Cigarbutt

A Bloomberg article has come out concluding that the output of the Ghawar field is coming down, perhaps big time. The conclusion may be correct but I would say that the info in the bond prospectus is not sufficient to reach that conclusion. Historical data is sparse but it has often been assumed that the Ghawar field was producing 5M bpd with a very low decline rate. The 3.8M bpd number found in the bond prospectus is a helpful data input but is reported as an MSC measure which does not automatically correspond to potential production but more to a minimum that can be reached in a certain time frame. https://csis-prod.s3.amazonaws.com/s3fs-public/legacy_files/files/attachments/040224_baqiandsaleri.pdf (from 2004, page 20) Bottom line: Depletion is real and official predictions are probably way too optimistic but, to this day, it is not widely known to what extent.

The story is slowly evolving. True that the situation is incredibly complex and that amazingly competitive vulture players are circling around the residual stake but a potentially simple thesis is that there will be equity left for current holders assuming a reasonable transfer of funds from current owners to previous victims and victims to come. Some private discussions are becoming not so private: https://www.latimes.com/business/la-fi-pge-bankruptcy-exit-plan-20190327-story.html In essence the opportunity funds 1-would seed new capital and end up with about 50% of the equity, 2-it would mean that a "penalty" fund be set up for previous wildfires with a reasonable discount to present estimates and with PG&E being the prominent seeder of that fund and 3-it would mean that a new "wildfire fund" would be set up to cover future costs unrelated to negligence which would require participation from relevant actors: PG&E, other California utilities, state (directly and through securitization). It seems that this is a balanced plan (from all perspectives) and may represent one of the best outcomes for equity holders but the plan assumes an optimistic emergence in early 2020, an unusual cooperation from a diverse group of stakeholders with diverging interests and an absence of material wildfire damages for the upcoming fire season with potentially uncomfortable prioritized post-petition claims. In my book, the common shares are priced for perfection. Interesting times.

Interesting to note that the two leaders (Sid Ferenc and Steven Menzies) apparently were very well paid (at least in 2015 according to some reports) when each made about $9 million from salary, bonus and other compensation which would have ranked them high in the corporate ladder and which likely means that the Boss was happy with results. Opinion: the top two managers are VERY bright, stayed within legal and possibly even ethical bounds but they became too distanced from center court. When the opponent frequently debates if the ball is in or out, the game loses its rhythm. Being able to fetch a high price probably helped with the decision and some private equity players don't mind playing along the lines. Some details about the business which may interest some: The loss sensitive policies with profit-share are not new but are usually sold to large businesses which have larger financial and technical (to really understand the implications of the policy) resources. Applied devised a product for small businesses and rapidly gained market share. Buying workers comp insurance is typically easy for small businesses (often purchased by the owner) as there are state-agency-supervised lists of payment rates (%) for different categories which are simply multiplied by categories of payroll. The typical feature offered by Applied involved defining a minimum and a maximum premium with an initially defined premium within the range and a deposit to fund potential negative development. The idea is for the small business owner to have skin in the game and to pro-actively reduce injuries and focus on cost-effective safety. Applied are great operators and, overall, underwriting results (it seems) have been very solid so many small business operators had good deals and recuperated the deposited money. However, the small business owners effectively became involved in a complex reinsurance transaction and some of those with negative development suddenly realized that they were involved in a very complex and lengthy process. Many disappointed clients decided to attack the innovative aspects of the policies and many regulators developed a receptive ear. Also, those suing often mentioned that they had been attracted to the Applied policy because of the Berkshire halo and often described that the Berkshire parent was benefitting ("siphoning funds") from the reinsurance component of the transaction... Insurance commissioners can, at times, show unusual sympathy towards the small player "fighting" large corporations. In 2016, there was a detailed decision which reached the conclusion that the EquityComp product was toxic. Here is the decision: http://www.insurance.ca.gov/0400-news/0100-press-releases/2016/release071-16.cfm http://www.insurance.ca.gov/0400-news/0100-press-releases/2016/upload/nr066ShastaLinen-Decision-Order.pdf The decision is being referred to again and again. My humble experience in this area is that it helps if you can outsmart the regulators. But being too smart can be detrimental. They should have hired Mr. Buffett for public relations and regulatory interactions but he probably has more important stuff to do.

