omagh
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Posts posted by omagh
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http://www.patientcapital.com/newsletters/newsletter-2010-12.pdf
As you might expect we are of a different mindset. We believe that now is the time to be
very cautious. The past year’s strong returns have increased valuations to levels that we
feel are extremely risky. ...
...Strongly rising markets are a double edged sword. We have enjoyed the recent strength in
the markets as we have taken substantial profits in many of our holdings over the past
several months and most of our remaing holdings have shown strong appreciation. On the
other hand, current circumstances make it difficult to find investments that meet our very
high standards of value and quality.
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Sanjeev: Rocky Gaudrault, CEO of Teksavvy, puts some more colour to the positioning of Bell in particular. Teksavvy buys wholesale service from Bell and he has some compelling comments about Bell's competitive positioning against Netflix.
http://opinion.financialpost.com/2011/02/07/internet-usage-debate-the-real-myths/
It's worth a read.
Agree with the general sentiment that there is differentiation in the customer base, but the base provisioning of the service is identical everywhere. By your logic, heavy users of the phone system should be charged more -- which nobody does anymore. The internet is little different from the phone system in terms of its geographic dispersal and the dispersal of routers and switches.
I agree with you...it's almost at that point. But not there yet. Probably not for several more years, if not a bit longer. There are still areas of every city where there just isn't enough bandwidth. I have one of the best telephone, cable, internet packages, but it's still not fast enough. And that's because the capacity isn't there for peak hours of use.
And I agree the regulation needs to be better. Either way, the world is far better off today with the technology we have than 10-20-50 years ago. I'm just amazed how humanity's mind works and the development of new technology...it's absolutely fascinating. Cheers!
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Ta Da!
“The CRTC should be under no illusion — the Prime Minister and minister of Industry will reverse this decision unless the CRTC does it itself,” a senior Conservative government official said Wednesday.
“If they don’t reconsider we will reverse their decision.”
Agree with the general sentiment that there is differentiation in the customer base, but the base provisioning of the service is identical everywhere. By your logic, heavy users of the phone system should be charged more -- which nobody does anymore. The internet is little different from the phone system in terms of its geographic dispersal and the dispersal of routers and switches.
I agree with you...it's almost at that point. But not there yet. Probably not for several more years, if not a bit longer. There are still areas of every city where there just isn't enough bandwidth. I have one of the best telephone, cable, internet packages, but it's still not fast enough. And that's because the capacity isn't there for peak hours of use.
And I agree the regulation needs to be better. Either way, the world is far better off today with the technology we have than 10-20-50 years ago. I'm just amazed how humanity's mind works and the development of new technology...it's absolutely fascinating. Cheers!
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There must be a ton of carry trades being supported through this.
HIBOR is very low. That’s because the Hong Kong dollar is still pegged to the U. S. dollar, and our interest rates are almost nothing. The cheap money (and perhaps some corruption) is causing incredible real estate speculation. You know there is a bubble going on when only 100,000 out of 8 million residents can afford to own a home. More than half of Hong Kong’s residents depend on the government to subsidize their housing requirements. Meanwhile SHIBOR keeps going up because the Mainland Chinese want real estate speculation and inflation to slow down. If this can’t go on forever, it has to eventually stop. At some point the bubble will become so extreme that Hong Kong may finally depeg from our dollar. HIBOR may then imitate SHIBOR.
It appears a sideways market is a value investors best friend.
I really hope we are range bound. I would love a 10 year range bound market while I am building capital, and then a 10 - 20 year bull market starting in 2020. One can only hope.
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Hi Sanj,
Agree with the general sentiment that there is differentiation in the customer base, but the base provisioning of the service is identical everywhere. By your logic, heavy users of the phone system should be charged more -- which nobody does anymore. The internet is little different from the phone system in terms of its geographic dispersal and the dispersal of routers and switches.
