omagh

http://www.bloomberg.com/news/2011-01-04/buffett-may-post-a-6-billion-gain-after-wells-fargo-rally-barclays-says.html Barclay's report summary includes: - The stock market rally may have helped boost Omaha, Nebraska-based Berkshire’s fourth-quarter unrealized net investment gains to $7.2 billion from $322 million a year earlier - Fourth-quarter operating earnings may have risen 43 percent to $1,794 a share

That 1913 $100 bill would have done quite nicely in a wealth-creating company which earned above its cost of capital. Coca-Cola is but one example. http://ir.thecoca-colacompany.com/phoenix.zhtml?c=94566&p=irol-stocksplit If this is the central thesis of your argument, you may want to check it more closely. -O

Many sales to Berkshire come from succession and estate planning concerns. For succession, the founder can stay in place and continue with the management team that has been groomed from within the founder's company. For estate planning, the founder's family has cash or BRK shares in exchange for the business. At a certain age, founders may not just hold out for the highest price in order to keep their personal legacy in place -- these are social concepts beyond extracting the last ounce out of the business. A founder with a few hundred million from Berkshire may not give a cr*p about "excess capital" and a "boss" and may be more concerned about providing wealth for his family or the charities and foundations that they are also involved in. It sounds like you're on a single track with your line of questions. Linear thinking only takes one so far. -O

merkhet, Long ago, I realized that I have no special abilities to predict the price of commodities or the price of money (interest rates). I do have some meagre ability to judge intrinsic values of cash-generating enterprises that have low capital expense requirements. I stick to my knitting and it serves me well. I feel quite liberated ignoring companies that depend on the price of oil, gas, metals and so on -- others may feel they have some special knowledge here. It allows me to focus on things that matter in my modelling of intrinsic values and where I have some small advantage that outperforms regularly with very rare downside surprises. Buffett, Graham, Klarman, Templeton, Watsa, and others (the grandmasters) give us examples to study and learn from. On this board there are many who share regularly and have fantastic ideas. Some ideas work short term, investing frameworks from those grandmasters work long term. All the best in your investing journey! -O

In the words of his employer... http://www.investorsdigestofcanada.com/ One of Canada’s most prominent “gold bugs,” John Embry manages the Sprott Gold & Precious Metals Fund. He brings Investor’s Digest readers a unique and fascinating perspective on the precious metals market. Embry is obviously talking his book... -O

Thanks DC...Montier is always a good read. -O

Bill Berkley has made the case for a hard market in insurance pricing, so I'm on the watch for pricing changes. It looks like unit volumes are rising, but rates are not. If someone has access and can summarize, there is a report available from either PCIAA or III. http://www.bloomberg.com/news/2010-12-21/insurance-sales-rise-most-since-2006-on-auto-home-coverage.html?cmpid=yhoo "The study was jointly published by the association, the Insurance Information Institute and ISO, a unit of Verisk Analytics Inc., the supplier of actuarial data to insurers. The last time sales climbed more than 2.3 percent was in the third quarter of 2006, according to the groups’ data."

The Air Canada lounge in Calgary likes the change. Thanks Sanj! -O

Partner, The insider trading, mostly selling, in commodities-related Canadian stocks has been hugely active in the last 2 months. It's no surprise that Watsa is making this statement. Interestingly, there are lots of unloved Canadian small caps that are repurchasing shares while the market chases the glittery taillights of the mining stocks. It's all about having the right focus on identifying wealth-creating companies and buying at a discount. There are some companies selling at healthy discounts to intrinsic value where I'm adding to existing positions. Strategically, I'm keeping extra cash aside for the inevitable turmoil. -O

Carl...as our resident conspiracy theorist, one applauds your tenacity in all things conspiratorial. Certainly we will all be, at least entertained, if not enlightened. ;) Bringing things back to valuation, is there any monetary value in this or just protection of reputation for FFH? -O

