Mungerville
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Posts posted by Mungerville
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Fu*@ - would it not be great to just be able to invest as investors used to in the United States. i.e. buy cheap high quality companies, sell, and recycle without having to worry about all this macro shit. I don't like macro shit but it is the driving force right now. You can't just go around ignoring it and buy 60 cent dollars right now which is what I like to do. I mean you need to do that to get some core gains going and that is a value investor's competitive advantage, but I think you need the hedges too because of, on the one hand, these crazy men running the Federal Reserve and Congress not getting the deficit in order and, on the other hand, massive deflationary forces.
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This is not easy. When the US does a Greenspan for 15 years and now Bernanke - a hero for saving the system last year - is arguably just doing a Greenspan-squared. Wise men do not put themselves into situations where they need agility to save the system. Kicking the can like this down the road creating a bigger mess in the future - next crisis, its farm, gold, and canned food time.
I am not a gold bug, never have been but like Einhorn at Greenlight Capital I am getting religion fast. I have already started my hedge program for a strong recovery / stock market / inflation by buying out of the money options on silver via the ETF SLV - I don't understand it but a few reasonable investors think its a cheaper play than gold. I do understand that it is not the $US and they can't print it and that is about all I need to know. In terms of my deflation hedge, I have out-of-the-money puts on the stock-market reinstated because deflation remains the concern and those guys at Hoisington are probably right. Like Francis Chou said in his letter, the time to buy the inflation hedge will be when everyone thinks we are headed for deflation again. Unlike Francis, I don't think you can wait though - you have to buy some now and that is what I am doing. You may have to double down later but that's fine too. If everyone knows Obama will stimulate and Bernanke will print as soon as the stock market starts declining back to S&P 800, then that puts a floor under $US assets including housing - preventing deflation seems to be in the DNA of the Federal Reserve because they feel they could have averted the Great Depression if it wasn't for their bad policies then. So they are hell-bent on not letting that happen this time.
It is much simpler to just sit in $Cnd cash - maybe I should do some of that. Like Buffet, I sure as hell would not sit in $US cash over the long-term unless congress gets serious about the deficit. In the short-term, if deflationary forces reassert themselves, we could see another big move upward in the $US though.
This is not easy. This is not the way the economy or asset markets are supposed to work. We will have massive volatility in the economy, asset markets, currencies and price stability. I think that is my bet for the next 2 years with those hedges going either way.
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Watsa is not doing this to lose money or for his health or for kicks - he is doing it because he sees value.
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This is a complicated question and answer.
I think we are somewhere just above or at long-term fair value on the S&P (depending on your inflation views) but that does not mean it can not go way higher or way lower in my opinion - or flat-line for four years.
I am thinking through this right now for my portfolio. Now that ORH, my main position, is being bought out and I can not buy FFH for personal reasons, I am thinking about what to do. Bonds have rallied and so has the junk in the S&P - but high quality names have not rallied enough. Say JNJ, BRK, and maybe KO although that is up a lot, might throw in a few commodity-related investments which are tricky, and some good old 50 cent small cap investments if I can find them, maybe a junk bond or preferred. I think you need a core portfolio generating some earnings yield or spread - to do that, I think I will go long the highest quality names mainly. Any commodity, junk or small cap will be fully hedged. This will handle the stock market flat-lining for four years scenario.
Then I think I need a hedge both ways: if the stock market / economy / inflation rallies further and if the stock market declines substantially - both of which could happen and I think the latter is more probable but the timing is the question. These hedges will eat up my core spread but I think I need them for the next 1-3 years. I'll take one of them off if the S&P rises too high - say 1300 - or descends to low - say below 600. In between, I think I should sell as the S&P moves one way or the other.
I found it interesting that Prem hedged pre-crisis and the guys at LUK made the comment that they were surprised he felt comfortable doing that kind of thing like it was a speculation of sorts. Seth Klarman hedges often as well for example. Buffet did as well in his partnership days. Anyway, I feel more comfortable hedging for the next 1-2 years especially. Where things are headed are anyone's guess. Could be inflationary or deflationary.
I have hedged my $US portfolio since 1999 against the S&P and the $US about half the time - so 5 out of the 10 years, or 7 of 10 with partial hedges - which has cost me. My annual compound returns are still in excess of 23% in $Cnd terms with the S&P down 2-3% annually over that time in $US terms and down much much more in $Cnd terms and gold.
The point: You can still make money if you hedge and I did not even know what I was doing when I started other than it was clear that we were in a massive stock market bubble in 1999 and the bubble never burst until late 2008/ early 2009. It is tricky though and I did not make money on my hedges in 2000 believe it or not! I think I sold on the only day I could have at a slight loss!!! How bad is that?
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I guess people like it when their stock goes up even when they are giving much more long-term intrinsic value then they are receiving.
