scorpioncapital

Get 600% a few times and who cares if you lose 80% :)

Isn't this an expected value exercise? A) .9 * 100 - .1 * 20 = $88 B) .7 * 600 - .3 * 80 = $396 C) .75 * 300 - .25 * 50 = $212 So one would reasonably put 100% into B? I would think the bigger question is how you get the confidence levels, people pull these out of a hat, but there is no way to tell that one is right or wrong about these weightings.

"such volatile businesses with unpredictable revenue. As rohitc99 just mentioned, the fact that they own some businesses which "could be profitable in future" makes it tough to value some of their business/investments." Actually I find this a fascinating subject. Consider a predictable business a la Coca Cola whose earnings and future can be modelled with greater certainty. Such a business should theoretically be easier to value and without making any calculating mistakes, an investor can get a reasonable return and sleep well at night. Buffett loves these kind of situations... However, There is another situation which is equally lucrative and that is the Leucadia model of making investments with intrinsically volatile and sometimes uncertain outcome. This is not to say it isn't a probability play or that a baseline value is not available, but the future outcome has more possibilites and valuation ranges. Why is this model also good? Because as Buffett mentioned, there is a volatility arbitrage trade, namely the trade where you know more than the market and are willing to give up certainty for the extra return possible where the market cannot so easily value the future cash-flows. I am very comfortable with this model and feel that in today's semi-efficient market environment, this is one of the few opportunities for outperformance. Embrace the volatility, with intelligence and being an astute deal maker, and you stand to do very well.

It's a catch 22, you either have to buy it during periods of panic, but how can we know those ahead of time or you have to find a long stretch of undervaluation - but if you find a long stretch of undervaluation then something has gone wrong, namely it is less likely that you'll get your 18%. In other words, if it sells for 50% of book, it may be that you'll now be getting 9%, the addition of the two should, theoretically, amount to the same end result (9% return to book + 9% annual return = the same 18%). Really an irrational panic is the best time to buy but you have to determine if a) it's an irrational panic or b) something has changed about the company.

Look at it this way, even if trading at book value, if book value is growing at 19% per year over time, I would say that's a pretty respectable return all other things being equal.

Obviously Munger you didn't read the article you posted :) What is important is not only what Buffet says but what he doesn't say. He says inflation swindles the equity investor but that is only because it swindles the cash holder, bond holder, gold holder, property holder EVEN MORE!

I think growth in book value per share is a better gauge of performance that share price because as you mentioned they can't control the share price, that it went up 600% is no reflection positive or negative. BV/share however has been more steady, averaging around 19%/year when you factor in divestments and return of capital to shareholders.

only in Wonderland would people be having a discussion of what net worth is and if it includes your house and if an $8 million house should be considered part of your net worth. There are people in the world with nothing, whether you include your house or not, sell it or not, most Americans are rich by global standards.

This assumes the hedge fund fee is paid yearly. However, how would a fund , mimicing Berkshire, pay 20% of unrealized gains in any given year? Buffet partnership paid the fee in the form of share dilution by increasing Buffett's ownership interest, by not taking it out in cash he actually created a better return, even though the fee was the same.

this question is an exercise in valuation. Do the voters consider their house as part of their net worth? Do the voters consider the potential market value of a private business which may or may not be sold and whose value is more subjective than a stock quote?

Nobody has mentioned LUK, masters of the capital allocation universe :)

Did Buffett achieve a 50% annual return when he was younger or is he claiming this as of today? I believe the partnership was shy of 50% per year. Obviously a claim that an experienced 70 year old investor can do 50% on small sums is a completely useless statement in relation to a relatively unexperienced 30 year old.

"Which is why i am surprised to hear Buffett appear so definitive " Actually it's very simple - the National Bureau of Economic Research has not called the recession of 2008 over yet, therefore Buffet can be certain there will be no double-dip because you can't have a double dip if the original recession is not over. Semantics? No - a perfect prediction!

