Kraven

Kraven, 1) I couldn't agree more with your attitude of "I couldn't care less about any individual stock...I don't hang any stock on a wall to marvel at it's beauty." 2) I'm curious to know how you keep track of so many positions. How do you follow each company's news, note your most recent estimates of each company's intrinisic values, and ultimately keep up with it all to make sure you sell when the stock price is no longer cheap. I have the exact same philosophy as yours, but I implement it by holding far fewer companies. Since I am buying on the basis of cheapness alone (as opposed to high quality business model/management) I consider it far more important to scrutinize management's decisions and stay up to date on any relevant information I can find on the companies. In practice, I end up with 5-15% positions, and a very large cash balance (but that is also partly because most of my investments are in pretty small, illiquid companies) GG, In terms of keeping track of positions, IV, etc. I use a spreadsheet. In terms of news, nothing special. I use Yahoo finance, google alerts, various feeds, etc. Remember that I do this full time too so it isn't a burden to keep up with things. I also don't really care about quarterly moves and the like, so time isn't usually of the essence to me. I update what I can, when I can. I try to prioritize to some extent. If financials come out on both a larger and smaller position, I will usually look at the larger one's first. Many of my smaller positions are ones where they are for tracking purposes or where I never was able to fill much of anything. So to the extent I have 100 shares or something of some illiquid stock, I don't really bother doing much with it. Hope that helps.

I don't know about that. I'm as competitive as the next guy, but what does it matter? I'm not out to beat anyone. I simply need to achieve satisfactory, absolute results. Relative results don't support the family. We can all do well, everything being equal. It's not a zero sum game in that respect. If your concentrated portfolio does great, well I can still do just fine too and vice versa. At the end of the day, Mike Burry said it best. Know thyself. If you are the intellectual heir to Buffett and Munger, then by all means follow that road. Hell, if I could, I would. If I could tell which companies would be doing great in 10-20 years that's what I would be doing too. I can't. To me all of "those" companies always seem expensive. Sure, if I could buy AAPL, IBM, DVA, etc at BV, I would toss other things and do so. Absent that, I do what I do. The biggest mistake I think investors make is trying to be someone they aren't. If you are uncertain about things and believe we don't know what we don't know, then perhaps having 5 20% positions isn't the wisest course of action. If on the other hand, you are able to do so, then that's the path you should follow.

In addition: Schloss, Graham, Cundill, etc.

Over 100 positions, about 30% cash. I couldn't care less about any individual stock. In my grocery store all inventory is available for sale. I buy what's cheap and sell what's not. I don't hang any stock on a wall to marvel at it's beauty. My stocks are shoved into a storage room and are spilling out into the aisles. It might not be beautiful, but wander the aisles and there's plenty to choose from. Everything from packs of gum to Diet Coke to a brush for the grill to filet mignon.

My kids loved: [amazonsearch]Green Eggs and Ham[/amazonsearch] [amazonsearch]Cat in the Hat[/amazonsearch] [amazonsearch]We're Going on a Bear Hunt[/amazonsearch] [amazonsearch]The Very Hungry Caterpillar[/amazonsearch] [amazonsearch]Brown Bear, Brown Bear[/amazonsearch] [amazonsearch]Sheep in a Jeep[/amazonsearch] [amazonsearch]The Runaway Bunny[/amazonsearch]

Be aware of possible securities law violations.

At bottom, this is why I've been a bit concerned about FFH (I don't own any at the moment, btw). It's almost like they're going for an "absolute return" strategy vs. a "total return" strategy, where they always make positive mark to market returns despite aggregate market movement. On the other hand, they may believe that the best thing to do for "total return" is to preserve the ability to underwrite as much business as possible because they believe a very hard market will ensue at some point. If that is the case, they should be more clear about this, rather than saying, we're trying to "protect" ourselves. This is why I continue to be puzzled about the notional value of the equity hedge. Why 100%? When they first put the hedge on at 1060, with 25% notional value, it only protected about 1.75% of book value if the market were to drop back down to 800 level (where they had dumped all of their hedges). Now think about that... 1.75%! Really??? Honestly why is that "protection" from anything? Without knowing the details on the hedges, these types of points are what I think of as real world implications. So to go to all the hassle and expense of doing something to protect 1.75% of BV seems quite worthless to me. Even with the larger hedges, as pointed out earlier, the protections was 10-15% of BV. I can't comment on the implications from an insurance standpoint (that is, ensuring safety of appropriate reserves), but separate from that it seems as if the upside missed far outweighs any downside protection.

They are not meaningful. That is, they are not representative of anything. I was still working then and had significant constraints on what I was able to buy and sell. This at times was both a blessing and a curse. For what it's worth, I had losses, but much less than the market. Again though, it's not representative of anything either good or bad.

