oec2000

Well, wasn't that a good indication that we were not yet in a bubble last year? :) I wonder what the result would be today. Agree with you about the difficulty of timing when to buy gold. That's why I'm looking for an way to a low risk way to play the upside. Another thought that just came to my mind. People always talk about a gold bubble but never about a USD bubble. If you think of gold as a currency - all currencies have no intrinsic value and they can only be valued in terms of other currencies - then why can't we see the USD as in a bubble instead of the other way round? If the USD is in bubble, then gold might just be cheap! ;D This is not so heretical a view, imo.

The problem is we are conditioned to think in terms of today's dollars - which is why $960 seems so little. If there had been no monetary inflation in the past 100 years, $960 today would be equal to $960 back then and it would buy you a lot more. Also, you must not ignore the ability of banking system to create credit/money - think about the currency to money supply relationship. Even with fiat money, we do not need $15tr of physical USD notes to support a $15tr economy. If you think about it, we were on the gold std (or is it the gold exchange std?) up to 1973. The gold supply then was not materially different from now - it did not cause any problems in the functioning of the economy. In any case, we could always add another rare commodity as "currency" if gold supply was too limited. The only requirement would be that it cannot be created too easily by irresponsible govts. Even IMF Special Drawing Rights (SDRs) would work it we could be confident that the supply can be properly controlled. As to your question about innovation, I suspect that it is driven more by human need and free markets and that fiat money has little impact on it.

Haha, that's funny. I'm a cheapskate too but the way to think about gold is not to compare it with stocks. Think of it as a currency. Even value investors hold currencies sometimes. So, gold can be a good currency if you think govts are going to debase their currencies. If you were Zimbabwean, you would be very happy to hold gold as a currency. If you believed that Bernanke might take QE to crazy levels, you too might see the wisdom of converting USD to gold. Some people assume that stocks will give you protection in the event of a currency collapse. I'm not sure this is the case at least in the initial stages of a collapse. Certainly, Asian stock markets cratered when they had their currency crisis in 1997/8 and I think Turkish stocks also suffered for a while when they had their bouts of currency depreciation. Another point to consider: Not everyone invests in stocks or has 100% of their financial assets in stocks. These people hold cash or some fixed income equivalent. If there is a crisis of confidence in the major currencies, might these people switch into gold? The issue is not black and white because we live in interesting times of unusual financial stress. I don't have the answers but I'd like to have some insurance if I can.

Hi Sanjeev, Maybe I should have just minded my own business! :) I may have overreacted because this is too good a forum to be marred by ad hominem "attacks". They detract from the value of the discussions because people get defensive and dig their heels in. We learn more when the discussions are cooler. I do know Eric Sprott (not very well but I don't see how this is relevant). It's funny but I used to think of him in similar terms to you until I got to know him. His blunt style and controversial views do sometimes create the impression of a "kook" and I have told him that myself (not in those exact words, of course. :)). Even his managers say that he is both his own best and worst advocate. However, once you get to know the man, you realise that he is not very different to the other investors we respect so much on this board. He is smart, yet humble and open to criticism. He is a deep thinker whose views are well thought through. He has the courage to go against the crowd and the conviction in his own analysis (yet he accepts that there's a fine line between such conviction and stubborness). He has an impressive track record (both in returns and macro calls) that puts him up there with the great investors. His compensation policies are not very different from Buffett's or Watsa's in terms of shareholder friendliness (he recently incentivised his two top executives with $30m of his own stock rather than diluting shareholders). He is not a perma gold/commodities bug - he would not have made any money in the 1990s otherwise. But, he did get into gold and commodities at the time when they have possibly been the best performing major asset class. So far, it's difficult to argue that he's been wrong. I understand that your comment was a flippant one not to be taken seriously but it does paint an inaccurate picture of Sprott. This board is great because of the quality of the reasoned analyses - we should maintain these standards. If someone else had made misleading statements on Prem, I'm sure you would have felt obliged to correct them. Cheers. oec Disclosure: SCP-T is my second largest holding after FFH. (I wrote about it here during the meltdown when it was trading at a big discount to cash.). I have been buying SII-T recently (because it has similar defensive characteristics that FFH had in 2008.) but I'm not defending him because of my exposure. I would like to buy more SII if Mr Market gives me the opportunity so I actually hope that he has more detractors.

