original mungerville

If we got QE3 I missed it. Are you talking the previously announced Operation Twist?...because they did not announce QE3 today. I expect it to happen as you do and they announced that it is on the table today however they have not made the decision. In any case, I expect my silver, gold and related minor bets to outperform the stock market. We are probably of a similar view on matters - not sure if you have listened to this funny related link:

Even Bill Gross recently stated that his New Normal was too optimistic (and is more predisposed to treasuries) and now El-Erian is buying gold of all things.

Just another "unforeseen" event driven by the mountain of debt in the developed world. I am betting that a string of these unforeseen events are fairly likely to take place, and could compound each other into a downward deflationary spiral then forcing central banks to monetize. I think we are past the point of no return: low underlying growth constantly reduced by confidence shocks stemming from unforeseen events. There is too much debt and the best we can hope for is very very low growth.

Adjusting for size my returns would be better than they have been. There is no doubt in my mind about this. I have made most of my big percentage returns on large cap and mid-cap stocks so liquidity would not have been much of a constraint there, weird derivative positions (an would have gotten more exotic opportunities with size), also there have certain illiquid junk bonds I could not get ahold given my smaller size and I wanted to buy a ton of them. Further, I have gotten killed on F/X fees being a Canadian investor buying and selling US equities inside a registered account settling in Canadian for every f**n' trade - actually its quite embarrassing to estimate how much I have lost annually percentage wise just on f/x settlement with my discount broker in the last 3 years.

+40% year-to-date after trading and FX fees; made some money in precious metals in first half of year - silver mainly; my handful of large cap value blue chips also outperformed my equity market hedge; but now long only Berkshire in terms of stocks and still hedged with puts on the Russell (not unlike HWIC's portfolio positioning) but also still long precious metals and miners in a material way (not unlike Sprott); don't see changing anything any time soon other that tweaks here and there around this positioning; the debt needs to be reduced relative to the economy to achieve long-term economic stability - that will either happen via deflation/default or very significant inflation, or the former followed by the latter.

Frankly, I think they should go after the bastards of this generation and make them examples for the younger generation. But that's just my style.

Cardboard, That is exactly it. I agree completely. Not to complicate things, but then the next step in the thinking is, in these types of frothy environments, is it a) better to hold greater amounts of cash (by requiring higher discounts to intrinsic value) or b) hedge in those times and be fully invested in stocks that are relatively cheap compared to the frothy market. I think its mainly the latter because you can have the value investing machine continuing to run full speed ahead even in frothy times, you don't have to reduce the throttle. [Then finally, in practice, if you are not experienced doing b) thereby undertaking implementation risk of the strategy, optimally then you do some a) and ease into b) while you learn.]

I am also not sure how the average value investor made out in the Depression. Value is what you get but if you are not taking into account the potential for 10 years of deflation in your valuation, you are neglecting a key risk. Also, if you don't have some protection against hyperinflation/monetary system structure change, you are neglecting a key risk.

Yes, I agree that it is a form of timing and a drain and so I do not advocate doing it other than when things are out of wack from a 1:100 year perspective - like the last decade. In any case, at this point its getting expensive to hedge the market so I also agree FFH and BRK now have built in value/market hedges which is just one more reason I think both a great investments in this environment. Moore, I am not sure what you mean that any professional investor has made a killing from 2000 to 2010? The S&P is down probably 30-40% in real terms. What are you talking about exactly? Do you mean the mutual fund unit holders and pension fund were left holding the bag while hedge fund professionals made a killing? Surely you can't mean the average institutional investor made a killing?

"to sit there and say that in 2015 you will jump in the market is a little insane" That's what I have done for 12 years: I bought US value stocks 100% long fully hedged for most of the time (say 80%). So I was rarely taking market risk for those 12 years. 12 years ago, the S&P was at 1500 and now is at 1150 (25% lower in nominal terms and if you assume there has been 2% inflation a year, knock off another 25% or so to get to real purchasing power loss)...and that is in $US terms. As a Canadian investor, the $ Canadian was at 66 cents or something and has been at par recently (so another 50%). In real terms, the US market has been completely horrible for the last 12 years, and that over a period when government debt mushroomed to support the real economy. Now we have to go through debt destruction in real terms, so this ain't over by a long shot. In general, taking on market and currency risk over that 12-year period seems a bit insane to me. Similarly, not having deflationary and hyper-inflation hedges in place for the coming 3 years seems a little insane to me.