Fair points. There is a huge difference between running personal funds vs outside money. I know very well what a huge headache it can be and it does provide many of the problems you list. Where I would quibble with your points though is when you say "You give up the optionality of cash, for probably a very modest upside from here...not a great bet." I repeat the same question. Why would it be "modest upside" if the stock is undervalued? Let's forget about volatility for a second. If a stock is worth double the current price and the market falls 30% everything being equal (it never is, but let's pretend for a second) doesn't the stock have the same value it did before? So if you can pick a portfolio of "those" stocks, why is the upside modest assuming you can ride out the volatility? I think there is often confusion between pricing based declines (i.e. the market is frothy) vs a change in business or economic environment (i.e. a recession or something). I am never quite sure which of the 2 people fear when they post.

Good post, but I will ask the question I've asked before. What does it matter? Unless you are investing in the market what does it matter if its overvalued or not? Either an individual security is undervalued or it isn't. Perhaps there are less opportunities and that's fine, but I am trying to understand your point. For me the general market level figures in at the margins. I am more conservative in terms of valuations and that affects both buy and sell decisions. But it never stops me from buying something undervalued and there is still plenty of that.

Sorry if I didn't ask the right questions. I'm just a young guy trying to get educated from the learned experts like yourself.

My understanding is that Prem and his team use a Graham-type (as well as Templeton-type) approach for investing their float, as opposed to looking for long-term compounders. Ah, the irony! Yes, quite ironic. So like WFC, JNJ, LVLT, USB, etc. You are correct, it would seem. Those are very much Graham type investments. I certainly didn't intend to limit being known for investing acumen to requiring one to be a Buffett clone (although I should note that Watsa is known as the Buffett of Canada), however it would appear to me that is primarily the approach that is taken. There are certainly some "Graham type investments", at least in theory - something like Blackberry is likely to be a balance sheet play although Graham wouldn't have touched it probably. So which is it? It would appear to me that the growth in the equity portfolio to date is from "Buffett like" names like WFC and so forth. Am I wrong about that?

I am no FFH expert. Since they are known for their investing acumen, just out of curiosity what major stock picks are they known for? By that I mean, what stock or stocks have they selected that one would say defines them as investing gurus? As an example, when one discusses Buffett one of the first stocks that would be discussed would be KO. I can think of numerous Buffett slam dunks, but can't think of one from FFH which is more representative of my lack of awareness I'm sure. Please enlighten me. Please also do not mention the 2008 macro bet. There is much more luck involved in that than people want to admit and in any case, even if it was to be assumed that there was no luck involved the chance that such success is replicable is open for debate.

Good points generally.

Hi Kraven, I know you are extremely good at what you do, but even for you it must be a huge amount of work! I think you run a portfolio of 50-60 securities, right? Please, correct me if I am wrong. And I guess your medium holding period is between 2 to 3 years, right? Let’s say 2.5 years. You have been investing for more or less 20 years now, right? So you must have already bought and sold something like (20 / 2.5) x 55 = 440 securities. Let’s say that you have bought and sold all those companies at least twice: that would bring the count down to 220 securities. The single thought that you have studied 220 companies deeply enough, to get to a strong conviction about all the cash they will generate until they shut doors, gives me the headaches! ;D Moreover, what for? If they are selling for less than a reasonable target price, you already know that there might be a huge discount to IV… is it so useful to know exactly how huge that discount actually is? giofranchi Gio, I currently have over 100 positions, but I am not sure exactly how many. Some are small, tracker positions and illiquid stocks where I never got much of a fill. I do this full time so it's not like I'm trying to squeeze it in in the evenings and on the weekends. Remember that I invest primarily on a quantitative basis. I let the numbers as I adjust them tell me what I need to know. And they do. If you listen, the numbers tell you a story that you can either believe or not. So I look at however much I need to in order to reach a conclusion. I have made determinations after looking at and adjusting for many many years worth of data and I've made decisions to move forward in 30 seconds after looking at one or 2 things. Sometimes I don't have an IV in mind other than the proverbial Graham knowing that a man is overweight without knowing his exact weight or the wonderfully dated knowing a woman is old enough to vote without knowing her age. Without an IV in mind though its difficult to know when to sell. Usually in those cases I'll sell after a "satisfactory" return, whatever that means to me at the time. As I've said before, my investment approach is run like a grocery store. I buy and sell inventory. That's all stocks are to me - inventory. Some people hang their stocks on a wall like they're beautiful artwork never to be touched by human hands again. I treat my stocks like 12 packs of diet coke that are shoved against the wall bought at one price and available to be sold at another price. So when a stock hits my buy price, assuming nothing has changed, I buy. When it reaches IV (my sell price), or close to it, I sell. That's it. As Mr. Gekko said, don't get emotional about stocks. I don't (or I try not to!).

