jegenolf
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Posts posted by jegenolf
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1. It's a mistake to believe cellular bandwidth is or will become inexpensive to deploy. Every time the government put up a dozen MHz or so of spectrum on the block, bidding ends at $1B+. AT&T's shelling out $35B+ for T-Mobile US and in the process taking on significant regulatory risk of ramming the deal through the DoJ and the FCC, Clearwire and Lightsquare's having any value at all despite being massive capital sinkhole; it all goes back to the spectrum landgrab. Ask yourself why Sprint's CapEx is going up 50+% year over year. All that while over the air Netflix, video calling etc etc are still far from mainstream.
I just came across an interesting data series on this exact topic, so I thought I'd resurface the idea that carriers will go all data instead of voice+txt+data as they do today:
In 1 year, the cost of bandwidth has been cut in half, while data usage has shot up 90%.
The headline is pretty sensational for a simple inverse correlation between units and price per unit in an all you can eat world. 1.89 * 0.54 = 1.02. 'Usage up 89% and Revenue up 2%' would be a more honest but less eye-catching headline. It does expose the business model problem of all you can eat though. 90%/2% can't last for all that long. The carriers are probably still well covered by the low usage customer subsidy, but that won't last forever.
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I'm totally intrigued by fairfax's derivative position that is betting on deflation (I didnt see any discussions on this).
Given Japan's experience with long term deflation, I would be interested in getting some feedback on what sectors, industries or stocks work well in deflation.
It is obvious that Real estate is a bad place to be.
Ok, I'll bite... How about FFH? It will give you instant exposure to Fairfax's derivative position!
I'm somewhat serious though. If you truly believe deflation is coming, buy FFH and close your eyes for the ride. They're positioned to do pretty well in that scenario.
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INMO the profitable section of MSFT (OS, Office) is in runoff.
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HPQ, DELL, and Google seem a bit better....
This isn't really directed at you since I'm seeing it from several folks on this thread, but the thought process is confusing to me.
Under what circumstances is Dell a better long-term buy than MSFT? If MSFT is in runoff, DELL is toast. MSFT has a shot at hitting a monster home run with Azure. What does Dell have?
And just to clarify, I do think DELL is toast. It confuses me that Fairfax and many other very smart investors are buying Dell and I'd love to know what the long-term long thesis is.
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Cash earning very little overseas and Skype can be accretive within year one.
great point. The cost of capital is pretty low here, if only because MSFT is doing its best Scrooge McDuck impression sitting on mountains of expatriated cash.
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I don't have a regular IRA anymore though -- 100% RothIRA at this point.
Ah the benefits of not having a job. You got to convert to Roth and shield some income in those low tax brackets didn't you...
The non-capped Roth conversion is a pretty nice disincentive to work, at least for a year or two.
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The really long term real return on real estate is more likely approx. zero percent as documented in this very thorough study covering the period 1628-1973:
http://arno.unimaas.nl/show.cgi?fid=10696
Problem is, there are larges swings along the years, and it's very easy to get caught in thinking based on just a single lifetime experience. For all of us living now, the personal experience is likely somewhat different higher than zero, but unfortunately this doesn't change the really long term propable real return.
Cheers!
I don't think anyone is referring to capital gains being a positive real return. If you own your house outright, capital gains net out inflation and owner's equivalent rent is pure real return. But there is no need to own your home outright.
I've never actually done this math on paper, but I think the math is something like:
Capital gain + OER - opportunity cost on equity - mortgage interest - property taxes - upkeep = net gain of home ownership.
And taxes are a huge benefit: Capital gains are tax free up to 500k in the US, OER is tax free, mortgage interest is tax deductible. Property taxes are deductible (unless you pay AMT).
The big unknown is the opportunity cost on equity. But assume the following:
- you buy at a OER/price ratio of 5% (5% is a little low in my area, Boston, which I think is lower than normal for the US)
- with a 20% down payment
- borrowing at roughly 3% after tax (Just using 4.5% pre-tax which is low but doable right now and assuming you have offsetting income in a high tax bracket)
- with taxes + upkeep at 1.5% (taxes 1%, upkeep 0.5%. That's most MA taxes. Upkeep is probably a bit low but in the ballpark...)
