Cigarbutt

... If you have an interest in the Lloyd's insurance platform ... One thought that came to mind on the 1st vidi was unrelated to insurance. Coffee shops seem to be pretty durable. - Pricing risk must have been extremely difficult back in the day. Did they have usable data or were they just winging it? Seems like a very complicated business with significant barriers to entry. The early underwriting practices look quite primitive according to our modern standards but Edward Lloyd's coffee house was a major advance because the meeting place (market) output became of higher quality as decisions were based on a diverse range of well-informed participants and a data set based on a network of global correspondents reporting to Mr. Lloyd. I understand too that, at some point, groups of retired captains (isn't this related to what you did in your previous life?) eventually began associating at Lloyd's in order to share their expertise with brokers and underwriters specializing in marine insurance. What the Planck company is providing is both automatization of basic cognitive skills and trying to introduce data insights. Dealing with underwriters (personal or professional) more and more seems to involve answering a few questions that tend to capture the essence of risk for a particular situation. An interesting example for this process (insight from data) is when (I can't find the exact reference and the details may not be exact) an air force (UK?) was recruiting pilots during one of the major wars of the early part of the 20th century. For obvious reasons, many pilots did not come back from their missions and there were restraints on time to select and screen candidates. A screener had found that an answer to two simple questions increased significantly the chance that a pilot would come back alive with the plane after a "successful" mission. The first question: Did you ever ride a motorcycle? The second question: Do you still own one? The best results were obtained when the answers were yes for #1 and no for #2. I can't explain this but maybe AI can. The potential low-hanging fruit may lie in the expense ratio and the data insight impact on the loss ratio may be more challenging.

And I guess we're not even at the end of the beginning. If you have an interest in the Lloyd's insurance platform and if you have a few minutes to spare: Lloyd's has made progress but has been incredibly slow in integrating new technology. Before dismissing the value of the first video, helpful to remember that the 2019 video already looks and sounds out-dated when AI enters the picture. Resistance to change at Lloyd's may be related to resilience as they sort of defined the risk shedder-taker relationship a while back and would risk affirming that they will continue to be around for the foreseeable future.

AI algorithms actually are just an application of technical analysis, but in a diiferent context. 'History can predict future events'; in tech speak, make the machine calculate all possible correlations in a data set - & it WILL find some that are 'somewhat' predictive (middling R-square values). As it applies these correlations, we call it 'learning'. Of course, the 'machine' is only as 'smart' as the R-square of the correlation, and it's stability in an out-of-sample application; introduce it to a market-discontinuity, and it goes beserk :) One of the theoretical arguments around HFT is that if your holding period is very small (nano-seconds), almost all your price gain will be attributable to market drift; and we can calculate the amount of that drift, using the Brownian Motion equations. Applied to AI, the more you can apply the Brownian Motion equations to an AI algorithm, the more accurate and stable it becomes. All things coming out of the 'investment' silo, and making the jump into other places. SD ??? I find the above comments quite interesting. I've been using voice recognition software for quite some time and the technology relies on deep learning and machine learning, both subsets of artificial intelligence. Through recognition of voice patterns, the software reproduces written text and, over time, gets better at it. But the technology remains quite poor concerning certain aspects that require basic common sense (when I use a new word, a word in a different language, someone else speaks) and the "machine" does not recognize an obvious mistake with very potentially consequential impact on the substance of the underlying message. Proofreading has become markedly different as the software (even if amazingly efficient at certain tasks) can produce very stupid results. neil9327's point, I think, was that we would hope to integrate and or understand the underlying "behavior" that led to the subsequent price action in order to improve prediction capabilities. The best short-term predictive ability of where a stock will go is what it did in the short-term past and this has been captured by simple linear regression models assuming markets function linearly most of the times (with some predictable variation) and this is where correlation coefficients and R-squared values come into play. The idea (and the hope at this point) of machine learning and higher artificial neural networks for better prediction capabilities relies on improved pattern classification and ability to recognize patterns on its own in order to determine non-linear extrapolations. In a way, this is nothing new as Thomas Bayes described the foundation of machine learning in 1763. Pattern recognition can be improved but the underlying principles that rest on past behavior can lead one astray (such as when using the VaR concepts) especially when transitions occur between calm and chaos or vice-versa. Artificial intelligence will need to integrate behavioral aspects and IMHO we're not quite there yet on many levels. One of the biggest risks may be missing the forest for the trees (bigger picture, perspective etc) because the complexity of the model and the huge amount of data used may result in an illusory sense of precision. I would say pattern recognition has value but is only a starting Brownian point for deep and independent thinking. Potential bias: "Investment is most intelligent when it is most businesslike."