Einhorn and Soro are betting on it. In the WSJ article is accurate, Klarman is not bullish on gold. "All the obvious hedges”—commodities and foreign currencies, for example—”are already extremely expensive,” he warned. Especially gold. “Near its all-time high, it’s a very hard moment to recommend gold,” said Mr. Klarman." http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704167704575258442772338282.html Thanks for clarifying. I thought I may have read somewhere about him buying gold as insurance but could not find the article - hence the "?" in my earlier post. Maybe I was thinking of John Paulson - not sure I would put him in the same league as Klarman though.

Impressive revenue growth numbers. I shop quite a lot on Amazon.com and after hearing about Overstock decided to comparison shop several times. Each time I've been disappointed with the results and ended up using Amazon (because of price, convenience, availability). I'm really surprised to hear OSTK's customer satisafction numbers are better than AMZN's. Does anyone here prefer shopping at OSTK rather than at AMZN? Care to share your reasons why?

The argument being made by the "gold bugs" is not so much inflation but that it might become the default reserve currency if people lose confidence in the USD. You can't create gold out of thin air like you can fiat money which perhaps explains why gold has risen in value against the USD over the long run. I don't know what gold has returned in real terms or how its performance compares with T-bills with income reinvested. (It's not exactly true that gold does not provide any income - you can get some income by lending it out as many central banks used to do.) We've seen how central banks offloaded their gold holdings when gold was in the doldrums in the 1990s. It would not be surprising to see some central banks jump on the gold bandwagon because of its rise in value (some central bankers look through the rearview mirrors too). I have a tough time buying gold because I can't figure out its intrinsic value (if anybody can at all!). But, there are some smart people (Soros, Einhorn, Klarman (maybe?)) who have taken positions in gold - as insurance, I suppose. That should give us some food for thought. Maybe those of you who are economists can explain whether there is an argument for the value of the total stock of gold to have some kind of relationship with global GDP or money supply (for as long as gold is accepted as a reserve currency). It does feel like gold is in a bubble yet it seems still far from the euphoric last stages when every man and his dog is clamoring to buy the stuff. It might be a good idea to short it then but for now Keynes' advice about markets staying irrational for longer than we can stay solvent should be heeded. Or, if you are like Soros, you may want to buy into the developing bubble to profit from when the bubble becomes fully developed. Of course, none of these has anything to do with value investing! :)

From what I understand the current price of WFC is only about 20% higher than what Fairfax paid. Somebody posted about a year ago that Fairfax got their WFC for roughly $19 or $20 -- I think they found that price from the ORH filings. The only reason I remember this is that about a year ago people were suggesting that Fairfax should dump it at $24. You are right. Prem also discussed it at the 2009 AGM and explained that they did not buy more when it went lower because they had hit their position limit. For some reason, the price of $17 is what sticks in my head as the lowest price they paid for WFC - so not quite near the lows.

...and all done tastefully and respectfully, which makes this community great! Come to the annual Fairfax shareholder's dinner and meeting and you can do it in person. -O I do attend both and find that they are, sadly, somber affairs unlike the highly charged discussions here. ;D

Seems like this discussion has turned into a kind of slugfest where people are taking punches at anyone who's view is different from theirs. Parsad calling Sprott "nuts" (tongue in cheek or not) just because "he does the opposite of what I do" (Buffett bought silver once and the Br Real another time - did you call him "nuts"? C'mon.) Some of you guys are beating up on Munger rather unfairly just because he has a different view. Shouldn't we be thankful to have someone who disagrees with us so that we can retest our own views? It seems like everyone has become so wedded to their own views here that they think their view cannot be wrong. Despite your "bullishness" about values available, Rick_v, I'm surprised you only have 40% in equities and 30% in cash. I'm assuming yours is a 100% equity fund? Parsad, iirc you turned somewhat cautious in your posts some months back after the market had its huge rally and saying that you were reducing positions. What has changed? Watsa talks with complete certainty about QE resulting in inflation without worrying about the unintended consequences. Sure, what you say may be true but do you really think your type of QE ($1m tax credit per person) is the type that you want to be fully invested for? John Doe quotes Buffett on the futility of macro forecasting without taking into account the fact that Buffett is not necessarily so dogmatic in his views. I believe there are times when macro circumstances are at such extremes, that you can make long term macro calls with a high degree of confidence - which is when he has made both market and macro calls. I think it may help for each of us to rethink why we might be wrong in our views, just in case. In this respect, I think it is instructive to take into consideration the positions the real Watsa has taken in recent months. Surely we don't think he is "nuts" because he just spent $200m betting on deflation?

