Cigarbutt

The underlying topic is capex of a BH sub in a form of renewable energy and in a regulated market. Business aspect and political aspect. -Mr. Buffett has made significant investments in this field and, presumably, will continue to do so, based on the fact that the energy market is large, regulated and will continue to provide relatively high and consistent returns. -He has stated that his investment decisions are, at least partly, based on the fact that "society" has "decided" to foot the bill concerning certain environment-related liabilities. (2016 annual report and others) So one may or may not agree with the above for political or ideological reasons and it is important to look at the whole picture but it must be possible sometimes, for healthy discussion purposes, to separate the business and political debate. Access to relatively low cost energy (so far mostly due to fossil fuels) has gone hand in hand with a massive and unprecedented global improvement in standards of living. But now, [glow=red,2,300]we[/glow] face a transition that may be (?) needed because of environmental concerns and that will eventually be inevitable because of natural depletion. In order to get through the transition, [glow=red,2,300]we[/glow] have to come to a satisfactory understanding about how this should be done and this will necessitate competitive collaboration at the business and political level. But, as far as this post is concerned, I am (and maybe others are) trying to decide if BH will continue to be a rewarding investment and understanding of the business underpinnings of its energy operations is an important component. I want to learn. I really admire and respect Mr. Buffett but that does not mean tough questions cannot be asked. There is a grey zone between building strong and efficient operators that will "optimize" competition and drive out "sloppy" operators on the one hand and, on the other hand, the possibility of regulatory capture through potentially unfair practices versus already existing competitors and through potentially unfair tactics versus potential new entrants (ie residential solar). Maybe the best place for that discussion would be in the thread recently initiated by LC. Concerning wind energy, my opinion is that, very long term, it is unlikely to be a winner because others forms of energy will continue to benefit from persistently decreasing costs whereas wind is likely to reach some kind of relative plateau. Whatever opinion or who you vote for, the reality is that wind energy is likely here to stay for at least some time. So, it will be interesting to see if and how BH continues to invest in wind energy. I found a link (see below) that maybe was covered on this Board before and which describes the various operations in some detail that is helping to understand the business dynamics and that, maybe, can contribute to a constructive discussion. https://www.berkshirehathawayenergyco.com/assets/pdf/2017-fiic-presentation.pdf For those interested, here's a reasonable link: http://mragheb.com/NPRE%20475%20Wind%20Power%20Systems/Economics%20of%20Wind%20Energy.pdf There will be many challenges and conclusions are based on very long term assumptions. There is clear possibility that some costs are vastly underestimated (transmission, storage). The price for "collaboration" on the "smart" grid may be particularly high in some markets. Food for thought.

Perhaps, as we can see on a related thread about solar power and BH, incentives matter when it comes to adoption of renewable energy options. (Un?)fortunately, the government is also involved and, like it or not, policies can influence choices. ------------------------------ sidetrack for Canadians I also feel uneasy about the equalization payment asymmetry (even if I am on the receiving end). These are tough questions and we should restrain from easy generalizations. That said, the present system seems to represent an unfair subsidy to provinces that have hydro-electric power generation potential. To me, higher electricity rates with some form of mitigation for the very low earners makes sense. http://nationalpost.com/opinion/peter-holle-artificially-cheap-hydro-power-your-equalization-dollars-at-work https://www.fraserinstitute.org/article/quebec-proves-canadas-equalization-payments-are-not-always-equal From one of the links however, it seems that fair compromises can be reached, ie Hibernia. end of sidetrack for Canadians -------------------------------------- So, when MidAmerican decides to invest long term in wind turbines, one has to consider that there may be a potential role for government involvement and one has to accept that the intervention may introduce inappropriate incentives. We need energy going forward. I have incomplete knowledge but, long term, I would bet more on solar. From Thomas A. Edison, who may be a reasonable reference: "I'd put my money on the sun and solar energy. What a source of power! I hope we don't have to wait til oil and coal run out before we tackle that."