If you think ORH shareholders should be happy, think again.
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Wow, the discussions of the committee must have been heated. Can you feel the tension?
Another low-ball price.
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I don't want the $60. I am a long-term value investor. Pay me what it is worth not what some i-banker says it is. How many insurance/reinsurance companies hold tax free munis guaranteed by Berkshire Hathaway equaling 2/3rd of book value per share? Answer: not many because this group owns over one quarter of all the ones Buffet guaranteed. Talk about an operating income head start. Why the hell would you want to give it up at 10% above book value per share? Yes, book value does mark that to market but the market value in my opinion is low as these have the risk of treasuries with Berkshire backing them and higher after tax yields.
Price in that, then let's talk. Problem is the i-bankers can't because they don't understand Berkshire. Also, the Indian operations are non-negligible.
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ORH book value has been compounding faster than the compounding of the stock price. So, of course, its wound-up like a cork screw right now and the bid comes in. The unwind started as it moved swiftly from $37 per share to the low 50s earlier this year when everyone thought they held on to the long treasuries. Then, when it became clear that they sold those and invested in the munis, the rally in the munis came about and brought the stock up along with the boost in the equity portfolio to where it was at the beginning of the year - in the 50s.
Now, this is not dead money. The stock wasn't $25 too long ago, it moved swiftly to $37 (and stayed there for some time because the S&P cratered 55% - go figure...but book value per share kept compounding and the price necessarily follows over the long term), then it resumed its sporatic but unrelenting march upward to the 50s because book value per share keeps compounding.
All this to say that if anyone thinks ORH minority shareholders are better off selling at $60 relative to holding for the next 5 years, they are nuts. Why do you think the offer is being made?
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My take:
ORH represent 150% of my portfolio. Bid is too low. Minimum $65 - God knows what the i-bankers will come up with as a "fair" price - those guys don't know what value is to begin with. Even that is a steal. I would rather hold for the next 10 years personally or at least the next 3-5 years than to take even $65.
Muni bond portfolio is highly valuable and concentrated at ORH relative to a portfolio comprised mainly of stocks - especially if you think the stock market can come down some more from these levels as we get a double dip and deflationary pressures will exist before inflationary or hyper inflation as per Francis Chou's most recent comments.
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How about certain individuals on this board?
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People saving instead of spending.
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Latest Hoisington remarks:
http://www.hoisingtonmgt.com/pdf/HIM2009Q2NP.pdf
Latest Sprott remarks: Start of a Depression?
http://www.sprott.com/Docs/MarketsataGlance/July_2009.pdf
And the certain central bankers are saying the recession is ending.
So, who's right?
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If it wasn't so depressing it would be funny. The so called 23% return doesn't include all the other forms of direct and indirect support to Goldman like bailing out AIG for one at Goldman's counterparty exposure to them. There are countless others. They are either good at PR or people are stupid enough to believe it. Mainly the latter.
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Viking,
No, you are right - I just had a momentary lapse there. I also agree with all your other comments re them potentially adding to corp bonds as well as other insurers maybe getting nailed a bit on treasuries.
I think that is a good baseline picture.
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Viking,
That's a great spreadsheet. Thanks. But why is that your optimistic scenario as the stock gains look straight-forward after your work and I would guess the percentage bond gains are low for ORH - very very low. Only 100M? Really? Wasn't the mispricing huge on the Berkshire guaranteed municipals on a significant portfolio of bonds?
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Returnonmycapital,
I am also thinking about starting a partnership-like mutual fund in Canada possibly in the next 12 months or so. I have a CFA (but no CIM qualifications). I would be very interested in your answers to a couple of questions:
1) Did you run into any legal issues with OSC requirements in terms of education, certification, etc... and how did you comply with those; what are the options here in your experience. (Last time I looked into at high level it seemed you needed to have managed over x million for 10 years as a requirement for starting an investment management firm.); and
2) What do you figure is the minimum size of the fund to get started given accounting/audit and other costs?
I guess I am primarily really interested in the first question with some elaboration and in any other board member views on that first question. Wondering maybe if starting in certain provinces other than Ontario is easier, etc.
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Yes, have been doing this for 2 years now. Long ORH, short the market makes sense to me right now.
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Hoisington believe we have deflation not inflation. Watsa seems to be playing the reflation trade but believing deflationary forces will be greater than the market expects. He seems to be playing this thing almost like a contradiction. Its not simple at all.
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I have bought and sold Berkshire 3x over the past decade. First buy was in early 2000, second buy was around the time all the other Euro reinsurers had no capital left from the Nasdaq crash and I expected BRK to gain share, also price was decent - that must have been around 2002/3 or so; and then again in 2005ish. Anyway, I probably made around 25% compounded annually on average for the three purchases and sales (average hold about 1 to 1.5 years roughly) with the last one being the worst performer and the first two probably doing better than 25%.
I haven't looked under the hood in detail lately but my sense is to wait for something around $2300 for the Bs or around $70000 for the As. That's my sense, but even at that price, I think ORH is likely a better deal right now and that is why I haven't really bothered to analyse BRK in detail at this point.
My investment partner wanted some BRK and I was telling him to buy ORH instead. Anyway, he gave me some cash to invest and wanted it in BRK. I wanted to wait for a lower price, but he wanted it in there at current prices, so I put it in at 2900 on the Bs which price I did not like. His call though. We agreed I could put the rest in ORH. So far ORH is up and BRK is down and I am pretty sure that outperformance will continue.
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Anyone tracking ORH's book value at this point?
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Ucc,
Is that good or bad for ORH?
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Similar to ORH's municipal bond portfolio in size but ORH's shareholders' equity is much lower than Berkshire's AND ORH's muni bonds are guaranteed by Berkshire. So, in simple terms, ORH has more better.
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My brother gave me a chunk to invest. One third of it is invested so far: into ORH at around $37 and KO in the low 40s - keeping it safe at this point with lots of Canadian cash on the sideline (which has increased relative to the US dollar just sitting there doing nothing).
He saves which is great and wants to buy his first house. He's willing to forgo current desires in order to have some financial independence so you have to respect that. In terms of housing although its not a good investment, its going down if we have inflation (and the higher interest rates that that entails as stocks did in the late 70s or early 80s) or if we have deflation like Japan and 1930s. If we have something in between, which is probably going to be tough to achieve, housing is not going up in my opinion. So under the first two scenarios, he wins, under the the last scenario he draws. So cash is a good bet right now relative to housing.
He wants to move into a country home and there are 50% odds mine may be coming available for rent for 2-3 years - I'll know in a couple of weeks. I would rather rent it to him below market than to someone I don't know so it would be win-win in my opinion if he rents my home which is a great family/kids type home for 2-3 years below market, continues to save, and buys a house in my area with cash in 3 years when, in my opinion, they will definitely be lower due to deflation or higher interest rates combined with some forced sales. My recommendation to him is to try and buy at 70 percent or lower relative to replacement cost and I think he is going to get it despite the area he is looking at not being depressed at all at this point. I bought mine for 60% of replacement value, and he'll be able to do the same I think. Does that make more sense?
I think we will have deflation personally - that's why in the Fall of 2008 I went variable on the mortgage about 2 days before all banks in Canada started reducing their discounts to prime on their variable product moving to prime plus. The fuckin' mortgage broker did not understand why I was in such a rush and neither did the bank manager I was dealing with - but they were not understanding the only reason it hadn't moved already is because everyone thought things could come back to normal including bank funding costs which increased significantly in the Fall of 2008. I was actually paying the fee to break my current variable rate which had a few months to go and was at Prime minus 75 bps to lock into a 5 year deal immediately. The bank manager couldn't figure out why I was doing it and actually called me with the intent of ensuring I, the client, wasn't doing financial harm to myself! Christ, this after I had completed the transaction and almost all banks in the country had raised the variable rate to prime plus 100 bps - I think a few were at prime plus something lower but the point was most went to prime plus a few days before she called. I had to explain to the bank manager in detail before she got it. I said, look, I paid the penalty to lock in at this low variable rate for 5 years because if I waited only a few days let alone months, the only rate I could get now would be prime plus something whereas now I am locked in in the go go era variable rate at prime minus which equates to somewhere around 1.5 to 2%. She said "how did you know when I didn't even know they were going to change it"? I felt like saying "Honey, I have forgotten more about finance than you have learnt in your lifetime" but I figured that might not go over well so I just said "Well, I guess I got lucky".
The investment in your personal residence is not bad if you buy it cheap like anything else. Templeton bought his cheap and, actually, so did Prem after the real-estate collapse of the late 80s in Toronto I believe. Why pay full price even on your principal residence? I bet sometime in the next three years, my brother gets a deal, meanwhile he rents mine below market in the same area while he waits and looks, and as the vice grips clamp down on other highly levered home owners with questionable employment stability in what will be a long and tough recession including double and triple dips.
In my opinion, there is almost no way housing is going up in real terms in the next 3 years in Canada overall.
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My brother is sitting on a bunch of cash that he saved and he wants to buy his first house mainly with cash. My advice to him was to wait and hope for inflation which will send interest rates higher bringing down the value of homes. This is exactly what Grantham is essentially saying in that bolded part - it presents an opportunity for the long-term investor. Alternatively, we may have deflation in which case the cash will be worth more. Pain is good if you are sitting on cash.
hedge your portfolio
in General Discussion
Posted
Jeremy Grantham's fair value is lower than what you guys are talking about. I think he has fair value at around 850-950 on the S&P.