ERICOPOLY

Actually, it is quite the contrary. It is known to be much more damageable to the brain during your teenager years, when you are still growing up. It would be much less damageable if people started only when they are adults! Anyway, I think it could be comparable to alcohol, but what I have seen is that it more often leads to more damageable paths (tougher drugs) or higher frequency consumption (but I don't have any data about this, just empirical observation with my bad own sampling!). Right, supposedly people who smoke pot regularly as teenagers wind up with lower IQ scores as adults. However, people who begin their pot smoking regularly as adults do not show any decline in IQ scoring. There was an article about this in the past year -- either WSJ or NYTimes.

We should make it illegal so that it goes away. Just like alcohol went away when it was illegal. Just like we have no prostitution, because it too is illegal. And we have no cocaine, because it is illegal. Thank goodness meth is illegal, because boy we wouldn't want anyone using meth. Everything is gone when it's illegal. When I was in high school, I smoked pot several times a month. And I drank alcohol usually every weekend. Both were illegal, so my parents were relieved to know that I wasn't using either pot or alcohol.

Software -- stress testing I was thinking about this the other day. Every company you buy that relies on rolling short-term debt -- it will eventually fail to be able to do so under a stressed environment. Same goes for a software program that relies on a system resource allocation without a backup plan to fail gracefully. Then there are multiple paths (an execution tree) that run through the code. We had software that would point out bugs in samples of such paths (it would simulate the execution via static analysis) -- this is a bit like the way you think about your investments when you are trying to grasp an estimate of that one true IV. You effectively execute a static analysis of a sampling of possible execution paths. You often at that point walk away if it's "too hard". You need more stable, predictable, boring businesses with long histories to more effectively utilize these static analyses. The more paths you can analyze statically (as a percentage of all possible paths), the more confident you can be that you'll have solid execution (as you can't test all possible paths in highly complex systems). Thus, the method works best when you can reduce the complexity (Buffett style businesses). Somewhat similar types of work.

Just run for Congress: http://articles.baltimoresun.com/2013-04-24/news/bs-ed-congress-inside-trading-20130424_1_congressional-knowledge-the-stock-act-insider

It is a skill that is useful if there is an actionable investment idea brought to my attention. Somebody needs to throw the ball in the air for me to catch it. Somebody needs to put in some good blocks for me to get open. I can't work in isolation like the punter. come on Eric, I though you werent serious when you were posting all this, you are undoubtedly a much better investor then average and you will improve with time and make even more money. (like in perf reviews they say everyone has areas of improvement) but you are definately a 1 in stack ranks. you also exemplify some of the quotes of buffet with your style of investing “I’m no genius, but I’m smart in spots, and I stay around those spots.” :) you know your area and you have been doing excellent staying around those. And you also exemplify the 20 punch card quote opportunity look where you have got with 3-4 punches once you have 20 in next 40-50 years you might be on forbes list. its otherwise difficult for me to get what buffet is saying unless there is an example I can understand I got by with a few picks after having posters here spoon feed the basics about the business and the upside to me. It has to be a really simple idea for me to understand it -- which is probably the real reason why I don't have a diverse portfolio. Anything more complicated than completely basic and I'm lost. Really I admire Kraven's approach with 100 items -- I certainly don't think I can even manage that intellectually. And Packer really understands the businesses well, and lots of them. I just hope the board keeps turning over good simple ideas every now and then.

14.2% is not far from 15%. So if they could simply earn 14.2% in a mutual fund I could purchase it in my RothIRA and get virtually the same as their 15% goal without using any leverage at all. I don't put too much weight on their historical bond returns because of the great bull run from high interest rates to today's low interest rates. This is why I went with 4%. Anyways, what is their actual leverage level? If it's 50% equities and the rest must be sequestered for the insurance operations, then the bond leverage is expressed as a multiple on that sequestrated percentage. But if only 25% must be sequestered, then the bond leverage is expressed as a multiple of that smaller amount (double the leverage yet again). I'm obviously not dead-set opposed to their insurance operations (why would I be), I just want to quantify what their actual returns are from insurance -- it's all muddied together and if I knew how much they sequester for insurance (versus equity investing), then I could easily determine whether it offers a better return versus just using that sequestered money for equity investing instead. I think Berkshire doesn't have to sequester any money for insurance because they have relatively smaller insurance operations relative to their total pie. I believe the cash they have on hand for catastrophe events is actually just uninvested insurance float.

