Cigarbutt

shalab, You are opening a breach (immigration, entitlement reform) that may lead to discussion gridlock (ideological contamination). Perhaps, we can stick to the issue at hand which is free trade and bilateral agreements that the USA has reached with Canada or else. This remains controversial and I will try to stick to objective data. For some time, I have carefully looked at several reports/analyses of the effects of NAFTA between the US and Canada. In the pile, you can find anything that you want. The most dogmatic reports are not terribly helpful. Out of the many that I dissected, I include one below. The report is balanced, is coming from the US and appears to be free of any specific agenda. The report is described as resulting from a bipartisan effort. Personal opinion: a lot of great things coming from the US are a consequence of constructive and respectful bipartisan work. https://cdn.bipartisanpolicy.org/wp-content/uploads/2017/06/BPC-North-American-Free-Trade-Agreement-Overview.pdf In the early part of this century, the US was in a very large trade surplus position. The pendulum does swing. Let's keep an open mind.

Thank you. Comments help to understand the notion of unfairness that is now labeled to NAFTA and to all other international trade agreements. Not much emphasis is put, it seems, on the gains. My humble Canadian impression is that most people remain in favor or free trade on this side of the border. Contentious aspects remain: lumber dispute, aspects of dairy/agricultural products and others. My conclusion was that the main parts of the agreements worked well and aspects were, are and will be a source of discussions. Maybe I am wrong. I continue to have difficulty internalize how the free trade agreement with Canada caused such harm to the USA. Successful agreements (whatever kind) work best when they are a win-win. Negotiation skills include empathy, something that is not taught in university. Hard to see a good outcome under present circumstances. Disclosure: long term optimist.

