HJ

SAM is one I found early, I bought it at $21.50 in 2005, and sold way too early ($113 in 2012). I unfortunately no longer own it. Not that I have that much insight about when to sell vs. hold, but Buffett speaks about holding an investment forever, and in many cases he did, even for the less successful ones. Yet he sold Freddie Mac, which makes it an interesting case study. See the interaction below of him explaining why he sold his position. https://www.youtube.com/watch?v=QrFyo5Ettcw So I think 1) you have to identify the nature of the business, in the case of a "compounder", understand what allows it to generate and sustain high return on equity, (in the case of Freddie Mac, the ability to have a cheaper cost of funds advantage vs. any other financial companies out there), and 2) have that "sixth sense" to see what could alter the risk / return dynamics, and be able to walk away when others are still fully enamored with, in this case, a legislatively mandated "moat". So it requires one to understand the nature of the investment and risk and return dynamics so much that one sees it coming, whether its a certain management behavior, or external factors, a level of understanding probably only possible after observing numerous successes and failures in all kinds of businesses in all kinds of environments. And then, everybody makes mistakes, it's also how you deal with the mistakes and improve yourself that matters. It's not the end of the world if I owned a compounder which, in hindsight, stopped compounding some point after I bought it. Maybe I simply failed to fully understand the dynamics that caused it to have compounder investment characteristics to start with. I just need to sharpen the pencil and read some more K's.

The fall off in performance probably has more to do with the soft insurance market, especially in E&S. It's generally acknowledged that the market peaked in 2005 post Katrina. And has been in a soft market ever since, briefly interrupted by the "Great Recession". But then again, the P/B ratio reflects that, falling off from 2x down to 1.2x. It's a tough environment, and there's something to be said for Markel Venture as a strategy, which diversifies the space where they can get ROE from. That book of business, though is of manifestly lower quality than the ones owned by Berkshire. But evaluated as a pure insurance company, I'd say it's "fair value", in line with the other good underwriters, WRB, CB, etc.

Yeah. I certainly agree with that sentiment. One thing about looking at insurance companies is that it's really hard to look through the filings to get a feel for what's going on in each of the underlying business. Even the regulatory filings doesn't really go to that degree of granularity, and these guys are going in and out of lines all the time. So you just sort of have to go with some level of trusting the management. In a way it makes the job easy, just go with a P/B ratio. But it certainly doesn't satisfy the intellectual curiosity.

Is it the same question as asking what is the fair value for Berkshire? Whatever we think it should be, market has priced it at 1.7 - 2.7 x book back in mid 90's, 1.5-2x book back in early 2000's, 1.2-1.5x since the crisis. And in each case, as long as you have sort of avoided the couple of years where the valuation range took a jump to a different range, the return has all been quite satisfactory. The big piece of it, of course, is also the insurance cycle in the background, and Markel valuation range is influenced by it much more than Berkshire.

I think it's being pragmatic vs. dogmatic, and quite wise in an effort to achieve the best outcome for the long term good of the company. Creating an acrimonious environment is not good for the company any way you cut it. There are many shades of grey in how the corporate boardrooms function.

I watch it too, love the show. Would love to see follow ups in another 2 years on how the businesses are doing then. There's also the restaurant fixer upper shows, which I catch once a while.

So here's Tide http://www.wcpo.com/money/consumer/dont-waste-your-money/pg-raising-prices-of-some-tide-detergents-by-as-much-as-25-percent Here's Arm & Hammer http://stream.wsj.com/story/corporate-intelligence/SS-2-60962/SS-2-492167/ "So far, P&G’s effort with a budget Tide, called Tide Simply Clean & Fresh, has had mixed results. Data from retailers in the past month indicated that sales of the new budget detergent may be coming largely at the expense of regular Tide, whose sales have declined, instead of Arm & Hammer, which has so far held its share, according to a report this week from Jefferies analyst Kevin Grundy. One reason may be that some retailers placed Tide Simply on shelves next to the pricier Tide, instead of placing it next to cheaper detergent brands as recommended by P&G. That could change in the coming months as retailers make changes to their shelves and displays, Mr. Grundy said. With $3.2 billion in annual revenue, Church & Dwight is much smaller than P&G, whose yearly revenue tops $84 billion. But it is heavily exposed to the laundry business, which makes up about a third of its sales, and to this point has benefitted as cash-strapped consumers have traded down from pricier detergents to bargain brands. Arm & Hammer liquid detergents on average cost about 60% less than Tide, a premium brand. The growth in recent years has helped Church & Dwight capture roughly a 13.7% share of the North American laundry detergent business, while P&G has a 59% share, according to a report from Mintel Group. Church & Dwight also sells toothpaste, baking soda and cat litter under the Arm & Hammer brand. " I'm giving Arm & Hammer a slight edge to continue to gain share, mainly due to the broader economic environment. It's still interesting that Tide has 59% share vs. A&H at only 13.7%. But any walk down a grocery isle wouldn't indicate disparity of that magnitude at all. I think on the margin, A&H is winning the distribution war.

