Cigarbutt

Here's a more recent reference: http://www.chrisleithner.ca/newsletter/2016-2018/nov18_newsletter.pdf The author seems to be on a mission and there are red flags vs objectivity but the part covering climate change and catastrophe loss exposure is relevant and useful IMO. The underlying fundamental point is that insured losses have come up over time and this increase can be explained, at least partly, by urbanization and growing concentration of property value but, as a ratio, insured losses to GDP has come down. So, despite headlines which tend to link catastrophes to "climate change" and tend to be sensational (as they should be to a certain degree), the "losses" profile related to catastrophes (human and financial) has been improving. The major risk remains unpredicted, and sometimes unaccounted for, variability. Work in progress.

^"And the entire bond portfolio for a company with $736 Billion in invested assets is $17.8 billion at cost ($18.3 at market). An insurance company with a 2.5% allocation to fixed income." And within that fixed income category, 40% is due in less than 1 year and 50% in 1-5 years.

BTW rb, I also appreciate your inputs, especially when I agree with you, something perhaps I should do more often. :) The constructive aspect is to build on something else or to bring another perspective, which may have a component of disagreement. I like the way you picure float. Another way to value float is to combine its dual nature. One can see the value of the float as a portfolio of set aside funds recorded on the asset side and adjusted for by a contra account of liability reserves which can be discounted to a large and varying degree because of time value and also because of the potential cost (negative) and growth of float (both the liability side and the asset side). Every float profile is different. For instance, looking at numbers from a certain perspective, the Geico acquisition (49% of what was left) in 1995 implied a discount of + or - 50% on the float liability. Since then, float at Geico has compounded at about 7-8% per year, in a profitable manner. Recently, BRK completed the acquisition of MLMIC, a professional liability insurer based in New York. Looking at numbers, it seems that the acquired liability float was only slightly discounted. Interestingly, it is reasonable to expect comparable returns going forward after acquisition in both scenarios. Comment on BRK's "huge" bond portfolio in the "reserved" funds recorded on the asset side. I see what rb means (cash, bills and bonds + or - match the liability reserves) but technically the "bond" category is very small at BRK (about 15-16% of liability float). In fact, apart from Fairfax, I don't see any insurer even close for comparison in terms of financial flexibility if or when needed. In terms of valuation of the float (which can be done many ways), a possibility is to include an option value for this aspect which, for instance, may mean the ability to grow profitable float inversely to what others could do under certain scenarios.

The underwriting is very strong and reflective of a longer term trend. IMO very strong Q3 underwriting results on an absolute and relative basis. Florence cost 71.9M with most of the cost spread evenly between Brit (30.8M) and AW (27.6) with only 7.5M at ORH. Advent has been morphed into other units and in runoff with the Lloyd's platform "reforming". NPW growth is getting lower yoy (AW actually down 4.1% yoy) and actually down from the previous quarter. The subs remain very well capitalized and reserve releases continue unabated. A significant runoff deal will accrue going forward. Will listen to the conference call to better understand their investment strategy and outlook.

Hi muscleman, The thing with equity funds is that, over the course of the year, the fund will buy and sell various securities within the portfolio. If this trading activity generates more realized gains than losses, the fund will distribute capital gains to investors at the end of the year, so if you buy units of an equity mutual fund before year end, you're also "buying" the embedded tax liability related to the capital gain that is already reflected in the unit price. This is not an issue with the money market fund as, by definition, securities are short-term and held to maturity. If you are a "foreign" investor, you may want to remember the exchange rate effect which is taxable. Also, you seem to worry about the 0.01 spread on a price of 91.46 (0,01%)? If you are chasing for yield :), just put your price at the low end and it will likely fill during the day. Maybe this is obvious stuff for you, but you may want to look at how these securities "behave" over time. When you buy a bond, you have to pay accrued interest separately. With these money market units which typically have monthly distributions, accrued interest is not paid but the "market" derives this and the price will typically go up in a pretty linear fashion until the next ex-date is met. For fees, read the prospectus Hope that helps.