- property values increase at a real rate of 0%, meaning at inflation
your math when you first buy is:
inflation + 0.05 - (x * 0.2) - (0.03*0.8) - 0.015 = 0, where x is the opportunity cost rate of return to break even on home buying.
solve for X:
x = (inflation + 0.05 - 0.024 -0.015)*5 = 5 * inflation + 0.055.
If long-term, inflation is 2%, your return on equity when you FIRST buy is 15.5% and your real return is 13.5%.
If we (really stupidly but simply) average equity at 50% over the life of the loan:
x = (inflation + 0.05 - 0.015 - 0.015)*2 = 2*inflation + 4%.
So your nominal return is 2x inflation plus 4% and your real return is: inflation + 4%.
That assumes you never refinance and never move, so I'd consider it a worst-case for trapped equity, but even still I don't think it's a bad real rate of return. It won't turn out very well in a deflationary spiral, but it'll do nicely if we ever get big inflation. And 30 years is a long enough time horizon that we WILL inflate out of debt in that time. If your trapped equity is just a portion of your investment portfolio, I think it provides a nice inflation hedge. For those that like diversification, it provides that too.
Also note that (in the US) as taxes go up (very likely), the return goes up unless those taxes come in the form of removing the mortgage interest deduction. I believe that's a political impossibility though. So it's likely that buying a house is an inflation hedge and a tax hedge.
Also note that if you buy at a cap rate of 7.5%, your real rate of return at 2% inflation starts out at 26% and averages 11%. But the chances of prices STAYING at a cap rate of 7.5% I think are small. But either it stays there or you likely have some significant capital gains on top of inflation. Either one is a fantastic outcome. Real rents could drop dramatically, but I'd bet against that in the long term.
Anyway, I know this is a drastically simplified model, but I think it's a decent one. I just think given where long-term rates are, buying a house is a no brainer. If I could buy rental property with a guaranteed tenant for the life of my 4.5% loan, I would do it in a heartbeat. That's what buying a house is. I just think it's a great time to buy a house if you think you'll stay put for a long time. Mostly because mortgage money is just so cheap...
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But you are forgetting the X in Parker's and my example. Its TBV x X = Where x takes into account all of those items you listed. You have a point though, I should have quoted you to make it more clear, I missed that in my long winded tirade. The comments were partially addressed to you, but were really more about the community in general.
That's pretty much what I guessed. That the mechanism for determining X includes what you have to include even if it's more qualitative than quantitative. I wasn't thinking you ACTUALLY ignored float, underwriting etc. But to end up putting a price to book ratio on the stock is misleading. The price to book is just a final simplification not really the main part of the valuation. What goes into X is how you'd really learn to value an insurance company. The final ratio is more noise than signal unless you know what went into it.
I just think it's a bad lesson for people to learn to 'buy insurers below book' when that is such a small piece of the puzzle. Some insurers should never be bought and some are a bargain well over book. LRE and FFH are good examples of the latter, and the reasons will never show up in BV or TBV except in the rear view mirror.
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Ok, after rereading I see what you mean, I can try again.
I want to know what the net tangible assets of an insurance company is. Then I look at reserves, past, management, blah blah blah. Based on that I come up with some sort of earnings estimate or target. Lets take Prem at his word and go with 15% return on assets. Now every dollar I pay more than Book Value reduces that return, we also have a soft market, low yields, and a high cat year. We may enter a medium market though so who knows. Investment gains have been largely taken off the table due to hedges, but FFH is well positioned defensively. From where I sit 15% may be hard over the short term, unless things harden.
Based on all this I pick a multiple for Book Value and go with that. Thats IV for me, its an approximation. I obviously want to pay less than that. I think 1.5 Tangible Book Value is a fair price for FFH. I think FFH is a quality above average insurance company and deserves a decent multiple. I also have to take into account that there are several very good insurance companies trading at .95 - 1.25 book value, and finally have to consider that someone buying at 1.5 is getting a fair return but nothing specular. Thats a good price for them, but I am a value guy.