Seems like each specific leasing business has its unique aspects, and difficult to generalize. But couple of things come to mind: In the case of aircraft leasing, it's some enterprising businessman saw, within a businesses that is essential to an economy (air traffic), but for whatever reason very difficult to manage (in this case, unions, high operating leverage on a down turn, etc.), that there is an opportunity to carve out a reasonable business sub segment that can somehow be shielded from those aspects that made the business difficult, and generate reasonable returns. Then in the case of container leasing / rail car leasing, there is some network / logistical advantage for different shippers to share equipment. The back haul of empty containers from North America back to Asia, for example, and where do you place the empty containers, for example, can be managed much more efficiently away from any single shipper, and the maintenance / service aspect of the equipment may also be benefit from sharing. Offshore drilling shields the business away from the dry hole risk, United Rental, Agrekko, even Hertz benefits from sharing and management of logistics.

The last real estate bear market in China was 1993-1995. Prior to that, was 1949-1955 where most private ownership were slowly confiscated. From 1993 to 1995, in USD terms, Shanghai real estate went down probably 60%-70% for domestic buyers and significantly more for foreign buyers. For domestic buyer, though, most of that depreciation was not visible, because it occurred in the form of RMB exchange rate going from 3.5 to 8.2. On a previous exchange on Macau gambling revenue, this reuter's article estimates transactions running through Macau to avoid capital control at $202 billion a year. http://www.reuters.com/article/2014/03/12/us-china-unionpay-special-report-idUSBREA2B00520140312

Kraven, A Chinese one at that? lol!

There is a world of difference. It's the nature of financial companies to manage both sides of the balance sheet, the liability side and the asset side. For certain assets (bonds and loans), where the difference in return on the asset side is measured in basis points, managing liability, and being funded the right way makes all the difference. I work in the world of creating CLO's, which basically is a product created to invest in LBO loans. Pre crisis, there are 2 ways to do it, 1) through the use of a total rate of return swap, which is basically buying loans on margin, guys used to do it on a 4:1 leverage, but with mark to market risk, and margin posting requirements. 2) through CLO's, which are financed with term funded, and rated debt, with reinvestment periods (i.e. it's agreed that proceeds from asset maturity can be used to purchase other bank loans for a period of time after the deal is done). CLO equity pre crisis was leveraged 12:1. But it's term funded, with no margin calls. Through the crisis, these loans which historically traded 97%-100% traded down to 60-70, and all the total return swap funded vehicles were forced to meet margin call, most couldn't make it, and were forced to liquidate, handing investors losses to the tune of 70%-80%. The CLO's, on the other hand, didn't have mark to market trigger, and in fact, was able to reinvest any loan maturities into the crisis, and bought these loans at 60%-70%, with most ultimately fully repay, reaping 50%-60% returns from the 60 purchase price. Now the investor in those vehicles were leveraged 12:1, so imagine the ultimate realized returns to those instruments. Even though default rate spiked, it was more than made up by the investments that those vehicles were able to make throughout 2008-2011. All thanks to the form of the leverage that it took, which at the time actually looked quite inefficient. The debt issued by those CLO's were downgraded by the rating agencies when it was the bleakest, but now virtually every single tranche is expected to be money good. Pre crisis, the sophisticated hedge fund investors preferred leverage through total return swap (because they could unwind that trade easily, and there's perceived liquidity, unlike CLO equity, once you bought into the trade, you can't really unwind, other than selling the investment outright, which had bid/ask spreads of 5%+/-), and they thought they were being prudent by being only 4:1 levered rather than 12:1 in a CLO. So here's my story of mark to market vs. funded term leverage. In an asset class like equity, it's what open ended mutual fund manager deals with constantly, i.e. investor redemption at the worst of times, forcing them to sell into a sell off. Think Bruce Berkowitz in 2011. There's a reason he want to live in a different vehicle. If one were to analyze, on the asset side, (depending on what asset you are buying), you have say a down market every 4-5 years. For bonds in general, I can think of 90-91, Drexel induced high yield blow up, 94-95 rate cycle, where mortgage funds blew up, and all bonds had a bear market, 97-98, emerging market bonds and specialty finance companies, manufactured housing, Long Term Capital, etc blew up, 00-02, telecom and high yield blew up, 08-09, everything blew up. For P&C insurance, where it's more liability sensitive, for the smaller guys, whether it's due to mismanagement or what not, you could always have somebody get into an isolated situation, and go out. But for the system at large, with well diversified liabilities, the cycle is really much longer. From '91-'92, you really can think of only the asbestos / Lloyds related episode in the late 90's to 2001, which caused industry panic, and put industry solvency into question. Katrina caused lots of damage as well, but it was much more focused on a handful of companies with cat focus, and much smaller in scale relative to the industry capital, compared with any of the asset cycles that I have just mentioned, and very quick too. The life companies are a different story, being much more asset sensitive. But the only time the system was put on a question mark was '90-'91, when Equitable Life was in doubt. Once you have managed assets through several of those down cycles, you would come to realize: being funded in an insurance company setting vs. margined borrowing, there is a world of difference, potentially the difference between compounding at 20% year i year out vs. being liquidated, at 50% loss.