Thanks for the idea. Twin studies are fascinating. Scandinavians have produced a lot of excellent work in this area. Thoughts: 1-It seems that investment behavior and biases are, in a large part, directly related to genes (which eventually could be "scored" for potential ability...). Also, there is an indirect effect: the fact that you are drawn to read Ben Graham or Warren Buffett may explain more about future investment decisions than the act of understanding the concepts described by the mentors. That may explain why people say that value investing comes "naturally". 2-Genetic testing and eventual "scoring" raise very interesting (and controversial) issues for insurance underwriting (life vs sickness and mortality, auto vs driving behavior, etc). It's about trying to avoid adverse selection vs genetic discrimination. 3-Also, do you want to know that you will develop a non-preventable disease for which there is no satisfactory treatment? There are still grey areas. When my kids do well, I tell them it's genes. Otherwise, it's because of their environment. :) One can alter the course and some may achieve large deviations but genes are dominating, in a Darwinian sense. A devil, a born devil, on whose nature Nurture can never stick; on whom my pains, Humanely taken, all, all lost, quite lost ... The Tempest, Shakespeare (1611)

Applied Underwriters is actually quite an interesting business. Before coming under BH's umbrella, it seems that they were noticed by Mr. Jain when completing a reinsurance deal. My take on the company is that they are very efficient in closing claims, have high retention ratios, are very good at offering innovative products in neglected segments of their workers comp market, including profit-sharing instruments that may confuse some clients, brokers and regulators. There may be something more to them but I don't see it. Insurance is very much about reputation and, perhaps, head office has had enough of the noise and decided to sell because it was no longer a "core" asset and was effectively competing against other BH subs in the WC market (BH's business has grown quite a bit in that segment). Another aspect is that alternative capital providers and private equity have had a large appetite for this type of operator in that kind of market. FWIW, Applied Underwriters recently won a battle but it's not over until it's over. https://www.natlawreview.com/article/applied-underwriters-defeats-class-certification-long-running-worker-s-compensation

I agree with the potential for human ingenuity but -"progress" is not linear -"today's" progress is based on a depletion mode -transitions are basically unknown territories of the same kind that led Columbus to leave the European Continent (many failed) I don't agree with everything Mr. Sachs proposes but like the invitation for tough discussions in the following article: https://www.scientificamerican.com/article/are-malthus-predicted-1798-food-shortages/

Would say that the "new" book does not add very much if you've followed Mr. Marks. Maybe helpful in consolidating some concepts. "One of my most persistent observations and – in a related way – one of the questions I’m most often asked is whether people can learn to be unemotional. My answer is “yes and no.” I think it’s possible for people to be on the lookout for potential emotional influences and to try to restrain their effect. But I also think people who are inherently unemotional will have it much easier. A lack of emotionality is a gift (in investing, that is, but perhaps not in other areas, like marriage). It’s not my point that emotional people can’t be good investors, but it will require a great deal of self-awareness and self-restraint." The more it changes...

1+ The eco-anxiety movement tends to lose focus and incontrovertible evidence sometimes implies no room for discussion or appropriate questions. So, I thought the presentation was useful for perspective. Usually, the crowd gets it approximately right but, as individuals and as a "group", we sometimes widely miss the mark on long-term issues that involve sustainability issues (Versailles Treaty, post-2001 real estate bubble in the US, fiscal debt? etc) It's basically an NPV decision and may explain why some want to lower the frequency of financial reporting. The difficulty may also reside in the difficulty to switch from the thinking fast to thinking slow for issues that are not imminent. It is also easier to see what others can do when the burden needs to be shared (from today): https://finance.yahoo.com/news/us-debt-unsustainable-path-192804468.html Dogma and ideology can stand in the way. I am reviewing the potential of Vail Resorts (ski stations) and it is obvious that climate change has and will alter the industry dynamics over the longer term and firms like Vail would decrease their likelihood of survival if they don't take financial decisions now in order to adapt their product. I have also spent time on PC&G (utility in BK due to wildfires). This is retrospective work so there are various analytical risks (data mining etc) but a review of government reports and good research done in the 90's and after described well the growing risks and trends about forest fire risks in the wild-urban interface. Despite all this data and analysis in plain sight, the policy makers (through land zoning rules, infrastructure decisions and subsidized insurance) encouraged extensive building and development in exactly the wrong area!? How do we best tie short-term decision-making in democracies in order to mitigate potentially adverse outcomes?

