merkhet
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Posts posted by merkhet
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I love The Walking Dead, but I agree that they make some colossally stupid mistakes...
This season was a little slow, but MAN did they make up for it in the last few episodes...
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Hasn't she considered that BRK hasn't risen as much as the market since the 2009 lows because it didn't fall as much from 2007 to 2009?
I think that the above is what bothers people the most. (Or perhaps I'm extrapolating from my own view.) It's hard to argue that a person of Alice Schroeder's ability or experience would have missed this obvious logical fallacy, and so the remaining default position (by virtue of Occam's Razor) is that she has an agenda.
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I actually started rereading it again today for the umpteenth time. Can't remember the 2-week call option thing, though, so will have to get back on that.
The OP is referring to the Marriott situation starting on page 233.
I haven't gotten involved in too many spin-off situations, but my sense is that while the price/value discrepancy has narrowed a bit since more people are looking at these things, the structural issues that create the discrepancy in the first place still exist and can provide good bargains.
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I think the other scenario that can result in permanent capital loss is if you need access to the capital during a period where volatility has you sitting on a loss. For the professional managing OPM that could arise from redemptions, or for the individual investor just from a need to generate cash for living expenses, especially upon retirement. In a well diversified portfolio this might not be as much of a concern, but many on this board talk about taking large focused bets.
To go back to what started much of this discussion, how much effect do macro issues have on the IV of a company? I would say that it depends, with some companies especially financials, being very sensitive. So if I have a large position in a company or sector with high sensitivity to macro issues, and I hedge, I think I'm hedging against both volatility AND risk. If the PIGS all default within the next 5 years, I believe that the IV of many companies will be permanently impacted and I want to protect against that.
If you're not managing OPM, then capital access is another scenario where you could create a permanent loss from a temporary condition. If you're managing OPM, you're not going to get a permanent loss from a temporary condition due to redemptions as the manager -- well, actually, you might have some "loss" based on lost opportunity from incentive fees, but that depends on your definition of loss.
I actually also agree with you in terms of macro issues. If you buy a shipping company and China hits a wall, then you might have problems, right? I mean, sure, over the long-haul, shipping will probably pick up again, but it's also possible that you don't live long enough to see that because you trip a convenant or two in your debt agreements. So macro concerns do come into play with certain investments through interaction with both the income statement and the balance sheet.
The question for me isn't whether you should consider macro, but rather how you should consider macro. One way to consider macro, in the example above, is to not purchase a shipping company where that's a possibility. Another way to consider macro, in the example above, is to find a shipping company that has non-recourse leverage to each ship with long-dated or at least spread out maturities on their debt. Another way is to hedge it out on your own terms either by hedging the company itself, similar companies, a basket of similar companies, broad market exposure, etc. (In terms of most narrow to most broad, which I believe also matches a continuum of most directly correlative to less correlative.)
That said, does anyone know how long it took Argentina, Mexico, Russia, the Asian Tigers, etc. to clear up their issues after default? Neither the natives (Argentinians, Mexicans, Russians, the Asians) nor us, the Americans, are in particularly dire straits as a result of their respective defaults. It turns out that life goes on even after "armageddon" and "catastrophe" so long as you didn't die in the storm. (Jim Collins' new book "Great by Choice" has some interesting insights into companies that grow slowly and hold lots of cash -- they tend to do well in chaotic environments because they can survive.) In fact, as your competitors die off in the storm, you may find yourself the recipient of market share growth.
So can intrinsic value of companies take a hit initially if the PIIGS default? Sure, that's possible. It depends on the company and how they do business. If you're buying See's Candies @ 50% of intrinsic value, though, it would be silly to spend time wondering if the PIIGS will default, leave the Eurozone or riot.
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Hmmmm, that is a very interesting point merkhet. How you do differentiate the two? I agree that some of what I'm hedging against is volatility, but I'm not entirely sure how to separate risk vs. volatility, especially if you're talking about timeframes of 10 years or more. If I take a position that loses 50% of it's value, and it then takes 15 years to recover, is that just volatility?
Risk tolerance, to me, is about the risk that you'll have a permanent capital loss. That could mean that the equity becomes worthless (worst-case scenario) or that intrinsic value crosses below your purchase price. Volatility is any fluctuation in the market price that does not implicate those two situations.
It's tough to discuss this in a vacuum, so in the situation you pointed out, you'd have to describe the company.
