Cigarbutt

"Here is another problem - most of the Canadian code monkeys find jobs in the U.S. I don't think there are enough jobs in Canada to support all the engineering grads." shalab, Pretty strong statement. What are you implying? Historically, the "brain drain" (Canada to USA) that has occurred for high-skilled workers has been relatively marginal and has been more than compensated by international net brain gain. I work with the assumption that it is best for a country to have a trade deficit in terms of the brain trade. :) But this brain drain has been relatively marginal and, in my field, the trend has actually reversed. One of my children recently started a software engineering degree and her local/regional/national job prospects are incredibly strong. This anecdotal evidence concords with what augustabound reports and is somewhat supported by facts. Link: https://engineerscanada.ca/sites/default/files/Labour-Market-2015-e.pdf see pages 12(11), 144(143) to 155(154) and 179(178) to 189(188) The international numbers do not separate the USA and other than USA components. What stands out is that there will continue to be excess demand for computer and software engineers and it is projected that excess demand will be continue to be met by net positive international migration. If your post meant that the US will likely continue to be an attraction pole for some of the best and brightest, I agree. if your post implies that computer and software engineers who graduate (I understand that code monkeys is meant to be recently graduated computer/software engineers) will need to go to the US to find a job, you may want to provide more solid data or justification.

Agreed that a BOD selection based only on reputation is not reassuring. And agreed "that's about as idiotic as choosing board members (or employees) based on their race or gender, which seems to be common phenomenon these days." But I would say that a lack of diversity can also be a relative red flag in terms of assembling a team from the same network (old boys' club) that may result in an echo chamber and an inability to ask tough questions when necessary. The Board of Directors should be an area where tough questions can be asked and discussed (constructively) like this Board perhaps. :)

"It's interesting times ... - as always!" In 2017, looked at a few IPOs (in order to discover and learn). Yes, interesting and...a lot of difficulty integrating the "narrative" into a profitable course. For perspective: https://www.topdowncharts.com/single-post/2018/03/14/A-Familiar-if-Ominous-Sign-in-the-US-IPO-Market Apologies for the "ominious" title as the point of this post is not about predictive power. Still, this has a "late in the cycle" feel to it and that may explain (?) the lack of enthusiasm on this specific thread. I have to disclose that many IPOs with negative earnings are from the technology space and this is outside my reach (there may be homeruns in there). But I can reasonably value biotech and the bridge from the narrative to a profitable exit is really hard to visualize even if you feel that animal spirits are truly getting to work. Interesting times indeed.

"You guys are missing the point as usual. Sometimes founders have to create grand stories to raise the money to finance the work to get to the point that they aren't stories anymore. So many great companies have been built this way that it's very typical of a value investor to jump all over the leaders who fail to make the transition. Reflexivity is real and Holmes did not prove as skilled at mastering this art as Musk, Trump or Bezos. Classic case of value investors missing the point, again." Disclosure: -Have more difficulty with "narratives" -Try to keep an open mind Does this have to be a duel between numbers and stories? Is there any way to bridge the gap? Mr. Damodaran gives it a try: http://people.stern.nyu.edu/adamodar/pdfiles/country/narrative&numbers.pdf I will only say that investment on a great story that rely on character evaluation is a very difficult exercise (at least for me).

Interesting post-mortem type of perspective. In hindsight, everything becomes so clear. https://www.bloomberg.com/view/articles/2018-03-14/theranos-misled-investors-and-consumers-who-used-its-blood-test The author suggests that: "In a very real sense she was the biggest victim of her own fraud." Echoing what was said above, I guess it depends on your definition of victim. It seems to me that the "message" sent is very upsetting.

"I would guess scheduling and routing algorithms are not trivial. Is that enough of a moat, I don't really know." "Also, people will order through some portal, so you'll have to pay for your car to be included in one. So perhaps portal with no car fleet will win. Who knows." Reflecting on the airline industry, over time, profitability (cyclical) has often been linked to superior "scheduling and routing algorithms". As road transportation becomes more commoditized, it is hard to imagine that the coordination activity will be separated from the fleets of vehicles. Who knows who will win long term, but I wonder if the moat won't be passed on to the end-consumer in correlation to what I imagine to be continued deregulation and free markets. Then again, the airline industry has been referred to before as a death trap, in terms of investment returns, only now to be considered a reasonable investment since it is felt that the industry will show more than ususal capital and operational discipline (?).