--Cable Cowboy Remember that I am a “guy who owns his business”, I am not a finance guy. And by “to own my business” I don’t mean that I must micromanage it… in fact, I never do! It means, instead, that I am the one to take all the “strategic decisions”, that I am the one to choose how its capital is used. If I cannot do that, to invest in a business, I require at least that there be another person, I admire and trust, who puts his/her interests and mine at the same level, and who does that job in my stead, possibly the same way I would have done it! Otherwise, I won't invest. giofranchi Gio, 2 quick points. One, I would agree with you that no one can really know a bank like BAC very well. People who think they do are fooling themselves. It all comes down to a few primary facts and the rest is virtually unknowable. Just as an example, a derivatives book could take down a firm very quickly. Something like the JPM situation is just a minor example of what could occur. How would one know what the derivatives book is? From the filings? That's amusing since it changes on a minute by minute, second by second basis, so the "picture in time" from weeks or months earlier is virtually meaningless. And even if someone had real time access to it, it's still meaningless since all valuations are guesstimates and assumptions anyway. So this is 5-10 guys on a desk or 2 in NY and London. What about the hundreds of other desks? And this is just on the investment banking side. No one, not Buffett, not the CEO, not someone reading a filing, has pure knowledge on a large bank. Of course, the same could be said for many other institutions as well. Second, in terms of IV, I think you're mistaken on that point. Many people calculate it, myself included. No, it's never exact, but that's where the "art" of investing comes in.

It's probably a safe assumption that it's never happened to any guy who hangs out on a value investing message board. You are almost certainly the first. Live for us, Eric, live.

All good points. It's an interesting idea but if it happened its far in the future. I suspect too where one grew up will determine how appealing this is. For anyone who didn't grow up in a large urban area like NYC cars are all important and a fundamental part of personal freedom. There are many millions of people who love their cars and are not going to give them up so easily.

[amazonsearch]Hedge Hogs[/amazonsearch] Hedge Hogs is a recent book by Barbara Dreyfuss. It's an interesting, although unspectacular, recap of the Amaranth implosion. It's somewhat recommended for anyone interested in that saga as well as anyone who wants to learn a little something about energy trading. I don't expect that it has wide appeal. The author does a decent job of keeping the story moving although lets some of her own biases come through (things like "they traded $1 bil of contracts - an amount that could feed starving people in Ethiopia for 15 days!").

Kraven, I think we live in a much more uncertain world… Sometime I look back at the file in attachment… either those folks at Value Line were complete fool and wholly incompetent, or we live in a much more uncertain world! giofranchi Gio, I agree that the world is uncertain. I always say we don't know what we don't know. So buy cheap and good things should happen. Of course what I think is cheap and what others do may be different. Thanks for attaching that BAC value line. Very interesting. I wouldn't have touched that (and didn't). It wasn't cheap at all to me.

Hi Kraven, think just a second about my firm. The majority of its assets are concentrated in 4 businesses: 1) Engineering services 2) For profit higher education services 3) Fairfax Financial Holdings 4) Lancashire Holdings Then, there is cash. You surely know many companies. Let me ask you a question: how many of them, percentage wise, hold just the minimum cash required to smoothly operate their businesses, and how many hold some cash also for safety? Just in case a rainy day comes? Even if that sad day might never come to pass? I want my firm to be in the second group. If I had to choose between 15% annual + a safety net and 20% annual with no safety net, I would go for the first one without hesitation. And for safety net I mean cash. So, my question in not: do I have to hold cash? Instead, it is: how much cash do I have to hold? Furthermore, it is something that is continuously changing. Both to always hold 5% of cash and to always hold 50% of cash doesn’t make any sense to me… Of course, I tend to decrease the cash level depending on how many opportunities to do business at high rates of return I see out there… But I also like to keep my eyes open and see what other people are doing. Anyone who manages a business know that, even if he does everything perfect and doesn’t commit any error, his results will still be influenced by external forces. More specifically, if everyone around you is going to suffer losses, you will experience some pain too… So, how are they behaving? Soundly or foolishly? If foolishly, I want to increase cash. Finally, I don’t understand your view on FFH or LRE: in 2008, when the market fell (37%), FFH stock price increased from CAD$287 to CAD$390, +35.9%; while LRE stock price increased from 368 GBp to 425 GBp, +15.5%. Furthermore, it is very likely that LRE will go on paying huge dividends also in a downturn, dividends that could be used to scoop up great bargains. So, I sincerely don’t see how anyone could time these things… giofranchi Gio, your points are well taken. In your case you focus more on the macro and your own operating business than individual security selection. You walk the talk. That's fine. What I find interesting is the people who spend their time looking for undervalued securities but then fret over Grantham or Hussman or something. If a stock is undervalued its undervalued. What should it matter if the broader market does nothing over the next 10 years? My point on FFH, etc is different than yours. I see why you want to hold and continue to hold FFH, LRE, etc. What I was trying to say is that for those involved in selecting individual securities it makes no sense to me why someone would hold any of these stocks if they "know" a downturn is coming. Either certain securities are undervalued and will do fine or they won't. The world of securities that will do fine in the next 10 years isn't limited to BRK, FFH, etc. Finally, personally I put very little weight on the FFH macro bet from 2008. Sure, they called it right and others did too, but there was a lot of luck involved in that call. It was not preordained that the financial crisis hit the way it did. There was a tipping point. If Lehman had not been allowed to go under things may have turned out much differently. If the Fed had backstopped them for a couple days to allow Barclays to buy them we might have been looking at things differently. If that had happened it may have been that Fairfax's macro bet was similar to that of today's - I.e. a mistake, not prudence in my view. There were many variables at play. Skill it recognizing it for sure, but plenty of luck too.

