original mungerville

Another 8%? Wow, if that keeps up, it'll drag down North American markets on Monday morning big time. Make that 9% now at 11:00. just a hair under 10% at 12:15 - I'm going to bed now; in China, they are going lunch now!

I'm feeling OK, but I'll feel good only when the trade is unwound (tranche by tranche) and the portfolio gains are in. I agree on Gold, but remember the market is forward-looking. If you and me - the couple of idiots getting lucky here - could figure this out a few weeks/months ago (ie stocks exposed as internals breaking down big time, Apple and other high-flyers also start breaking down with S&P crossing 200-day moving average, Fed is going to be trapped therefore no Fed until significant drop, the Fed probably comes back in with a u-turn into QE4) it won't be long before the macro guys realize Gold is going higher. Hell, even the Fed wants it higher given the deflationary pressures we are seeing now. Its not exactly a coincidence that Stan Druckenmiller - probably one of the foremost experts on currencies/macro - just went long 20% of this portfolio with GLD. Actually, would you not agree that the more the stock market sells off, the closer we get to Gold going materially higher - I just don't think its wise to compare what we have now to 2008. We may be going into full-on currency debasement mode now. It shouldn't take more that a few days or week or two to start seeing big time upward pressure on Gold if this continues. The miners are in the shitter, they would make a great hedge (ie cheap/asymmetric) , in my view, to your deflationary FFH bet. You know the Fed is going to try to take out your deflationary bet - and the rest of the market will think that also. I don't know, you may have a bit of time... my feeling though is it might not be much time.

Another 8%? Wow, if that keeps up, it'll drag down North American markets on Monday morning big time. Make that 9% now at 11:00.

I'm also thinking 20% correction - possibly relatively fast - before the Fed steps in. I wouldn't be surprised if they start talking about changing course even before that. So this shorting thing, while a nice position to be in, is very tricky to execute. Take out the Fed, and it would be easy to hold the shorts... my plan is therefore to do tranches, with the first tranche likely starting Monday at some point.

Another 8%? Wow, if that keeps up, it'll drag down North American markets on Monday morning big time.

I was 200% long Valeant though which had a very bad week last week. But at this point, the stock price is so close to the strike on the call LEAPS I bought, there is not much more downside on that long - so even though my only stock position was down dramatically, last week my portfolio edged up a bit. From here on in however, any further declines in the S&P are all gravy from the 400% notional short of which I am taking off 100% Monday leaving 300% (against a 200% notional Valeant position that can not go that much lower given the dynamics of the options pricing on that). I do expect precious metals to do well in this environment as well.

Dazel, By the way, how are you trading this? I have way too much short exposure at this point. I will exit the 100% notional in the money puts on Monday (we were down 5% last week, and if down another 2% Monday, that'll be good for 7% down). This way, I will only be holding the cheaper short-term just out of the money options I am holding representing roughly 300% notional. I will take 100% off of that as significantly more pain is felt, then the final 200% later (when QE4 chatter really heats up, assuming it does).

I just read on Bloomberg some guy starting to talk about the Fed saying they won't raise at all...and they may have to do QE4!!! Wow, a week ago, only lunatics had that perspective. Having said this, there should be very strong counter-rallies. One will come when the Fed decides its not raising rates this year...I think that will be very painful for me, but I just don't know if that will stop the decline or not... When the market starts talking QE4, that'll probably stop it and between massive chatter and the Fed starting to debate that is probably the time to exit the shorts.

Couple idiots getting lucky - I was short 400% notional of my portfolio! About 100% was in the money puts, the other 300% was via a cheap out of the money November put on SPY which I bought about two weeks ago when everything was "rosy"!

I should also note I have made about 30 to 50% annualized returns on Berkshire since around 2000 using this approach - buying reasonably close to lows over the past 15 year and selling reasonably near highs - never perfect but good enough to outpace Berkshire itself. I think I did it 4 or 5 times, each time holding for 6 months to 3 years or so. With this new 1.2x book floor thing, however, I don't think those opportunities will be as available anymore using this approach - Warren and Charlie figured out a way for existing shareholders not to sell to guys like me who take advantage of them too much when they are fearful or lose faith in Berkshire. I believe out of these 4-5 times, I have bought Berkshire at least twice at 10x earnings. So, for it to go to 10x earnings from where it is today, it would have to drop 40% - which it won't because they have the 1.2x book thing in place. This is what I mean by those opportunities not likely to be there as much in future. Doesn't mean it can't happen once in the next 5 years though...

