txlaw

Thanks. Have been waiting for this to come out.

I am close to fully invested due to positions in certain distressed/formerly distressed equities -- they're deep value style positions. So I'm not buying anything at the moment. However, I am hoping that there will be catalysts for these stocks due to earnings reports and possible M&A activity that will help me realize the value in these positions. What's on my radar now is anything to do with agriculture -- fertilizer companies, ag commodity distributors, etc. I bought some of this sector a couple months ago. If I can release some cash from my deep value positions due to a catalyst, it is likely that I will add more if things still stay cheap.

2008: down 45% 2009: up 60% As you can see, I still have a ways to go before I break even. My 2008 performance was severely damaged by two positions that were holdovers from before I started value investing. I didn't have a good understanding about these companies' balance sheet issues, and my investments in them became permanently impaired in 2008, as both companies eventually filed for bankruptcy. While it is quite possible that these companies would have survived a run of the mill downturn, they could not withstand the great credit crunch, and their managements acted horribly, running the companies into the ground. Unfortunately, I also ignored a sage piece of advice from Warren Buffett with regard to these two positions: "You don't have to make money back the same way you lost it." I first learned about value investing in late 2007, and I really started to delve deeply into Warren Buffett and value investing in early- to mid-2008. Prior to that, I really didn't know what I was doing, and investing was more of a thing I was just supposed to do with my disposable income. I had a very rudimentary understanding of how to go about conducting due diligence, and I didn't really understand many of the other factors involved in investing that many of the greats always keep in mind. When I read the essays of Warren Buffett in December 2007, compiled by Lawrence Cunningham, a light switch just flipped. All of a sudden, investing made sense to me, and I couldn't get enough of learning about it. Not only did I want to learn about investing, but I also wanted to learn about business in general, finance, the financial system, and the reasons why we were in this crisis, so I started to read like a madman. I consider this board one of the best learning tools I've had during the last two years. I would say that my investment process became quite good just prior to the market meltdown caused by Lehman going under, so I was able to capitalize on the October and March lows. However, I still have lots to work on. For example, my 2009 performance would actually be much better -- I would be better than even -- if I had not traded so much. Here are some of the investments I actually owned and that I sold waaay too early because I got spooked about the market going back down again: DELL at 9 EBAY at 14 WFMI at 10 NRG at 19 I sold all of these for about 30% returns, but if I had just held on to these instead of trying to exit and re-enter these positions based on market movement, I would be much happier with my results. I've learned that I have an itchy trigger finger (exacerbated by the fact that I'm not employed at the moment) when it comes to selling my stocks. I need to learn more about hedging my portfolio to counteract my inclination to sell too early. Sorry for the long post, guys. But this thread really got me thinking. Great question, Packer.

This is a must read for anyone who's interested in what really went on behind the scenes last year. http://www.vanityfair.com/business/features/2009/11/too-big-to-fail-excerpt-200911?printable=true

Ericopoly, I just wrote a long post on this in another thread. My theory is that the price of gold was severely depressed between the late 90s and the early 2000s due to central banks leasing gold to bullion banks as part of their easy money policies. A bunch of gold was dumped into the market as a result, and so gold hit bottom in 2001 and 2002. Then between the early 2000s and the financial crisis, two things happened: (1) supply and demand for gold began to revert back to more normalized levels, which resulted in the price of gold reverting back to its mean; and (2) people began buying gold as insurance against systemic crisis and a sharp devaluation in the dollar. These two things caused gold to appreciate rapidly relative to even the most sound currencies. Going forward, I believe that sound currencies will appreciate at a more rapid pace versus the dollar than gold. We are beginning to see this in the one year charts.

