Munger

The point of emphasis from Howard Marks verbatim: Bottom line: anyone who invests today in a pro-risk fashion out of belief in the recovery must be confident he’ll be agile enough to take profits before the long-term realities set in. I know for certain I'm not that agile...I'll happily wait for the fat pitches/great margin of safety, fully recognizing the market could go up while I wait for the long term realities to set in... In the meantime, I do search for great investments...tough sledding on that front right now. Further -- can't recommend the Howard Marks memo enough...outstanding -- a must read. Best.

I had to move on when I read the assertion "inflation is wealth redistribution." Inflation destroys the masses. And deflation is not a bad thing. Folks who speculated with debt and/or lived beyond their means need to be accountable -- this is capitalism. Deflation also clears the system of bad debts, restoring the economy to a firmer foundation from which to grow. Hard work and thrift would be restored as virtues in our country. No one ever mentions the massive downturn in the US economy post WW1 because the pain (which was significant) was over quickly and the economy then moved forward.

Of course Buffett is correct. But you can only afford to ignore the macro when Mr. Maket is offering a high margin of safety. Buffett has always said that the three most important words in investing are....margin of safety.

Parsard -- there was headline fear but reality is GDP barely declined. I think the perception of blood in the streets was driven by the fact that America hasn't experienced any real economic blood in the streets in a very long time. In my opinion, the lack of perspective and whining was stunning relative to the actual pain. Everyone thought (and continues to believe) that after a small pause, the good times should just continue to roll!!! GDP declined 32% during the Great Depression -- now this is pain my friend...true blood in the streets. I firmly believe this scenario is very possible at some point over the next 5-10 years.

(2) this increase in cash in circulation from government buying treasuries back from insurers, pensions and banks will force them to invest in other marketable securities, pushing up asset prices, creating asset-based inflation This is crazy talk. First -- QE doesn't force insurers, pensions, and banks to do anything...they can and will sit on the cash or buy more treasuries as they are doing now and have done in Japan for 20 years. Further -- ASSET BUBBLES ARE NOT SUSTAINABLE by definition. Asset based inflation MAY delay the day of reckoning but will make the ultimate pain far more horrific as the debt will still exist (and must be paid off) after asset values collapse. (3) this inflation will reduce the debt/assets and debt/GDP ratios of the country. Any lender will hurt, hurting the wealthy. Repeat -- asset inflation driven by cheap money (i.e. a bubble) is not sustainable -- solves no problems. Sorry -- more easy money, inflating asset bubbles, adding more debt to an already over-levered system solves no problems. Wish you the best with your approach.

I grew up in midwest (live in chicago now, cleveland originally). There remained a sentiment that throughout it all, the recovery was jobless and only benefited rich. The housing bubble was a mass hysteria -- more in some parts of the country than others but the country was broadly infected by the delusion that buying a house was the road to riches for the middle class. -Credit card debt is at 8 year low. Credit card debt is same as it was 8 years ago The article goes on to state -- " the foreclosure crisis could be helping to improve the timeliness of credit card payments and lower balances. When people don't make mortgage payments, he suggested, they have a short-term cash boost." Not exactly a sign of financial health. And here are some facts: In 1929, household debt as a % of GDP reached app 100%. During the period btw the Great Depression and WWII, declined to approximately 20% of GDP. Further, household debt did not again pass 50% of GDP until 1985! Now let's see where we are today: Household debt as a % of GDP reached 100% again in 1Q09. At the end of 1Q10, household debt as a % of GDP totaled app 93%. The US consumer has not de-levered in any material way -- we have a long way to go! I think you're wrong here. No -- value investing is based on absolute value. There is no debate. Playing on the greater fool is a different story. You study up on it. How many have there been? Great sample size. Do you really believe the accuracy of the analysis is a function of sample size?? The accuracy of the analysis is based on the math and the numbers as they exist today. What do you think will happen if "Ben" buys back every treasury, and there are none left? Each and every bank in the US would immediately stop lending (issuing new loans) the minute Ben announced his intentions and the economy would collapse shortly thereafter. Further, every foreign institution would immediately dump existing holding of ALL US debt -- chaos would ensue and the US as you know it today would no longer exist. Stocks would collapse. What do you think would happen if tax rates went to 0% and government just printed money. See above. At some point, fiscal/monetary stimulus has an effect at margin. Do you really believe easy money is the solution to our problems? Inflating another asset bubble? Adding more debt to an already over-levered system? Also, private sector is adding jobs strong Those hiring numbers are terrible.

