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StubbleJumper

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Everything posted by StubbleJumper

  1. Yeah, but have you seen his investing style? He's an absolute genius with the biggest set of balls that I have ever seen. But that's the source of risk. Can he ever invest without going "pedal to the metal?" Can he ever adjust to buy Procter and Gamble, Coca Cola, and 3M just to collect a 3% dividend and some modest capital gains? If he had the temperament to do it then he'd certainly be set for life with his current capital endowment. But I'm not sure that he could just do such lame investing. The problem with his style is that there is always a tiny probability that one day he'll be wrong and the whole thing will blow up (like seriously, 12 months ago he was 100% BAC for Christ's sake!). Last year he began to hedge against that, but.... Much better to get bright guys like Sanj or Pabrai to invest, and maybe keep a million or two of "play money" to do the crazy shit that has resulted in his accumulating so much wealth! SJ
  2. "Never risk what you have and need, for what you don’t have and don’t need." Warren E. Buffett.
  3. Apologies. I read that your objective was to beat the S&P by 10% or more per year, and then I mentally went a step further and assumed that you had been doing it for a sustained period (and on this board we do have a couple of people who have actually done this sustainably and who are in the top 0.01 percent of investors!). As far as my own investing skills, I'm still undecided whether I am slightly above average or whether I'm just lucky. For planning purposes, however, I only assume that I am average because the consequence of being wrong might mean that I'll end up eating cat food! SJ
  4. Fair enough. You used what is known as a "cash buffer strategy" which enables to to avoid withdrawing during a down market. There's a whole literature on that too: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1969021 But ultimately, if you are not intending to go back to the labour market, you are effectively implementing some sort of a withdrawal strategy. I would encourage everybody to review the literature on these strategies before selecting and enacting one. SJ
  5. No, for the withdrawal phase, the focus needs to be annual not, LT. A quick review of historical returns (ie, Siegel) will demonstrate that any average investor has a solid expectation of a 6% or 6.5% in real inflation adjusted returns over the long-term. However, that does not mean that any average investor can simply withdraw 6% or 6.5% adjusted for inflation annually. Historically, the killer for a withdrawal strategy is downside volatility. An unlucky bear market in the first or second year after you retire, followed by a sideways market for 6 or 7 years is what causes portfolios to fail. The reason for this is that you keep withdrawing from your portfolio even in the years that it is has been hammered. Where you get into deep trouble is when your annual withdrawal ends up being higher than any return that you can reasonably expect to get. At that point, your portfolio begins the death-spiral where its value declines in real terms every year. When that happens, you've got an unpleasant set of options to work with: 1) return to the labour market; 2) reduce your withdrawals by living a less extravagant lifestyle (ie, eat cat food); 3) sell some other assets which do not currently generate income (ie, sell the cottage at the lake or sell the Corvette). Of course, if you can regularly and reliably thrash the S&P by 10 percent per year, then it's all academic. But if that's true, then that would put you in the top 0.01 percent of investors? In my case, I like to believe that I generate a small amount of alpha, but I worry that maybe I'm just a lucky coin-flipper. I'll wait a few more years just to be sure! SJ
  6. I think this implies that you need to make a decent bit more than 10% to stay even because of the volatility in your net worth. If you get a bad year that $150K withdrawal is a lot bigger than after an up year, and you would need to make a lot just to earn that back. If the first year would be a -40% year you would start the second year at 0.84 million. Spend 0.15 million and you need to get a 21% return just to get back to 0.84 million. That's why I linked to that Monte Carlo calculator a few posts above. Volatility matters! Yes, I would never recommend that people begin with a 10% withdrawal rate. For this to work, historically, you would need to have begun such a strategy during a "lucky period" where double-digit returns just seem to automatically roll in, or you would have needed to be a superinvestor who can regularly generate significant alpha. Personally, I like to believe that I can generate a little bit of alpha, but realistically, I am just not a good enough investor to fund a 10% inflation adjusted