If you buy a cigar butt that has no growth (worth maybe 8x to 10x) for a 50% discount, and it falls 50% upon purchase, then the market price is at a 75% discount. If it takes 15 years to reach intrinsic value, then your rate of return would be okay but not spectacular, right? Doubling every 7.5 years based on Rule of 72 indicates a slightly less than 10% return.
If you buy a growth company (worth somewhere above 10x, maybe 15x to 20x) for a 50% discount, and it can compound its intrinsic value at 10%, then you have a wholly different story. You'd be purchasing a company whose intrinsic value @ initial time + 15 years would be roughly 4x the intrinsic value @ initial time. However, because you were purchasing the stock at a discount to the intrinsic value @ initial time, you'd be getting an 8x return over 15 years. That's about a 15% annual return, which is much more respectable.
That said, I'd be willing to bet that a growth company that can compound its intrinsic value at 10% does not stay undervalued for 15 years -- volatility notwithstanding, someone realizes after 4 years that the intrinsic value is at ~1.5x the initial value, and the market value would likely converge quickly thereafter. FWIW, if it only takes 4 years to converge, you'd get about a 30% annual return.
So I guess my reply is that if it takes 15 years to recover, it's possible it's just volatility. But I think it's unlikely that anything stays undervalued for 15 years. Though I haven't really studied Japanese equities, and I'd guess that if it's happened before, that's the place where it'd have happened.
I'd also like to note that there's nothing "wrong" per se about hedging volatility. If you're the type of person whose emotional brain gets triggered when they see a stock they own trade down 20% over two days, then perhaps you want to hedge out that risk. It's like Odysseus tying himself to the mast. If you know that the sirens will call at some point, then it makes sense to plan ahead for that. However, I believe it's quite difficult to hedge correctly/intelligently, and for some with higher volatility tolerances, it's pointless to spend time thinking about hedging volatility.
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It's my only long position. My only short position too (short term put hedges purchased recently).
You sold off AIG, MBIA and WFC? Wow. I mean, I'm confident in Bank of America's prospects too, but dang...
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For example, after seeing merkhet's last post, I really wanna know every time he posts and like some of the other posters I sometimes don't check in for a few weeks.
Well, I don't know how useful that might be. It's possible that I'm just a blind squirrel that finds a nut every once in a while... :P
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That's exactly what I'm saying - he has basically set up BRK to be a massive version of BPL, where the "total portfolio" if you will is invested in A) Controlled Businesses, B) Equities, and C) a safety cash position. When he's buying equities, he doesn't care about the market because the rest of the "BRK Portfolio" is invested defensively. If Buffett was just investing equities (i.e. did not own controlled businesses), my guess is that it would not be 100% invested in the market - if it was, then I would be dead wrong about how he views general market valuation.
One thing I'd point out is that we must be careful to attribute the cash position and/or the recurring cash inflows to market hedging. After all, Berkshire is an insurance company that requires liquidity to fend against large cat losses. It's very difficult to know for certain how much to attribute to market hedging and how much to attribute to insurance requirements.
Perhaps there is no difference. If there isn't, then I would wonder why BPL Buffett would bother buying a control stake in companies when other opportunities were available in the open market (particularly when you consider the small amount of capital he ran).
If you have a control stake, you can make things happen for yourself. For instance, some of us on this board own companies that have large cash positions and are overcapitalized. If you're a passive investor, you're essentially trusting in management to release and/or deploy those cash positions. If you're a control investor, then you get to call the CEO and say that they're going to release and/or deploy those cash positions, or they're going to polish their résumé. Recall what happened at Sanborn Maps with the collection of securities that they had -- Buffett seized control and was able to get them to distribute the securities in their investment portfolio.
AMEX was part of his category "Generals - Relatively Undervalued", which was his "pairs trading" category. I have no idea "why" he was worried about market risk - but if he truly wasn't, I don't see what the need was for offsetting the AMEX position with a short.
