Munger

First, the company increased its short positions on the general market to hedge 93% of its equity portfolio. It shifted nearly half a billion dollars into long-term U.S. Treasuries this year. Most disturbing of all, Fairfax purchased $23 billion worth of protection (notional value) against the threat of deflation in the coming 10 years. I'm surprised this didn't get more notice on the board. Prem has essentially eliminated all exposure to the equity market on a net basis. I'm clearly not bearish enough as I still have some exposure -- between 10-20%.

You don't see any large cap stocks that look good for long term buy and hold? I do think that if you buy and hold many of the stocks you mentioned for 20 years, you will likely earn a reasonable return over that period -- with much of the benefits realized during the latter part of that period. The difference between myself and Buffett is that new capital gushers into (and will continue to flow into) BRK's coffers every day -- so he is willing to accept (and in some ways must) a less than optimal risk/reward (or certainly less than he would have required during his early years) and he knows that if the great companies he is buying today sell off as part of a broader market downturn, he will have plenty of capital to buy more -- most of us don't have that luxury. Remember Buffett brilliantly pulled completely out of the market in the late 60s/early 70s and moved to cash because he didn't like the risk/reward. My personal hero, Charlie Munger remained almost fully invested and got beat up pretty bad during that period. At this point, I prefer to wait for Mr. Market to give me a better risk/reward. If I'm wrong -- so be it...I miss out on 7-9% returns (nothing that will change my life) and there will always be opps in individual stocks at some point in the future, regardless of what the market does. But if I went meaningfully long with prospect of earning 7-9% returns and the macro does prove as bad as appears likely, I'm destroyed and my life changes dramatically for the worse. So I'll happily sit on my ass for the time being and not try to be a hero. I would also add that anyone who takes the time to do the work on what I would call the "global balance sheet" and doesn't conclude that we are headed for a massive day of reckoning that could easily approach (and possibly surpass) the 1930s is effectively arguing 1+1 does not equal 2. The math is the math.

Anyways, I agree with Parsad that it's a good time to be a buyer of stocks. That's what makes a market. Honestly hope your investments prove highly profitable.

1/1/07 - 8/1/07 "Jim Chanos" = 553 hits 1/1/10 - 8/1/10 "Jim Chanos" = 54,600 hits

just to further point out the insanity 1/1/2007 - 8/1/2007 "buy real estate" (the supposed peak of the real estate bubble) yields only 210,000 hits 1/1/10 - 8/1/10 "buy real estate" yields 2,350,000 hits

thank you for bringing us back to reality cardboard

the absolute absurdity continues... "buy stocks" from 1/1/2010 - 8/1/10 yields 791,000 hits

opihiman shows a valid distinction in my humble opinion

moving from silly to insane

I have a hard time believing that. I require citation here. Opihiman2 -- if you type "buy stocks 2010," the result is 52,200,000. As the debate devolves into a matter of semantics and how cute one can be with a google search, we have entered the land of silliness.

now we debate semantics???? i'll take the higher road (it is much less traveled) and agree to disagree best

Munger, this community works best with positive contributions and that includes valid criticism. I was being honest -- Parsard is much smarter than what was nothing more than a flippant response. And I believe my most recent post shows the validity.

just to add to the comedy of the "google suggestion" "must buy stocks today" yields 113,000,000 hits

I've got an easy way to resolve this. Do an advanced Google search for a few of the words you've entered in the sentences below and add "2010". How many hits do you get? C'mon -- you're smarter than that my man.

There were very few articles on credit derivatives, the housing bubble, overvaluation in equities, the narrow spreads between corporate bonds and treasuries, etc at the time. This statement is just not true. Not sure how to resolve other than to agree to disagree. How many articles do you read about the US entering a massive depression in the next 5 years? Forget that -- how many economists or anyone in the mainstream believe a double dip is possible? How much do we see/read about the once in a lifetime opp in quality large cap stocks?

I remember very few, if any, articles making the same sort of arguments Prem was making before the credit crisis. You have got to be kidding me. There were articles every day about the housing bubble and a US consumer spending beyond their means. Everyone was aware of the risks but still didn't believe housing prices could decline while also believing the US consumer could go on forever. Reminds me of the environment we are in today -- while the risks are as clear as day, virtually NO ONE can bring themselves to believe a massive depression is possible in the US -- no one. The response I love most -- "the government will never let it happen." Same was true in 1998 -- everyone knew tech companies were valued at 60x earnings (at best) and in many cases 60x revenues...it was reported every day in the papers -- clear as day. Yet most still bought the stocks, never thinking a crash was possible or ever better, believing they would be the smart ones to get out just before the top. And in fact, stocks went straight up for the next 18 months...and then the music stopped. As for today, Sokol, Munger, and Howard Marks are among some the voices stating very clearly that the US faces major challenges that we will be fortunate to overcome. These folks are not influenced by the media, ever. I urge all to read Munger's essay "Basically, it's over" -- published earlier this year. I would add that the media report first what the people want to hear, because the more that's what they want, the more people read them, the more advertising revenues they get. Reality is that people read what they want to believe and hear what they want to hear. And no one wants to hear that their life will soon get a lot worse. Best.

