Cigarbutt

If you choose to be something different than a "reasonable" investor and think that you combine the necessary attributes (IQ, business savvy, behavioral edge), you have to consistently come to conclusions that are different from the wisdom of the crowd AND act accordingly (AND be right). It is much easier to fail conventionally. I think that Mr. Buffett and Mr. Munger have consistently tried to lower expectations as the odds tend to be against you. The argument of who is smarter may be irrelevant. Investment decision making is an individual exercise and I understand that Mr. Buffett continues to work alone behind his desk. He was able to find a way to work with somebody who had complementary skills, who could rapidly understand a situation and who could almost instantaneously provide unfiltered high quality feedback. It seems that this investment process has worked out fine. When the "modern" investor is mentioned, does it imply that Mr. Buffett and Mr. Munger: a)have lost their touch? b)can no longer adapt to changing environments? c)size is just too large? d)value investing is dead? I'm asking since I still consider them to be the golden standard.

I like Mr. Pinker's work but his optimism is quite monolithic. Here's a critical look at his most recent book. "This approach holds a certain appeal for wonks who may hope that today’s problems can be fixed by a set of inspiring TED Talk slides." https://newrepublic.com/article/147391/hype-best Maybe the curve of human progress is like the stock market. It will tend to go up, but there may be intermittent periods of regression. What is fascinating is that humans always want more and take a lot for granted. Maybe that's the spirit that has always driven humanity forward? Hoping for the best.

Good point. Past a certain threshold, maybe it's the high overconfidence/ability ratio that can get you into trouble. Often wrong, never in doubt.

Always had mixed emotions about Mr. Tilson. and this article won't help with character sizing. Billy Joel used to say you're only human. Don't forget your second wind.

I would say that there has been a strong tendency to make an association between costs related to "weather" events and "climate" change. Association is not automatically cause and effect. But it sells well. Probably a long term issue but worth keeping an eye on. Some interesting "facts": -Studies have built a relatively convincing case that wind storm activity has increased in the North American Basin since the 1970's BUT this has not been replicated in other areas in the world and results may still be within statistical noise. -Storm activity as measured in many studies has increased in the last 20 or 30 years but these levels are comparable to what happened about 100 years ago. -Studies clearly show an increasing trend in storm activity of lower intensity and this is "associated" with the notion of higher water temperatures but this trend can be essentially explained by improved measurement equipment and technology. However, this needs to be watched because, if there is a trend, the trend may not be linear and factors may compound. Example: With the Superstorm Sandy, it has been estimated that a significant part of the insured losses were related to higher sea levels. The trend in sea level change is significant and it is hard to see how this trend will change. This is a long term trend and it is not essential for your investment decison to establish if this is related to climate warming or not. Sea level rising levels is just a fact. If you think of what is happening in the Netherlands for instance, you may see that a rising sea level will not have a linear effect in terms of the consequences as the measures taken to control floods may spectacularly fail at some point. It may be possible at this point to model how a 1mm level of sea level rise could result in a certain amount of insured damages to exposed areas such as New York or Florida. Potential black swans. FWIW, I think that this "factor" (climate change) should not be a major variable in your decision. The underwriting cycle is much more of an issue. Historically, after earthquakes, people have kept coming back progressively closer to the volcano as the quality of the arable lands (lava) was inversely proportional to the center of the eruption center. People (like insurers) tend to forget how things can get nasty after quiet periods. It is just human nature. As always, it is likely a good idea to look at insurers and reinsurers that keep a reasonable cap on losses (think Allied World), that have a diversified book of business and that have the capital buffers in place to deal with "surprises".

The unravelment may become in fact more interesting than the rise. For those familiar with Bre-X (not saying that the situation is the same, saying that there may be some parallels), the most interesting character was not be the one in the limelight. I always thought that the most interesting character was Michael de Guzman, the geologist. Who knows what really happened to him? For Theranos, if a movie is ever made, I hope they focus on the "mysterious tech entrepreneur with almost no digital footprint". https://www.statnews.com/2018/03/19/theranos-ramesh-balwani/

I found the SA articles to be uneven but some of them were very good. At times, found it helpful to look that way in order to continue validation of an already researched investment thesis. Even in the less than stellar articles, there were sometimes details which could be helpful in terms of potential outcome assessment. Not sure it made a significant difference though. Perhaps time better spent elsewhere.