Well, a pair trade is a different animal than a market hedge. Buffett did both. (http://buffettfaq.com/#i166) I have no problem with the logic of pair trades, though I don't engage in the practice myself. However, we're now back to the question of whether Buffett hedged market risk because he viewed it as a "risk" per se or whether he did so because he wanted to blot out volatility for his investors. Now that I'm thinking about it, this would be a great question to ask at the Annual Meeting if one of us gets the microphone. :)
On an individual company basis I agree 100%. I'm thinking about it from a total portfolio perspective. Monish is the best example - he's a master at finding 50-cent dollars, but he went from a cumulative return of 365.2% as of 12/31/2007 down to 90.1% as of 12/31/2008, and now back up to 451.2% as of 12/31/2010. If you look at the graph on the attached letter, it took over 3 years (from June 2007 to December 2010) to make up for the losses in 07/08/09. That entire rollercoaster he was finding 50-cent dollars. What if by chance the Fed hadn't come in to manipulate the market? All I'm trying to point out is that from a total portfolio perspective, it's difficult to make up losses. Yes, someone could have put 100% of the portfolio in McDonalds back in the fall of 2008 and doubled his/her money while the market flat-lined, but nobody only invests in one stock or has the ability to anticipate such a return with such accuracy.
I'm only marginally familiar with what happened to Mohnish in 2008, but I think he had a few permanent capital losses. So that's a different situation than the one I originally posited.
Assuming he did not have permanent capital losses, then what he may have done in 2008 is horse trade a little. After all, let's say you're down 70% -- actually, let's make it 75% so the math is easier. Simple math shows you have to be up 300% just to break even -- again, a seemingly tough prospect. However, if you own A, B, C and, as a basket, they fall 75% and should be worth 2x what you bought them, you're probably still alright over the long-haul provided that your investors stick with you. It's also logical at that point to look around and find companies, say X, Y, Z, that have possibly fallen 90% during the same period, that are also worth maybe 2x from where they were before the fall.
Assuming that the Fed doesn't step in, then at some point, I think we still get back to normal. The question is how long this takes and whether your 25 cent dollar will provide you with a good enough return. Here, I think we see the divergence in usefulness between cigar butts and fallen growth stocks. If you're a cigar butt and it takes longer to get to intrinsic value, then yes, you are somewhat screwed. However, if you're buying Charlie Munger-type growth stocks, then they only get better over time. If you're buying a company with a return on equity of 10% that grows 10% a year for half of book value, then it's merely coiling your spring for the eventual return to intrinsic value, no?
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Looks like it was Oklahoma.
We're better off without Oklahoma anyway -- Hook 'Em Horns! :P
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They are referring to the background of the video.
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So let's see if I understand this correctly, because I think a lot of conflict on this board is a result of misunderstandings and not real disagreement... nonetheless, apologies for the long post.
BRK Buffett invests behind a corporate veil, and as a result, has a natural hedge in the form of free cash flow pouring in the door on a daily basis as well as the ability to keep operating businesses marked at book value as oppose to book value. Let me explain....If you own 100% of Burlington Northern, it's on the books at $20 billion and you earn $2B, your ROE is 10% regardless of what general market is doing. Now let's say you only own 10% of BN common, or $2 billion worth of the company - further, let's say you receive 50% of your share of annual earnings ($200 million) in the form of dividends. If your investment stays flat, you earn 5%, or $100 million on a $2 billion investment. Well if the market re-values your investment down to $1.5 billion, your return for the year is then -20% including dividends. Yes over the very long run the investment, whether 100% or 10% owned, should generate the same return - but one must admit there is a rather stark difference between the two types of operations. BPL Buffett didn't try to allocate toward "Controls" for no reason.....
BRK doesn't have to care about general market risk for two reasons: (1) they have free cash flow generated from operating companies that operates as a periodic inflow of money and (2) their wholly-owned companies are marked at book values as opposed to (what I assume you meant to write) market value. Those are fair statements, but it kind of goes against the whole BRK Buffett doesn't care about market valuations theory. In fact, he might still care, but it's irrelevant to him because of (1) and (2).
I would disagree that there is a "stark difference" between the two types of operations. I mean, even you say that "over the very long run" the investment should work out the same. That's sort of the entire thesis of Graham and Dodd, right? The question is whether short-run deviations from the long-run matter... They might. They might not. I fall in the latter camp...
Perhaps BPL Buffett allocated to "Workouts" in order to appease clients (i.e. for "business risk" purposes), but I think not. He specifically says in his letters that "Generals" were at risk of declining "in sympathy" with the market in the event of a general market decline. Also - leading up to his October 2008 op-ed "Buy American. I Am.", Buffett was 100% in US treasurys. If the greatest investor on the planet did not care about the general market, isn't it likely that he would be able to find a place to invest $500 million in a $13 trillion equity market?