Interesting data form the latest (October) survey by the CMHC. -in the main, sentiment remains positive. -85% of first-time buyers spent the most they could afford on their home. -About 40% of buyers do not have a monthly buffer in their budget. Of those that do at least 50% (64% for first-time buyers and 50% for repeat buyers) buffered $300 or less per month. Of note, the average annual Canadian household budget for lottery tickets is also about $300 but the average masks the skew as the lower income earners (who typically rent) spend more than the average on lottery tickets implying that higher earners have better capital allocation skills. https://www.collaborativefund.com/blog/no-one-is-crazy/

Thank you for the link which I just reviewed. Also led me to the following conversation: https://www.mlmic.com/blog/physicians/warren-buffett-on-protecting-physicians On the expectations about the joint venture (It feels like Columbus looking for a continent... and we don't really know where we're going...expect failures) I find that it's the good 'ole way to manage expectations. It feels the same when one reads the early partnership letters concerning investment return expectations... Atul Gawande also shares this capacity to hide the drive behind humility. But it's there. Also interesting because, during the interview, Mr. Buffett clearly said that the cash cushion at BH was still 20B. Something I had not heard for some time and expected to be higher as insurance operations have grown somewhat in the last few years.

Titan Pharmaceuticals is in the right spot but does not seem to have the right product. The bill is the result of a reasonable bipartisan effort which, by itself, deserves at least some praise. To help in evaluating entrants which could eventually benefit, interesting to look at the different paths: -primary prevention: avoid occurrence of the problem -secondary prevention: intervene in the early stage(s) of the problem -tertiary prevention: mitigate the impact and complications related to the problem You may want to look into naloxone (and related products) which is used in acute situations (tertiary prevention). The bill has provisions for the use of naloxone by first responders. If you have ideological unease with this aspect, I have too just as I felt unease when the TARP program was approved. Interesting also because, some "experts" suggest to look into a recently defined quaternary prevention which imply using methods to mitigate or avoid results of unnecessary or excessive interventions in the health system which brings you back to primary prevention which is where the money is. Of course, primary prevention has to do with how your "environment" deals with mental disease and general socio-economic distress, two factors that are unlikely to hurt your investment returns, at least in the short term. Have you been to Vermont? I often go there for reasons unrelated to investment. They just tend to be nice people. https://www.vox.com/policy-and-politics/2017/10/30/16339672/opioid-epidemic-vermont-hub-spoke

^The topic does often come up and there have been some equations suggested to discount the liability. I wonder if the discounting exercise applies to all insurers as the underlying principle means a long term capital commitment related to underwriting discipline. Recently reviewed transactions completed in the non-life insurance runoff area (including by Fairfax) over the last few years. Interesting because the acquirer, in these transactions, aims, in a way, to decrease the advantages related to float: 1-cost of float The acquirer aims for a low cost of float instead of a negative cost of float. 2 and 3-discounting and growth The acquirer aims to accelerate the runoff (active management of claims, commutations etc) and to bring the number of claims to zero. Despite the above, it is possible to buy a runoff book of business at book value (assuming "adjustments" to reserves, strong claims management and superior investment ability) and obtain a satisfactory return. So, reserves liabilities at BH deserve a significant discount. However, unless in a last man standing scenario, growth in float should moderate and float to shareholders' equity has been decreasing and stands now at about a third. When looking at other insurers, interesting to compare the investment leverage (float per share) and to multiply that number by a factor related to excess return expected (or absence thereof) related to superior investment ability. The discounting exercise for BH (balancing float assets and reserve liabilities) also helps to evaluate how much cash could be converted to stock investments if stars align. I would say about 30 to 40% of cash float could be used pretty much overnight.