https://www.the-american-interest.com/2019/02/25/bigger-fewer-riskier-the-evolution-of-u-s-banking-since-1950/ Reference suggested by someone who knows nothing and who also feels that the biggest financial innovation is the ATM because i don't mind the heat.

Investor-owned utilities will tend to "behave" as a bond-proxy in the short term but will tend to "behave" like equity in the long term. Also, in 2018, in some circles, there was an appetite for "defensive" stocks and securities potentially having uncorrelated returns. In the last few years, despite risk-free rates going (and staying) down, the regulators have tended to adjust their CAPM models and there has been stickiness with the historical 10% ROE number while the cost of debt has remained low in the context of high leverage and thin (and thinner) spreads. In december 2015, WEC energy issued 30-yr bonds (yield 4.3%) when the 10-yr RF rate was at 2.19%. Last October, WEC issued another round of 30-yr bonds (yield 4.3%) when the 10-yr RF rate was 3.15%. The utilities model now rests on low debt costs, high valuations, "adjusted" rates of return and high expectations. Reversing some of those variables may increase the degree of correlation with other asset classes. In 2018, an analyst described WEC and others as too big to fail. If you compare the share price "charts" of WEC and AWR, you will find that the curves tend to superimpose. Does that mean anything?

Follow-up to replies #351-3. I like wabuffo's example but the buyback does not explain all for AutoZone. Potentially interesting to look at the math behind the decision and the compounding effect. (1+%TR) = (1+%ΔREV)*(1+%ΔNPM)*(1+%Δ of multiple)*(1+%reinv. div. impact)*(1+%buyback impact as a function of a lower share count) The compounding impact is related to the size (continuous or opportunistic) of the buyback and to the discount to IV. One can play with numbers (backward and forward looking). For BRK, there are a few reasonable assumptions and perhaps a major conceptual flaw. For instance, looking back, if BH had used 20B of "excess" cash per year for the last four years in order to complete a buyback: instead of BRK.B at 204 and cash/equiv./ST at 112B, one gets BRK.B at around 260 and cash/equiv./ST at 32B What do you prefer? If you think the old man has lost it and that his deviation from the fully invested mentality is no longer appropriate, you may prefer the second hypothetical scenario. If you think that the Capital Allocator in chief has been considering all opportunities in a rational way, you may prefer the real scenario and see how getting towards the 150B mark with the present BRK valuation has made the job more difficult. Last time I saw an interview with him, he still showed the same charm and folksy nature but I still deeply respect the man and his focus, to the same degree I would respect a man carrying a fully loaded gun. I still don't think he will let go of the cartridges so easily.

Long-term wise, the US potential for growth (and related government revenue) will very likely result in far better returns on stocks than holding gold. For perspective: https://www.thestreet.com/story/10582079/1/warren-buffett-delivers-warning-on-us-debt.html It’s hard to see how this will play out (and Japan and others seem to be able to play with the odds, Italy's 10-yr gov. bond yield=2.84%, Japan=-.05%) but it seems to me that a reasonable way to follow the sustainability issue is to look at the evolution of the debt (public and total) to GDP or how the growth of debt has been outstripping GDP growth (in the US, the developed world and, more recently, China). While it is true that servicing of the debt (despite a growing debt-asset mismatch) has actually gone lower (because of low interest rates), we see the same phenomenon (diverging curves) with Canadian real estate and one has to wonder about potential outcomes. Another way to look at the debt issue is to look at the long-term trend of the marginal impact of debt and GDP (ie how marginal increase in GDP has been “matched” by marginal increase in debt, yoy). Going back over the last 70 years, the curve is noisy but there is a clear downward and convincing trend heading from above one to zero. Why? Admitting that I have a general anti-debt bias and realizing that I may spend way too much time in distressed securities, it seems that, as a general rule, firms that grow a certain level of debt tend to be tempered by increasing yields by the market (although that has not been so preeminent lately given the general easing conditions) and firms that make it through typically have a liquidity problem and not a solvency issue. An interesting aspect with government debt in developed and democratic states is that it tends (under any circumstances) to be very hard to raise taxes and reduce services and the essential liquidity-driven moves made by the central banks during the GFC have been maintained and the persistent easing has resulted in the liquidity issue slowly morphing into a solvency issue for government-issued debt. We’ll all be fine but it may not be a straight line. The best way to escape quicksand is to avoid it. “Remember, earlier in this letter, how I described retained earnings as having been the key to Berkshire’s prosperity? So it has been with America. In the nation’s accounting, the comparable item is labeled “savings.” And save we have. If our forefathers had instead consumed all they produced, there would have been no investment, no productivity gains and no leap in living standards.” (my bold) Mr. Buffett appears to be in a saving mode and he reported 111.87B in cash, equivalents and short-term liquid investments at the end of Q4.