You are correct. The strength of a conclusion is based on solid reasoning based, as a foundation, upon the quality of clearly defined assumptions. I got carried away with empathy after reviewing the indexing topic and after reading this article. https://www.bloomberg.com/view/articles/2018-01-30/the-dumb-money-is-about-to-become-very-influential Riding the wave is so much fun. I'll try no to let it happen again (on this Board). ;)

Interesting. Sticking to the strict mathematical definition, for a fund, the difference between passive and active investing is crystal clear. When you put the underlying investor into the equation, the concept becomes qualitatively blurred. Then, you may want to consider passive and active, not as two extremes, but as part of a spectrum. Say you have an investor who changes his/her asset allocation from the classic definition and decides to invest 100% of funds into plain vanilla index funds. Passive? Or if an uninformed investor actively decides to suspend the dollar cost averaging schedule in a standard index ETF and invest once per year on his/her birthday. Passive? What about the so called actively managed mutual funds that very closely mimic indices and that rarely outperform? My point is that the generic notion of passive investing may simply mean that the underlying process is not concerned with the use of price discovery and fundamental analysis of individual issues in order to significantly outperform the stock markets. Some say that the rise of passive investment is relatively new and extraordinary. I submit that, in a lot of ways, many ETFs are simply a new name for many of the so called actively managed mutual funds. And I say that the typical retail investor will continue to buy high and sell low. At least, that’s what the record shows. Perhaps I agree that passive investing mitigates the key man risk (fund manager). But it does not mitigate against those who want to have a quick and easy way to gain access to the market. This post initially came as a rant but was modified as I reached conclusion. Purely from the opportunistic point of view, the more the better.

Follow-up The link provided above may no longer be available or may have an availability time-dependent feature for access. Here's a more generic access to the research with more recent data. https://www.spratings.com/ca_AD/structured-finance?catSelected=88212 ---)Subprime auto loan tracker, 2017 review...14/03/18 https://www.spratings.com/ca_AD/structured-finance?p_p_id=122_INSTANCE_w5mTyRwrkVAV&p_p_lifecycle=0&p_p_state=normal&p_p_mode=view&p_p_col_id=column-1&p_p_col_count=2&p_r_p_564233524_resetCur=true&p_r_p_564233524_categoryId=88211,88212,88228,88240,88319,88340,88352,88359 ---)Subprime auto loan tracker, January 2018...19/03/18

"Will the public tolerate more than a couple/few fatalities in the testing of these vehicles?" Delicate topic. Pedestrian death due to a car impact is a tragedy. I agree with a lot of what you say but here are some nuances. “Roadkill” has been an American term used for millions of animals that are victims to automobiles every year. When « road engines » hit the road in the late 1800’s, they got the label of an evil machine as the car became the innovation, among others, that would prevail as the unavoidable substitute to horse-drawn carriages. From the perspective of the late 1800’s, motorized vehicles met a very strong demand for better and more efficient mobility. However, before it became a basic necessity, as it slowly became mainstream, it gave rise to significant popular discontent as accidents were common and many fatalities occurred. Especially outside urban centers, cars (and their owners) were met with fear and even hatred. Stones were thrown. Guns were seen. Cars came with dust, smell, noise and eventually pollution but, at the beginning, sadly, it became clear that cars were also the cause of auto accident victims. But various attempts to stop the widespread use of cars failed. In 1906, President-to-be Woodrow Wilson said: "nothing has spread socialistic feeling in this country more than the use of automobiles. To the countryman they are a picture of arrogance of wealth with all its independence and carelessness." Ford then came around and made the cars affordable for the masses. Cars (and the drivers) continued to kill but became mainstream America. In the American ideology, “roadkill” has also become a label for anything and anyone standing in the way of the relentless march of destiny. The above is my summary of a very interesting book with an excerpt following below. www.press.uchicago.edu/Misc/Chicago/467412.html Motorized cars conquered public opinion because its utility became larger than the consequences and measures were taken to maximize utility and minimize consequences. Will it always be this way? I don’t know. Will autonomous cars become standard practice? I don’t know. Last time I checked (2015 numbers), a US pedestrian is killed in a traffic-related crash every 1,6 hours and a pedestrian is treated in an emergency department for non-fatal crash-related injuries every 4 minutes. In another life, I was intimately involved in the management of the after-effects from these accidents. These are tough issues. Hope that helps for a serene discussion.

