Cigarbutt

A simplified conceptual way to make money with investments is either to buy cheap stuff and sell it when it gets to intrinsic value or to pay a reasonable price for stuff that will grow intrinsic value over time. The initial article which refers to William Bernstein alludes to the cost of capital. A possibility is that the wall of cheap money is larger than the wall of worry and, intuitively, this suggests a tendency for general valuation levels to rise and a necessary forward-looking underlying assumption is that the cost of capital needs to continue to be low. Cheap capital or cheap money either means the crowd is getting brighter or dumber and I would submit that the jury is still out. http://www.efficientfrontier.com/ef/adhoc/coc.htm

One can question methodology and holding-period returns at the individual level may make those studies irrelevant. This has been looked at along many variations of the same theme and here are two examples: https://www.chase.com/content/dam/privatebanking/en/mobile/documents/eotm/eotm_2014_09_02_agonyescstasy.pdf https://csinvesting.org/wp-content/uploads/2017/05/Bessembinder-Do-Stocks-Outperform-Treasury-Bills.pdf The idea is that there is significant positive skewness with a far right-sided fat tail. So, the returns have been concentrated among a select few and, interestingly, returns have continued to be concentrated within only a few days of the total holding period, with most or all return in the last few years (since the irrational exuberance speech in 1996) happening in the 24h before and after Fed policy public annoucements (typically 8 times a year).

In my household, I would say that 99% of circulating photos, clicks, likes, searches, videos watched (the number of which has been growing sequentially and quasi-exponentially) should NOT be counted in GDP. Unless we made it to the leisure society but I think the economic possibilities are not quite there yet. That's a good point. So, let's say you don't have these free services anymore. Are you not going to print pictures and would it not cost money? How much information are you getting now free that would have cost you money before? How many times have you looked up some info and used it, instead of relying on paid experts? How many free youtube videos? Email? What would be the alternatives and would they be free? etc. Even if you somehow not spend any money if all of these are turned off tomorrow (unlikely) it would not negate the fact that they added value and increase productivity, for free. Transportation: much, much more efficent with Google maps; how is this economic and life improvement captured in GDP data? Education: much, much better with the internet; how is this economic and life improvement captured in GDP data? Software is transforming every aspect of life. Banking is a great example of this transformation. Not that long ago i used to get paid with a paper check that i would then have to go to the bank, stand in line and deposit. Need cash to buy something? Go to the bank, stand in line and withdraw cash. I would write a check to pay someone (who would then go to the bank, stand in line and make a deposit). Need to pay your utility bills? Go to the bank, stand in line and pay. Want a second account? Go to the bank stand in line and open. Investing was pretty much impossible for most people; so they bought Canada Saving Bonds or left their money in a savings account at their bank (my monther-in-law still does this). If you did have investment accounts, most people paid big fees. This was life a few short years ago. Today everything is done electronically. Much, much quicker. Much more accurate. Much, much cheaper. Much more selection. Quality of life is much, much better. How are all of these improvements captured in GDP data (maybe they are .... not sure)? And for banks, their cost structure has to be way, way lower. All the people they no longer need must be a big drag on GDP (layoffs or separation or someone leaves and are not replaced). And we are just getting started with software improving pretty much every aspect of ones life... I agree that marginal utility can be significant (efficiency and fun). But I remain unsure if, as a whole, we are getting more productive in a revolutionary way (vs evolutionary). Transportation: For example, productivity improvements have been phenomenal for 3rd party logistics providers (CHRW, EXPD). But given innovations and technological advances, why is commute time getting longer in North America? (compare to railway and internal combustion engines introduction). https://www.npr.org/2018/09/20/650061560/stuck-in-traffic-youre-not-alone-new-data-show-american-commute-times-are-longer Education: Is the value of education getting better? Is the education industrial complex getting more efficient and productive with technology? Banking: GDP share of finance has gone up in tandem with the introduction of technological tools and, based on aggregate measures of intermediation costs (which remained stable during previous historical revolutionary changes in technology), those costs have been going up in the last 20 or 30 years (during the IT revolution). Lower transaction fees have been more than compensated by a significantly increase in the number of transactions such as when people follow a rinse-and-repeat strategy :) People may consider using credit cards as a great personal advantage but may not fully realize that merchant fees and rewards do not meet the free-lunch definition. In another life, was involved in assessment of the value in introducing technological tools and was always amazed how allocators of funds (especially if not their funds) considered technology to have a magical appeal. Technology perhaps should be seen as a tool and not as your master. Of course, technology allows discussions and debates that otherwise would not occur. ;) I read the following recently and it seems relevant: https://blogs.wsj.com/cio/2019/03/29/the-productivity-paradox-digital-abundance-scarce-genius/