The rating agency reaction to an insurance company not writing business is peculiar. I suppose the logic goes "if they can't find any business to write, they must be speculative grade". There may still be some extremely soft pricing in some markets. Glad to see Clearwater keep its wallet zipped if this is the case. http://www.insurancejournal.com/news/national/2010/11/22/115079.htm Standard & Poor's Ratings Services has placed its 'A-' counterparty credit and financial strength ratings on Clearwater Insurance Co. on CreditWatch with negative implications. Clearwater is a subsidiary of Odyssey America Reinsurance Corp. (A-/Stable/--), which is ultimately owned by Toronto-based Fairfax Financial Holdings Ltd. "We placed our ratings on Clearwater on CreditWatch with negative implications given that the company did not report any new premiums in the first nine months of 2010," explained credit analyst Michael Gross. "The CreditWatch placement also reflects our questions about the insurer's prospective strategic importance to Odyssey Re and Fairfax in the context of our group methodology rating criteria." S&P noted that Clearwater "generated positive statutory net income of $4.1 million in 2009 and reported surplus of $696 million at year-end 2009. Statutory net income remained positive in the first nine months of 2010 at $5.9 million, and surplus increased to $739 million. We expect to resolve the CreditWatch status over the next 90 days. It is possible that we could lower the ratings to speculative grade." -O

http://www.amazon.com/Value-Investing-Balanced-Martin-Whitman/dp/0471162922 Martin Whitman wrote briefly about insurance companies in rising inflation environments in his Value Investing (2000) book. Essentially, there is a period where claims and bond durations in the investment portfolio may be mismatched. This can cause insurance companies to be seen as less valuable (market cap). However, in roughly a 2-3 year timeframe, portfolios will start to roll over to bonds at increasing rates where interest investment income rises. There is also likely to be an increase in premium rates accompanying inflation. The market will begin to revalue insurance companies based on the increased income stream and increased premiums. Obviously Whitman is writing about the 1970's experience and this is a general theory. Individual companies may be better positioned in their portfolios for inflation. With increased availability and use of hedges, the experience could be dramatically different from the 1970's. No doubt there will be opportunities to find mispriced securities as the herd flees. -O

75% of book:

Some Seth Klarman wisdom on the usefulness of alpha and beta: As value investors, our business is to buy bargains that financial market theory says do not exist. We’ve delivered great returns to our clients for a quarter century—a dollar invested at inception in our largest fund is now worth over 94 dollars, a 20% NET compound return. We have achieved this not by incurring high risk as financial theory would suggest, but by deliberately avoiding or hedging the risks that we identified. In other words, there is a large gap between standard financial theory and real world practice. Modern financial theory tells you to calculate the beta of a stock to determine its riskiness. In my entire professional career, now twenty-five years long, I have never calculated a beta. This theory urges you to move your portfolio of holdings closer to the efficient frontier. I have never done so, nor would I know how. I have never calculated the alpha or beta of my firm’s investment performance, which is how some people would determine whether or not we have done a good job. -O

http://www.sec.gov/Archives/edgar/data/915191/000095012310104863/o66554ae13fvhr.txt

Thanks for the comments, Al. I'm not invested in OSTK, but watch it for enduring improvements in the financials. What is noticeable is the improvement in OSTK's cash generation. AMZN was in a similar position from a cash generation perspective around 2001-2003, but the market sales opportunity was there for the taking and they occupy a significant part of online retail as the incumbent with branding (moat) and customer loyalty at larger scales than OSTK. There is a knee in the cash generation curve (i.e. an acceleration) where the freecash flows for online retailers leverage off a relatively small set of invested capital that scale slower than the cash is generated (a FCFRoIC curve). OSTK has never achieved a significant acceleration in cash generation, but the trend is positive.