Oh, make no mistake, I am not bearish on the Macau casinos, and am not bearish on China long term either. For a country of a billion and half people to experience in 30 years, what the West experienced in 200 years, all sorts of extreme phenomenon happen. What has been going on is extraordinary, but for most entities grounded in Western framework, quite unpredictable. For a North American investor, though, if you so chose, you don't really need to be involved in the game, which is a tough one to figure out. There's a reason most of my friends in China chose not to preserve their wealth in the form of equities, but in real estate. Because the equity game on the ground there is too hard for them too.

There are all sorts of innuendo's that the junket operators use the Macau casino's as an avenue to launder money, and mainland businessmen use the casinos to escape capital control. It wouldn't be surprising if a decent chunk of that money lost in the casinos represents flight capital.

Let's just say China is a replay of Japan in 1990 (which I'm not convinced it is, but let's just say that's a pretty bad scenario to follow). Even if you had 100% foresight about what's about to happen in Japan in the following 20 years, what would you have done about it, and what could you have done about it, sitting in North America managing a North American focused portfolio, with a North American liability stream to defease in 1990? And whatever you would have done, would it really have mattered in hindsight?

Structured Finance / Securitization 17 years

It's absolutely true that North America is resource rich. The discovery of America and its integration into the world economy on European terms is certainly one of the most important factors in explaining the ascent of the western economies. Precisely for that reason that humanity has been migrating from Eurasia to the Americas for the past 500 years, and will probably continue to do so for the next 500. But I don't buy the argument that somehow socially engineered demography was necessary, or even desired in China for it to have developed over the past 30 years. The baby boom in the US did end by the 70's. The population of Japan and Germany are in decline, all without the dictate of a governmental policy. Even with the one child policy, the truth is the Chinese government could never really control what went on in rural China anyway. And today, even without the government's dictate, the traditional preference of boys over girls is gradually given way for most families, even in the rural areas, because finding a wife is getting to be ridiculously expensive for families with boys. The one child policy has as much to do with China's economic success in the past 30 years as the previous "glorious mother" policy has to do with the economic failures during the Cultural Revolution and Great Leap Forward. They are "lazy solutions" by the central planners with unintended consequences for generations to come.

Anybody has Pine River's thesis on why Progressive is a short? I've always been interested in the stock because of similarity with Geico. Maybe 2.5 x book is a bit rich, but shorting it here is a whole different statement.

