SharperDingaan

Go by the textbook, & you cannot know where you are in a cycle until it is over. Look more critically- & you will notice that the metrics were calculated on trailing earnings because they are verifiable, & the article was written from an academic viewpoint. Cycles do exist, we are all aware of them, & most of us actually do have a pretty good idea of where we are in them - we just don't act on it. The problem is that we could be wrong (so do high, medium, low), & that we have little confidence in our number - because we cannot verify it anywhere else. An analyst cuts his/her employment risk, by staying within the herd consensus - even if he/she thinks the consensus may well be wrong. A PM has a similar problem, but more flexibility. While individuals do not have the restriction, most do not have the background or ability to do the projection either. Look at forecast forward earnings, adjust for the possibility that you may be over/under optimistic, & it becomes very obvious. Nobody knows the future, but we all take our best guess - from there its just our confidence in our own decisions. SD

A few things we have learned along the way .... Think less in terms of %, & more in terms of ships on the sea. If you have to hold XYZ for 2-3 years, most would want a 7 digit value when its done - net of 15% off the assumed selling price; work that back to todays $, & you get the size of the required investment. After that it is all about how you manage the risk, or whether you need to scale it back. Most of us will only be right 1/3 of the time, so to be reasonably sure of reaching the 7 digit value - we need 3-4 equal size & independent positions, made today, & each with about the same prospects. We then need to periodically rebalance our risk/return - as our position risks will evolve at different rates. You only need 1 ship to come in, but you need many ships out there - and every success you have will usually spawn 3-4 new investments. Your systematic approach is essentially akin to spreading a virus - & the more successful infections, the richer you get. The problem is that the virus also infects the host, producing stupid decisions; this thread is evidence that many on this board are aware of this. Successful casino players all systematically take $ off the table. There are various ways to do it, but ultimately the ship reinvestment goes into T-Bills - & not new equity (ie: new ships). Over time - total equity (ie: ship) investment fluctuates, but remains largely the same; at least one new ship reliably arrives every year, & the T-Bill investment continues to grow - steadily reducing the risk of the portfolio overall. The basic principles are ancient and have been practiced by many a trade merchant, all over the world, across the centuries. We simply adapt them to fit our specific application. SD

You may want to keep in mind that shale wells deplete very rapidly, and most need $45-$55 to be economic. A material portion of new NA production is simply replacing depletion on existing old wells; stop drilling, & we will all see just how big that depletion rate actually is. The world belongs to the o/g drillers & servicers - not the producers. Alberta crude is increasingly dirty oil, land-locked & without new pipelines it isn't going anywhere - re its environmental label. But refine it into gasoline, in Alberta, & the issue largely disappears; value add, jobs, cleaner exports, fewer environmental issues, etc. Naturally there will be strong resistance - but how far away can the 'peoples' oil refinery coy really be. Great future, but it is not going to look anything remotely like the past. The future never does. SD

We moved a chunk of our non $C funds into NBG - just before the extension was agreed to; a supposedly very high risk proposition. For us, not so much; as the USD were originally bought when the $C was well above parity. Currency matters. Every nation runs on its major banks; because if the people cant get their cash out of the ATM - you get instant riots, and new politicians. Hence the major banks of every nation are protected species - DSIB's, GSIB's, etc. Most would consider all the names mentioned, DSIB's. If there's an exit, it is fabulous business as almost every domestic banking transaction is going to pass through these gate-keepers. If there is no exit - its mostly the same process, but slower. Hold a gate-keeper & you have an unlimited long put on exit, and an unlimited long call on grinding recovery. No roll-over concerns, exceptionally anti-fragile, the only issue is the premium paid. For a large and rising number of the population it makes a lot of sense to exit. There are enough folks today to vote in a leftist party, but tomorrow it will be the majority and with a focus on attempting to direct the outcomes as much as possible. The tipping point has already been crossed. We wish them all the luck in the world. SD

Keep in mind that oil is an intra-government currency. In the short-run, marginal cost has very little to do with it. You buy my oil, I buy your weapons is a common petro $ recycle. You support my cause, I give you my oil, etc. Oil sands get developed because it is in a nations economic interest. The high cost limits the competition, ongoing technology & increased throughput lower the per barrel cost over time, & tax on the resultant economic activity exceeds the cost of temporarily subsidizing production at > market price. Same process applies to oil substitutes - shale, biofuel, solar, wind, etc. Cash pays bills, not revenue. So long as market price remains > cash lifting cost there is incentive to keep producing. The P&L loss destroys the BS & continues until creditors eventually foreclose on their debt covenants, & shut the firm. Degree of leverage trumps cash cost. QE is not limited to just cash, it can be done through commodities as well. An awful lot of people are benefiting from lower fuel prices, & many would argue that its economic benefit exceeds that of QE. SD

