Cigarbutt

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".

^This is all speculation of course but the wording and the overall philosophy of the firm would tend to confirm that they would, like the Oracle, tend to build positions in the US-based too-big-to-fail banks. I have a media article from 2012 (not in Danish or English) that features a member of the Giverny team (who came from the banking sector) who described his line of thought on the topic. He underlined the long-term orientation and the capacity for strong banks to eventually benefit from more difficult environments. As you likely know, the Giverny group still had (as of Q4 2018) a large position in the Bank of the Ozarks and that bank was not mentioned in the 2012 article. What was discussed then was a position in Wells Fargo and M&T banks and it was explained that both could reasonably be expected to double in the next five years, which is a typical benchmark for them. For M&T, they have historically described respect for Bob Wilmers, the previous leader of the bank and the stock has basically doubled. For WFC, a double would have been within reach absent a temporary lapse in governance but that was hard to predict. Hope this helps. BTW Charlie, thank you. The Giverny letter usually comes out contemporary to Mr. Chou's letter who has been a big fan of large US banks through warrants.

I recently completed an annual "review" with my two older children (22 and 21) and part of the discussion concerned the interest-free loan that an individual or a couple could auto-contribute to a home purchase by borrowing (tax-free if rules followed) from previous RRSP contributions. I showed them real-life scenarios going back in time starting in 1996 (home purchase) and assuming the interest-free loan was reimbursed in the RRSP over 15 years, comparing returns and outcomes: 1-house bought near Montreal, RRSP Home Buyers' Plan used 2-house bought near Toronto, RRSP Home Buyers' Plan used 3-funds kept inside RRSP and invested in CDN index funds 4-funds kept inside RRSP and self-managed It will be eventually up to them to decide and the future may not look like the past but this was a useful and instructive exercise.

Yields are getting horizontal and who knows what that means? Bias: in another life a flatline meant efforts for resuscitation and it seems that the FED may be getting ready to do just that as they recently surveyed primary dealers on how to fine-tune the management of rates. A lingering thought is that successful resuscitation is generally unlikely and is inversely related to the length of time spent attempting resuscitation. At least, that's what Wikipedia says.

^Agreed that the underlying issue is affordability. Interesting to note that the US Congress legislated their own version of a First-Time Homebuyer Credit in 2008 with the intent of stabilizing a falling market and in order to stem the waves of foreclosures. It's always hard to evaluate one policy action among others but it appears that the application of the bill was fraught with IRS-related administrative difficulties and fraud and, apart from possible limited postponement, did not really influence the built-in trajectory of prices. That was in 2008 and the GSE thread is still a very active one. The new rules where the CMHC invests alongside the new owner is a reminder of how dominant the real estate has become in Canada and the government will only become more involved with support (and moral hazard) in the event of significant declines in home values. Also, there ave been unusual demand factors (well described by some posters in this thread) but encouraging young households to put a significant part of their registered savings in a home "investment" when the affordability is so low is IMO borderline irresponsibility.

This opening post has been deliberately put in the general discussion section. He was an academic economist who was able to build a bridge to effective and practical policy-making. He produced the kind of work that caused cognitive dissonance and often contradicted my own conclusions and laid out principles helping to determine if correlation was causation. For those interested, he shared his work on many levels: -Value of education Relevant to the recent elite school admissions scandal, he produced work showing that elite people going to elite schools will not influence their earning power; the phenomenon is likely more related to social labeling. Using a well-designed twin study and other credible constructs, he showed some of the drivers behind the return on education. -Inequality He is the person behind the concept of the Great Gatsby curve and explained how effective policy should focus on the related impact on the equality of opportunity, framing the issue in a way that may rally different political flavors -Minimum wage, music industry etc Mr. Krueger elevated the level of discussions by focusing on real issues, using an open mind and building on pillars of evidence-based analysis. He represented the kind of governance that we sorely need. RIP

^Lately, it has become clear that it will be very hard to take the monetary punchbowl away. https://business.financialpost.com/news/economy/why-central-banks-like-canadas-are-finding-it-hard-to-navigate-home The mortgage stress test that has been introduced by the OSFI regulator has hurt the market quite a lot, especially for first-time buyers (a stress test implies being stressed now in order to have less stress later) and today's fiscal announcement appears simply to be a temporary measure to appease the short-term political stress. Hoping for sunny ways may not do the trick.

This is a follow-up and update from previous work that had sparked interesting debates a while back including here: http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/buffets-alpha/msg83746/#msg83746 IMO, there are significant flaws (both conceptual (volatility, risk measures etc) and common sense) but some parts are helpful ie a) concerning the cost of float earlier on when interest rates were higher and when stocks, in general perhaps, were a better deal and b) how the long-term performance is truly outstanding. In the last 20 years at least, Mr. Buffett has not used (apart from limited opportunity time periods and only to a limited degree) float as leverage. Some of the larger and growing cash balance has been related to a growing relative dislike of bonds with cash and fixed income remaining in overall balance with the float liabilities. Interesting to note though that BRK's returns have also gravitated to the market in the last 20 years and, in this respect and forgetting size, the authors may have a point concerning leverage. I get that the underlying motivation of the authors is to come up with some kind of model or a statistical factors equation that would reproduce past results and that would prospectively continue to outperform. For those interested in a career in basketball, people who studied Micheal Jordan have come up with 21 steps on how to become like him: https://www.incomediary.com/how-to-be-like-mike-20-life-lessons-from-michael-jordan The mathematical model is coming soon.