For those who wonder if less is more in healthcare: http://www.nejm.org/doi/full/10.1056/NEJMms1713248#t=article https://www.medscape.com/viewarticle/891091?src=WNL_infoc_180301_MSCPEDIT_ONC&uac=15207AZ&impID=1569981&faf=1 Relevant because the outcome of this debate will impact some players more than others. The two articles are written by respected authors who, despite conflicting views, elevate the debate and help to find the way. Perhaps not inappropriate in an era where people have never been more inundated by data (of unequal quality) often leading to the triumph of ignorance. Need humble guiding lights in order to "see" the data-driven answers and filter out the hype-driven and purely profit-driven promises. At the risk of raising the ire of zealots, I'll disclose that I subscribe to a sensible less is more approach but remain open to other ideas as there are no perfect answers in this difficult "market". For those interested, an important contributor to the the field is Atul Gawande who got praise from Mr. Charlie Munger after "The Cost Conundrum" article.

Additional data related to the private equity value proposition going in 2018. http://go.bain.com/rs/545-OFW-044/images/BAIN_REPORT_2018_Private_Equity_Report.pdf?aliId=12399378 "The challenge is to create more winning deals" at a time when a well known CEO reports, reflecting on 2017 potential opportunities: "...price seemed almost irrelevant to an army of optimistic purchasers." "Spreadsheets never disappoint". Interesting times.

ScottHall, I've followed this thread with interest. I understand your comment as a reminder to avoid over-reliance on mathematical models. The quantitative is often put in opposition to the qualitative but is not reasonable to see them as complementary? Do you suggest that value is only based on an ability to assess the balance between spontaneous bearish and bullish intentions? Or simply to be better than the average subjective opinion?

For those who follow this "venture", here are some potentially useful links: https://25iq.com/2018/02/23/what-might-the-amazon-berkshire-and-jp-morgan-health-care-joint-venture-actually-do/ https://www.wsj.com/articles/hidden-profits-in-the-prescription-drug-supply-chain-1519484401?mod=pls_whats_news_us_business_f http://fortune.com/2018/02/27/apple-health-clinics-ac-wellness-employees-amazon-warren-buffett/ Not clearly investable yet but Medicare Advantage type scenarios and bundled payments may become subjects of interest.

The letter contains a lot of useful data and analysis. I second John's appreciation and gratitude to SlowAppreciation and Dynamic. So, many interesting topics covered in the letter. A word here about passive investing. The growth in ETFs has so far continued unabated. Some suggest that this is not a problem as long as some residual investors continue to do the "active" work. Too easy? Here's a link that covers an asset class that has been influenced by this relatively new trend, the high yield debt market. https://www.bloomberg.com/view/articles/2018-02-26/passive-investing-has-brought-marxism-to-the-junk-bond-market The title is sensational and the conclusion contains a forecast type ending which is not necessary but the graphs and data are interesting. Passive investing is now a large part of the high yield debt market and I agree that this likely explains the increasing correlation between the different components of the asset class. Obviously, there are cyclical forces that will tend to drive spreads up and down from time to time but this increasing correlation in a very benign environment is quite unusual. (see page 17 of the letter for the two graphs showing the historical evolution of yield and spread). I submit that going in the high yield debt market requires an eyes wide open approach. I think that the rise of passive investing is contributing to the synchronized dampening of yield and spread. It is not a problem in itself. It just means that (here assuming that the credit market is cyclical) the price action and momentum in the other direction may be magnified and that may give rise to contrarian opportunities.

Basic notions in a sense but truly fascinating. Statutory accounting rules has historically focused on the solvency aspect of the numbers but that's been changing. It would be reasonable to conclude that book value as generally reported now is closer (?) to fair or intrinsic value. In the last 20 to 25 years, in general, the market price to book "gap" has increased (especially the market to tangible) but specific reasons could explain that: larger buybacks, technology, more industries now characterized by an intangible "edge". Bottom line: despite what Mr. Benjamin Graham was saying decades ago, book value as reported these days, in general, has a poor correlation with "market" value appraisal. What is nice with BRK and many others, because of the nature of businesses assembled and the "culture", reasonable efforts can result in a fairly precise adjustment to book value. Of course, in a group exercise, the final number may vary but, if done in a value-based forum, maybe, the efficient theory may apply here to some degree. :) At the end of the day though, derivation of an adjusted book value remains an individual exercise. That can involve financial notes, fancy math, comparables etc. But, at the end of the day, the premium you pay should correlate to the actual amount that you would pay for the whole company if you were a private investor. Theoretical exercise with BRK, but potentially rewarding nonetheless.