This position and cash post is a component of the alpha that we try to obtain through "active" investing. Relevant link. http://www.marketwatch.com/story/americans-are-still-terrible-at-investing-annual-study-once-again-shows-2017-10-19 The article is about fund investing but I would bet that conclusions can be generalized to specific investments pickers. In the end, this is a zero-sum game. It's comforting that people on this Board are part of the group in positive territory. ;)

I held Supremex a few years ago and it was a mistake. The main business was (and I think this is still the case even if they are trying to catch the new wave related to e-commerce) envelope manufacturing in a consolidating and declining industry. During the time I held it, it behaved like a value trap. Ended up with +/- zero return (small capital loss more than compensated by dividends) but the opportunity cost was very significant. Went to annual meetings and visited their installation. I liked the CEO who was at the helm then. This is a company in transformation in a commoditized environment. Will keep watching. Good luck.

-Informational post only. In order to better understand the dynamics (economic and political) of the coming energy transition, since early September, I am following a Coursera course named: "The Future of Energy". Overall, I find it quite good but it is not free of bias. The course is a nice complement to "Fundamentals of Global Energy Business" which is more conventional. For those interested in espousing or rejecting wind power as a potential solution, week 2 of "the Future of Energy" has two relatively short videos on wind power and turbine technologies. The "lecture" is given by a structural engineer and deals with topics like: blade structure and aerodynamics, torque and others. I learned why there are three blades. The engineer feels there may be future in off-shore wind power? If the course is not open now, it will likely re-open in the future.

In a way, investing makes most sense when it is business-like. Would you shut down your business simply because a downturn may be around the corner? Sustainable businesses through ups and downs often show financial flexibility, useful in both scenarios. What is fascinating in money management though is that you don't need to sell assets, terminate leases or fire employees if you want to change course, you just need to press on a button. I think that is also a form of flexibility that comes with its own risk-reward profile. What is also fascinating (think of the Graham-Doddsville theme) is that there are many "right" ways to deal with position sizing based on your investing style and personal temperament. "Perhaps we should include how we think about preparing in advance and what actions if any to take." Maybe, we can expand on that using principles or specific examples but, for now, I will give you a short answer. I understand that you are from the UK and maybe hockey is not your thing but a guy named Wayne Gretzky, who was called "the Great One", apparently candidly explained his successes by saying that he tended to go not where the puck was but more where the puck will be. Simple but not easy.

I have some training in biology. That may be a handicap in terms of perspective. Scientific progress is often incremental but can occur step-wise (unexpected). So, don't want to be a naysayer and dampen the enthusiasm but I would submit that this research is going in a completely different direction. It's not about finding a way to unclog a blocked blood vessel or to lower blood sugar, it is about a significant change of genetic expression or even a fundamental alteration of the genetic code itself. Here's a link that offers, perhaps, a more balanced perspective. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2774752/ Primum non nocere. Quality over quantity?

Somehow now, maximum life expectancy seems to be stuck. Hope may lie in regeneration biology. But that field is only in infancy. The clock is ticking. http://www.fis.org/public/survivalcurve-2020.html

Disclosure: -anecdotal evidence, by itself, has little value. The shoe shine boys stories or similar can always be remembered after the fact. -limited knowledge and no interest in Bitcoin. Still, the following link describes an interesting phenomenon. http://www.newsweek.com/bitcoin-man-sells-house-possessions-cryptocurrency-682459 Isn't this too easy?

Why this post? -working on a thesis and eventual contribution to an active thread about a stock discussed on this Board where what happens in China matters. -I want to learn. It is expected that China will be the workhorse here in renewable energy. https://www.theclimategroup.org/sites/default/files/archive/files/RE100-China-analysis.pdf Many now assume that coal demand in China will plateau for the next 20 years. Isn't that an unusually large assumption? Even looking back only 3 to 5 years ago, it was felt that coal demand would continue to increase in China? We are talking about extremely large numbers. A small difference can make a large difference. Aren't we not calling the paradigm shift a bit early especially if we base our projections on the institutional framework in China? And if the assumptions hold, isn't this a massively bullish signal for commodities in general? If energy demand and electricity consumption in China follow the proposed graphs going forward, isn't it reasonable that they will also require "dirty" iron ore also? Change is inevitable but difficult to predict. No? I always say to myself (+/- from Yogi Berra) that I've got to be very careful if I don’t know where I am going, because I might not get there.

