Cigarbutt

Volatility. Sense of calm. Many theories. Another one. https://www.nytimes.com/2017/05/09/upshot/the-stock-market-is-weirdly-calm-heres-a-theory-of-why.html?_r=1 Clearly the “trend” is down (outside of isolated small blips). Some suggest that low volatility is the result of better policies and better risk management. The author even suggests that some of the volatility may be suppressed by the “technical” use of risk mitigating “products”. Hmmm… My opinion is that there may be a component related to complacency. Volatility has two components: volatility of fundamentals and volatility of market sentiment. Volatility levels and trends may be one of these things that can’t be explained or “predicted”. Mr. Market can be a friend. An unpredictable friend. https://www.crestmontresearch.com/docs/Stock-Volatility-Cycle.pdf Some food for thought: -Volatility tends to be volatile. -Swings can be violent. -At best, volatility is a coincidental indicator. Volatility perhaps is like riding a wave. To be on top requires preparation and balance but this is where you get your best opportunities. But it’s hard to catch the right wave. Nexflix is mentioned and this is related to another topic: some divergence which may be visible in this sea of calm (apparent low volatility). http://wolfstreet.com/2017/05/09/faang-stocks-gain-rest-of-sp500-lose/ This is short term but interesting nonetheless from the FAANG point of view. https://www.ft.com/content/b3cb9a98-acb4-11e5-b955-1a1d298b6250 Similar longer term insights. Different currents under the surface. Reminds me too of the Nifty Fifty. Difficult for a typical value investor to benchmark against the index. Isn’t it? A lot has been said and written about the Nifty Fifty period. However, even if one bought at the top and even if one looked very awkward for a while, long term results (holding period of at least 20-30 years!) show that eventually, one would have done better than the index and quite well on an absolute basis. Moats matter. And then, if you were able to invest at the lows, one would have done as well as Mr. Buffett! Of course history does not repeat itself. Sorry, long post.

"We live in interesting times." Absolutely. "Change" needed perhaps more than usual. "Progress" can be linear but can occur in leaps and bounds. The US maybe has the best of the worst systems to allow/survive changes. My take is that meritocracy may be more complicated but is alive and well. Essential. Would prefer adjustments but the context may require creative destruction. Or destructive creation. Based in Canada but have 65-70% net exposure to the US dollar. Long USA. Long term view required.

Individualism vs collectivism. Perhaps "no fits all" answer here. Reminds me of youtube verbal matches between Milton Friedman and "progressist" students. Especially the video showing a student discussing the responsibilty of car manufacturers vs defects and injuries/deaths resulting from the defects. The "if you can save one life" argument is convincing but often one realizes that there is no free lunch. Often decisions involve trade-offs. One has to be mindful of the not so visible trade-offs that come with decisions. For instance, respectfully submitted, the "if you can save one life argument" can be insidiously very demanding if applied widely. Most here have accumulated (or will accumulate) significant wealth. In a way, this "excessive" saved wealth could be used to save lives. I like the way SharperDingaan puts it and submit that we should exercise care before judging others based on individual moral grounds. Relevant link: https://www.currentaffairs.org/2017/04/its-basically-just-immoral-to-be-rich I suggest that morality tests that are applied to others should also be applied to oneself. Often it is a matter of balance and compromise. Nobody's perfect. But we can try? Interestingly for investments and to evaluate management, as investors, we often use the three tests: competence, passion AND integrity. So these ethics question can be used as an input for the third criteria. This is the area that I compromise the least on. I often ask myself if I would accept to work with or partner with people in charge. But often difficult to evaluate. Easier to calculate profit margins and financial ratios. Important nonetheless.