^This is morphing into a BAM topic but the point is how a company can thrive whatever environment in the next decade or two. BAM is highly levered but a lot of the debt is structured at the asset level (real assets) and maturities are quite long. But the high leverage makes it an inadequate candidate for the tight definition of anti-fragility. If the 2008-9 episode is considered a test for fragility, at the height of the crisis, AUM did decline by 5% but, in the end, BAM was able to raise $1.2B in 2008 and $14B in 2009. And to thrive, it was able. In 2008-9, the crisis was unusually deep but the recovery was unusually steep (at least for the assets relevant to BAM) so how BAM deals and comes out of the next one may be different. Since then, AUM has pretty much tripled and as of now, BAM has $35B of deployable capital (year-end) and a committed $35B. https://archive.nytimes.com/www.nytimes.com/imagepages/2010/12/19/business/19brook-gfc.html?action=click&contentCollection=Business%2520Day&module=RelatedCoverage&pgtype=article&region=EndOfArticle Unless the future test is unusually deflationary and unless capital in general disappears for a prolonged period, I think BAM meets the relaxed definition of anti-fragility. -----)Back to expectations of market returns for the next decade or two.

Hi wachtwoord, I'm not sure this is worth time spent especially in terms of short-term forecasting but if you give importance to where we may be in the cycle, here are some useful tools to answer your questions: https://www.brandes.com/docs/default-source/brandes-institute/2018/the-cape-ratio-and-future-returns-a-note-on-market-timing.pdf From an academic point of view, models are never wrong and one has to adapt the reality to the model. ::) People who publicly discuss these valuation models as potential forecasting tools tend to mention that deviations can occur and say that pendulums do swing and underline that they will eventually be proven right but broken clocks can also be right. In reality, as individual investors interested in that line of thinking we have to decide which scenario applies: -markets can sometimes stay irrational for long periods -this time is different It's interesting because the opening post referred to an article written by Mr. Buffett in 1999 (I still have the original article with contemporary hand-written notes on it) and, from 1999 to today, his “prediction” about reasonable expectations ended up quite prescient. Maybe that's because of his long-term outlook and because he avoided to think in a binary fashion. I guess then that it would be reasonable to maintain a similar outlook for the next twenty years with a nearer-term path defined by ultra-low interest rates (whatever the implications of that). BTW, I meant to ask you a question about Bitcoin but found out the fundamental explanation behind the price action: the price of avocado. :) https://www.newsbtc.com/2019/04/03/analyst-bitcoin-btc-likely-to-continue-surging-to-5500-but-significant-pullback-is-imminent/

I appreciate the balanced response. Vancouver is a nice place and warrants a premium :) but, if I were to move there, would probably wait a while before buying. @scorpioncapital I don't mind investing in stocks that have negative equity, as long as future cashflows warrant it.

Recent results from the Greater Vancouver area (prices and inventory on sales) are pretty interesting. https://betterdwelling.com/city/vancouver/vancouver-real-estate-sales-fall-to-1986-levels-inventory-rises-over-50/ The results are presented in a sensational way and other reports suggest that the changes are "policy-driven" but probably worth watching. The policy measures to stem speculation probably "work" to some extent because there are growing price pressures (starting from a very low base) related to foreign investor interest in my area where those policies are still absent.

Right, which is why I wouldn’t be too surprised if we had a final stage of euphoria before this cycle ends. One thing to note though is that corporate profits as a share of GDP have been unusually elevated over the last 10 years or so, and the CAPE ratio (by only looking at earnings over the last 10 years) effectively assumes that this is the “new normal.” That may be correct, but if it’s not then the market is already just about as expensive as it was in 1999. I think I failed to follow. How would the share of profits to GDP and/or margins work into measure the dollar of market cap paid share of smoothed net earnings (right?). So like market cap to GDP is equal to 99? Many would probably also argue that profits to GDP is higher in 2009 than 1999 because of greater intl trade/share of S&P 500 revenues coming from abroad (e.g., like the FANGS dominating industries across the globe). I personally think margins will mean revert or at least trend that way, but I've (wrongly) thought for a number of years. I don't want to get directly involved in this dicussion but I've read this in the past and thought the discussion fun to read and Mr. Montier talks about the margin effect: http://lwmconsultants.com/wp-content/uploads/2014/04/JM_CAPECrusader1.pdf

