coc

Thanks for elaborating Rod. Seems sensible. Out of curiosity, what ideas have fallen into this net since you switched? How long has it been? No need to give current ideas if you don’t want to share them, older ones are fine. I've been investing in stocks for 25 years, usually owning 5 to 7 at any one time. This level of concentration was not by design, but by having a pretty high bar for what I would invest in, usually 1 or 2 simple ideas per year would pass the hurdle. I focused almost entirely on small and obscure Canadian stocks, often special situations. My performance during that time was at or close to 25% per year, with a success rate of about 85% on the ideas I bet on. I can't remember if that ridiculous performance number includes leverage because I did leverage up after the two crashes in 2000 and 2008. Most of the time I was debt free. I don't pretend to be as good as those numbers suggest. I just think the area I was prospecting in--small and obscure Canadian stocks--has been able to offer up just enough really easy deals over the time I've been looking that I could get a good one once or twice a year if I searched enough. I'm sure I could have just kept doing that, but about 3 years ago I decided to reduce the amount of time I was devoting to stock research. It struck me that over the 25 years I've been doing it, I have identified about 7 or 8 "no-brainer" ideas (one every 3 or 4 years) that I would put 20% into. All of them put up excellent 10 year+ records after that, whether I kept them that long or not, often I did keep them. More "average" ideas I would put in 10 or 15%. I realized that if I had simply stuck to those 7 or 8 "no-brainers" ignoring everything else, and put maybe 30% into them when I found them and held on, I would have done about as well or better than I did investing in the much larger number of "average" ideas I got into. So, in the interest of reducing time spent I've been experimenting with high-grading my ideas to invest in only the no-brainer ones over the last 3 years. Performance during this three year period has been about 25% per year. My biggest holding by far right now is Dream Unlimited (DRM-T), a diversified real estate company. I bought it at various prices starting around 3 years ago. I think it's worth more than $20, currently trades close to $12, was $7 earlier this year. My average price is about $8. I expect to hold this one for at least another 7 years to make my total holding time 10 years or more. This one big, long term investment will probably replace 10 or 15 more average deals I could have done, so that is where the big time savings will come from.

Out of curiosity, what ideas have fallen into this net since you switched? How long has it been? No need to give current ideas if you don’t want to share them, older ones are fine. I think the questions you are asking are not even that relevant for people owning 3-4 stocks long term. The results can vary drastically among this kind of concentrated portfolios, and people who outperform spectacularly come out to talk and people who underperform keep silent. I’m not looking to copy his strategy. Thanks.

Out of curiosity, what ideas have fallen into this net since you switched? How long has it been? No need to give current ideas if you don’t want to share them, older ones are fine.

As a financial services professional, I will state strongly -- you have a DUTY to bring this to your client. Who else can call this stuff out besides professionals? The layperson often doesn't know they're being fleeced, and the regulators are weak, and understaffed. Do it as best as you can, do it with the most tact you can gather (lots of good suggestions above), but above all, do it. Since you already manage their money, there shouldn't be any accusation of self-interest. Taking a modest amount of risk to yourself on behalf of others is among the highest forms of honorable behavior.

The most commonly used function in Excel for this is XIRR. All you need is a column of dates and a column of principal added/subtracted. The final values in each should be today's date (or the end date) and the current value (or end value) as a negative number. XIRR will give you the annualized return for that period while taking into account the timing/amount of the principal adds and withdrawals. There are certainly limitations to this approach, but it is one way. A more accurate way (in my opinion, as far as your performance) would be to compute your returns for each time period between adds/withdrawals and then compound them. But that is very tedious to do and I don't know of a function that does it automatically. You would also need the value of the position or the account at each add/withdrawal.

A moat is a set of attributes that make competition particularly difficult. No one, least of all Buffett, has called a moat impenetrable. If you don’t understand why your local utility has a strong moat against new entrants, why GEICO has been gaining market share since 1936, or why Frito Lay is awful hard to challenge in snack food, you ought to think hard about it. I believe there is also a category of businesses that have moats around poor businesses. Hard to compete with, but you wouldn’t want to anyways.