Al, The valuation model to value an online retailer is all about the net cash on the balance sheet, the amount of invested capital (net over time), and the free cash flow generated per dollar of invested capital. It's capital intensity is surprisingly low given that it has resumed generating cash from the balance sheet. Here's a typical earnings call transcript from Amazon where you can pick off the key metrics for how they measure the progress of their business. They built a successful franchise with hawk-like focus on these metrics. Bezos is the genius that Byrne aspires to be. http://seekingalpha.com/article/62375-amazon-com-q4-2007-earnings-call-transcript Seasonality is a huge factor in retail, so trailing twelve month blocks are the best way to look at any set of numbers. Quarterly numbers are for headlines, TTMs are for valuation models. Mike Mauboussin who taught at Columbia Business School lays out the ground work for a valuation model in an older paper here. It lays out the mechanics of the cashflows for online retail, including generation of cash from the balance sheet (which is atypical for most businesses). After a couple of reads, it makes sense. http://www.capatcolumbia.com/Articles/FoFinance/Fof9.pdf With a bit of grunt work, you can build out a similar model. Given the progress in OSTK's cash flow generation and the recent drop in valuation based on the headline numbers, it's trading below intrinsic value. How much depends on your own estimates of future scenarios of cash generation. It's not a high certainty trajectory, but the pattern of increasing free cash flow generation is obvious over the last four years. -O

Good interview. I've been reading a couple of his books recently which give some good insights for securities analysis of corporate filings. Loved this quote: Whitman: One of the things about buy-and-hold value investing is that it is not labor-intensive. It is not stressful, unlike most things on Wall Street. Just look of the number of value guys who have survived to over 100. I give you Roy Neuberger and Irving Kahn. It is a nice business. -O

twacowfca, Interesting. Bill Berkley is claiming that combined ratios will be even worse -- "We believe the real accident year combined ratio for the current year will be somewhere between 110 - 115. At the same time, investment returns have come down by 200 basis points." (Page 4) http://ir.wrberkley.com/common/download/download.cfm?companyid=BER&fileid=411620&filekey=a51eb556-8e08-486b-99d3-76b238bf9ed9&filename=NAPSLO%202010.pdf Also, a previous Reactions interview with Montross is available: http://www.genre.com/sharedfile/pdf/MediaArt_TheQuietAmericanSpeaksOut_TMontross_Reactions-en.pdf -O

Berkshire says Combs joining as investment manager http://www.marketwatch.com/story/berkshire-says-combs-joining-as-investment-manager-2010-10-25?siteid=yhoof2 Warren Buffett's Berkshire Hathaway (BRKa.N) on Monday said Todd Combs would join the firm as an investment manager, potentially bringing the company a step closer to solving Buffett's succession puzzle. Buffett said in a statement that he and partner Charlie Munger looked for three years for someone like Combs "to handle a significant portion of Berkshire's investment portfolio." Combs, 39, has been managing Castle Point Capital for the last five years. It is a long/short equity hedge fund that focuses exclusively on financial services.

http://www.nytimes.com/2010/10/26/business/26markets.html?_r=1&partner=rss&emc=rss Inflation-protected securities sold at negative yields for the first time ever on Monday as traders anticipate that the Federal Reserve will start a new round of asset purchases. Analysts said that asset purchases by the Fed would lead to a higher inflation rate and a positive return on the bonds. The $10 billion auction of the five-year bonds sold at a negative yield of 0.550 percent, according to the Treasury Department. The results of the auction of the securities, known as TIPS, came as indexes on Wall Street edged higher, buoyed by recent strong corporate earnings and a rise in housing sales. The previous lowest yield for the TIPS was in the auction on April 26, when the yield was 0.550 percent.