withdrawal rate. For this reason, I would encourage anybody who is considering an early retirement or full time asset management to carefully read the literature on safe withdrawal rates. That literature will demonstrate the historical outcomes of an average investor managing a portfolio with a given annual inflation adjusted withdrawal. For an average investor, given the level of historical volatility, a withdrawal of no more than 4% has been sustainable for a 30 year period. If anybody is seriously contemplating a 10% withdrawal, they need to have a strong level of confidence that they can routinely generate significant alpha (and frankly, I know of very few investors who can actually generate that much alpha year-in, year-out). The alternative is that you can roll the dice to see whether you are beginning your withdrawal during a "lucky period." You'll probably know within 5 or 6 years whether you are fortunate in your timing. If you are unlucky, then you could possibly return to work. The only problem with that is that you might end up returning to the labour market for a much lower salary than what you had 5 or 6 years previously. To a certain extent, it might make more sense to work for an extra year or two at your current high salary than to face the prospect of returning to the labour market at a potentially much lower salary. SJ
  7. ^Quitting work and focusing on investments worked pretty well for this guy. Just sayin'. ;) Yep. But a 4% inflation adjusted draw is also about the right level for a 30-year safe withdrawal rate. However, it is possible that Ourkid might need a higher annual draw, which would not necessarily be consistent with a safe withdrawal rate. In general, once your living expenses are down to about 3% or 3.5% of your portfolio, you effectively have enough money to never work again, irrespective of your current age. For a 30 year horizon, 4% is reasonable, for an 18 year horizon a 5% draw is safe. So, it just depends on how long you expect to live, and as Clint Eastwood said, "...you've got to ask yourself one question: "Do I feel lucky?" Well, do ya, punk?" ;D SJ
  8. I've done a little bit of thinking about this too. I guess the primary issue is whether you are viewing this shift as: 1) a means to increase your portfolio size, or 2) early retirement. If it's #1, then you have a tough row to hoe because you have to pay your living costs out of your portfolio returns. So, assuming that you have $1m capital and your annual living costs require a $50k draw, essentially you will impose a "management fee" of about 5% annually on your portfolio. Now, in the context of the past five years, a 5% draw sounds like bugger-all because double-digit returns have been easily attained. However, if you believe in Siegel's Constant and if you believe that inflation will be 1-2% going forward, then you might expect that nominal equity returns might be roughly 8%. With such a high management fee, you run the risk of having to draw down your portfolio after a bad year. So, if we hit an air-pocket that results in a 40% decline in the S&P, suddenly your $1m portfolio is valued at $600k. But the problem is that your annual draw is still $50k, which suddenly becomes a "management fee" of 8.17 percent. In short, there is a significant risk that you'll find yourself in a situation where your portfolio drops in value to the point where your returns do not exceed your inflation-adjusted draw. At that point, you either need to dust off your CV and head back to work, reduce your annual draw by eating cat food, or accept that your portfolio will slowly deplete itself. On the other hand, if your objective is #2 (early retirement), then it might be completely acceptable to incur the risk that your portfolio will deplete itself over the course of a few decades. Effectively, what is the point of accumulating assets if we do not eventually dispose of them (either on ourselves or on others)? However, before making that jump, I'd recommend that you spend a little bit of time reading up on safe withdrawal rates (SWR) which underpin the early retirement theory. One of the better fora to obtain info on ER and SWR is www.early-retirement.org SJ
  9. Thanks 50cent. I always like to peruse Chou's quarterly reports to see what kind of ideas that he's finding. He truly is a genius and has a big set of balls when it comes to position sizing. I noticed that he's holding about $1m of SinoForest bonds which he probably bought for a fraction of a penny. Anybody have any ideas about what his value proposition is for SinoForest bonds? Surely they are cheap, but maybe deservedly cheap? On the other hand, maybe he knows something that will earn him 5 or 10 bags? SJ
