SharperDingaan

We're great fans of how FFH generally goes about its business, but at this point we think the next few years are 'ho-hum' at best; primarily because the current price is so high. A double will require an enormous improvement, whereas even a fairly small error will hurt quite a bit. The same $ amount invested in any of Canada's big 5 banks would also earn quite a bit more, & for about the same (but different) total risk. We would also remind you that FFH returns are very 'lumpy', & 'compound return' is a smoothing mechanism. Nothing wrong in that so long as your cost price is low, you have a long runway, & recognise the limitations; many folks miss it. This board is prone to 'hero worship' over prized cows. Hero's are not always the 'best' investment, all the time - no matter how much we would like them to be. SD

Central Bank 'mistake'. The globe has been in the Great Recession II ever since 2006, we just haven't seen the dust bowls of the Great Recession because central bankers have been very good students of history; and their combined sustained efforts have been herculean. But even when an interventions risk of failure is small, it compounds UPWARD the more interventions there are; and there have now been a great many interventions. At some point a sneeze is almost certain, and we'll all catch flu. SD

You have be sure that you fully understand the 2nd and 3rd level drivers when you buy these things - and how you should be using them. Already pointed out is that these things are marginable. If/when you need money for personal use, you should be margining against them and taking the cash out of the account. After tax deductibility (Canada) the net interest cost is usually well below what you might have paid elsewhere. It’s the portfolios ATM. 1st level valuation is straightforward – simply plug the variables into your calculator. If it trades for less it should be either because dividend payments, or the principal repayment is under threat; if it’s true, by & large there will be a ratings downgrade before the event(s) actually occur. If you think this is unlikely, the pref is an opportunity. There are 4 2nd level returns; spread (pref yield – interest cost) on the margin used, pref yield on the equity contribution you’ve put up, discounted capital appreciation (face value – purchase price), and cash yield (dividend/purchase price). This is what you are managing. There are 2 3rd level returns; 1st level valuation, plus speculative spread (your view versus the market view on 1st level valuation). If the bulk of the pref buyers are primarily income seeking retail investors - with limited investment knowledge/experience; most of this board’s membership would have a positive spread. If the other side of the trade is primarily professionals (i.e.: GS in distressed prefs), the spread will be negative. Expertise/Experience pays. The good news is that the expertise/experience developed here, also helps on the equity side – where the same type of 3rd level spread is common. Look no further than many of todays oil/gas equities. SD

You may want to consider that these things are NOT linear; you do not have to make your $ first - then do something else. This is just the way that most people (that we have heard about it) have approached it, and survivor bias is a significant overlay. Most folks today, consider what they are going to 'do' in retirement - well before they get there. They also act on it, TODAY; typically through doing something extra-curricula - going back to school, volunteering, partnering in a small business, doing something different, music, etc. You make your $ and do something else AT THE SAME TIME - the strategic plan of work today, & figure out how you're going to do this four years from now. Most folks work in jobs they are at best indifferent to; it pays the bills & puts something away for retirement - but is soul destroying. In many cases 'retirement day' was 'freedom' - but you were dead in under 5-10 years because you didn't know what to do with it. Dead from boredom via drink, obesity, or drugs. Today, that 'retirement day' is now earlier than many would prefer - and having that 'something else' to do has become a necessity, not a luxury. Look around you at TODAY'S folks in their mid-50's, and outside of your social circle. I put it to you that a great many are NOT slowing down - IN ADDITION TO THE DAY JOB they are getting the bucket list things off the list, &/or are preparing for their new freedoms - as kids fly the nest &/or get pushed out. There aren't many years until the grand-kids arrive, you haven't had this degree of freedom since your kids were born, & most aren't about to piss it away. These things are of course generational, & reflect the attitudes/mores of the times. To someone in their 70's this is complete BS - because it wasn't what they did, to someone in their mid 30's its just plain 'duh'; different experiences. Your home country, &/or culture will also materially affect this. All good! SD

