Cigarbutt

Had an interesting discussion recently with a member of the preceding generation (boomer) who was explaining how lucky people are these days when comparing mortgage rates that "they" had to deal with (rates at more than 20%...) in the early 80's. I guess it's a question of perspective: https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/housing-affordability.pdf Need to worry? Not to worry according to official sources because the economy is robust, real estate is sticky and people have developed a "slower mentality". https://www.bloomberg.com/news/articles/2018-05-29/why-canada-s-big-banks-aren-t-too-worried-about-household-debt

For 1- Calculated Risk made many useful observations during that time frame. The author focused on a few key housing variables. Interestingly, mortgage debt to GDP was one of them and he has updated the analysis recently (for the US): http://www.calculatedriskblog.com/2018/02/the-housing-bubble-mortgage-debt-as.html This is one of these graphs that suggest that the US is back to its long term trend. But who said that this trend should be upward? I understand that the avg 5-yr fixed mortgage rate has come down since 1980 but who cares about the debt/equity ratio when your home value keeps going up? Even without the pendulum swinging the other way however, if the US pattern can serve as a potential template for the Canadian outlook, then we should fasten our seat belts. Avg 5yr mortgage rate (Canada): 2000: about 8% 2008: about 7% now: about 5,5% Diamonds are forever but 5yr fixed mortgages and variable ones are not. For 2- I agree with the "hedge" that you describe. For the real estate reason mentioned and other reasons, I have brought up the USD based portion of the portfolios to about 75% with most of the currency change happening during the recovery after the financial crisis when the CDN $ was close to par. So far, this has been a positive move and because of the expected relative outperformance of the US, I will keep the same currency profile for now.

Interesting thread. Personal perspective: We bought our house in 1996 (Montreal metropolitan area) and the CAGR on the value (appraised/market) has been 3,4/3,9%, pretty much in line with our region of the country. Not particularly impressive but still about double the average inflation rate over the period. So? When I include the "value" of the house into net worth calculations, I discount 30 to 40% of the market value. Why? Because, from 1900 to 2000, it was expected that, in the main, the value of a well maintained piece of real estate would keep pace with inflation. Our real estate market is comparable to Ottawa but the environment of other urban centers in BC or Ontario and in the aggregate leaves me perplexed. Some stats for the Canadian market (in the aggregate): -Price trends From Q1 2000 to Q1 2009, house prices rose by 79% (49% inflation-adjusted) From Q2 2009 to Q3 2012, house prices increased by another 24% (17% inflation-adjusted) From Q4 2012 to Q4 2015, tighter mortgage rules implemented in July 2012 helped calm the market, but house prices still rose by around 15.7% (10.8% inflation-adjusted) From 2016 to 2017, house prices surged by 22.5% (18.5% inflation-adjusted) -Size of the mortgage market versus GDP 1990-2000: 40-45% 2008: 54% 2014: 65% 2017: 71% Reflecting on what Sunrider just wrote, wondering now how to benefit or to protect from the downside. Need to do more work. There is definitely some kind of disconnect but timing is always hard especially with residential real estate. On a personal level, if I would live in Toronto or Vancouver, I would now consider selling even if the house has sentimental/practical value. The Bank of Canada has produced a lot of interesting work in the area. They are trying to navigate the disconnect, hope for a soft landing and do not want to look like the people taking the punch bowl away. Maybe an impossible task? Here's a link that shows an interesting tool that they have come up with, the vulnerabilities barometer: http://news.buzzbuzzhome.com/2018/03/heres-canadas-housing-market-cause-banking-crisis-hint-debt.html The title is sensational but the only public comment may be a sign of the times: "The plan is to die with as much debt as possible while living life's best." The graph should be taken as a picture is worth a thousand words but for those interested, here's the more official reference: https://www.bankofcanada.ca/wp-content/uploads/2017/12/san2017-24.pdf What I find fascinating is that, despite what seems to be an incredibly high vulnerability, uncharacteristically, many measures of financial stress are very low in the context of an unprecedented interest rate environment. Where is the margin of safety? Interesting times.