Thanks for your time. I also use 3 separate evaluation grids for scenarios #1, #2 and #3. Historically, had to focus more on #1 and #2 when #3 did not yield buying actions. But I prefer #3. Hopefully, going forward, either because the markets will adjust or because I will, buy and hold will apply. "and I got a more normal job and got married and began to save more cash" I guess this was about a margin of safety too. :) "I then became quite an inactive investor for most of the next 10-11 years." Since this post is about the dynamics of position sizing, if you have time or think it is relevant, how did you manage in 2008-9 when indexes were going down. Did you just ride it out? Did you buy more of the most battered stocks? Did you do #3a?

Good stuff. Keep core holdings. OK. Bottom up in your universe. OK. Long term (over 20-30 years), these questions matter much less. OK. Cash and related only if you find nothing. OK. It is easier to be optimistic most of the times (all the time?). OK. It is hard (but not impossible) to show the advantage of opportunistic buying if the future looks like the past. OK? Still, there is a guy inside my head who keeps whispering margin of safety. I may need to work on that. A concurrent thread discusses Mr. Hussman and his strategy to deal with that aspect. I agree that some of his premises are highly questionable but, at this point, it is reasonable to consider the possibility that, for a time-period as long as 10 to 15 years, the forward looking equity premium may be negative. That's unusual. Potential headwinds. To learn, it may be helpful to look at/analyze what happened to the nifty-fifty stocks. Controversial. Potential conclusions (fully invested): -Even if you paid dearly versus IV as potentially suggested by the high PEs, long term, you did at least OK compared to the S&P. -If you had sufficient insight (careful hindsight) to avoid the big losers and keep the big winners, you did better than the S&P. -Coming in 1973-4 fully invested however, you had to be ready to suffer (Mr. Munger colorfully described how he felt then). -But, If, somehow, you were in a position to buy ++ the compounders in the downturn and hold for the long term, you got Buffettesque returns. So, back to the 10-Ks.

Appreciate that you took time to describe a valid point. A lot of noise. Need to filter. To outperform, one has to find the pockets of value. Timing does matter as being early can be equivalent to being wrong (?last part of the article from the first post). I'm not saying that 2017 is 1929 but here's a potentially relevant quote from someone sticking his neck out and commenting on waste. "The Board thus found itself subjected to a cross fire from two opposing camps, one blaming it for meddling too much, the other for not meddling enough. To cool observers it was clear beyond doubt, first, that the Board's attempt to bring about a loan contraction without adequately increasing rediscount rates had proved an impracticable and wasteful experiment, and second, that unless a more effective course were pursued the country was headed for a most serious catastrophe. What my own thoughts and apprehensions were in the matter I laid down in a statement published March 7th, 1929, a reprint of which will be found as Appendix ThirtySeven. This statement is referred to, not for the doubtful satisfaction of seeing one's views vindicated, but in order to show that it was entirely possible, indeed easy enough, at that time to foresee what inevitably had to occur unless we promptly mended our ways." (my bold) From Paul M. Warburg The Federal Reserve system its origin and growth 1930 Yeah, probably off-the-mark and need to be shouted down.

Got the book from the local library. Here's a link: https://www.amazon.ca/Ingenious-Canadian-Innovators-Healthier-Wealthier/dp/0771050917/ref=sr_1_1?ie=UTF8&qid=1508326631&sr=8-1&keywords=johnston+ingenious They do mention Myron Scholes but the book has a focus on the positives. Many items mentioned are relatively trivial. But maybe, small things matter. The Coffee Crisp bar was invented in Toronto, in 1939. Insulin is also mentioned. For those who are critical of modern science, that piece of history may be an interesting benchmark.