The currency of the stock quote is irrelevant. To understand your true FX exposure, you must look to the underlying business. IN the case of FFH, a significant portion of their business is USD denominated but they do have CAD and other currency exposure. It's the same logic WEB applies for holding businesses with significant overseas earnings like KO. That thes stock is quoted in USD is not of concern. It could be quoted in Zimbabwean currency for all we care but it will reflect the value of its underlying business in the long run.

Hawks, Good post and fair points although I disagree with some of the conclusions you draw. Yes, there are some posters (only a handful imo) here who are very macro driven who have gone to very high cash positions. There are also some who adopt the fully invested buy & hold strategy. However, the majority of the posters fall in between these extremes. I would put myself in the last category. You mentioned Watsa, Buffett and Templeton. Watsa overlays macro calls over his stock postions. And he is >90% hedged now and has just bought deflation protection. Buffett tempers his stock buying with a keen eye on market and economic conditions. There are times when macroeconomics influence his decisions. He has shorted the USD, and he goes through periods where he builds up cash. BRK is a monster cash generating machine so when he is not increasing BRK's equity holdings, he is effectively raising cash. He has not been talking excitedly about candy stores or harems lately. Templeton would not have been able to buy at times of max pessimism if he did not have wads of cash lying around when that happened. (This is why many fully invested value investors stumbled in 2008/9 - they could not take advantage of the blood in the streets.) So, there must have been times when he was not fully invested. Seth Klarman is another master you did not mention who remains guarded. The question is whether we are at a point of max pessimism right now. I don't think so. Yes, the recent economic data have turned more negative recently but most commentators are still blissfully sanguine about the outlook and worried about the wrong risk (inflation and the bond bubble). Very few predict a double dip or deflation which would cause much more severe problems because of the high levels of debt everywhere. Eurozone fears have ebbed even though their stuctural deficits remain and their banks haven't deleveraged to the same extent as in the US; and, the indebted US consumer is not ready to resume his spending binge soon enough to ward off the danger of deflation. Meanwhile, equity sentiment measures are on middle ground - fear is not in the air. So, while I agree with you that some stocks look inexpensive, I don't think they are even close to "blood in the streets" cheap. Given that there is not an insignificant risk of deflation, I would leave myself some room for manouevre. We have much less experience with deflation than inflation so we do not really understand how things could play out in that scenario - especially with the high leverage around us. Under the circumstances, I am happy to keep 50% in equities (provides upside if crisis is indeed over), 25% in relatively high yielding pfds 7-8% (which will deliver very juicy real yields in case of deflation, yet provide a decent steady return if economies do not falter but recover) and 25% in cash for fat pitches if they arise. I would like to be 100% in equities but only at prices that adequately compensate for the risks. I don't know how the risks will play out but right now I am happy to trade-off some potential return for a more resilient portfolio.

In n Out is pretty good but I agree that the patties are almost like McD's. Have to disagree with you on White Spot although it is a favourite of many Vancouverites - I still can't figure out why. Earls and Milestones serve up better burgers, imo. Vera's used to be good. My personal favourite is Moderne Burger in Vancouver West - you should check it out. My vote goes to Five Guys over In n Out - their patties seem to be made from good quality beef. There is an FG's in my 'burb so Sanjeev if you are hungry and want to check it out, let me know. Goodburger(?) (in NYC on Broadway near Union Sq) is better than all of the above imo but my all time favorite is a takeout place (don't remember the name) on the main tourist street in Sausalito (the patties are thick and juicy). Any locals here who know the name of the place. Now, if I spent as much time researching stocks as I do food, I might be able to follow in the path of the great Buffett. Unfortunately, I have been more successful following the path of the great Buffets (the all you can eat type!). ;D

Problem is it is difficult to have a great deal of confidence in the ability of their directors to evaluate risk in MFC's business. Anyone who was rushing in to sell (or give away, who knows?) equity guarantees after an extended liquidity driven bull run (in 2005-7) without hedging or understanding the potential impact of a margin call on their balance sheet either does not understand risk or was ignoring it. I think senior mgmt was ignoring it and directors did not understand it. Read the sections on risk mgmt in their AR and see if you come to the same conclusion as I did. Heavy on words but light on substance! Then, compare that with WEB's remarks on risk, especially his comments on the equity puts BRK sold. BRK and MFC took on similar equity risks - unfortunately, their understanding was far from similar!