Thank you rukawa for the Singapore reference. They seem to combine various features that maximize the right incentives. Why are you not fan of the Canadian system? difficult access? long waits in the emergency room?, long waits for primary and specialized care? others? Most "successful" countries tend to have a hybrid system (private and public). I would like to add that specialized care tends to become more expensive (at rates much above GDP/inflation) and my opinion is that this tendency overall, despite what is often mentioned in the mainstream media, has NOT brought proportional health benefits. Another major problem is information asymmetry as Richard Gibbons describes. There is what seems to be a paradigm shift coming with a tendency to focus on evidence-based care. There are now poor incentives built-in the system. The patients want the best care and the treating teams/MDs want to provide the best care but, somehow, the end result ends up often being VERY far from optimal care. In addition to evidence-based medicine and algorithmic based guidelines, perhaps a private/public intermediary could become an option in the future. Just think of the transport logistics providers (C.H. Robinson, Expeditors) and how they really optimized the use of transport ressources and ended up creating value along the way. In the US, there are already some of this in action in the workmans comp "business" space. I submit that this could become a nice opportunity in healthcare as well. There is a potential relative win-win with care obtained/provided being optimized and, at the same time resulting in a profit potential for an asset-light private model based on knowledge and technology acting within the restraints of basic regulations. There are potential opportunities there. For those interested, Corvel (CRVL) is worth looking at because it has already a long and profitable operating history (mainly workmans comp) and may be in a position to expand. Many large health insurers have subs that tend to reach similar objectives but these subs tend to be regarded as "cost control" tools and don't seem to be a priority for the parent company. For instance, for those who followed Zenith (before and after it has been acquired by FFH), a component of the business (claims management) deals indirectly with this aspect of "optimal care" but again here, that component is not seen as a dynamic tool to maximize efficiency but more like a cost control unit to keep costs along reserves.

Again, interesting reference. Thank you. Fascinating, in order to learn (and improve), sometimes, if you like metaphors, you have to lower your guard (listen) and accept punches (uncertainty and dissonance) before engaging in the intellectual "fight". The primitive parts of our brains are not wired that way. Probably a good thing in the evolution scheme of things. Perhaps, we, humans, have reached another stage of the game. But, when one reads the news, that does not appear to be true. Doesn't it? Sounds easy to apply in theory. In practice, incredibly difficult. Worth the try?

I would tend to agree that Mr. Buffett doesn't work for money. He simply has a passion to make money. Not exactly the same. Yet.

Link to a Mr Ritholz article with reference to Michael J. Mauboussin's book "The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing". https://www.bloomberg.com/view/articles/2017-04-24/the-average-person-today-really-isn-t-rockefeller-rich "...skill and luck are “hopelessly entangled.” Everyone possesses different levels of skill, and we are all subject to outcomes that are based on luck. We also are not very good at distinguishing between the two. How large a role chance plays in determining outcomes may be variable but it is also significant. Once we acknowledge how much of our individual success or failure can be at the mercy of random fortune, it changes the usual assignment of causation and blame." "...serendipity. This isn't false modesty or humility, but rather, an honest acknowledgment that chance can make a significant difference in people’s lives."

Libertyarian?

Maybe that's the fascinating part. I would venture to say that a society could not function very well as a whole with a bunch of unconventionals. But somehow, value investing can be an tool that allows to deviate from the norm in a way that you decide. Assuming that basic luck is on your side too.

Edge and Odds has a part of its daily report on ETFs with graphs. http://www.bearnobull.com/ I am not sure how this will play out. Food for thought though. A lot of momentum thinking. Can clearly go both ways. I tend to prefer price discovery. A quote (source?): Once everyone's in, there's only one place to go. Your pick.

By the way, initially in the thread, I thought that one of the key variables was that the median retirement savings for the US American family in the 56-61 age group was 17000$! I know, with the safety net and all, this figure may not be that relevant. But, just for fun, if you apply the 4% rule for the median family, that comes to about 13$ per week! Even Mr MoneyMoustache would have a hard time here. However, what has become of the thread is very interesting. Good perspective. Value investors are typically unconventional so many recipes for success here. Liberty, thank for the link and video. I also highly value independence (not just the financial meaning). From Freedom! George Micheal Heaven knows I was just a young boy Didn't know what I wanted to be (Didn't know what I wanted to be) I was every little hungry schoolgirl's pride and joy And I guess it was enough for me (said I guess it was enough for me) To win the race? A prettier face! Brand new clothes and a big fat place On your rock and roll T.V. But today the way I play the game is not the same, no way Think I'm gonna get myself happy You may be interested in getting a book written by Pierre-Yves McSween. It goes something like: Do you really need this?

