Cigarbutt

Thank you for the wise words. Conventional wisdom: what counts is time in the market not timing the market. OK. Want to spend time on income statements this week (and for the next 20 years) but will add the following: The last 30 years (despite dot-com and real estate induced volatility episodes) have been unusually "good" for investors. The "excess" return was not based on fundamentals. Animal spirits. I'm not saying that the next period will be "bad". I'm suggesting that maintaining the same trajectory requires certain assumptions and that lower expectations may be reasonable. I'm not sure that investors who are indexing now have appropriate desired/required expectations. My understanding is that human nature has not changed. For reference, go to PDF document, exhibit 5 page 8. https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-investors-may-need-to-lower-their-sights Going forward, there are many ways that this can play out. One of the scenarios is that "stocks are cheap now". Before going "all-in" and "adjusting" some parameters in my investment universe, need to "see" how my investments would turn out in various scenarios. To conclude, one prediction (!). In 1997, Siegel and Thaler (recent Nobel for what it's worth) predicted a forward looking ERP of 3% for the next 20 years and said: "‘we are stressing long-term results and will not accept complaints for 20 years. Feel free to call us in 2017." My prediction is that the forward looking ERP for the next 20 years will be much closer to zero and I can discuss again this issue publicly in 20 years (2037). May we all do well. :)

Mixed feelings. Experiences with agencies are uneven. Sometimes, as Mr. Lewis describes, you get the impression that the person on the opposite end cares. But (anecdotal), that is not always the case (far from it). Reading the article leaves me under the impression that these large entities are somewhat self-sustaining which may be a larger problem. There are many ways to "restructuring". Reminded me also of another kind of attempt: The Common Sense Revolution in Ontario from a few years back. The jury is still out on this one.

OK. I see your point. But this is playing on words with a chicken and egg question. -What the graph and basic deductions mean: --)% equity allocation in the aggregate is essentially explained by change in price. --)so we can conclude that markets are cyclical (we won't get the Nobel prize for that conclusion). --)another consensual conclusion is that if markets are high, returns will tend to be lower going forward (no need for thousands of words here). What this thread is about: 1-the level of the S&P now vs its "normalized" level 2-is indexing contributing to the divergence if any? 3-in combination, is it moronic to index now? From a previous post, you mention: "If investors increase their equity allocation, it will lead to higher prices" From the last post, you mention: "And as equity allocations go lower, returns will be lower." The points of my last post: These statements are truisms and derive form basic math. These statements, as expressed, suggest (wrongly in my opinion) that what causes markets going up or down is the actual "participation" of investors or absence thereof in the markets. From the last article: "It will undoubtedly come as a surprise to many of you that households’ equity allocations are at close to record highs, since the financial media in recent months have been serving up a steady drumbeat of stories about how the average investor, traumatized by the memory of the 2008-2009 Great Recession, is out of the stock market entirely." What seems to be surprising to the author of the article and the author of the previous links that you provide is not surprising at all. It can simply be explained by basic mathematics. Back to this specific thread. The links that you provide tend to show that markets are overvalued and that going forward returns will be lower thereby questioning if passive investing is a wise choice. The links that you provide and your own quotes tend to support the idea of mass movements, momentum and reflexivity. These are concepts that are self-reinforcing and may contribute to deviations from intrinsic value. My opinion is that price tend to correlate with intrinsic value but variations can occur. In terms of cause and effect, demand and supply factors can interact in a subjective manner to increase the divergence. My opinion is that there is a significant divergence between aggregate intrinsic value and the level of the S&P index, and indexing/passive investing is a contributing factor. I submit that the data you provide support those conclusions.