Vinod1, Yes, that's right. Also, an investor has to understand what his neutral position is. In 85 of the 100 years, my neutral position would usually be, you know, something like 75% value stocks, 25% cash on average with the 75% going up and down depending on how many opportunities I find but 75% would probably end up being my average percentage invested over some period - probably similar to those arguing currently that hedges are not required for the unlevered investor. Well, I don't want that in THIS 15 years (2000-2015) as my neutral position (and the good news is there are probably only a few years left to go). A counter-argument is that when you are not hedged, you are effectively betting on the market going up, and value investors should not bet on the direction of the market. When you don't buy CDS like Prem did, you are betting on the financial system not breaking down. So many inverse the logic used by the average value investor and state that when you don't hedge, you are in fact making a macro bet. Although this inverse logic makes sense to me to prove a point, I am not sure I would take it quite that far... but I thought I would throw it out there because there is some truth to it. And I am not saying everyone needs to be hedged. I am saying that not hedging is suboptimal in this particular period which is far different that saying everyone needs to be hedged. It seems many good value investors just don't see this. If I remember correctly, for example, the guys at LUK pre-crisis made a remark about Watsa's hedges that was not too flattering. In any case, most value investors just seem to continue to value invest because it has worked so well for all these years while not seeing that it didn't work so good in the Depression or in Japan... and they just go on with this we can't-hedge-because-that-is-macro-betting attitude view of optimal portfolio structure even in this 1:100 year crisis. I think that is a bit silly and sub-optimal.

Parsad, Picking and choosing? OK, let's do it another way then: what do you think Prem 9% annualized would have looked like without the CDS bet and equity shorts, and while you are at it without the big long-bond gains - those are all "macro" type bets? Pretty shitty I would guess. In any case, you are totally missing my point: My point is that your strategy is optimal for say 85 years out of 100, but you are not realizing that when you get 15 years where things are so out of wack your strategy of no hedges is suboptimal. Like I said, after 2015, I'll be investing like you - when it will be optimal again. That's the point. So yes, you are right, but only in the very long-term - ie 10 years plus. So it doesn't matter if your fund made 12% annualized or whatever, or if you made 20% plus personally - my point is its suboptimal for this unique period of time - ie your fund could have made 16% and you 28%.

Sanjeev, Not sure I am shouting from the rooftops. The point I am making is, from say 2000 to say 2015, we are in a 1 in 100 year era where there is going to be a cleansing. As such, my point is it makes sense to focus on the "macro" to some degree and hedge against those risks in this period - irrespective of whether you use leverage or not. I am not advocating making a macro bet, I am advocating hedging against potential macro pitfalls that could take away returns a very good value investor like Chou should get. He is a good example, because his funds were legally limited from doing so in certain situations. This 7% compounded return you cite would have been much higher over the last 10 years and it should have been given his knowledge of the various bubbles, etc. I am almost sure he did far far better in his personal accounts, in part, due to some sort of hedge on the macro. Personally, I think that 9% book value increase you cited is a questionable way to look at Prem's returns on investments. The 9% net compounded annual number you cite for Fairfax is comprised of 1) excellent investment returns relative to book far greater than 9%, and this multiplied by 2) horrible underwriting losses relative to book due to the 7 lean years of the TIG and Crum acquisitions. Fairfax breaks out their earnings into these two big categories, the first category is the investment side. I think if you worked through those numbers, the returns would be at least 10% higher compounded annually than the 7% Francis got. So I am looking at the numbers before speaking, I am just not looking at them the same way you are. Again, this is not to fault Francis (because he was legally limited in more than one situation to hedge against the macro forces), it is to demonstrate how a very good mutual fund like Chou Funds essentially got much lower returns than it otherwise could have in the last 10 years.

I have to say that this is probably the only thing I disagree with you on! My view has been since 1998 that we are in a historic period of massively overvalued equity prices and other asset prices and we have not yet gone through the full cleansing that we inevitably will either through debt destruction and/or very very significant inflation. Hopefully this period ends by 2015 and we won't have to disagree any longer - I'll just invest with no hedges like you. I can't wait because it will be so much simpler.

Parsad, "None of the people you mentioned are leveraged. Prem is leveraged. I think Francis can ignore macro for the most part, because it would be nearly impossible to wipe him out." Sure Parsad, Francis can ignore macro all he wants because he is not leveraged, so can you. You can ignore the fact that the Canadian dollar went from 66 cents to par with the US, you can ignore the financial system collapsing in 2008, and governments and/or the monetary system collapsing now, but you are both going to be getting much worse returns during the 2000 to 2015 period relative to Prem who, poor guy, is leveraged and therefore has to pay attention to macro. Your logic of relating the need for attention to macro, to the use of leverage escapes me.

I am sure that the records of many people on this board are much better than Tilson's. The people on this board would not make the comments Tilson makes extrapolating Buffet's views based on this buy-back announcement. I mean he just doesn't make sense. He should just cut out the last half of whatever he says most of the time. I remember some of his remarks on Fairfax did not make sense at one point. I think he also recently sold Fairfax?