Thanks for the link. The question is limited to one state but may represent a larger current. I live in a place where electricity is essentially a vertically-integrated regulated monopoly (wholesale and retail) with hydro responsible for more than 90% of electricity needs and with policies in place favoring low and uniform prices and in a relatively steady place versus the socio-political sphere. But I really like what has been going on in the US considering the experiments with various deregulation plans. It's noisy and sometimes disruptive and inelegant but it seems like it's the best way to go IMO. What is happening in Nevada (it seems like the ballot item will pass?) may be part of more to come at the national level and underlines the risks of transition costs and partial recovery of the value of stranded assets and I guess BH can manage transitions but investments in regulated utilities does rely on trust versus potential regulatory harm. The context in Nevada is fascinating with the recent residential solar issues and the ballot question does not go along traditional political divisions. I've looked into the issue, from a Nevada perspective, and come to the conclusion that it is very hard to decide what is best on a net basis for "society". In terms of consumer costs, I wonder if the Nevada experience would look more like California or more like Texas. I would tend to vote against the trend and for BH (bias here) because of the traditional reasons that it has used to justify the venture into regulated utilities (efficient operations, low cost of capital, reasonable rates of return, long-term outlook with stable and low retail prices and flexibility for alternative sources of energy and environmental concerns). Found the following to be useful: https://guinncenter.org/wp-content/uploads/2018/07/Guinn-Center-Q3-2018.pdf https://guinncenter.org/wp-content/uploads/2018/07/Guinn-Center-Q3-Voter-Guide-2018.pdf But this is not simply a story about two billionaires.

You make good points. Just want to add that technology can go both ways. Have heard of this from the local media but it seems to be gaining traction. It's called Hopper and will likely be included in my planning process. https://www.hopper.com/research/bunny-saves-money/ https://www.forbes.com/sites/kathleenchaykowski/2018/04/10/the-vacation-predictor-how-the-fastest-growing-flight-booking-app-is-using-ai-to-transform-travel-hopper/#65069ec323bd

Whether one agrees or not as an individual, is it not reasonable to expect increasing pressures to deal with perceived or true externalities? Historically, efficiency gains have not been sufficient to reduce variables like CO2 emissions because of volume increases (trade and number of passengers). Air transportation is so much less efficient (CO2 emission per tonne-kg) compared to maritime transport (10x less versus heavy truck and 30x less versus cargo) that IMO it makes it an obvious target for increased regulation and taxation. Right now, maritime transport accounts for 90% of volume of global trade and is associated with an about 3% share of CO2 emissions, which is only slightly more than for global air transportation. Our world is changing and the rules of the game will be redefined. Here are two "visual" references that show how global movement has changed and where it is today. https://www.shipmap.org/ https://www.theguardian.com/world/ng-interactive/2014/aviation-100-years

Possibly, there is a coming paradigm shift that only a few can see and there may be pockets of opportunity but the paradigm shift, if it is to manifest itself, must include a scenario of low growth and low volatility of fuel costs and a departure from the historical competitive rivalry that has existed for, at least, the last 50 years. Revenue growth and productivity gains have essentially been captured by different participants along the value chain (including the customer who complains about poor relative value...). For fun, just checked the price for a Montreal-Toronto ticket and what I could get today is, in nominal terms, comparable to what could be obtained decades ago. An argument can be made that service received is less and hidden fees have become the new normal but there is no question that the price/value proposition has tremendously improved, very much at the expense of the airline industry equity holders. https://www.mckinsey.com/industries/travel-transport-and-logistics/our-insights/a-better-approach-to-airline-costs When looking at the value chain and competitive landscape, the overriding conclusion that seems to remain is that the industry has been characterized by high cyclicality (both demand side and volatile input costs), high capital intensity and very high degree of competition based on a product which remains, essentially, a commodity. The labor issue that KJP mentions is discussed in the following document (page 24). I understand that it is a factor but would say that it is not the major one. Last time I looked, the proportion of crew costs over total costs per block-hour of operations was typically slightly less than 20%. https://www.iata.org/whatwedo/Documents/economics/profitability-and-the-air-transport-value%20chain.pdf In the above article, the conclusion seems to say that the value chain needs to be fixed and investors are expecting higher returns compared to historical trends but one doesn't spontaneously always get what he/she wants or needs. Looking forward to opposing views and would look at specific opportunities but otherwise the airline industry will remain in no man's land.