I agree - I was just responding to your post in which you mentioned only jockey stocks. In any case, I suspect "non-jockey" companies have better longevity records than jockey stocks (because jockeys tend to be already quite old by the time we identify them). I am curious - can anyone name some jockey stocks that have made a successful succession transition? (I have not followed jockey stocks in NA for that long so my knowledge base is limited.) Digressing slightly, I am curious to hear your views on the pros and cons of passing down what Asians might term "an iron rice bowl" to your heirs. Are you worried about how that might affect their motivation to strive? It sounds like you had that benefit handed down to you as well - I am curious to know how it affected your thinking. (I ask because I am grappling with this issue myself of how best to provide for my kids - give them fish or focus on teaching them to fish. From a societal viewpoint, I'm thinking that after I have provided my kids the best educational opportunities and some basic safety net each marginal dollar I give away will have a much greater beneficial multiplier effect on society if it is given to someone smart, driven but financially disadvantaged rather than to my kids.)

Sounds reasonable but don't you think it is necessary to have a margin of safety, e.g. cashflow/expenses should be at least 1.5x or 2x? The problem with using CF is that it matters a lot what its quality is. CF that comes from high-yielding stocks (that has low or even negative growth longterm) is not the same as CF from blue chips like JNJ. That's why I favour the net worth/expenses ratio. Just my preference - not saying that my method is better. I'm assuming this question is for me. 40-45 years. Most of us have been retired for ~10 years so have experienced adverse markets in retirement. Our circumstances for retiring were very different - some were planned; others were forced (by layoffs) but our philosphy towards investing, money and spending are very similar. We are all risk averse value investors, see money as a purely a means to an end (rather than an end itself), and practical and prudent in our spending (i.e. we are prepared to adjust our lifestyle to circumstances: bad year = spend less; good year = pamper yourself a bit).

I've been retired for awhile and have several friends who retired early too so can speak to our experience. I think 25x portfolio/annual estimated retirement expense (incl taxes) is comfortable. 40x is super conservative. You can get by with significantly less than 25x (if you have decent investing skills - ability to do abt 12% CAGR without taking undue risk - you might get away with 12-15x expenses). Two other points to bear in mind: 1) Don't simply assume that your expenses in retirement are going to be the same or less than they are now. You have to take into consideration whether you will spend more time and money travelling; you should allow for healthcare expenses later on too. 2) Your performance the first few years after retirement are critical. You don't want to get hit with a 50% drop in your first year of retirement (like 2009). So, if you are looking at numbers after an extended bull market, you might want to build yourself a margin of safety.

Just thinking, doesn't the jockey approach suffer from the same problem of succession that you are trying to solve? Wouldn't you be better off identifying companies that don't need exceptional jockeys (e.g. KO, PG, PM, etc)?

Does anyone know where we can get info on other long term warrants such as these (e.g. BAC)? TIA.

As the saying goes, "It's not a question of if, it's a question of when." We should worry only about the "if," not the "when." As long as the saying holds true for an eventual hardening of insurance markets, I try not to waste time thinking about the "when." If the "when" takes longer, I take consolation in that it gives us opportunities to keep on buying cheap. Thinking too much about the "when" only sets us up for unnecessary disappointment and frustration.

Teach your heirs to read these message board discussions every day. :) The ideal solution would be to teach them what you know and then give them some money to manage while you are still around to monitor and guide them. The problem is that this easier said than done. The reason value investing still works is because not many people can do it well. So, if you have heirs who neither have the interest or the emotional aptitude for it, then you are forced to look to third parties for help. One way would be to work with financial adviser types. Unfortunately, good ones are hard to find. I would not, as someone else recommended here, look for them based on the letters (CFA, CFP, etc) that come after their names. It is more important to listen to what they say, understand how they think and see what they actually do over an extended period of time in order to judge their suitability. More than 90% of the advisers you interview will not be suitable and you can normally tell after just one or two meetings. The third option is to identify fund managers/asset allocators to place the funds with - e.g. FFH, BRK, FPA Capital, etc. - and then encourage your heirs to learn from these managers by reading and listening to them. This is a good way to go if you can trust your heirs to take a long term view and stick to the program instead of doing other things with the funds. If you are worried about the self-discipline of your heirs, then it might be worthwhile to go the trust route even though that means more cost and red tape. You can write rules into the trust to limit the investment of the trust funds but the danger of rules is that they may become outdated and cause unforeseen problems for your heirs. There are no simple solutions but you can console yourself with the fact that your heirs will have a headstart over most others and it's up to them to make the best use of it. You can only help them up to a point.

One point I forgot to mention in my earlier post. I get the impression that some of MFC's variable annuity products have minimum withdrawal guarantees which means that their potential liability increases every quarter even if equity markets stay flat. (Maybe I need to take English lessons to understand their reports.) Does anyone know whether I'm reading this correctly?