Thoughts on the fixed income side of the portfolios. Short version: Fixed income spreads are very low along the spectrum in the context of a high supply of debt but a stronger appetite for spread, in still a low risk-free rate environment. IMO, insurance companies are reaching for yield and FFH is well positioned to benefit. Longer version: http://www.naic.org/capital_markets_archive/171221.htm http://www.naic.org/capital_markets_archive/180313.htm The first link is about the junk exposure. Insurance firms have increased exposure to high yield debt and the comparison year used in the references should be 2008 and not 2009. In 2008, high yield debt issue dried up and the reasons why high yield exposures increased in 2009 were: 1-many issues were downgraded with investment grade issues becoming junk on the books and 2-despite the widely publicized issues with AIG, financial guarantee insurance firms and mortgage-backed securities, the high yield debt market recovered remarkably well despite the relative severity of the recession and liquidity issues in certain areas. P+C firms’ exposure in high yield debt is skewed to lower quality along the spectrum and has a significant component in leveraged loans which IMO now reflects higher risk as most of these loans are covenant-lite and comparatively probably riskier than the typical high yield security. Exposure is diversified and 2017 was a “good” year but, cyclically, widening spreads tend to be periodically strongly correlated (unlike the spike limited to oil and gas in 2015-6). Interesting to note that, in the high yield space, Fairfax has become involved with Toys“R”Us only after chapter 11. The second link describes a significant exposure to the lower end of investment grade. Most of it is corporate. The authors don’t seem to be concerned but the exposure has increased considerably as we go through quite an unusually benign (and levered) period. In terms of sentiment, which is kind of hard to assess, I just finished reading the 2017 annual report of Unico. Unico (UNAM) is a very small P+C insurer. I am a minority shareholder holding 1 share :) but some here may be interested to know that Bigliari (through The Lion Fund) owns 9,9% of shares outstanding. The reason I bring this up is that the company used to run investment portfolios in-house, based on a very very conservative profile. Starting this year, investment guidelines allow to reach for yield. I think that the increased exposure to high yield debt (and high yield debt to be) is significant in the P+C insurance industry. This may go on for a while but reaching for yield is pro-cyclical. I very much like how Fairfax positioned the cash and fixed income side of their portfolios. I also happen to think that long exposure to credit default swaps especially to high yield debt at this point would make sense given that premiums now are very low and given potential time-weighted scenarios where spreads could widen considerably and in a correlated manner.

"it's probably counterproductive to focus on what random people supposedly own or earn at what age." Had a glimpse at the unedited version and I really admire that position. You may want to appreciate that your attitude is unusual. If it were the norm, markets would be efficient and investment boards such as this one would lose some of their utility. :)

You are technically correct about statistical distortion within the group. But stahleyp's reference group is only the top 1%. :) Interesting link about those who feel relatively poor within the 1% (from 2014, so outdated but, if anything, the trend has accentuated): https://www.cnbc.com/2014/03/31/the-other-wealth-gapthe-1-vs-the-001.html

Hi randomep, Will give it a try. Canadian perspective but I assume same principles apply elsewhere. About 10 years ago, looked at this seriously and decided to pass. Have references if you want but here's a summary. The idea is that, if you are incorporated or a business owner, you can maximize your tax-deferred nest egg. There are definite advantages: -can maximize contributions (above what is available with RRSPs as registered vehicles) -especially as you get older (the contribution limit increases with age) -can catch-up "past services" with lump payments (all tax deductible within the corporation) -can aim for efficiency by including kids as potential beneficiaries (tricky and rules can change) -all fees (including interest to some degree) are tax deductible within the corporation There are definite disadvantages: -need to set it up as some kind of trust (fees) -need to register to CRA as a defined benefit pension plan (rules and regulations) -need actuarial input at setup and periodic audits every three years (fees) -the trust can de "self-directed" but you need to follow the "safety first" and the "prudent rule" approach and cannot put more than 10% of assets into any single investment -need to transfer your existing RRSP assets into the plan to avoid "double dipping" My understanding is that, in most cases, the disadvantages outweigh the potential advantages. A case can be made for someone who reinvested earnings into the corporation (no salary) and who is in a situation where the company becomes very profitable and somehow starts to think about retirement plans later on in life. Most people that I know who did this outsourced the entire process and IMO are not likely to be ahead in the end. An option that was availbale was to let the funds inside the firm and use the vehicle as a partially tax-deferred "pension" asset. With the new Morneau rules, this is still possible as long as the firm does not produce significant operating income.