I would respectfully add that concentration in Berkshire does not meet the strict definition of concentration. -The focus has always included a large consideration for downside protection, whatever scenario, macro or otherwise. -The downside protection is "naturally" counter-cyclical as it is firmly anchored on true value. -The insurance/reinsurance side is the most "risky" but Mr Buffett, again this year in his short letter, describes how the non-insurance little correlated businesses act as a buffer against large insurable events. Even a massive event would be, after a relatively painful period, a major plus in the forward-looking insurance competitive landscape. -The non-insurance businesses are many, varied, do not overly rely on leverage and many in the group, including in the big 5, could be considered, in isolation, as a diversified entity (ie the Marmon Group). I would even say that holding BRK now is an excellent way to mitigate concentration risk because of Mr. Buffett's unique ability to maintain independent thinking in this homogenized market. Thinking about what Viking has described, I would say that, when capital preservation becomes a larger issue, there is the potential "risk" that the risk (and reward?) appetite goes down. To reconcile, Mr. Buffett mentions that you have to sleep well and only need to get a few things right. Sounds good. :)

Aberhound, "...this mark to market rule is stupid as in enhances instability in downturns and it was brought in by the mercantalists along with other similarly stupid policies during the Great Depression, removed only in 1938 and in 2007 just before the 2008 crisis." With all due respect, I don't subscribe to the "mercantalist theory" in its pure form. With all due respect 'cause I tend to respect people who are more intelligent. Would like to add the following: Going in 2008-9, it seems that many scenarios could have played out as animal spirits were in disarray. Who knows what measures were necessary, planned or otherwise, but I think (FWIW) that a major (and unusually little mentioned) factor that helped turn the sentiment tide around was the FASB "modification" imposed by Congress in March/April 2009 concerning the "relaxed" definition of mark-to market accounting to take into account liquidity distortions (rule 157 suspension). In my mind, that simple measure contributed immensely in asset value recovery. Some would say that these measures prevented perhaps a necessary restructuring and was actually part of a series of moves to extend and pretend. Some would even say that this was orchestrated. :) Kindergarten advice from Mr. Buffett: "In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price."

It is certainly possible that some reserves may stay in the ground. But the thirst for fossil fuel will continue for a while. This post is about the opportunity to get a valuable product to the end markets and the potential of a US Gulf Coast refinery opportunity. Heavy oil supply from Latin America, especially Venezuela, is expected to decline. Venezuela is in a geo-political free fall. https://oilprice.com/Interviews/Venezuela-In-Freefall-An-Interview-With-Francisco-Monaldi.html Takeaways: -The Chavez-Maduro episode was animated initially by promises for the common man and low value for democratic institutions. -The result is an inability to fully benefit from valuable reserves. -Disruptions in reserves management by these centralized states are likely to be relatively temporary as other controlling figures will take over. -Global reserves controlled by central authorities are significant and the associated social cost can be variable (expensed vs accrued). Overall, there is a reasonable opportunity for Canada. It needs to be explained and the reward has to be "shared" equitably. Tough assignment in today's world but possible. https://www.ceri.ca/assets/files/Study_157_Final_Report.pdf Venezuela vs Canada Look at oneself, desolation. Compare oneself, consolation. Opportunities don't last forever.

Read the letter in parallel to the Semper Augustus piece. Typical annual reminder how the stuff is simple but not easy. In terms of valuation, -for the underwriting side, the table of growth in premiums and float and related comments suggest that this aspect still warrants a premium but much less than in the earlier years. -for the investment side, the premium attributed may be a function of the importance that one attributes to the cash optionality that is now potentially formidable. The letter was short and to the point. I liked it. BH is a masterpiece and it may be time for the last strokes from the Master.

The Enron guys were, no doubt, very smart. In a way. The talk is interesting because it underlines that how you filter your decisions is based, at least partly, on how you define being smart. Recycling of convicts in a promotional way is certainly controversial but my own humble evaluation is that Andy Festow is a broken but reformed man (perhaps like the broken and reconstituted trophy that he showed during his presentation). The "moral" question revolves around the rules and principles dilemma that we all face from time to time. Questions raised about how individuals felt about tax loopholes were a source of uncomfortable introspection. It can be relatively easy to rationalize in order to internalize the disconnect/dissonance. Thank you for the link.