-Potential perspective of the investor who would want to buy units in an investment fund. Did they have access to a valid description of the fund's market cycle thesis and the associated explicit use of (costly) hedges? Isn't the AUM curve proving the survival of the fittest theory if the funds are disconnected from reality? -Potential perspective from the value investor watching this. Hasn't it been shown that, in general, fund investors buy funds at relatively high levels and sell funds at relatively low levels (Malbar studies et al)? Doesn't that mean that one should look [glow=red,2,300]prospectively[/glow], for a specific idea, to assess the potential value going forward? If the return curve shown in the last few years would be for a specific firm, wouldn't that attract the attention of a hungry contrarian value investor for potential value? When we smell potential opportunity and when we decide to go in, isn't usual to average down (for some time) before relative positive outperformance? -Concluding remarks. I am not saying that investing along Mr. Hussman since 2009 has been a good idea. The answer is clear. I am not even stating that investing along him is a good idea now. But it could be. I am just saying that the idea is relatively better now. How better? That is the question. The ironic thing is that the potential outperformance could occur at a nadir point for AUM. Investment returns are skewed. The challenge is to be on the right part of the curve.

By David Johnston and Tom Jenkins. I have deep respect for Mr. Johnston who was principal at my alma mater, has been and will be associated with Fairfax and recently was Governor General. An entertaining, inspiring and unpretentious list of innovations coming from deep theory, intuitions, minor events or simply luck. It seems that the common denominator for innovation may be, in essence, an inclination to improve.

Slight digression from the main thrust of the post. Some here explicitly voice some dissatisfaction concerning investment returns and, at the same time, expect sunnier days. Implicit value investing risk here? Can you explain why it is felt that Chou funds will outperform going forward apart from random variables? And to tie in with the main thrust, by making the new insurance entity part of the funds, wouldn't that align incentives?

In my huge file on Fairfax, I found this link: http://financialsector.blogspot.ca/2006/01/prem-watsa-fairfax-financial.html It's a 2006 article but there are relevant comments that seem to be well sourced about how Mr. Chou suggested to Mr. Watsa the value of float/insurance around 1984. Nostalgia.

Yes he is a genius. Perhaps another way to put it is that he is a complex individual. ??? This line of reasoning is not about identification of lies or deception. Example. He often says that most people should invest in index funds. The fact that you agree with the above statement does not mean that it is true all the time and does not mean that WB will do the same for himself. The underlying point is that what he says and the way he says it may depend on the forum and to whom the message is directed. Despite certain shortcomings, I submit that Alice Schroeder's biography does a good job when describing the importance of a favorable public perception for Mr. Buffett and how this may impact his public discourse. Mr Buffett is a hard core capitalist and wants to be perceived as a nice guy. I really admire him but it is hard to persistently score highly on both fronts. The underlying point of this specific post is that the cash position at BH has been increasing for quite some time and it is difficult to reconcile this conclusion with the present notion that stocks are "cheap" as Mr. Buffett remains the key capital allocator at BH. I also enjoy to be greedy when others are fearful. That does not necessarily mean I am proud of it.

"It is funny how many posters want to prove that Buffett is a liar by saying one thing and doing another. He is always opportunistic and if a $50 or $100 B deal comes to his desk that he likes, he'll buy in a heartbeat." I agree with the second statement. But the first statement may be a slight mischaracterization. I submit that his job as a public persona is distinct from his job as CEO of BH. You see this for instance when he generally discusses how tax rates should be higher for the rich and then explains in details why BH should opportunistically sell losses now in order to benefit from coming tax changes. My take is that he is sincere. It may be that when you integrate his comments, as an individual investor, you may want to keep in mind what hat he is wearing when communicating with the outside world. BTW, we all have to deal with contradictions and I find that WB has done quite a good job given his pro-eminence.