I see some evidence that the net worth numbers are not simply objectives based on multiples. https://dqydj.com/net-worth-brackets-wealth-brackets-one-percent/ https://dqydj.com/the-net-worth-of-different-age-groups-in-america/ The financial planners' mantra is to save early (30's and 40's) and start to dissave later, starting in the 50's. interestingly, when one disaggregates the numbers, only the high earners and very high net worth households follow this pattern as the bottom 80 to 90% do not really save.

Just finished: Gorbachev: His Life and Times by William Taubman https://www.amazon.com/Gorbachev-Life-Times-William-Taubman/dp/0393647013/ref=sr_1_1?ie=UTF8&qid=1527084124&sr=8-1&keywords=gorbachev+taubman Detailed, well researched and fairly balanced (IMO). Fascinating account of the last Soviet period. Useful for those interested in capitalism versus other potential systems, international politics or the man himself who remains an enigma. Some highlights: -The Soviet regime contained the seeds of its own destruction and despite its inclination for authority and self-preservation nominated Gorbachev, a man who accelerated the chain reaction. Fascinating. -Interestingly, the introduction of glasnost increased the popularity of Gorbachev for a while but created a context that strenghtened oppositions (on both sides of the spectrum) and eventually undermined the potential perestroika reforms. Reforms threatened the central state that held the system together. -The Chernobyl disaster revealed how the system was rotten from the inside. -The rivalry between Gorbachev and Yelstin, the unusual populist champion of change, is very well covered. -Transition to a democratic system requires a solid institutional foundation. -Ethnic discontent can destabilize a cautious and calculated approach. -The way Putin ("black box") eventually consolidates his power with oligarchs is alluded to. State strengthened at the expense of individual freedoms. This happens to be the norm, rather than the exception, in regime "changes". -Gorbachev's goal was to play the game in order to change it using a "dual consciousness". In the end, he was overwhelmed by the task. -The author concludes by qualifying Gorbachev as a "tragic hero". -After 693 pages, you can come up with your own conclusion.

Taking a long term view with a market share perspective listing relevant competitors (N.A. 2017). There is still ample room to grow float. http://www.naic.org/documents/web_market_share_170301_2016_property_lob.pdf https://www.insurancejournal.com/research/app/uploads/2018/05/2017-NAIC-Market-Share-Data-Workers-Compensation.pdf

Article is biased and uses incomplete information. And poor choice of words. I would add that Mr. Buffett has not used off-shore tax havens reinsurance associates when this could have been considered to be a competitive disadvantage not to do so. From the Supreme Court, Judge Learned Hand (1934): "[a]nyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes.” The Judge also said: "...taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant." Personal attacks, especially if ill-founded, do not add anything constructive to the debate.

Full title: The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business https://www.amazon.com/End-Competitive-Advantage-Strategy-Business/dp/1422172813/ref=sr_1_1?ie=UTF8&qid=1526296165&sr=8-1&keywords=mcgrath+competitive+advantage Thought this would be relevant given recent comments made by Mr. Buffett about moats. The value of the book is limited IMO. The message of the book is that moats are not what they used to be and, going forward, "culture" and innovation will drive results as moats will be more and more transient. A sustainable competitive advantage is dynamic and can be lost suddenly or gradually. In some industries, moats are more structural in nature. Maybe innovation can be seen as a relative component of moat similar to what Philip Fisher describes with companies being able to re-invent themselves. I thought that Pat Dorsey's book (The Little Book That Builds Wealth) had more value in terms of giving a framework to define and identify a lasting competitive advantage in an investment opportunity. https://www.amazon.com/Little-Book-That-Builds-Wealth-ebook/dp/B008L045N4

