SharperDingaan

Most of the best investors I know are from 'main street', not 'wall street'. They do other things, and largely treat 'investment' as simply cash management. Laborers who ended up as major house developers, managers/developers who developed their own products, little old ladies who married well - and often! They are all entrepreneurial, enjoy pretty balanced lives, have tremendous common sense, and express a wicked sense of humor. They also take the long view on just about everything. Point is that a 'wall street' man/women is a one-dimensional product, sitting in a bubble. Pop, or move outside, that bubble - & it quickly becomes apparent how much of an illusion it actually is. OK for a while, but do you really want to emulate it? SD

I just used the extremes to highlight the excesses. Put all these skills in one person - & pretty soon nobody but sociopaths would do business with you. Points are that almost all markets/businesses are cyclical to some degree, and each stage of the cycle will have its own dynamics. If you understand those dynamics, and are flexible in your approach; it can serve you very well. Welcome to the board! SD

No big deal - we're all here to learn. A few 'truths' from o/g, where this kind of thing is fairly routine. Bankers are salesmen - their product is money, & they don't want you paying it back. Use it. Paying a loan back lowers interest revenue, lowers 'spread' $ to pay employees, & results in layoffs. Use it. (1) Hence you set up credit facilities when the sun is shining, creating fee revenue when its hard to find. (2) When the cycle is rising you borrow every cent you can, against forward (higher) reserve valuations. The initial $ go into drilling to raise total production (cash-flow), intermediate $ go into acquisition for reserves (collateral), & later $ go into buybacks. The objective is to spend the money on things that cant be unwound later without a loss, boost eps (share price) & your bonus, and boost the bonuses of the bankers lending you the money. The true predators will also be using part of their bonuses to buy puts on their competitors (avoiding any conflict of interest). (3) When the cycle turns, you simply squeeze the orange. In the initial rounds, bankers desperate to keep their bonus/jobs will bend for you (its why you boosted their bonuses in the good times). In the middling rounds you'll work together to minimize the asset & loan write-downs (more bending). In the later rounds you'll be forced to sell assets (often to the predators who benefited from the puts), & will spend some time in the penalty box. (4) The cycle turns again, you spend a year or so 'turning around' - and go back to (1). At different stages of the cycle, different people will be involved. Everybody benefits (including shareholders), and its preferable if the trough-to-trough time is intermediate versus overly short or long. Predators routinely turn into angels, and back into predators. As an investor, recognizing that these cycles exist (in many industries) is helpful - but it is clearly way more advantageous if you can also recognize how to exploit them. It does have its surreal sides though ... Next time you ask your banker for a loan - which one is the pusher, & which one is the junkie? SD

Buybacks are situational. There are no general rules. Imagine you have an asset worth $110M, a revolving floating rate loan of $100M, and 100M shares. The loan is currently at 5%, revenue is $8M, interest is tax deductible, and the tax rate is 40%. Assume the asset is a hospital wing that you have refurbished & leased back to the government - revenue doesn't change. Gross profit today is $3M (8-100*.05=3); net profit after tax is $1.8M (3*(1-.4)). EPS is $0.018/share (1.8/100). BV = $10M (110-10) or $0.10/share. BV/E = 5.56x (0.10/0.018). Interest tax saving of $2M/yr (5Mx40%MTR). A crash happens, central banks lower rates to 1% to stimulate the economy Gross profit is now $7M (8-100*.01=7); net profit after tax is $4.2M (7*(1-.4)). EPS is $0.042/share (4.2/100). BV = $10M (110-10) or $0.10/share. BV/E = 2.38x (0.10/0.042). Interest tax saving of $0.4M/yr (1Mx40%MTR). The company is clearly coining it post crash. NPAT at $4.2M is 2.4x higher than it was at $1.8M - but according to the falling BV/E ratio; the times are utter Sh1te. So the company uses the miss perception ... It persuades its banker to lend it an additional $12M to buy back ALL its shares at 1.20x BV (they read WEB) Assets = 110, Liabilities = 112, Equity = -2. Gross profit is now $6.88M (8-112*.01=6.88); net profit after tax is $4.13M (6.88*(1-.4)). EPS is infinity ($0.0413/0 shares). At the end of the year equity = -2+4.13 = 2.13M This is an infrastructure example, & illustrates why they are so attractive. Rework the example in a rising rate environment, and the payback period is how long you need rates to stay low. Its short. If you went only by a generalized BV/E ratio (market view), you would have totally missed the boat .... ... Underlining the counter-culture, & independent thinking required of a good value investor. SD