What you say here is, again, very true. However, I wonder about the "in sympathy" statement. He was definitely worried that his Generals might decline in sympathy with the market, but it doesn't say why he was worried. I keep going back to AMEX, but if he was really worried that AMEX might decline further after his purchase, then 40% is quite a large allocation, no?
Additionally, I think the fact that he was in 100% Treasuries could mean that he either (1) couldn't find a place to invest $500 million in a $13 trillion equity market or (2) couldn't find a good deal in a $13 trillion equity market. The two have the same phenotype (outward appearance or outcome) but vastly different genotypes (inward cause)...
And, of course, lastly, he might not have had his money 100% in Treasuries because markets were "expensive" but rather because "risk was rampant." The two often coincide, but they need not be a 100% overlap.
Even though I do manage OPM, I don't care one bit about their tolerance or lack thereof for volatility. All I care about is the math of generating superior long-term returns by losing less in market declines - i.e. one must generate a 100% return in order to break-even after losing 50%. As a simplistic example - I'd rather return 50% of the market return on the upside in order to generate 50% of the market return on the downside. So if the market returns 10% and I return 5%, then the next year the market declines 20% and I decline 10%, I've returned -2.8% per annum versus -6.2% for the market. Going a step further, it would be my hope that coming off a low such as after a 20% decline, I would be able to strongly outperform the market on the upside because the starting point would be from attractive general valuations. In hindsight, the 2011 low would have been the perfect opportunity to get very aggressive and outperform through now - I just did not think that was the opportune time due to the reasons I've cited ad nauseum. My strategy worked to a T last year, as I strongly outperformed on the downside, and kept up decently in the rally due to increasing net exposure at the bottom (I just was not aggressive enough as I said earlier, in order to really outperform).
Again, there's nothing I disagree with here, except for the following -- implicit in your example of a company that falls by 50% and has to generate 100% is a theory that generating 100% is a hard, possibly Herculean, task. And generally that statement might be true. However, I think the numbers suggest a "logic" that is out of touch with... "reality" logic.
If I buy ABC for $20 a share, and I know that its intrinsic value is $40 a share, that's a pretty good deal. If the price then drops to $10 a share, I've suffered a 50% loss, and you're correct that I need a 100% gain just to break even. And yet, we are not quite operating in a vacuum, because while it sounds difficult to get a 100% gain, the stock's intrinsic value is still worth $40 a share or 400% the current share price.
Does that make sense? I re-read it, and I'm not sure it's all that clear to anyone other than me. When you're looking at just the stark percentages on their own, then it does seem like a 50% drop is terrible because it requires a 100% increase to break even -- however, that doesn't take into account the magnitude of undervaluation. Sure it might take 100% of increase to break even, but that seems somewhat meaningless if you're looking at a 400% increase from the 50% initial drop, no?
Now, a permanent capital loss of 50% is an entirely different story, but I'm not sure that's what we're talking about at this juncture, but please correct me if I'm wrong...
Cheers!
[Note: I edited to add "Cheers!" because I'm worried I sound too confrontational, and I've always felt that Parsad's signature of "Cheers!" takes a bit of the bite out of any post -- ;D -- though I'm not sure that's his intent.]
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Basically what this entire debate comes down to is some investors worry about the general level of the market (myself, Grantham, Hussman, BPL Buffett) and those that do not (Moore, Peter Burke, Berkshire Buffett).
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With regard to whether general market valuations matter - as always, I cite BPL Buffett who intentionally allocated capital to "workouts" based on where the general market was trading. This point isn't really up for debate, as he explicitly writes about it in his early letters, and it is discussed in the "Snowball".
bmichaud,
What you're saying here is right, but I would pose the question of "why?" Why does Berkshire Buffett not give a hoot about market valuation and BPL Buffett did?
I would posit that BPL Buffett allocated to workouts based on the general market level because he was worried about business risk and not investment risk. He was worried about the emotional sensibilities of his clientele and knew that he could put 40% into AMEX if he could use market-neutral (activism, arbitrage, etc.) methods to blot out most of the volatility associated with the 40% allocation to AMEX.
Some posters have said that hedging is always wrong, no matter what. I've always been of the opinion that it's more about the individual's risk tolerance than anything else.
