a more serious note, Mandelbrot deserves a ton of respect for his mathematical genius, but I've always found it difficult to apply his insights to investing. If anyone has views on this, it would be great to hear them. I knew that because #2 son has the Sierpinski Gasket tatooed on his arm, and he told me that weird factoid. A good book about practical application of fractal geometry for investing is Why Stock Markets Crash by Didier Sornette. :) The biggest take away from fractal geometry is that there is often underlying, recursive order within phenomena that appear at first glance to be random. In the stock market this shows up as kurtosis, a warped bell shaped curve that is hyper normal for the most part and then goes crazy for briefer periods. Any investor who appreciates this has a huge advantage over the herd. Calling turns in the market or with single stocks is probabilistic, but it is possible to get an edge in prediction of changes in direction with study.

If you buy them, they will come . . . back . . . eventually. :)

Formulas may be useful for providing a framework for evaluating investments. But formulaic investing has huge blind spots, especially about changing conditions. These formulas may be oblivious to dark clouds on the macro scene or they may command selling the rare great company too soon. Most allocation formulas are intended more to reduce volatility than to produce exceptional absolute returns or guard against permanent loss of capital. When I find a truly great company, selling at a bargain price, put as much as one third or half of my funds into it, and let it run for years, there is a bonus because the eventual large gains are taxed at a low long term capital gains rate. This would be disallowed under the diversification and rebalancing required by almost all allocation formulas, but this is how Warren and many other superinvestors have made their fortunes. :)

Thank you Sanjeev for your concern for the quality of our board. The life of a moderator is not an easy one. I appreciate you personally and especially in view of the time you take to make this the best investment board by far! I think that any poster who doesn't have a thought disorder or an extreme mood disorder will be able to comply with the spirit of what you have said. There is one point of clarification. I agree that rants against public figures are inappropriate for posting as are antagonistic comments against board members, but thoughtful comments about what makes people like Buffett or Obama or Prem tick, in my opinion, are among the more interesting on the board and indirectly help to clarify investment philosophy or public policy, I think these should still be allowed if the tone is appropriate. I believe this is what you are saying, that such topics and criticism are still OK. Is this correct?

More mem is always better. Take it from an old Mac user. Mac Air, iPad and iPhones R US. :)

I know what Bruce's secret plan is for this out of the way area. He plans to turn it into a natural preserve for viewing that endangered sub species, the American redneck. ;D

If you have a good way to handle the situation outlined I am all ears. The risks you don't consider would end up killing you even if you do not use a model to do allocation, since you are subject to them as long as you bought stock. For every security you buy, you are implicitly making a statement about the downside, upside, and expressing some form of confidence in it. The question is when you have multiple choices, what are good techniques you would use to decide how much to put into each choice? It would be immensely helpful to know how you approached this. For example with Buffett and Korean stocks - he got a basket of them trading at PE of 2-5 and didn't know much about them individually, but that basket did well overall for him. Just because North Korea might attack South Korea(a risk Buffett acknowledged) it still didn't stop him from committing some money. The situation with the Korean stocks was that if North attacked, they would all tank pretty much close to 0. If North did not attack, then they would no longer remain cheap and probably can go up 100-200%. I doubt anyone can really know the chance that North Korea will attack South Korea, but I guess Buffett assumed it was small. The main question is how many % of your portfolio would you put into the Korean stocks if you were in Buffett's shoes? The answer would be a combination of: 1) depends on how comfortable you feel about the Korean situation 2) depends on what your other choices are, and their respective upside/downside/confidence level That's what I am curious about - how people handle allocation so I can do it better. The Kelly Criterion comes into play for us, but it's the last thing we do. It's far more important to understand all aspects of risk. Some risks can be ignored if you like because they may have little relevance to asset allocation, for example, asteroid strike. However, nuclear war is one thing we take into consideration. We have a moderate position in a New Zealand company mainly to help provide a new start if we should flee there if a big war looms. New Zealand would probably be about the safest place to be in that unfortunate event. First degree relatives in our core family have unmortgaged houses. That gives a lot of comfort, especially to the members of the gentler sex. We have zero debt. That's a good way to be, less worry, better sleep. So we build a base of prudent security first, and then it doesn't seem quite so risky to put a third or half of one's investable assets into a really good idea if one thoroughly understands it, and the idea is much better than anything else that's well understood. When we have an investment, there is a continual process of calculating and recalculating the estimated weighted probabilities of how the investment will do. This is a Bayesian analysis. It's not perfect, but the ongoing process helps keep the evaluation objective as new information appears and is evaluated. It's much easier to do this with a concentrated portfolio than with a widely diversified portfolio, and the returns will be much better if well executed than with a large portfolio that will be subject to "diworseification". :)

Thanks for the ideas. The drillers look interesting. Paula did reach hurricane status, but Paula's energy content was only about 5% of the energy content of the bigger storms in the Atlantic this season. :)

That part of the panhandle is about as far from Miami as West Virginia is from Chicago.

Here is the latest update of the composite WSBase/S&P500 graph as of October 13, 2010. The sharp drop 3 weeks ago caused a little concern, but the flattish trend over the past few months has now for the most part reasserted itself. Twacowfca

If we build it they will come. ::)

These were not without risk at the time of purchase. I had assumed that WEB knew what he was doing and that the assets behind his standing as an unsecured creditor compensated for that risk if he could control that creditor class.

Well put, Harry. Application of the Kelly formula may lead to false confidence, and probably does lead to overconfidence in most uses as with the overconfident fund manager mentioned earlier. Like the black scholes model for options pricing with all its limitations, it may be useful as a starting point for starting to think about all aspects of risk. This can stimulate thought about what are the risks that are out of the box and what is their estimated magnitude and probability. I'm reminded of an old card counter I once knew. He would agree with you that the risks of making a big score may be greater than leaving your money on the table and walking away for good.

A good point. It's not a good idea to have all of your eggs in one basket, even if you watch that basket very carefully. But the truth is that risk happens. There is a small chance of being hit by lightening every time I take a walk on a cloudy day. There is about one chance in a million that I'll wind up DOA when I drive across town at night in my car, no matter how careful I am. The Kelly formula in theory doesn't provide for taking a fatal risk, but always holds back some capital to live to fight another day. That's the theory. In practice . . . . well, as the bard said : "Aye, there's the rub."

I agree that the possibility of substantial financial fraud always exists, but it is far less likely to occur with some companies than with others. Thus with BRK the risk effectively would be zero, with a startup managed by people of uncertain reputation, the risk might be high, with some other companies, too hard to call.

Exactly, The CEO of our biggest holding has most of his wealth tied up in the company, and he has a long term record of dealing fairly with investors whose funds he's managed and returning enormous value to them. His CFO worked for Jack Byrne and was mentored by him. Plus his returns are almost entirely not dependent on how well financial markets are doing. :)