"I don't agree. The transition to indexing could lead to a bubble if it occurs too quickly but indexing in and of itself does not create bubbles. Indexing leads to less trading and possibly if adopted on a very very large scale , wider bid/ask spreads. Philosophical economics has already basically beautifully explained what happens when indexing is adopted on mass: http://www.philosophicaleconomics.com/2016/05/passive/ http://www.philosophicaleconomics.com/2016/05/indexville/ The real question is not about indexing. Its about equity allocation in investor portfolios. If investors increase their equity allocation, it will lead to higher prices. Again philosophical economics provides a great explanation: http://www.philosophicaleconomics.com/2013/12/the-single-greatest-predictor-of-future-stock-market-returns/" The first two links state that the ratio of active and passive investing does not matter in mathematical terms versus returns. This is the same type of premises which are used in quantitative investing that assume that investors are rational and that behavioral economics does not apply. The 3rd and last link is based on a fundamental flaw. The author suggests that 1)the % equity allocation by investors will vary according to supply and demand factors, 2)the % equity allocation by investors will closely predict future market returns. The article, in fact, in a lengthy and convoluted fashion, goes on a detailed circular discussion about these assumptions. But, simply looking at the top graph, the % equity allocation by investors simply coincidentally follows the market (price). For instance, when the market corrects by 50%, the % equity allocation will fall by close to 50%, as bond value overall changes much less and as cash, by definition, does not change value per unit. Also, when markets gradually increase, the market value of the equities held by investors will also gradually increase and that essentially explains the gradual increase in the % equity allocation. No wonder, the % equity allocation by investors can be interpreted as a predictor of future return as it constitutes a closely related coincident indicator. In fact, any significant deviation of this correlation would require a separate explanation. The reason behind this simple reasoning is that, for every investor who is a seller, there is an investor who is a buyer. Equity does not disappear when you sell it. I would submit that using conclusions based on a fundamental flaw may lead in the wrong direction. What is perhaps interesting is that the first two links (active versus passive investors) are based on the fact that even if individual investors change camp, the total number of investors does not change. Fair enough. Well then, concerning the third link, the author seems to forget that even if individual investors % equity allocation (in terms of quantity of equity held) will change over time, the total % equity allocation (in terms of quantity of equity held) will be relatively stable in the aggregate. The essential reason explaining the variation of % equity allocation in the aggregate is because of share price change per unit of equity held. So, when this philosophical explanation suggests: "If investors increase their equity allocation, it will lead to higher prices", I tend to reflect that, for my accounts, I will tend to increase the equity allocation when prices will be lower. And perhaps that discussion explains why a relative infatuation with passive investing may be a contrarian signal.

Arguments from LC: "All excellent points." 1+ But there is a risk of a fallacious basis in a multi-variable problem where critical variables are not clearly defined. To illustrate: If the S&P is not in bubble territory or in fact if stocks are cheap, then why do BRK, FFH, Klarman and other value investors have high cash levels in their portfolios and why do they not simply invest in index ETFs? Or is the argument that indexing creates opportunities for value investors outside the indices, then why do BRK, FFH, Klarman and other value investors have high cash levels in their portfolios and why do they not simply invest in equities outside of the S&P? The argument may not be that indexing is causing a bubble. It may be that passive investing is contributing to crowd psychology in any market (up or down).

"Do you have evidence of this?" Trying to look at this objectively with data. The growth in ETFs has been matched to some degree by investors getting out of mutual funds. So, in a way, what we see may just be a new distribution of the same pool of investors. However, some numbers suggest that, overall, the level of "passive" investing is on the rise. Nothing wrong with that if guiding lights are rational and act based on fundamentals. The inherent risk is that crowd psychology associated with passivity can go both ways. In terms of evidence, have you been in a moving crowd recently? Better hope that the crowd is moving in the right direction. https://www.amazon.ca/Crowd-Study-Popular-Mind/dp/1773230190/ref=sr_1_3?s=books&ie=UTF8&qid=1510349533&sr=1-3&keywords=the+crowd+le+bon Data from GS: http://www.goldmansachs.com/our-thinking/public-policy/directors-dilemma-f/report.pdf Having said all that, if your time horizon is 20 years or more, with time, these "crowd" issues become progressively inconsequential.