We've always found that our circles of expertise drives our 'idea' timing. O/G is cyclical, so we tend to be buyers around the troughs, net sellers on the way up, and T-Bill investors on the way down. Same expertise but we'll look like 3 very different investors, depending on where we are in the cycle. And the more circles you have ... the more manic you will look. Absent the central bank manipulation of the last 10 years, few would even question whether a forecast low rate environment is highly stimulative - yet suddenly that isn't the case anymore? Or is more likely that the people telling you (hires within the last 10 years) just haven't had any experience with this environment - & simply don't know any better? leaving you with a macro opportunity to be exploited? To do value investing well, you are by default - counter-culture; & able to think for yourself. Just the thing for this kind of environment. SD

I would suggest that rather than do a CFA; simply work for 2-3 years in main street corporate finance, pay off some bills, and THEN make your decisions. Both co-op and online MBA programs are widely available, and nothing prevents you from doing a CFA at the same time - many people do exactly that. For most employers what will matter is that you have an MBA, a designation, and experience with a recognized 'name'. 4-5 years of experience evidencing what you can do, is going to count more than what school (assuming its reputable) you went to. You'll also be a lot more confident in knowing whats important to you. Good luck! SD

Welcome to the board. We were reminded many years ago that investing is about USING the capital, & riding BOTH the yield AND quality curves. Always keep the core positions in quality, leverage into lesser quality only when yields have crashed. Once mean reversion occurs sell off the lessor quality, pay off the margin, pay yourself a healthy distribution - and do something life changing with it. It works very well ;) SD

Recognize that if you go to 'Wall Street' - you are going to be doing sales. If this is what you want to do; you need to be crystal clear on why you aren't in pharma or software instead (both pay better), and why you don't have a MBA in Marketing. Because your competitors - will have one. The vast majority of 'Wall Street' business is value destructive, trading paper is also a zero sum game. Zero value creation, and the 'fee discussion' of the latest BRK letter. As a young person interested in value investing, & thereby value creation, do you really want to spend an entire career in this Sh1te? - & simply because it's perceived to be glamorous? If you do an MBA in finance, & go up the corporate route - you will doing 'real' value investing every day. Every time you run the numbers on whether machinery should be replaced, factory expanded, workforce in/out sourced, etc. If you're good, its also far easier to either open your own firm - or buy out a retiring partners interest in an existing firm. Brains and chutzpah are in short supply, not money. Its 2017, and it has almost never been easier to open your own firm. Long term - do you even really need them? Blockchain technology is severely disrupting almost every industry it is applied to, creating opportunities, and making it even easier - if you are young, clear in what you want, and flexible. For most people value investing is a hobby, not a career. You don't need to be in the industry, and you're frequently better the further away you are from 'Wall Street'. End of the day - if the salesman is as good as he says he is, how come he's still just a salesman (selling you) and not a PM? And how come it is YOU that has the money, and NOT him? Kills the BS right there. Of course everyone is different, & we wish you the best of luck. Just be mindful of industry cool-aid SD

You might want to consider that a large block of cash and a very short bond duration IS a hedge. There is quite some opportunity cost to doing this, even in today's very low return environment. They are value investors; they buy cigar butts, and wait for them to turn around. They also carry the additional burden of not writing off their failures, & continuing to invest in them - explicitly recognizing that every dog eventually has a day in the sun. They use compound return as a metric for a reason - and it does not mean a steady rise of X% every year. FHH is a particular view on the market. They have a lot of very smart people, and it is highly likely that their view is continually vetted while it is being executed. If you don't agree with it, you don't have to own the stock. If your intent is to buy and hold 'forever', the up & down returns from hedging don't matter. The priority is that you didn't lose $, you maintained your buying power, and over time you've drawn out less than growth and dividends have contributed. If your intent is something other than this, the error is yours - not that of the company. Obviously not a popular view. SD

The net return over the last 2 years is essentially flat after inflation - similar story over the last 5 years. The only constant has been the dividend, and macro bets that would have paid well - had the event materialized To the technically minded; Isn't this really just a high quality bond + a long straddle on the market? Interest on a $450-650 bond (share price) less the cost of the straddle = the dividend? Dividend - inflation on the bond = roughly zero? If you have the expertise to do this yourself, the power to you; but if you don't - at least recognize that this is essentially what you are getting. There's nothing wrong in that. FFH is a great training ground, but everyone eventually has to fledge. SD

