ERICOPOLY

I am afraid I am buying into the China thesis of Fairfax. I have this nagging feeling that an inflection point has arrived for a while now where demand for China's exports has slowed. The last three paragraphs are resonating with me: http://www.theguardian.com/business/2014/jan/05/george-soros-chinese-slowdown-biggest-worry The financial crisis showed the weakness in the idea of becoming the workshop for the world when that world couldn't afford to go on buying. To keep the wheels turning, local authorities and other government agencies were allowed to borrow. Last year the Chinese leadership said it recognised that plan was flawed, and public sector debt needed to be cut. But when the economy slowed dramatically after borrowing was restricted, the policy was quickly reversed. The subsequent boost looks shortlived, even if China has billions of dollars in foreign exchange reserves to soften any economic blow. Soros said: "China's leadership was right to give precedence to economic growth over structural reforms, because structural reforms, combined with fiscal austerity, push economies into a deflationary tailspin. But there is an unresolved contradiction in China's current policies: restarting the furnaces also reignites debt growth, which cannot be sustained for much longer than a couple of years."

Alright here is what you can do with your time after you quit your job: http://santabarbara.craigslist.org/grd/4355321242.html

Maybe I would have an ego about it if I could actually analyze the companies myself, but I can't. I have very little confidence that I can continue these results.

That is a bit of a problem. Moving to Montecito made it easier because a lot of people here have a lot of money. However most of them either currently own a business that pulls in a lot of money, or they have already sold one for many millions and are set for life. So it's a safety in numbers kind of thing. The neighbors aren't jealous of me. I have two kids (kindergarten and 2nd grade) so we meet a lot of parents. I think if we didn't have kids it would be much harder to establish social relations.

Something similar occurred in England during the Industrial Revolution. Changing technologies and practices in the agriculture sector freed up significant labour that migrated to towns and cities to fuel the IR. The scale of agriculture in China would suggest that there will be ample opportunity for the agriculture sector to shed labour over coming years. SJ They need city jobs to afford housing. Unless the city parks are large enough for their tents. But what jobs? I get the fact that the past migrants to the cities took factory jobs -- all that stuff at Walmart is made in China. But have we saturated the demand for Chinese factory labor? Is there untapped demand for manufactured goods from China? That's the wrong way to think about it. It's not that the cities are demanding labour; rather the countryside is shedding agricultural labour. This has occurred steadily since the discovery of agriculture in Mesopotamia, but accelerated during the industrial revolution. And, that's what is going on in the developing world. The adoption of technology will force people to urbanize, and that is what will generate wealth (as it always has). SJ I understood your point about needing less bodies in the fields (shedding agricultural labor). I am wondering do they become unemployed or what do they do next? I remember 10 years ago it was clearly cheaper to manufacture many goods in China. But today I believe the costs gaps are much slimmer, and energy is cheaper in the US. We're even spinning yarn in the US again. Tesla decided it was cheaper to do some of it's manufacturing in California of all places, rather than China. So I'm just wondering how that all impacts the "For Hire" signs in Chinese cities. Merely a slowing of manufacturing growth should leave an impact on the rate at which people will take up jobs in Chinese cities. Anyways, I'm not firmly arguing these points. Rather, these are the areas I'm confused about and I want somebody to explain why 250 million people will find city jobs -- what jobs are the Chinese cities currently trying to fill that these people are skilled for? Are we still in a transitional phase where China is growing it's factory labor force at the same pace as the last five-ten years? Like in the United States -- if somebody is no longer needed on a farm, it doesn't mean that for certain he is going to get a job in a city. It could just mean that he is unemployed, right?

I believe you are double counting. The forward P/E is 15x. That's normal. But several years ago, earnings were far lower. So were profit margins. So when you start using Shiller P/E, you are mixing in many years of lower profit margins. In other words, you are saying "Look at how high the P/E is when you blend it with much lower profit margins". That's what Shiller P/E is telling you. Shiller's P/E is useful to help detect periods like this one where the forward looking P/E might be a lot higher than it looks -- because it might look low at this (potentially fleeting) moment merely due to abnormally high profit margins, or a credit bubble causing artificial demand, etc...

Estate taxes. Get this... the government thinks that 40% of each additional dollar I make is theirs. Even if these are after-tax dollars! It's a Kleptocracy.

Something similar occurred in England during the Industrial Revolution. Changing technologies and practices in the agriculture sector freed up significant labour that migrated to towns and cities to fuel the IR. The scale of agriculture in China would suggest that there will be ample opportunity for the agriculture sector to shed labour over coming years. SJ They need city jobs to afford housing. Unless the city parks are large enough for their tents. But what jobs? I get the fact that the past migrants to the cities took factory jobs -- all that stuff at Walmart is made in China. But have we saturated the demand for Chinese factory labor? Is there untapped demand for manufactured goods from China?

I've been thinking about this discussion all day. I don't really understand how 250m people can leave the farms for the city over just 11 years unless there is an urgent need for them. Doesn't make sense.