-Ever since bush years / 2002 recession, average joe has not felt optimistic about economy...this is a long time (about 8 years) to pay for excess of tech years. Ahem -- during this period, we experienced the greatest housing boom/bubble in the history of the country. -Credit card debt is at 8 year low. Credit card debt is same as it was 8 years ago On what measure??????? Regardless, unemployment is at 30 year highs. -recent WSJ article: $2 trillion cash on S&P 500 balance sheet. Let's talk about cash net of debt. relatively low interest rates, investing is relative. True if you follow the greater fool theory. Value investing is ABSOLUTE, always and forever. Quantitative Easing will spur inflation. Study up on a balance sheet recession. Banks have already taken their loan losses. Could not be further from the truth. They are making huge spreads right now with rates at 0%. Spreads in fact are declining. And new regulation will hit profit margins hard over the next few years. Also, private sector is adding jobs strong In which country?

and only hindsight will provide the answer with any certainty, This statement could not be more true -- so let's keep in mind with regard to all responses. Nothing personal here. But I think the US has done a much better job than Japan ever did at hacking away at the bad loans and restructuring financial institutions. They will also work their way through the backlog of housing inventory faster than could be expected based on the massive amount of inventory they were originally dealt. Corporations, the backbone of the economic system, are in better shape to handle future shocks to the system (which will come). The only reason why the economy stabilized was because the gov't expanded deficit spending to 14% of GDP (and continues to maintain) and the Fed employed large QE. Otherwise the economy and the banks would have collapsed. The underlying problems have not been fixed -- we were riding a sugar high that is now coming to an end. If fact, if gov't spending was normalized and interest rates were normalized, the economy would collapase today. Interest rates eventually will have a stimulatory effect as the yield curve continues to flatten...banks will have to start to loosen up their lending This completely ignores the reality that we are in a balance sheet recession and those willing/able to BORROW essentially do not exist. You can only lever up an income stream so far and we have reached max capacity -- a long time ago. A misguided increase in borrowing will only lead to greater disaster down the road. You don't solve a debt problem with more debt!!!!! institutions, especially insurers and pension funds will have to reach for yield and will allocate their large cash pools into other asset classes, including equities and real estate. This is simply the greater fool theory of investing. Things were pretty damn ugly from September 2008 to March 2009, yet the world didn't end. Headlines were bad but reality was not ugly -- peak to trough GDP decline of 1-2% is nothing compared to historical periods of stress. 9/11 comes to mind...yet what did the US do? Lowered interest rates. And this is the fundamental problem. Over the past 30 years, whenever the US encountered any problems, the answer was to lower interest rates -- increasing leverage NOT for productive investment but for stock/real estate speculation and increased consumption, continually pulling forward future demand -- effectively nothing more than a ponzi scheme. That game is over and the enormous debt levels still need to be paid. The math is the math. And as a result you will NOT invest in equities until such time as the macro issues are cleared? This statement is not true -- I will not invest until Mr. Market offers me a margin of safety that compenstates for the risks. The macro issues will not clear for at least 10 years. During that period, I fully expect to be investing aggressively in stocks at some point. Best.

here relating to deflation and economic uncertainty at the end of each year we have more fiat currency in the system. This is just how it is, and so regardless of interest rates there is more money supply in the economy. This statement is wrong. Study up on the difference between the monetary base and the money supply. For further help, study up on the results of Japan's "money printing," which will bring you back the to the difference between the monetary base and the money supply. And then go read up on a "balance sheet" recession and the implications for monetary policy. Now the strongest most perfectly positioned franchises that have built their moats over decades are so well connected into the main artery of the economy so that they are able to grow the amount of currency they bring in year over year. Regardless of spending habits, over time mathematically there is more and more money in the system so naturally shares in enterprises earning a decent return of capital will always gravitate towards higher lows. Sorry to be blunt but in the spirit of the real Mr. Munger -- this is more absolute crazy talk. And to me we are in a terrible time, and there is blood on the streets. You are entitled to feel what you feel. Relative to other historical periods of stress, there is no blood in the streets, not even close and stocks are not priced as if there is blood in the streets. Also, when I find a value play I always start buying it early because I want to get a feel for the stock "getting a feel for the stock" -- this is more crazy talk. But if you find a true value opportunity, you indeed should start buying regardless of the macro risks. They will keep expanding their monetary base until things get better. And those who bet on that side will be the winners coming out of this. I don't bet. Good luck. I honestly don't have time for this type of discussion but wanted to give the courtesy of a response since you asked. What I have said and will always say is that if you have the opportunity to invest in a good business with a strong balance sheet at a high margin of safety, buy hand over fist regardless of the macro. If the stock price goes down but the core business economics and balance sheet remain strong, buy more. I don't believe the current market environment offers a sufficient margin of safety, on average. And no, there is no blood in the streets. Best to you and good luck! -- sincerely hope your approach proves profitable for you.