I also look at float as a means of gaining leverage from bonds. But let's say for every dollar of shareholder equity that needs to get conservatively idled (my explanation for their smallish allocation to equities despite hedging the equities and having permanent capital), you leverage it 3x with bonds. So let's say they have 4% bond yield -- times 3x is 12%. After tax that's in the 8%-9% range. Then add in a couple of points for underwriting profits (after tax) if they start to generate some. Then you get a number on what they actually generate from the insurance side of things. I'm merely saying that if you compare this number to what they earn historically on equities, it might actually be lower.

I'm looking for the line that illustrates the opportunity cost of the conservative investment portfolio as a cost associated to the insurance operations. Just ask Sanjeev... he'll tell you. Many times he has posted about how the portfolio is managed with the mindset that it's a large financial company (insurance) and thus the shareholder's equity cannot be managed the way it otherwise could be with respect to equities investing. I believe he specifically said this with regards to the large amounts of equity hedging. I don't think Sanjeev has it wrong.

I don't go to those dinners.

Alright, so if falling commodities prices are going to hurt the US economy, then rising commodities prices are going to help it? Did the parabolic rise in commodities prices over the past 15 years feed into better employment for US workers over the last decade, and rising wages for US workers? Did it boost consumption, or hinder it? Did it create a level of prosperity that is now going to unwind here in the US? My basic intuition is that it drove costs higher, which led to lower consumption, consequently lower levels of production and lower wage pressures. I recognize the effect it had on Australia (huge mining boom in a country hugely dependent on mining)... but I guess I'm just looking at it from the lens of the US economy.

Commodities going down in price isn't going to squeeze the producers of finished goods, is it? Let's say I depend on the price of steel to produce pickup trucks. I should worry about deflation's effects on my business if we are merely talking about the cost of steel going into the truck being cheaper? I don't get it -- that sounds like helpful deflation. I either make more profit on the truck, or I lower the price and make more trucks (getting full utilization out of my truck making plant, profits then rise). It is not helpful for commodity producers especially ones with debt. If it reduces earned income it would reduce consumers spending power. What will that do all the factory workers in developing countries? No question on the commodity producers. I don't see the causal link with factory workers. Non-commodity-producing companies see falling costs, the can sell more units at lower prices for the same or higher profit. Increased production leads to increasing demand for factory labor and this is bad somehow for factory workers?

Well, I guess that’s a matter of what you do best and what your circle of competence is. They have extraordinary investing results. This is where their circle of competence is. They do NOT have extraordinary underwriting results. So will you tell me where their should stay if you advocate for circle of competence? Staying within circle of competency is exactly what I am arguing for if I suggest that a pure investing structure might get them the same (if not better) results with less risk.

Well, I would argue that the ability to issue shares at 2x or 3x has been just another advantage over a mutual / hedge fund? Has it not? Gio This is a positive advantage to a holding company structure. Fairfax can have such a structure without writing insurance. I have not argued that holding companies are bad structures -- I have merely asked about the insurance operations. Specifically, I am asking if they can achieve these same returns without the risk and hassle of insurance.

If you don’t consider the outlier year of 1985, FFH’s BVPS at the end of 1986 was $4.25. Therefore, BVPS has compounded at 17.5% annual for 27 years. Sincerely, I don’t know many mutual / hedge funds, but among those that I know not one managed to sustain 17.5% annual for 27 years. Leucadia imo has yet another business model: I think it has been much more of an activist value investor than many people realize. Just read the last letter by former management and it simply jumps out of the pages! Activist value investing, like Mr. Ichan has proven many times, exploits a weak link in modern capitalism, and therefore enjoys a clear mean to outperform. Just like insurance, also activist value investing is not without risks… That’s why, just like insurance, it works only in the hands of skilled and shrewd entrepreneurs. Gio Fairfax has been very activist. Their model was to take broken insurance companies and try to fix them -- this was not passive investing. They take board seats at OSTK and BBRY (and others).

17.5%. And how much of that is due to issuing shares at 2x or 3x book value? Then, take that adjustment, and compare the final result to their historical return on equities. Then you get to whether or not it has been worth it, and to what degree. Irrelevant. It doesn't matter how many you know of outside of Fairfax, because there is only one HWIC. And it can be decoupled from Fairfax. It's like saying Buffett can't do well outside of the Berkshire structure because you can't think of mutual funds that sustain high returns. I would say "so what, they're not him!".