  10. I hope you are ultimately right and RIM turns things around, but I would suggest that the Brick and RIM ran into drastically different problems. In the case of the Brick, their business model is to sell crappy furniture to middle and lower income Canadians who are financially strapped and mathematically challenged. During the period that I followed the Brick, they basically broke even on the furniture, but they made decent profit from financing and extended warrantees. The Brick ran into trouble due to the financial crisis. Their market was sound, and their business model was sound (even if it is slightly off-putting), but they hit an air-pocket for a couple of years when we were slammed by the Great Recession. Blackberry is a different beast. At an industry level, people are buying as many smartphones as they ever have. However, consumers have collectively decided that they hate Blackberry's products and have switched to devices of other flavours. This is not just a temporary market disruption caused by the financial crisis. This is a broad-based consumer rejection of Blackberry's products. In my opinion, fixing Blackberry's problems will be much more difficult than the Brick, because Chen cannot simply sit tight and wait until the economy turns around and people once again start buying crappy furniture on credit. No, if Chen fixes Blackberry, it's because he'll have reoriented the products in a way that consumers appreciate. SJ
  11. I have no experience in this area either, but as is usual, my view is that my cocksure ignorance is ample qualification to offer a couple of observations. ::) If you can find a $1m business selling at 3X, that means that owner earnings are $333k. But, as an absentee owner, you'd need to pay somebody to manage your business for you. If that costs $100k/year, your net would be $233k on your $1m investment. So, assuming that there's no CAPEX requirement, that would be 23.3% return annually. I would suggest that the simple purchase of BAC shares today would probably net you a double-digit return over the next 2 or 3 years. With a bit of leverage you could push that up near the 23.3 percent that you might get from your small business. The key difference is that if you ever tire of BAC for any reason, you can exit very easily....but if you ever tire of your small business, you could have one hell of a tough time to exit.
  12. Is there enough liquidity in out of the money puts for a multi billion portfolio? I'm sure there is. They can deal directly with the bank(s). In 2007 they had a multi-billion dollar hedge via call options (a hedge against the market climbing). Or they can deal with BRK. Buffett happily wrote multi-billion dollar puts a few years back.
  13. Now that's ironic, because the gist of FFH's lawsuit against the hedge fund is that the hedgies' unethical behaviour prevented FFH from being able to raise capital on reasonable terms. Guess the shoe's on the other foot!
  14. Sanj, I have been a member of this board and your previous board for more than 10 years. Rarely have I disagreed with your viewpoint in any material way, but this time I must. Prem's past 25 years have been fantastic. But I don't make money based on the past, and nor does Prem. The past 25 months have been the problem. I do not have a problem with the hedges, because those were at least well thought out and constituted (excessive?) risk management initiatives. But RIM? Nobody had a problem when FFH threw a few bucks into King Pharma. Nobody had a problem when FFH threw a few bucks into Watson Pharma. And nobody had a big problem with having thrown a few bucks into the Brick or the crappy restaurant stocks. Those were small bets on dubious opportunities. But when FFH starts putting meaningful amounts of capital into something, then yes, long-time shareholders get a bit concerned. When he put big bucks into Abitibi we swallowed hard and crossed our fingers...and same when he put big bucks into H&R. But what he's done with RIM has crossed the line. The cumulative investment goes well beyond "big bucks" and is now 15 or 20 percent of market cap. If it had been JNJ or WFC nobody would have even blinked. We would have mused about whether that sort of large cap would offer a reasonable return, but there would be no bellyaching whatsoever. But RIM offers crappy products and has a tertiary market position in one of the most competitive, rapidly changing industries. There is a strong probability that he has effectively flushed 10 percent of FFH's market cap down the toilet, to say nothing of the personal time that he has wasted on RIM through his board membership and the buyout proposal that he initiated. Unfortunately, this is not an asymmetrical bet; you cannot just look at RIM like the credit default swaps or like H&R and say, it's a dhando type of investment. RIM is entirely different. In this case, it's about even odds about whether FFH doubles its money or gets wiped out. Heads I win, tails I don't lose much? Not on your life! When he makes such a drastic departure on position sizing and on risk of a permanent loss of capital, it should hardly be surprising that some of us think