The answer to that question is "yes". Two important nuances: 1. I believe you are factoring the mark-to-market on Kraft Heinz into your "only about 10% away" comment; 2. Remember Q3 ends end of September so factor in any decline in general stock prices which will cause Berkshire's book value to drop (ie because of its publicly traded equities and because of the protection it sold (via derivatives) on various equity indexes - both of these are marked-to-market). Factoring in #2 is not as easy as #1(until you are past quarter-end). The way I have bought Berkshire in past is via a look-through p/e approach. Not the Tilson two-column approach copied from the Berkshire annual report, rather I look through everything including the public equity holdings, Kraft-Heinz, etc and figure out the look through "e" or owner earnings. I have not done that in a while, but would guess its around maybe 14-15x right now, maybe 14.5x with the recent acquisition. So if the stock drops 10% more here, take 10% off of that and you are at 13x earnings for something that will growth 6-11% annually pretty safely. What is nice about this "look through everything" approach is that it doesn't move at all with fluctuations in the market prices of securities. Whereas that is not the case with the question you asked on this thread (because of #2 above) and that is also not the case with the Tilson two-column / annual report method. As such, from a a value perspective, you can act more decisively using this approach in a turbulent market - its just a more fundamental approach relative to the multiple of book or two column approach.

Seems to be pretty prescient on China. Other than that, I held all the same views/points - but China is proving to be a key trigger/risk right now. Let us see what happens over the next few weeks/months. As I explained in an earlier post on another thread with Dazel, my view/guess is: The market basically continues to correct (with violent upward spikes - including when the Fed says they were just kidding about raising rates) until the Fed reverses course - meaning not just making it clear it will NOT raise rates, but making clear it is flirting with QE4 (or alternatively, we get something equivalent from Chinese authorities which would have to be huge). The Fed can not rescue the market near-term - until more of a sell-off - because they are looking the other way (ie thinking about raising or waiting). Pain needs to be felt first for the Fed to do a complete about-face at this point. So, if you believe like me that the markets (Equities, junk debt, etc) have risen because the Fed always had everyone's back - and they don't/can't at this point - you are at least fully hedged at this point. But don't worry, if you are unhedged, they will probably attempt another reinflation of assets, so this could be a material and abrupt correction followed by a policy response. My concern is that if that is not as effective this time around, the investment landscape will materially change (ie a seminal event that happens once every 30-40 years). In any case, that is my market prognostication for what it is worth.

Yes, Fleckenstein - who is very level-headed - sees similar downside exposure for the stock market. He is also long precious metals and miners as he does believe the Fed will come back in.

Agree. This traps the Fed further by potentially adding fuel to the currency devaluations in Asia, maybe including Japan. The Fed is already out-of-the-picture - they can raise or delay but they can't ease at this point. With the $US relatively strong, the US stock market is exposed with no Fed to rescue it (finally) in the short term. No need to worry too much though, they will come with QE4 at some point once there has been enough/some stock market pain (which is why my hedges now include not only stock market hedges but also silver and gold miners - both of which in my view provide significant asymmetry, especially from these price levels). At some point, a) either we will face massive persistent deflation, or b) people will realize its looking like QE to infinity. Basically, I don't think the debt of the developed world will be repaid. Finally, its probably more productive to ignore this macro stuff, I am pretty sure that is a good rule because getting the timing of this is almost impossible. But at the same time, when currencies start jumping around like they have in the last year while commodities tank, and emerging stock markets follow, with Europe and Japan not that strong, at some point you have to ask yourself a question or two - even if you are a value investor. Having said this, I have been very negative for some time (not unlike Watsa) - more or less ever since I heard Greenspan speak when I first started value investing in 1999. He didn't take long to scare me so much on the macro side, that I thought hedges were important - even as a value investor. I have probably over-hedged and, if measured currently, my performance suffered significantly. At the same time, however, 1999 was a peak in valuations as was 2007 - and today we can't be that far off from a top (at least in real terms because under my "b)" scenario who knows where this stock market can go), so I'll take another measurement in 3-4 years and will be able to see whether these hedges were productive or not (they sure seemed productive measured in 2008/9). In any case, the key lesson I have learned is low cost/asymmetry is critical to long-term sustainable hedges. And in terms of further reducing the long-term costs, some sort of strategy on when to press them a bit and when not to, while very difficult because it gets into timing to a degree, may be something to attempt - this however is still work in progress (I nailed 2008/09 moving to full hedges in the summer of 2007, however I have been too negative over the past few years). Sorry for this personal ramble. I just thought I would share to ensure nobody thinks I am saying with certainty that the stock market is exposed to a correction in the short-term here. I have been wrong for some time now.

