Cigarbutt

https://www.cfainstitute.org/-/media/documents/study-session/2018-l1-readings.ashx?la=en&hash=CF0C95241ECE0CB2F0A4F70F94D6CBA5E3E0FB00 Section VI: Conflicts of interest B. Priority of transactions http://www.portfoliomanagement.org/wp-content/uploads/2011/04/CFA-code.pdf Section C: Trading 2. Priority

The project is taking form with one more addition. https://www.healthcareitnews.com/news/amazon-berkshire-jpmorgan-venture-hires-bcbs-it-exec-dana-safran-data-driven-position https://aboutus.bluecrossma.com/affordability-quality/alternative-quality-contract-aqc https://nam.edu/wp-content/uploads/2018/07/5.3-Safran.pdf Her title could have been chief of incentives alignment and she could be seen as capitation with a smile. Her task will be to try to tackle the price/value proposition.

Given those assumptions, your conclusion appears to be reasonable. Historically, relative divergence has occurred but interest rates and inflation measures tend to move in unison. Along the scenarios that you may want to consider and under the sub-group of what may prompt the Fed not to raise rates, you may want to assess other non-market forces which could be very vocal and the possibility that lower growth and not so great expectations about growth may cause the Fed to even consider lowering rates, perhaps big time, even if that's not part of the conventional discussions at this point. BTW the table found in Figure 5 is a tool I have used often for many different problems, investing or otherwise. You combine two essential variables for a particular problem and the table helps you to define 4 groups of outcomes. I thought this was useful and helped compensate for limited analytical capacity and recently found out that Peter Thiel (in Zero to One) uses a similar approach for some problems.

Another perspective: Think of the yield as a real yield + inflation (CPI). If you hold to maturity, you get inflation protection (floating rate) and minimum par value but, in the interim, you remain exposed to the interest rate risk on the fixed component. I kept the following for reference: http://www-stat.wharton.upenn.edu/~steele/Courses/434/434Context/TIPS/TipsGE2005.pdf I like figure 5 on page 4 for conceptual reasons. Take a look. The breakeven notion that TwoCitiesCapital refers to is well explained. In the last year, real yields have risen and CPI is close to where it was. Look also at FRED data: 10-Year Treasury Inflation-Indexed Security, Constant Maturity

All your points are valid and have nothing further to add. The future, as always, is uncertain but, from my perspective, full of confidence and eyes wide shut, I would say the best is yet to come. Wherever we may sit, let's enjoy the ride. CF

I solve this problem by never averaging down... This is very smart. I have wrestled with this a number of times. Nearly every time I have averaged down in the last few years I have gotten stung. Stock A looked real good at my buy in price, therefore, it must be better at a cheaper price. The problem arises when the position gets bigger and bigger, and keeps dropping in price. And then it drops way beyond any expectation I could have dreamt up. At this point I should buy more after all: "there is blood on the streets, we should buy at the point of maximum pessimism, If it was a good buy 50% higher then its a great buy now... etc." ... A case in point for me is Whitecap Resources (WCP-T). On this I have averaged down. It was all well in good when it was trading at 7.50 to 8.50 but it is now at 5.50 and I have too much in it. In order to right size the position I will end up selling a good chunk on the way back up when I hit break even. The position is just too large to carry for very long comfortably. I still believe that WCP is a great company but I dont want to hold the whole company. When I really crunch the numbers honestly the amount I will make on the way back up from averaging down will not be very much, IF there is a back up. By averaging down I have reduced my aggreagate purchase price from perhaps 8.50 to 7.20. Is it really worth it to get trapped in a position, for who knows how long, to make a spread of 1.30. I have concluded that it is not. For me position sizing is the most important thing now. Its a tricky thing to figure out but I try to do the best I can. Once I figure out the right size for a position it is best to stop and ignore it. Its hard and takes discipline... My experience with averaging down has been quite consistently satisfactory and I wonder why. From FFH AR 2011, experience with International Coal: As an example of our long term value investing approach and the need to be patient and calm through adverse market fluctuations, in the table below we show you the results of our purchase and sale of shares of International Coal. This is a company of which Wilbur Ross was Chairman and owned 16%. Our Sam Mitchell, who originated this purchase idea, joined the Board in 2008, after we had acquired 13.8% of the shares. -Purchases of International Coal Sales of International Coal Number of Shares (millions) Cost per Share Total Cost 2006 1.4 $4.58 6.4 2007 19.7 4.39 86.3 2008 9.1 1.81 16.5 2009 15.0 2.87 43.1 Total 45.2 $3.37 152.3 -Proceeds per Share Total Proceeds Number of Shares (millions) Cost per Share Total Cost 2010 22.6 $7.26 163.9 2011 22.6 14.60 329.6 Total 45.2 $10.93 493.5 Total realized gain: 341.2M The table shows how we averaged down from our initial cost of $4.58 per share to an average cost of $3.37 per share. We sold half our position at $7.26 per share (a 115% gain) and only five months later, there was a takeover offer for the whole company at double that price. In spite of not buying only at the low and not selling only at the high, we earned $341.2 million by selling at over three times our cost. Our experience with International Coal is exactly what we have done over 35 years of investing – average down when buying and average up when selling! An added advantage in this case – we got to know Wilbur and he is an excellent partner. Obviously the excerpt is a selection of a selection bias but I could put up similar tables for my gradual involvements in Fairfax, OdysseyRe and The Brick among others, including some cyclical stuff. Maybe it's just luck and I agree with others about checklists, slow thinking, writing down etc but I wonder if the factor you mention about position sizing may not be an important determinant ie deciding in advance about a potential maximum percentage of portfolio with quantitative triggers (price vs intrinsic value) on the way down and up, hopefully in that sequence. I think Newton did the opposite once with his South Seas investment but that's another story and maybe by quoting the difficulty of quantifying the madness of men, he was the father of behavioral finance. A clear potential disadvantage with this strategy is the implicit need to have available fire power and this perhaps ties in with what SharperDingaan is trying to explain in a different thread (house money etc). Take the above with a grain of salt as I seem to become more and more confused in today's markets.