I think we, collectively, are confusing cause and effect. The stimulus programs are a blunt instrument response to the slowing of the economy. The slowing of the economy started long ago in relation to the aging demographic. Because of all the noise from the tech run up, the twin towers and the war afterwards, the pre-2008 China expansion, and the financial deregulation crisis, we didn't see the slowdown happening. It started in Japan, and Europe, in the 1990s, and moved on to include North America, and parts of Asia. It has now moved into the rest of Asia, and is now encompassing the bulk of the worlds GDP. The governments and central banks are only reacting. There is really nothing they can do. Japan has shown what the long term will look like. Interest rates will settle at the lowest they have ever been. Governments will continue to try and fight deflation. The next thing they will attempt is infrastructure programs. Since the demographic tap has been shut off forever it is an entirely new paradigm for the world. The future is one of much slower economic growth than the past. The major markets have barely made positive territory in the last 15 years. It is not all bad though. I have been investing for 20+ years, during the slowdown, and have done very well. +1 It's useful to take a page from nature, and recognize that nothing grows forever; everything eventually either runs out of nutrients, or dies from its own pollution. Yeast in a sugar solution (grape juice, malt, etc.) comes to mind. The fuel for all economies is demand (buying power); lots of people, with ability to pay. The people side is driven by demographics, ability to pay is driven by monetary and fiscal policy. If you don't have the people you need mass immigration, the immigrants need to be of child bearing age, and they have to be able to establish once they reach your shores. It also means you have to recognise that your home culture is going to change, and that it's a very healthy thing. Canada's iconic dress 'Mountie' used to only be male, 6' 1" or taller, and wore a Stetson. Today, he (or she) is a lot shorter, also wears a turban or a hijab - and is frankly just as good, if not better. Cultural change is part of life. SD

It's much more basic, & primarily demographic. We know from supply/demand that as long as there is 'excess demand' price will go up. We can get that excess by raising the number of buyers, getting them to spend more, or cutting back the supply. The average person spends far more in their 30's through 50's (kids, house, etc.) than they do in their 20's & their retirement. Folks in their mid 50's to mid 60's are generally anomalies as spending is more influenced by saving for retirement, retirement packages, and 'crossing things off the bucket list' - before they retire. On top of this is annual inflation and growth, which may or may not be positive. NA markets are primarily influenced by the baby boom - their peak is entering their mid 50's, but the early boomers are retiring - in growing numbers. Hence the current flow of new saving $ (excess demand) into the market is about as good as it's going to get. As aging continues we really need inflation & growth to offset lower net contributions - & retirees starting to sell down to fund their retirements. Japan has very few young people, & their economy reflects it, same thing for big parts of Europe. It's also hard to 'make' inflation when there are annual declines in the underlying buying need (growing numbers of retirees), and growth when there are few folks to man the factory. You can import labour (Germany), but at some point it's easier to just move the factory to the labour. In any given quarter a particular NA sector may outperform, but it may not be sustainable. SD

Value = (FCF(1+k)/(k-g))/(1+r) where FCF = Free cash flow at end of year 1, k = Return on Equity, g = growth rate, r = CAPM market rate of return. You are mistaking Earnings for Free Cash Flow, IRR for Return on Equity, & not recognizing r. Assume no change in FCF k could be high because of high debt, operating leverage, or tax effects. Look up the DuPont breakdown. g could be high simply because the base is small, versus lots of new business r could be low because of QE efforts by local central banks. Assume FCF of 2, k = 10%, g = 8%, r = 3% ( A growth company in a 'risk off' market) Value = (2(1.1)/(0.02))/(1.03) = 106.80. A high valuation because its a growth stock. Assume FCF of 5, k = 8%, g = 3%, r = 3% ( A more 'mature' company in a 'risk off' market) Value = (5(1.08)/(0.05))/(1.03) = 104.83. 2.5x the FCF & a lower valuation - because it isn't growing. Growth stock investment is all about understanding k-g; what's causing it, changing it, & its sustainability. SD