In 1950, the population in China was somewhere between 400MM - 500MM. By 1979, it was a billion, and one child policy needed to be instituted. (The growth rate was about 2x that experienced in the US post war baby boom, which was unprecedented up till then). The population didn't naturally more than double during that twenty odd years. Starting in the 1950's, Mao encouraged families to have as many children as possible, partly to replenish the soldiers lost in the Korean War. Mothers who gave birth to more than 10 children are given the title of “glorious mother”. Most Chinese who are in their 60's and 70's have, by today's standard, extremely large number of siblings. The baby boom in post war China was given an extra policy steroid. The policy, of course, needed to be turned 180 degree by the time of Mao's death. China was the most populous country by the 1500's, partly as a reflection of the development of its social economic sophistication relative the the rest of the world by that time. The policy induced demographic change post 1949 is another piece of social engineering that the central planners will never acknowledge as a silly mistake. The Malthusian line of argument, while may have validity in short run, is a bad argument in the long run. I would never bet against the human race in the truly long run. Whenever I see relics of past civilization, I simply can't help but marvel at the ingenuity that they embed. How do you bet against the limit of a humanity that built the pyramid without 20th century machinery, travelled to the moon, figured out how to communicate thousands of miles without even using a wire and converted atoms into energy!

Interest discussion. I happen to have glimpsed at the first third or so of his book "Onward". In addition to coffee, he talks about creating an environment just for people to hang out, the "Starbucks Experience". So for example, he took out the breakfast sandwich when he came back as the CEO, and that's just when McDonald was starting to serve coffee, at the time perceived as a big threat. The reason is he thought the smell of burnt cheese detracted from the smell of coffee, integral to the coffee experience. Does the smell of cheese really cheapen the experience? I don't know. But one thing is for sure. When my friend and I meet up at some random place, it's invariably a Starbucks, not McDonald or Dunking Doughnut. Those guys can have their customers, and Starbucks will have theirs. Stuff like free wifi, when he first started it, all are integral to the experience. Incidentally, I also happen to catch Danny Meyers, the restauranteur on Bloomberg TV once, talking about the tremendous success of "Shake Shack", the New York burger hang out when he first created it at Madison Square Park. It was literally just a shack in the park. In the summer, people line up for hours. He mentioned that return on investment wise, it's the single best investment across anything he's done, and that's from a guy who created some of the most premium fine dining experience in the world. And the secret? He thinks people are there just to hang out and watch other people while enjoying a burger under the sun. When you think about it, coffee shop is the one place people (who drink coffee) go to pretty much every day, order more or less the same thing. How much of that is habit and how much is conscious choice? I wouldn't call "Onward" the greatest business book you'll read, and a lot of it is wishy washy stuff, but for guys who build brands for a living, there are lots of interesting nuggets.

I think it really depends on the specific locations, competitive dynamics, etc. My mother in law lives in NJ. Ever since Costco in that town installed a gas station, and soon after, Sam's Club down the block followed suit, the couple of gas stations that I used to go to have shut down. The other thing is the continued decline of cigarette sales, which seemed to be a significant pct of those businesses. So it seem to really depend on the specific circumstances of those places.

I think the other thing that's impacting it is the changing disribution landscape. You have Walmart, Costco, Whole Foods and drug stores taking shares away from grocers, and the rapid expansion of the dollar stores. You have to really adjust your marketing strategy / product offerings to reflect the reality of the market place.

The more I read and think about the detergent market, the more it makes me feel that among all the consumer product categories, the consumers may exhibit the most price elasticity here. The brand loyalty in this category is probably more fleeting than other categories. Compare this to, say toothbrush, tooth paste, or hair care etc., when pinched for money, most people will be quicker to cut on something they apply on their clothes than something they put into /onto their body. In a tough economy, with large segment of the consumer migrating over to the discount / dollar stores, it's not a surprise that Tide needs to do something to shake up the competitive dynamics in its business. But I'm very curious to find out if they end up self cannibalize more or take shares away from Henkel or Arm & Hammer. On a side note, I was at a local Costco today. Prominently on display, sticking out of the end of the laundry isle, are Arm & Hammer detergents and Kirkland branded fabric softners. Tide is there as well, but is placed in the middle of the isle, and seem to be under-represented vs. its market share.