Was fortunate to come across the writings/speeches of Buffett, Munger, and Graham at a relatively young age. Nevertheless -- still have made plenty of mistakes primarily by not demanding a sufficient margin of safety -- with that said, I have tried to focus on good businesses with strong balance sheets...so with time, many of my mistakes were recouped as cash flows ultimately increased. Strict discipline re margin of safety has come with experience -- Mr. Market is a tricky, sneaky bastard...I hate the guy, except when he panics.

Not sure if legal and wouldn't use this as a forum to disclose anyway. I do pride myself on patience and demanding a high margin of safety from Mr. Market -- no doubt I will miss upside trades but expect the approach will continue to serve me well over the long term. An example of stocks I was buying included SBUX, EBAY, WFMI, MSFT, and PCLN. Even then, I did not believe the margin of safety was a no brainer in any of those stocks. I did believe the risk/reward was in my favor -- high margin of safety. I bought the stocks without any specific price target in mind. And with the possible exception of EBAY, I don't see any of those stocks offering a great risk/reward at the moment.

End of 2008 into 2009 -- and even then, I was only 70% invested...if more stocks (of good companies) fell to trough valuations consistent with prior periods of stress I would have been fully invested. Stocks bounced sooner, faster than I expected (and if truthful -- sooner, faster than virtually everyone else expected for that matter). Still made a lot of money with only 70% invested.

But, how do you know that these lows will probably never again be seen in our lifetime, if you are 30 years or older. I don't know. I readily admit that I have no clue if the lows have been seen. What I have said and continue to say is that stocks are not attractively valued on an absolute basis -- alternatively the margin of safety is not sufficient. Is the end of the world at hand? No idea. But you shouldn't think for a moment that stocks are priced for the end of the world. But the US is at least working its way out of all this This statement is false. Not only is the US not working its way out of the current mess, the problems will be compounded when Japan and Europe experience further stress. you think that Templeton bought his boatload full of stocks in the depth of the Depression because he thought he would be wealthy and right in 3 months? one year??? or never?? If you didn't think the US was coming to an end, stocks offered an enormous margin of safety on MULTIPLE occasions during the Great Depression.

Also -- how could anyone possibly say there is "blood in the streets" when the stock market is up 50%+ from its lows...c'mon.

The current environment is not "blood in the streets" -- not even close. No one believes a depression is possible. Valuations are still very high compared to historical periods of stress. Current valuations do not offer an attractive margin of safety, on average. Investing in long duration assets with interest rates at record lows without a huge margin of safety is a fools game. Trading on the basis of a yield arbitrage leading to a great fool buying higher than you -- might work but who knows...good luck. To compare the experience of 2008 into the early part of 2009 to the Great Depression suggests a lack of perspective. Valuations never got near as cheap as experienced during the Great Depression. Peak to trough decline in GDP was only on the order of 1-2%. If you find a great investment with a high margin of safety, buy hand over fist. Otherwise -- don't try to be a hero in this environment. Large cap equities are not attractive on an absolute basis, no matter what Bill Miller says in an effort to save his business.

I agree with Prem's positioning. The math shows that deflation is almost certain, at least over the next 3-5 years.

To quote the great Buffett in Snowball -- "Interest rates are to finance as gravity is to physics" Translation -- anyone investing in a long duration asset (e.g., stocks, real estate) at record low interest rates better have a high margin of safety. At some point over the next 30 years interest rates will rise sharply, creating a tremendous headwind for returns on long duration assets. Large cap stocks may indeed prove a great trade if the greater fool theory plays out -- personally I have no clue. But from a true Buffett/Graham perspective, no way -- modest returns at best from a long term investment. The same holds for real estate -- anyone buying real estate at record low interest rates with the hope of meaningful capital appreciation over the long term is severely misguided. Best.

As always -- this is what makes a market and the investment process so fun -- I see it very much different. Risk of a 10% downturn in the market is almost always present. Hence, when Prem compares the current situation to the Great Depression or Japan and declares the financial crisis not over, I personally don't believe he is hedging against a 10% decline the market. Best.

