Thrifty3000

Holy crow. I’m going to have to invest even more in this thing aren’t I? Thanks for the additional detail! Just came up with a new investment mantra: Be greedy when others are clueless.

@Viking to bring this down to a per share level, you’re suggesting over $80 per share of income from the insurers alone is possible next year. Wow, sounds like I’m going to have to update my look through earnings model. Sounds like look through earnings could comfortably exceed $100 per share in 2023.

BABA Baby!! $80 per share. Unbelievable

People, people, please let us not forget how much we friggin love (and benefit from) wholesale panic-induced market selloffs that are no fault of Prem’s. Many of those insurance premiums we’ll enjoy this year were paid up front, and now we just get to sit back and watch FFH buy up more of its own and others’ assets than we would have been able to had ol’ Vladdy P not been such a cotton headed ninny muggins. These are the times when the oracles make us wealthier, while almost certainly giving us more intrinsic capacity to donate to causes like Ukrainian relief.

Put a fork in Russia. It's done. Ukraine will fall in a few weeks/months. But, that's in no way a Russian victory. In fact, it will only expedite the Russian collapse. It may only take 100,000 to 200,000 Russian troops to conquer Ukraine, but conquering is never the hard part of a hostile takeover - sustaining power is. It will take Russia's entire defense budget just to hold on to a land with 40 million pissed off enemies (keep in mind Ukraine's population is about a third of Russia's). Just look at how much the US has had to spend to maintain order in Iraq and Afghanistan. Further, the world-sanctioned Russian economy won't be able to feed and equip a 1-million person army to govern and police an obliterated Ukraine while Russia's own 140 million citizens are starving and pissed off as hell. Russia (well, Putin's Russia) is done. The big eye-opener for me in all this has been learning just how idiotic of a strategic miscalculation China's Xi made. Xi took what may be the dumbest wrong turn in history trying to drive a wedge between itself and the US, while buddying up with a broke-assed country ruled by a monster. (I'm only now realizing just how much more frail China has become as a result of all of this.)

Yeah, I agree it’s quasi-debt. I was actually just digging to see if the AR had more color on the Odyssey deal. I haven’t found anymore clarification on the amount FFH will ultimately have to pay to buy back the equity. So, I’m going to assume the buyback will cost somewhere in the neighborhood of $1.2 billion. If FFH’s shares are worth $1,000 apiece in a few years then it will have been a good trade. Here’s the language from the AR: “Sale of non-controlling interest in Odyssey Group On December 15, 2021 Odyssey Group issued shares representing an aggregate 9.99% equity interest to a subsidiary of Canada Pension Plan Investment Board (“CPPIB”) and OMERS, the pension plan for Ontario’s municipal employees, for cash consideration of $900.0 which was subsequently paid by Odyssey Group as a dividend to Fairfax. The company recorded an aggregate equity gain of $429.1, principally comprised of a dilution gain and the fair value of a call option received, which was presented as other net changes in capitalization in the consolidated statement of changes in equity. The company has the option to purchase the interests of CPPIB and OMERS in Odyssey Group at certain dates commencing in January 2025.”

It’s all a figment? $hit! Call me crazy (again), but I like to think of an oversimplified explanation of observable trends as more of an insight than a figment. Now, I will gladly concede a couple things: 1) The current excitement around recent and near term earnings prospects are greatly influenced by several strong market cycles and tailwinds. Ie. the insurance hard market won’t be here forever. 2) I previously said Prem appears to be dialing back unilateral “bet the farm” investment decisions. I may have given the impression that I think Prem is now simply passively watching others make investments, which I don’t actually believe to be the case. He almost certainly has a heavy hand in big capital allocation decisions, like the recent TRS and share buyback decisions, and I’m sure he played a strong role in the recent decision to allocate more to Kennedy Wilson. So, I should further clarify, that the capital allocation trend I believe we’re seeing is that Prem is pulling away from making sizable investments in one trick ponies (like Sandridge Energy. Barf.), and is consolidating capital under managers/allocators that have proven long term track records managing multiple assets/investments. I think the Prem of today would rather shop a deal around to Wade, D Sokol, Trott, etc to see which one of them, if any, would want to add it to their own portfolio/scorecard/track record. If he’s not doing that then he should, because it’s a brilliant approach. ^ I think that’s a critically important insight (or figment). It’s also an easy thesis to monitor going forward. (Just like it’s easy to monitor whether he shorts again.) To know if I’m wrong in the future, all we have to do is see if Prem makes a very large direct bet in another one trick pony. If he does, then I’ll update my thesis and adjust my financial projections downward, just like I would do if he shorted something. It ain’t rocket surgery. Now, if you still think my insight is a figment please tell me, because my therapist is going to want me to call up Prem, D Sokol, Wade B, Byron Trott, Brian Dalton, and all the leaders at FF India, FF Africa, Kennedy Wilson, the restaurant group, etc etc and tell all of them that they and their track records don’t really exist.