I look more and more at this component when assessing investment opportunities, esp. in the large cap category. Typically this comes as one of the adjustments after the main analysis. This is potentially a big issue going forward. Some talk about a crisis but the most likely scenarios imply "adjustments". When you look at the financial statements footnotes, one at least has to appreciate that optimistic assumptions are usually the norm now. When you play with these assumptions, because of the long term nature of the largely off-balance sheet obligations, the financial impact can be very real. For some large corporations, the pension assets are comparable to the firm's equity. Even reasonable adjustments to assumptions can offset 1 or 2 years of earnings for the firm. Perhaps not the end of the world, but if you use some kind of cash flow discount model or even an adjusted type of P/E measure, some kind of adjustment has to be made. For those interested in this issue, two links: 1- http://www.apapr.ro/images/BIBLIOTECA/reformageneralitati/2016%20citi.pdf Sorry, long document by Citi but well researched and balanced. 2- http://www.mauldineconomics.com/frontlinethoughts/angst-in-america-part-5-the-crisis-we-cant-muddle-through Mr Mauldin is a story teller and often attracts attention with a doom and gloom type of approach and the text focuses on public pensions but I find he stresses important principles that may need to be applied to both the public and private sectors.

The tiger? Mostly, unsustainable trends get resolved over time with "adjustments". Sometimes, the only solution is to revolt and/or get rid of foundational institutions. Rare indeed, but historically, these situations can occur overnight. I am a optimistic and a deep believer in the future of USA so my next sentence has to be taken into context. I have been following the situation in Bolivia. When an animal is cornered, it can do strange and unpredictable things. Humans can be like that too. I like healthy compromises and prevention. I submit that this thing about the elite disconnect is definitely present and is a deep force that is perhaps now under-appreciated.

This is a general topic perhaps not related to a specific investment but potentially worthwhile nonetheless. Link: http://www.cnbc.com/2017/04/21/how-much-the-average-family-in-their-50s-has-saved-for-retirement.html Moreover, I assume that most here are affluent or will be (if past results are indicative of future performance) so the gist of the article may be irrelevant because it concerns the little ordinary guy. If you look at average amounts of lifetime savings for those nearing retirement, my opinion is that it looks insufficient. If you look at median amounts, then I really start to scratch my head. Because my thinking is deformed by a deep interest in history, I would submit that, at some point, the tiger may start to roar. Perhaps worthwhile to think a minute about this issue as I finish my Starbucks extra latte non-fat with a caramel drizzle coffee.

Can't find the specific article but here are potential helpful links: http://economics-files.pomona.edu/GarySmith/Nifty50/Nifty50.html http://www.burgundyasset.com/data/newsletter/2001_11_Wise_Passivity_Cautious_Opportunism.pdf Useful variables to dissect: what to include/exclude (especially important looking retrospectively) and effect of market cap weight within the "index" chosen The more long term you look the less important the price you pay becomes. Not many people have time horizons of 30 years or more as most stocks turnover is about 3 months. Dry powder versus interruption of compounding. Price is what you pay and value is what you get but cash return is 0%. The game is on.

I find this is a significant issue too. In Canada, the problem shows regional variation and is less severe but adequate access to affordable education is getting more difficult. For the US situation, some may be interested to look into what Daniel Pianko has to say about the student loan issue. Late payments and defaults is a developing concern now. One has to wonder about the underwriting principles of those loans and the unintended consequences that are being played out due to government (over)intervention. Like in health care, these kinds of issues will be resolved in time. It's just that we seem to be going in the wrong direction. Access to affordable and relevant education is key to social mobility which, itself, has been decreasing for some time. For the new generation: -Are they acquiring the right skills? -Are they getting their bang for the buck? -Does the higher education system maximize potential abilities for all? Should the government get out of the student loan business or redefine its role? My perspective is that a lot of people are going through higher education because of lack of better options, don't acquire relevant skills, incur significant debt along the way and end up in positions that don't require specialized skill and knowledge. This is not a recipe for success.

kevin4u2, Maybe the best comparable period for Mr. Buffett (vs Mr. Chou) is when he ran his partnership (1957-68, fund closed 1969). Did Mr. Buffett make mistakes. Yes. In fact, he tends to talk about them a lot. But. When you read his letters, he often mentioned that he was expecting to lag the markets in good years and to perform relatively well in poor years for the markets. He clearly emphasized margin of safety and rule #1. From 1957 to the end of the partnership years, he obtained better results in good market years. He never had a negative year. Even in bad years for the markets (negative return), he always had positive returns! A picture is worth a thousand words. https://i2.wp.com/vintagevalueinvesting.com/wp-content/uploads/2016/09/Warren-Buffett-Partnership-return-chart.jpg According to The Brooklyn investor 02/17: "Buffett Partnership (1957-1969) Beat the market 13 out of 13 times: Chance of occuring: 0.012% or 1 in 8,192. Given that Buffett partnership gained 29.5%/year with a 15.7% standard deviation while the DJIA returned 7.4%/year with a 16.7% standard deviation and the Partnership had a 0.67 correlation, the partnership returns is 6.0 standard deviations away from the DJIA. 6 standard deviations make the partnership returns a 1 in 1 billion event. What's astounding is that the standard deviation of Buffett's returns is actually lower than the DJIA." If Mr. Buffett is your yardstick, I submit that one has to be humble. I would also say (vs finetrader's comment) that Mr. Buffett did not have his Charlie then. In value investing, it may help to collide ideas (like on this board) or to your favorite Charlie, but, at the end of the day, this is not committee investing. Your partner is the one looking at you in the mirror. So, if you're a deep value investor today, what do you do? In 1967, Mr. Buffett, who since then has gone through drawdowns, terrible investments, losing nearly everything etc, had this to say: "When the game is no longer being played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, etc. I have been scornful of such behavior by others in the past. I have also seen the penalties incurred by those who evaluate conditions as they were – not as they are. Essentially I am out of step with present conditions. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large and apparently easy profits to embrace an approach which I don’t fully understand, I have not practiced successfully and which, possibly, could lead to substantial permanent loss of capital." It's all about our inner score card. Isn't it?

Fair enough. Mr Chou's style has always been deep value though. I would submit that, if you "forget" the last 5-10 years, Chou funds returns approximate the returns that Mr. Ben Graham had. Deep value investing has become very awkward in the last 5 to 10 years. General price levels are high and, even in that field, there is a lot of competition. Maybe, it has to do with the "trade-offs" that Mr. Vito Maida described. Of course those "trade-offs" diminish the margin of safety and likely lower returns. What is a deep investor to do in those circumstances? Keep high cash levels? Liquidate à la Buffett in 1969? Waive fees and cross fingers? Simple but not easy.

Fair enough. So a new equilibrium has to be established. Maybe then costs related to public services (and pension liabilities) may need to be lowered also. Not easy. Kind of sticky. Time for price discovery? Restructuring is by definition painful. Sharing the pain makes sense.

Your comment resonates with my opinion of Mr. Chou. I think that his approach has been consistent. Based on that approach, one has to conclude though that his long term results have become subpar. Why then? Investment environment has changed? Probably yes. Secular or cyclical? That remains to be seen. We may realize though, retrospectively, in the next years, how unusual the last 10 to 15 years have been. A lot of deep value investors show subpar results these days. Mr. Buffett has publicly commented recently that markets were on the cheap side (given low interest rates remaining low going forward). Interesting perhaps to reconcile (try to anyways) this with what he said in 1999 and 2001. http://archive.fortune.com/magazines/fortune/fortune_archive/2001/12/10/314691/index.htm He cautioned about the rear view mirror bias. He also said that stocks would do well if corporate profits would remain high or go higher (they have), if interest rates would remain low or go lower (they have). Mr. Buffett alluded to the stock market cap vs GDP ratio. Based on the above, I would submit that we live (from the investment perspective) in an unprecedented era. Perhaps it would be wiser to wait for more equilibrium before pronouncing a definitive judgement on competent investment professionals such as Mr. Chou.