Came across a clever card that sums this up very nicely .... Some learn by reading, some learn by observation, and some just have to pee on the electric fence. No matter how much you read you have to road test your understanding of it. Preferably via someone else! Happy New Year SD

Just to stir the pot! The best consigliere in the world are female - so that should tell you something right there. Those leased assets are usually advised by these consigliere, private partnerships are fairly common, & along the way there is a lot of asset, & inside information accumulation. What do they need you for, especially when Ken & Barbie are widely available cheap throwaways. If you are not prepared for a life-time partnership you probably should not go there. The female side of the equation has too many friends!! Merry Christmas! SD

Probably not what you want to hear .... but take the big firm. For all jobs there are really only 3 levers; (1) the inherent interest of the job itself, (2) the boss, (3) the money. When just starting out you need the money, & if the bosses are a-holes you put up with it. 2 years out you move to another firm & cash in on the nameplate you just bought. The great things about a-holes; is that their firms have to pay more to overcome the divas, & they have a lot of turnover because of the divas. Nobody is going to hold it against you if you're on the street again 6-12 months after starting. You took a risk & it didn't work out, but you had the brains to realize that if you hadn't stepped up, you would have regretted it for the rest of your life. SD

You have to play in the real world, & if the game gets rough - dish out as much as you receive. Then, if you like the game; make the decision to study it, & beat the hell out of everyone else! Everyone gets tired studying; that's normal. Its when you go back to the game, & find out if you actually studied anything useful! Take some time out, & come back with a list of what you want answered when you come back to studying. And answered TODAY, because we are all getting older! Then keep in mind that there are thousands of extremely good business people out there who will never get the chance to take their skills further, purely because of their circumstance. Imagine what could happen if you took that drug dealer outside, taught them marketing, & then had them sell tech or beer. SD

Couple of comments. What is a regret changes radically with stage in life. Should have had 3 kids & a parrot (punk rocker) back in the day, is a great idea at 60; but sucks when you are 30-40 & trying to pay for it all. A major regret was not realizing until very late, what my advantages as a young man were. Once you have been trained, you have nothing to lose, have no attachments, & have the whole world at your feet; but its only a limited time offer. Work for the most aggressive firm that will accept you, take the high risk options, always speak your mind, & thoroughly enjoy yourself. Speaking your mind will be the most valuable thing that you will do. A second regret was delaying entry into private companies for far too long; playing the market was only supposed to be the vehicle that funded the lottery tickets. There are far more very smart people in private industry, & much of the agency corruption that takes place in a public company - just does not occur. Nobody ever heard of a Capone having an employee agency problem. SD

Not to be a bummer, but we all post here to also hear the opposing view .. I understand that you/your family already own property in this area, this purchase will materially affect your ongoing liquidity, & there is some possibility that it may not always cover its carry cost. A 2nd property in the area is not going to add much to your enjoyment, will significantly reduce your options, & will potentially expose you to a negative carry that you will have to cover from other sources. Undertaking this purchase will change your investing approach, and were it a stock you would walk away - without hesitation. Does not mean you don't purchase, you just do it with partners and rights of first refusal. A smaller chunk that is manageable, and which does not end up altering your investing approach. More work, but much less risk as well. We all regret the one that got away, stock or property. That's just life. SD

Thanks for the tip. I suspect the major reason we got the mortgage was because of the times, the program, & that UK resident nephews are the prime beneficiaries. The sublease is with a major PLC, the prefs are shares of their own bank, & dividends + lease payments more than cover the interest. To help the decision we also ensured that to formally question the structure, was to question the solvency of your own bank - a career ending event. The current thinking is that we will probably exit once the sub-lease expires. By that time we should have captured most of the gain, & the ongoing risks will no longer warrant it. SD