Let’s dig a bit here. What does the rising cash pile (absolute and relative basis) tells us? Obviously, Mr. Buffett buys stuff when it makes sense to buy stuff. He’s been the Master at that. Inverting though, it may be useful to try to answer why he is not buying and having to resort to a larger cash position. He hates cash and has said something to the effect that he considers cash as a holding position until he finds something else. A part of the cash position is related to the rainy-day fund idea. He has mentioned in the past that he took this idea of a reserve fund from his grandfather. My understanding is that he has mentioned a few years ago that he kept a 20 billion cushion at the holding company largely to absorb large intermittent insurance losses. With inflation and growing insurance and reinsurance subs, this number may need to be adjusted upwards. However, the rest of the cash pile has to be explained by a relative lack of opportunities and has been used in the past for the other component of financial flexibility: opportunities. Said before: “During the episodes of financial chaos that occasionally erupt in our economy, we will be equipped both financially and emotionally to play offence while others scramble for survival”. I don’t buy the idea that the phone does not ring. The discipline showed around the Oncor acquisition tells us that he may simply find that, in this low interest rate environment, he cannot compete on price with firms that can effectively finance projects at such low rates. In terms of numbers, the insurance and other assets versus total assets for BH has decreased in the last 10 to 12 years and the cash to total equity may not be the best measure to assess the lack of opportunities index that Mr. Buffett provides in his yearly statements. Here are some numbers (not audited) cash and CE over total insurance and other assets. 2006 20,3% 2007 18,1% 2008 12,0% 2009 12,4% 2010 14,9% 2011 13,4% 2012 15,3% 2013 13,8% 2014 17,4% 2015 17,6% 2016 17,3% Q2 2017 19,1% These numbers show a similar pattern to the link that John provided for us. However, if you subtract what you evaluate to be the “cushion required” for unusual insurance losses, the upward trend in cash accumulated versus potential opportunities since 2008-9 is greatly magnified. So this is not a forecasting tool but it would tend to go against the remain fully invested at all times rule and certainly gives credence to the idea that cash may be a call option on opportunities. No?

For those interested, simply have to fill an on-line form to receive the reports automatically. http://www.hoisingtonmgt.com/cgi-bin/tmplMailer.cgi?formName=EconomicOverview They certainly have an interesting perspective. Looking at the table on page 6, they report a [glow=red,2,300]20 year [/glow]annualized return (net of fees) of 7,8% versus 7,0% for S&P 500. I understand that the S&P return reported does not include dividends reinvested (?). But still, I thought some said that government bonds (even long term ones) are not supposed to beat the market over long periods. At least, that's what the conventional wisdom says. It is just that sometimes long term can be very long.

For those who may have an interest in the General, I found his Personal Memoirs to be a useful read. Available on Gutenberg. http://www.gutenberg.org/ebooks/4367 Don't know much about Chernow and will look into it. Thanks.

There is always a leap of faith between past returns and forward looking statements. And a lot of assumptions. There were three -if items before the "it means". I would also hope that my portfolio of stocks will outperform. It just remains to be seen. ;)

Definitely a good read. Over time, a lot of excess return to capture. But a zero sum game overall. We know that most excess return occurs relatively infrequently and this article suggests that only a minority of stocks provide the excess return. The article uses some "bootstrap" technique which can introduce even more skewness. Important to remember that the benchmark they use is not the markets but T-bills...yield now at about 1,05%. Implications? Many firms disappear. You don't hear much, usually, about investment management firms that disappear (survival bias). To win the race, you have to finish the race. The horses (unicorns?) you bet on will make the difference. To succeed, avoiding losers may be just as important as picking winners. The game we play fits into a spectrum varying from at large diversification to highly concentrated investing and "tactical" allocation. Fascinating game. One more thing. -If you accept the assumptions and limitations of the study, -If you are a regular joe who plans to meet a financial planner at this point, -If you accept that most mutual funds/equivalents underperform the market despite "adequate" diversification, It means that now, your expected return (less than T-bills) is less than fund management fees. Does that mean that the financial planner would suggest to stuff it under the mattress? I doubt it. Interesting times.