Volatility. Some say there is more and some less. some even suggest it is suppressed. Looking at a VIX graph, (max, for longer term) https://ca.finance.yahoo.com/chart/%5EVIX?ltr=1#eyJtdWx0aUNvbG9yTGluZSI6ZmFsc2UsImJvbGxpbmdlclVwcGVyQ29sb3IiOiIjZTIwMDgxIiwiYm9sbGluZ2VyTG93ZXJDb2xvciI6IiM5NTUyZmYiLCJtZmlMaW5lQ29sb3IiOiIjNDVlM2ZmIiwibWFjZERpdmVyZ2VuY2VDb2xvciI6IiNmZjdiMTIiLCJtYWNkTWFjZENvbG9yIjoiIzc4N2Q4MiIsIm1hY2RTaWduYWxDb2xvciI6IiMwMDAwMDAiLCJyc2lMaW5lQ29sb3IiOiIjZmZiNzAwIiwic3RvY2hLTGluZUNvbG9yIjoiI2ZmYjcwMCIsInN0b2NoRExpbmVDb2xvciI6IiM0NWUzZmYiLCJyYW5nZSI6Im1heCJ9 one would think that, since 2008-9, the mid-term trend is down. Perhaps many factors involved. How to benefit? Too hard for me. I tend to work on mental preparation if/when volatility shoots up. If you like Minsky's unstable stability hypothesis, timing may be the challenge. Is volatility good? Business environment uncertainty and labile policies are no good. Institutions matter. Suppressed volatility however, if it exists in this "Great Moderation" era, may be detrimental. Unfortunately, creative destruction comes with a certain amount of embedded volatility. Perhaps relevant (volatility, bubbles, connection of business with politics), Robert Rubin (Goldman Sachs, Treasury Secretary Secretary) is interesting when he describes deep (unappreciated) market forces at work and how, for the large part, those forces should be ignored. As an arbitrageur when he started out at GS, he learned to benefit from bouts of volatility. That was recurrent in his career. Of course, it helps if you're on the right side of the trade. If interested, his memoirs: In an Uncertain World: Tough Choices from Wall Street to Washington (ISBN 978-0-375-50585-0), co-written by Jacob Weisberg.

Interesting link perhaps about property taxes in the US. http://www.marketwatch.com/story/want-to-see-how-america-is-changing-property-taxes-hold-the-answer-2017-04-07?mod=MW_story_top_stories Interesting comment about the property tax Laffer curve. Relevant for Detroit? Cyclical or vicious circle?