The hazelnut topic has to do with what Peter Lynch has suggested: Buy what you like (and understand). :) If you don't allow me to discuss hazelnuts, what is there left? Writing a poem about blockchain and cryptos? ;) Anyways, thanks for the geo-political analysis of Turkey. I'll be able to skip Le Monde Diplomatique and spend the day outside. To the point, your posts are always dense and powerful. I'd wish to have this talent.

Roasted hazelnuts are awesome. I know somebody who works at Ferrero's HQ in Alba and I understand that Nutella's flavour and aroma are related to a molecule called filbertone (among 37 others!) which is also used in perfumes and cosmetics. Global sourcing of hazelnuts is an issue as reports mention that Ferrero needs anywhere between 25 to 50% of global production. Remembering that Mr. Buffett once invested in cocoa beans, if you have time, could you elaborate about the bolded part? https://www.npr.org/sections/thesalt/2014/09/16/347749070/thanks-to-nutella-the-world-needs-more-hazelnuts https://www.reuters.com/article/us-agriculture-hazelnuts-ferrero/nutella-maker-ferrero-seeks-to-crack-turkish-grip-on-hazelnuts-idUSKBN1D22L4

Paul, You make it sound so obvious. I was following market developments then with quasi-autistic obsession, but was confused at least half the times and never even considered the possibility that there would be a run on the money market. Relative sleep deprivation and lack of perspective could explain some of that as I was only partially retired then. Reliable reports (including from the SEC) have been made, describing that these funds threatened to break the buck at least on 300 different occasions since the 70’s and the 1994 episode barely broke the buck and the fund was “tiny”. In 2008, what was different was the run. Fascinating when you think about it because it shows how close we came to the brink as these funds are short-term in nature and the run literally occurred on the part of the money market that was responsible for overnight (less than 24h!) funding of large structural and foundational aspects of the US (and world) economy. Consoling to compare, in terms of poor capacity to anticipate events, because important people also seemingly were still dancing: -from the CEO of the “Reserve” fund that “caused” the run (letter from early 2008): “[T]he tenets that define a money market fund: sanctity of principal, immediate liquidity, a reasonable rate of return– all while living under the overarching rubric of boring investors into a sound sleep.” -from a review (pieces of a puzzle) --September 14th, 2008, GE sends a reassuring a letter to investors (I wish I still had that letter and it has “disappeared” from their website). From memory, things were hunky-dory and access to credit markets was robust. --September 15th, 2008, GE CEO phones Mr. Paulson and explains that funding has become difficult as lenders’ maximum maturity extend to the next 24 hours. So, over 24 hours, the 24-hour outlook darkened considerably. Of course, dominos had started to fall and things were more fuzzy than the above description and, somehow, GE most likely had been preparing plan B, C, D etc and legend has it that Mr. Buffett authorized his 3B “bail-out” early the day of October 1st, 2008 dressed in his bathrobe when more unexpected events were to occur. @muscleman Probably the best response would have been to let go but FWIW here’s a brief answer submitted mostly because you asked. I think there may be a last puff in there. Reading today how people feel superhuman driving a car, I’ve become particularly humble and sensitive to fallibility. Also writing this makes me realize how much luck has been the predominant factor in trades previously made in government bonds. Since 2010, I have opportunistically and recurrently realized very significant gains from buying and selling long term US and CDN bonds and, since 2016, there is a residual allocation of about 10%. From a certain conventional perspective, with the mind-blowing flattening, a long-short position could be considered (short long-term bonds and long short-term bonds) but conventional is not always right. If you are into multi-dimensional analysis, conventional thinking in risk-free bonds now reminds me of what is expected in multi-stage rocket technology ie the rising short term rates (first stage) in substance means that the energy (assuming no fuel leakage) will be transmitted, through higher long-term rates, to the second stage eventually allowing the economy to reach escape velocity. Humble evaluation of this reveals that the quantitative operation will be delicate and alternative scenarios should be considered. There is a very significant possibility of being wrong here and I’m no rocket scientist but, in terms of a potential asymmetric bet, I find that, among other downside risks, the value of the open-ended equity put embedded in long term “risk-free” government bonds could be mispriced. Some say that “riding the dragon” can only be experienced once but, from limited personal and very natural experiences in investing, the last puff is often the best one. I do not plan on expanding here as unconventional discussions can reveal how one is stupid, really.