The technology adoption is spreading. Closer to home (Montreal), there will be a major upgrade to provide a complete driverless light metro system (to be completed in 2021) led by Alstom. When you think of it, commuting metro/trains in urban centers are conceptually similar to elevators. And now, elevator operators are a thing of the past. http://www.elevatordesigninfo.com/why-elevator-operators-went-extinct Freight trains may be next on the list but security issues will be raised. It is possible that resistance (union or otherwise) will be met. Anyways, as mentioned before, I think that potential cost savings would be minimal but human errors due to fatigue (real problem) could be eliminated. Apparently planes would also be a realizable target. Would you board on a plane without a pilot? I have a feeling that my grandkids may find it funny when I will tell them that there was actually a pilot sitting in the plane. The pace of change is accelerating. Buckle up!

The historical evolution of railroad employment shows a long term trend that started well before the 1980 deregulation Staggers Act. https://www.railserve.com/employment.html Freight railways have continued to decrease manpower but it is hard to see big savings going forward at that level. Since the Staggers Act, freight railway has produced a widening and staggering growth in productivity in comparison to air, trucks and private business in general but this growth has also shown a tendency to become flatter because the low hanging fruits are gone. From the input side, there are still potential promising areas (increased locomotive efficiency, innovations in car design and capacity, longer train lengths, improvements in operating practices, and technological innovations in train control). From the input side, I would submit that the moat that freight railways have for long-haul transportation will continue to widen versus trucks because the roads are essentially public infrastructures that need to be shared. IMO, driverless truck technology and convoys will not compensate this growing disadvantage. Would like to add though that the major reason for increased productivity and improved operating ratios (BTW most of the gains have been harvested by shippers (and consumers?) although that may be changing? {railway pricing power versus potential re-regulation}) has come not from rationalizations and decreased employment but from increased economies of densities (increasing output in ton-milles per network) and the two most important factors behind this phenomenon have been 1-western coal and 2-intermodal shipments related to containerization and increased global trade. Interesting to note that increased energy prices would tend to magnify the moat between freight trains and trucks (even driverless) but economies of densities can go both ways.

I think that FB is way cheaper than GE. GE does have a very low cash flow yield that is almost entirely consumed by the dividend, high debt load, pensions issues and probably more accounting skeletons hiding some where in the financial arm. None of the above applies to FB. I think FB FCF yield is equal or higher than GE’s, especially if you take the EV as a denominator rather than market cap (a bit unfair because GE has a financial arm) -The assumption here is that I'm wrong and the post is respectfully submitted because the thread has a historical connotation. -The quote is from Mr. Benjamin Graham and I concede that it comes from a different era. -Still, the message is that is still hard to know the future but easy to project it. "I am reminded of an analysis that we used in this course in 1939, in their very first lecture, which I believe illustrates that pretty well. We put on the board three companies: A, B, and C. Two of them, which we did not name, showed earnings of practically identical amounts for the last five years -- $3.50 a share in each case. The earnings year by year were closely similar. The only difference was that one stock was selling at 14 and the other was selling at 140. The stock that was selling at 140 was Dow Chemical; the one that was selling at 14 was distillers Seagrams. Obviously, the difference between 14 and 140 meant that the market believed that the prospects for Dow Chemical were very good and those for Distillers Seagrams were indifferent or worse than that. This judgment showed itself in the use of a multiplier of four in one case and a multiplier of 40 in the other. I think that represents a very dangerous kind of thinking in Wall Street, and one which the security analyst should get as far away from as he can. For if you are going to project Dow's earnings practically to the year 2000 and determine values that way, then of course you can justify any price that you wish to. In fact, what actually happens is that you take the price first, which happens to be not only the present market but some higher price if you are bullish on the stock, and then you determine a multiplier which will justify that price. That procedure is the exact opposite of what a good security analyst should do. I think if a person had tried to project the earnings of Dow Chemical for a five-year period and the earnings of Distillers Seagrams for a five-year period, and compared them, he could not have gotten values which would have justified the price differential as great as ten to one in the two companies. It is always an advantage to give examples of this sort that have such a brilliant sequel; because I notice that this year Distillers Seagrams sold as high as 150 as compared with its earlier price of 14, and Dow Chemical sold as high as about 190, against 140 -- which is quite a difference in relative behavior. We have been trying to point out that this concept of an indefinitely favorable future is dangerous, even if it is true; because even if it is true you can easily overvalue the security, since you make it worth anything you want it to be worth. Beyond this, it is particularly dangerous too, because sometimes your ideas of the future turn out to be wrong. Then you have paid an awful lot for a future that isn't there. Your position then is pretty bad. There will be other examples of that sort which we may take up as we go along." In 1939, Dow Chemical was one of the stocks to own. In 1939, Seagram introduced Crown Royal in honour of George VI and Queen Elizabeth’s royal tour of Canada that year. The bottle was presented in a purple pouch with gold stitching — which became synonymous with the brand.

