original mungerville

I hear you - this has been my view since I started investing in 1999. 2000 was the top of a massive bubble, reinflated again into 2007, and then now again into 2014. I made money in all the downturns, and generally took off half to 100% of the hedges coming out, but then put them on again. I think I have been hedged or semi hedged for half of the last 15 years!!!

3) Cash. If you have continued financial repression, you want a much higher share of equities, because they are the highest performing asset, compared to bonds and cash. If you think financial repression will go on for another 20 years, you need to have equities. For the scenario that the central banks will exit their policies, you will want to own cash, because that’s the only asset that does not get impaired when interest rates rise. So you have two extreme portfolios: One almost fully in equities, the other almost fully in cash. So that’s what we do: We have about 50% in equities, and 50% in dry powder-like assets. That means some cash, some TIPS, and some long/short equity spread trades. But as said, we are reducing the equity part over the course of the year, to build up dry powder. http://mobile.fuw.ch/article/equity-markets-are-overvalued/ I wonder what Montier has against Gold and Silver? I mean to just be 50% cash for deflation and 50% equities for inflation with no allocation to previous metals seems a little odd to me. I see Gold as a cash like investment that should respond well to financial repression providing a higher return than cash. At some point, let's say if the market goes up from here and equities go to a bubble, or say even now, equities get so over-valued that the allocation really should be zero. So by Montier's logic he should be 100% cash. But he can't because of financial repression and the timing of the burst of the bubble is unknown. In that situation, I would rather be 80% cash and 20% precious metals - that is my 100% cash equivalent at a time of financial repression and a bubble in equities. I may be the only one on this board with that view.

Gio, Yes, buy buy buy Lancashire! I think Berkshire should do well in almost any environment as well. With the former, you get no exposure to the economic/market environment but concentration risk in Brindle's underwriting. In the latter, you get some exposure to the environment but more diversified earnings streams. Of course if Brindle can produce a consistent ROE in the mid to high teens, more money will be made in Lancashire at this point. We are swimming against the tide… So better choose among 2 strategies: 1) To be an incredibly smart stock picker, a la Packer; 2) To invest in something whose future results won’t depend at all on what the stock market does, a la Lancashire. Strategy n.2 is what Mr. Buffett is concentrating on since the late 1990s, preferring the purchase of whole operating businesses to the stock market, unless the stock market were hit hard (2003, 2009). Original mungerville, I am buying more Lancashire today too. ;) Gio

Agreed Liberty, however earnings to GDP is just one indicator. What about bmichaud's attachments on profit margins and price to sales, or would you argue that the blogger's argument refutes those as well because they also have different means depending on interest rates (and I would suspect government deficits/surpluses) during the three periods. I am not suggesting either is correct just looking for your views. I guess that could be the case as well?

Maybe I have been bearish for good reason?

So second to 2000 as an all time high in price-to-sales combined with an all time high in profits relative to sales (ie profit margin). When you multiply those two out, its not a good place to be in terms of valuation is it?

What that article does is that, if correct, it means we are not quite in bubble territory yet. We are at very very high valuations, with the Fed tapering no less (which could have huge ramifications which may not be completely priced in...I don't know), but not necessarily in bubble territory. This is important because, as Jeremy Grantham points on, bubbles tend to burst / implode themselves whereas very high valuations can persist, correct a little to high valuations and high valuations can go on for some time. The article also may also explain why Munger said at the last Berkshire meeting that just because Warren put up a chart on profits to GDP 15 years ago, it doesn't mean that that view is of the most relevance. If this article is correct, it would explain my over -bearishness for the better part of 15 years (which made me big money in the downturns of 2000, and 2008 but cost me otherwise). 15 years... I have no anchor but this is the first time I have seen this argument backed by data. Having said all this, we are very high valuations regardless. And the Fed is trying to stop its grand experiment.

Yes, thank you. A very good read. With continuing government deficits, and low interest rates, maybe corporate margins could remain elevated for some time or at least not fall back too far...say by only 20% or so... If this is the case, the charts in Buffett's 1999/2000 articles in Fortune magazine showing profits relative to GDP are off...which would have been great to understand about 2 years ago!!!

That was good. First, the Western world put them on an unsustainable growth path fueled by our debt bubble in the US and elsewhere that boosted unsustainable consumption of Chinese exports. Second, when that blew up China has tried to maintain that growth trajectory using unsustainable domestic credit growth rate. So what happens next? Either IWM tanks or gold goes through the roof or some combination of both over time.

