investmd

Pabrai has previously laid out metrics for investments. He wants to buy mispriced assets. I believe he said the expectations for the first 50% of portfolio cash deployed is 2x return in about 3-5years. The next 25% of cash deployed has a higher expected net return and so on till the last 10% of cash may be for potential 10 baggers. Of course, all the purchases with these assumptions won't all go according to plan and thus when one combines the winners with the picks that lost money, his returns "average" over long periods of time 15%/yr. As he is quite "scientific" in his investment process (extensive check list), I'd be shocked if he entered into a new position with a hope of "only" 10-15% annual return. Do not think that would interest him in the least. He makes his 15%/yr by picking mulitbaggers (Fiat, Rain) and forgetting about the losers (Horshead Holdings).

Sculpin, tough patch to be looking to compound savings for Canadians. 1) As you point out the market has been flat for a decade - maybe appropriately so as oil and gas was in bubble territory at time of last TSX high. 2)In addition, C$ is no longer as strong as it had been for majority of past decade - around 2006-2008 it was 88cents USD to a 1CAD and there was a steady march to parity - was a great time to buy. Today, purchase of US equities costs more. 3)Weaker CAD makes travel abroad more expensive Around 2007-2008, I got out of Canadian equities and started purchasing only US equities. Over the past year, have been looking for opportunities in Canada due to reasons above. So what are the opportunities in Canada? With barriers facing the oil patch, in my opinion, the upside is not enough to overcome the possible downside. But what about companies like FFH.TO, alternative asset manager BAM.TO? or even BRK partnership structures (no fees for first 6% of returns then 25% of returns above 6%) that exist in Canada like Corner Market Capital (Sanjeev Parsad) and ROMC (David McLean)?

stahleyp, what is an appropriate amount of leeway for a money manager? Some suggest 10 years. Chou Associates returns over 10 years have been <6%/year. After being in the fund for over 10 years, does one stay the course for fear of missing out? I think this year's annual letter will be important. Will he address why returns have been disappointing and what he is doing to change it? If not, may be appropriate to re-deploy assets?

Well, No Free Lunch, the next trading day provided you with your 5% drop you were wanting. Did you buy? :)

Stahleyp, Both 10 & 15 year results are under 6%/yr. This would qualify as long term and I would suggest this is underperformance for someone so bright and engaged in deep value investing. What I've seen is that the fund manager has the ability to pick equities with 5x & 10x returns, but the benefit gets negated by so many picks that result in >50% losses. So far, he has been able to find winners but unable to avoid the losers. I'm hopeful a turnaround is in the future, but am I wrong to keep the hope?

Chou's flagship Canadian Fund - Chou Associates - with $330M in assets is up some 7.5% over past 3 months - not close to the Chou America. 10 and 15 year returns for Chou Associates are in 5.5%/yr range. I'm disappointed he's not given an explanation as to what he has learned from this underperformance and changes that have been made to avoid similar fate in future.

Mephistopheles, Applaud your effort to be "audio centric" and try connect with your audience. Curious to know how you handled it? Will you attach your presentation?

WTI bottomed out at $48 in Feb 2009 & $30 in Jan 2016. While WTI has "stabilized" at 20% above 2009 lows, the Canadian oil patch has many companies trading well below Feb 2009 lows : CPG (60% below Feb 2009), ECA (40% below), BTE (70% below), TDG (30% below), OBE (85% below), CVE (60% below). Why are these companies not tracking WTI price? Does the market believe these companies are not sustainable at $59 WTI? The "large caps" in the Canadian energy patch - SU and CNQ have doubled from their 2009 lows as one would expect. Why have the smaller companies not only lagged in appreciation but have actually lost market cap since 2009? Factors such as WTI price, environmental regulation, negative press associated with carbon producers and fossil fuel should be affecting all oil and gas companies somewhat equally. However, there appears to be a disconnect. Are these companies a value trap or unjustified market mismatch suggesting buying opportunities? Thanks for your thoughts,