I guess the confusing part is that when they buy something TBV goes down if they pay more than net assets. For me its not a hard and fast rule. I dont go FFH bought a company, let me remove this and blah blah blah. I would wait and see how it goes, but as FFH drifted up to vs. tangible book I would have to look at my other options. If FFH is at 1.7 tangible book and LRE is at 1.0 book value. I am moving. If nothing is out there I may let it ride. Who knows, its just my way of thinking about things. Also for FFH I care more about the investments then the underwriting. I usually love to buy when I see giant hidden investment gains. I agree with Harry, if I am buying for underwriting. I want to see very low combined ratios and reserve releases.
Finally, the qualitative factors weigh on me much more than the quantitative factors. I simply dont like the environment and it doesnt make sense to me to walk around saying FFH is worth 2x BV when you have great insurers available for much cheaper.
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You want to give Prem credit for buying an insurer at 1.3x book value (Zenith, Mercury, pretty much any of the deals they have done). Thats nice, but I dont want to pay 1.3x book, so I dont give much credit for it. I wouldn't sell at 1.1 book value because a take over created goodwill, and pushed up the tangible multiple, but it all gets taken into account. Before I could just take stated book, and know that ICIC was undervalued. Now its a bit more complex. I prefer to give create for the acquisitions after they start earning their keep.
These are great acquisitions, which feature what FFH lacks. Solid underwriting. Between them, ORH, and the Asian subs things will get better. I predict they are solid buys, but I personally dont want to pay up for them. I didnt own any of them at book (except for ORH), wouldn't have bought them at 1.3x BV. Prem gets control, and headache free float. You can pay up due to future earnings, and as a buy and holder it makes perfect sense, but the environment is a bit off for me, and I dont have the capital to buy and hold for a lumpy 15%. I want bigger fish, and will likely be burned for it lol.
Im used to FFH having a stated book value of $250, and actually book value due to unknown gains of $300, a none event hurricane season, and a stock price of $240. Thats a fat pitch. Thats what I want again. We also had leaps to boot.
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You guys kill me with this nothing represents the intrinsic value of the company stuff. Give me a break, plenty of ways to fry an egg. We all just want to eat. Pick one and get to cooking. I feel like some folks can get too theoretical in the value investing community. But you are right FFH is worth precisely its future cash flows properly discounted at an accurate / conservative rate. Since all of those variables are unknowable, I will stick with my approximation ;D.
I'm not sure if these strawmen are directed at me. All I'm saying is I think price to book is a pretty bad approximation of an insurance company. It ignores float, underwriting and investment returns. And I'm saying tangible book value only helps if your model is more complex than just a price to book ratio. Otherwise, I'd say plain old price to book is a better approximation. At least you have a shot of including some additional value.
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I haven't gone back and read the entire thread but I also agree w/ Eric if the issue is the value of goodwill. It is worth zero to me when assessing any business. It is accounting bullshit, and this is coming from a CPA.
I knew this day would come. I agree, with Bronco and Eric and feel like some of you guys are making this way to complicated. TBV is a good way to compare insurers. After that you look at Management, reserving, track record, and what not and then pick your multiple. Goodwill used to be canceled out by the Indian Sub which is on the books for peanuts. With FFH buying 3-5 insurers at 1.3 BV, I dont think thats the case now. Goodwill is piling up with every acquisition.
TBV can be useful. I dont think anyone is saying its intrinsic value. They seem to be saying the plug value of Goodwill is just accounting noise, and screws up BV calcs.
Goodwill is literally just a plug because debits have to equal credits and entries have to balance. Literally. It means nothing. FFH is worth whatever you are willing to pay for it, but goodwill is BS. Google Goodwill to see how its determined, then tell me how you can get any real investment insights from it. All this theory stuff, is nonsense. Have a look at the Goodwill Accounting entry.
If FFH bought An Insurer for 6 times BV, they would have a ton of Goodwill. Perhaps that info is useful (from a what the hell are they doing perspective) but why should they get credit for that when you are looking for a hard bookvalue?