Wfearful_Bgreedy, -I like your post too and agree with the potential. -Cycles are cycles and subprime auto lending appears to form a top. -However, as with all these opportunities, timing is an important factor. So, even if I like your thesis, here are three moderating factors. 1-Resilience of the subprime auto lending market I have done some work to compare the « state » of the auto subprime market before the 2007-9 episode to now (interest rates, credit score, lending origination by credit tier, LTV to loan, term length, delinquency rates). IMO, auto finance lenders are only in a slightly worse position (I think banks exposed to this segment are, in fact, in a better position). The auto finance lenders have a relatively larger piece of the subprime pie but I think that the creditworthiness of customers is comparable. Also, the auto finance companies ratio of subprime debt over total outstanding auto debt is actually lower. This is a cyclical business and CACC has had its share of problems (more familiar with CACC than SC) but it has been around for a long time. Even if the the terms of loans have gotten longer, those loans do season fairly rapidly. If you are quasi-autistic , you may want to look at the link below (slightly outdated but relevant). The link also shows that going through the Great Recession (certainly a significant real life stress test), not a single securitization issue was downgraded (at least by S&P). Despite the severity of the recession, the auto ABS market rebounded quite nicely after a relatively short period. The US Treasury came to the rescue of GMAC but my understanding is that the rescue was more directed to GM, the manufacturer itself. It may take more than a usual credit cycle adjustment to really hurt the underlying business. https://www.capitaliq.com/CIQDotNet/CreditResearch/RenderArticle.aspx?articleId=1817685&SctArtId=420028&from=CM&nsl_code=LIME&sourceObjectId=10010733&sourceRevId=1&fee_ind=N&exp_data-ipsquote-timestamp=20270320-23:12:27 2-Relative advantage to CACC and SC if/when the auto credit cycle turns I see that many newer and smaller players have appeared on the scene and these entrants likely have been/are using loosened standards and those players may absorb first a significant portion of the losses if credit dries up as larger players such as CACC and SC suffer relatively less, use their relative scale and maintain access to credit. 3-The auto subprime financing market, by itself, is not large enough to precipitate its own demise. If you can identify a catalyst, it would be then reasonable to run various time-weighted scenarios. What was interesting with the subprime mortgage segment leading to 2007 was that the worsening lending standards were way more significant than what is happening now in the auto subprime market and formed a large enough market to trigger a wholesale liquidity crisis in the mortgage prime segment, then in the general economy triggering a recession and then sustaining the self-fulfilling prophecy of a massive decline in the mortgage subprime segment that started the whole thing. I don’t think that the auto subprime segment is large enough to cause that type of vicious circle. There are plenty of potential catalysts in our markets now but, for your thesis to play out, you have to rely on a large increase in interest rates or a recession in order to make a large profit. A simple cyclical adjustment would do the trick to some degree but IMO expected profits would be less with names like CACC or SC compared to weaker players and timing remains an issue. Thanks for sharing. Will follow.

Climate change is a tough topic but I’ll give you my present thinking concerning the potential impact on catastrophe insurers and reinsurers. I have references if you need them. The long term trends in costs (inflation-adjusted) are going up but there are many variables. The obvious ones are: increasing population density and urbanization, population migration and concentration in coastal areas and generally increasing economic activity. At this point, the « consensus » is that climate change might be an independent contributor to the trend (more frequent and more severe events). 2017 events might trigger this line of thinking but one has to be careful about recency bias. But the climate change effect (whatever it is) will likely manifest over decades. Catastrophe modelling is historical in nature and will tend to « naturally » incorporate more recent trends. For the insurance industry with cat exposure, IMO this is worth watching but more as a long term threat, especially if the trend becomes clear and accelerates. So, to answer your question, climate change related events are unlikely to trigger a hard market soon. Natural variability in catastrophe activity and human volatility in financial markets could however. Still looking for a model to explain the latter.