Zorrofan, Do you really think the US wants to get involved fighting Russia in their backyard? What makes you think they can win on the ground in Putin's backyard? Do you think Putin would cave to US pressure? Look, I'm no expert but if the US doesn't back down, let Europe negotiate with Putin, this can spin out of control. OM Does the US WANT to get involved? Of course not, but I am saying that all of our allies are watching to see what happens. How does Taiwan feel given the US is supposed to protect them from China? South Korea from North Korea? Israel vs Iran. What message will doing nothing send to countries such as China and Iran? The longer term costs (in foreign policy) will be huge if nothing is done. I don't want a war, and i don't think there will be one. What I am saying is that Europe (NATO) and the US have to do something. I don't imagine Putin wants a war either but he is counting on the US to talk, talk, talk some more and do nothing. Putin put 15,000 troops in Crimea because he is not expecting a fight. If NATO/US puts a few hundred troops into Ukraine as part of a "training exercise" Putin will get the message. Restart the missile defense shield along the Polish border with Russia as well. Putin doesn't give a rat's A@@ about being kicked out of the G8. He will care about the missile defense shield, about sanctions that hurt economically, and of course he will understand force. A few troops in Ukraine sends him a message and he will back down. Doing nothing costs more in the long run. cheers Zorro Again, I'm no expert but I don't think putting a few US troops in the Ukraine is going to do anything but escalate a conflict. My guess is Putin does not want to be seen giving up influence over the Ukraine - especially directly to the US. So I don't think that happens - but again, I'm just talking out of my ass here, I know nothing in this area. I could see the US/EU really opposing Russia with sanctions, Russia taking Crimea, tensions getting a little high, and then Merkel gets sent to negotiate with Putin and everyone saves face over the rest of the Ukraine. But I can't see putting US troops in there making any sense.

Had Berkshire's book value collapsed in 2007/08/09 in line with the value of the S&P, Buffett would have beat the S&P over the past 5 years. So should we want a mea culpa for a book value that didn't collapse during a time of extreme market stress and therefore didn't rebound?

A market bottom in 2009 and then a market top - ie end of 2013 - is not the best period for measuring performance even though it happens to be 5 years in this case. His rolling 5 years is a great measure, it worked every year except 2013 - that's a pretty good record for the yardstick. So not only has Berkshire's performance (over the past 5 years) been amazing but so has the yardstick (for several decades). There is no need for a mea culpa.

Have you thought about what it means to "defend Ukraine's sovereignty"? We are talking about a country which they used to call "little Russia" a century ago. And you think the EU and US would draw the line here, on Russia's front porch, and threaten to go to war over it? What would they have to gain and would it justify the risks? Should the US have some jets circle over Ukraine to project force? What if one got shot down? This is a high stakes game with potentially terrible outcomes and it's very easy to maneuver yourself into a corner. Best not to buy into the game if you're not prepared to see it through to the end (which nobody in the West is). I can guarantee you every actor in this play has carefully considered what they are willing to wager. And Putin's conclusion has been he can make a move. That should tell you all you need to know. I would also reiterate that Crimea is a sideshow because it's pretty clear that it's Russian now and will remain so (nobody can force them to leave by force and they will get a majority of the people to vote to split from Ukraine). The real question is what will happen to Ukraine East of the Dnieper river (and Kiev which sits on top of it..). Exactly.

Zorrofan, Do you really think the US wants to get involved fighting Russia in their backyard? What makes you think they can win on the ground in Putin's backyard? Do you think Putin would cave to US pressure? Look, I'm no expert but if the US doesn't back down, let Europe negotiate with Putin, this can spin out of control.

I wouldn't count on a bailout for an earthquake and so I buy separate earthquake insurance on my house as well. On the main question, I would say if its a 30 year fixed mortgage that is tax deductible, I would borrow the money and look to offset part of the interest with some very very low risk investment while I sit and wait for some really good opportunities to come along over time. They surely will to someone who is an active investor - the next 4 years in the stock market won't be anything like the last 4 years so there will be a big head wind to making progress - at least in real terms. We Canadians can generally only get 5-year fixeds (which in my mind is basically a floating but more costly so people get them and tend to get screwed versus just getting a variable). We can now also get 10 year and 15s but they start getting quite expensive and the interest is not deductible unless its used for investing purposes - but even there there are a lot of caveats, tax rules federally and provincially on what you can deduct, etc ...So we don't have the benefit of a nice 30 year tax deductible opportunity, that you don't have to renegotiate for a long period, which is a pretty important opportunity.