Yeah, there is that side but the question was about financial, not holistic. I have always wanted to play music live. Call it a work in progress. Dont know about SDs brothel idea... maybe a meth lab. Could meet some interesting characters as Heisenberg North. Both these women were French, & Paris based - so completely different to start with. They were both very strong minded, did their own thing versus what was societally expected of them, & very adventurous. Not shy either. There had also been a few previous husbands, but they had kept dying on them - apparently, it's very frustrating. The old lady 'knew somebody' & publicly told him off over the poor treatment of his girls. Unable to extricate himself - he 'bet' her that she couldn't do any better. If she could, he would make her a partner; 3 years later she was. The end result was nothing like what anyone would have imagined, was very effective, & was very good - but could not have been replicated outside of Paris, or perhaps Berlin. Turned out that one of my grandmothers knew the old lady from times past, & that they would share a few beers over the 'store' every time she passed through Paris. Needless to say both of them were very swift, & very colourful. Retirement is what you make of it. SD

I was reminded many years ago - that one of the smartest things you can do for yourself in retirement, is to get a job. You are your own worst enemy, especially when you have nothing to do; so most folks choose to do something entirely different. One of the people who told me this ultimately chose to become a part owner of a brothel, and died in her sleep at 84. Her daughter was a wealth manager to trophy wives and kept women. The two of them together were some of the smartest women I’ve ever met. SD

I disagree with this. Someone looking where everybody else isn't would have automatic advantage only if the pool of companies/stocks they are looking at is of similar quality than the one where others are looking. But that's not true most of the time. Most of the time the companies/stocks in "contrarian pool" are actually (much?) more crappy than in the other pool. So, yeah, the guy gets advantage due to "other people not looking", but they get a disadvantage because the pool is crappier. And I disagree with your claim that the advantage automatically outweighs disadvantage. In other words, if you fish by the known fishing hole, you have more competition, but you also have a tons of large good quality fish there. If you go where people know the fishes don't swim, you have less competition but fewer and smaller fish. The secret of course is to find ignored fishing hole with a lot of large fish, but that doesn't happen automatically by just being contrarian. And yeah, sure it happens that ignored holes exist at various times for various reasons. Whether for growth investing or value investing or art investing. ;) Some would say that both parties are actually looking at the same fishing hole, and that just one of them - chooses not to fish there. Of course there may be various reasons for that - some of them having nothing to do with the quality, or size, of the fish. The contrarian fisherman might also spend all day at that fishing hole to catch one fish. Whilst his/her more skilled competitor at the same fishing hole may take less than 5 minutes to catch that same one fish - & have better things to do with the rest of his/her day. SD

So we have that Graham formula of <1.5x BV and <15x earnings. Well, the earnings part is still quite valid, but the BV criteria not so much. Why? I wonder if in the old days companies either: a) retained earnings out of a deep conservatism due to the Great Depression causing BVs to be inflated. Today such companies might buyback stock or return to shareholders. If they didn't they'd meet the criteria. b) companies were more capital intensive due to the industrial/manufacturing stage in human evolution and less globalization. Today, many companies are in the 'cloud' and so the average P/BV is going to creep up as more money is made with less physical investment. So if you keep the P/E criteria as a reasonable price for growth, it does still look very similar. Of course quality of earnings and qualitative factors are another thing to look at, but you can't really put a number on them. +1 Keep in mind that these formula were developed when 'big' businesses were primarily 'value chains' and everybody was using Porters 'differentiate' or be the 'lowest cost provider' strategies. Scale, brand-name, capital intensity, operating leverage, etc. mattered - & underpinned the 'moat' that every 'value' investor strived for. P&G, or Coke, were great businesses - in large part because their scale was prohibitive to replicate, & they were too big to acquire outright. All good - but pre internet. Todays model is internet enabled 'platform' business - driven by network effects. IT/Capital Intensity is cloud sourced, & value is measured entirely differently. In the 'old days' we called this 'platform' business the 'brokerage' business, as it does the same thing; for a small fee, bring buyers & sellers together to purchase a good or service. The management of the hotel, mutual fund, and head hunting industries have long been brokerage businesses - it is not restricted to just the tech sector. However, one of THE biggest enablers in this brokerage industry - is the new 'blockchain' technology; & its ability to dramatically improve the standard operational metrics of efficiency, effectiveness, speed, flexibility, data quality, and transparency. We just don't want to hear it, because its new - & disturbing. Nobody likes being reminded of their obsolescence. Hence you are valuing 'potential' - where most of the metrics are actually non financial, & the smaller P/E multiple has to be compensated for by large volume. Seeing where 'XYZ coy' could be in 2-3 years, handicapping the various possibilities for likelihood & ability, how (& if) it monetizes, & whether 'XYZ coy' is the right kind of firm for that future space (buy-out, die-out, etc.). It is really a form of venture capital investing, but we think of tech - primarily because it has been the poster child for this kind of approach. Very different from Graham, but very much in the same grain as well. Grandpa used formula & pen & paper, we just use different techniques, & we can expect our successor generations will do much the same. All good - but it highlights that all techniques have a natural lifespan to them. SD

