Liberty

Thanks.

Out of curiosity, from what level were you shorting?

The thing that I worry about in "less crowded" investment areas is not the competition from fellow buyers, but the motivation of sellers. I think it is incredibly important to understand who is selling to you and what their motivation is. Without that piece of insight, for all you know, you could be the dumb money at the table. Absolutely (though the same thing is just as valid when buying, say, AAPL -- why are they selling?). Value investing stars always say "don't follow the crowd" "think for yourself", "do your own work", but it's actually much easier to follow the value crowd and invest after Buffett, Pabrai or Berkowitz or some great investor on this board has done the work and bought something (cloning, no bonus points of originality, etc). If you go out on your own and screw up, you'll have nobody to blame but yourself.

The way I see it, there can be two ways to make money. One is by getting the big things right, as tede02 just said. Cutting through the noise to see that company XYZ is undervalued and good things should happen to it over time or that company ABC is super high quality and should keep outperforming over time. Another way is to know things that other people don't know because they haven't done the work. So Michael Burry reading CDO prospectuses or some analyst spending a year sorting through Enron bonds might mean that they are almost the only people with that information, because it was hard to find and most people didn't bother. That's kind of the argument in favor of microcaps. They're too small for pretty much all funds and institutional investors, so very few people are looking at them. If you do, you might be one of the very few people with the info, so it's not priced in properly. I don't think these are mutually exclusive.

Liberty, One last question if I may: earlier in the thread you have said you are holding 0% cash right now. To imagine you holding 100% cash “on a few occasions” during the last 10 years is hard… I mean, you hold cash only if there is no investment that offers good value… And I can hardly think of any time in the last 10 years in which it was as difficult to find attractive bargains as it is today (with the possible exception of 2007)… So, could you please tell me when those “few occasions” have happened? Thank you! Gio It was non-market reasons. I didn't know what I wanted to own at one point, so I owned nothing. Or I wanted to move to higher quality companies because I realized that fit better with my style, so I cleaned the plate while figuring out my next moves. Stuff like that.

Well, I think it was Vinod who asked how my cash reserve would change if FFH, LMCA, and BH were at certain price levels… Anyway, let may ask you a question: how many times in the last 10 years have you held a significant amount of cash for an extended period of time? My point is: the problem is not to hold or not to hold cash, the problem is those who hold cash tend to always hold it, while those who are fully invested tend to always be fully invested. ;) Gio I've been almost 100% cash on a few occasions, but that's beside the point. We were not arguing that you should be fully invested or not; we were arguing that the decision to do so would be better if not based on unreliable macro indicators but rather on what individual opportunities you are seeing.

Who said it should be static? Sometimes you seem to argue against things that were never said... But glad our arguments seem to have influenced you and that you didn't wait for a lower Schiller CAPE or a happy Hussman or whatever before buying something you find cheap... ;)

Might be just me, but I think sharing short positions is the same as sharing longs. It might not be perceived the same way socially, but financially it's the same. And I think this forum is sophisticated enough to not take the layperson view that "shorts are bad guys who want to see America fail" or whatever. Michael Bury's a hero here in good part for his short bet. Shorts provide a useful service by uncovering frauds and pointing out overvaluation and such. I wish we heard more from shorts, even if it's not something I feel comfortable doing myself. Maybe others have a different point of view, though. But I'll point out that there are lots of short ideas posted on the VIC and it doesn't seem to be a faux pas.

I just liked it better, but think he's generally boring and long winded. He reminds me of writers from the 19th century when people had nothing to do other than read a book that was 3 times longer than it should be and was a combination of story, travel guide, etc. In Business Adventures, the Edsel chapter almost killed me. About 60 pages and nothing happens. Here's the synopsis - it was a crappy car and they didn't research it properly or roll it out properly. He just seemed to go on and on about uninteresting stuff, giving almost full dry biographies for random people tangentially involved in the action, and he tells you about a lot of things rather than showing them to you via dialogue or action (Michael Lewis can quickly let you know a lot about someone just by showing you the way they talk and describing them in action). Maybe it's just the writing showing its age... Business writing had to start somewhere.