Glad that you appreciate John Hjorth, especially coming from somebody I perceive as one of the wise voices on this Board. “Keep them hungry and they will keep coming back”. Many valid points raised. Sorry, long post. 3 assumptions here 1-Politics is messy (perhaps especially American politics) 2-Free trade is the way to go 3-A segment of the American population is suffering through relative economic hardship. Obviously, political bickering over tariffs is not new. Wasn’t one of the triggers for the American Revolution the backlash against the tariffs and the mercantilist doctrine of the mother country, “no taxation without representation”? I recently visited a house where John A. MacDonald (our first prime minister, equivalent to your George Washington, in a way) lived for a while. Let me tell you that protective tariffs were high on the agenda and could mean victory or defeat at election time. In fact, it was a decisive factor that helped him and his Conservative Party win the 1878 election against the Liberals, who were in favor of free trade. This “protectionist” platform lasted several decades. Comments about President Trump being able to skillfully gather support are very relevant. But his victory may have something to do with other factors as well: weak opponent, union disaffection (many reasons for that) and many others. However, this time, as correctly mentioned, disgruntled voters, who felt that the trade deals were unfair, made the difference. The political wave now goes towards a protectionist attitude and various drifts are possible but I submit that, eventually, our institutions will take us back to its long term trend towards more liberalized trade. The USA may be the champion of political expediency and pork barreling but, somehow, its foundation allows adaptation and change. The US has not become the richest nation in the world by chance. The political system is messy but it works. Admittedly, to watch the process can be (extremely) painful. Looking back, as the 20th century progressed, despite a non-linear and sometimes contentious process (World Wars, Great depression with the Smoot-Hawley episode and others), I submit that institutions in advanced economies allowed for a progressive decrease of protectionist policies and that was a major factor behind the global improvement in living standards. This is clear in the aggregate and I submit that the USA, as a country, has greatly benefitted from free trade. https://www.winton.com/longer-view/us-protectionism-in-four-charts In the last 25 years, world trade volume has increased more than fivefold. No wonder, adjustments need to be made. Why would one consider going back? Please explain. I remember a lot of controversial discussions when the free trade agreement between the US and Canada was signed in 1992. I remember Ross Perot’s “giant sucking sound” argument. There were and there are still “issues” and obviously improvements and transition measures can be considered but my opinion is that the deal has been mutually beneficial for both countries. I think that a similar conclusion applies to Mexico and China. If you believe in the benefits free trade (that’s the underlying basic question), adjustments and improvements of the mechanisms to deal with disagreements should be sought for, not nullification of the entire deal. When you consider Mexico and China, a problem is clearly related to a major wage arbitrage that has occurred. Despite mutual benefits overall, segments of USA population have borne the brunt. This new Grapes of Wrath segment is identifiable, relatively concentrated in certain states and members of that segment have not been able to find equivalent jobs. That is the problem. This situation has been worsened by robotization (see recent post on tech replace jobs) and other factors that have nothing to do with free trade. Also, this segment does not “see” the gains that they had but clearly feel the disarray associated with job loss and difficulty to find an alternative. I submit that major and unilateral changes to international agreements may not achieve what is expected for this segment of the population and protectionist side effects may kick in. If you agree that free trade has been and will continue to be beneficial, this debate reminds me of the technology debate that displaces and perhaps even eliminates (on a net basis) jobs. Does that mean that we have to abandon technology, innovations and the implicit “progress” associated? So what to do? To deal with the Luddites, the British government used the army. Proponents of a “strong” government would propose “transition” measures. In one of his annual reports, Mr. Buffett suggested that the USA should do a better job with this transition. I don’t know about the way to achieve this. All I know is that going protectionist in order to try to “satisfy” a segment of the population will be a lose-lose proposition. Concerning the trade with China (main topic of this post), trade statistics are revealing. https://fas.org/sgp/crs/row/RL33536.pdf Even if there has been some questioning in the last years, free trade has provided tremendous advantages to both countries. The notions of intellectual property theft, persistent large trade imbalance and the considered unfair trade practices should continue to be part of ongoing discussions. Obviously the context is dynamic and “black swan” events can happen (interesting to remember that China has replaced Japan as the poster child of the cheap exporter, champion of unfair trade practices and currency manipulator) but I would venture to say that a relative stability/balance has been achieved in terms of trade between China and the USA. The geo-political relation between the two super-powers has remained relatively good and, so far, the Thucydides trap has been avoided largely, I think, because of the growing economic ties. Trade has become a force for stability and this should be remembered after going through a century devastated by two World Wars. Sometimes you have to be careful about what you wish for. With growth rates coming down, an aging population and many other challenges, China may also consider adjustments. Their central government may act differently than our Western ideology would suggest. I submit that an unbalanced and indelicate approach may cause China to turn inward. Aggressive outside pressures may cause China to become even more centralized as it may have to safeguard its political legitimacy. Handle with care. In the last few years, globally, the growth of world trade has slowed down and that may be due to decreasing domestic political support for such agreements. My opinion is that this trend should be reversed. Maybe, the recent rhetoric is just about simply negotiating better deals (maybe needed, for instance, concerning the specific examples mentioned in DTEJD1997 post). However, if this is about a Smoot-Hailey type strategy, I submit that this is a wrong turn. An obvious option for the counterparty is retaliation…We’ve seen the movie before. Historically, in terms of foreign policy, the US has alternatively used a flexible approach related to the classic guns versus butter tension (home versus abroad focus). Interestingly, now the guns and butter approach seem to be combined. Food for thought. Some may feel that this a peripheral issue but perhaps helpful to remember that investors have enjoyed abnormal returns in certain firms that profited from globalization and to keep in mind that, historically, the protectionist predicament has typically hurt animal spirits and expectations.

This kind of follow-up perhaps has little value as they just recorded man-made seismic activity near North Korea but the following recent link shows an interesting parallel to what Mr. Buffett did many years ago. http://www.businessinsider.com/beyonce-jay-z-new-house-los-angeles-mortgage-2017-8 This is not about envy and I think that both are artistically very talented but this is really a head scratcher for me. I doubt that they will do as well as the Oracle, financially speaking, and, worse comes to worse, even if they lose the house, it would not be the end of the world or a Johnny Depp moment but, still, I am amazed at the general complacency about debt and the reaching for yield with eyes wide shut mentality. My thinking (and biases) suggests that this has percolated down fairly deep. When we collectively look back at this period maybe we'll say: "It was the best of times. It was the worst of times". Maybe Dickens had something going then.