The ISPs already have differentiated pricing based on access speeds. The cost of use is another differentiation that is attempting to be introduced, but the argument "use more, pay more" doesn't hold up when you compare it to the phone system. This type of differentiation is being attempted, but it is also competitive positioning to delay leakage from TV distribution to internet distribution. In internet distribution, the ISPs are "dumb pipes" with no competitive hold on content -- it's a problem and they're fighting to get more for their internet infrastructure investment in anticipation of other revenue destruction.
The argument that it costs more to build out internet infrastructure (switches, routers) is a blatant misdirection when costs are actually exposed. The largest cost of the infrastructure is wire/cable/fibre installation or spectrum if wireless. Once put in place, these are sunk costs intended to be amortized over decades. It's the loss of the TV distribution monopoly that has these providers scared shirtless.
It's a business where government and industry are hopelessly co-mingled and effectively cartels are established and maintained because the industries are not competitive by nature; they lead very naturally to monopolies where regulation is weak. The regulation is a necessity in comparison to monopoly, but when true costs are exposed, it's never satisfying to the consumer who ultimately overpays for the costs of regulation and uncompetitive service delivery.
I've taken the consumer view, while you've argued the business view. I'm all in favour of reducing costs to the consumer and would love to see a better regulator.
-O
Hi Omagh,
I don't agree with the rates they plan on charging, but I do agree they should charge users. I would suspect with the CRTC looking into it, they will probably allow the ISP's to charge, but for a lesser fee decided by the CRTC on an annual basis. Not unlike telecommunication rates, etc. I don't want to be subsidizing the heavy users because they want their television or videos for free.
Pay for use is the most equitable, although the rates should be reasonable enough to provide value to the user, and fair compensation to the service provider. I think the same should be applied to everything, including the healthcare system. Some costs for heavy users should be carried by the user. You take better care of your health, your costs are lower. You drive your car more carefully, your insurance premiums are lower. You watch less tv or download videos, your cost should be lower. Society would be better for it. Cheers!
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Sanj,
This is about delaying competitive threat to television content distribution over the internet. The incremental cost of delivering a GB of bandwidth is <$0.01 where the ISPs want to charge overages of $1 and $2 which is over 10000% markup on cost.
In a letter to Netflix shareholders released Wednesday evening, Mr. Hastings explained why his company’s is opposed to the UBB model.
“The ISPs’ costs to deliver a marginal gigabyte, which is about an hour of viewing, from one of our regional interchange points over their last mile wired network to the consumer is less than a penny, and falling,” he said. “So there is no reason that pay-per-gigabyte is economically necessary.”
I have a TV in the basement that only does TV over internet with no cable connection. The ISPs which have traditional media distribution channels to market are trying to maximize this capital investment.
-O
It's really only an issue for heavy users. I'm on the internet all day and night, but I don't go on YouTube, Netflix or download very large files constantly. So it's not an issue for me. Really, I think the caps are good. Either that or go to a fee for use basis...amount of GB's of data for a set fee. That way those that are heavy users get dinged their fair share and the telecom companies can have adequate funding for their capital costs.
This was the same sort of issue when the telecom companies here set caps for iPhone and Smartphone data users. Whereas unlimited plans in the U.S. are relatively cheap. I use my iPhone for a few hours each day, and I don't come close to the 500MB monthly data plan. Now if I was watching movies on my iPhone, that might be an issue, but I don't, so it doesn't bother me. Cheers!
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The legislators are reviewing the recommendations of an unelected regulatory body because of citizen petitions and calls to legislators. Expect a change in position.
-O
I know there are quite a few Canadians on here. I was wondering what you guys think about the new usage based billing, and the really low bandwidth caps that has been implemented by the CRTC. I'm sure most Canadians find it irritating, and probably downright appalling. However, capitalists view things quite differently (if not oddly). For example, it may seem like the consumer is screwed, but the shareholder of Bell Canada, etc... should do quite well with the excessive new profits.
Also, I believe this will definitely affect the markets for large bandwidth companies such as Netflix and OnLive. UBB is common throughout the world, and I wouldn't be surprised if it made its way to the States. Australia, New Zealand, the Middle East, and now Canada all have limited bandwidth. I'm hoping it ends there.