There is a big difference between cows and gold. Cows have more intrinsic value or utility to them than gold. You can milk them, you can slaughter them for meat and leather goods, and you can use them for labor (e.g., pulling plows). Gold has some utility, but not as much as cows or most other traded commodities. Gold, however, does function very well as an alternative currency, which is driven by the fact that it is a precious metal and has a hold on human imagination that goes back since time immemorial. Furthermore, the absolute supply of gold cannot be influenced/manipulated by central banks, though central banks can affect the dynamics between the supply and demand for gold in the market, as they control most of the gold that exists in the world. This monetary function in the minds of most people in the world makes holding gold a nice insurance policy to have in case of sudden currency devaluations or systemic crisis. I’m not sure that I would ever make the claim that gold has a "stable" value as it is in the end just a currency to be used in exchange for goods and services. The ratio of exchange between gold and useful goods and services can easily fluctuate based on animal spirits and short term supply/demand fundamentals. ----- Here's my theory about what has happened to gold over the last few years and what will happen going forward: -In the late 90s and early 2000s, many central banks -- and the Fed in particular -- came up with an easy money policy where they would inject liquidity into the system to soften every little recession. One of the things that the central banks did when they lowered rates was to lend gold out at very low interest rates, promoting what has been called the "gold carry trade." Gold was leased at these low rates to bullion banks, who subsequently dumped the gold into the market in order to lend out the money or buy fixed income securities such as MBS. This caused the price of gold to be very depressed during this period and the price reached a bottom in the early 2000s. -Between the early 2000s up until the financial crisis happened, the supply and demand in the market for gold began to normalize and so the price of gold began to revert to a more normalized level. On top of this, many smart people began to realize that we were getting to the point where we would finally see the dollar be devalued at a rapid pace and where we could have global systemic crisis due to the casino-like, too big to fail, derivatives-laced financial system that was reaching its apex. These people saw that if a global panic were to ensue, you might want to be in gold because of its insurance value. Reversion to normalized prices plus realization of the potential systemic crisis caused the price of gold to appreciate relative to many sound country currencies over the last five years. -Then the panic happened. It became clear to everyone that the dollar was going to be worth much less going forward, including the Chinese and Japanese central banks who had continued to hold dollar reserves and lend money to us in order to sustain their export sectors. Fearing a sudden devaluation of the dollar and systemic collapse, these central banks, institutional investors, and even retail investors began to pile into gold and useful commodities (such as oil) in order to preserve the wealth they had accumulated. They did this because it was the easiest and quickest way to do so. Gold and commodities spiked versus the dollar and versus other currencies. Gold continues to remain high because supply cannot be ramped up as with useful commodities such as oil, nat gas, and copper, and because demand for gold is not as tied to the real economy as demand for these useful commodities. -Now we see China and Japan, which still have lots of dollars and dollar-denominated fixed income securities in their coffers, chomping at the bit to get rid of their dollars in an orderly manner, i.e. in a manner that won’t destroy their export sectors overnight and cause unrest. Instead of dumping dollars into the currency markets, they are planning on investing in U.S. commercial real estate in the next few years and will probably buy more stakes in U.S. business so that they have claims to real/productive assets instead of dollars in their hands. They will likely also slowly diversify into other currencies such as the Canadian dollar and Australian dollar, which will push these currencies up relative to the dollar over time. Buying gold will no longer be the best way to combat dollar devaluation, and the price of gold will stagnate versus other currencies that are backed by useful commodities, fiscally sound government policies, and strong industrial concerns. The time to buy gold was between 2001 and the financial crisis. Not now.

Haha -- great post, woodstove. ;D

Boy, I hope so. I was recently looking at companies that do mezzanine financing, and the CEO of one of the companies I was looking at noted in an interview that because of the turmoil in the credit markets over the past two years, there is a gap to be filled in terms of providing financing to small and medium size companies that have solid earnings potential and are well run. This is because many of the companies that were lending in the mezzanine finance space were very leveraged and are now in the process of deleveraging. I imagine that FFH would be a go-to lender for small companies in Canada that are looking for a trustworthy, deep pocketed partner to help them finance their growth. Because the HWIC guys are such good business analysts, they would likely make a very good return over time on a portfolio of such hybrid loans. Ultimately, I passed on all the companies I looked at, and I may never revisit the space if FFH starts deploying more cash into these sorts of investments.

http://online.wsj.com/article/SB125415836962146789.html From the article: Lending also plays a role in the SEC's separate effort to limit, in particular, "naked" short selling, in which investors sell stock they don't own. The SEC has said it is exploring a "preborrow" requirement, which would require a short seller to have an agreement to borrow specific stock from a specific broker before placing the order.

You should check out a site called Greenbackd.com. It's devoted to Graham style net-nets for the most part, and there were apparently a lot of these situations last year. I myself have never invested in any Graham-style net-nets.

You know what . . . I apologize for my response. It was heated, and I regret having written most of it. Part of the problem is that this is the only board I have ever posted on, and I am not at all used to the tone that people use sometimes when arguing or debating over a particular issue or investment idea. I know that many times the poster doesn't mean to say something in a way that will be construed as an insult, but it still makes my blood boil when it happens. But it's just a part of the way that communication occurs through the medium, and I'll have to get used to that, I suppose. Again, apologies.

I'd love to meet up with you guys for dinner. I probably won't be able to come to the first one this October, but I will be in the Bay Area from time to time and would definitely try to make plans to attend if possible.