that he's fallen off the rails. And that's my first major philosophical disagreement with you in more than 10 years. SJ Stubble, with every investment you pointed out, he's had an equally successful investment. Everybody is talking about the size of RIM, when the Bank of Ireland investment is nearly as big. Everyone talks about Abitibi, but no one talks about Resolute. Everyone talks about Level 3, but they've pretty much gotten all of their money and then some out of Level 3. My point and opinion, is the same one I give to investors of any manager, even the ones I don't like...let them work! You have a chance to ask them anything you want once a year, and they are one of the most accessible. Just let them work! Screwups happen to the best of them. They screwed up with TIG and C&F, but came back stronger. They may have screwed up with RIM, but let them work and prove that they know what they are doing. And this advice applies in particular to those invested in Fairfax, not those that DIY and aren't invested in Fairfax...but those guys can shut up a bit too and just see what happens. A couple of years ago, people were second-guessing Berkowitz, now everyone is coat-tailing. 7 years ago investors were ripping into Mohnish's 70% drop, but now it's hey Dhandho, dhandho everyone...play the bhangra music and coat-tail Pabrai! These waves of love-hate come by alot. Once in a while they are right about the manager, but more often than not, they are wrong and the manager hasn't suddenly become an idiot. One of my other favorite dogged managers right now is Tim McElvaine. I had lunch with him today. The size of his fund is significantly smaller than in the past, since investors always judge their managers by what have you done for me lately. Yet, he's one of the smartest, most ethical managers I know. Without a hesitation, not even a temporary moment to second guess, I would have my family move all of our assets over to him to invest if something happened to me. Yet many of you out there don't get that! Francis too...a couple of years ago people were saying the same things about him as they were saying about Berkowitz. Well, he's kicked ass in his funds since, not unlike Bruce. My family knows, everything goes to these two to manage if I'm not around. And they've heard it from me over and over...no matter what happens, whether the fund is up dramatically or down dramatically, don't do a God-damn thing. JUST LET THEM WORK! Cheers! Sanj, It's not about screw-ups. I completely accept screw-ups because they're part of a batting average. If you take another look at the examples I listed, you'll see that I was exceptionally balanced by listing investments with good outcomes (King Pharma, Watson Pharma, H&R, Brick) and bad outcomes (Abitibi). The characteristics that most of those investments share is that, ex ante, they were high risk, high reward propositions. And with those, obviously some will be dogs, you just hope that you've got a favourable batting average so that it all works out well in the end. No, my message was not about screw-ups. It wasn't about avoiding cigar butts. It wasn't that FFH should never jump in holding their nose. Rather, it was about position sizing for the risk level of the investment. Full stop. And that is the problem with RIM. In the end, it might work out. But if it doesn't work out (and there's a good chance that it won't) we're not just talking about the type of exposure that FFH took when they bailed out H&R. The position sizing is a significant, conscious error of commission, even if RIM turns around (which it might). It is also completely inappropriate to compare the RIM position to Bank of Ireland. In the case of the former, FFH is piling an ever growing amount of capital into a badly risky asset. However, in the case of the latter, they only put in their $500m and it happily grew to $1.4B. So, yes, with Bank of Ireland, FFH now faces the happy problem of needing to find an exit-strategy for a position that has rapidly grown too large. But with RIM, they are actively growing the position by throwing capital at it because they do not have a credible exit strategy. At worst, you could say that the Bank of Ireland position sizing is an error of omission because FFH has failed to trim it as the stock as risen...but that is far more acceptable to me than their error of commission with RIM! I have no trouble letting value guys do their thing. But I have a big problem when the value guys make a sudden departure from their otherwise sound risk management practices. SJ