^Interesting value-based insight. From the 2003 annual meeting: Buffett: The Black-Scholes model is an attempt to measure market value of options. It cranks in various variables, mainly past volatility of the asset involved, which are not the best judge of value. ... Berkshire had a very low beta – experts like to give complex Greek names to simple things – but that doesn’t mean the option value to anyone who understood it was lower than another stock with higher volatility. As Charlie said, Black-Scholes can give silly results over longer terms. Last year, we made one large commitment in which somebody on the other side was using Black-Scholes and we made $120 million. We love the idea of someone else using mechanistic formulas. They may be right 99% of the time, but we can pass 99 times and only invest the one time they’re wrong. Munger: Black-Scholes is a know-nothing system. If you know nothing about value – only price – then Black-Scholes is a pretty good guess at what a 90-day option might be worth. But the minute you get into longer periods of time, it’s crazy to get into Black-Scholes. For example, at Costco we issued stock options with strike prices of $30 and $60, and Black-Scholes valued the $60 ones higher. This is insane. Buffett: We like this kind of insanity. We will pay you real money if you deliver someone to our office who is willing to offer us three-year options that we can pick and choose from. ----- Whether it's options or else, the market is there to make offers and it's up to you to figure out if it's a good deal.

If you're interested: https://www.cfainstitute.org/research/foundation/2013/fundamentals-of-futures-and-options-corrected-april-2014 I guess section 5 (67-97) in the downloadable pdf book contains the relevant pricing info. On page 91, you'll find what rb referred to ie using call-parity to derive the put value from the call value. The section may also explain well how to use BSM even for American options (with the underlying paying dividend) because early exercise is rare (early exercise of puts is more frequent).

This topic brings mixed feelings. The growing proportion of political posts is problematic. At times, I found it useful to wait 24 hours before contributing and realized that the post would have been superfluous or even stupid. The questions I ask myself: Is it necessary and is it relevant? Hoping for a good outcome.

nickenumbers, The issue you describe was debated when Mr. Buffett discussed his investment (as a seller) in long-term European-type put options on various stock indices. The BSM model works well for approximations (especially short term) and its use is commonplace so it can be used as a language (which Mr. Buffett supported for interim reporting purposes). I also have used "adjusted" approximations like wabuffo describes. Mr Buffett's point, I think, was that the implied volatility used as an input (which is derived from the market itself with the obvious risk of circularity) gave a put price which deviated clearly from expected historical results and common sense (inflation, retained earnings etc) and that this probable deviation was more likely to occur with long term puts because the inherent approximation gets larger with a long term outlook. Mr. Buffett IMO simply decided to take advantage of that opportunity which was not guaranteed to result in a profit but was associated with a significant possibility of reaching an excellent return. The space-based navigation systems usually work very well but sometimes (if you keep your eyes on the road), it can be beneficial to override the system. I'm not sure what you mean with your post and call question but put options on equities are usually more expensive than call options on equities because, in the main stocks tend to go up but, when they go down, they tend to do so faster, with obvious repercussions on "volatility".