The youth is a very good point - as is the amount of space, and the dynamics of local conditions. Pretty hard to 'feel big' up north, when the Northern Lights are over your head, & there may well be more polar bears and cariboo walking around than there are people. You're just happy to have someone else to talk you - & more bodies between you and the bears! If you were born in Western Europe between the mid 50's and 60's (age 60-70 today) - you benefited almost your entire working life, from the mass rebuilding of infrastructure and population following the end of WWII. Yet if you were born in the same place just 30 years later in 1985 (age 32 today), you've had to fight hard for diminishing scraps pretty much your entire working life. Hardly surprising that multi-culturalism doesn't work in a great many places. The good news is that theoretically you can migrate elsewhere for a better life. The bad news is that theory isn't practice, and it has seldom ever been different. SD

Everywhere in the world there is muzzling of the population - it's just matter of degree. Canada's Mountie isn't the 6'2" white male that he was 60 years ago - today he/she is a lot shorter, and wears a variety of head dress; all of it good. It would not have happened were it possible to muzzle the population to any great degree, and simply recognizes what Canada is - multicultural. The wedge issue is fear of change. There are of course thorns. Integration and treatment of the native populations being very high on the list. So long as there is 'us and them', we give the racism a place to fester - and keep our prisons full. SD

Re indexing; this board is a very good example of what Klarman is talking about. Look at the stated 2016 returns everybody posted; weight the returns by the number of people who reported them - & it comes out to a high number. Cut it by around 1/3 for calculation error and posturing. Then look at the 2016 return on the average equity index fund (after fees). The adjusted board return is what a reasonably knowledgeable person would have made. The index return is the alternative. An investor putting money into an index fund earned less, as it was much less efficient. Both index fund and investor are stock picking – it is why the fund has tracking error. But the investor has less restriction. The inefficiency is primarily fees. Assume a 100K index portfolio that rises to 106K (6% equity return), with fees of 75bp. In the same period the investor does 2 round trip trades, for total commissions of $50. The portfolio earns $6,000, that 75bp fee is $750 (12.5% of what you earned), and the difference in costs is $700/yr per 100K of equity portfolio. The same calculation using a bond fund that earns 3% with fees of 50bp; and the investor doing 1 round trip for total commissions of $80. The portfolio earned 3K, & the fund charged 16.67% ($500/yr). The difference is $420/yr per 100K of bond portfolio earning 3%. A 200K portfolio split 50/50 between equity and bonds, would earn $9,000 (4.5%) and pay an additional $1,120 of fees (12.44% of the $9,000 earned) – over what it would have cost if the investor had just invested in the market(s) directly. In Canada a great many funds charge well above the fees mentioned, making the inefficiencies materially worse. But your fees bought the benefit of our managers expertise & experience …… or you could have learned it on the COBF board. You also discover that sloth clearly pays - about 12.44% in this example! SD

Agreed it cuts a little close to the bone, and could be seen as somewhat offensive. My apologies for any offence. The reality is that we can all be replaced, the Mexicans as well. There is always a cheaper labor pool somewhere else, and being the lowest cost provider is a well-trod competitive strategy (Porter). For many countries, people are the only real export, & life is cheap; whether it be a migrant worker repatriating earnings home, or an unskilled domestic worker forced to work in a Bhopal garment factory - because that's the only job there is, & it's that or starve. Unfortunately people aren't the competition, its automation; the robot can do it better, and more reliably, than just about all of us. The fear is real; trade agreements are one of the many ways of dealing with it. Trade benefits us all, and agreeing to rules over a specified timeline - allows us to plan (NAFTA). Gaming by all sides is par for the course, hence agreements are usually renegotiated every 'X' years to contain the abuses. Posturing is a negotiation strategy, it's not in the collective interest of all, and it needs to be called. For hundreds of years; theater, comedy, and sardonic humor have been the well-worn methods of achieving it. The best robots are executing software, not machinery. To make them work for us, and not against us; we have to be willing to radically change what we do, and how we do it (ie: adapt). Roughly 100 years ago we were still getting around by horse and buggy, and traveled to/from major cities by either rail or ship - motor vehicles and aircraft were still in their infancy. Today we have block-chain and smart-contracts executing on common databases; and have reduced the time to confirm and settle a securities trade to near real time - with complete audited history & elimination of the need to reconcile. Within financial services it means the elimination of literally tens of thousands of back-office jobs, paying maybe an average 50K/year, or $25/hr before benefits. The potential public sector impact is much higher. Fear is the mind-killer (Herbert), but human ingenuity is the light. My money's on the humans. SD