I understand that the SEC requires maximum maturities of 13 months or less and average maturities of less than 90 days for money market funds. For your curiosity, the times, they have been changing. https://fred.stlouisfed.org/series/TB3MS https://www.bloomberg.com/markets/rates-bonds/government-bonds/us Wow this is mind blowing. How can the short term rate be so close to 30 yr rate? Hmm... Indeed. But is it fundamental or is it sentimental? Luckily, after all the fundamental work, was able last night to finally figure out the interest rate conundrum and will be able to follow Spekulatius' advice to stop worrying about "economics". The path of interest rates is related to the central bank leader's stature: https://forbesfinancialonline.com/will-hawks-take-control-2018-bond-market-perspectives-october-24-2017/ Still a nagging thought though because mind-blowing has two meanings: -overwhelmingly impressive. or -inducing hallucinations. The money market is dead, long live the money market.

I understand that the SEC requires maximum maturities of 13 months or less and average maturities of less than 90 days for money market funds. For your curiosity, the times, they have been changing. https://fred.stlouisfed.org/series/TB3MS https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

^For various reasons, home ownership has followed the same curve as the US, but on a slightly delayed basis. An argument can be made that a segment of the population (lower middle class and upper lower class) were "encouraged" (low interest rates, various policies etc) to buy homes in an unusually favorable environment. Regular folks who don't read the FOMC statements gradually realize that homeownership is no longer affordable and see rising interest rates at a time where wages are not following the cost of living. A similar scenario is playing out for people making (financing) car purchases. https://www.huffingtonpost.ca/2018/09/08/canadas-tradition-of-homeownership-is-at-risk_a_23520973/

No inside or privileged information. I have followed Mr. Volcker (with respect) and have compared, for pushback, to others such as Mr. Greenspan, on how one can/should evolve with thinking (keeping what is essential and getting rid of nuisance) and infer rather indirectly that he has his share of ailments for his age and have found that he has tended to speak in terms of legacy which usually corresponds to one feeling his own end coming. An interesting part that has filtered around the publication of the memoirs and which is relevant to the noise heard about others who have recently published material potentially tied to vested interests, is that it appears clear that noboby (the publisher, the editor, or any other) could have told Mr. Volcker what and when to write. https://dealbreaker.com/2017/10/paul-volckers-memoir-will-be-less-arousing-than-warren-buffetts/ When asked about the motivation behind the ultimate piece: ""I had no intention of writing a book, but there was something that kind of was irritating me," he said. "I'm really worried about this governance thing." These people have huge responsibility, have to deal with diverging interests and deserve a lot of respect. I thought Mr. Buffett expressed an aspect of this fiduciary responsibility in this video (2012). https://www.youtube.com/watch?v=bPk0UFKHEHs Mr. Buffett has a way to wrap tough messages into softer choices of words but he seems to say that a man's got to do what a man's got to do.

I just need a cash sweep vehicle to park my cash temporarily as I am looking for stocks to buy. I am not looking to hold cash over the long term. Same here. :) But basically what you're asking is if it matters if you wear sunglasses when crossing a narrow and quiet street (vs being hit by a car). The risk remains extremely low but, from my point of view (risk and reward), I don't see why you should hold commercial paper in your cash-equivalent vehicle. Black swans are rare by definition but occasionally weird things happen. https://www.bbc.com/news/blogs-news-from-elsewhere-45938724

Not sure I can build a constructive discussion here (and I take responsibility for it) but I have a question. This is about sharing the gains and the pain but, in a previous post you mention: "Oh yeah, and all Presidents push the Fed. Maybe less publicly but, when the big guy tells you to do something, you tend to obey. I actually think that words behind closed doors are stronger than what Trump is doing: Trump will get backlash if the Fed bends." Can you elaborate on the bolded part. Asking because of an article I read recently. I won't refer to it directly because it is coming from a "source" which is quite typically biased and the article itself focused primarily on form (irrelevant personal details) over substance but the title was: "Trump Vows to Continue Trashing Jerome Powell Until Fed Chair Bends to His Will". BTW, I plan on reading Mr. Volcker's to-be-published memoirs. Because of his personality traits and seemingly impervious nature to biases, the value of the thoughts may be particularly significant because he is 91 and dying.