The NHS in Britain is state-run. The German example is instructive. If reform is considered in the US, the German hybrid system perhaps has something to offer. Interesting though if one looks through the prism of historical path dependency, I understand that the present healthcare "compromise" in Germany essentially rests on a set of political decisions taken after the Franco-Prussian war! Interesting also because the man behind the scheme, Otto von Bismarck was conservative, authoritarian and anti-socialist. The idea was to quiet the agitation of the populace in order to make it as a country. In 1883, he passed a law requiring laborers to insure themselves through sickness funds complemented by an employer contribution. The system has evolved but its foundations have remained intact to this day. The scheme is not perfect and some want more "reforms" but I sense that most Germans are happy with it. Do I get this right? The way the German healthcare system functions may be a more palatable inspiration for the US because it means that the core societal values (personal freedom and responsibility etc) are maintained. Bismarck was able to introduce the concept of solidarity without naming it. But he was awfully shrewd.

From recent surveys, the percentage of US respondents who: -would support single-payer system managed by government: 60 to 70% -would distrust the government always or most of the time: 60 to 70% ? From a recent survey: What is meant by a health insurance premium? 24% responded the best type of health insurance you can buy or a bonus you get at the end of the year if you stay covered. ?? Food for thought: Definitions of affordable: a)inexpensive to buy b)inexpensive to maintain

Fair enough. To maintain is as difficult as to accumulate. You may also consider the possibility that concentration of wealth may have been a factor behind the decline of the pharaonic Egyptian dynasties. But if you try to quantify the rates of change and the more recent trends like Ray Dalio does, the concentration at the top and the resistance to bringing new blood seem to be reaching plutocratic levels. And the cavalier attitude too. The let them eat cake persona. https://www.bloomberg.com/opinion/articles/2018-07-10/rich-kids-inheritances-will-last-many-generations Especially since the great bailout crisis, have you looked at statistics related to family offices? There are many motivations behind a family office but one of the basic aspects of this growing phenomenon is to systematize a retention program, ie prevent Junior III from doing too much damage too rapidly. The deal comes with multi-generational wealth management and has a component of philanthropic activity to give the whole thing a veneer of respectability. https://www.capgemini.com/wp-content/uploads/2017/07/The_Global_State_of_Family_Offices.pdf Swamps come in different varieties and an argument can be made that a certain amount of wetlands is inherent to any semi-organized ecosystem. In hunger games type scenarios, the biggest swamps are not the most visible and are typically inhabited by people wearing suites who know the rules of rulers. Capitalism and free markets need sufficient mobility, otherwise the transporting medium becomes stale and murky. I would submit that self-regulation should be considered because the historical pendulum does swing. The present level of concentration and immobility is based on a trickle-down philosophy. One day, the harvest will be poor. Looking at recent historical trends and being a relative contrarian, under certain scenarios, one has to wonder if the Barbarians at the gates of the gated-communities may be, one day, looking more than to accomplish a plain vanilla hostile takeover. There are many ways to “deal” with a cartel and heads don’t need to fall. I would tend to see it like an investment with a negative initial cash flow.

Potentially useful input for discussion: https://inequality.org/wp-content/uploads/2018/10/Billionaire-Bonanza-2018-Report-October-2018.pdf Meritocracy is to be cherished. But. In high school, I did well in a regional speaking contest. The title was: "Excess in anything is a fault". Voluntary reset does not seem to be on the horizon for the vast majority.