This is a follow-up related to the expected increasing divergence between reported book value and intrinsic value. -In his annual report, Mr. Buffett seems to suggest that this ratio (IV/BV) will increase over time because of unrecognized goodwill related to profitable acquired subsidiaries. Maybe he meant that this has not been recognized fully yet. But his "new" emphasis on buying whole firms has been applicable since the early 1990's. I know that the market is not efficient. 25 years is a long time for value to be recognized. Isn't it? Even for the crowd? -Some here seem to support that hypothesis. -This premise has very real implications for BRK valuation and trigger to buy. (especially if one of your input, like BRK to buyback its shares, is the MKT/BV ratio) So, for the quasi-autistics, I prepared an accounting exercise. I work under the assumption that, long term, CAGR of MKT will approximate (gravitate to) CAGR IV. My hypothesis is that the value of consolidated subsidiaries will be recognized over time in the books even if the inherent goodwill is not revalued up because the superior earning power of the sub will be recognized eventually at the parent level as retained earnings. What you do with retained earnings is critical but that sub-question is dealt with in the second scenario below. So, let's say we have two hypothetical firms with comparable assets valued on the books at 100 millions and having no liabilities. The ROE (=ROA in this case) is 10%. The two firms are allowed by the "Great Accounting Regulator" (GAR) to transfer on their books two identical sets of "superior" assets held privately (BV=50 millions). GAR, however, allows them to "recognize" the assets in a conservative way at 50 millions and no goodwill (the conservative recognizer, CR) OR in an aggressive way at 100 millions, assets (50) and GW (50) (the aggressive recognizer, AR). For CR, the ROA (acquired tangible assets)=20% and for AR, the ROA (acquired tangible assets)=20% also. I know the example is artificial but helps to answer the basic question perhaps. Controls: share count remains constant and no dividend. -Scenario 1 Over time, earnings at the consolidated level are re-invested on a prorata basis back into the tangible assets. Ratio of (reported BV CR)/(reported BV AR) = 0,75 at the beginning. (150/200) Let's see what happens over time. AR CR yr BVbeg NI BVend yr BVbeg NI BVend Ratio BV CR / BV AR 1 200 20 220 1 150 20 170 0,77 2 220 22,67 242,67 2 170 22,67 192,67 0,79 3 242,67 25,69 268,36 3 192,67 25,69 218,36 0,81 4 268,36 29,11 297,47 4 218,36 29,11 247,47 0,83 10 512,72 61,70 574,12 10 462,72 61,70 542,42 0,91 15 915,19 115,36 1030,55 15 865,19 115,36 980,55 0,95 -Scenario 2 Over time, earnings at the consolidated level is re-invested differently for CR (not based on a prorata of tangible assets) -for CR, consolidated earnings are re-invested preferentially in the "superior sub" ie all superior sub earnings are invested back in the superior sub. -for AR, keep scenario 1 assumption for re-invested earnings Ratio of (reported BV CR)/(reported BV AR) = 0,75 at the beginning. (150/200) Let's see what happens over time. AR CR yr BVbeg NI BVend yr BVbeg NI BVend Ratio BV CR / BV AR 1 200 20 220 1 150 20 170 0,77 2 220 22,67 242,67 2 170 23 193 0,80 3 242,67 25,69 268,36 3 193 26,50 219,5 0,82 4 268,36 29,11 297,47 4 219,50 30,59 250,09 0,84 10 512,72 61,70 574,12 10 493,82 75,18 569,00 0,99 15 915,19 115,36 1030,55 Note: numbers not audited. So what's the point? Conclusions For scenario 1, the "gap" between the two (AR and CR) will narrow and not widen. The conservative firm will eventually recognize the value of the superior sub through retained earnings even if the value is not recognized through an upward revaluation of goodwill at the sub level. For scenario 2, if, like BRK, you have superior capital allocation skills, this gap will narrow even faster. Corollary for BRK. I think that the hypothesis of an expected gap or divergence of IV over reported BV based on this unrecognized goodwill recognition of superior subs has to be rejected. I happen to think that BRK is a good buy at present level if you think long term. But I would dampen my expectations. The key aspects going forward will reside (assuming margin of safety is preserved) in the capacity to make significant acquisitions at good/fair prices and in the capacity to maintain superior abilities in capital allocation. Not a given. Given the size of BRK now though, I would submit that, long term, BRK return will tend to gravitate to the return of the market as a whole. That may still be a satisfactory outcome. But, long term, outsized returns are not to be expected. IMOHO. Somehow, I wish I could have invested in BRK in 1965, but I was not born then. Now is a different story. Good luck.

investmd, The Chou funds website is one of those sites where you may have to "actualize" the page to make the last report "appear". The 2016 report is available. Spekulatius, Good point. Investing on principles (à la Buffett) is likely (for most) to give more reliable (and good) results than investing on styles (à la Graham). For some, the investing process anchor has to do with consistency. To improve is about evolution isn't it? Charles Darwin, the unconventional thinker behind the non-creationist revolution, deducted that most attempts to improve resulted in failure. Food for thought. On top of that (like Mr. Chou), if you have good results for a stretch of time, confidence bias may combine with the quasi-automatic attention bias (tend to reject contradictory evidence especially if it is "negative" information). It is tough to be consistently different AND better. To be consistently different or espouse the "wisdom" of the crowd is the question. In the meantime, to be different may not look advantageous.

Thank you Liberty for the link/info. Will definitely look into this. Spent some time in 2008-2009 looking into US bank capitalization and potential opportunities. Will come back on this forum in a few weeks/months with hopefully helpful insights. By the way, your post helped me discover the philosophical economics site. The last article though (see link below), the one that followed your link on potential preferred security opportunities, tells me how out of step and not attuned I am versus our evolved and efficient Market. http://www.philosophicaleconomics.com/ "To summarize: over time, markets have developed an improved understanding of the nature of long-term equity returns. They’ve evolved increasingly efficient mechanisms and methodologies through which to manage the inherent risks in equities. These improvements provide a basis for average equity valuations to increase, which is something that has clearly been happening." It's all about evolution and progress. Isn't it? A permanently elevated plateau of some sort?