"...the US government deal with the resentment to free trade". Perhaps many options here. I like to think that best government policies are based on an net NPV type of philosophy, articulated on a clear vision combined with ways to mitigate transition effects. Isn't this what you expect of your favorite CEO when you invest in a company? "As with a lot of things in economics, the problems morph into a political one, and will be resolved, one way or another, at the whims of politicians rather than by some economic professor pontificating on the laws of comparative advantage." I agree but do you think that politicians have done this relatively well in the last decades and do you think that it is reasonable to suggest that global living standards (in advanced AND emerging economies) have improved substantially because of free trade? https://ourworldindata.org/international-trade Fair to say that we have to make sure we agree on destination before we discuss the mode of transportation or the itinerary.

Thought I would bump this old thread as the issue is still relevant. Have done some reading lately on factors leading up to, and on potential solutions for, the US-Canada lumber dispute. I thought the following (recent) link was useful and perhaps brought useful elements about protectionism and the present dilemma with China. https://assets.realclear.com/files/2017/08/662_pa819.pdf Personal comments: (My opinion is that free trade is a globally and net positive policy.) (The Cato institute cannot be considered completely objective, independent thinking required) -The link provided an interesting analysis of the effects of tariffs on Harley Davidson, a company I have followed for a long time (as an investor). -The link also includes an overview of the direct and second order effects of tariffs on the steel industry in the early 2000's. Disclosure: I respect and even admire Wilbur Ross as an investor. He clearly accomplished a badly needed restructuring of the steel sector and the fact that he benefitted greatly from tariffs does not change that conclusion. However, my opinion is that, overall, protectionist measures result in a negative outcome for the society as a whole. Perhaps something to consider when redefining bilateral agreements with Canada, Mexico and China. Free trade and protectionism are macro concepts but may have implications for some of our investment targets.

Potentially relevant links. Info available in the context of a so-so US jobs report and perhaps more workers unease than what some headline numbers suggest. https://www.brookings.edu/blog/the-avenue/2017/08/14/where-the-robots-are/ https://pilotonline.com/opinion/editorial/cartoons/michael-ramirez-unemployment/image_c60edd85-908d-53f7-9a5d-4ce9e767809d.html

I would tend to agree with you. In fact, I am trying to define some kind of simple formula, to help trustees deal with funds when I'm gone, that would follow +/- Mr. Buffett's 90/10 rule but, at the same time, would prescribe a way to deploy funds.(to try to avoid what you describe) Very long term though, common stocks remain the way to go even with bad timing. Nice studies and reports have shown that, even if your entry was at the worst possible time, long term results of investing in a basket of inflated nifty-fifty stocks are quite satisfactory. (not in the first years though) I would add also that, if you follow the "be always fully invested in stocks" mantra, and if you maintain cognitive coherence, you should have no problem plowing a large amount like an inheritance into common stocks in one single shot. Long term, things get easier but investing is not easy. The goal is to do better than the index. Isn't it?

I would add that Mr. Buffett has cultivated his public image and, despite the folksy manners, is a really shrewd negotiator and investor. Also, he has used strategies to diminish taxes at the corporate level and has been critical of holdings (think Kraft) that did not devise tax effective transactions. However, my opinion is that he is sincere about personal tax reform that would include higher income tax rates for the very rich. http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html

Came across this. https://www.advisorperspectives.com/articles/2016/02/01/now-is-the-time-for-value-to-outperform-growth Includes this quote from Mr. Steve Jobs: "I'm convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance." Perseverance or stubbornness? Grey area.