Value investing is not hard science my friend. Its subjective and hence most people are not going to "get it". I love picasso more than warhol. Does it mean " i dont get art". Repeat value investing is not hard science. +1 That's why we don't use either the 1 year, or compound return; Its also why we buy cyclicals - at their lows, & sell near their highs. We let the commodity price do the 're-rating' for us; And, why we hold both long & short term views on any given cyclical. Gains on the way down, AND on the way up. If we tried to use 'hard science' most of this wouldn't work. But it means that we periodically consult the academic literature, & apply whatever is new. No 'one' formula, or 'technique'. SD

Most folks just don't 'get' value investing .... You are not doing 1-year, or a 'forever' investments; you are also looking at 'lumpy' returns, & extended holding periods - assessing return based on monthly/annual/compound return is just BS measurement. If your intent is fashionable 'talking points' to use on the cocktail circuit, there are many cheaper ways of doing it. You are also not applying 'magic' formula. An established firm that is growing rapidly - is just as much a 'value' investment, as buying cheap & hoping for mean reversion to produce a price increase. Just because 'growth' doesn't have a 'magic' formula, does not make it a 'not value investment'. If you just want to be fashionable ... you really shouldn't be value investing. SD

There is no disagreement this a legal case. There will be an outcome - the speculation is a recompense. It may/may not happen. We just point out that even if there is recompense - it doesn't mean that you will actually get paid. Many a parent successfully suing for child support has found out that ultimately they couldn't collect, despite having a legal judgement in their favor. Hence its not the legal judgement itself, its the collectability on it. Related. Not too sure what the legal authority was for rescuing banks, forcing bank mergers, and re-writing MTM/regulatory requirements during the 'crisis' - but it occurred, & continues to this day. We put it to you that this type of 'arrangement' would follow similar lines. Of course, it may never happen. Our point is that predicting outcome isn't enough. SD

What does this have to do with any ruling by any court? Even if you win, you just get paper - not cash. And if you can actually sell it - its at cents on the $ SD If I expect the UST defease my 6.4% coupon to perpetuity, I won't let it go for cents on the dollar. Neither will anyone else, because it will be worth 160% of par at a 4% government rate. A UST defeasance payment is not a 'guarantee' that the UST will defease all future payments - there will not be a 160% of PAR value, & you will not be able to borrow against an 'implied' versus 'explicit' guarantee. There is also nothing to prevent a UST intervention from simply calling/buying in everything > the 4% government rate, issuing new UST debt at a fixed 4% to pay for it, & then having FNMA/FMCC defease that newly issued UST debt. Defeasance works both ways, at most you might get 105-110% of PAR on a forced redemption. But if at any point in the extended life of this new UST (50-100 year) debt, the market rate significantly rises > coupon rate - these things will trade at a steep discount. A simple swap of new FNMA/FMCC debt for old UST debt; will produce a healthy gain on the FNMA/FMCC books. It's just a different POV. SD Relevance to legal. Agreed, the best legal result is a 'win' and a recompense of some kind. But that recompense could be in the form of an immediate cash payment, or in the form of an annual interest payment at the prevailing rate on the value due, or even in the form of a series of zero coupon instruments redeemable many years from now - AND THE PAYER MAKES THE CHOICE. Sure, the receiver is better off in 'value' than they were - but that 'value' is not necessarily cash. SD