Saudi Aramco is a huge variable in the supply equation and hypotheses can be raised but the challenge is data transparency. Access to capital markets will require some data sharing: https://www.rns-pdf.londonstockexchange.com/rns/6727U_1-2019-4-1.pdf Not much new actually and "independent" review of some of the proven reserves do not make the assumptions valid. In the last 20 years or so, Saudi Arabia has defied the odds (maximizing primary and secondary recovery) and has raised production levels but essentially increased production levels have come from the same old giant oil fields that were discovered 40 to 70 years ago and for which the depleted status can only be grossly estimated until the market has access to granular production data and field-by-field statistics. I would say Saudi oil economics will look more and more like tight oil with "new" projects offsetting declining overall mature production. The status of Saudi Aramco will play a key role in the grand transition scheme and outside investors will be asked to participate. It is certainly possible that in order to prevent investor interest decline, Saudi Aramco may need to release more information and that may give rise to non-linear scenarios. Saudi Arabia setup an extractive socio-political system based on extraction of a limited resource. Extractive regimes can be very efficient at extraction but do not typically deal well with transitions. Of course another authoritarian group may take over but, in a declining scenario, another Venezuela is also possible.

FWIW I think these are very good points and I agree that postponing the decline will only result in eventually steeper declines but the big question is when. Who knows apart from a very short list of true insiders? In the early 2000's (and even before), there appeared several detailed (and convincing) reports showing how the massive output decline was imminent.

Thanks. I enjoyed that. Other "sources" have mentioned that Saudi Aramco reported net income of "only" $13.3B in 2016 but it shows the operating leverage inherent in a concentrated operation. It would also be absolutely fascinating to have access to an independent review of their reserves but that may require some arm-twisting. The long-term evolution of the Saudi Arabia Foreign Exchange Reserves may be a related topic, to be kept for another discussion. https://www.theglobaleconomy.com/Saudi-Arabia/Reserves/ Last measured (Q3 2018) at $497.2B. The race is on.

It's fair to say that looking to buy or sell the market likely isn't a useful exercise most of the times, especially looking bottom-up. But a lot of the assumptions seem to be taken for granted and rare events occur much more frequently than statistical models would suggest. Mr. Buffett once quipped that he would be ready to pay a large sum in order to know if all his stock holdings would fall by 50% within a month but he has also said that investors in the stock market should be ready to handle an across the board 50% decline. So, there is a price to pay for protection and a potential price to pay for unexpected reactions. Even if historical comparisons are only a starting point, I find that the late 60's share a lot of features with now (but there are also huge differences) in terms of overall valuations and outlook. Interesting because then, it looked like Mr. Buffett preferred bonds over equities for a while which is markedly different from now although he has kept the financial flexibility constant.

I don't have access to the FT article and no longer follow closely the global supply-demand factors but spent a lot of time in 2015-6 looking into (or more like trying to) Aramco's earning power and would like to add the following: -Net income reported is after various government dividends, taxes and royalties, likely corresponding to "tax" rate well above 50%. -The Ghawar oil field is still a monster. -Break-even operating costs (of extraction) probably still stand around 4 to 5 USD per barrel! -Social safety net costs allowing for sustainable production however probably require oil prices higher than they are now. -More recent releases of financial disclosure and various "leaks" seem to be related to the IPO and the coming transition. -The transition has involved selling oil-related assets to buy stakes in Uber and Tesla.

Your question hurts so it must be a good one. The obvious answer is nothing. But. I guess the point that Mr. Buffett was making in 1999 was to differentiate expected returns and realized returns and this may have something to do with the two components of returns: fundamentals and sentiment especially if the end point is shorter term. And this is a question that an individual investor needs to answer for every stock selection by going through some set of investment criteria within a certain opportunity set. But what is an investor to do if opportunities are trickling down? The obvious answer is to expand the opportunity set and/or to "improve" criteria but isn't a big risk (not conscious) to lower return standards and to adopt the general public's expectations? In the last few days, I read reports from Chou Funds and Patient Capital Management, two funds that I respect. It seems that I looked at many "picks" that they made in the last few years. Opinion: In the last 5 years, they likely lowered their standards and would have been better off returning funds to shareholders or investing in short-term government bonds, given their specific opportunity set. http://choufunds.com/pdf/AR%202018%20ENG.pdf (page 2 for returns) http://www.patientcapital.com/calendar-year-returns#chart3 Also, another value-related aspect is that Mr. Chou and Mr. Maida are not the only typical value investors underperforming. In the last few years, riding financials, energy and commodities without catching the information technology wave likely hurt results on a relative basis. https://alphaarchitect.com/2018/12/11/after-a-lost-decade-will-value-get-its-groove-back-in-2019/ So, the idea appears to be to keep your eye on the ball and, of course, one shouldn't mind others' prodigy. See, I was able to produce a full post without writing the word bubble. mjohn707, in another thread, recently suggested that the enlightened value investor should engage with lower expectations and I would say this is not a quixotic advice.