Instructive. Would add an opinion that the increasing market share of ETFs (now very significant) has had a tendency to reinforce the general upward trend and to decrease short term volatility. That's OK. A big question is how the typical investor will react when trends change. As GregS says, history offers some suggestions. Would also add that the significant rise in synthetic replication ETFs has created a new potential risk, especially in the leveraged category. The risk is related to the opacity and lengthened financial intermediation process. It reminds me of the period when the market of credit default swaps on a specific underlying asset was actually much larger than the value of the underlying asset. I don't know exactly how this may play out if risk management is eventually tested but the 2008-9 period for the CDS market showed that price discovery may be a painful process when the true market value of an asset is difficult to appraise in a fire sale context even if the pool of assets is said to be over-collateralized. Ask AIG. Of course then, systemic risk was socialized. Who could have predicted that? A word on ERP mentioned by Packer16 along the way. Probably not worth discussing but Damadoran has written a lot of interesting stuff on the topic. What I find particularly fascinating are not the numbers he comes up with but the actual "models" used. There is a relatively large consensus on historically realised ERP. But, I would humbly submit that, going forward (let's say for a relatively short term horizon like 10 or 15 years), you can hypothesize a number but need also to include a standard deviation that is much larger than the number.

Things are far from perfect but I say that we're making progress. https://phys.org/news/2013-05-aliens-star-trekfact.html A graph is worth a thousand words. There will be temporary setbacks but we just need the overall trend to continue.

Thought this may be relevant. https://www.linkedin.com/pulse/just-because-youre-right-doesnt-mean-theyre-wrong-brian-walker "For me this is the true value of diversity, everybody examining and considering different perspectives and coming up with the best answers for the challenges they face. It’s not easy work. It’s often very uncomfortable. But the rewards are unmistakable, and we can end up finding solutions to problems we never imagined possible." Then again, who I am to say?

Looking forward moving to a normalized stock picking mode. Disclosure: -have held TLT (ETF 20yr+ long term US government bonds) since 2010, with opportunistic buying along the way. -net seller overall, especially in the last 2 years, with a residual +/- 10% of portfolio. Reasons to keep residual position: -USA potential as safe haven -Deleveraging environment with extreme over-indebtedness But now: -The Fed intends on tightening. -The US may lose its cleanest dirty shirt status. -This is a bubble and, at some point, the cycle will turn. For some horizon: https://seekingalpha.com/article/4121565-800-years-bond-markets-cycles According to the economist Eugen von Böhm-Bawerk: “the cultural level of a nation is mirrored by its interest rate: the higher a people’s intelligence and moral strength, the lower the rate of interest”. ??? Looking for contrarian opinions. In the meantime, will read more about the Venetians.

mjs111, Not the accounting pro here, but what you describe simply seems to correspond to the "convergence" that leads to the progressive incorporation of the IFRS policies into US GAAP.

"These big losses are telling you that they have run through their reinsurance cover; the unknowns are 1) is there another band of cover above them?, & 2) how far are they from it? Another 1-2 hurricanes/tropical storms showing up over the US mainland this quarter, could really screw up your day." Contrarian thought provoking. Speaking of covers, it looks like the sector is suffering to some extent as the earnings events are starting to look like capital events for some. Probably not enough for a material hard market in the days of ultra loose and centrally planned easy money. Maybe getting there slowly. In no way hoping for natural catastrophes but big hits in Q4 may reveal more as some may be more naked than others. The comment made me look at my 2005 notes about a previous holding which I still follow. For the long term minded, in 2005, Wilma was the 4th category 5 hurricane of the season and landed in Q4. When you look at the numbers, even if Wilma was relatively less costly than Katrina, losses reported by industry players including FFH revealed the potential problem related to relatively saturated layers. As always, the context then was not completely comparable. Retrospectively looking, Q4 events (and others) gave rise to an opportunity to participate in a secondary IPO with shares priced at 162,75 (USD). And that proved to be expensive for a short while. Still, hardship can give rise to opportunities. To address the underlying concern more fundamentally, from the operations standpoint, would humbly submit that risk management is not only related to the setup of layers and layout of covers. Have to look at the diversification of streams and overall capitalization. 2017 vs 2005 = different strokes.

Interesting question then. Should a benchmark be chosen based on previous returns or based on the philosophy of the fund manager?