The problem with this reasoning is that you can: A. Attach it to anything B. It has no upper or lower bounds. Which is how speculative bubbles start and end. Under this reasoning, there’s almost no upper limit to pay for bitcoin - and no way to even determine a price that makes sense or not. It’s easy to say “the upside is infinite and the downside is capped”, but the truth is you’re picking statistics at random. Why should there be a 50% chance of 1000-1 odds on bitcoin? How do you know it’s not a 1% chance of 10-1 odds - how would you do this in a rigorous way? It seems too easy to fool yourself with these number games.

writser, The “skeptical-but-too-hard” pile is just about the most important pile to have, in my judgment. You don’t have to get them all right. I’ll also add that Chanos has said before that he thought Enron was just a bad business, overpriced, overcomplex, overlevered - he didn’t know the numbers were so cooked until after the trials.

I forgot to include this report in my prior posts - written by a great analyst / short seller named Mark Roberts in 2001 before Enron collapsed. He pretty well outlines everything you should/would have found in the filings — which again, were the tip of the iceberg, but as his report shows, more than enough. https://www.offwallstreet.com/userfiles/files/ideas/NEW_ENE_5_6_01.pdf

Important to note: understanding the public filings will probably not let you conclude fraud in and of itself. It’s only part of a puzzle. But unless the fraud is extremely clever, and Enron wasn’t, they should give you strong hints that all was not well. It’s not necessary to have a full picture of the fraud to know what to avoid. Chesapeake Energy is a good recent example - perhaps not fraud, but very problematic in some ways familiar to the Enron story. (Hiding debt, hiding payments etc) It’s also worth looking at Azurix, which Enron IPOed and then had to buy back. Another total sh*tshow. https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=0001080205&type=10-k&dateb=&owner=exclude&count=40

That used to be called momentum investing and it was an acceptable strategy for a while. It’s still done by computers. The managers just don’t state it quite like that. I read an interview with an investor lately who does arguably just this, but states it more like a value investor would — the companies will earn XX in five years and be worth YY so it’s undervalued — but strip away the verbiage, and he owns a group of unprofitable companies trading at massive valuations that are constantly increasing, in the hope that they’ll go higher. It’s just not saleable as momentum investing anymore.

This is a really key thought to have. If you combine the idea that the business was simply not comprehensible with an actual business analysis showing how poor the results were, the lack of cash flow, and the constant dependence on the capital markets, consistently poor ROIC, plus the later footnotes indicating that a senior manager was doing deals with a private partnership he had an interest in, the indications of substantial off-balance sheet debt (well known in the analyst community), you are probably as far as you need to go to avoid or even short the stock. Of course, the story was infinitely deeper. Fastow and Skilling were pathological and the business was rotten, But it was hard to see all of that until the reporting was done. You’ll note that stories like this (perhaps less extreme) still exist even post Enron.

I would basically start by trying to “track the cash” over the years. Was there real cash coming in, and if so, how was it being allocated? Can you explain in plain English, and does it make sense to you? Was it self funded or dependent on capital markets? Was it earning its cost of capital? What kind it accounting paradigm did they use? How did it look like they were making the money? Enron was a pioneer in the extensive use of “gain on sale” accounting and mark to market assumptions, which later haunted the financial industry. Also try to calculate the return on assets for various divisions. Fraud aside, Enron was an atrocious business, which any fundamental analyst should have picked up. Next check the footnotes. Anything off? Confusing? Lastly, read The Smartest Guys in the Room to understand what was being done behind the curtain. Detecting fraud is difficult and you have to think more like a detective (the dog that didn’t bark) than a financial analyst sometimes. It’s not obvious, and they public financial statements provide more clues than smoking guns, which are usually found later. Markopoulous presented the SEC extensive evidence that Madoff was a fraud and they didn’t even get it.

Where was this said? Thanks!

Like it! Thanks.

Yes some portion of GEICOs profitability has obviously been retained in order to grow, but the larger part of its income over the years almost surely came from its investment results. If you’re writing 3x premium to equity and have an investment portfolio of 3x equity, you’d only need a total return of 3% to match 3% underwriting profits. I’d imagine it’s been much higher than that at GEICO. So the company would have distributed a large amount of money even while retaining $14B to grow. An insurance company really (in my opinion) can be valued no differently than any other enterprise. What do they earn on equity? How fast will it grow and for how long? How much capital is needed to grow? If you can answer those with some confidence, you’ve got a good beat on it. I tried my hand at that above. If you told me you thought GEICO was worth $50 billion today I wouldn’t necessarily argue though.