Whatever we may think of the recent threats/discussions to 'build walls', there is a funny side to this .... Per some of the Canadian comedy shows; the North American Free Trade Agreement (NAFTA), has been 're-named' the The North American F*** Trump Agreement - with a few extra gestures from the Mexican side. The on/off again refugee ban, is also being referred to as the 'The Art of the FU' Probably not what the US had in mind. SD

The man is very smart, & plays his own game; the 30 year return, & the $ in his fund, do the talking for him. Live in the fortress, & its hard not to drink at least some of the cool-aid; yet we all know that being a lemming is generally a very bad idea. A few sips of vinegar go a long way, and there is nothing 'un-american' to capitalizing on a good idea - wherever it comes from. Trump plays the unpredictability game, & plays it well, but it's a zero-sum game. We have an entire options market developed for just such markets, & it does very well. Play the fish. SD

Am I missing something? Write puts means go short puts, which increase in value when the stock falls. So, you're saying if management screws up, the share price plummets, and the short puts skyrocket. Wouldn't the loss on the short puts cause severe losses in the plan rather than large profits? Or do you mean write calls? Agreed, I used the wrong terminology. The sponsor contributes shares with the intent that the value of the shares rises over time; and at the money puts to cover all the sponsor shares the plan owns. Ideally over time the value of the sponsors shares rise to the point where the plans assets exceeds the present value of its future obligations. ie: the plan becomes over-funded, and the sponsor becomes permitted to take a contribution holiday. Everyone benefits from growth; but if the sponsor tanks - employees lose their jobs, shareholders lose money and avoid additional pension cost, but the value of the sponsors shares in the plan remains the same. The short and long term horizons are kept separate, & the short term costs are distributed equitably. ... and we have an option market on every DB plan sponsor, allowing shareholders a vehicle by which to manage their risks. But apparently DB plans are terrible things ... SD

When a workforce is young, a firm uses a DB plan because it costs cents on the dollar to what it would otherwise cost if it funded a DC plan. The compounding works to the firms benefit, & the more years to retirement - the greater that benefit is. It's why firms went with them through the 70's and 80's. A firm gets a very strong wake-up call every time DB costs > DC costs. It means your in-house workforce isn't young enough, and that your management usually needs replacing; because when they outsourced production they got rid of the younger folk, & kept the experienced folk for quality control; they didn't include the additional DB costs in the cost-benefit analysis - a firing offense. As soon as you bring that outsourced young workforce back in house (Trump), DB costs fall like a brick. Someone trying to tell you otherwise - is simply lying to you. When you're on your game, DB plans cost materially less, & the future payouts both reduce a firms future taxes, & build the firms future customers. They &/or their families have the $ to buy the firms product, & upon retirement - will frequently choose to move as well - further boosting the firms sales. Fund a portion of the employers contribution with company stock, & let the plan write puts on that stock; the cost of the plan radically falls even further. All the C Suite is incentivised to move the share price as high as possible, & every time management screws up - the puts on the plan ensure that the plan benefits. Screw up big & there are NO DB contribution costs this year - because the put profits were so large, it's no longer needed. Happy shareholders. As a contributor, DB & DC plans, affect your mobility equally. Leave your employer, it doesn't matter what type of plan you had - you aren't contributing anymore. The terms of the plans themselves are specific to the plan, & have nothing to do with the sponsor; you and your sponsor just pay the agreed amounts into it. SD

For those of us a little more commercially minded ;) http://www.paddypower.com/bet/politics/other-politics/us-politics?ev_oc_grp_ids=2657726 I understand that supposedly 9 of the last 10 US presidents had assassination attempts on them, and that the odds on impeachment are usually around 4:1 – about the same as for assassination. Donald’s doing 4-5x that. And ... as Paddy Power is Irish – a win would be tax free Even the Donald would approve :D SD

This is an investment board, not a political one. While the political climate is a material consideration; ultimately it is about how one does business or invests. History rhymes. The current US actions evidence a great many parallels to the early days of Hitler, Franco, and Apartheid; if you were one of the chosen few, you got the work, and the ability to lift yourself out of depression. Infrastructure rebuilding that started out as roads and ports; in all cases - subsequently morphed into various degrees of rearmament. Profit assimilates. “XYZ” first, was clearly stimulative - & a great many did very well by it. It would seem reasonable to expect much the same effect today, but history evidences that its longevity depends very much on locale. The conflicts have to be fought someplace else, not at home. Within Germany, the big winners were the German multinationals that we know today; the winners were similar in both Spain and South Africa as well. Applied to the US, it’s maybe 20 names – at best. But in all cases, you had to be one of the chosen ones. Sadly the way forward seems pretty clear, but as with all things - it is not an automatic given. The run-up to the 1995 Quebec referendum being a very good example; 93.5% voter turnout, and a ‘No’ separation vote of 50.58%. https://en.wikipedia.org/wiki/Quebec_referendum,_1995 SD