Hi muscleman, Not familiar with the specific instruments you mention but will offer the following comments: -it seems "money market funds" are very variable and one needs to look under the hood to see the composition of assets and some funds have an unusually high level of commercial paper which occasionally can surprise (on the downside). -these funds "break the buck" relatively frequently with unexpected bumps but sponsors typically "bail out" the temporary liquidity issue and it's no big deal. -what happened in 2008 with Lehman failing and with nobody knowing exactly what short term commercial paper was really worth (remember GE?) was highly unusual and could not last. Government intervention was quasi-automatic (even if nobody as far as I know had considered this possibility) as a failing money market meant basically going back to barter trading. With government backing, confidence came back and the buck was no longer broken. -with "risk-free" rates having gone up quite a bit in the last few months (3mo: 2,30% and 6mo: 2,46%) and if your opportunity cost for this category of your funds is 1,6%, why don't you go with plain vanilla stuff like SHV (minimal duration risk) or SHY (low duration risk)?

The value of rest appears to be underestimated. On a related note, in sports science, you may appreciate the concept of supercompensation that can only happen after an adequate amount of rest, regeneration and recovery. https://en.wikipedia.org/wiki/Supercompensation http://skitrax.com/supercompensation-what-is-it-good-for/ The best time for a competition or an investment decision is after a good night's sleep. In the building on previous work domain, I think Newton called this phenomenon standing on the shoulders of Giants.

Fascinating question and would add that future opportunities will come from what is available at a cheap price wherever that may be. Your question is difficult to answer because one has to rely on what is written between the lines and is subject to personal interpretations. I guess we all have, to varying degrees of formalness, a list of owned stocks and a watchlist tabulating the ratio of price to intrinsic value, that we update on a regular basis. For Mr. Buffett, this may be recorded in a book slipped into his drawer but may simply be in his brain. The 1979 annual report has useful comments (annual performance based on investments at cost and longer term performance OK with investments at market value) and more recently, Mr. Buffett has described his 2-column valuation "model". If interested, Mason Hawkins at Southeastern Asset Management periodically discusses this aspect when "monitoring" portfolios. As value investors, typically, our recorded price to intrinsic value ratio should be below one as we allocate entries and exits in our portfolios. At Berkshire, there is a long term mindset and the turnover is relatively low but, in the main and long-term wise, the market has recorded the closing gap between intrinsic value at acquisition and at every year-end reporting. All that to say that I suspect the price to intrinsic value ratio at Berkshire is below 1 but not by much, especially since it has grown so much and because of present circumstances. Wondering if Mr. Buffett makes adjustments or not, would say that the price to intrinsic value for marketable securities held may have gone down to some degree when capital constraints are felt and when maximum pessimism abounds (time for juicy returns, especially in the early days but also more recently, to a lesser extent) and may have come closer to one in different 180-degrees scenarios. However, I don't think Mr. Buffett needs to make adjustments, especially for the more recent period, for the following conceptual reason. My understanding is that the cash position at Berkshire tends to "naturally" increase when the price to intrinsic value gap decreases in BH portfolios. This happens because, despite cash being associated with an opportunity cost, I assume that Mr. Buffett considers that the temporal optionality value provided more than compensates for the opportunity cost and "naturally" allows to benefit from the widening gap opportunity occasionally seen. In summary, I think Mr. Buffett does not adjust for the fluctuations of the intrinsic value gap for the marketable securities in his portfolios because of his long term and opportunistic valuation approach using financial flexibilty as an input. As an aside, the recent "evolution" on the buyback stance may be related to evolving thoughts on the present opportunity cost of cash and the opportunity set (or absence thereof) on the horizon.