I hit $10.3m in RothIRAs (including my wife's) at the end of 2013 -- that's what the closing statement was between my wife and I. Then I have taxable money as well (which I still manage). I'm only 40, so if these guys (Sanj and Mohnish) can do 10% a year... well... I'll be set. Heck, how about just keeping pace with inflation. Now here is what I wrote to somebody in private mail a few moments ago who was asking why I don't just keep managing it if I did so well: Quoting myself: I have a tendency to put it all on one idea with lots of leverage. So it's risky if I put it on the wrong idea. Once it was all in Fairfax calls. At another time, all in BofA calls. And what is the point of this really? The government will take 40% of any further gains I make -- if not more. 4% yield on $9m is a thousand dollars per day, tax-free. So will I need more than that? So it's just sort of like... I don't need more, and I know I will eventually make a bad call. And if I don't make a bad call, I don't need more money anyhow. So it's useless to keep going.

That would be one Manhattan per month for 11 years. That,s a lot of subways! It's the same pace as the past 5 years -- per the FFH letter, they've built over 50 Manhattans the past 60 months. So if they need to keep building 1 every month for the next 11 years, then I'm scratching my head. Is the 243 million person migration over next 11 years really happening or isn't it?

Eric, who did you farm out the management of it to? Sanjeev/Alnesh got some of it. Mohnish got some of it. Back in the summer of 2006 I wrote to Mohnish that I didn't have enough to invest in his fund yet, but soon would (I explained to him that I had a lot of FFH call options). Then I got carried away with things and it took me forever to let go and finally invest with him. Same thing with Sanjeev -- I told him in late 2009 that I was soon going to invest with him but then got carried away again.

Eric are you looking gross pretax or net after tax? For example a $200k salary vs $2m saved I assume implies a 10% yield-- assuming the 200k number is fully baked with benefits, etc. The value of my pretax_Salary+Benefits was equal to 4% of my pre-tax net worth the day I quit my job. Some of my net worth was tied up in yet-to-be-taxed 401k and IRA -- so I'm comparing that pre-tax net worth with pre-tax salary (apples to apples).

By the end of 2013, my RothIRA hit a level equivalent to 100 years of my 2008 after-tax salary (at 20% tax rate). Worked for 10.5 years. Quit. And six years later I've banked 100 years of peak-earnings. Okay, sorry. Bragging :D Now I'll say something humbling. It fell 10% in value during January when I decided that I didn't need the stress of managing it anymore. So maybe it's only 90 years' now.

I quit at age 34 with a 7-month pregnant wife, and a 2 year old. My salary+benefits at the time was comparable to a 4% yield on my net worth.

That would be one Manhattan per month for 11 years. That,s a lot of subways! I have an interesting game for you guys at the Fairfax dinner. How many Manhattans can you down and remain seated in your chairs?

I'm curious how long the excess vacant space will last (not to say there isn't a bubble that will pop first... but how long will it take them to grow into these shoes): Estimations are that Chinese cities will face an influx of another 243 million migrants by 2025 http://en.wikipedia.org/wiki/Migration_in_China Guys, how many Manhattans is that?

I can't find a shot of Prem's arms anywhere without long sleeve shirt. He doesn't get much sun on his arms. His neck would be darker and it's the same in this photo above. The neck is darker.

Not a lot of white guys have black arm hair.

I think it's Prem. 1) I believe he is on the board of Dakshana Canada (and he has I believe donated a lot of money), so he'd have a file cabinet for it 2) The ear lobe looks like his

No, using today's earnings levels the market is not high at all. 15x forward earnings is completely normal. It's not 30%-50% overvalued unless you consider/believe that margins are abnormally high today.

Tesla is quite likely overvalued, but I found this pretty misleading: Tesla Motors, for example, sold 22,477 cars in 2013 but commands a market cap of $31 billion, while Fiat, which we like, sold 4.4 million cars but has a market cap of only $14 billion. Porsche of course sold for more than $20billion in 2012, and produced less than 140,000 cars at the time. Compare that to Fiat which sells roughly 32x more cars and yet is valued quite a bit less than VW paid for Porsche. Had they instead compared Porsche to Fiat in the same manner, would it not have made it sound as though Porsche was wildly overvalued in 2012? Yet they still found a private buyer. And yes, Tesla sells less than Porsche and is more highly valued. I'm just saying that their wording makes it sound all that more overvalued by comparing Tesla to Fiat, instead of comparing Tesla to Porsche. No need to exaggerate the optics with distorted comparisons.

How many people have left the farms in the US over that period of time seeking jobs in the city? I don't dispute that China has been building excess capacity, but I find it hard to compare China to the US due to the demographic migration of Chinese to cities from farms. Having said that, I don't know if that effect was already fully completed by 2008 or if the migration is still ongoing. And yes things can be overdone even if there was significant ongoing migration -- but it matters how long the excess capacity will remain truly excess... meaning how long will it take for that space to get filled if people are still migrating.

30% overvalued means 23% decline back to fair value. 50% overvalued means 33% decline back to fair value. However if you can expect a 7% return if you were to purchase the index for fair value, then over the course of one year going forward you can expect the following range of losses: 17.7% loss over one year if market is 30% overvalued today and it declines to fair value (and you make 7% return on fair value) 28.7% loss over one year if market is 50% overvalued today and it declines to fair value (and you make 7% return on fair value) So you would be expecting a loss of somewhere between 17.7% to 28.7% over the course of the next year if the markets are 30% to 50% overvalued today and they merely decline to fair value. It's interesting to calculate this out -- 30%-50% sounds a lot scarier than 17.7% to 28.7%. But I think I got the math right.

It distresses me to pay taxes when there is no gain.