"I admit I'm struggling to see how it's indexing rather than just the general flow of capital into funds of all kinds, that is driving the concentration of gains into a narrow range of large-caps." I actually agree with that statement. My assessment is that mostly the shift to index funds can be explained by the move away from mutual funds and even if index funds are passively managed, the underlying investor population, in essence, has a passive mindset. I submit though that there may be pockets of ETFs where this does not apply: specialized, leveraged and synthetic ETFs. These funds may attract a momentum crowd and liquidity issues with precipitated attempts at price discovery have not been tested (remember how that worked out with packaged real estate subprimes securities). IMO the infatuation with indexing is simply part of the larger picture and is based on momentum (may work in both directions as markets don't usually follow a straight line). Isaac Newton would have said: "what goes up must come down" but markets tend to go up and his investment record is not impeccable. I thought you would be the type to be interested in the following: www.goldmansachs.com/our-thinking/public-policy/directors-dilemma-f/report.pdf http://mathinvestor.org/does-indexing-threaten-the-market If pressed for time, -the first link shows a nice graph (exhibit 4, page 6). -the second link refers to well done specific studies evaluating the relevant underlying questions. Apparently, according to Mr. Bogle, the father of indexing, as long as 25% of funds are actively managed, we're probably OK. I wonder if that number has a margin of safety.

"Another gem by giofranchi" Politely submitted: I read yesterday an investment fund annual report where the manager candidly explained that he had underperformed 33% of the time since inception. There was also the typical section describing the podium of the "best 3" most recent mistakes. Valeant was there the year before. This manager, over time, has done very well for himself and the investors in his fund. I'm relatively new here but I have looked back many threads (and learned). Mistakes happen. They are not the end, they are the beginning.

Speaking of lumpiness. the uncertainty of future returns for Fairfax revolves a lot around investment returns. Comments by petec and StevieV triggered the following. Hat tip to Brooklyn Investor (note 22/11/17) vs the concept of matching invested assets and insurance reserves. https://brooklyninvestor.blogspot.ca/ My numbers are not audited and may not be perfectly exact; exercise done for conceptual reasons. So for Fairfax, in 1998 (all numbers in billion, expressed in CAD $), float was 8,15, cash was 1,15 and bonds at cost were 9,86. Ratio of (cash + bonds)/float=1,35 Fast forward to 2017 (USD $), float is 22,7, cash is 18,5 and bonds at cost are 8,76, for a ratio of 1,20 Conclusion for FFH: cash is king (now). The real reason for this post is the following: For BH, in 1998, float as estimated by Brooklyn Investor was 26,3, cash was 13,58 and bonds were 21,25, for a ratio of 1,32. For BH, in 2017, float as estimated by Brooklyn Investor is about 120, cash is 103,98 and bonds are 21,35, for a ratio of 1,04 For BH, float has been multiplied by about 5, bonds have remained the same and cash has been multiplied by 8. Mr. Buffett is said to hate cash. What then, are his feelings about bonds now? Fairfax' profile in terms of the composition of float coverage is comparable, to some degree, to Berkshire Hathaway and IMO that may not be a bad thing.

Fair enough. Have only indirect or second-hand knowledge about this (mostly Montreal and Toronto area). I hear though that the future job market in this space (and others) will be affected by a large amount of baby-boomers retiring. I will encourage my daughter to look at the US in terms of further training or work but I see that she has gotten an interesting offer for a summer internship in a local venture capital firm after her first year of study with an annualized salary above median population income (!) and, if present circumstances persist, will have a choice, before she graduates, between several interesting alternatives with a starting salary above a 100 grand (CAD $ mind you :)). It is hard to say that the market is not tight in my neck of the woods for code monkeys. I also agree it is probably best to let the natural laws of economics play with minimum friction. Everybody wins as this is a positive-sum game.

The big multi-variable equation question about Fairfax capacity to grow profitably is one I am wrestling with. Historically, FFH has shown an incredible capacity to grow float and more recently to grow it profitably. Isolating the residual room to grow variable going forward, here's an excerpt from Berkshire Hathaway 2017 edition: Here’s the record: (in $ millions) Volume Float 1970 39 1980 237 1990 1,632 2000 27,871 2010 65,832 2017 114,500 Fairfax year-end float (2017): 22,700 If you go back in time for Berkshire Hathaway, in 1998, year-end float was 22,800 Question: From the perspective of 1998, did BH have an opportunity to grow float? Float has grown at 8.9% (CAGR). FFH is not BH but even if the rate of potential growth in float has come down, IMO, the variable, in itself, is not a major limiting factor in terms of the return objective that they describe going forward. And indeed, opportunistic buybacks, given the right environment, could help with float per share.

"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.