Enjoy... What environment are you positioned for today? PW: The two historical periods we believe are relevant are the U.S. in the Great Depression and the Japanese experience over the last twenty years. In Japan, nominal GDP remained flat for 20 years even though total debt as a percentage of GDP went from 50% to 200%. People will say it’s different this time and that that can’t happen in the U.S. Maybe, but I remember being in Tokyo in 1989 and people were saying the same thing. It won’t be that bad because we have high savings rates, or because the Keiretsu cross-shareholdings provide stability. Look how that turned out. The economic story was similar in the U.S. in the Depression. After falling dramatically, nominal GNP came back up at the end of the 1930s to where it was in 1929, so there was no growth for the entire period. If not for the war, that would have lasted for a longer time. So we don’t believe the financial crisis is over. After 20 years in which most developed countries saw leverage going to record levels, we think there are many, many years of deleveraging to go. Governments have tried to step in to mitigate the pain of that process, but as you see already in Europe, attention is turning to cutting spending and raising taxes. We expect after the mid-term elections to see much the same thing in the U.S. With a $1.5 trillion deficit and near-0% interest rates, there aren’t many bullets left. Our conclusion is that the economy either stays relatively flat as it de-levers, or the economy slips and the resulting crisis of confidence contributes to a double-dip recession. With that cheery prognosis, what’s an investor to do? PM: What we’ve done is position ourselves not to give back the significant gains we’ve had. We like the stocks we own, such as J&J, Wells Fargo [WFC] and U.S. Bancorp [uSB]. But while we’re holding on to those, we’ve increased our equity hedge ratio as of June 30 to 90%. Those hedges are almost exclusively in the form of shorts on the S&P 500 and Russell 2000 indexes. We’ve trimmed our corporate bond portfolio significantly and have added some to our municipal bonds, which provide a nice stream of income for us. We tend to focus on bonds that support essential government services, say funding the Los Angeles airport, where we’d expect the U.S. government to step in if there was a problem. Our cash position in the insurance-subsidiary portfolio is now about 15%, and is building up again. What we’re basically doing is battening down the hatches and just being very careful here. If the stock market takes off and interest spreads come down even further, our performance might lag for a year or two. But in the spirit of building our company over the long term, we’re willing to take that risk. Are you at all concerned about inflation and rising interest rates? PW: Right now we’re more concerned about deflation, which would reduce Treasury rates even further. If we have a repeat of the U.S. in the 1930s or Japan over the past 20 years, long Treasuries could keep going down – or at least stay very low – for some time. What advice would you give policymakers confronting the environment you fear? PW: There are no easy answers, but I generally believe that the more we allow the economy to naturally adjust, the faster we come out of it. In the U.S., housing starts have gone from 2.2 million per year to 500,000, which is the type of thing that has to happen for the excess inventory of homes to ever be digested. When you’re working off way too much debt in the system, there are no short term fixes for that. I’m not a long-term pessimist. The U.S. and all of us are going to survive and the economy will come back. But I do think we’re on dangerous ground here.

No -- he pulled completely out of the market...well known fact by anyone who has spent the time to study Buffett.

And still surprised that Prem eliminating essentially all exposure to stocks on a net basis has not gotten more mention on this board.

I love this quote, its one I reach for when my knees get a bit wobbly - Warren Buffett - "An argument is made that there are just too many question marks about the near future; wouldn't it be better to wait until things clear up a bit? You know the prose: “Maintain buying reserves until current uncertainties are resolved,” etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear and you pay a very high price for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values." Let's remember that Buffett moved entirely to cash in the late 60's/early 70's -- brilliant move. If you find a great company with a strong balance that Mr. Market is offering to you at a very low valuation (i.e., very high margin of safety), buy boatloads of the stock regardless of the macro -- otherwise, be careful my friends.

So many of these "high quality" mega caps that many talk about have a big issue: ego and incentives of their managers; can accomplish anything and best to expand the corporate empire. It is especially true today since many of these have grown rapidly in the recent past so they cannot accept the idea of being stuck with slower growth. To them a dividend or share buy-back is just like throwing a bone at the dog (shareholder) who is crying all the time. You increase it a little bit once in a while to keep the dog happy. Because of that, I believe that looking at earnings yield is inadequate since you don't know what rate of return will be made on retained earnings. Smart man Cardboard. Very accurate observation. These managers have egos the size of Texas and are dumb as a box of rocks re creating sustainable shareholder value.

About 85%. And based on Prem's positioning, I should be holding more cash.

Could not agree more. And despite the INSANE valuation, complete waste of time, money, and angst trying to short. Almost anything remotely associated with "cloud computing" is a bubble. VMware -- $880 million of FCF in FY09. Market cap = $32B Netsuite -- FCF negative; Market cap = $1.2B