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The naysayer responded: Well, perhaps “rebuttal” isn’t the best word to use because the piece – which appears in the January 28 edition of Investor’s Digest – relies more on personal attacks than persuasiveness. He refers to me as “some gold neophyte” and calls my article “egregiously awful.”
Embry hammers more gold naysayers:
http://www.sprott.com/Docs/InvestorsDigest/2011/MPLID_012811_pg003Emb.pdf
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I'm impressed with the personal growth of Watsa through the hedge fund crisis and the fixing of FFH's balance sheet. I don't think that he was in the same position as a leader 10 years ago as he is today and he's the better man for it.
If he's up for it, I have an idea on Bloor Street in Toronto that would be right up FFH's ally as a whole company purchase where the principal shareholder is in his early 70's and runs his business on a pre-tax 15% ROE hurdle. The whole company could be bought for <$200M.
-O
Combine that with Prem's leadership, handoff and delegate management style, honesty, integrity, ethics and long-term focus, they would be the buyer of choice for many people...particularly in Canada! Cheers!
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Well said. We all have our specializations and you have to do unique things to outperform. I've been down the deep value road and generally like to keep the "special situations" to a small part of the portfolio. Usually my deep value plays are good small cap businesses that have stumbled over short term issues with the business model still intact. You would be amazed at the bargains that can be turned up even after you hive off every commodity-based business in the investing universe. In baseball terms, I make a reliable living off a steady diet of hanging curveballs and don't even lift the bat for a fastball.
This forum seems preoccupied with commodities at times because it's the flavour of the day, and cycles can move quickly against trend. But, moving away from where the crowd is, you can find lots of other niches that are profitable. And to stay on theme, I feel adequately protected against inflation.
-O
It sounds like you are simply a guy who doesnt like commodities or commodity businesses. I can respect that. They are crappy businesses, but can be very profitable investments. I dont like them either, but I believe in the oil story (As does Buffett and Grantham). I prefer sustainable businesses, of high quality but I dont see myself making much money with Coke, MSFT, ADP, Mastercard, AON, or the 5 or 6 other large cap ideas that meet these requirements. I have a few gems in the small cap world, but for me I go where the value is.
At this stage in my career I like deep value, and that usually means a commodity business. I own a number of oil companies and companies driven by the oil cycle. I agree its a crappy business, but I see 50 cent dollars with fairly pessimistic projections. I also think anything more than very basic modelling in general is fraught with error and a waste of time.
There are plenty of ways to skin a cat (though I have never tried) and plenty of ways to make a dollar. I can understand why you avoid the oil patch (probably for the same reason I avoid the Uranium patch).
I have no idea how Soros or Jim Simons made money but, both of them have a pretty big chip stack and I wouldnt go around quoting Buffett to them. Similarly I wouldnt do it with T Boone, Jimmy Rogers, or Sprott. Plenty of ways to skin a cat, and earn a buck.
With that said, this is a commodity thread, and just about every value investor worth his salt has a commodity investment, and likely owns a commodity business or 2....
Also the one thing in life I am certain about, is few things relating to business are certain.
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I asked Sam Mitchell about this issue a few years back and he indicated that FFH would look at this in the future, but it wasn't their focus since they still considered themselves to be an insurance company with some equity investments. Obviously they do think about this very issue.
-O
Now that the first 25 years of Fairfax's history is complete, and they've created a formidable insurance business, is it time for the student to follow the mentor?
In my opinion, I think Fairfax should now follow the Markel Ventures model and begin to acquire whole private businesses that most people would not be able to negotiate.
- With Fairfax's history of "Fair & Friendly" insurance acquisitions, I think they would be the buyer of choice for private business owners who are too small for Berkshire and may not be as familiar with Markel.
- They are so deep on the management front that this is a no-brainer.
- Adding private businesses that aren't worried about quarterly reporting and regulatory hurdles at fair prices would diversify Fairfax's income stream.
- Adding successful business owners would only strengthen Fairfax's bench.
- Prem is getting older and succession will become a bigger concern over the next 10-15 years.