"Berkshire cash position end of September 2017: Now at USD 109.290 B, as I calculate it [including T-Bills]." Here's a relatively recent link: http://www.silverlightinvest.com/blog/when-cash-king If the author wants to update the chart, there needs to be more room at the top. Go for gold or sky is the limit?

Great stuff. Interesting economics. It's good to hear from the real world. It seems to me that Amazon takes a large bite. Maybe when you reach a certain volume, you may obtain a better rate? At any rate, good luck. Your customers are probably part of the group who feel tight (disposable income, savings rate) so keep us informed. Thx.

To reconcile, the answer may be on page 65 (of the report) under the heading Holdco liquidity position and referring to the remainder of 2017. "Net proceeds of approximately $1.6 billion expected to be received on the closing of the sale of the company's 97.7% ownership interest in First Capital would further augment holding company cash."

The book is about resource conflicts, security and "global justice". The defining issue is the coming energy transition. Will we have to? versus Do we need to? versus Do we want to? Disclosure: my take is that the transition may not be as smooth as "planned". Decided to look at opinions that appear to be far from my own at this point. Typical ivory tower type of book with a relatively high anti free market sentiment. Useful because the book contains a lot of relevant data and the way the analysis is done allows checking on the underlying assumptions. The book was published in 2007, which is a relative advantage as there is an adequate period for a retrospective assessment of the positions. One of the takeaways is that the concerns about sustainability have been around for some time in a Malthusian type of way. Like in the case of Mr. Hussman for the markets, the concerns may materialize...eventually. Another takeaway is that the transition will be a challenge. Optimist, but the "adjustments" will raise fairness issues that may trigger instincts. We'll need to talk. Good book if you can tolerate being left with more questions than answers.

Page 18, he means, using the page numbers in the document - Allied World's income statement history. Sorry, couldn't resist.

Interesting. No wonder the retail space is being clobbered. If you can answer, how do you choose a supplier and how do you decide if a supplier is reliable? Do you specialize in only a few items? Your turnover seems quite high but do you store the inventory in your home? Maybe you are on your way to become a leading indicator. :)

As per pp 51-52 in interim report. http://s1.q4cdn.com/579586326/files/doc_financials/2017/q3/2017-Q3-Interim-Report-Final.pdf -accident year loss ratio from date of acquisition (July 6th to end of quarter). -both numerator and denominator It's a risk business. From the report, acquired insurance and reinsurance portfolios "responded as expected". Large numbers, but in line. So, should be a blip in the long term scheme of things.

Few more comments. Maybe this all benign. Maybe not. For those interested: http://www.libertylawsite.org/2017/10/31/giant-qe-gamble-how-will-it-end/ https://www.stlouisfed.org/publications/regional-economist/third-quarter-2017/quantitative-easing-how-well-does-this-tool-work The questions: -Is this just about splitting hairs? -Was QE effective? -Will this be an uneventful symmetric unwind? I submit that nobody really knows and we have history in the making. My opinion: this is a colossal gamble. Bias: always worried when some play with other People's money. Certainly a topic worth re-visiting at some point.

From Seth Klarman: "You might think that the increasing percentage of investor funds managed by professional ("professional"?) money managers would serve as a check on market excess. If you did, you would be seriously wrong. Very few professional investors are willing to give up the joy ride of a roaring U.S. bull market to stand virtually alone against the crowd, selling overvalued securities without reinvesting the proceeds in something also overvalued. The pressures are to remain fully invested in whatever is working, the comfort of consensus serving as the ultimate life preserver for anyone inclined to worry about the downside. As small comfort as it may be, the fact that almost everyone will get clobbered in a market reversal makes remaining fully invested an easy relative performance decision. Isn't this what always happens at the top of historic bull markets? The answer, of course, is of course. Investors and the financial media, always eager to grasp at straws, however slim and brittle, jumped on the year-end shareholder letter of legendary investor Warren Buffett as fodder for the bull case. The Dow immediately rallied 200 points. What Buffett, Chairman of Berkshire Hathaway, said is that at today's level of interest rates, and assuming prevailing levels of corporate profitability, in his view U.S. equities as a whole are not overvalued (and, just as assuredly, not undervalued.) Virtually no one explored his real message, equally prominent, suggesting that today's unprecedented level of corporate profitability may well be unsustainable; future profits may fall far short of today's lofty expectations. The U.S. stock market is extremely vulnerable to disappointments; nothing short of perfection is built into today's prices. And Buffett confesses that it has become increasingly difficult for him to find bargains in the current market environment." That was in 1998. From the Oracle: "Today's price levels, though, have materially eroded the "margin of safety" that Ben Graham identified as the cornerstone of intelligent investing." Also from 1998. I'm not saying that markets are overvalued. I'm just asking: Is this time different?