Interesting. Many buyers are cautious about buying properties on a short lease. How much certainty over renewal costs do you have and how will you fund them? I guess you could now remortgage? The remaining term of our lease is 57 years, & we are subleasing in 5-10 year chunks. At the end of 57 years the value of the lease will be zero, so at each sublease expiry we will formally reappraise. Sell the lease & buy another - do nothing or roll up/down or out/in via a sale and repurchase. We do not intend to hold the property forever. In market parlance we have prepaid 57 years of premium on an at-the-money call on a specific property in a desirable location, with the years option decay (all else equal) equal to the years premium. We do not know what the premiums will be (the greeks are constantly changing), and we cannot determine what the current years premium was until the year has expired (ending - beginning value). We can exit the option at any time, by simply reselling the property into the liquid market. Short subleases allow us to arbitrage the option decay. Our sublease is to a PLC & we are prepaid the annual rent at the start of the year. Realized CF against unrealized decay loss on our underlying lease. The primary greek is volatility, not interest rate; our increase in MV is primarily because of volatility reset. We think it will reset again before interest rate starts to move in any significant way. We don't need a mortgage; we took one out primarily to exploit the current incentives, & give us a higher paying option on our surplus cash - than a straight gilt would do. The proceeds are in high quality prefs with dividend flow applied against interest. We could pay out the mortgage at any time. The UK is unique to this type of ownership, & its part of the culture. We would have preferred a simpler arrangement. If you understand options (Eric) this is no big deal, but if not - its a bad place to be. Oddly, the optionality produces a result not that different to what you might see around a junior mining coy. Part of the reason why our stakes in ALS & ADV do not particularly bother us. SD

We bought a London, UK property & went through something broadly similar. Options. Congratulations, your growing wealth is giving you options. You have the ability ….. but not the obligation to purchase a property. Rational. Nice place, pretty locale, but if you want to visit … why would you not just rent a room or apartment during your stay. If you plan to buy & rent, then visit when the place is empty – the place must be furnished; was that part of the plan. If you are a successful renter or lessor, the place it is not going to be empty & you are not going to be visiting; was that part of the plan. Trophy. If you get a huge bonus, most would use it to buy a nice house to live in, or a nice car - to mark it. This is much bigger; if you don’t intend to be a landlord & hold many apartments or houses as a business, it is really a trophy – to which there are many other options with much lower price tags; from paintings through to mistresses. Diversification. This is really a reserve asset that diversifies earnings; if your life goes to hell tomorrow, this is the nest egg to get you back on your feet. The local property market needs to be reasonably liquid, even in the bad times. We chose London, because of its liquid property market, and the place is unfurnished. We bought because the price was exceptionally low. We treat the property as a trophy asset, & kept the equity investment to less than 20% of total net assets. The mortgage is used to absorb any surplus operating cash that we may have, as the before tax return is well above what we might earn on a gilt. The property has 8 years to go on a 10 year lease, and has appreciated 65% over the short period that we have held it. SD

FTP. We avoided the equity as we thought the odds on worsening prospects outweighed the positives. Today we hold the distressed debs, as we think the odds on a successful restructuring are favorable. Lot of anti-fragile elements, & it gets more anti-fragile every time a cash interest payment is received. Drillers. We hold PD as a core holding, have done for a very long time, & have a very low cost base. Again; anti-fragile, plus dividend cash flow to reduce exposure. We also hold a small and growing exposure to PWE, which we think is overdone. ADV, ALS. Our position is well known. With all of these you have to be comfortable with volatility as your friend, comfortable with not put putting reliance on the traditional valuation metrics, and have some idea of the kickers that come out of IFRS (all are Cdn coys). Buy and hold, and routine hedging, are not mutually exclusive. The names are also strongly asymmetric , both up and down. And with asymmetry - you don't have to be right very often, especially if you can reduce losses to BE, or slightly above ... SD

There have always been a great number of very strong minded women in the world. Most just chose to act publicly through a male screen, as it wasn't worth the effort to change the culture. US culture is also not reflective of everywhere else. Madeline Albright was enormously respected in the ME - largely because she was short and dumpy. She just let the US military do the talking for her, bluntly spoke her mind - whether the audience liked it or not, & went for comfort over beauty; the Emir's then heard it again from their spouses (who recognized what she was doing), behind closed doors. Didn't take long for the wise to realize they couldn't win. SD

Don't focus on the calculators; focus on what you are going to do once you retire. Most people re-invent themselves and will pursue a 2nd or 3rd career for a good 15-20yrs+, after 'retirement'. When Jagger can still play, & swivel the money-maker at 70, the whole idea of 'early' retirement becomes pretty ridiculous. Do something completely different if you can - especially if you don't really need the money. Carny barker had a certain appeal, but the misses wouldn't go for it ;) SD

I'm not sure I understand this. In the case of Zenith for example, I suspect PW could sell it for more than he paid so the intangibles have value to me under all scenarios and holding periods. IFRS defines goodwill (intangible) as whatever was paid above market for the asset, less all FMV adjustments to the assets & liabilities of that asset at date of acquisition. That goodwill is then amortized forward by means testing every year, & the difference in values is amortization. For you to benefit as an investor, Zenith had to be on the books as an asset available for sale, with quarterly FMV. If it is not available for sale, the best you will see is time of purchase goodwill at FMV (means test of identified CF). An estimate, of no real value, unless Zenith is actually sold. SD