Excuse me -- why don't you read my posts before you start claiming that my "investment thesis is driven by a bunch of 'maybes' and 'hopes.'" When did I say that I would buy Walmart now or that it was cheap? I specifically said in my first post that I believe it is trading at a fair (or reasonable) price but is not cheap, and that I would not buy WMT given the other opportunities available at the moment. Yeah, I agreed with (1) and (2). I don't agree with (3) because I believe that whether WMT is a good buy depends on what you're trying to do with your investment portfolio. If you're very rich (which I am not) and you're looking for a low risk place to preserve your capital and grow it, albeit at a slow rate, it might not be a bad buy even at a P/E of 15. After all, that's a greater than 6% earnings coupon that I think will grow over time even if that growth comes through buying back undervalued stock. I'm not trying to change anyone's view about WMT based solely on these potential new lines of business. I'm simply trying to add value to the discussion by bringing up some potential future developments for the business -- after all, we're trying to look to where the puck is going, aren't we? Even if I were trying to change people's view, people like you clearly have their minds made up and cannot benefit from hearing other points of view. I disagree with Uccmal, but I respect his opinion and understand the points he has made about WMT. Very useful posts he's made. The last post you just made was worthless, on the other hand. No shit.

True, but that does not mean that WMT cannot succeed in these businesses by partnering with other companies or even by starting such businesses in-house. It depends on whether you think Walmart can get good people to start and run these new businesses. I think they can. But finance and health care are going through enormous changes right now, and it makes sense for WMT to wait back and see how things turn out before potentially moving in to try to add value in these sectors. My main point is that Walmart, which I believe is a well-run company, still has the opportunity to leverage their customer base in the U.S. to provide new products and services at a value price. Certain financial products such as consumer/transactional credit and basic health care services (think walk-in clinics for simple medical problems) could be a great fit for the company, which would boost their bottom line profits apart from expanding their retail presence.

Last time I looked at Walmart, I determined that it was trading at a valuation that was fair but not cheap. Walmart is a great business, and I'd rather own Walmart for the long run than many other available investments, but it's not trading at enough of a discount for me at this time given the other potential investments available. As people have pointed out, Walmart has pretty much saturated the U.S. market with its retail operations. So the question is whether they can successfully expand abroad, either through wholly-owned direct ventures, joint ventures, or equity investments in retailers that WMT can help optimize. Walmart is expanding abroad in the BRIC countries, but it's unclear what type of profits they will make from this expansion. Just recently I heard about Walmart having opened up a store in Amritsar, which is in the state of Punjab (in India). However, according to an article I read about the Walmart operation in Amritsar, the store is a wholesale rather than retail operation. It's all about logistics and supplier networks, not the brand. And they will have quite a bit of competition from the likes of Tesco, Carrefour, and homegrown companies, who were much faster at moving in India than Walmart. Margins will be razor thin, and if they cannot expand and gain meaningful market share, earnings from India may not be meaningful in terms of increasing intrinsic value. Basically, if you want to figure out what WMT’s growth will be going forward from their retail business, you need to do some serious due diligence into how much success they are having with their big box format abroad and whether they've partnered with the appropriate people (via joint ventures and equity investments). Success is by no means guaranteed. They’ve actually had to pull back from some countries after failing. Note, however, that Walmart may have the opportunity to expand into other lines of business in the U.S. such as health care and finance. Walmart pushing down the costs of consumer credit transactions would be amazing -- hopefully, the government lets them get into this business. So that's a potential upside that no one has talked about. You may want to consider other specialty retailers that are trying to expand abroad such as HD or LOW. I haven't looked at these guys, but they may do better abroad because of their more differentiated operations.

Some questions I've been turning over in my head regarding investment results going forward: How will the diversification of FFH into insurance companies located abroad affect investment returns going forward? Polish Re and Advent, for example, may have substantial investments in European bonds and equities. Hard for me to tell what sort of affects this will have going forward. Also, while some of the diversification is from minority investments (e.g., ICICI Lombard and Arab Orient), perhaps HWIC is learning about how to optimally invest in these countries from the homegrown managements of these companies. What sort of returns can we expect for FFH's distressed company investments such as Abitibi, the Brick, etc.? I have to admit that I haven't done any analysis of these positions. Is FFH going to try to compete with the likes of GE Capital, Brookfield Asset Management, and other distressed investment shops? If so, do they have the chops to do this? Does size matter at this point? Are we at a sweet spot in terms of size in that we can use financial muscle to obtain opportunities we've never had before (e.g., DIP financing investments)? Does diversification abroad mitigate any size issues if there any?

Cardboard, Mungerville, and other long time FFH watchers -- if you're reading this, I'd be interested to hear what type of returns you think HWIC can get going forward. -txlaw

Excellent! Thanks for letting us know about this. Looks like I'm gonna have a lot of reading material for the weekend.