That they were really undervalued. :) Totally possible, but how many simply followed the few great investors that really recognized this? Hypothetical; lets say you had a group of people who simply copied Buffett a couple of decades ago. They would have outperformed, and you probably should give them some credit for choosing to follow Buffett. But it would be really one guy that would have been the great investor, not the group of followers (imo). So how many great investors versus followers are there on this board? There are great followers and poor followers. Who loaded up on IBM and ignored BAC? Who bought BBRY and ignored Bank of Ireland?

That they were really undervalued. :) It says we were lucky that a planetary extinction event did not happen during our holding periods. Any positive returns are merely a result of this luck. We are biased by the outcome believing it to be the only possible outcome. We are fooled by randomness. (some people try to elevate themselves by talking this way, so I figured I'd give it a try)

Share issuance I believe is something you want to factor into their growth of equity rate. You don't need to be an insurer to issue shares. How about you think beyond simply hedge funds and mutual funds. Leucadia is not a mutual fund/hedge fund. We can agree that they aren't deep in insurance either. They have done well for themselves anyhow. I am merely asking how much insurance operations help Fairfax. Seems like the first question one should ask of them: Why did you enter the insurance business? You already kick ass investing, how much faster did you compound your money after adding insurance risk? It does add risk doesn't it -- are you achieving meaningful risk-adjusted returns? You have years when equities are at their cheapest, and I think the insurance model is a drag then as it hinders their ability to load up. That's something that isn't discussed -- people only look at their float and only talk about underwriting loss as a cost of that float. I'm suggesting the float costs more than that because it hinders their flexibility at times when you least want to be encumbered.

It is a skill that is useful if there is an actionable investment idea brought to my attention. Somebody needs to throw the ball in the air for me to catch it. Somebody needs to put in some good blocks for me to get open. I can't work in isolation like the punter.

I'm partway through this book. Somebody (a member of the board) mailed it to me unsolicited. It is dragging up some old memories of statistics and probability from my college years (math major). I switched to math after a stint in psychology and business. I'm only a third of the way through the book so far. Mauboussin likes sports analogies. I think I am more a wide receiver than a punter. Mauboussin says it's easier to trade for a punter than a wide receiver because the success of the wide receiver depends more on the team attributes/dynamics, whereas the punter is more or less a lone wolf. So in the world of investing, all of my success came from ideas and discussions originated on this great message board that Sanjeev started. Therefore, I am not a punter. Take away my supporting team players, and I have no demonstrable skill.

Commodities going down in price isn't going to squeeze the producers of finished goods, is it? Let's say I depend on the price of steel to produce pickup trucks. I should worry about deflation's effects on my business if we are merely talking about the cost of steel going into the truck being cheaper? I don't get it -- that sounds like helpful deflation. I either make more profit on the truck, or I lower the price and make more trucks (getting full utilization out of my truck making plant, profits then rise).

Yes! Of course! Never pretended to be such a good investor, and I think that probably I will never be! ;) Gio Well, that makes two of us. I continually assert that I'm just an average retail investor who copies better investors.

Yes! Of course! But I think a goal helps you to keep things in perspective, and I find that to know what you are trying to build is very useful. By the way, I started my company with 25.000,00 Euros in capital at the end of 2004. Today its equity is worth 1.672.000,00 Euros… You calculate the compound rate! ;D ;D ;D Gio A bit under 60% annually compounded. This includes your own savings though I presume (earnings you chose to retain rather than paying out to yourself). I used to be able to compound by 100% in my 401k just by saving $12,000 so the balance went from $12,000 to $24,000. Is that partially the effect here? Still impressive though.

I find it astonishing that after the gains in 2012 and 2013, it is still conceivable (barely) to make 30% annualized returns from BAC for two more years over 2014 and 2015. The stock would have to be $25.35 (including dividends) by end of 2015. That would be 12x $1.80 per share (13% ROTE) plus $2 per share earned (using DTA) for 2014 and 2015. It comes out to $25.60 (12x1.80 + 4). It also assumes the $25 strike call is written (to bring the starting price down to $15). I'm not sure it's wise to write the $25 strike call (yet), but I wanted to do it for this example just to bring the math down to stock price that's within the range of capital generation + 12x earnings. That's really funny. Another couple of years at 30% annualized (possibly). It's not terribly unreasonable.

I got some immediate results when I went for the stripper shoes. I finished up 47.5% in my RothIRA. My wife's RothIRA finished up 67.5%.