What does this have to do with any ruling by any court? Even if you win, you just get paper - not cash. And if you can actually sell it - its at cents on the $ SD

You may want to rethink this entirely ... It is far cheaper for the fed to simply defease the dividend payments & issue new paper; shareholders are never going to get their money back. All the fed need do is take out the old prefs out at a premium to market, pay for it with new long-term (50-100yr) prefs at a modest premium to todays rates, & pay the dividend out of general funds (defeasance). Even if it were 7% on 140B of new prefs, it is only a cash cost of slightly less than 10B/yr. Furthermore, it is highly likely that over a long enough time horizon - the entire problem will eventually self correct; if only because todays asset values appreciate under 50-100yrs of continuous inflation. So ... we are ultimately really looking at an eventual federally guaranteed perpetual. Lot of opportunities here, but its not much different to holding a Greek (or Italian) sovereign bond. The big difference is just a dividend guaranteed by a much better creditor. SD

You could also stop the piddling around & just go straight to the Statement of Cash Flow 'cashflow from operations' - where the reconciliation has already been done for you. To project the operating cash flow forward - either model each line item on its own, or use some kind of adjustment factor. ie: If you expect year-on-year cash flow growth of around 33.33% (oil/gas) and the last 4 quarters of operating CF were 200M, you might apply a 20x multiple to the historic 200M to get 4B. Alternatively you could project a forward CF of around 266 (33.33%) and apply a 15x multiple (because you could be wrong) to also get 4B. Many would simply look to managements most recent guidance & apply a 'quick & dirty' multiple of 15-20x depending on the degree of confidence in managements numbers. If there's a sizeable hedge book removing most of the price risk, lots of drilling activity adding new barrels, & a rising commodity market - most would tend to the higher multiples. SD

Great quote. Agreed Bitcoin is much closer to the original concept, but I also live in the real world - & the real world is full of competing product. Sure a central bank crypto/digital currency forces everyone to rely more on the central bank & less on distributed security, but its no different to what we already do every day. Every time we buy a US Treasury, UK Gilt, German Bundt, or a Canada - we are relying on the central bank to make good on the bond at maturity. Most of the central bank interest is also in the block chain, & not purist cryptocurrency. The central bank crypto/digital currencies are basically 'tokens' guaranteed by the central bank, & every hash validation is essentially a central bank confirmation that the payer has the tokens claimed. In this system the distributed ledger is a centralized ledger held & updated by the central bank guaranteeing the token; much faster, & way more transparent. There is an domestic token-cash FX rate, & multiple domestic-foreign central bank token FX rates. It is essentially Bitcoin 'light'. The first mass produced car (in the US) was one colour & one model - & it changed the world; today we can have whatever we want. Current central bank crypto/digital currencies are at pretty much the same stage as that first Model T. SD

Bitcoin is literally just one of thousands of virtual currencies; we know it - because it was one of the first to be popularized. The same way we generally recognize the Motorola 'brick' as being the first 'cell' 'phone. Central banks already have their own digital currencies, & most are far along their development cycles. For many there is a strong argument to using the digital currency to settle all electronic transactions, & using coinage/cash 'bills' only for everyday purchases. We aren't going to be settling in Bitcoin. Its more reasonable to think of Bitcoin as collector pieces (not much different to the value of a historic sports car), particularly as there is a finite number of them. However unlike most collector pieces (cars, art, jewels, etc.) you don't have to pay to maintain them, & there is minimal frictional cost to purchase/sale. If you like the idea, but not the concept of 'Bitcoin as the actual store of value' - there are many alternatives. BitGold is one choice ... but it could just as easily be BitPlatininum, BitSilver, BitIridium, etc... SD