Ah, okay -- that makes sense. Wasn't sure if they were talking about 767-ERs that were converted to freighters by ATSG.

I posted this in another thread about gold and the USD, but it's worth taking a look at what Bruce Flatt of Brookfield wrote in his last shareholder letter about BAM's exposure to various currencies: In summary, about 50% of our equity is invested in U.S. dollar-based investments. We are comfortable with this as we believe that the U.S. dollar will remain an extremely important global currency for many decades. This is mainly because we see no viable alternative currency which has the necessary scale, universal acceptance and a history of rule of law backing its existence. The other 50% of our capital is invested predominantly in three healthy, commodity-based countries where we believe the odds favour the currencies doing well compared with the U.S. dollar. [He's referring to the CAD, AUD, and Brazilian Real.] This is as a result of their current fiscal situation, but more importantly because the drivers of their economies (oil, iron ore, coal, copper and agricultural products) should enable them to maintain positive fiscal positions. There's the value-oriented approach to currencies you may be looking for, I think. As for commodities as a dollar hedge, I prefer useful commodities such as agricultural and energy commodities to gold, which is more like a currency anyway. I'm thinking the run up in gold versus the dollar may have a ways to go, in which case we will finally be in bubble mode.

"DHL Adds 767s For Trans-Atlantic Flights," The Journal of Commerce, http://www.joc.com/node/413560. Could these be the 767s put to DHL by ATSG? If so, does this mean that they've come to agreement on the value of the planes?

I agree that intrinsic value calculations are not accurate in terms of precision, but I completely disagree with you in abandoning the exercise of trying to calculate intrinsic value. I tend to have an appraisal range for a potential equity investment a la Seth Klarman in Margin of Safety. Note that even Longleaf uses a metric they call price to value (P/V) to serve as a reference point for judging the value of their portfolio. From the 2008 Partners fund annual: The price-to-value ratio (“P/V”) is a calculation that compares the prices of the stocks in a portfolio to Southeastern’s appraisal of their intrinsic values. P/V represents a single data point about a Fund, and should not be construed as something more.We caution our shareholders not to give this calculation undue weight. P/V alone tells nothing about: • The quality of the businesses we own or the managements that run them; • The cash held in the portfolio and when that cash will be invested; • The range or distribution of individual P/V’s that comprise the average; and • The sources of and changes in the P/V. When all of the above information is considered, the P/V is a useful tool to gauge the attractiveness of a Fund’s potential opportunity. It does not, however, tell when that opportunity will be realized, nor does it guarantee that any particular company’s price will ever reach its value. We remind our shareholders who want to find a single silver bullet of information that investments are rarely that simple. To the extent an investor considers P/V in assessing a Fund’s return opportunity, the limits of this tool should be considered along with other factors relevant to each investor.

I use 12% for the equity return because, according to the AGM presentation, that's how they've performed over 15 years when not considering equity hedges. I use 9% for the fixed income return because they've consistently earned over 9% on the portfolio over 5, 10, and 15-year periods. However, you're probably right about using between 6% and 7% for the bond return in order to have a margin of safety built into the model, given the lower interest rate environment. Note that it's unclear to me whether the AGM presentation is talking about returns on the portfolios before or after tax.

I'm curious. When you guys are trying to determine the intrinsic value of Fairfax, what types of investment returns do you use for HWIC going forward? For the equity portfolio, I use a pre-tax return of 12%. For the fixed income portfolio, I use a pre-tax return of 9%. Do you think I'm being too optimistic here? I'm particularly interested in hearing what people think about the fixed income returns going forward, as I don't know much at all about fixed income investing. Also, how has HWIC been able to generate such a high return on its fixed income portfolio? Based on their AGM presentation, they appear to have blown out many well regarded funds such as Pimco's various total return funds. Is it because they have significant fixed income investments outside of the U.S.?

Here's a link to an interesting article on rating agencies with a description of the Canadian rating agency, DBRS. "Rating Agencies at the Crossroads," http://www.theglobeandmail.com/report-on-business/crash-and-recovery/ratings-agencies-at-the-crossroads/article1287567/ There's also a quote from Paul Rivett of Fairfax in the article: “A good way to do it, and a fair way to do it, would be to have investors who use their services – research and ratings – pay for it,” says Paul Rivett, a spokesman for Fairfax Financial Holdings Ltd. “If [the agency is] not good and the analysis is not sound, no one's going to pay.” I found the article via a Zerohedge post on ratings agencies and Canadian public pension funds: http://www.zerohedge.com/article/rating-public-pension-funds