In my household, I would say that 99% of circulating photos, clicks, likes, searches, videos watched (the number of which has been growing sequentially and quasi-exponentially) should NOT be counted in GDP. Unless we made it to the leisure society but I think the economic possibilities are not quite there yet. I like the anecdote (which seems reasonable for him) when he decided to sell all long exposure and buy treasuries instead, on the spot, while playing golf. He says it was a tweet and I guess he felt the wind change.

^I had similar concerns years ago. The answer I had obtained (if memory serves well) was that my broker was using a rolling 5-day weighted average price on the payment date. After following a few quarters, it seemed that the brokerage firm was applying a consistent method. If you have discipline, doing the buying yourself may save some broker-specific embedded fees of the "free" plans, especially for larger amounts. But discipline also has an implicit price.

I used to have DRIP programs in my accounts for companies offering them but no longer do because 1-I think/hope to do better with the timing of reinvestments and 2-of concerns that, with firms paying high dividends and having a high DRIP participation rate, dividends may be reinvested during a period of artificial and temporary increase in demand (slightly higher prices). In one specific situation, the DRIP option helped to transform a losing value trap proposition into a neutral result. It's basically a form of dollar-cost averaging. The share issuer initiates the program and may outsource the administration to a transfer agent. Some issuers even offer a discount on the shares bought through the designated re-investment program. Look at the WFC prospectus: https://shareowneronline.equiniti.com/PlanMaterial.aspx?Type=Dpp&Plan=NW01 For the cost basis, the broker statement should update the cost with the additional shares bought through the plan. You still have to pay the tax on the dividend though. :)

-A note on the sale price and financing Last month, we bought a nice garden shed. The sales price included 12-month "free" financing. By paying cash, got a 7.5% discount (!). Three years ago, buying a new mini-van, got a 4% discount from waiving "cheap" financing. The car seller's way of explaining was more contorted but it basically came to a creative definition of cheap or free. I think car dealerships have a future. In the last few years, selling new cars has become a pretense to make money with the package of options coming with the ownership and operation of physical locations selling cars. There are obvious secular headwinds but cars are becoming filled with technological gadgets that will require onerous maintenance and repairs. The models will evolve. Given the perceived headwinds, the significant operating and financial leverage and where we are in the cycle, FWIW I think it is a good time to spot the survivors and the ensuing consolidators. Useful references: https://advisory.kpmg.us/content/dam/advisory/en/pdfs/the-end-of-car-dealerships.pdf https://www.nada.org/WorkArea/DownloadAsset.aspx?id=21474857318 NADA comes out every year with a report and long-term trends can be assessed.

Thanks for those comments. An interesting aspect is that while you reject the academic argument, to justify expectations, you basically submit what Myron Scholes brought to the quantitative side of LTCM. Being idiosyncratically stupid in most areas, I've found that, to do well, I have to be ready when genius occasionnaly fails. Some months ago, there was an interesting thread led by meiroy about the Austrian stock market. The 10-year government bonds then were at about 0.46%. Today, it says about 0.12%. Does that mean that I should expect stocks to have tripled or quadrupled? When I visited Austria, they seemed to behave like most people do in most circumstances. Your inputs remind me of the Great Moderation period when one of the other inputs were initial claims. Nobody knows the future but what I see looking back are cycles and, since 2007-9, most of the subpar "growth" has come from people going back to subpar work. Looking forward, it seems to me that a lot of people will be disappointed and, maybe, that's what long-term bond yields are saying. https://fred.stlouisfed.org/series/ICSA

What is RuleNumberTwo again? https://www.collaborativefund.com/blog/five-lessons-from-history/ "Long-term success in any endeavor requires two tasks: Getting something, and keeping it. Getting rich and staying rich. Getting market share and keeping market share. These things are not only separate tasks, but often require contradictory skills. Getting something often requires risk-taking and confidence. Keeping it often requires room for error and paranoia. Sometimes a person masters both skills – Warren Buffett is a good example. But it’s rare."