The bulk of the BRK ‘value’ is off-book & not represented anywhere on their financials. It is their reputation, long term approach, ability to do big transactions, the fact that everybody is getting old - & the likelihood that BRK may well be broken up into smaller more manageable units, once the masters are gone. That’s not a bad thing, & many would argue – long overdue. More than a few have suggested, at various times, that the world is currently going through the greatest depression in history; that big cash balance is a very nice thing to have, & the ability of the subs to borrow in a big way – is simply icing on the cake. The strategic value is enormous. You could park your $ in a US treasury, or BRK; for many the risks are about the same. If you think the masters are wheezing a bit more than they used to –adjust your weighting accordingly. SD

+ 1 .... & a few things to add to this. The BoE, the BoC, the US & China all have the equivalent blockchain Shekel; what isn't being talked about is their FX conversion rate between other blockchain &/or paper currencies. We assume that the FX conversion rates for both the blockchain & paper versions of a currency will be the same; when in fact - it is highly unlikely. Material & significant disruption. Replacement of credit score with a 'reputation score' as the loan granting criteria. It's brings 2B+ more people (& billons of other micro applications) into the banking system, - opening the door into micro-banking. This isn't possible under todays cost structure. JIT & systematic removal of 'float', drastically reducing profitability. NA equity 'trade through to settlement' can now be done in 10 minutes (& less), versus 3 days; bond settlements are going the same way. Trillons of $/day that don't have to be financed - is a lot of saved interest. Global versus bank network. The entire global network of a 'Google Pay' versus the more limited network of even a major global bank. Hawala systems, & remittance payments - moving onto the global network for the cost & transparency benefits. Expansion feeding expansion. No people, significant job loss, & lower wages for the young. There are few youngsters in the developed world, lots of competition for their labour, & therefore push towards higher & rising wages. With blockchain the automation does the work, there is no demand for labour, & wages decline - & fall. Scaling up doesn't increase the labour requirement either - just add another server. Higher speed, reliability, flexibility, & transparency. Terrifying to many bankers, & the opposite of what their banks are about. It's already here; just in the early stages of being rolled out. SD

All contributions/withdrawals to/from the TFSA are recorded, & the individual reports it in their annual tax return. As a withdrawal this year does not increase your contribution room until next year; both the taxman, & your FI, will discourage you from using the TFSA as a tax free chequing account. Withdraw 50K when the life-time limit to date is 46.5K, & you will meet resistance. The FI would rather not have the exposure of a potential rule violation - & recommend delaying until Jan-01 (when the limit will be 51.5K). The taxman will also not give you extra lifetime credit for the extra 3.5K (46.5-50) withdrawn. SD

Just so that you know ...... TFSA's were not designed for withdrawals greater than the lifetime contribution limit. Most everyone will not allow a withdrawal > the lifetime contribution limit (unless you're dead); even if you have well over that amount in the TFSA. (because you invested wisely). SD

CPI is pretty meaningless as a personal cost comparative - if only because if your basket of goods is significantly different from the CPI basket, you are comparing apples to oranges. You may have different weightings, &/or entirely different purchases altogether. The reality is that both your costs (in fiat $), & the benchmark (gold) are moving - so you are measuring 'relative' change. Both periodic debasement of the fiat $, &/or panic buying/selling of the benchmark - screw up the comparison. The whole 'basket of goods' concept is a diversification measure aimed at reducing this problem. For most of us - the working measure is monetary growth (central bank target) + GDP growth (export/import) + local area growth (where we live). In simple terms; at 1% monetary (inflation), .5% GDP, & 1.0% local - you would have 2.5% cost growth/yr. The technical measure is ((1+monetary)*(1+GDP)*(1+local) - 1) x 100. If you consume a lot of imported product (foods) & your local currency has devalued - your local growth could be a lot higher (5-10%+) As most of us are primarily concerned with daily cost of living increases - local growth affects us most. Hence the focus on 'cheapness', clipping cents of the cost of gas, coupon clipping, etc. SD