I seem to remember that FFH, with the purchase of Zenith, had used an upstream dividend from the acquired sub itself to "finance" the purchase and was expecting a similar scenario with the repurchase of minority interest for Brit as Brit had, at least at the end of last year, significant dividend capacity. Earlier this year, I had tried to figure out the ins and outs with FFH disclosures and numbers didn't seem right. Just looked deeper at Brit's own disclosure (half-year report, see below) and numbers do add up. See note 19 p.41 and note 15 p.38. Conceptually, FFH, through a sub, actually used the "contribution" to buy shares (new) of Brit and Brit used its own capital (contribution minus dividend) to acquire and cancel shares from OMERS (who is the only minority holder for Brit). I can't explain why FFH did not buy directly from OMERS and wonder if it is related to legal structure, regulatory capital rules or tax reasons. The net effect on Brit capital appears to be essentially nil. http://www.britinsurance.com/financials/results Of note also, versus the share awards issue that may have resulted from the acquisition of Brit (and AW?), I looked at note 33 from Brit AR 2017: 33 SHARE‑BASED PAYMENTS (continued) (a) Long‑Term Incentive Plan (Performance Share Plan replacement) On the Fairfax acquisition of Brit Limited, the 65% of PSP awards that did not immediately vest were converted by Fairfax into awards under this scheme. The conversion terms allowed for 60% of the 280p Brit Limited acquisition share price to be converted into the equivalent value of options to acquire shares in Fairfax at a nil exercise price. Subject to continued service, the options vest in November 2018 and there are a further seven years to exercise the options. The fair value of the awards are determined by the market price of the underlying shares at the valuation date. The calculation of the compensation cost recognised in the income statement in respect of these awards assumes forfeitures due to employee turnover of 5% per annum prior to vesting, with subsequent adjustments to reflect actual experience. Reconciliation of movement in the number of awards Year ended Year ended 31 December 31 December 2017 2016 Number Number of awards of awards Outstanding at 1 January 7,712 7,865 Forfeited (312) (153) Outstanding at 31 December 7,400 7,712 In order to settle share‑based payment awards, in 2015 the Group purchased US$10.7m of preference shares in FFHL Share Option 1 Corp and that company has purchased shares in Fairfax. Of the purchase, US$3.9m related to this scheme and was recorded within equity so as to offset the share‑based payment charges recorded in equity on exercise of the awards. There were no additional shares purchased for this scheme in 2016 and 2017. So it appears that a small amount of share buyback activity has been earmarked for the unvested Brit share awards at acquisition.

https://www.rgj.com/story/news/politics/2018/11/06/63-million-spent-defeat-nevadas-question-3-worked/1908835002/

What a great resource to identify physicians that they do & DON'T want in the BRK/JPM/AZN system. Are they only operating in NY? Seems like insurance, in general, is a great business to own, for identifying risky businesses to avoid. Even if the emphasis was on the positives and the synergies, the point you make is interesting because the stick component may be just as important as the carrot (in the UK, there is a car insurer named Carrot Insurance that rewards "good" drivers). -comment on the presence in NY State New York State appears to be the largest market for malpractice insurance in the US. https://www.diederichhealthcare.com/the-standard/2018-medical-malpractice-payout-analysis/ MLMIC is AFAIK only writing business in the NY State and, in 2008, had 40% market share (in 2017, 26% and MedPro, another BRK sub, 10%). The MLMIC transaction is a classic Buffett one because the NY market has been challenged by new players, including some risk rentention groups, that have clearly shown less than ideal discipline. In this market, the typical delay for payout is about 7 years which may give an unusually long and apparent period of growth and profitability before hitting the wall (see Oceanus Insurance recent liquidating experience that happens with surplus depletion and the tide going out). When looking at the incredibly instructive cycle of reserve releases in this specific market, it seems that shit is about to hit the fan and, as usual, BRK businesses will be there to pick up the pieces and continue to build the masterpiece. -comment on the opportunity to share knowledge with the venture Healthcare liability insurers want to keep premiums low and the incentives behind that aim correlates well with an improved quality of care to cost ratio. They have built a huge database and tools that help to identify "deviant" outcomes. In the positive sense, they can identify groups or areas that have somehow put together a format of care giving superior results. They can also spot relative negative outcomes and are ideally placed to define strategies to improve results (constructive feedback, education but also other "unpleasant" measures). Just in case you have time, here's an example of "cooperation" between the liability insurer and the clinical world: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2725304/ Take-home message: companies like MLMIC can identify areas of unusual costs, can help define the costs and their causes and can help define a cost effective way to improve the quality to cost ratio. Sponges left inside a cavity is an extremely rare event (about 0,01%) but when it's you, it's a 100%. This study and others have shown that there are simple and cost-effective strategies (including a systematic method and a checklist) that can reduce the risk of "forgotten" items in human cavities. With this mindset, imagine the potential for people going to the emergency room with a heart attack or even for more mundane conditions as people going to primary care for eye styes.

http://www.rationalwalk.com/?p=16931 Interesting perspective and a few backward and forward looking questions.

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.