I would suggest additional perspective. The Gulag Archipelago provides a slightly wider meaning to the above quote: "Gradually it was disclosed to me that the line separating good and evil passes not through states, not between classes, not between political parties either – but right through every human heart – and through all human hearts. This line shifts. Inside us, it oscillates with the years. And even within hearts overwhelmed by evil, one small bridgehead of good is retained. And even in the best of all hearts, there remains. . . an unuprooted small corner of evil. . . It is impossible to expel evil from the world in its entirety, but it is possible to constrict it within each person." Solzhenitsyn lived through some very unusual circumstances but he warned against blind adherence to ideologies and the risks of keeping silent. An argument could be made though that this Board is not the place for political noise. But the world (and the markets) is not always efficient.

Cigarbutt, Somehow I'll argue, that the bullet #1 in the Youtube video : - "Slight nose up attitude" - certainly has merit in the current investment environment, -but not exactly meant the way mentioned in the video ... - more conceptually meant with reference to Icarus, Hubris & Nemesis. [ ; - ) ] - - - o 0 o - - - Today, I've been bear hugging my NVO dividends just received. - - - o 0 o - - - On a more serious note: In short, I share Spekulatius' view, expressed above. Likely rough times ahead for us. Personally, I just hope that we this year get at least some satisfactory clarity on the situation going forward with regard to Brexit & ongoing trade disputes. This may however still be too much to ask or hope for. Hi John, FWIW, last April 7, 2018, after reading a post of yours and trying to deal with investment-related persisting cognitive dissonance, I wrote a poem (which nobody will get to see) with the following title: On Wax and Wings and it referred to Icarus (the myth and the Bruegel painting). https://en.wikipedia.org/wiki/Landscape_with_the_Fall_of_Icarus http://www.cornerofberkshireandfairfax.ca/forum/strategies/getting-gains-in-a-bull-market/msg329541/#msg329541 -----)back to the quantitative side of investing.

I think it can be be both right? At first it's a symptom - it's markets being concerned about future growth/inflation and predicting a rate cut; however, it can also become self-fulfilling and contribute to the slowdown because the inversion strangles credit supply further slowing the economy Reflexivity. In this case, there are definitely fundamental issues regardless of expectations. Rising rates would have a serious impact, no matter how they do it, the only question is how bad. The method the Fed uses makes things worse, because, well, they are clueless as the past few months have shown. ... ... That's my bet, it's not going straight down from here. We will have fun first. As for the Fed, I think people have an exaggerated sense of its impact on the economy and it’s power to control its path. As an investor for quite some time, I can only say that when the pundits put their hope into the feds bailing out the market, we were typically in for a rough time. ... I agree that the Fed may become irrelevant but they have been a major driver behind valuations. I would say they have a very difficult (impossible?) mandate, given built-in expectations and circumstances. ----- Continue reading if you have a PhD in physics, have an interest in aeronautics (Boeing issues) and if you have two minutes to spare. It seems that the crowd is expecting the Fed to do an aileron roll. What is fascinating about this acrobatic maneuver is that the plane ends up at the same altitude it started while benefitting from increased pitch and greater angle of attack, enabling the wings to generate lift when the airplane is completely inverted. While watching these shows in awe, I always wonder what the downside risks are. ----- Back to investing.

The 1937 period is interesting, isn't it? But "I don't know how we get out of this": https://www.cnbc.com/2015/04/11/druckenmiller-this-could-end-very-badly.html Charter: a document issued by some authority Chart: some kind of map If things get rough at this point, I'd rather have a map.

If indeed the Fed starts to lower rates, it means we never really left the accommodative phase. Uncharted waters.

I somehow remember Mr. Parsad making instructive and relevant FFH investment process comments on this Board before and further comments about the process would be appreciated. But as potential or actual investors, how can we appraise investment results if not by looking at the outcome over a certain period of time (3 to 5 to ?10 years)? A possible avenue to evaluate the process from the outside would be to look for coherence and consistency. When comparing to great investors such as BAM or BRK, even if one does not agree with a certain acquisition of shares or assets, it may be a matter of degrees of interpretation within a consistent and coherent pattern. When the consistency and coherence are hard to define (or to understand), one may have to rely on trust, which, IMHO, increases the uncertainty of the investment outcomes.