“Elizabeth sees herself as the victim”... In 2015 when facing reasonable questions:"First they think you're crazy, then they fight you, then you change the world." Kudos to John Carreyrou because it must have been, at the time, very hard to question the conventional and rhetorical wisdom.

You were implying that me saying I didn't have enough specific interest in the topic to provide what the other poster demanded was akin to not caring about environmental sustainability and giving up on the future, did you not? It didn't feel like much of a bridge to me. I'm saying that pointing out a common flaw in these debt discussions is the opposite of not caring, it's caring about having a more rational discussion about the issue, but that it also doesn't make me an expert and I won't pretend to be one. It also doesn't mean that I'm in favor of a big debt or that I like the current debt, as I keep repeating. Being against something doesn't mean you should turn a blind eye to bad arguments against it. In general, I've found it difficult to build constructive discussions with you and I take responsibility for it.

^I submit that you're missing my point also: I'm trying to build a bridge and you're not helping.

My point was that the population is growing over time, and the economy is growing too. And thanks to globalization, US businesses now make a lot more money internationally than before. Interest rates are also much lower than before. This is all context. You might interpret this as being a defense of the current fiscal situation or of the level of debt or whatever, but that's not what this is. I don't know enough about the situation to have an opinion on it, because it's not a field I particularly am interested in. I guess it has to do with sharing interests about sustainability. Think about environmental sustainability. Why do people (even smart people) ignore the issue? -other things to worry about -tendency to focus on immediate concerns -interest or knowledge deficit -individual sense of "why bother?" -it's a hoax... Opinion: the fiscal gap trajectory is unsustainable, will have a material impact (eventually) and I will continue to look for disconfirming evidence, here or elsewhere.

I'm in favor of selling California to Mexico. An excellent deal was the 1803 purchase of Louisiana (a nice example of the importance of holding on to valuable assets). What are the assets is a good question: https://en.wikipedia.org/wiki/Financial_position_of_the_United_States Using the four Cs of credit analysis, within the Capacity lie asset-based and cashflow-based (ie GDP) ratios but the most important one remains Character. At least, that's what JP Morgan said at a congressional hearing.

The fiscal gap, like intrinsic value, is hard to figure out exactly because there are so many assumptions. It doesn’t mean we shouldn’t try to put a range on it. :) So, there is some kind of gap that has been growing, call it inter-generational, inter-temporal, “new era” or whatever. The parallel with GE is poor but the idea is that future events will eventually end up on your doorstep. What did GE leaders do when they realized (somehow) that imbalances were growing? Don’t you think it will become increasingly difficult to deal with the fiscal gap issue (whatever strategy or vision) as both ends are becoming more polarized, as leading factions from both sides need to feed their evermore-distanced bases and as raising taxes and/or decreasing benefits will become more and more unpalatable to the general population who don’t spend their days calculating the infinite-horizon present day values of future circumstances? FWIW, The Merchant of Venice is one of my Shakespeare’s favorites, maybe because it deals with the tension that exists between personal contract liens and public policy and because it shows how debt can be dangerous. In those days, debt could mean to be a poison. Now, with our macro-prudential policies, I wonder if debt has not become a slow-acting anaesthetic? Why keep waiting when we know that the ultimate price tag will keep getting larger (absolute and relative basis)? Human nature I guess. Have you read Dow 36,000: The New Strategy for Profiting from the Coming Rise… and Bubbleology by Kevin A. Hassett. If not, here is a short summary: who cares about tomorrow where there is a long line of greater fools? What is fascinating is that Mr. Hassett is now the Presidential Chairman of the Council of Economic Advisers of the United States of America. And then: https://news.gallup.com/poll/246800/record-high-name-government-important-problem.aspx?utm_source=alert&utm_medium=email&utm_content=morelink&utm_campaign=syndication …