I didn't like Go Go Years too much. Don't care for the writing and what he decides to focus on... The events themselves sound very interesting, though. I shouldn't have ordered three books by Brooks at the same time...

What if the things that were bought had goodwill on their balance sheet, and they themselves had bought things that had goodwill, and so on... Goodwill all the way down!

Good luck! Let us know how it goes.

Who argued for that?

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very true. So hard to predict these things. Often the reason you like something can be very unexpected. And it is generally very difficult to predict how you will feel about something. I think it's like investing. It might not be possible to know the outcome of a decision ahead of time, but it's not like nothing about the situation can be known; it's certainly possible to tilt the odds in your favor by thinking about it carefully, analyzing the situation, making sure you have all the relevant information (gathering evidence about the top choices, thinking of ways to do trial runs or find proxies (people who have done what you are thinking of doing) to gather more data to make a better decisions, etc), etc. I have a friend who told me once that she doesn't take any supplements (vitamins, Omega 3, etc). I asked why, and she said: There's so much information, a lot of it is contradictory, the science changes with new studies, how can you know what's the right thing to take? The thing is, by taking nothing, she's also making a choice. She's not actually avoiding the problem. It could turn out to be a very sub-optimal choice. If rather than think "I can't know for sure, hence I'll do nothing", she said "let's see what I can know, what seems most likely to help, less likely to do harm, and I'll do what seems best based on the best information I can find", she might be doing something different that has a higher chance of being closer to the optimal path, whatever that is.

Smallcap, on the human scale, the Earth seems very static, but on geological scales (the planet is about 4.5 billion years old), things are quite dynamic. The earth's crust cycles around quite a bit, and in comparison, biomass (esp. aglae and plankton, since 70% of the planet is currently covered in water and more of it was during warmer periods) grows incredibly rapidly (try to visualize how much biomass is produced over just 1 million years just in the amazon forest (to put things in perspective, what we consider 'ancient' history is maybe 2-3 thousand years old). Now multiply that by a much larger surface, over hundreds of millions of years). These are time scales and volume scales that our brains simply haven't evolved to intuitively grasp, so that's why you have to trust the math and the evidence uncovered by scientists (which you can verify for yourself if you are so inclined -- you can read up on all these topics if they interest you, it's all available at the library, in various journals, or via books on amazon). Good starting point: http://en.wikipedia.org/wiki/Petroleum http://en.wikipedia.org/wiki/Geology

Good post, wise words.

That's what I'm saying. Yet the Schiller CAPE said that the market was only "slightly undervalued" at the bottom, which is why I'm saying that using these macro indicators often doesn't help much and can actually do more harm than good if it keeps you from buying what you would otherwise buy. Many good investors didn't buy as much as they could have or stayed hedged for way too long after the crisis because they had made certain macro predictions and were waiting for something that never happened. The problem with predicting the future is that there's an infinity of wrong predictions and only one version of events that actually happens. And keep in mind that most markets environments are not early-2009. I think there are too many generals fighting the last war out there, expecting these "once-in-a-century" events to happen every 5 years. As Buffett likes to say, if you could have told someone in 1900 all the big events that were going to happen during the 20th century (depression, WW1, WW2, cold war, vietnam war, inflation, famines and purges in Russia and China, oil shocks, double-digit interest rates, countries defaulting, large banks failing, US president assassinated, epidemics, etc), they'd think that nobody could possibly make money, yet the Dow went up something like a zillion times and living standards multiplied. Of course. And if I can't find anything that is attractive enough for me, I'm ready to go 100% cash. But if I do see things that are attractive enough, I won't hold cash just to hold cash. I'd rather miss some buying opportunities here and there than have significant cash in my portfolio for the next 30 years, because missed opportunities compound too. And if there's a buying opportunity that comes along and that is truly juicy enough that I can't miss it, it'll be more undervalued than what I hold by definition (otherwise it wouldn't be particularly juicy, right?), so I'll just sell some of the less undervalued thing I own to buy that very undervalued thing. Or I'll go on margin and delever later. Who knows, there are all kinds of reasons why one could hold cash. I'm not saying that everybody who does is timing the market - especially not those with funds managing other people's money, with peak redemptions always happening at market bottoms, or with operating businesses that might need big cash cushions. I'm speaking as an individual investor, only managing my money, with a long-term horizon, and seeing enough opportunities to fill a portfolio.