1+ Agree even if using a widely different approach, more of a punchcard-type. "Never in my life have I owned 30 stocks" [no edit necessary]. The average holding times (from a reasonable reference): "Here’s the NYSE’s average holding period for stocks at the start of each new decade: •1960, eight years, four months; •1970, five years, three months; •1980, two years, nine months; •1990, two years, two months; and •2000, one year, two months." Now it is a few months and in 2008-9 it was apparently around 2,5 months. Hard to think that this is investing. FWIW, paradoxically, I happen to think that this "new" phenomenon has the potential to offer real (note to Jurgis: did not use the word remarkable to avoid a possible sense of misrepresentation) rewards to the patient and disciplined, whatever value style you focus on.

The idea is to share data and describe potential outcomes with an audience of independent thinkers. The constructive aim was to underline how short term thinking and performance chasing can hurt returns. The Dalbar studies show this really well at the retail level. https://www.ifa.com/articles/dalbar_2016_qaib_investors_still_their_worst_enemy/ But nobody says that it’s easy. One has to decide if it is worth the try. I think it is reasonable to assume that most “true” value investors, once inoculated, won’t radically change their approach but it’s been said that, historically, bull markets get to their cruising speed when enough “value” investors have switched to the “growth” camp. BTW, I like the way DTEJD1997 says it in reply #22 and it’s important to not let the Market be your guide because it is there to serve you, if you so decide. Peace.

To openly question one's performance is commendable. Before capitulation, it may be helpful to revisit the Graham and Doddsville's list: https://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984.pdf Beside Mr. Buffett who is truly unique, most "successful" investors "suffered" relative under-performance for many years (often consecutive years). What may be interesting is that, if you are right and have a strong inner score card, the periods of under-performance are often preceded, and followed by, remarkable out-performance. Hope that helps.

“Beating” the market is not easy and IMO is not getting easier. Need to have longer term retrospective tools to self-evaluate. I would say that, in certain instances, short term thinking may “justify” taking on more risk in order to maintain one’s edge. From my perspective, there is an increasing level of competition in many already crowded fields and many participants are bright, educated and sophisticated. When it gets confusing, perhaps some time should be devoted to what one doesn’t know. On a related note, many reasons contribute to the difficulty of maintaining one’s edge. Size is one of them: https://qz.com/1216260/warren-buffett-doesnt-beat-the-market-anymore/ IMO, holding BRK is a relatively easy way to “beat” the market going forward. Over time, however, I think that the edge will tend to get smaller and more difficult to maintain.

The 10k to 51M example implies a +/- 11,9% return. A recent video of Mr. Buffett with a more specific example (see below) with 114,75$ invested in Q1 1942 with an expected value of 440K would imply a +/- 11,3% return. From another site (see below), one gets 11,7% CAGR total return. http://www.moneychimp.com/features/market_cagr.htm To paraphrase Sir John Templeton, if you're pessimistic, don't be too often or for too long. :) The limitations about taxes, transaction costs are valid but, like you mention, less so now since dividend yields are lower (or are prices too high?). Still you can see the effect of dividends on the margin as an extra % of return (even if you have to adjust down for limitations). Just remember the tables that show what happens if you change your CAGR by only 1 or 2% over long periods. The final value numbers get to be very different. Interesting piece on the contribution of dividends (not dealing with limitations described though). https://www.gafunds.com/wp-content/uploads/2012/11/imdf_WhyDividendsMatter.pdf