And Templeton agrees as well, hedging into 2007/08 was appropriate: "Watsa: John Templeton was my mentor, I'll tell you, I've known him for 30 years, he passed away a few years ago, but John Templeton was always a long-term investor in common stock. I remember in 1999-2000 he said to me, "Prem, buy bonds, forget about common stock, they're too risky." Then, more recently, four-five years ago, he always hedged, and he said "In this environment, what I like to do is buy the best things I like, and I short the things I really don't like." But I try to be neutral, sometimes more short than long, but that's John Templeton. So John, one of the key lessons he taught me was to be flexible. His investment philosophy was always value oriented, long term, buy at the point of maximum pessimism, but be flexible in your thinking, and that's what we try to apply."

Parsad, The following quote from Prem settles the little debate you and I had in 2008/09 and just recently where I have been saying that in these markets you should stay hedged whereas you have disagreed stating the only reason Watsa does it is because he is running an insurance company with market to market capital requirements. While he does allude to that in relation to pension fund management and mutual funds because those are relative games, he makes clear in this quote that if you are running your own money (as most of us are on this board), you should be hedged: "If you are managing your own money, as we are with the insurance company portfolios, you will want to be hedged because we do not want to incur impairments or the loss of capital, whereas mutual funds and pension funds are more focused on performing relative to their peers." Do you agree that this settles this difference of opinion?

sorry ... I believe it was Odyssey (not Fairfax) buying back Odyssey shares at $37 back in 2009.

As a percentage of my portfolio, I had about a 70% notional long position in Berkshire before this morning (previously sold my KO to buy more Berkshire a few months ago, then sold my JNJ last week to buy more Berkshire). Had and continue to hold another 25% in gold, 5% in gold miners, 5% Altius, and a 10% position in levered silver options and silver miner options. That total of around 115% long was hedged by puts on the Russell 2000 of 130% of my portfolio - so I was net short 15%. Today I added Berkshire to go 100% long Berkshire, and sold 15% of my Russell puts. I am now long a total of 145% and short 115%. So I went from a net short 15% to net long 30% - a swing of 45% of the value of the portfolio which is significant. I have seen this scenario before, in 2009 Fairfax was buying back Odyssey Re at $37. I was 100% long Odyssey rolling in-the-money calls with a strike at $30 while 100% short the Russell 2000 with in the money puts. While the Russell went down 50%, Odyssey Re just kinda' sat there at $37. Every once in a while it would go down to $36, 35, even low 30s I believe once and then would bounce right back to 35, 36, 37. In any case, I had 100% in there just not moving while the Russell collapsed. Watsa bought all of Odyssey back on the cheap (as one would expect from Watsa being a great value investors) for $65 a share or whatever (when I figure there is no way I would willingly sell for anything less than $85 short-term - and long-term I just would not have sold EVER). In any case, the point of all this is for those concerned about a potentially large overall market drop here (me, although I am also concerned about the opposite force of monetary debasement), buying Berkshire now at these prices with the buy-back announced, while more expensive than Friday's price when looked at simplistically, is actually arguably cheaper than Friday's price when I consider that there is less of a need to hedge my long position with puts on an index. Not sure if this is interesting to anyone, but thought I would share. This is interesting to me as I take only a few large long and short positions with 15 to 25% in-the-money calls and puts typically to limit my downside. I don't recommend these complications to those with less than 10 years experience (and a good record) because leverage slices both ways and it gets really ugly really fast... but I do recommending trying to find ways to hedge yourself about some crazy potential outcomes we are likely to get in the coming years - ie either the stock market going down significantly or monetary debasement. And in this respect, with the buy-back announced and Berkshire only trading at $72 or roughly 110% of book at close on Monday, there is some potential upside but almost no downside (unless, of course, the bottom falls RIGHT out of the market and we enter a very severe debt-destruction/deflation) ...but there isn't much downside even with a 30% market drop and that is a DAMN GOOD risk-return trade-off in these markets short-term. In the long-term, of course, Berkshire should do very well relative to other US stocks from these levels. The risk-return profile is a no-brainer today even after the Monday close.

Cardboard's view could be correct. My silver position is a very long-term play.

Yes the price could go down materially further.

I bought January 2014 calls at $35 on SLV today just before close

I'm with Viking. This isn't panic. People still think this volatility is something temporary but I think it is here to stay until debt levels relative to GDP are brought down in the developed world either through default (2/3rds of the debt is liquidated) or massive inflation by the authorities (the price level is tripled). I think its going to look like the former then all of a sudden will be the latter over a period of 12 months or less. The only panic was in silver today (apparently the biggest two day drop since 1983 and biggest one-day drop since 1979) and that got me out of bed to buy some more. I think in this environment precious metals will outperform my deflationary hedge which is puts on the Russell 2000. This ain't panic. I agree with Viking completely.

I would not pick Grantham as a guy that gets in at the top. I think he felt in his bones that gold would ultimately go higher but could not explain it so he bought some. I don't think the game is over on the precious metals front (at least relative to my hedge which is my short on the Russell 2000).