The healthy pushback is appreciated. I've learned to respect your judgement but would still push for an appeal in this specific case. :) As far as WIN and Unity, there is now a cloud of uncertainty that is not going away anytime soon. There's a relevant example that may be instructive in relation to this specific case. Norske Skog was a Norwegian paper company that got into trouble after heavy acquisition financing. Perhaps, because of operational and financial bad decisions, they deserved to file for bankruptcy in late 2017 but AFAIK did not use the same strategies as Windstream when facing liquidity issues. During out-of-court restructurings, involvement of "active" debt investors can be beneficial because claims tend to consolidate and valuation ranges narrow down for various classes even if conflicts are expected because of different interpretations and valuation appraisals of various outcomes. For Norske Skog, in late 2015 and early 2016, there was an attempt (IMO that possibly could have prevented the eventual bankruptcy) for a bond exchange offer but, there were three large groups that manifested counterintuitive behavior (similar to what has happened to WIN) and the attempt failed. It doesn't help when some players benefit even if the total value is reduced. The issue is how to deal with informational asymmetries.

A striking feature in this case is that a majority of bond investors followed through with Windstream. Majority votes and related "strategies" are not ideal but may be the best of bad options to align incentives, on a net basis, for all participants. I think its relevant (and so did the judge, who mentioned it) that of the original owners of the bonds in question, less than a majority voted to waive the default. Windstream got a large majority of the bonds that the exchanged into that indenture, but without that (pretty dodgy, imo) exchange, they wouldn't have had the majority and wouldn't have a waiver of the default. The transaction being a sale-leaseback seems pretty straightforward to me, so I doubt that's very likely to change on appeal. Maybe they can get the waiver of the default to stand somehow, that seemed less obvious to me. These are valid points of view. Windstream, it seems, instead of facing head-on the delayed notification of default with litigation decided to try to circumvent Aurelius with an add-on of notes maneuver that would have created (from the indenture) a new "single class for all purposes" including voting and that makes sense from a restructuring point of view but that, in substance, is a 'dodgy' way to deal with the situation, a conclusion reached in the last decision. But. Windstream completed the sale-leaseback transaction in 2015 and, effectively, because there were no (AFAIK) official adverse reactions, was acknowledged with 100% consent from the bond owners of all classes. More than two years after, when Windstream went ahead with more restructuring action (noise at that point that a fixed income activist is involved), a notice of default is sent by Aurelius (relevant questions: when was the bond stake built? and what was their net position on all Windstream-related securities?). I understand that Aurelius held part of only one of the series of bonds and Windstream carry the typical cross-default and cross-acceleration provisions. Think intent and economic reality here. Let's say you held Windstream notes in 2015 after the sale-leaseback transaction do you notify a default or decide to follow the situation? Why? Let's say you held Windstream notes in 2017 after the notification of default. Do you side with Windstream or Aurelius? Why? I would say that the individual intent has to do with maximization of individual outcome and the rules of the games should optimize the net maximization of value for all while maintaining a fair playing field to determine how this maximized outcome is shared. I have followed the CDS market for a while and feel that the regulatory/legal structure has difficulty catching up. More work needs to be done on empty creditors. https://corpgov.law.harvard.edu/2018/08/07/the-rise-of-the-net-short-debt-activist/

I would like to challenge you on that. :) I work under the assumptions that 1-debt over GDP should stop growing at some point (and maybe that point has been reached?), 2-payroll taxes account for only about a third of revenues and 3-aging demographic pattern will cause a disproportionate increase in Medicare and other mandatory spending AND conclude that the fiscal gap has been and, absent major changes, will continue to grow larger and larger. Where am I wrong? This "unfunded" question is interesting. I've been looking into GE (I assume you are also) and have spent some time on their unfunded (assets-liabilities=a negative number) pension situation. Last time I looked, there was a 29B gap and some suggest that the gap is only theoretical and one should not worry if GE continues as a going concern and, in a way, that's fair. But why let such a gap build up? What if interest rates go down instead of up? What if markets fall (for real)? I would say GE will be interesting to follow and boring, it probably won't be, cashflow wise. Isn't it easier to deal with a growing gap early on?