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My method for valuing insurers is simple. TBV x X. X being what I feel is the right multiple for the company given all qualitative and quantitative aspects. For me FFH is 1.5 tangible. I wouldnt buy for over book, but would sell at 1.5. I wouldnt buy over book because there are tons of insurers at or under book with decent records, we have a ton of cats out there, and I just dont see spectacular returns given the capital I would have to invest. Thats just me. If FFH earns a lumpy 15% to get that 15% compounded you have to buy at Book Value.
You are saying that buying ORH decreased the price you are willing to pay for FFH. Same for Zenith and whoever else they buy over book
. Every time this happens their tangible book value goes down. And their intrinsic value goes up (in my opinion). If you'd adjust the multiple you're willing to pay based on acquisitions, then you're implying you're doing some kind of DCF analysis or something that you're rolling into your magic TBV multiple for a given company.
Or maybe you're just modeling it on Fairfax's stated 15% book value growth objective (which does not subtract out goodwill), which is fine. I can think of worse ways to try to value FFH.
Or maybe you're just using it to model your entry point not your intrinsic value calculation. It's hard to argue that based on the last decade. There's no reason to pay over 1.5 book (if it ever got there) when you'll almost certainly get a chance at or below book. (Someday that ship will sail but it's been a long time coming already...) I just find any intrinsic value model of an insurance company that relies on a book value multiple to be incomplete.
I dunno. But to me the first half of what you said doesn't agree with the second half.
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I am going to keep on looking at this the way I presently do, and acknowledge that it's not the best method for all people.
Goodwill is necessary for people that want to slap a price/book ratio on a company to determine value. If, as you're saying, your valuation model includes earnings power, I think you'd absolutely want to subtract out goodwill. It's just noise at that point.
I see lots of people (on this board) attempting to assign a price/book ratio to FFH to determine value though. If that's your method, it would be confusing if buying ORH lopped value off of FFH. Goodwill just provides that balance sheet continuity assuming that the acquiring company paid the correct price for acquired company. It makes book value seem much cleaner than it actually is.
So I guess that's a long-winded way of saying exactly what you said.
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All that happens is that the BS & opening equity gets adjusted downwards. They have allready disclosed how much & where the adjustments will be.
Because they wrote down plant there is less to depreciate, so most would expect quarterly depreciation from 01/01/2011 onwards to be lower than the previous run-rate. Improved profitability.
SD
Do they get the write-down as a NOL or something? I'm not really tracking on how they just lose a depreciable asset. Profitability be damned, I want the cashflow.
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After taking a closer look at FBK and MERC, I moved my position to MERC.
The reason I switched was because I felt MERC was better positioned to take advantage of this cycle of rising pulp prices. It still appears undervalued to me trading at a P/E of 4.0 to 5.0 times next 12 months earnings.
It appears FBK has many multiples more of long-term upside, but it could take several years to realize its potential. Until the major revamping occurs I don't see a catalyst to substantially improve their operations. In other words, I expect the market to reward Merc more in the near-term than FBK. Longer-term FBK has more upside, but because of my concerns that management may not implement many of the ideas discussed, I went with Merc to capitalize on the rising prices.
I ran a spreadsheet comparison (a little more than a back of the napkin) based on sales increases (prices) and it shows Merc's superior operating leverage. (attached)
Perhaps I should add back FBK and hold both, but I'm not convinced. Am I missing the forest for the trees? (sorry about that one)...
Ericd1: I just took a brief look at your Merc vs FBk spreadsheet. How did you deal with EUR reporting of MERC?
I just looked too. I think MERC has a better business and FBK is a better investment. It looks like you may be ignoring Price/FCF. For me, that's the biggest piece of the puzzle here. Not sure how everyone else gets to sleep at night with money in FBK, but that's how I do it.
And that's also why I'd rather be lucky than good. This big a pulp tailwind was not part of the thesis.
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Those 700k houses in the upper class subdivisions are now selling for under 500k. Condos and apartments? $240k down to $170k and below. This isn't in a crappy inland community. It's in probably one of the most desirable coastal communities in California.
That sounds like crappy inland prices. Where exactly do you live? If it's one of the most desirable coastal communities in CA, I'd like to buy a house there!