Interesting comments, biaggio and uccmal. Allow me to add my own. FFH - don't think they avoid the life business because it is too complicated. Those guys are so smart they could turn the complexity into a competitive advantage. Prem has said that the problem with the business is that it is subject to a "run on the bank." Any event that triggers mass policy surrenders can kill the company. I don't know what WEB has said about lifecos but would be interested to know if his view coincides with Prem's. Also, while the business may appear complicated to outsiders, this is because of reporting rather than underlying complexity of the business. After all, it's just a matter of understanding probabilities and pricing adequately - not so different from P&C. If anything, life insurance is easier in that the contingencies are in most cases binary (dead or alive :)) and the claims amount is fixed and finite. So, I don't think that the people running the businesses have problems with complexity. Besides, you have to be pretty smart to become an actuary! MFC management - obviously, this is a subjective judgement but my view is that Dominic D'Alessandro and Don Guloien are neither fools nor integrity-challenged. (Rod McQueen's biography of D'Alessandro is a worthwhile read; and both Dominic and Don are quite impressive in all the interviews I've seen.) Under Dominic's long watch, he earned the reputation of being a good capital allocator as a strategic investor in the financial sector - no dumb or overpriced acquisitions). Embedded value - is akin to intrinsic value with a difference. EV does not take into consideration the value/cashflows from potential future new business. So, it is a more conservative measure than IV provided the assumptions they make in calculating EV are reasonable. EV is a good starting point for valuing lifecos - you can then make your own adjustments for losses from equity movements, more conservative actuarial assumptions, etc. Problems with MFC - there are a few: Lifecos are in general more leveraged than P&C cos. Maybe, 10x vs 4x assets: equity. Also, their liabilities are much longer duration and therefore more sensitive to interest rate fluctuations. MFC has two key risks that are non-diversifiable (but hedgeable): Major equity risk (from their variable annuity business), and interest rate risk (long duration liabilities). In theory the interest rate risk should be hedged through asset-liability matching - if you hold assets of similar duration to liabilities, interest rate movements should have offsetting impacts on the balance sheet. I'm not sure why MFC was not hedged this way. On the equity risk, I've also not been able to understand why they never hedged it out. I think D'Alessandro may have given a vague explanation that they were in the process of looking into this when the markets went south and then it was too late - I thought this was a pretty lame excuse which showed that they launched the product before they were ready with their hedge tools. It also seemed like they were reluctant to incur the hedging cost - again, it is difficult to tell whether this was the products were priced too aggressively or whether they were just being greedy. They have some of the "institutional imperative" type of thinking that WEB criticises. It is apparent in their focus on market share, pandering to Bay/Wall St, and the committee style of risk mgmt and exec compensation that produces important sounding statements more than practical solutions/results. Purely conjecture on my part, but I think that some of the problems were caused by Dominic D'Alessandro's planned retirement which unfortunately coincided with with the financial crisis. Seemed to me that there was a bit of GE/Jack Welch thing with him wanting to leave on a high note - may have been the motivation to delay the hedging program to sustain profit growth in the short term. Welch was lucky with his timing and left Immelt holding the can. D'Alessandro was less lucky and took a big hit in the value of his holdings in MFC ($100m+?). Conclusion: I have mixed feelings. MFC has a strong franchise both in N America and in Asia. On the other hand, a great franchise is no use if you use it to chase market share with unprofitable/risky products. I get the sense if they survive this debacle (I think they will) that mgmt will have learned its lesson (sort of like FFH did). There is a an opportunity for Don Guloien to make drastic changes to cut away from the old culture of going for market share. There could be a great buying opportunity at some point - I think we are not quite there yet.

But you can't get chewing gum there. :)

It does not make sense to discuss inflation using a single measure such as the CPI or the GDP deflator. For a huge and diverse country and economy such as the US, it is meaningless to talk of a single inflation number. Inflation is local (depends on where you live) and dependent on socio-economic factors such as income, sex and age among other things. Surely, inflation means different things to a retired auto worker in Detroit, a young investment banker in Manhattan and a high tech worker in California. I think the gold bugs look at monetary inflation which they believe will eventually translate into price inflation at some point - not an unreasonable premise. Because we all have different circumstances and perspectives, we can all argue that inflation is understated or overstated and all be right. I think it is more important to use the measure as a tool while understanding its shortcomings rather than trying to push a particular point of view. Personally, I find it more useful to look at the trends rather than the absolute numbers.