That's a good question. Accounting rules for stock options measure and reporting is a form of compromise. The convention now requires to bring no adjustments to the allocated expenses after the grant date but the principle of incentive alignment between you, the shareholder, and the manager is maintained. Remember that when the stock is down, the same logic works in reverse unless the Board grants large numbers of options at low prices to "compensate" for the expiring stock options previously granted. Stock options are truly an expense and the "true" expense (in the form of foregone opportunity to issue shares at market price), even if unrecognized, will be larger if the company does well. That seems fair. Another mitigating aspect is that the relevant accounts (compensation expense and paid-in capital) will gradually incorporate the new market information over time. BTW, nice avatar.

Thanks bizaro. I saw that but maintain that the issue is not so clear-cut. Out-of-court workouts are tough but, in some cases, sufficient and much less costly than BK restructurings. In this specific case, there is a toxic mix of creditor opportunism who wants to fabricate (or at least time) a default and debtor coercion who wants to fabricate a consent. During this workout, distorted negotiations were expected but my point is that the holdout problem that arises from a specific participant may be related to a private agenda possibly tainted by a conflict of interest. Pure application of contract law may not work so well here. A striking feature in this case is that a majority of bond investors followed through with Windstream. Majority votes and related "strategies" are not ideal but may be the best of bad options to align incentives, on a net basis, for all participants. In terms of where the money is in this scenario, the outcome has a binary nature with retro-active implications that will get more and more potentially adverse over time, and the outcome may have something to do with who is sitting on the bench, which is hard to discount. Also, uncertainty (increased now) will persist and will put pressure on the cost of capital (both Uniti and Windstream) in industries where the cost to access to market often makes the difference.

These depictions are interesting but like the mandated publicity on cigarette packs (black lungs, photos of people on chemo etc), the sensational aspect wears off quite rapidly, especially if you're addicted to nicotine. This is truly a bipartisan problem/issue and here's a graphic link with relevant info also about military spending. It seems to me that a combination of expense reduction and revenue increase is doable. https://www.debtconsolidation.com/us-debt-presidents/ With all the talk about decline (Mr. Munger etc), it's noteworthy to remember that it's not the persistently high military expenditures that broke Pax Romana, it's when the Romans' intrinsic capacity to generate revenue declined and when they had to outsource protection at the borders of the Empire where the Barbarians were waiting at the door.

This is indeed a very interesting situation. After some thought, I wonder if Windstream has a decent shot at a successful appeal. The decision's foundation rests on the literal definition of the sale-leaseback transaction, listed as a negative covenant and the logical outcome of default, with retro-active effect. The result of this judgement, if it stands, will result in a (undefined) benefit to Aurelius and a potentially negative outcome for others. The outcome may be the result of emphasis of form over substance. A conceptual way to evaluate what Winstream did is to see it through the lens of a succession of out-of-court restructuring attempts to get through a temporary period of distress. The economic reality of the 2015 transaction quite clearly corresponds to a sale-leaseback transaction but the delay before any debt holder officially notified the issuer suggests that there was an implicit consent and the second phase of the restructuring (the 2017 bond exchange transaction) was also met by consent from most bondholders. The intent of Aurelius, when they sent their notice of default in September 2017 and invoking a chicken or egg question, linking the 2017 and the 2015 transactions, could be interpreted as a way to cause a default in order to benefit. By waiting before reacting to the 2015 transaction, my take is that Aurelius provided a tacit consent to the ongoing restructuring efforts and forcing a default by referring to a previous event effectively prevents Windstream from completing out-of-court restructuring steps that could have maximized the outcome for all participants (equity holders, debtholders, partners, workers, community etc). Also interesting to see that Aurelius was sitting face to face to Elliott Management, in this specific case. Just my 2 cents.