The answer to the question may depend on what exactly you are talking about ie personal funds managed by himself, funds managed by fiduciaries or other. The relevant answer maybe is: From 2013 annual report, "My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers." I also seem to remember that he advised, based on the above concept, to adapt the withdrawal rule to retire funds from the bond side when stock markets did not do well. My understanding too though is that he probably personally favored 100% stock allocation all/most of the time. Unless (that part remains somewhat fuzzy). I would like to politely underline that the cash pile at Berkshire has grown at an incredibly high pace in the last few years. Mr. Buffett's money tends to be where his mouth is. No?

Fair enough. The competitive landscape may change. But, it could go both ways. Disclosure: biased with cycles and reversion to the mean mentality.

Planned to fish at the bottom for ideas this morning, trying to spot the "pockets" of value left. Will share if applicable. My net mostly comes out empty these days. Maybe not looking at the right places. Will keep trying. But got again distracted by an article that I think is not benign and suggests that maybe excessive (?) central bank interventions and attempts to manage the economy have introduced some serious distorsions in asset values. http://viableopposition.blogspot.ca/2017/08/ And then they say that markets are efficient. :o

I really respect Mr. Chou and have followed what he has written, bought and sold. However 5 and 10 year periods are sufficiently long to evaluate performance and smooth statistical fluke. The tide may change but survival is about adaptation. I submit though that the oration being spelled out may be too severe as it reminds me of the death of equities mentioned in some 1970's headlines. Value investing is not dead. The best days are ahead. Past performance is not indicative of future returns and I suggest that Mr. Chou's returns will be relatively better.

Trying to follow here versus the present opportunity cost of holding cash. Opportunity cost can be a forward looking concept. With inflation, bond yields and earnings yield being so low, historically speaking, why would the opportunity cost of holding cash be considered high now? There must another explanation than fear of missing out? No?

It also depends where you are in the underwriting cycle. https://www.canadianunderwriter.ca/insurance/m-best-projects-combined-ratio-100-3-u-s-industry-2017-1004108128/ http://www.insurancejournal.com/news/national/2017/06/29/456156.htm But reaching for yield seems to be prevalent these days and, given the unavoidable volatility sometimes down the road, industry players with a sufficient margin of safety on the asset side are likely to benefit. Time to work on the watchlist.

Thought provoking. What comes to mind: -Thinking like a private investor may help. -What Mr. Charlie Munger has said: http://www.valueinvestingworld.com/2013/11/charlie-munger-on-his-experience-in.html https://www.cnbc.com/2017/02/15/stock-pickers-beware-charlie-munger-thinks-youre-in-big-trouble.html To be a contrarian value investor is nice challenge. You have to be different AND right. Passive investing is certainly "winning" now.

Good points investmd. Unfortunately, it may boil down to your investing style or even personality. I am not sure I would be able to, in a secular downturn, sell securities at a loss in order to take advantage of other opportunities. Maybe? Your arguments are convincing but, for perspective, I would add the following paragraph from a recent commentary by Frank Martin: " Benjamin Graham once noted, “You don’t need to know a man’s exact weight to know he’s obese.” In an early 1929 exchange between Graham and Bernard Baruch, both agreed that the market had advanced to such “inordinate heights, that the speculators had gone crazy, respected investment bankers were indulging in inexcusable hijinks, and that the whole thing would have to end up one day in a major crash.” Several years later Graham lamented, “What seems really strange now is that I could make a prediction of that kind in all seriousness, yet not have the sense to realize the dangers to which I continued to subject the account’s capital.” Baruch, in writing the foreword to the 1932 edition of Extraordinary Popular Delusions and the Madness of Crowds, expressed sentiments others will feel again should this current episode in financial folly end badly. " I am quite optimistic in general, but my opinion is that we live in an unusually benign period. An investor I respect a lot, Irving Kahn, spent literally decades investing in securities with a fairly consistent value attitude. He started short selling though. This is not an easy question and even Fairfax seems to be struggling somehow with this aspect. When you manage portfolios for others, it gets even more complicated. For now, I will stay on the sidelines and will do more thinking. Thank you for the comments.