Irwin Michael shares a lot of his thinking on individual investments: http://abcfunds.com/en/media_centre/abc_perspective/ http://www.valueinvestigator.com/en/valuefavourites/ http://abcfunds.com/en/media_centre/monthly_commentary/ -O

If macro is your thing, you may find this interesting. Tax geeks will find some interesting bits too. -O http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2010/10/18/o-canada.aspx [snip] As I’ve given various speeches over the last year, it has become clear to me that very few Americans are aware of the extraordinary recovery Canada has achieved since the mid-1990s. When I bring it up, most people seem surprised that Canada could have gone from a laughing stock to the envy of the developed world in just a decade. But, actually, 10 years wasn’t the true recovery period. And that was my big surprise from reading The Canadian Century. The reality is that Canada achieved stunning progress in a mere three years. Further, this time frame was consistent at both the federal and provincial levels. In case you think I’m exaggerating the speed and magnitude of the rehabilitation, let me provide some specificity: • Paul Martin, the finance minister for the national Liberal Party, unveiled a budget in early 1995 that shocked all the cynics accustomed to smoke-and-mirrors accounting. It reduced program spending by 8.8% over two years (and our politicos quiver over a mere hint of spending freezes). • As part of this radical spending rationalization, federal government employment was reduced by 14%. • Federal grants to the provinces were reduced by 14% as well, but the trade-off was that they were allowed to control how the money was spent. Provincial governments also needed to provide half of all funding (i.e., put skin in the game). • While some taxes were raised (and, according to the authors, these worked against the recovery), spending cuts were 4 ½ times tax hikes. • Canada’s welfare system was dramatically modified. Rather than just providing a blank check to the provinces (which administered the welfare programs), Ottawa incentivized them to put the funds to better use. Benefits were cut for single, employable individuals and aggressive efforts were made to get them back in the work force. • Despite accusations from the far left that the poor would suffer due to these changes, the percentage of welfare recipients fell in just a few short years from 10.7% of the population to 6.8% by 2000. From 1997 to 2007, the percentage of Canadians classified as low-income plunged by over 30%. • The tax structure was dramatically redesigned. Corporate tax rates were cut by nearly a third, taxes on corporate capital were abolished, and personal income and capital gains taxes were reduced. • The General Services Tax (basically a consumption tax or VAT) was instituted to pay for the tax cuts described above. While initially very unpopular, it was a key part of the rehab plan. • The Canada Pension Plan (CPP), the country’s version of Social Security, also underwent major surgery. Instead of payroll taxes gradually rising to 14%, the increases were pulled forward but capped at under 10%. This produced immediate surpluses that were invested in higher-returning corporate securities. (As noted in past EVAs, this is a huge defect with our Social Security system; its many trillions are tied up in low-yielding US government bonds that simply add to our overall national indebtedness.) The CPP today is well-funded and actuarially sound. • As a result of these actions, and many others I’ve left out, the federal budget was balanced within three years. After achieving this remarkable feat, Canada went on to produce 11 straight budget surpluses. This allowed our northern neighbors to reduce their federal debt from 80% of GDP to 45%. Further demonstrating how quickly good policy can turn things around, the provinces enacted similar measures. Most of them also moved to balanced budgets or surpluses within just three years, though in the case of Ontario it took five years. However, that was still one year ahead of schedule (pronounced “shh-edule”, of course). By contrast, even Congressman Paul Ryan’s allegedly bold goal to balance the US budget will take decades to attain. [snip]

Van Hoisington's latest quarterly report is available... www.hoisingtonmgt.com/pdf/HIM2010Q3NP.pdf - QE1 unsuccessful; QE2 is risky - Treasury bond bubble - believes that bonds are still undervalued on a real yield basis "... For QE2 to work, a renewed borrowing and lending cycle must take place, resulting in a further leveraging of the already highly overleveraged U.S. economy. Such additional leverage would not be beneficial since increasing indebtedness from these levels ultimately leads to economic deterioration, systemic risk, and in the normative case, deflation, as documented by Rinehart and Rogoff in their book, This Time Is Different. Therefore, at best QE2 can be nothing more than a short-term panacea exacerbating the serious structural problems already facing the United States. ..." -O

Good post here which lays out the thesis that Greenspan reflated assets after the Nasdaq bubble and it looks like Bernanke has the same reflation game plan. A couple of great charts inside. More monetary stimulus to the rescue (or not). http://pragcap.com/did-the-consumer-ever-recover-from-the-nasdaq-bust -O