  15. Sanj, I have been a member of this board and your previous board for more than 10 years. Rarely have I disagreed with your viewpoint in any material way, but this time I must. Prem's past 25 years have been fantastic. But I don't make money based on the past, and nor does Prem. The past 25 months have been the problem. I do not have a problem with the hedges, because those were at least well thought out and constituted (excessive?) risk management initiatives. But RIM? Nobody had a problem when FFH threw a few bucks into King Pharma. Nobody had a problem when FFH threw a few bucks into Watson Pharma. And nobody had a big problem with having thrown a few bucks into the Brick or the crappy restaurant stocks. Those were small bets on dubious opportunities. But when FFH starts putting meaningful amounts of capital into something, then yes, long-time shareholders get a bit concerned. When he put big bucks into Abitibi we swallowed hard and crossed our fingers...and same when he put big bucks into H&R. But what he's done with RIM has crossed the line. The cumulative investment goes well beyond "big bucks" and is now 15 or 20 percent of market cap. If it had been JNJ or WFC nobody would have even blinked. We would have mused about whether that sort of large cap would offer a reasonable return, but there would be no bellyaching whatsoever. But RIM offers crappy products and has a tertiary market position in one of the most competitive, rapidly changing industries. There is a strong probability that he has effectively flushed 10 percent of FFH's market cap down the toilet, to say nothing of the personal time that he has wasted on RIM through his board membership and the buyout proposal that he initiated. Unfortunately, this is not an asymmetrical bet; you cannot just look at RIM like the credit default swaps or like H&R and say, it's a dhando type of investment. RIM is entirely different. In this case, it's about even odds about whether FFH doubles its money or gets wiped out. Heads I win, tails I don't lose much? Not on your life! When he makes such a drastic departure on position sizing and on risk of a permanent loss of capital, it should hardly be surprising that some of us think that he's fallen off the rails. And that's my first major philosophical disagreement with you in more than 10 years. SJ
  16. You could always short RIM to have a 0% net exposure. BeerBaron Yeah, you're right. I probably should either short RIM or just sell my FFH shares. I've allowed the RIM exposure to grow incrementally without taking an offsetting position at any point in time. Having taken my eye off the ball, it's now grown to the point where it's actually meaningful (especially with the recent purchases of the converts)....and there's no real reason to believe that Prem is done with the RIM purchases.
  17. I don't want to think about my percentage ownership of FFH because that will make me think of my "look through" ownership of RIM. So, if I have 30% of my assets in FFH, that means effectively I have about a 6% position in RIM? :'(
  18. I actually get very uncomfortable when people ask my advice about investing. The strategies that I use and the decisions that I take are driven by several years of formal education, many years of reading and a temperment that I have developed over time. I cannot recommend something to another person without first understanding their level of knowledge, which is usually close to zero....and their risk tolerance which is also usually close to zero. You can't just tell somebody like this that they should buy FFH or BAC or something which requires a depth of knowledge. In the end, I usually feel like I would need to teach these folks a basic course in finance before we even begin. But who really wants to do that? I have neither the time nor the interest to teach people the basics of fixed income investing, equities, options, etc. In this context, the best thing to do would to advise them to buy SPY, and just hope that the advantage of the low management fee offsets any disadvantage from lack of diversification. :(
  19. I just don't get it. They have now invested 1.38bln! Think about the opportunity cost of that money in todays market. Opportunity cost? Where else are they getting seven year notes at 6% that are effectively first lien notes with an equity kicker? As a total aside, maybe not relevant to this discussion maybe it is, FFH now has over $1 billion invested in Bank of Ireland. 6%???? Who cares about the 6%? When it comes to Blackberry, I want return OF capital, not return ON capital. The potential for a permanent loss of capital is significant, and FFH just keeps expanding its (my) exposure. :'( SJ
