ERICOPOLY

IV estimates can and do change. Unless you are all knowing about the future, you have only estimates (guesses). Surely this we can agree on. How have you witnessed the movement of IV itself? You do not have perfect enough knowledge of the future to know what IV actually is, let alone any illogical change in it's value.

There are not multiple possible guesses at IV, but multiple possible IVs. The wave function will collapse to one particular IV when the observation is made in the future, but this does not mean that IV was destined to happen. Or in a many-worlds interpretation you might have BRK with a market cap of $1 trillion at some fixed point in the future in 60% of the universes, but BRK is bankrupt in 0.00001% of the universes. I added the bold, because I think it represents some confusion. No one is arguing that the one IV was "destined to happen", that is, it couldn't have been another value. Rather, the claim is much weaker: it will be some value X, and no other value. To me this seems to be above reproach. This is independent of wave functions or any other deliverance of the physical sciences - in fact it they have nothing to do with the question. +1

Let's try another approach. There is one universe that we live in, but we do not know everything about it. Only estimates and glimmers. Because we can only estimate it (and the estimates vary widely), you say there cannot be just one universe that we live in.

I bought FFH in mostly taxable accounts because short term capital gains tax is 52% in California where I now live, and long term tax is bad too (at least 33%). So I wanted something that wouldn't be too volatile, that would compound at a rate that would beat my cost of leverage in BAC. I wound up selling it for a small gain to buy MBI.

Plato, this is macro investing, and is very dangerous: in 2008 FFH was up 30%+, while the market was down 30%+… :) giofranchi FFH got down to roughly $210 in 2008 from over $300 in 2007 (or perhaps early 2008). (US DOLLARS). Hedged the entire time. In fact, hedges soaring while it was plumbing the 2008 lows. Everything thrown out with the bathwater. As for 2008's performance, the stock closed 2007 at $286 and finished 2008 at $313. Total of 9.4% gain (not including dividend). US Dollars.

There are multiple estimates of intrinsic value. The presence of estimates to IV does not refute the existence of a single IV. "Possible" suggests "it could be this, or it could be that, or it might be this other thing, or perhaps that other thing". There are multiple "this". There are multiple "that". There is only one "it". People are effectively arguing that if there exist multiple possible guesses at the answer (most likely none of them exactly correct), then there cannot be one unknown precisely correct answer. That's flawed logic.

Eric, I understand the comparison, but don’t agree 100%. If they were truly the same, both Mr. Buffett and Mr. Watsa wouldn’t have taken the trouble to run insurance operations, right? Instead, the difference is clear enough to me: once again I repeat that “safety” comes first. And, if you write insurance profitably, nobody can take the leverage provided by float away from you, no matter what. To paraphrase Mr. Buffett: Even the best funds, see for instance Mr. Berkowitz in 2011, don’t enjoy such a luxury and constantly risk to disappoint their clients… In insurance you are working for yourself, not for clients: apparently, it seems a small difference, in practice I think it gives a huge advantage to insurance over leveraged funds. giofranchi I view the comparison in components. You have the utility of earnings from leveraged bonds. (component #1) You have a different risk profile with a leveraged fund vs an insurer. (component #2). A risk premium. Different cost of leverage (component #3) A low rate environment brings them closer together. And there may be more components. So if you think of each (insurers and leveraged bond fund) as a sum of the value of their components, then they move directionally together by similar amount when you increase or decrease the value of the earnings from the leveraged bond component).

The trouble for me with holding FFH for long periods of time is that when equities get really cheap, I want to load up on them. I don't want to be 50% invested in them at that time. Furthermore, I want to maximize the opportunity and not sit around in JNJ. They are limited in what they can do because they are an insurer. So the very time when the market bottoms... is the time that would be most rewarding to leave them behind. Further, if you expected the collapse to come you would be best off never owning FFH in the first place (because it too will drop). I made a mistake in holding FFH and adding to it in March 2009 -- I imagined they were aggressively buying up stocks on my behalf but it didn't happen. I realize today that my expectations were unreasonable -- they are an insurer.

How does thinking in terms of ranges of potential outcomes relate to "lack of control"? I don't believe anyone asserted that they have control over which outcome is ultimately realized. That's a misunderstanding of what I was saying. As there is only one past, there will only be one future (this statement was actually denied earlier on and the poster commented that instead there is a range of potentialities). You can't probability weight all of the branches, too frustrating and your biases will lead you to assign probabilities as you see fit -- how reliable will your bias be?. The illusion of greater control of course may contain negative utility. The more complicated the tree, the more likely it won't have meaningful value to your powers of prediction as the probabilities of the entire paths across multiple decisions in the tree are multiplicative. Thus to regain a measure of control you can apply Buffett's wisdom to prune the tree of avoidable mistakes (the kinds of mistakes that are made when your biases lead you to have confidence in predicting a given technology will last 10 years without being disrupted). Work with simpler trees, put the more complicated ones in the "too hard pile" rather than spinning your wheels constructing them.

Why, with multiple futures, is there but one past?

I live in one universe. There has been one past, as there will be one future.

They flutter behind you your possible pasts Some brighteyed and crazy some frightened and lost A warning to anyone still in command Of their possible future to take care

With so much drama in the L.B.C., it's kinda hard being Snoop D O Double G.

Ok, I have understood your thinking. I would also like to know what Eric and Al think about the causes of HWIC’s mistakes today, and whether they will be able to correct them in the future. giofranchi Do you think I had inferred mistakes they are making today? Certainly (to me) I have not done so. I can only tell you that my position on Fairfax is far more nuanced than I suspect you believe. Hopefully you understand this following comment: My thinking is multidimensional yet my communication is two dimensional. So realize that my thoughts are populating a multidimensional space and yet you see only a two dimensional plane. Limitations of communication. So much thinking, little explanation. So many things to say, so few said. Precious attention of the listener. Misunderstanding is the price of compromise.

The future holds only one IV. Oh, you may deny it and instead talk about ranges and probabilities etc... but don't let lack of control frustrate you. What to look for in order to gain back a measure of control? Attributes that accentuate your predictive powers: for example, you can assume that diapers will still be in demand fifteen years from now, but you are less certain that a specific technology will not be replaced by a better one. All the rest of the stuff that Buffett keeps trying to teach us...

I need to have an income of $166,600 in order to pay an $80,000 rent in Montecito.. The investor might only be getting a 4% yield on his $2m property, but the renter is effectively needing to achieve 8.33% income yield on his $2m of financial investments in order to pay that rent. So given that an 8.33% yield is tough to come by, especially one that increases at the pace of rents, it's maybe worth it to just buy the damn house. So for the buyer it might seem like buying a home to live in isn't so dumb, even though getting only 4% rental yield from an investor's perspective may seem dumb. I find the rent vs own comparison in California muddied by these absurd tax rates -- 52% at the peak end. Perhaps that explains how these homes sell at prices you scratch your head, you know, at prices where investors wouldn't be too happy to invest.

Ultimately I view most insurers as leveraged bond funds that attempt to get a bit extra from underwriting profits. They (in a sense) compete against leveraged bond funds for capital investment. Is that completely off the wall? So it follows that if investors in leveraged bond funds (making low ROE in a low rate environment) see insurers making a lot of profit (from a hard market) they would then push money into the insurance market to drive ROE back down. So I'm curious enough to ask if there is a long term relationship between ROE from leveraged bond funds and ROE from insurers. Do leveraged bond funds tend to typically earn a given spread below what insurers earn (and the spread is there to account for the added risk)? So in other words, will there really be a hard market due to low rates that will drive insurance ROE's back up, or will bond investors drive it back to a soft market again in a reversion to the mean ROE spread of leveraged bond funds vs leveraged insurers?

This is the irony I am seeing. These guys are wonderful equity investors and just a few years ago I was reading that their lifetime return on equities was 17% annualized. One who looks at safety first and return second, isn't satisfied with this performance and would choose to add the risk of insurance operation to get better results? Myself, I'm guilty as charged and would do the same, but I wouldn't claim that it reduces my risk. I would call this looking at growth at the expense of some additional calculated risk. I'm of the opinion that an unlevered fund is safer than a levered one, even if that leverage be from insurance. There was a little bit of a scrape they got into ten years ago that suggests I'm right about this. Then of course Berkshire was run at the risk of permanent 100% capital loss for years before Buffett woke up to the risk of terrorists -- history could be written differently and Berkshire could be a zero today. He might have had a long string of wonderful results followed by a zero. Fortunately, he realized his blind side and nothing terrible ever came to pass. More recently he claims that his operation was last in a line of dominoes (financial crisis) that would have fallen if the government hadn't acted in 2008. They are going to earn 7.5% on their investments without a good chunk of it coming from their equities that are not under pressure to perform? That's a lot of yield in the bond portfolio don't you think? You laid out a target of 7.5% and portray it as having no pressure on equity stock picking. Then does it have pressure on bond picking? Remember these are the same guys that run the hypothetical unleveraged stock equity fund. Why are they under pressure in one scenario but not the other, when it's obvious that you either need to cream it in bonds to make 7.5% in this low yield environment or cream it in stocks? Or some of both at the same time if you like. I do?

Ok, let me ask you a question: if it were just between you and me, no Mr. Market involved, would you sell your shares of FFH at $380 to me? I would buy them without hesitation. But, forget about having them back at a later date. Because I won’t sell them back to you or to anyone else for anything below $700! If your answer is no, you are playing the market with the shares of a company that already is undervalued. If it weren’t undervalued, your answer would be yes (but, of course, you wouldn’t be receiving this offer from me!! ;)) Well then, good luck! What happened today? giofranchi Hypothetically, if they offered to invest your money in an unleveraged equity mutual fund with no management fee, would you sell your FFH stock and put the cash in that unleveraged fund? You've talked in the past about a 15% rate of book value growth, but that sounds to me a bit similar to their historical returns on equities, unleveraged. The equity fund shares of course would be purchased for tangible book value. Your unwillingness to sell FFH below $700 suggests that you would be willing to buy into FFH up to a bit more than 1.8x tangible book value. So I'm not sure that 55.5 cents growing at 15% is going to be as good a deal as $1 growing at perhaps the same pace, or maybe slightly less (a percent or two). I don't know. What are your thoughts on how much faster FFH can compound versus what they could do just running a 100% unleveraged stock mutual fund?

Now, I know you have powers of seeing the future with your $9 forecast on MBI, so now I worry that you are confusing a vision taken from one of these spirit talks with events already passed. This worries me a little given that I truly know nothing about SD. In truth, to date I have not purchased any calls on SD. Back to the "argument" of mine, I continue to stand by the definition of "future", and that all present actions of management are incorporated in a past future. I grew up on the words of the great philosopher Yoda, who effectively said "difficult to see is the future, always changing it is". Buffett talks about one foot hurdles -- he knows we can only make an estimate of IV, thus one needs to be WISE about what to throw in the Too Hard pile. Too hard to make a reasonably accurate prediction!

I disagree. IV doesn't change. Your perception of IV changes along the turbulent path of discovery. You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing. No. To get the IV prediction accurate with a higher batting average, and thus fewer investment mistakes, stick to businesses that are more predictable. (that's a "Duh" comment). I guess that by definition of the term "predictable business", you then realize that your IV number is a "prediction of the business"... well, more of the obvious. I would say IV changes in some cases and doesn't in other cases. For example, due to the fact that AMZN is trading at extremely inflated multiples for prolonged time, it is able to issue a small amount of equity to do a lot of things. The IV increase whenever it issues the equity at such extremely inflated multiples. You can run some simple math. Suppose AMZN's book value is $10 per share, and it issues equity at $200 per share and doubles the share count, what is the book value now? It is $105 per share! Who can create value faster than this? Buffet clearly cannot! ;) Then if the market thinks OMG, AMZN is much cheaper now than before, buy a ton! Then the stock price will jump to maybe $400. Those kind of companies' IV has little to do with BV and thus the effect on IV is much smaller. It's substantial but I don't see how they could exploit this forever. Do you have examples of extreme cases that were able to double share price a few times? I doubt they are out there and if they are it simply won't be for the capital injection but market perception of the company / simple momentum. OT: Bought some ITM SD leaps. Is CRM not a good example? They are making reckless acquisitions, so eventually they will go really bad. But assume they can issue shares at such extreme multiples and have our champ ERICOPOLY on the board to manage all the acquisitions, won't you agree that over the past few years, their IV would be growing? My point is, when these kinds of ridiculous companies trade at 100x IV, and they issue shares to acquire companies trading at 0.5x IV, doesn't this increase their own IV significantly? The future is the future. On a rolling basis, it is revealed. Intrinsic value didn't change, you merely witnessed managerial actions that were part of a past future, and this were always reflected in IV. You merely updated you estimate based on revealed information. To more accurately estimate IV, you need to listen to Buffett's list of what he looks for in an investment with low hurdle.

But when? And how will we know when we are at intrinsic value, and that our intrinsic value estimate is the "true" intrinsic value? :) Berkshire's intrinsic value may very well be zero. You don't know. You have only prediction to rely on, and thus you will have better luck restricting your forecasting efforts to the relatively more predictable businesses. Again, nothing brilliant in pointing out that "prediction" and "predictability" are related. However, still some disagree!

I disagree. IV doesn't change. Your perception of IV changes along the turbulent path of discovery. You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing. No. But isn't the concept of intrinsic value a "perception"? It is always an estimate, not a quantifiable, or verifiable property like say mass. There is only one intrinsic value. Time will reveal it to us. We have only prediction to rely on divining it's value.

I disagree. IV doesn't change. Your perception of IV changes along the turbulent path of discovery. You keep trying to predict the unpredictable, and blame it on the IV of the business rapidly changing. No. To get the IV prediction accurate with a higher batting average, and thus fewer investment mistakes, stick to businesses that are more predictable. (that's a "Duh" comment). I guess that by definition of the term "predictable business", you then realize that your IV number is a "prediction of the business"... well, more of the obvious.

Regarding the 1491 time period, I'm reading another book at present: Blood and Thunder. One thing I didn't realize is how new the Navajo were to (what we now call today) the United States. Here is the kids version: http://www.historyforkids.org/learn/northamerica/after1500/history/navajo.htm You know, I was under the impression that the US troops had moved the Navajo from their ancestral homeland, but if we're only talking about a Navajo presence not even 100 years old before the Spanish arrived, then that's a little different IMHO.