That's exactly what we've been talking about here and in Racemize's thread. It's easy to posit a single event where one approach of the other would be bad. The reverse is equally true, but not as visible because sins of omission always less noticed. What if the market goes up rapidly for years while you hold a large amount of cash (this has just happened to many people over the past 5 years)? Many people never stopped being bearish after 2009 and missed multi-baggers. When they buy in the next downturn, it might not make up for their missed opportunities, but most of that will be pushed under the rug. Or maybe there's a drop, and they expect the apocalypse, but it's just a mild one and they never actually buy because they're so sure it'll go much lower... What truly matters IMO is over long periods of time. I might not be able to buy as much during dips, but I will participate more when things go well. If the businesses that I pick have more attractive characteristics than the market overall, and are more attractively priced, and they can live through almost any crisis and deploy capital opportunistically (buybacks, M&A), then holding them seems quite safe to me and I feel like they can create more value for me than I could with cash. If I could predict general market moves, I would. But I've been hearing people call for huge drops for years, and if I had listened to them I'd be poorer, and there would be the very real risk that I would stay bearish through the bounce off the bottom anyway and miss the following recovery (this seems to happen frequently even to very good investors). Timing is hard.

I don't think we have the same definitions for those words, because if you use general market levels and ratios to make decisions about a portfolio of single companies (and you don't own the general market), and you are seeing things that are attractively priced that you're not buying because of those decisions, that's macro investing to me by definition. That's a call on the general market. It's fine, you can do that if you want. It's just not something that I think I can do well. Yes.

Good. I don't either. You're looking at a single event (market drop, market rise). I'm looking at it over an investing career. Unless you can time market cycles reliably, I think the bottoms up approach is better than the macro approach. If I'm in good companies at good prices, I'll get through both up and down cycles just fine in the end. I might not get to buy as much as the bottom, but I won't spend years of value being created at my favorite companies holding fewer shares than I could have. Am I doing a bunch of statistical analysis here? I was just pointing to someone who has found valid flaws in the macro tools that you kept citing. If macro was as simple as "look at these things and make a decision based on the ratio", there would be a lot of rich macro investors. But it turns out, even Hussman isn't doing so hot, and in a lot of those cases, being early is the same as being wrong. That seems like a 9-foot hurdles to me, so I prefer not to play that game.

That's for each investor to determine. Some have very high hurdles, some are looking for 10%.. But whatever your target is, you have to ask if holding lots of cash helps you get closer to that target over long periods of time or if it holds you back.

What I mean by macro is looking at general things to make decisions about specific companies. If you are investing in indexes, maybe looking at CAPE and such can be considered valuation. But if you're thinking of investing in a specific company that you are finding cheap and would like to own, but don't do it because you think the index might fall/some reversion to some mean will happen at some point, that's market timing based on macro. That's what I'm trying to avoid. I don't think I have an edge there, and I think that a lot of people who will consider themselves to have been 'right' on macro will fail to properly take into account their opportunity cost (ie. a lot of people have been telling us to be careful of a market top for 3 years).

And to be clear, I'm not saying "everybody should be fully invested all the time". I believe there are times when I'd probably be 100% cash (can't find anything worth buying, everything I own was very overvalued so got sold). What I'm saying is just: If, say, I thought that Liberty Broadband and Fairfax were very cheap right now, I think it would be a better idea to buy more of them - even if I were to later sell some shares to finance a different, even cheaper purchase - than to hold cash for macro reasons (there might be other non macro reasons to hold cash, such as potential redemptions if you have OPM, or capital requirements for a business, etc). As I said above, it's certainly possible to get timing right sometimes and enter a huge market crash with tons of cash. But we hear about those a lot more than about people who rode a huge bull market with tons of cash (or worse, while shorting the market) despite having seen lots of good opportunities... Two sides of the same coin, but one requires market timing and the other just buying things that meet your investing criteria when you see them.