  20. It is equally baffling the certainty with which you present our ability to invent our way out of trouble. Think about it from the point of view of a person taking on a lot of future liabilities from a loan shark. On the one hand, it may be likely that one's income grows to make sure that those future liabilities are not a problem. After all, you still have your knees. On the other hand, this does not mean that prudence and conservation of existing assets for the payment of those future liabilities all of a sudden becomes silly. History is on my side. ;D But more seriously, the US has like what, 10 years of proven reserves at current rates of production? So that would be what, like 100 years of actual production if you really forced the issue and extracted every possible drop out of every domestic reservoir and if you discovered every reservoir on US soil and in US waters that is not yet discovered? So in the end, even if one were to seriously contemplate the possibility that we might not "not invent our way out of trouble" by not immediately extracting domestic petroleum from the US what we're really talking about is the difference of a few decades before supplies are exhausted. So at best we'd be postponing the energy cliff, which really doesn't do that much for us. In the end, a transition to some other energy source must occur...and a couple of decades more or less doesn't really make much of a difference on that. If you subscribe to the view that petroleum reserves will become irrevocably depleted, then you must also subscribe to the view that prices will necessarily increase. And it is from the scarcity-driven increase in petroleum prices that the next dominant source of energy will be born as people seek out rents from innovation. Personally, I'd say the earth probably has another 200 or so years of petroleum, if we elect to use it and if we are prepared to pay the cost of extracting it. But I'd guess we'll have moved on to our next dominant energy source long before the 200 years elapses. And likely before 100 years elapses. Again, history is on my side. ;D SJ
  21. The very definition of cursory, in fact. There is some survivorship bias in your statement. Yes there is a great deal of survivorship bias in my statement. It's a pure observation of human ingenuity and economics driving innovation.] Would you like to do the same process with the revolution of food sources? It's really the same thing. We develop/discover superior products over time and the new superior products displace the old. It is baffling that people have such a short term perspective that they think the process has ended and that our current dominant energy sources and our current dominant food species are somehow the end of the line. SJ
  22. Why would you say its dumb? It's not obvious at all that it's a bad idea to drill your own oil, and the fact that Munger sees no opposing argument as worthwhile reeks of stupidity and arrogance. I'd say it's a one-off but he has a long habit of making dumb statements, "Civilized people don't own gold". Yeah ok Charlie. I agree completely. On rare occasions, Munger fails to take a multidisciplinary analytical approach before coming up with a dogmatic one-liner. A rudimentary review of history would yield the observation that the western world has had several energy revolutions, with wood, peat, coal, whale oil and petroleum all being dominant for some purpose at some stage of our development. A version of Munger from the 14th century might have said, "It's the height of stupidity to cut our own wood", while in the 16th century Munger II might have said, "It's the height of stupidity to dig our own peat", in the 18th century Munger III would have said "It's the height of stupidity to harpoon our own whales", and so on. So, we are currently dealing with Munger V saying that we would be better to not fritter away our own petroleum. Munger VI will probably say that we shouldn't export natural gas (LNG). Munger VII will say that we really shouldn't dig our our own uranium. And then Munger VIII will eventually realise the dream of renewables or perhaps fusion. Now, none of the future sources of energy are obvious from the current perspective with existing technology. However, a cursory review of history would tell us that there will almost certainly be something else before we fully exhaust our reserves of petroleum. Dogmatically declaring that we're bonkers for using the most best source of energy economically available today seems like a bizarre thing for a man of Munger's learning. SJ
  23. +1 for Google spreadsheets. Easy, powerful, portable and free. What's not to like?
  24. actually, they have no issues competing with Starbucks head to head, at least in mMontreal Coffee is a bit of a strange bird. There are plenty of places in urban areas where you can walk down the street and come across a coffee shop literally every 200 feet. For whatever reason, all of those coffee shops seem to be viable and the market does not seem to be saturated (ie, there are still line-ups). Even in suburban areas, in some places it's getting to the point where there's a Starbucks, Second Cup or Tim Horton every 500 meters, and somehow they all seem to stay in business.
  25. Why do you like it? I've always been of the view that clothing retailing is a crappy business. I haven't paid enough attention to RET to know whether they bought a crappy business at a great price, or whether they've paid an average price for a crappy business. SJ
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