Nice! Sold MKL the same day. Also own BAM & PVI ;) Rkbabang & EricSchleien1: I like BAM for their management, alternative investments, and ability to deploy capital wisely during downturns. Plus, am able to buy in C$s. I too have been adding to BAM recently, while continuing to hold previous investments in BIP (Brookfield Infrastructure) and BEP (Brookfield Alt Energy). Also adding to recent Brookfield spinoff : TSU - Trisura. So overall I'm bullish on Brookfield. My question is why are both of you selling MKL? I bought into MKL a year ago with the idea of it being a BRK like stock that could be held for a long time/forever. After a 25% gain in past 12 months, are you finding it overvalued? Has there been a structural change at the company that caused both of you to get out? Thanks,

Wondering if the 1.5% management fee and the performance bonuses get paid to "Prem Watsa & team" or to Fairfax Financial ? Do FFH shareholders benefit from fees paid by FIH.U? Thanks, Jehangir

+1

#1 above intuitively it makes sense. Problem, as I've learned, is that markets are highly correlated. If there were/when there is another black swan event resulting in a large correction/recession, likely all asset classes will be hit equally. So whether one holds ETFs or a portfolio of "undervalued" stocks, likelihood is both will be down 30%. The question is which is going to rebound better.

The idea of anti-fragile is something that could withstand something previously unforeseen, the "black swan" event. It will be different next time, but who will be around to take advantage of the opportunities in the next different environment. Who has the DNA and financial wherewithal to survive and be an acquirer...

Have followed with interest this thread started by LongHaul. Tried to re-read most of it to see if there is a consensus opinion on one side or the other. My summary of the thread is that although there are a variety of opinions, the majority do NOT feel that S&P indexing is moronic right now. Reasonable conclusion? Whilst arguments have been made in the thread for overvaluation of equities and high % of portfolios in equity, I have to think that long term index investing is still the optimal strategy for 90+% of people who are not part of this Board. If a friend with reasonable intellect but little interest/understanding of markets asked me how they should invest their savings, I think I would still suggest broad spectrum, ultra low fee ETFs, ie: the Buffett suggestion. After reading this thread, is this wrong? For those of us on this Board who seek alpha, index investing might be more reasonable when valuations are not so high, but it is likely not moronic now.

Interesting. Reasonable thesis and good play on specific knowledge you have. In this case you are making the argument for a macro event and placing bets that it may happen. If there is another "great Recession" unrelated to a plague, it's unlikely that this pharm company may get stronger. It might not survive the downturn. R&D may get halted. Due to recession, drugs won't be bought on patent....Thus, whilst the investment thesis may be sound, it wouldn't be part of an "anti fragile portfolio" in my view.

Thanks. I did enjoy Taleb's book, Antifragile, but it was challenging to read. It's been a couple of years. You are right, I should look at it again. A 90% cash portfolio wouldn't "strengthen under stress", so don't see why that would be "anti fragile".

You want to look for something that gains market share or can buy distressed assets or be a cannibal during a downturn. Many options here: Brookfield Asset Management Oaktree Capital Constellation Software Interactive Brokers (trading volume spikes in volatile markets) Industrial distributors (FCF increases as they reduce inventory and collect receivables) CVS - Non-cyclical cannibal trading at a cheap valuation (cannibal thesis disappears if they buy Aetna) BRK (can do distressed deals like BAC and can get better pricing for insurance) NVR CACC Liberty Complex (e.g. SIRI acquisition) - though debt can be a problem here AN/AZO Non-obvious examples were WFC (and possibly JPM) during the financial crisis. They were able to buy distressed assets, capture deposits from weaker institutions, etc But this is generally true for the stronger (and smarter) companies during a sector crash. Canadian Natural Resources did a pretty good job buying assets during the oil crash. It wasn't anti-fragile, but it managed to maintain it's value and is now leveraged to any upturn in oil prices. A few key ingredients: good capital allocators, cash (or at least low leverage), strong FCF. Thank you. Agree fully with your well worded comment of being able to buy distressed assets or being a "cannibal". Thanks for sharing your insight on the potential cannibals. As we sit at markets at all time highs and low VIX, I would think a portfolio of "anti-fragile" companies could carry on doing well if markets continue upward, but provide the optionality of "winning" by being able to acquire when markets regress. Win-win scenario? Brookfield may fit this model well.