It's an old book (1997) and it is a balanced auto-biography by Gordon Cain. Got the idea indirectly from this Board. I enjoyed it and thought it was still relevant. The financial highlight of his life was the successful accomplishments of several leveraged buyouts using junk bonds in the 1980's. Much has been said about the junk bond era and reading Barbarians at the Gate certainly offered another perspective. I understand that Gordon Cain was able to buy chemical plants at the bottom of the cycles, restructure them and create a tremendous amount of value. Unlike many other participants who may act as greedy vultures in these circumstances, it seems that he was able to integrate honesty and fairness into the process. The book is well written and includes perhaps too much information about his life before his main accomplishments. His vocation as a deal maker occurred relatively late in his life. He was clearly a contrarian who could detect and uncover value. He was patient and expectant when necessary but could focus and inject a "clarity of purpose" when needed. Value investors may appreciate. He offers his own pearls of wisdom. What comes across is that he was an apostle of free markets and wished less encumbrance by the government. However, he seemed humble and open to different and opposing views. He attributes at least some of his financial successes to these qualities. He was a pragmatic man who was "not interested in social theory" but always tried to optimize factors under his control. He was critical about many regulations and various government agencies. However, he also underlined positive aspects of unions and various government interventions. He wished that the government could go through a restructuring just like he did with the acquired firms. Mr. Cain was results oriented and understood incentives. He liked and applied the works of Deming concerning efficiency and productivity. He was not entangled in a dogmatic conceptual framework. He felt that there was a major problem with "the inertia and bureaucracy of large institutions". The book contains chapters dedicated to certain transactions which could be treated as case studies. A major aspect of his "deals" was that, in addition to himself, managers and workers benefitted as well in a fair way. He encouraged share ownership and put in place profit sharing programs. So, interesting for value investors, people involved in restructurings and/or corporate financing and just for those who believe that individuals can make a (positive) difference. Everybody wins!

The GMO paper deals with equities. A lot can be said about the bond markets too. I know, the link provided is coming from a site often tainted by doom and gloom but the graphs are food for thought. European junk bonds spreads gravitate towards US treasuries. (!) Some of these CFA equations that I still use from time to time really give weird answers these days. http://www.zerohedge.com/news/2017-08-10/italian-junk-bonds-yield-less-treasurys-insanity-bond-market-4-charts

In the aggregate, the opportunity set appears to be challenging. Likely many valuable pockets left and who knows how long this tailwind will last. Sometimes doing nothing and sitting on your ... may be OK? Thanks for the link.

Thank you John Hjorth for the article. The Korean War which finished in 1953 was not really finished. China became massively involved and forced an armistice with the US, reaching some kind of equilibrium. This North Korea clash is really about super powers as China is testing the waters. Let's hope for a bilateral retreat but the Korean Leader and Korea's geo-political importance is at a completely different level versus Libya or Iraq. This is about balance of power and shifts. Tectonic shifts can be immaterial in the grand scheme of things but are unpredictable. I don't like the present scenario. http://sam.gov.tr/wp-content/uploads/2013/06/Namrata_Goswami.pdf

You then need humble souls looking for compromise. Good luck. Poison pen ranters nourish themselves on confrontation. The Supreme Leader won't abandon. Expect more stars to fall and more slathered worlds. One has to remain optimistic but humans are what they are.

I would submit that we should look also at graphs that show margin debt as a % of GDP. Graphs are less impressive/scary but this specific variable certainly points to some complacency. Thank you for the letter. I am mystified too by the extremely low levels of volatility. However (only a personal/subjective opinion), I find it presently feels like when one stands in the eye of a hurricane/tornado. I worry about rogue winds. I'll stay in the basement for a while.

I'm fairly new but somehow got into the article on the relevance of remaining fully invested. This is work in progress for me. Racemize, your article has made it to my reference base for this topic. Thank you. I will look at the rest.