I read this book after boilermaker's recommendation. It's a short book which can be read slowly. One of the messages is that it is not necessary to suffer to find meaning in life. If unavoidable, the author candidly reveals how he found meaning during a life-changing event. Reading the book was easier than going through three years of concentration camp exposure.

I’m sorry, must be missing something, how does this relate to my post on GEICO’s value? I’m very familiar with insurance regulatory capital req’s. In 1995, tangible net worth for Geico was 1.9B and surplus at end of 2016 was 15.7B suggesting that a significant part of statutory operating income (including the 15.5B of pre-tax underwriting gain) was retained at the sub level. In the 2018 report, Geico's float is stated at 22.1B. The 2010 report has interesting comments about intrinsic value of Geico, referring to the fact that the intangible value paid in 1996 for policyholders stood at 97% of written premiums. Adding the 2016 surplus of 15.7B to 97% of 2018 written premiums (33.1B) approaches the 50B mark. Geico does not have the same potential for growth now but interest rates are lower and perhaps will stay low. @DooDiligence Thank you for the corrective due diligence as León Gieco is the Argentine Bob Dylan.

2 questions: By moving sources of imports to different countries (trade diversion effect), a)How will that improve the trade deficit? b)What about the common sense suggestion that the eventually imported product will be more expensive to the consumer? It's hard or impossible to predict what will happen but, from a historical perspective, the last 30 years has witnessed a very unusual rise in global trade and the consensus is for more of the same with some tweaks along the way. The following two references seem to be helpful: https://blogs.imf.org/2019/04/03/economic-forces-not-tariffs-drive-changes-in-trade-balances/ https://www.schwab.com/resource-center/insights/content/street-fightin-man-president-trump-ups-trade-war-ante?cmp=em-RBL

That always happens though in the maturing of the cycle. As rates move higher, lenders can accept more defaults and still end with the same, or higher, income due to the higher rates. Riskier loans means defaults get higher even if the economy is strong. It's not to say that there's nothing to worry about, but you can't just look at the data in a vacuum like that. I mean I get your point, but I'm not only looking at that data. I was just adding it to the mix. No defaults on cars probably wont bring down the economy. But If we hit a recession it will have some big implications. Especially when you look at how inflated used car prices are and how over saturated the market is. You have used pickups with 200k miles on them selling for 6-8k less than a new one. If we hit a recession, I think the auto industry will be one of the first to take a dive. It's also worth noting that if your willing to take out a risky loan on a 70k vehicle then that lack of financial aptitude probably carries over into other aspects of your life. https://wolfstreet.com/2019/05/15/subprime-bites-serious-auto-loan-delinquencies-spike-to-q3-2009-level-despite-strongest-labor-market-in-years/ So two perspectives on this. 1-Sales are growing and so are defaults and pent-up demand will continue to manifest itself (see slide 37 Fairfax Financial 2019 annual slides) 2-I was following this in 2006-7-8 and it seems that defaults are building up before an actual decline in car sales or general economic activity. Most of the stress is building up in the subprime segment (especially the younger age groups) which is relatively smaller vs total auto loans but there has been a very significant absolute increase in the volume and outstanding value of subprime loans (and duration of loans has increased). If interested, there was a related thread: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/leap-puts-on-sub-prime-auto-lenders/

Interesting. Always looking for disconfirming evidence. On the return of manufacturing jobs: https://www.bloomberg.com/opinion/articles/2019-04-05/manufacturing-jobs-boom-is-fading There has been some change in the trend (trend about to change again?) which occurred also in the context of a massive Keynesian-like stimulus (Keynes is dead but he had said during his lifetime that a stimulus was to be used counter-cyclically and that a surplus was to be built for times of duress). On the new NAFTA. Most suggest that changes will be relatively marginal (at least from my side of the border). It is expected (expectations vary according to allegiance) that auto manufacturing jobs will be created because of relocated production in the US but most balanced analysts mention the risks of increased auto prices for the consumers, reduced competitivity of North American producers and increased incentive for automation (may be a good thing but obviously not what is promised, in terms of jobs). A large part of the alchemy is based on the premise that white american blue collar workers expect to go back to the golden days of manufacturing but an alternative scenario is that a synonym for alchemy is trickery.

I wouldn't read too much into the announcement. For AI (however you define it) to work, connectivity and a certain level of transparency is required. This evolution makes the data processor more accountable for confidentiality access and privacy standards.