I agree with this. I think part of the problem is that a lot of people think they know about the benefits of good sleep, so they discard a lot of the nuance and emphasis that someone like Walker tries to bring to the discussion. Also, it seems like it's hard to fully appreciate the effects from things that have small, regular costs but long-term, non-linear effects. Things like saving money, reading, diet/exercise and sleep all fall into this category in my view. Likely because of evolutionary reasons, humans seem to be poorly wired to accept short-term pain in order to harvest long-term gain. One could use higher cognitive skills (slow thinking) to overcome this "natural" tendency. An alternative would be to realize that good sleep may even have short-term implications: https://www.ncbi.nlm.nih.gov/pubmed/25772315 "Analyses revealed that longer sleep duration was related to greater next-day sexual desire (b = 0.32, P = 0.02), and that a 1-hour increase in sleep length corresponded to a 14% increase in odds of engaging in partnered sexual activity (odds ratio = 1.14, P < 0.05)." :)

Interesting indeed. If you look at corporate debt to GDP as a proxy for overall leverage and graphically superimpose with float reserves on cash and fixed income held at BRK as a proxy for the use of float leverage, it results in a very interesting perspective. In the last 20 years, the corporate leverage has been cyclical just like BRK's leverage of float but the peaks at BRK are lagging chronologically behind overall corporate leverage peaks. The message here seems to be that Mr. Buffett has deployed float (only to a limited degree compared to the early years) when other corporate players were deleveraging. Statisticians and quantitative-oriented investors may want to work on this data which could result in a very high correlation ratio etc with a lag adjustment by 2 or 3 quarters for instance and this may suggest what Mr. Buffett may do under certain circumstances. But it seems that what motivates Mr. Buffett is not primarily what others are doing, it is what he thinks is the approriate thing to do, a stance that will always be difficult to capture with a mathematical model. From the 2018 annual report: "Nevertheless, I like our own prospects. Berkshire’s unrivaled financial strength allows us far more flexibility in investing our float than that generally available to P/C companies. The many alternatives available to us are always an advantage and occasionally offer major opportunities. When other insurers are constrained, our choices expand." I would conclude that the use of float as leverage at BRK will continue to be proportional to the extent of opportunities available.

Read lately here and elsewhere: -The Fed hasn't been able to engineer a strong recovery after the 2007-9 episode. -The Fed has had a hard time managing the economy due to unforeseen circumstances. -The Fed hasn't been able to stage a credible exit process. In the last 20 years, most of positive stock returns have occurred around FOMC meetings, the GFC happened more than 10 years ago and, on a relative basis, the Fed had only started to decrease its balance sheet. Question: How have we come to rely so much on central planners?

In probably nowhere near that bad. I highly doubt that in reality 50% of people do not pay the required reimbursement. The stat is probably flawed by a peculiarity of the HBP. You have to make the payment by Dec 31. Whereas you can make RRSP deposits until the first business day in March. A lot of people make their RRSP deposits in Jan and Feb and probably miss the deadline. It's really not that big of a deal. There's no tax impact. All that happens is that they get dinged a little on their RRSP limit but they probably have plenty to spare. So no biggie. I agree with your perspective. I'm not sure the majority appreciates the foregone tax-deferred investment gains. So before the discussion on opportunity costs, one would need to review basic reading skills (government documentation) and how to look at a calendar. :)

^I actually don't know any but it looks like around 2M Cdns (about 5% of popn) are participating in the program as first-time buyers and something like 50% of participants do not pay the full required reimbursements, triggering tax payments...and leaving wider unused contribution room across the board... When you think of it, this plan is equivalent to what many folks seem to be doing when they ask for an intra-family loan. It also seems that the program has been losing popularity as 1-the younger generations tend to put temporary savings in TFSAs instead of retirement accounts and as 2-it is said that it's hard to put money aside because of high renting costs! You may have noticed that the fastest growing segment of the mortgage sector by far is the reverse mortgage in more experienced segments of the population. https://www.mortgagebrokernews.ca/news/reverse-mortgage/reverse-mortgage-growth-reaches-8year-high-252772.aspx Instead of reverse mortgaging, I plan eventually to offer time to high schools in my community in order to give a teaching session on the value of compounding. The talk will be called "Snowball".