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Yep we just need an enterprising investor to update it :D
I can update that spreadsheet when i get some time over the weekend - if someone can list the link to the 13f (dont have it here)
I just switched the sheet so anyone can edit it. If we end up with Viagra spam in the sheet, I'll have to reconsider that move...
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Most people enjoy buybacks without focus on share price. I equate that to not caring whether you bend over to pick up the soap in your own house or bending over to pick it up in a corrections facility. You better know your environment
Great line... This thread won't give me an investment idea but it did give me a line I can steal!
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we're looking for a similarly cheap hedge against continued deleveraging/deflation as well but have yet to find one...
At the risk of pointing out the obvious, isn't this exactly what Fairfax already did earlier this year?:
Given the nominal figures you're throwing around, I'm guessing you're able to play in the same market, and the cost is at least the same order of magnitude as what you're paying for inflation protection, especially given the difference in the hurdles. (A +2% hurdle for deflation protection seems much closer to the money than a +9% hurdle for inflation protection.)
Did you look into this and determine the protection is simply too expensive?
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This means that physical gold is not an asset, but a liability. It does not produce income -- instead it produces monthly expenses because you have to pay somebody to securely store it.
Re: gold as an investment
It produces no cash flow either positive or negative, if you store it yourself. It does however keep its relative purchasing power and can not be devalued like fiat money... it is the ultimate store of value and has accordingly to WEB, outperfomed BRK over the last decade (in fiat money terms).
As a fisherman, I appreciate the quality of the bait, Ericopoly.
Broxburnboy, all of a sudden stored purchasing power exists? I thought your model was purely cashflow driven which leaves no room for stored purchasing power. Where does stored purchasing power show up on the income statement?
Obviously gold should be included in net worth, but I don't see how you can be a goldbug AND find owner-occupied real estate to be purely a liability. Being a goldbug seems predicated on the fact that purchasing power storage is paramount. It just seems to me that real estate is one of the most tangible methods of purchasing power storage so I find your stance confusing. I can see thinking the stored value will decline dramatically, but I cannot see putting a value of 0 on it. Are we implicitly saying that property rights will have no chance of being enforced in the future making ALL real estate worthless? In a world like that, I can guarantee you'd incur expenses protecting your gold hoard though...
I just genuinely don't know how to connect the dots of this thought process. I'd like to see it though.
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nevermind, looks like there is. Someone is really trying to pick up some loose change to pay 25.52 though... Maybe they make 5 cents a share?
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Any reason not to sell the B's for more than the buyout price of 25.375? Is there a dividend coming before the buyout or something?
I'm not clear why it traded over $25.50...
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Actually, it looks like there's a better way to get the google link. If instead of clicking the link on the google results page you copy the link and paste it like this:
It gives you a direct link to the article. Only a minor additional convenience but I'm lazy enough that I appreciate a direct link (and obviously cheap enough I don't have a subscription!).
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*grumbles*
Just trying to help...
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Here you go:
https://spreadsheets.google.com/ccc?key=0AgRisBBB7yNgdG5ZcTlJQlQxRm1ONDlKd0RvcnBuZlE&hl=en
The US portfolio is up $450M for the quarter, or just over 12%. Not too bad...
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I updated the google spreadsheet with the latest 13F:
https://spreadsheets.google.com/ccc?key=0AgRisBBB7yNgdG5ZcTlJQlQxRm1ONDlKd0RvcnBuZlE&hl=en
Enjoy!
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Glad to see people use it. I just ripped the spreadsheet off from someone else on the board and added the google financial links to it. (Viking made it originally I think?).
And I know this is all a thinly veiled request to update it for the latest 13-F. I'll get to it eventually, but I've been busy lately. I'll find some time over Thanksgiving to do it. If someone wants to put together a spreadsheet for BRK, I'll add that with live links as well.
- Jonah
Google's Browser Market Share Now 20%!
in General Discussion
Posted
Unrelated, but I installed Skype today and was surprised to see adware in the installation package asking me if I wanted to install chrome. Microsoft owns 'em and they're still pimping chrome? Seems odd.
The flip-side is that Google is definitely pushing for market share.