I know and I understand what you mean. Yet, every bubble in history was supported by some idea and justification. It is not like people all of a sudden get mad in mass and then a bubble ensues. There was always some reasoning behind, that was true… until it wasn’t any more. Today it is: if interest rates are bound to stay at zero for many years into the future, all asset classes are worth more than in the past, stocks included. No matter stocks are already priced to yield no real return over the next 7-10 years, according to the latest GMO letter… No matter negative real rates have led time and time again to the formation of bubbles… I am not saying I am out of the market! I am just saying that I am comfortable leaving some money on the table and playing it safe. giofranchi I think these are fair points. However, I think there is a lot of focus on the market as a whole being overvalued or at least fairly valued and not enough on individual undervalued securities. While the market itself might return little to nothing over the next 7-10 years (I have no idea), that doesn't mean that one can't make money on individual securities. Gio, not directed at you, but I do find that for a board where many people pride themselves on their security analysis there is tremendous focus on the aggregate market. Obviously a downturn will pull everything with it for some period of time at least, but an undervalued security will float up at some point. And what is the alternative? It would be to just stay in cash. Just a further thought on this. I find as well that people seem to confuse a pricing based market downturn with a decline caused by broader economic forces (such as a recession or something). Often people will say the market is due for a downturn so best to hold BRK, FFH, MKL, etc. That has never made sense to me. If we get a downturn simply because the overall price of the market gets too high, those stocks will come down just as much as anything else. There is no pricing safety in a BRK for example. If the market falls 30% so will BRK most likely. If it's a recession that's being predicted, then perhaps the alternative is to hold cash. Since I make no predictions about anything I just continue on my merry way.

That is a good way of putting it. The thing about Buffett is people take his words so literally when it's really the meaning that is missed. I don't believe for a second he believes 20 "punches" in a lifetime is the optimal amount or not. It's a moot point. He clearly has made hundreds if not thousands of investments in his lifetime. His point was never about counting your investments in a lifetime, but simply putting a lot of care into each on AS IF that was all you could do.

Murphy? Is that you? Agreed. A prediction has to have some kind of time constraint on it or it is meaningless. It's bullshit to give some credit for a prediction made with respect to another time even though it just so happens to occur in the future. I can make a ton of predictions that I am positive will come true at some point. A large money center bank somewhere in the world will go bankrupt. At least 10 more cities will declare bankruptcy.

I don't want to buy the put. I want to write it. Eric,... You should have a close look at Charles Ledley and James Mai in the book "The Big Short". They were in a similar position like you. They started from a garage in Berkley, CA with capital of only $110k in a Schwab account. These two guys were able get a license from Deutsche Bank's KYC program (Know Your Customer program) to trade directly with the most sophisticated, quantitative trading desks with the big boys on Wall Street, but by then they were able to manage already some $30M AUM. The hunting license, they called it. The hunting license had a name: an "ISDA", and was dreamed up by the International Swaps and Derivatives Association. Usually you are only allowed to trade with the big boys if you have something like $2B AUM,... so they got really cheap into the system. So the only available workaround might be to start your own partnership and some people that might help you raise $30M. http://en.wikipedia.org/wiki/Cornwall_Capital http://www.cornwallcapital.com/ There is a chapter in Hedge Fund Wizards about Jamie Mai. It's very interesting. It would seem that Michael Lewis took some artistic license in the telling of the Cornwall Capital story. Ledley and Mai were made to seem like a couple of down on their luck "losers" who somehow strike it big. On the contrary, Mai's father ran AEA Investors, a multi billion dollar PE firm. They were in the process of setting up a family office for Mai to run. So while it is technically true they started with a Schwab account, it was because it was taking some time to get things going and they wanted to get started. There was apparently a lot of money backing them. In addition, they are portrayed as not knowing much about the markets, etc while the truth is they both started at Golub I think it was. Still an interesting story but much less impressive than it was made to seem. They were much savvier than they were given credit for with tons of connections in the market.