On November 3rd 2016, FFH sold 90% of their long-dated US Treasury bonds and, shortly thereafter, removed their equity hedges. The expectations was for long term rates and stocks to go up. https://www.forbes.com/sites/antoinegara/2016/11/11/canadian-billionaire-prem-watsa-nailed-the-trump-treasury-trade-and-is-bullish-on-stocks/#2ebe1ef257b6 As of today, after 2.5 years, long term rates are at the same level as on the selling date and the R2000 is up by about 10 to 12%. I think that deflationary forces will continue to "win" over inflationary forces despite increasingly polarized forces and, for better of for worse, that conclusion continues to contaminate the investment thought process.

I can't figure out how to make money with CRSP and EDIT but found the following useful as it covers (the basics) the playing field. https://www.cbinsights.com/research/what-is-crispr/

These odds-ratio and relative risk studies are helpful but need to be validated and tentative conclusions have to be handled with care. The studies tend to show correlation but there is a big conceptual step to cause-and-effect. For schizophrenia and for other similar ailments, in the absence of a spurious statistical aberration, one has to try to differentiate between a risk indicator (pure association) and a true risk modifier (epigenetics stuff that Hielko refers to). The classic example here is the association of mental disease (including schizophrenia) and very high cigarette smoking prevalence. A lot of work has been done to show how an exposure to nicotine or else could trigger the disease. There is however an important body of work showing that there is simply an association through behavior. Also, there is a school of thought suggesting that people suffering from schizophrenia actually benefit from smoking (improved cognition, similar to looked-for effects with medications) and smoking may then actually consist in a mitigating behavior. It's a classic nature versus nurture problem but genes play a very significant role. I guess it's similar to value investing: it can be learned but it's easier if it is in your genes.

I would suggest that the 2010 Zenith acquisition will eventually be recognized as an excellent one. -Value at acquisition (May 2010): 1.3B for the 91.8% FFH did not own, including a 200M share issue "undervalued" at 355. -Valuation parameters now would suggest a relatively low return since acquisition because the market never really hardened, even if 781M in dividends have been distributed to FFH along the way. Workers comp insurance is very unusual, long-tail and requires an incredible amount of underwriting discipline and IMO Zenith continues to be a significant outlier, the value of which will only become apparent over the full underwriting cycle. Always hard to say ex-ante but many experts suggest that the present status of the net loss and LAE reserves is adequate, a similar situation to the soft market environment of the late 90's when, eventually, it was found, around 2001, that the net loss and LAE reserves deficiency had in fact reached about 33% of the calendar year total premiums (!). It's impossible to know the future but the reserve deficiency cycle suggests that redundancies are likely to reverse. For the 1997-2000 period, retrospective hindsight allowed to (see who was swimming naked) increase each of the ultimate accident year combined ratios by 15 to 23 percentage points (!). The last few years have resulted in an amazingly competitive (soft) environment. Zenith has grown in the early 2010's when there was some hardening but growth (almost doubled NPW) came to some degree from rising premiums per policy and written premiums have been essentially flat to declining in the last 3 to 4 years. ZNT reported very poor combined ratios in 2010 to 2012 due to a very high expense ratio (kept their infrastructure, about extra 10% of the CR) and due to (too) conservative reserves adjustments. Over the long term, Zenith continues to show an enduring capacity to report lower loss ratios than the industry. The reserve release (20.5% CR points) in Q1 2019 is another example of their conservative reserving of prior periods. In 2018, NWP for the year were 789.2M. In 2005, their NWP was 1.2B. They have huge opportunistic capacity to increase market share. Since 2015, many competitors have increased market share with gradually decreasing retention and likely a component of "cashflow" underwriting. In the industry these days, the typical reserves to NPW ratio sits around 3.5 to 4. For Zenith, it is now at 1.8, which means that even in an environment where redundancies become deficiencies, the negative impact will be much less on Zenith. So, the market in this space is incredibly soft and nobody knows when the market will turn but turn, it will. Not long ago, AM Best had this to say about payroll growth and its potential impact on the workers comp insurance market: "However, the US has not recorded a consistent decline in the unemployment rate longer than nine consecutive years since it began tracking the unemployment rate in 1929. Historically, long declines have typically been followed by sharp spikes in unemployment-which may serve as a forewarning for workers' compensation writers to expect payroll growth, and any resulting premium growth, to cease sooner rather than later, unless wage growth accelerates." Zenith looks positioned to profit in correlation to the underwriting discipline they have shown in the last part of the journey.