@petec I think there's more to it than that. Prem is a formally trained engineer and systems thinker. He engineered a strong insurance operation by getting talented leadership in the right positions and allocating capital to those who proved best able to deploy the capital profitably. I believe he realized there are a number of people more (even far more) talented than he is at allocating non-insurance capital. He spent the last decade engineering an non-insurance capital allocation engine, consisting of David Sokol, Byron Trott, Kennedy Wilson, and so on... I have a thesis that he doesn't want to make anymore material investment decisions unilaterally (though he would tell you he never did make unilateral decisions - which is horse hockey). I believe he gets just as many deal opportunities as he always has, if not more, but I think he is now funneling every opportunity to his network of non-insurance capital allocators. I think the Prem of today wants his non-insurance allocators taking ownership of all significant capital allocation, since they are all proven investors, and since the result will go on their own scorecard, and impact their ability to earn even more capital from Prem. Today, Prem gets to live the good life of having $100+ million a month flowing in the door, and he has a group of proven insurance managers AND a group of proven non-insurance investors vying for that cash (all more skilled than Prem at allocating capital in their respective domains). They pitch ideas to Prem, their performance scorecards are easy to monitor, and their incentives are well aligned. Prem supplies them capital as long as their scores continue to measure up. The strategy HAS changed. My latest epiphany is: - Prem ain't a great investment analyst - and realizes it. He may be a decent analyst, but he knows others are better. - Prem is a great business leader and - continuously improving - systems-thinking engineer. - Prem has brilliantly ENGINEERED a diversified capital allocation engine staffed by talented capital allocators.

Holy eff. A work of art.

At these prices I wish they'd cut the dividend to $0 and buy back more shares. I wonder if shareholders would vote in favor of reallocating the dividend to buybacks while the stock traded below a certain threshold?

I think the board, Todd and Ted all know to buy back aggressively in that scenario.

Yeah, that makes sense to use asset backed debt rather than margin - to guard against a great depression scenario. Like I said, I don't have a game plan yet, and I'm only talking about pulling the trigger in an extreme market dislocation (probably at least a 30% decline from a recent peak). I may only go that route when I see a really crazy spread between an investment's dividend yield and the loan's interest rate. For example, I believe Fairfax had some preferreds yielding over 12% at the height of the 2020 panic. Situations like that seem like a decent candidate to borrow at a sub 5% rate to net at least 7% (and hopefully enjoy appreciation as fear subsides and yields normalize). I'd love to have a handful of situations like that to take advantage of. And, I'd probably be tempted to ride high yielders like that to maturity, and then use the principle payback to pay down that debt. However, if I invested in heavily discounted low yielders, like BRK, then I'd probably cash out of that once it made a return trip to fair value.

Are you still tapping margin? I don’t use margin, but I’ve been thinking about doing what you did during future panics. But, I don’t have my margin game plan nailed down yet.

Yup. Agree with everything you’re saying. Comes down to those earnings, margins, growth rates, and multiples. Influenced heavily by interest rates, taxes, etc. We know what the earnings are. No one can convince me they have any clue what interest rates, taxes, profit margins or multiples will look like 10 or 20 years from now. All we can really do is look back at a hundred years of data and come up with a range based on long term averages. So if earnings will be around $220 this year, will grow 6% annually (being optimistic), and will be worth a 20 multiple in 10 years we’re looking at an S&P worth $7,879 in a decade. That’s about a 5% annualized return from today’s price (not counting dividends). Just gotta keep those fingers crossed that government won’t raise taxes, competition won’t create downward pricing pressures, productivity growth doesn’t remain as low as it has the last decade, and most importantly, that interest rates are permanently on the mat. If you look back at the last time interest rates were this low - in the 1940s - people believed rates had permanently reset to the near zero bound. Little did they know, the rates climbed and climbed for the next 4 decades. But, hey, let’s all say it together now, this time is different. Haha

Oh! Another fun fact to spook your friends with! When you have a minute check out the US’s total market cap as a percentage of worldwide market cap over time. Then check out Japan’s total market cap as a percentage of worldwide market cap over time. Something has probably gone a bit haywire when a country has less than 5% of the world’s population and produces a quarter or less of the world’s GDP, yet accounts for over half the world’s market cap. (Lets just say a healthy amount of optimism has probably been baked in to some prices.)

Yes, it’s easy to get distracted by S&P 500 fun facts - like the percentage of zombie companies (that couldn’t survive if interest rates returned to long term averages). Ultimately if you invest in the S&P 500 it comes down to: - dividend yield - growth rate - multiple at time of purchase and time of sell Over the next 10 (or even 20) years it’s very hard to predict what return an investor could expect. But, over the next 40 or 50 years the compounding of low fees and deferred taxes becomes pretty formidable.