Gotcha - you’re probably right!

I’m sorry, must be missing something, how does this relate to my post on GEICO’s value? I’m very familiar with insurance regulatory capital req’s.

Can I ask what would lead you to believe those four, among the most powerful insurers in the world (not to mention the most profitable), might be worthless?

Great point, but careful again here. The figures you quote are the average for NYC residential, not super luxury. For example it shows the current number (2010s) as $1,070/sq ft. That would be $3.2 million for a 3,000 sq ft apartment. The truly high end apartments (the ones that might cost $47 million) are more like $5,000 per sq ft. So the comparable number in 1976 might have been $250/sq ft or something. That might imply closer to 50 luxury apartments - for current earning power in the area of perhaps $100 million. Regardless, I think the order of magnitude is what’s important. And that was buying during a time of near depression in NYC real estate, as you mentioned. coc, Are you an accountant? [ : - ) ] -I ask because you think about this exactly like I do. - - - o 0 o - - - Edit: Geico - Financial Information. There was here on CoBF a similar discussion about NICO a few years back [for NICO, similar information is available at the NICO website], with some very good elaborations and explanations provided by gfp about how to interpret the numbers - they must still be laying around here in the Berkshire forum somewhere. How dare you accuse me of being an accountant. :D No, no.

Be careful because the cash GEICO has thrown off has also increased the value of Berkshire (as with See's). He may (though I'm not sure) be including that. He mentioned $15.5B in underwriting profits in Tony's time with GEICO - which one would argue is attributable to Tony's management - while earnings on float are not. If you take that out from the $50 billion, perhaps he thinks GEICO is worth ~$35 billion. If you "back into" an intrinsic value, I believe over time GEICO has underwritten to around a 3% underwriting profit margin, which would be $1 billion on current premiums. Including a 5% total return over time on its ~$30B investment portfolio (assuming float is roughly 3x equity as with PGR) would add $1.5 billion pre-tax, for a total of $2.5 billion or ~$1.9 billion after tax. At a 20x multiple (more than fair for a 25% ROE business growing at double digit rates), that's $37 billion. To Tim's point above, Buffett mentioned in the annual report that the $47 million they paid for the first half would get you a super luxury apartment in Manhattan these days. Here's a fun exercise. Let's say that would rent out for $2 million/year net or something. Even if $47 million would have gotten you 20 luxury apartments in 1976, you'd have $40 million of earning power today. Meanwhile half of GEICO's earning power pre-tax is $1.25 billion. Allocating capital is crazy.

Oh nothing crazy, just would like to read one of the interviews in there - Chuck Akre. Just curious about his comments on a few companies in that issue. 8)

Hi gang, Does anyone have the Jan 31, 2017 issue of Value Investor Insight and wouldn't mind passing it along? If so, I'd appreciate if you could PM me. I used to be a subscriber and haven't re-upped lately, just looking for the one issue. Thanks!

There is no specific regulatory requirement, but Fairfax could never put so much in equities that a major drop (of 50% type magnitude or more) would impair their claims-paying ability or their solvency as an insurer. Rather than look at it as “does fixed income cover claims?”, you might want to see it in reverse “does my capital cover my equity portfolio?” At the end of the day, the claims are a revolving door. In any one period, Fairfax does not need access to most of its investments. But it does need to be (comfortably) solvent at all times. Even Berkshire, with all of its earnings sources, has rarely had its equity portfolio greater than its actual shareholders’ equity (in other words, a leveraged equity portfolio). Imagine for a second that Fairfax put 150% of its capital in equities — so call it $16 billion — which then fell 50% in a market rout. With $3 billion of capital left, they would be in very, very dire straits as an insurance company - the regulators could force them to raise capital, stop underwriting, dilute, etc. So there are limits - but not hard limits. This is my understanding.

It doesn't strike anyone as strange that the company states a 15% IRR goal (over and over, year after year) when it hasn't achieved that in the last 5, 10, 15, 20, or 25 year periods? It's one thing to call it "aspirational" but one could interpret that as "deeply misleading".