Interesting. Alexander Hamilton was not afraid of controversies. Same with Mr. Druckenmiller. "If I were trying to create a deflationary bust, I would do exact exactly what the world’s central bankers have been doing the last six years. I shudder to think that the malinvestment that occurred over this period. Corporate debt has soared, but most of it has been used for financial engineering. Bankruptcies have been minimal in the most disruptive economy since the Industrial Revolution. Who knows how many corporate zombies are out there because free money is keeping them alive? Individuals have plowed ever-increasing amounts of money into assets at ever-increasing prices, and it is not only the private sector that is getting the wrong message, but Congress as well. I have no doubt we would have not gotten such a big increase in fiscal deficits if policy had been normalized already." Alexander Hamilton pushed for more central powers but he was well aware of the potential consequences and strived for balance through separation of powers: "Give all the power to the many, they will oppress the few. Give all the power to the few, they will oppress the many." Can we try capitalism?

For item 1, -One can argue that the long term thinking associated with lumpiness of earnings is a positive. Do you agree? -Another differentiator has been the "investment performance". IMO, to invest in FFH now, you need to factor in a macro component or you need to rely on their investment team to make the calls. That may be one of the reasons explaining the relative confusion about their current status as a market hedge. I am slowly coming to the conclusion that they just modified their hedge to a less costly one. Are you saying that FFH would carry a higher valuation if it would become more traditional in terms of investment style? For item 2, The last insurance acquisitions have been significant and quite satisfactory IMO. I have come to the conclusion, at this point, that 2017 Q3 and Q4 results are not significant enough to think that AWH was a bad acquisition. What makes you wonder about the Allied deal?

Humble contribution. Investment is like a race and you have to choose the vehicle and the driver. It is impossible to maintain a permanent edge. ScottHall's comments may be right that the time has come but (politely submitted) the comments remind me of an article I read in 1999 titled: "What's wrong, Warren?" when I was trying to define the rules of the race. At a time when the value of moats is questioned, if there is a message that will stay, even after Mr. Buffett is gone, it is that Markets can sometimes be wrong and, in spades, spectacularly so. Borrowed from "Get your groove back": "Looking at the past in the rear view mirror, Moving so fast I've never seen clearer, Now I get a new way to feel ten times better," Here to learn but to win a race, you have to try to finish the race, even if there is no finish line.

The topics are evolution, adaptation and disruption. Dinosaurs had something going for them as they dominated for about 150 million years. Weaker jaw strength may have something to do with the new winning species. Many feel that the "discovery" and use of fire allowed the introduction of cooked food with very clear evolutionary implications allowing for smaller and weaker jaws, a simplified digestion apparatus and resulting in improved energy efficiency and ability to carry (and use) a larger brain. You can check on yourself to verify that you are not a gorilla by palpating how high your chewing muscles insert on the side of your head. So what killed the dinosaurs? At some point, size may have become a relative disadvantage. Thanks for the link. Will look into it

Three aspects: 1-on the underwriting side, Q1 to Q1 comparisons have limited value but I would say that 2018 Q1 results were satisfactory because a) accident yr CR went from 99,6% to 99,1% and AWH reported below 100% with minimal positive reserve development. So, no major surprise and no major break in a relatively favorable trend. 2-on the operational leverage side, surprised too that disclosures don't show much in terms of increased cat exposure. Various industry reports tend to show a persistence of soft conditions in most other areas. Most of the growth in NPW came from Odyssey Group (insurance lines). For AWH, Q1 typically shows higher premiums versus the rest of the year and, compared to Q1 last year, NPW increased about 9% to 735 million which should result in around 2,3 billion NPW for the year. 3-on the investment side, the significant capital shift on the fixed income is not indicative of reach for yield. For this aspect, FFH's position continues to be unique in the industry.