I'm by no means a consumer products expert, but someone recently switched me onto the sector. And the company that I've spent a little time on is Church & Dwight, CHD, which today came up as potentially on the receiving end of an incipient detergent war to be initiated by Proctor & Gamble's Tide per this WSJ article below: http://online.wsj.com/article/SB10001424127887323932604579053433586299194.html Truth is I hardly ever give it a second thought on picking the detergent, but Church & Dwight CEO has been saying for a while now, quoting Nilsen number, that Arm & Hammer has been gaining shares due to consumers trading down in a tough economic environment. (Arm & Hammer is a product 50% cheaper). But not long ago, Adage was proclaiming P&G the winner in launching Tide Pod last year: http://adage.com/article/news/tide-pods-winning-7-billion-detergent-wars-redefining/238779/ And also articles like this: http://www.srginsight.com/index.php?option=com_articles&task=detail&id=29 Now how is one to figure out what's really going on in the product category, and evaluate a) how likely a price war will develop in this category, and b) what the outcome could potentially look like if such a war were to be initiated. Would Tide ultimately cannibalize their own premium brands more, or will they actually take share from A&H? Has there been precedents for price war like this for consumer brands? The Cola wars was not quite a price war in my mind, but more just a publicity stunt, and a fairly successful one by Pepsi. Is this the "New Coke" moment for Tide? I just find it fascinating to try to look out several years on a product like this, and any thoughts from the board on the subject is very welcome. In the process of googling this, I found this article interesting, talking about the power of the Tide brand: http://nymag.com/news/features/tide-detergent-drugs-2013-1/ But this comment from the article actually exposes a potential weakness: "Despite its popularity, Tide is not a big moneymaker for stores. P&G’s proprietary surfactants and enzymes are relatively expensive to produce, notes Bill Schmitz, a Deutsche Bank analyst, so Tide’s wholesale cost is steep. Only so much of that can be passed on to customers. “It’s so tight,” says Schmitz of the profit margin. In general, a retailer clears just a few percentage points on a Tide purchase. A store that charges $19.99 for a 150-ounce bottle might claim $2 in profit. " Anyway, rambling a bit here, but would love to hear thoughts from the board on this subject.

I don't think they bought it thinking it's a good business the way Buffett's businesses are, but a reasonable enough business that's bought at reasonable price. So whether you get satisfactory return or not over the long term is entirely dependent on their ability to manage the commodity cycle on the cost side and the inventory / consumer preference cycle on the revenue line. Once a while you may get lucky and be able to take advantage of export dynamics that could boost the industry profitability overall (SFD called out export demand as a driver of their profitability last couple of years). This all occurs with the macro back drop of US being one of the most competitive country worldwide as far as agricultural productivity is concerned (fertile land, fresh water supply, cheap fertilizer, mechanized farming, genetic science, etc., etc.) One thing to understand is that the protein market across the globe is pretty protected from international competition, so you don't plan for exports when adding capacity. But the Chinese government may not be able to keep theirs domestic market under full control for whatever reason, the speed of change in consumption pattern in China is really astounding, and the supply chain there also quite unstable (blue ear desease a couple of years ago, images of dead pigs floating across river, Yum had problem with their chicken supply chain recently, etc., etc. ), which could argue for these spurts of export gains more frequently looking out over the long term. They would argue that they have very strong relationship with the cattle ranchers to manage the cost side better than average, and to the extent the business was historically run as a coop, profits was not maximized, and there is probably room in the production chain to squeeze out some incremental margin. Precisely because it is a very tough business, that it will not attract new entrants, the competition dynamics of the industry will be held at manageable level for everybody to earn not an extraordinary ROE, but a generically acceptable private business ROE. Competitive advantage is not obvious from the out set, it's all in how you operate it.

Return on their fixed income portfolio is one of the many factors that affect insurer ROEs. For P&C guys, the underwriting cycle drives much more of their ROE's. For Life guys, they have a meaningful portion of the book dedicated to annuities, where they have to deal with pricing of minimum guarantees, etc. With the development of the Cat bond market, and the popularity of side car deals and ease of forming a new Bermuda reinsurer, argument can be made that the P&C insurance cycle may very well be dampened meaningfully going forward. But still, the underwriting cycle will having a much more dramatic impact on ROE (over the long term) than simply bond market returns. For one thing, the bond portfolio of P&C guys tend to be very high rated, AA- type, which is not what most levered bond portfolio look like. Although in extreme bond market return scenarios (like the ones we went through in '08-'09', ROE was clearly affected by bond returns, that tend not to be the norm.