It was a terrorist attack; why, we don't know ..... Terrorist act, motive unclear Couillard, Prime Minister Justin Trudeau and Quebec provincial police have all called the attack a terrorist act. http://www.cbc.ca/news/canada/montreal/mosque-shooting-witness-reactions-1.3958037 SD

More inclined to entrust him into the gentle care of the men in red serge. People are dead, & one of the gunmen turned him/her self in right after the shooting; implying that he/she was coerced. Perhaps a conversation that needs to happen. SD

I respect Trump for this change today. He's not a thoughtful guy, so everyone should expect many mistakes from him in one of the most complicated jobs in the world. But in this case, he could have remained rigid and let the courts fight about it for months. Instead, he recognized the mistake and wasn't to proud to correct it. That's much more than I expected from him. Well done, Trump. Just a few hours earlier, Spicer was not apologetic about this at all on "Meet the Press". Whether it's a Liberal leader like Obama or a right-wing conservative like Trump...such ineptitude in how they planned and executed this whole thing simply was stupid! When you are blind because of your ideology (Liberal or Conservative) you are going to make stupid decisions. This was simply just an idiotic, xenophobic idea, supported by very poor execution. Not some grand observance that they mistakenly included "green card holders". The original intent was obviously to include them. Early on, I viewed this administration as something akin to the "Abbott & Costello" of politics and governance. Funny, very disrespectful, but harmless to the U.S. and world at large. Might even create some positive changes in business. I was wrong! When you get this type of blind faith in a world view, combined with executive choices with unintended consequences, you have a very dangerous man. The leash gets shorter and shorter every day! Cheers! Well said. Its going to get realy hard for US, and non resident multinationals, to do business in this environment. The tech. companies have been calling back vulnerable workers. That kind of thing costs money, and impedes productivity. If anyone was looking for a catalyst to cause a recession and market crash, this leadership would be it. Hardly a black swan as we all knew this was a possible outcome. Companies that cant plan due to the erratic reactionary politics will stop investing, or invest elsewhere. The saving grace is that so far they havent attacked the bureaucracy, which provides some continuity and stability. But its only a matter of time, I suspect. +1 It may seem a little weird, but this is probably THE best thing that could have happened. This is where the world aggressively goes after both Silicon Valley, and Hollywood - and temporarily moves it North. For Canada its nothing but up, & in a very big way. This was Trumps own incompetence; he shot from the hip, lost, & is going to be forced to wear it. The brand value of all those Apprentice shows has now been destroyed - you are fired, now just causes laughter, every time it appears. And nobody to fire ... because he very publicly did it himself, without consulting anybody. Even the Pope has come out against him. In the commercial world, you would just get fired with a good package. In the political world you either quit, get impeached, eaten alive, or worse. Zero upside. Every night, every comedy show on the planet lampooning the Donald, and all of them getting progressively more ambitious. Against someone with apparently very thin and wrinkly skin SD

And now with the Quebec attack, if you want to be Trump Light ... you will be branded both incompetent, anti-immigration, and anti Muslim. But hey, we can still win this! SD

If you want to be PM - you will speak French, & do it fluently. If you've never lived in Quebec, it's acceptable to learn French & demonstrate that you are actively tying to learn the thinking, nuance, and culture. Show genuine openness, and the willingness to mix with all Quebecers, & Quebec will adopt you. But if you've lived in Quebec for some time, & chosen not to learn French - you've made a decision, & will be held to it. Use Trump methods, & you are a Trump; whether you like it or not. The label will be hung on you, & wriggling will make it worse; there is no Trump Light, it is Trump or No Trump. Your television brand will be used against you, and your unpopularity will be used against your businesses - to strangle your cash flow. Politics is a dirty game, & it doesn't take much to deliberately start a run on a mutual fund business. To really make real change, focus on implementing the Trump like radical & real changes needed to bring Canada's various native populations into Canadian society. Take a cabinet post, use the aggressiveness to make it happen; and apply a tamer version of the Shawinigan handshake. Show that you can walk. Disruption is not a bad thing, but in Canada it happens within guard rails. SD