investmd, "Does anyone with more experience than me, have thoughts on above or specific insight into Braddock, Giverny, Arlington Value? " I have never invested in Giverny Capital but have followed them. Really a fine operation with a consistent and candid approach. It's fairly easy to access the annual reports (some info is hidden for outside investors) if you want to understand their philosophy. My understanding is that they follow a GARP approach and do not look at macro stuff at all. racemize, Enjoyed reading your report and thank you for sharing. From Benjamin Graham, who does not appear explicitly on your list but who, somehow, is the "father" of all of them. "Common stock selection is a difficult art, naturally, since it offers large rewards for success. It requires a skillful mental balance between the facts of the past and the possibilities of the future." Congratulations on your results and good luck going forward.

So, our current economy is said to be business as usual as we are going through an unprecedented monetary experiment that has nothing to do with 2017 Japan which is trapped in a vicious circle and from which it can no longer disentangle. True enough, because of the absolutely unusual parameters, you need to look far and between for historical comparables. Didn’t a recent Chairman, full of good intentions, have answers for Japan in 1999-2000 (17-18 years ago)? http://www.sistematikrisk.com/wp-content/uploads/Japanese-Monetary-Policy.pdf Perhaps, since then, in a case of self-induced paralysis or lack of resolve, Japan has not done whatever it takes. ??? In simple terms, it is said that 1- the goals were currency depreciation and inflation 2- those goals should be relatively easy to attain if you understand the monetary logic that precluded a result that would be a manifest impossibility in equilibrium. Forward to 2017. The JPY/USD exchange rate and Japan inflation are essentially the same. So money printing is effective? From the great powers that be, who can explain that? Any side effects? In the same time frame, gross public debt went from 140% of GDP to 250%. :o And there is now no end in sight as a vicious liquidity trap circle has been initiated. What’s the relevance as one may be reading note 22 in the financial statements of a US manufacturing firm? Because, the same recipe is being applied in the US (and elsewhere). There have been recent talks of an attempt at quantitative tightening but, in a very recent talk given by Janet Yellen, it is clearly explained that the full unconventional armamentarium will be rapidly re-deployed in the event of even a run of the mill recession. https://www.federalreserve.gov/newsevents/speech/yellen20171020a.htm Vicarious learning, anyone?

"I'd be interested to know how your counter-cyclical macro focus has worked for you over time and how you use it to make decisions." Common themes: -no forecasting or timing ability -essentially bottom up, looking for long term compounders -anchor holdings -concentrated investments Differences: -very conservative intrinsic value appraisal -very large requirement for margin of safety -will tend to sell securities when IV reached (deep value and event driven stuff) -have adjusted positions in core holdings, with a net advantage even with tax effect included -Have not held BRK as I continue to assume that I will do better… -often high cash balance -so far absence in the markets more than compensated by opportunistic dipping -when cash reach high balance, still look at an expanding opportunity set but time spent looking at macro side, otherwise the macro stuff is just for fun -comfortable contrarian with what seem to be very awkward positions at times In terms of cycles, -went through the dot-com bubble with a conventional portfolio and no hype stocks -coincidentally in 2007-9, went all in with leverage -now back to similar profile as in 2006-7 Now, Trying to expand opportunity set Debating if high cash level is because I’m wrong or because the Market is wrong Mostly long term optimist Hoping to opportunistically invest in 5 to 7 holdings for the long run and keep cash balance at less than 5%