Munger, Maybe you should take off your critics hat and offer something to the board. Just a suggestion. What you interpret as a critic, I view as my contribution. I believe most do not fully appreciate the magnitude of the downturn we will experience -- and only an opinion, just as everyone else expresses on this board. With that said, I firmly believe (i.e., have absolutely no doubt) the day of reckoning will be brutal and when that time comes, you will no longer view me as a critic. With that said, I would most def invest in a quality business at 3x FCF and debt free balance sheet even in the face of the macro risks. Only my personal preference but I would not want to buy a poor business in this environment unless readily realized liquidation value far exceeded current price. Best.

The world, the whole environment is going to change in that time period, making precise predictions pretty fictional. No one is making precise predictions. Anyone who takes the time to work through the numbers quickly sees the the reality that the debt problem is so large that the only question is when the day of reckoning occurs and how much pain is felt. Sure, if society learns to travel at the speed of light or some other radical development dramatically improves overall economic productivity, the problems may be avoided. Absent some currently unimaginable development, the only question is when and how much pain will be felt. Buying stocks at 10-15x FCF does not offer the apporiate margin of safety given the risks, in my humble opinion.

Sure he would. Some of mine: SSW, FBk, SLf, FFh (close enough), cfp, pd, mtl I dont recall any mention of "Quality" companies: Just low debt and cheap. I was more addressing the increasingly popular view that quality large cap companies offer a good value, which is not close to being true according to the standards of Graham and Schloss. And generally speaking, the market does not offer a margin of safety that would be appealing to Graham or Schloss. If you like to buy cigar butts and see the companies above as meeting that criteria, hope it works out for you.

Any study of Graham would conclude that he would not be buying a stocks at the moment -- the margin of safety is just not big enough. Schloss "liked to buy stocks below book value" -- do you know how low the market would have to go in order for quality companies to be trading below book value. The margin of safety currently offered by Mr. Maket is not near enough for Schloss either.

Kyle Bass interview on CNBC today very much worth watching in entirety. Replay can be found in the video section of the website. Bass understands the magnitude of the problem and correctly points out that Japan will like be the first domino to fall. In my humble opinion, the margin of safety currently offered by Mr. Market is not close to sufficient relative to the risks.

What I do not get about macro worries if say Inflation/deflation/double dip is that none of these events can be predicted with even say a confidence level of 50%. When the macro risks are extreme, you shouldn't put your head in the sand. Further, no one is saying not to invest in the face of macro risks. Rather, you should demand a much higher margin of safety from Mr. Market. Margin of safety is the foundation of Buffett's investment approach -- he has said numerous times that the three most important words in investing are "margin of safety." An expect 7-9% return (IF everything goes well) does not provide much margin of safety, if any at all. Moreover, Buffett didn't become the richest man in the world by investing when the expected return was 7-9%, especially when risks were abnormally high.

On the other hand for an investor with at least a 10 year horizon, I think it offers strong possibility of at least 8-9% annual returns over this period. Personally, I don't view as likely but certainly possible. As for the Buffett quote, I would just add. Buffett has also said to buy only when there is panic in the streets -- we are nowhere near such an environment today. Further, Graham often told Buffett he was insane to buy stocks at or above P/FCF 10x. So sure, if you can buy stocks at 3-5x FCF, who cares what the macro will do because the margin of safety is huge. At 10-15x FCF (while lower than the past 30 years), the opportunity is not that great, especially relative to the risk.

3. WMT current earnings are sustainable IMO, this is the biggest risk to the analysis. I can see the merit of a WMT investment but not the no-brainer that so many value investors assume. How sustainable is earnings/cash flow growth when US revenues will experience an extended period of decline -- there is a limit to cost cuts. Some will argue int'l growth will outweigh US but that math seems challenged. Also -- the earnings yield analysis seems inflated relative to economic reality. Let's just take FY10 (Jan end). CFO = $26.2B (with a $5B boost from favorable working cap dynamics) Cap Exp = $12.2B So FCF = $14 With a current $191B market cap, the cash flow yield equals 7.3% Adjusting for the working capital impact, the cash flow yield drops to 4.7%. WMT is probably not a terrible investment (and you may get a tremendous trade, but who knows). However, not the table pounding screaming buy that some value investors argue.

1) The programs can be changed long before the debt is a significant issue. How/when are the programs changed? And what happens to the economy when the spending related to the programs significantly decreases? 2) While the debt is higher right now, it's also nowhere near as high as Japan or a bunch of the european countries. System wide debt is very close to Japan. Also -- note the sharp difference between domestic and foreign financing of US and Japan gov'ts 3)The basic point here is that debt is sustainable for a lot longer than most people expect. Possibly true (no one can predict with certainty). But it is certain that the current budget deficits are unsustainable and when those go away (either voluntarily or involuntarily), the economy would collapse. Better to close the gap on own and on our own time frame (which will require significant pain) than have the changes forced upon us. This debt number is misleading at best. No -- debt is debt. It must be paid or default occurs.