- They have the capital and the investment team to dig up and acquire wonderful small private businesses.
This is it Prem! Time to do it. Cheers!
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Myth...you're equating things that aren't equal, scratch a bit deeper.
I'd take the Buffett approach in a heartbeat over investing in commodities and commodity producers. If you've modelled the types of businesses that Buffett recommends, you'll note a stability vs high variability. Why is that important? Things that Buffett invests in have certainty (i.e. a lack of sensitivity) when modelled. It makes a ton of difference in setting intrinsic values. With the high variability in demand for commodities, the valuation modelling and results are similarly fraught with error. I choose to let pitches labelled commodities go with very rare exceptions. Not losing money in the portfolio makes a big difference in the long run. I'm concerned about inflation just as everyone else in the thread is, but my framework for approaching the problem is different and uses another approach that may be helpful to guys who are confused into making unforced errors by the macro events.
Where Buffett has invested in commodity producers (see The Midas Touch by John Train to go way back), they have been minority positions based on single company undervaluations.
-O
Swizzled...why not expand the choices? When looking at commodities, every one of the posts in this thread is trying to predict future events -- an exercise fraught with error. Montier and others write about this and none of us have any special abilities to predict the future.
What Buffett recommends is to look at businesses with high margins, pricing power and the ability to pass on most cost inputs to their customers. This allows these businesses to continually increase earnings on an inflation-adjusted basis.
I think everyone is implicitly or explicitly making productions about the future. Even Buffett in the recommendation is assuming high margins, pricing power, and other benefits of quality businesses persist. While many are making assumptions about the future, I dont think anyone here has made investments made on correctly predicting these outcomes (except for maybe buying gold directly).
Even engaging in a discussion about how to protect against inflation is basically assuming / predicting a future which entails inflation. lol. With that said, Buffett himself predicts inflation in the long run, as does anyone else with any sense.
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Swizzled...why not expand the choices? When looking at commodities, every one of the posts in this thread is trying to predict future events -- an exercise fraught with error. Montier and others write about this and none of us have any special abilities to predict the future.
What Buffett recommends is to look at businesses with high margins, pricing power and the ability to pass on most cost inputs to their customers. This allows these businesses to continually increase earnings on an inflation-adjusted basis.
-O
Wondering if anyone had any intelligent comments that could enlighten my thinking.
I just read this from Sprott
http://www.gurufocus.com/news.php?id=120425
I take anything from him and Embry with a grain of salt because they are after all selling their product. I can't ignore the fact that they were into this gold idea almost a decade ago. I don't know if they were lucky or smart.
What I can't get my head around is why not oil instead of gold or silver to protect against all of this loose monetary policy. Oil is essential, demand is growing, supply is flattening to declining. Seems like an easy choice over something where the value is determined basically by the popular mood and not supply and demand.
Thanks for any thoughts.
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Peter was an amazing individual. Sorry to hear of his passing.
-O
I understand that the world has lost another great individual - Peter Cundill has passed away. My thoughts go out to his friends and family!
<IV
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Through all the fluff ;) about macro, I haven't changed my discount rate -- have you? I am not finding as many undervalued companies as when the markets were obviously underpriced.
-O
Buffett has said there are only a few times in someone's investment career where it's fairly easy to determine if the market is priced very high or very low. Otherwise, it's not good to worry about it much. That's the stand I'm taking because I can't time it (usually).
Agreed. Also, I just thought we were all sick to death of talking about macro. :)
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http://www.hoisingtonmgt.com/pdf/HIM2010Q4NP.pdf
Proposes a set of results coming out of the QE2 initiatives by the Fed.
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BB...good work on the theory of relationship between gold and the value of asset classes. There are other demand-warping factors in play at the moment which are stoking commodity prices.
http://www.hoisingtonmgt.com/pdf/InterQuarterUpdate20101209.pdf
On the effects of QE2: "Commodity loans can be financed at 1% or less. This encourages speculative buying of commodities for inventory, thereby causing food and fuel price increases."
-O
There is no such thing as a fixed "correct" rate in comparisons between any commodity. The best we can do is say that there is a market rate set by barter in a freely traded market. Over time a bushel of wheat would trade at a "norm" ratio to another commodity say apples, bananas, copper or the time honoured and validated, universal, standard oz. of gold.
In 1935 the US Treasury used as money, a paper note issued by the Federal reserve redeemable in ozs of gold at the rate of 35.00/oz. There were circulated exactly 35* the physical number of ounces held in reserve. The buck was 1/35 an ounce of gold...they were the same..this was the "correct" fixed ratio. The Treasury confiscated privately held physical gold and exchanged them for newly minted dollars at this rate in order to break the downward stoking deflationary depression by injecting liquidity through fiscal spending. Eventually the dollar had to be unpegged from gold and floated in the current system of currency relativism. That's why prices of commodities over time rise when USD monetary is loose and contracts when US monetary policy is tight. Expressed in ozs. of gold however, prices do not have to be adjusted for the inherent monetary policies of fiat currencies.. gold is universally accepted and can not be inflated (or deflated)... commodity price trends expressed in ozs. of gold will be more "real" than expressed in fiat currency. Moreover, as monetary policy is in an apparent long term loosening phase, we can safely assume that the USD price of gold will continue to strengthen...i.e. that monetary inflation and debt monetization (as opposed to asset monetization) will continue to erode the real purchasing power of the USD.
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BB...now that the assumptions are on the table, we agree for the most part. I would question your assumption about gold being an invariant store of value -- it's hardly inelastic and is prone to some tulip bulb moments (hat tip to oldye).
-O
BB...no, the shares were still worth a fractional ownership of Siemens or Hoechst. Once the currency regime stabilized (i.e. new currency was introduced), the intrinsic value of the shares would have stayed constant. Cost inputs were probably ridiculous at certain points, but in the end, both companies survived.
As for the point about BRK underperforming gold in the last 10 years, it's a matter of choosing start point and end point for comparison. Going back 30 years provides a different story. As we go forward, I'm sure that the story will also change as the speculation in gold runs its course. Grantham and Montier have lots to say about mean reversion.
-O
Hey Mark..I get your point that paper devalues and it's a good one, but so does gold if a wealth-creating company is your fixed baseline measure. I would wager a small sum that under German hyperinflation in the 1920's, even shares in companies like Siemens or Hoechst were more valuable than an equivalent holding of gold once the currency stabilized. These companies produce units of value that are reasonably constant as a fractional ownership of profits regardless of the base currency measurement.
The currency in Germany never stabilized... it disappeared.. your wager would be lost.
"regardless of the base currency measurement."
Only if the base currency is sound.. it would be linked to gold (like the Swiss Franc in prior years)... and would perform identically in either base currency or ozs of gold.
If we agree that BRK is a wealth creating company it has underperfomed the price of gold by WEBs own admission over the last decade.
Sorry to be so disagreeable.
The value of fractional ownership of a company ultimately is derived from the profitability of the whole enterprise. This is the gap between it's real input costs and its income. If at any point an accumulated deficit in profitability eats up its existing real capital, the enterprise is bankrupt and needs to be either recapitalized or liquidated. The value of the existing shares goes to zero in any measure.
This profitability gap can be measured in USDollars, deutchmarks, Zimbabwian dollars, bananas or any other currency. The problem with these yardsticks are that they themselves are not a constant store of "real" value, they too are subject to their own changing profitability dynamics. Gold alone or currencies convertible to gold at a fixed ratio are the best measures of real value of all the alternatives.. for they are universally and historically accepted as money, have a constant virtually uninflatable value and is virtually indestructable.
If Seimens was a profitable concern in real terms during the Weimar inflation, it would be so afterward as long as its real costs and real income remained intact. These would also be the same if measured in gold currency, but totally skewed if measured in Weimar marks.
What you perceive to be a bubble in the USD price of gold (and by extension in copper, coffee, sugar, oil, the whole commodity complex) is simply a tit-for-tat price adjustment between a commodity whose purchasing power is being dilluted and one which remains constant.
BRK of course was wildly more wealth creating in its early years but less so in the last decade. A performance more accurately measured in ozs of gold than USdollars.
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Ghost towns of China - hat tip to Katsenelson for the link. It makes one wonder how much longer the misallocation of capital can continue before real estate pricing corrects or inflation becomes rampant in China.
I thought this was an interesting presentation on Japan and China.
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Prem Watsa always takes time in his annuals to point out the significant bubbles of the day -- housing in 2006, tech/media/telecom in 2000. He has a few to choose from for the 2010 annual. Will it be gold/commodities bubble or the reflating tech bubble?
-O
Alot of tech stocks are trading at huge multiples of book right now. Nothing like the tech wreck era, but definitely inflated. The $50B valuation on Facebook gives it a earnings multiple of 100 and a price to revenue of 33. Cheers!
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BB...no, the shares were still worth a fractional ownership of Siemens or Hoechst. Once the currency regime stabilized (i.e. new currency was introduced), the intrinsic value of the shares would have stayed constant. Cost inputs were probably ridiculous at certain points, but in the end, both companies survived.
As for the point about BRK underperforming gold in the last 10 years, it's a matter of choosing start point and end point for comparison. Going back 30 years provides a different story. As we go forward, I'm sure that the story will also change as the speculation in gold runs its course. Grantham and Montier have lots to say about mean reversion.
-O
Hey Mark..I get your point that paper devalues and it's a good one, but so does gold if a wealth-creating company is your fixed baseline measure. I would wager a small sum that under German hyperinflation in the 1920's, even shares in companies like Siemens or Hoechst were more valuable than an equivalent holding of gold once the currency stabilized. These companies produce units of value that are reasonably constant as a fractional ownership of profits regardless of the base currency measurement.
The currency in Germany never stabilized... it disappeared.. your wager would be lost.
"regardless of the base currency measurement."
Only if the base currency is sound.. it would be linked to gold (like the Swiss Franc in prior years)... and would perform identically in either base currency or ozs of gold.
If we agree that BRK is a wealth creating company it has underperfomed the price of gold by WEBs own admission over the last decade.
Sorry to be so disagreeable.
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Not sure if this was posted, but Tilson has updated his valuation of BRK. He's calling BRK a 75-cent dollar with reasonable growth projections for 2011.
http:// www.tilsonfunds.com/BRK.pdf
-O
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Hey Mark..I get your point that paper devalues and it's a good one, but so does gold if a wealth-creating company is your fixed baseline measure. I would wager a small sum that under German hyperinflation in the 1920's, even shares in companies like Siemens or Hoechst were more valuable than an equivalent holding of gold once the currency stabilized. These companies produce units of value that are reasonably constant as a fractional ownership of profits regardless of the base currency measurement.
Buffett made the point recently about how much value could be purchased with the total sum of the available gold. If you read his point closely, he says at the end -- which is going to produce more value? The rhetorical point being that gold will debase relative to wealth-producing assets.
"Look…You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"
Munger had a great one-liner about the general population and math: "Without numerical fluency, in the part of life most of us inhabit, you are like a one-legged man in an ass-kicking contest.”
-O
But at some point we started talking currencies and whether gold is in a bubble stage and I was just saying that over time the paper currencies trend toward debasement and worthlessness, and gold doesn't.
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The article is attributed to Robert Morrison. Can anyone shed light on who he is? Thanks!
-O
Extra bonus points for figuring out the real name of XYZ corp. :D
Patient Capital - December 2010 letter
in General Discussion
Posted
Sanj...thanks for the articles. One quality that leaps out of Maida's character is patience -- obviously the name of the firm comes from this. I keep a copy of speaking notes (link below) by Seth Klarman in my laptop bag. Like Maida, Klarman sets a great framework for patiently managing a portfolio for the great opportunities that come along. It's possible to have outstanding returns with reduced risk by being patient.
http://1-2knockout.typepad.com/12_knockout/files/Seth_Klarman_MIT_Speech.pdf
-O