I would think that an anti-fragile portfolio is one that will go down when markets tank, but due to its intrinsic DNA/value add/advantage bounces back much stronger as competitors lag, rather than a shorting strategy.

Nassim Taleb coined "Anti-Fragile" to represent an entitiy that not only is resistant to breaking but actually gets stronger after suffering a setback. Antifgragile can be applied to economies, individual personalities, and the investment markets. Berkshire Hathaway could be an example of an equity that is "antifragile" - comes back even stronger when it takes a beating. When setting up a personal portfolio in the anti-fragile model what would one own? BRK? Is FFH "antifragile"? What equities or funds/fund managers do you consider to be "antifragile"? Caveat is you are a long term value investor and have the ability to tolerate downturns.

educatedidiot, Thank you for the clarification. Much appreciated. Best,

I thought they bought in to Fairfax in a big way, but why is it I don't see FFH listed in above link of holdings? Did they buy in after Sept 30, 2017? The 3Q letter discusses Fairfax as being undervalued by the market...

Racemize, Thank you for sharing this important piece which has been a tremendous amount of work. Well done indeed! Commendable you would do that and compare your own firm's results. After reading this essay, my take for someone looking to invest $s today with a money manager, is that one would likely be well served going with almost any of the current members on the list. However, the "best of best" proven value investing options today probably include Braddock Partners, Giverny Capital & Arlington Value Capital and ? Austin Value Capital. I don't know the funds, but will look into them. Does anyone with more experience than me, have thoughts on above or specific insight into Braddock, Giverny, Arlington Value? Thanks,

Dazel, Thanks for sharing your insight and disclosing your big position in FFH. In re-reading this thread, the points I can glean from which you've built an argument for FFH include large cash flow, outstanding Bond Investing with Bradstreet, increased focus on insurance rather than capital gains, advantaged position in fast growing economy of India, focusing more on quality, & world wide acquisitions making it more like a BRK. Since you started the thread at end of July 2017, further cash has been raised through First Capital and Lombard deals and FFH has announced share buy backs. The stock is up 15% since July 2017. Can you share what you would consider to be "fair market value" today? When you bought into this "hated/misunderstood" stock in a big way, you must have had an estimate of how undervalued it was. Curious to hear your thoughts. I'll venture a guess that you think the stock is a double in 2-3 years.

Didn't think his mutual fund structure would allow him to hold a company that is not publicly traded, so really don't know how he is playing this. But time will tell. Also don't know if it would align incentives as his skill set is supposed to be in the game of purchasing mispriced/misunderstood equities. I do wish he would focus his efforts on what would prevent him from getting into more of these situations where he loses >70% on certain stocks. He knows how to pick "winners". Can he avoid "losers"? or at least get the balance titled in favour? thanks,

Fair question Cigarbutt. Bought the funds years ago due to Chou's devotion to deep value investing, ability to go against the grain and understanding of when companies are deeply undervalued - the "cigar butt" approach. His "honesty" and humility (when he halted his management fee due to subpar returns) helped drive the investment. Plus his mutual fund pays out a 0.5% MER vs. the 1.0% that is standard in the Canadian industry. Made it a core position - it's my only mutual fund holding. Over the years, he has been able to pick multi baggers but results have been poor because of significant number of stocks that tanked badly (Valeant, Sears, RFP...) So your question is at this stage, why do I hold on? Probably a psychological error in that one doesn't want to exit a bad investment, and declare that initial thesis was wrong, and possibly miss out on the always possible "big turn around" that may be around the corner. As Stahleyp says, one is "hoping" for a reversion to the mean. We've been through the bad years. Might as well wait around for the perfect storm of 5x returns that bring his 10 & 15 year returns back to where they "should" be. Bottom line is you are right, if it's not a good investment to buy today, it's probably not wise to hold on to an old investment. But psychologically....