An interesting aspect of private equity is that its relative opacity can be a source of stability as mark-to-market fluctuations can be attenuated, at least for some time. "...it's easy to look at historical data and think that the performance is inherent to the model rather than based on a context that has been changing." Great insight, I agree. In a way, private equity can be seen as an asset class which has been recently characterized, using historical standards, by high multiples and high debt ratios, which makes the author suggest: "In our view, the 2015, 2016, and 2017 vintage years are likely to return close to zero percent per year if history is a good guide." At a time when PE firms are flooded by capital (as per the linked article and many other sources) and have accumulated a record amount of "dry powder". The author calls the situation "bizarre". "Facts sometimes have a strange and bizarre power that makes their inherent truth seem unbelievable." Werner Herzog

20 years is a long time. I've done very well with Fairfax and related holdings during the time period but the result has occurred in the context of a variable level of ownership. Often hoped for a stable long term position but the ingredients have never been assembled (so far). Thank you for the post FFHWatcher. Perspective helps. In 1997: NPW=1392,6 (million CDN) Total investments=4054,1 (million USD) SO=11,1 (million shares) In 2017: NPW=9983,5 (million USD) Total investments=39381,6 (million USD) SO=27,8 (million shares) Then, FFH was getting ready to acquire CFI and TIG. Now, FFH is getting ready to play offense. Humble tentative conclusion: the earning power has been multiplied and the P/B premium that needs to be applied is in large part a function of float deployment.

Technology will change our lives, more and more so. Opportunities for related productivity growth will likely materialize somehow. But, at the same time, on a daily basis, it is amazing to see how technology puts a significant drag on processes. Relevant for specifici investment decisions and also relevant for the growth in the quality of life per capita. The authors suggest that progress is not linear and that we may be on the cusp of harvesting the full rewards of digitization once a certain scale is reached. I want to believe it. https://www.mckinsey.com/global-themes/meeting-societys-expectations/solving-the-productivity-puzzle

http://www3.ambest.com/ambv/bestnews/presscontent.aspx?refnum=26205&altsrc=9 http://www.artemis.bm/blog/2018/02/06/alternative-capital-lost-in-2017-has-now-been-replaced-a-m-best/ Data about the evolving competitive landscape.

So, what is driving the cycle? Following cycles can be mostly a retrospective exercise. However, a lot of data suggest that the present market compares to the "great soft market" of the 1997-2001 period. One of the underlying factors is the advent of significant alternative providers of cheap capital. Some (eg Fitch) suggest that this may be a feature that will "smooth" the cycles, as it is felt that "efficient" capital market investors will help disperse and diversify the "risk". Last year was a great example when insurers and especially reinsurers had to deal with extraordinary losses. However, many reinsurers were able shed some of the losses to the ILS market which capacity has been already replenished (and more) by institutional investors reaching for yield. The answer to the question about this being a positive or a negative is related to an appreciation of the cycle and to what drives the cycle. My take is that the last soft part of the cycle has been so far: very unusual in its intensity and duration, cheap capital has played an increasing role in maintaining a uniform psychology among providers which contributed to less discipline vs market share and cheap capital will not be a constant feature going forward. At this point, for Fairfax (underwriting side of the business), I see them being very well positioned because of a stronger and more consistent underwriting discipline in the last few years, a relatively low NPW/capital and the incredibly high cash and liquid position on the left hand side of the balance sheet.

Did not spend time around investment Boards then but held both FFH and ORH common shares. With the privatization transaction, I felt no significant change on a net basis. I remember that the game plan was to buy back the ORH public float at some point. I submit that a way to see an investment in ORH then was, conceptually, like holding callable equity at any time with the pricing schedule "determined" by the market quotation. So, I was OK with the ORH transaction.

Fair enough and every acquisition can have a Cinderella at midnight feel to it after the fact. But, the previous operating history of Allied suggests a positive outcome over time. In 2010, FFH bought Zenith National (with a 34,5% premium to book value) in the context of declining net premiums ++ and poor reported combined ratios (post-acquisition 2010: 137,8% 2011: 127,5% 2012: 115,6%). OK, different company and different environment. But, how did one feel about that acquisition then? How does one feel about that acquisition now? With Zenith, the net premimums were low at a time when they should have been low. The negative was the relatively high expense ratio and the need to bring reserve levels to the same standards. Results since 2013 have been excellent and there is a lot more potential in the WC lines. For Allied, the scenario is different and adjustments won't be at the same levels but expectation for a similar conclusion is reasonable IMO. A certain amount of patience and confidence are required and it may take a while before the realization of value. It may take a full cycle.

Reading your last post as I was finishing this. Brit has been into the fold for some time now. Their own disclosure describes a recognition that, generally, markets have been very soft. This would point to a lower risk appetite and to lower retention of premiums even if it remains relatively well capitalized. One does not know if this was a directive coming from the sub itself or "guided" by the parent, but Brit has disclosed for instance that it has been increasing cessions on quota shares. It's a question of degree and context but I think counter-cyclical adjustments are welcome even if it means less income in the short term. Expect more of the same at Allied World?