Gio, keep in mind that business buyers have different time horizons than investors. IV assumes a plan to hold forever; therefore intangibles are valid inclusions. If you have a shorter horizon, the carrying value of the intangibles as at the date you sell - has zero value as you no longer hold the coy (identical to what would occur if the coy was actually liquidated, & is no longer a going concern). Therefore, book value to the investor is total book value less intangibles. Divide current price by this adjusted book value, & you get a better picture as to the magnitude of the premium. Whether it goes higher or not is a judgement call. SD

"You are comparing how someone would value a mutual fund v/s a company. Isnt that a really dumb way of viewing it? " Not at all. FFH has consistently valued at a BV multiple < peers, for a very long time, because it actually is a HF - whether we like to admit it or not. FFH is just an unusual variety of HF as it chooses to invest via the direct ownership of P&C's - which make the actual investments. Very smart way of doing things (float, liability protection, etc.), but they take the risk of being so clever (insurance vs simpler direct investment approach), that nobody else can follow what they are doing. So .... they suffer a handicap for the uncertainty. The tallest poppy in the room gets cut down - to make the rest of the room look better. Obviously, the FFH model does work ... but with no direct comparable using a very similar model, how do you know if FFH is returning more, or less, than they should be? The nearest comparable is conventional P&C, plus a handicap for model difference & the uncertainty of the HF model itself. SD

No one buys a stock & sits on it forever; not even a BRK - as sh1te happens routinely. If WEB, or HW, had a heart attack tomorrow, the smart thing would be an immediate hedge. FFH is not going to receive a high BV valuation, until it gets the HW black box, & its big investments, out of its structure. The HW black box is opaque, inherently more complex ('finite' risk coverage), hard to explain, & exposes them to short attack (why the FFH raid a few years back had legs). Their hedging & the investments also make them perform like a hedge fund - not an insurance firm (& why despite a sizeable favorable reserve release, & a historically benign payout a year or two back - they lost money - when they should have been making it hand over foot). Even if you hold $1000 of shares trading daily in your subs portfolios, an equity investor will haircut 5-7.5% off that value - simply to recognize the potential costs of liquidation & wind-up if they need to get their money back; take an additional 5-7.5% off the valuation if there is a possibility of mystery wind-up obligations arising from the black box. FFH traded at 85-90% of BV, not that long ago - for a reason. To get a premium, your insurance ops have to be easily comparable to peers - & win the comparison. Comparable CR, & history of being able to successfully acquire & integrate various books - a routine part of industry business. Not great at either, but at least getting better. The HW team does add value, but they need to add 10-15% just to get past the structural drag. Good - but not good enough. At current pricing at 115% of book, it implies they are currently adding around 25-30%. SD

A few observations ... Moving from DCF to the simple (ie: magic formula) is emotional maturity. The investor has stopped trying to substitute the vagaries of DCF, for actual experience & thinking like a business. A handful of variables, & some critical thinking, will suffice for most situations. Eventually, most folks realize that all valuations are just estimates - not guarantees. The most precise estimate in the world, does not magically assure that the projection is actually going to happen - exactly as forecast. Very few realize that value investment is actually about using optionality, & that the G&D formulas were just simple applications. We don't need to understand asymmetry to use the formulas; but when you do - you get the remainder of the ice-berg. Most of the world routinely applies value investing principles every day, they just do it in different applications. Every market vendor, small businessman, etc. either makes a profit every week or very quickly goes out of business. What they call business sense is just optionality by a different name. Nothing particularly complicated, but its not a formula. Get over it. SD

You might want to consider that a deal was deliberately not offered - to raise the ante on the remainder. With this kind of organization it is far easier, & more reliable, for some people to meet with a permanent accident. SD

Long ago, it was drummed into us by a master - that you only need to know 2-3 names in each of your circles of competence really well. The rest is just waiting for the opportunities to present themselves, & patience; as some on this thread have already alluded to. SD

The PV generation process (because of the Gallium) drastically loses efficiency when ambient temperatures get hot, so to offset it - you concentrate the sun, & always keep the PV at 90 degrees to the sun (hence movable panels). You also try to put the things in the prairie where there's often snow on the ground in winter, & temps at <OC. The same panel, with the same amount of sun, now suddenly generates 2-3x the amount of power - simply because its being more efficient. Similar thing with windmills; today's next generation, but similar sized windmill in the same location, will typically generate 6MW vs 1MW - & doesn't cost 6x as much. SD