Now if its going to be hard to draw down on the house in future outside a mortgage (eg, if you are retiring early soon, etc), or if you think interest rates are going to spike, etc, and the 30-year tax deductible option is there, the answer is probably different. I would just try to earn a minor positive or negative spread over a tax deductible 3% with as little risk as possible. I would take a small negative spread rather than to expose myself to minor risk in order to earn a small positive spread. I would reserve risk exposure for when the opportunity is large relative to the price paid.

Paying off the house has some risk as well, although very small. House burns down and your insurance company is insolvent? or You don't carry earthquake insurance? Maybe you thought it wasn't necessary in Seattle? I think for example most in Seattle do not carry it, although there is a risk of a large quake there. I don't know where he lives, but I'm familiar with Seattle. Even here in California many don't carry it. I presume the mortgage is non-recourse... that can be very handy!!!! Although not very likely. Kind of like a basket of munis being worthless is not very likely. Eric, Those insurance and earthquake risks remain present when you layer on the muni risk. But if your point is that a paid off house is not some sacred risk-free thing, then I certainly agree. My point was not that munis are too risky, but that that is kinda marginal, and that it is nice to be removed from the need to invest and to only draw down on the house when there is a huge opportunity.

I agree completely with Uccmal - at this point in time, the market is very high so for the average person, definitely pay down the mortgage... but those on this board are a little more involved in investing so the answer is more difficult. You aren't buying the market, so there should always be something to do in small caps, etc. But if you are not finding anything, there will be another time to borrow a lot (secured against your house) to invest and it probably is not today. Further, the pressure of not having to invest in something now (because you paid down the mortgage and don't have the cash) and the barrier to accessing that cash (ie going to the bank to set up a HELOC) will help ensure that when you do decide to go through the trouble of getting that HELOC and borrowing against your residence, the investment will have a very large margin of safety. If you are in the US with 30 year mortgages that are tax deductible, however, the question becomes even more difficult. You could make a little spread on something marginal like the muni suggestion by Ericopoly and not lose money but that does expose you to some risk. Psychologically, paying the thing off but being prepared to draw down on it if something really mouth watering comes around (like Fairfax calls in the mid 2000s!), is much more powerful in my view. I remember reading one of the Money Masters books and the writer talked about some farmer that never invested, saved up cash, and every time there was blood in the streets in terms of the stock market, he would call up his broker and buy up all sorts of stocks, then go back to saving - sounded like he did that every 5-6 years. If you aren't finding anything now, you can do a lot worse than to be like that farmer.

Gio, I agree with you completely. Stocks are far too high. If the only reason to buy stocks is that bonds and cash will get eroded away by inflation, that argument works for a little while but can not work for too much longer as stock valuations relative to tangible book get larger and larger. As stock valuations are more and more divorced from what it costs to start a business (ie book value), that whole relative to bonds and cash argument breaks down as cash will be used to start competing businesses and earnings margins will get eroded. On every fundamental measure, stocks are way too high in aggregate. Doesn't mean there are not things to buy, but we should be prepared for a 30-40% or more swift market correction that can happen at any time. I don't want to say more than 40% because Yellen will step in far before that and send silver prices to the moon.

Some people would like you to believe that it never involves bear raiding and that it may not even exist.

Thanks Enoch01. That is quite the quote you pulled out there from their public report!

Enoch01, In which areas do you find Royal too eager to expand. Anything specific? or is that just in general?

Chinese New Year is 31 January...

So,are you holding BRK right now? No, I'm not in BRK. I would say its not expensive but not super cheap either. Given corporate profits are at all time highs, it may be slightly more expensive that it looks. In any case, its somewhere in the middle now which should produce returns of 7-11 percent over the next decade. This assumes the Fed can maintain price stability (ie that we don't have deflation or hyperinflation) - I am talking about returns in some sort of reasonably stable monetary environment. It will surely beat the S&P from these levels in my view.

BRK will outperform the S&P 500 for the next 10 years in my view - its hard for BRK to not return 7-11 percent annually on average, whereas the S&P will do worse in the coming decade given the current price level. Good investors in small caps, however, can do better - like many people on this board. Also, knowledgeable BRK investors can pick their spots with BRK buying it cheap and selling it when it is more expensive. For example, in the last 14 years or so, I have purchased BRK 4 times making no less than 20-25% annualized while I held it - usually for 18 to 24 months or so.