You may not be familiar with the Comgest people but they occasionally produce interesting white papers and tend to mean that long-term is longer than 3 months. The 2014 Long-term Growth Conundrum paper may contain the info that you're looking for (page 10): http://www.comgest.com/export/sites/default/data/en_data/media/images/WP6_2014-09_LT_Growth_Connundrum_EV_EN.pdf The numbers appear right and I assume that the share prices listed correspond to the share prices at year-end. You start in 1919 with 1 share and end up (if you're still alive) with 279803 shares (at the end of 2013). I would call it sizzling compounding. Let's drink to that! Today's trailing PE is 31.

Both. They are both a lender and shareholder (controlling shareholder actually, 59.6% currently plus warrants that would bring it to 80%) FFH exchanged their common and preferred shares of the old entity for a controlling equity stake in the new entity, which likely rendered the "management" buyout possible as the transaction may have been too leveraged otherwise.

Hi Lance, In this cycle, I have parked a variable amount of "excess" cash in TLT. An argument could be made that it is becoming increasingly reckless to invest in "risk-free" long-term bonds with a shorter-duration mindset but what else is new? In a 1999 investors' expectations article, Mr. Buffett quipped that if one thought that the US was becoming like Japan, the way to go was to buy options on bonds. He also "expected" that the Dow Jones would return about 6% over time. In that article, he compared the return (total return, per year) of a government 30-yr bond to the Dow Jones (1981-1998). 30 yr-bond: 13% (!) Dow Jones: 19% (!) Since then: 30-yr bond: 7.8% S&P: 5.4% 1981 to now: 30-yr bond: about 10% stock index: about 11% Further easing would likely put the 30-yr bond back in the leading position and I wouldn't want to be in charge of a pension fund right now.

PG&E just obtained a regulatory rate hike to pay some of the company's costs for rain and wind events in 2016 and 2017. There is realization (recent government documentation) that home building in high-risk areas should be curtailed and that the recent trend in higher wildfire activity may be due, in large part, to a natural reversion to the mean due to excessive previous fire suppression and poor forest management. Here's a reference that captures the spirit of data and analysis that has been out there for at least 20 years: https://fee.org/articles/let-forests-burn-if-you-truly-love-them/?utm_campaign=FEE%20Daily&utm_source=hs_email&utm_medium=email&utm_content=72148453&_hsenc=p2ANqtz--rLO-JA3sNMQ3amNwGBYs1khAwfty71tl5tNIl8_jZFlcPl3OuCJ1d6Qvp3YWvySMLbwOQA9_Bgc7qIO-rbqe7 A few days ago, there was a rumor that Berkshire Hathaway was looking to buy PG&E, which Mr. Buffett nipped in the bud. I would say there is value in a continuing entity but further wildfire losses this year and the next may have a catastrophic impact on residual value. Interesting to follow.

A hard market? What is a hard market? :) There has been noise about potential hardening including comments from rational players (TRV, RLI, WRB). Soft markets typically die of heart attacks but I guess they can also die from old age (poor pricing will eventually manifest, whatever the circumstances). The pressure seen in the E&S segment may be a false dawn and may be related to AIG (finally) showing some discipline (#1 player in US E&S market). The outcome may depend to what degree others respond, in terms of capital supply (in US E&S market MKL#2, BRK#3 and FFH#8). There is no point in forecasting but I like what Mr. William Robert Berkley said on the last conference call (2 days ago): "So, look, I'm not going to predict the redundancy or the deficiency of the industry. I'll leave that to brighter people than me, but I would tell you that, I think that the marketplace has been pretty aggressive for the past couple of years. I think a lot of that has been glossed over as a result of what was a benign cat environment, as well as positive development from earlier years for the industry. And I think that, at some point you can't keep putting lipstick on the pig, that's my policy." (my bold)

https://www.carriermanagement.com/features/2019/03/25/191219.htm?bypass=e03145bd4548bd8cd9548f6f89c3e8aa Interesting complementary article with additional perspective. This is work in progress with a lot of potential. Standardized forms with streamlined procedures around a bunbled product can take advantage of scale effects. Thinking outside the box resulted in simplification.