I would put far more trust in the dating skill of the main body for dating recessions than the one quoted in that article (http://www.nber.org/cycles.html#navDiv=6) Notice they have not called the end of the recession that started in 2007 yet while the article is already talking of a new recession - how can you have a new one when there is doubt the original one has ended yet? "Q: Why did the committee not declare the end of the recession when in met on April 8, 2010 even though, as it noted in its announcement, most indicators have turned up? A: The committee does not judge in real time. Rather, once all the relevant data are in and the early revisions have occurred, it looks back on history and determines in what month the economy reached bottom and began to expand again. The committee also has to guard against the possibility, even if very small, that what seems to be the beginning of an expansion is actually just an interruption in a longer contraction."

I don't have all the answers to this question but one thing I strongly believe is that model #3 is absolutely the worst of all possible worlds. Owning 90% of a large subsidiary and floating 10% seems destined to lead to perpetual undervaluation. As a stepping stone to divestment of the majority control I can understand but the idea that you do it so you can get a public valuation for something you own 90% of is just idiotic.

but then how do we pay for social security?

'However, as we’ve discussed in the past, perennially large deficits and an already elephantine national debt should drive interest rates higher on their own." If people aren't borrowing when money is free, why would they be clamoring to borrow when money costs 10%?

I for one am excited about certain stocks. Here's the most important thing to realize about this whole mess: What matters is REAL numbers not nominal. As long as the world has businesses and those businesses make a buck, what you have is a REAL return in ANY environment. An entrepreneur will make money as long as he charges more than his cost and that occurs pretty much in any environment - ignore the bad businesses of course! Rogoff did a comprehensive study on nations and showed that eventually all those that control their currency get over the crisis through a combination of a) a bit of growth and b) a bit of devaluation, sometimes more of one than the other, but the results I saw show it's about 50% growth, 50% devaluation.

Your historical statistics are spot on. Likewise, I can produce balance sheet, income statement, ratio analysis, and provide historical data on a company I might invest in (the US - or the entire world for that matter may be considered a giant company with many subsidiaries, but unlike a company it has different economic dynamics). However, I think the chain of logic to your conclusion has some weaknesses in it. The primary weakness is that the argument hinges on a comparison of a past historical state with the current historical state and an extrapolation of future consequences unravelling exactly like in the past historical state. However, much about the world in 2010 is very different than the world in 1929. I'm not talking about economic ratios alone, if the world is a machine with trillions of variables, the state of those variables today is a very different configuration. To wit: even if GDP were to suddenly drop 20% today in the US, why is it a foregone conclusion that the consequence must be the same as in the Great Depression?

so perhaps an added note can be, if an investor you like and trust allocates 100% of his net worth to a stock, maybe it's worth doing the same. However, I would point out how difficult it is to find out the net worth of somebody in an investment if they don't come right out and say it. Holding data shows only % ownership of a company and does not say how much of that person's personal money (5%, 10%, or 100%) that represents.

A very astute article, I believe Buffet made similar op-end pieces over the past 10 years saying pretty much the exact same thing

This doesn't make too much sense to me, let's say Berkshire, when younger was an A or B company, even Buffet was willing to put 100% of his net worth into it, what's the point of having 5 positions of diversified conglomerates? The duplication of values would be so large as to give similar results to owning 1 good one.

The Japanese central bank did not deposit the equivalent of $1 million USD into the bank accounts of every Japanese citizen. Until it does so, any argument that QE in Japan didn't work is not conclusive.

A no-brainer is an investor looking in the rear-view mirror. There weren't any no-brainers 60% lower on the S&P because people were posting the same pessimistic, mixed world view back then just as they are now. Some people made good money investing during the great depression, not as much as in other periods but I read that including dividends and not just capital gains it wasn't as bad for many stocks, assuming you didn't leverage up 10:1 and bought the high flyers.

nothing about the future is certain