Santayana and bmichaud,
I don't know if you guys are individual investors or if you're managing OPM. I'm sure you indicated one way or the other in the long thread about market values, but to be completely honest, it was very long and I wasn't terribly interested in the discussion, so I only skimmed it. :P
The one thing I'd point out is that I think you both might share a sense that thinking about market valuation or macro is about risk tolerance. It's not. It's about volatility tolerance, and that's a separate thing entirely.
If you're managing OPM, then thinking about volatility tolerance might be good -- depending on your client base. If your clients are flighty, then you might want to blot out volatility. If your clients are not, then you might not want to bother.
If you're managing your own money, then the analysis is the same.
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Somewhere between 14% and 15% for me. Roughly 10% cash -- 20% cash if you count Fairfax as closet cash, as I do. I actually find it odd that my cash/"cash" percentage is so high...
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Wolfram Alpha has an options calculator?
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Full-year results were about +2.6% or so. Avoided the selldown during the summer, but Bank of America was definitely a drag on results.
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Plan -- there is one that includes Orchard and one that does not.
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Does anyone else think that Eddie Lampert would do well to execute one of Bill Ackman's REIT spin-off ideas in the context of Sears Holdings? (See the presentations on McDonald's, Target -- possibly J.C. Penney in the future.)
I see no reason why he can't spin off a REIT-type company for the real estate and set some long-term lease rates with inflation-indexed rent increases for the OpCo.
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Has anyone else realized that the warrant symbols in their Google Spreadsheets have recently stopped working?
I can no longer get BAC+A to pull directly from Google... anyone have a workaround?
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I found it interesting that he called BofA a "crappy" business at ~26min. I wonder why...
I think he doesn't like black boxes. Also, I don't think Warren buys attractive securities in unattractive industries/businesses anymore -- remember that after US Air and Solomon Brothers, he vowed never to do that again.
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Smallest $70 million
Largest $55 billion
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I'm afraid we might be talking past one another on this one...
Regarding Munger and BAC, I only have the frame of reference from listening to him before Buffett made his "sweetheart deal," and what he said was unkind period.
I believe the frame of reference is slightly erroneous though...
I know Charles Munger hates the management team behind this company, and he said so less than six months ago.
He didn't say he hated the current management team -- he merely said Bank of America did stupid things during the crisis. Even assuming that you could equate "doing stupid things" to "hating the management team" -- the management team is different now. That's all I was pointing out.
Whether Munger is talking his book or not post-investment seems irrelevant to me. (FWIW, I'd give Munger the benefit of the doubt that if he hated the investment, he just wouldn't respond.) *shrug*
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Anybody have any details on this IPIC Tender, seems like these guys are either a hoax or have seriously gone out of their way to protect their privacy...
A PE Firm comes to mind, or maybe a Sovereign Wealth Fund... Surprised nobody has picked up on this.
I saw this, but I have no more information than anyone else. The random Travelzoo offer a few months ago comes to mind...
A Delaware entity search indicates that IPIC Group Ltd. was formed on October 4, 2011 of this year, but I must confess that my cyber-sleuthing skills end here, lol.
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Munger--talking his book if that's what you're saying--and Buffett do not hold the power or the influence to stop the RUN, if the RUN has been decided to take place at a higher level than they. Warren is secure in his investments with guarantees made behind the curtain which none of you mere mortals will ever have buying NAKED EQUITY! >:(
It's a WILD SPECULATION, so go have fun with yourselves watching the sea change of psychology according to the masses tied to traditional institutions which once bound them!
The masses have been ROBBED in the Crime of this Century, and they're not as stupid as you smart asses think!
Look at my shoe shine boy eating your lunches!!!!!!!!!!!!! ;D
I must admit, I'm not as much of a smart ass as you may think. You said that Munger didn't like the management team. I merely pointed out that the management team he was referring to was the old management team @ the Q&A. The only reference -- talking his book or not -- that Munger has made re Moynihan that I could find was the quote I posted here about Moynihan getting back to basics.
Why so worked up?
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I know Charles Munger hates the management team behind this company, and he said so less than six months ago. Much to his chagrin, maybe not, Warren bolstered a competitor's financials shortly after that.
Are you talking about the Munger quote during his Q&A? This is what he said...
Look at the troubles Bank of America got into. Talk about a disgrace in terms of decision making. Of course, there are risks with these companies.
I think he was talking about the old Bank of America management team (Lewis). Remember, there was another Bloomberg interview recently where Munger said the following re Moynihan...
"He has the right attitude, back to basics."
Where are people in this forum from?
in General Discussion
Posted
Houston, TX