I have a stingy friend who refinanced his mortgage via JP Morgan, and then he turned around and bought a bunch of JPM stock when it was cheap because he wanted to feel like JPM was paying for his house.

You're right, there's a big difference between the WeWorks of the world and a unicorn SaaS company doubling revenues every year with a gigantic untapped TAM. And, as long as more of the 10x revenue companies are unicorns than WeWorks then it shouldn't be a big concern. I do like this quote regarding 10x revenue valuations from the co-founder of Sun Microsystems from back in 2002: "Two years ago, we were selling at 10 times revenues when we were at $64 [a share]. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero research and development for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?" (Source: I pulled the chart and quote from an Almost Daily Grant's email)

Well color me impressed. That's a bunch.

@gregmal I feel like you rattle off more investments than Jim Cramer. Haha. How many positions are in your portfolio?

Oil is definitely in his circle of competence. He knows the industry data better than a lot of C level execs in the space. He has talked about oil a few times at annual meetings. He knows all the macro supply and demand trends over time. He knows how many active rigs are drilling. He calls them “straws”. He knows the estimated reserves underground. He knows the industry cost curve, etc. As you alluded, he projects a company’s average cost per barrel to get oil out of the ground and to market. He breaks everything down to the per barrel cost. And, he likes to buy the lowest cost producers when he expects supply to be tight. He said he was shocked when he read a company’s annual report one time and they didn’t provide their per-barrel extraction cost. He has made some mistakes in oil, though. You can’t copy his individual oil investments blindly. But, if you copied 100% of his oil investments you’d probably have more hits than misses.

Buckle your safety belts! ^ why I don’t own an S&P 500 index fund

One thing that actually does strike me as a bit "on tilt" for Munger is why he broke from he and WEB's usual approach to betting on an oversold industry (with an unclear winner), which is to buy a basket. It's a waste of time to speculate on the reason, but I can only assume that he has had Baba set in his mind as a long term winner from his prior conversations with Li. And, he probably has overwhelmingly positive China bias after his trips to China and his heroic BYD experience. Munger has a healthy amount of hubris - to put it mildly - so I'd honestly be surprised if he has read more than a handful of pages of the annual reports of any of the Daily Journal's portfolio holdings in recent years.

Very good question. Depends on your time horizon and investment appraisal abilities. If you have eff-you money and can comfortably live off the annual dividends from the Vanguard All World index then just set it and forget it. (You can’t really get anymore diversified for the money than that.) If you’re an amateur investor with a 50-year horizon and plan to dollar cost average for the rest of your career then continuing to invest in the S&P 500 (and never selling when it tanks) is probably about as good as you can hope to do. Today’s high valuation will be barely detectable on a historical chart 50 years from now. The cost and tax benefits of buying and holding a continuously evolving group of America’s 500 strongest companies will almost certainly beat any other tactics long term. Plus, you’ll get to spend your life doing whatever you most enjoy rather than stressing about individual investment decisions. If you want to beat the S&P 500 long term (after taxes and fees) then you have to invest in assets whose value will outpace the value of the S&P 500. Therefore you have to be able to correctly appraise the value of assets, pay a reasonable price for them AND have the temperament to hang on to the investment when Mr. Market tries to convince you you misjudged it. (Not easy!) I think Bloomstran laid out the clearest explanation I’ve ever seen on how Buffett and other value investors consider investment opportunities (in terms of earnings, growth/return on equity, earnings multiples, etc.). I believe it was his 2018 annual letter, but it could have been the year before or after. Bloomstran creates simplified financial statements comparing the S&P to his portfolio to make the point that his portfolio has higher cash flow margins, less leverage, higher roe, a lower PE multiple, and therefore better long term prospects than the S&P. And, I think that’s the ticket. If you think the S&P is dangerously overvalued then invest in assets that aren’t. Personally, right now I don’t own any S&P, and I prefer Vanguard’s all world index excluding the S&P 500 (VXUS). I think the earnings and dividends will chug along in similar fashion to the S&P, however, it has been selling for a much lower multiple than the S&P in recent years. I picked up a pretty big chunk of the VXUS back during the 2018 interest rate tantrum, and it has been slightly outpacing my expected 8% to 10% annual growth ever since. And, these days Vanguard is even advising having 40 to 50% of your portfolio invested outside the US (because of the US’s lofty valuations). In summary and in summation, buy low, sell high and never lose money.

Here’s a famous 1999 article in Fortune where Warren Buffett predicted returns for the next 17 years. (Spoiler alert, he nailed the prediction.) And, more importantly, he lays out all the key factors you need to consider to make the prediction. In short, don’t expect the next 20 years to look like the last 20. https://archive.fortune.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm