Mungerville

Its probably a great reverse indicator. Every time Chou gives back money to his investors in terms of the MER or back-end fees, the fund is probably poised to increase in value. But Sanjeev, I agree, the most important aspect is the honor, the integrity, and the leadership displayed by this act. This is what leadership is about and these types of acts should be highlighted in this world where executives which have blown up their companies not only continue to keep the bonuses from prior years without returning them (that thought would not even cross their pitiful minds), they not only continue to accept lavish retirement packages, but it also takes major public pressure for them to forgo their 2008 and 2009 bonuses. What a telling contrast. And let's not forget, Francis won mutual fund manager of the decade in Canada by Morningstar. Instead of being arrogant and on his high horse like the rest of gang of executives that expect entitlements, he continues to give back the MER just like he did in 1999. He should be put on a pedestal. Someone needs to get this story on the front page of the Globe.

People don't realize how massive an advantage it is for a great investor to be in control of a good P&C business in this market. There will be no-brainers coming in size, they are coming in size, and that leverage will be put to use at very low risk with good to great returns. Nobody can come ask for payment at maturity because there is none. Furthermore, at Berkshire, the interest rate is clearly negative.

$4B net worth is off for sure. I believe I have heard the man say / or read somewhere at one point in the last 5 years that 90% or more of his net worth is in FFH.

Thks. Yes. This latter chart seems more appropriate. If you slice and dice a bunch of different but reasonable ways, most of the time you get to the answer that 2000 highs and 2007 highs (i.e. after the 2002 to 2007 biggest bear market suckers rally ever) were both higher than 1929 highs relative to various measures like normalized earnings, GDP, price-to-book, etc. All that first chart on this thread may mean is that in the last decade, we have been taking huge provisions, thus remaining forward earnings before provisions are actually higher today than they were - so its a question of what bucket you put it in and that will change with time depending on management/accounting leniency/Goldman or whoever made the charts' bucketing techniques. The P/E means less in the first chart on this thread because the E signifies "earnings before all the bad stuff" and managements may have been more prone to bucket more stuff in the bad stuff category in the last decade. Furthermore, the analysts have been overestimating "forward" earnings since mid-2007 when the shit hit the fan so I don't think they'll get it right this time.

That chart is wrong. It implies the 1929 valuation on equities was lower than 2000 which is completely ridiculous because every other measure suggests that 1999/2000 highs dwarfed 1929 in terms of over-valuation.

We are not even close to 1974 or 1982 lows. Not even close. Confirmed by Grantham multiple times, Buffet as well. It doesn't mean its going to go there, but its been worse than this. We are simply around fair-value for equities at this point - maybe marginally below fair-value - say 15% below fair-value. No biggie. This is nothing much to talk about unless you really believed you were as wealthy as the market quote said you were when the S&P was at 1500 about 18 months ago. No big deal. Funny how everyone thinks it is.

I have no idea. Buffet is betting on the preferred, not the common - big difference. So he is betting GE can tread water and pay him that interest. Prem is betting on the common. I guess Buffet also thinks the warrant might pay off because he said he thought either the GS or GE warrant would be of value sometime in next 5 years - possibly both. I bought those calls that morning when GE was in the low 6s and sold when it was in the mid 9s a few days ago - so I am out. Never did any dd, just thought there was too much pessimism around the stock and knew how much it had fallen, got lucky as well.

The trust preferreds are economically debt instruments and are tax deductible so they are cheaper than preferred equity capital but a lesser form of capital. Rating agencies, however, may view trust preferreds like preferred shares (although they are not) for capital purposes so if ORH can use these things to act like preferreds when they are not for the purposes of the rating agencies and also have them tax deductible then that is a more efficient way to raise capital relative to preferred shares. Now, having said this, they may just want to raise capital now, keep the preferred shares, and build the capital base to really expand in a hardening market.

653211, Did not know it was you! I thought you were saying the exact opposite with the Munger quote but instead I think we agree completely. If anyone has not, they should really read Grantham's last 3 letters: Part 1, Part 2, and the short one he issued March 10th. At least two of them touch on the idea of these value managers that just doubled down on value stocks and how that worked for years - like the last 50. But then finally, you have a situation like this where these value stocks, which are normally of lower business quality relative to the high-fliers typically with higher P/Es, and that lower quality actually bites as if we go into very very harsh economic times, these value stocks will actually go bankrupts thus closing the gap somewhat between low p/e and high p/e. Anyway, he explains it much better than I and it is worth a read. I think everyone here should read it - its very important. If Bill Miller was not smart enough to see it, and Dreman, and others - and the list goes on and many of these former value greats are now toast for good, they aren't ever going to be called great again - anyway they had these decent records and experience ... so its worth a read as to Grantham's take on how they went wrong. www.gmo.com and all three are available with no password requirement

I probably don't understand the situation - otherwise, you are in extreme denial.

How about a permanent loss of money for his investors. Is that not reason enough. Do we really need to get into Charlie quotes on this?

You would probably also ask me to choose between a gorgeous blond and a hot brunette. On a serious note, for various reasons, I can't date the brunette, that's primarily why I date the blond.

Diane Francis needs a major helping of humility.

What a joke. They must be retarded. In what circumstance will Berkshire not be able to pay its debt as it comes due? Fitch was in bed with the bad guys a few years ago. We all saw it. So it looks like some of them are crooked and some of them are retarded.

I agree. Although the market essentially has - i.e. other than a little 20% bounce in December - it doesn't usually go just straight down. So my view is why not buy some things that should do OK fundamentally over 4 years with a portion of the portfolio regardless of the economic and market environment. I think ORH qualifies as an unhedged position. And I don't mind hedging and going long KO and JNJ at 4% yields.

And in my view, this all makes ORH a no-brainer at these levels. Their underwriting continues to improve and is well below 100% combined.

I want to add more to my point and pay attention, I am giving you pearls here. :P Grantham talks about minimizing the regret function. I brought some of this up on a recent thread with Ericopoly where I said that if ORH's equities (1.6 billion as at Dec 31) in 2009 dropped by another 50%, the bond yields (note a $400M yield with no M-to-M loss due to CDS held protecting principal as well as market fluctuations) would make up for half of that equity loss over the course of 2009. They would therefore get nailed with 400M in pre-tax losses or 280M after-tax. Their book value is $2.9 billion. So they take a hit of slightly less than 10% of book. Book value falls from 45 per share to $40 per share in this scenario. Guess what else happens though? Competitors can not write business and they double market share in 3 years. So, bring on the 50% equity market decline I say. I WANT that loss. Bring it. ORH benefits depression or not. So understand that no one has a crystal ball and to Grantham's point we all want to minimize the regret function. Well how stupid would ORH be if they DID NOT invest in equities in October. Answer: very stupid. Its the same answer even if the market drops another 50% in 2009. It was the right move. If the equity market surges from here, we may not get that rock hard P&C market and there will not be as great an expansion in the business but at least we get the gain in equities. So, to summarize, ORH's bet on the equity markets does not mean everyone should be "all in". They are minimizing the regret function as per Grantham or in other words maximizing the probability of adjusted returns given no one has a crystal ball and no one can pick the exact bottom and that equation has a different curve when your underwriting profits and market share are inversely relate to the equity and bond markets. This is likely NOT your situation. Remember what Prem said in that National Post article in the Fall of 2008: the first 50% hurts, its the next 50% decline in the stock market that can kill you. He, like all of us, understands that the bear market rallies can be furious and large - Buffet reminded us of as much in his October missive - and going in in October was a good move given his regret function. Going into equities in October/November was the right move. Its too bad about the timing, but no one is going to get the timing perfect. Pay attention, re-read it, I'm giving you pearls here! :)

You know - its worth emphasizing that in this current note Grantham is saying he moved in October to somewhere between minimal and moderate exposure to equities. This current note also seems to say he has not added to that minimal to moderate exposure as of yet. Sure, certain individual securities are cheap and should be bought, but the general market IS NOT the opportunity of a lifetime as confirmed by Buffet yesterday on CNBC - i.e. these are not 1974 or 1981 valuations. Grantham also echoes these views explicitly stating in this note that this is NOT 1974 and that is why he still believes that there is a 50/50 chance the market drops below S&P 600. Don't get me wrong, I am investing, but I am not going "all in" at this point. Furthermore, I am selling my gains - I believe there is an 80% probability that the market girates between S&P 500 to 1000 and it is just as likely to go below 500 as it is to go above 1000. I believe there is almost no possible way we will see S&P 1500 (Oct 07) highs anytime in the next few years. KO and JNJ at 4% dividend yields look like they can provide decent returns even in a depression. ORH to me looks like a no-brainer double in 5 years even in a depression and within 3 to 4 years if we don't have a depression. I think there is a 33% chance of a depression at this point. So we have non-depression lows in the stock market with a decent chance of a depression and a 90% probability of a deep recession followed by very meager growth thereafter for a few years (this is consistent with Buffet's view). Things can get a hell of a lot cheaper but we can also get a hell of a market rebound. Not to 1500 though - that is for sure.

Buffet echoed my views that this is not 1974-type valuations or 1981 for that matter for the market overall. Grantham also confirms it in his March 4 paper at www.gmo.com This does not mean that the market can not rally big time here like plus 50% or that individual securities are cheap. I think ORH right here is a no-brainer for example.

Something that Grantham said was obvious yet interesting to consider. He said P/Es should not contract in times of high inflation because stocks are an inflation hedge and provide a real return. Obvious as it sound, I think the above should be incorporated into the thinking. The other concept is the market price to replacement value of the firm. No matter how low other yields go on governments or corporate debt (as they did in the past 5 years), replacement value has to be an anchor on stock prices. Both of these concepts somewhat refute the idea of using the "Fed Model" of comparing earnings yields on stocks to the yield on 10-yr treasuries. And this is what some seem to be arguing here to some degree. I am not saying its totally wrong to this, just these two points need consideration as well as comparing corporate bond prices to stocks.

And those types of high quality companies are also the ones where the E will not shrink as much as the general market. These types of companies seems like the best place to be. They may indeed be as cheap as in 1981. 1981 was a time of compressed E along with compressed P/Es - the latter due to very high inflation. Because the Es of these high quality companies should tend not to compress that much due to their higher quality, they may not have got wacked with that double-wammy back in 1981. I don't have data going back that far on these specific companies, but I would guess that those are getting quite cheap right now. Its the "value" stocks and the market overall that I am more fearful of, not these high quality ones.

Good post JackRiver. Its hard to figure this one out. As the market moves lower like this, I really wonder if it can set itself up at some stupid level like S&P at 500 so that it is truly a no-brainer to buy - i.e. so it is truly priced for desperation. Somehow, I would think this would not be the case and investors would be more rational so as to not give others such a no brainer. Makes me think it settles somewhat higher - like somewhere around here. I am very tempted to take half my hedges off in the morning.

The key to that quote is in bold "When they’re priced for desperation, they can rally in the face of desperation". I know for sure they are not priced as low as 1981 at this point. So are they priced for desperation?

The best answer I have heard is that when everyone stops asking when capitulation will occur, then we will have had capitulation. (Jim Grant) So shhh!! ............

I think you have to be stupid to sell ORH at this price. Maybe Tilson is.