For what it is worth, I am in complete agreement with Dazel on the potential for a market problem soon. And Petec. Gio, I think you are making a mistake here. You should look at it as a stable very slow grower until we face very unfavourable market conditions for equities. When the rest of your money is in other businesses that will be negatively impacted by these conditions, it makes sense to have exposure. Furthermore, you could not establish similar hedges yourself for the same price. To me its a no brainer from a portfolio risk reduction perspective. I am not going to comment on the business itself, just the macro/portfolio context and costs/opportunity cost of that. ie. you give up less opportunity cost here (due to moderate business growth) relative to hedging say 15% of your portfolio some other way (as you get no business growth from that). In fact, at a minimum you are getting paid by the market for the hedge here rather than the other way around. There are worse things in life than not only getting a free option, but getting paid to hold one. Going all in on business/stocks has worked very well since 1980 - a time when interest rates dropped all the way along and the economy was more robust with the Fed easing everytime there was an issue, and debt burdens were lower. We have none of that right now going forward over the next 10 years. Furthermore, as Dazel pointed out, the Fed, for the first time, is out of the picture (can hike, or wait but can't ease) while market breadth is breaking down, junk bonds are close to new recent lows, key momentum stocks are getting trashed (Apple, media, tech, even healthcare starting). Anyway, there are better times than the present to be 100% long stocks. Doing so is actually speculating on the US dollar not rising, markets continuing to muddle through, commodities rebounding, financial conditions not tightening. Hedging is not speculation, not hedging is speculating. If you don't agree, certainly you can agree for 15% of your portfolio. Again, I do not want to comment on the business, just the portfolio aspects of this (not that I am a big believer in portfolio theory, etc).

Multiples aren't that high compared to interest rates. If we had those multiples with 8% or 18% interest rate, that would be something else. Not making a macro call, just saying that what would be much weirder would be to have 10x multiples with almost 0% interest rates... You're right. If I were to look at it from the efficient market view, based on the current interest rates the multiples imply fair prices if everything stays the same. What scares me is that you have record high margins, low inflation, zero interest rates, and these multiples. Not much improvement to be had on all those fronts. So if all stays the same then you have fair prices and get something like 7-8% pa returns. If anything changes, the market is overpriced and you'll have bad returns. To invert the situation, if you're looking at the early 80s you had low multiples, low margins, high inflation, and high rates. A lot of the great returns from 80s and 90s came from improvements in those factors. Now we're in the opposite situation where all those levers have been used up and all the changes can really only go in the opposite direction. I'm not making any calls either. Just food for thought. True. But in the 80s people were looking back at the horrible 70s and expected more of that. Their low multiples didn't seem that low to them at those interest rates at the time, which they expected to stay high longer (because they expected inflation to continue for a long time, even Buffett wrote about inflation a lot). Now we're looking back at the horrible 2000s and expecting more of that. Just from a different angle in both cases. Who knows? RB, Keep in mind that the 2000s were not horrible at all given the valuation level from which they started (arguably the biggest US stock market bubble of all time)...but the Fed just keeps stepping in to rescue the system as they did at the end of the 2000s one more time. There are only so many times the Fed can do this until the markets overwhelm them. So I would add that to Liberty's inversion list. The Fed had credibility with Volcker in charge in the early 80s, currently a lot of their credibility has been used up although the great majority of investors do not yet see it that way.

Great post Liberty. I love the inversion - its very true. Also good reply RB. Liberty's post definitely means future returns from these levels will be nowhere near the returns in the 1980s/90s - at least in real terms. If we get major inflation or hyperinflation, returns could be very high from these levels measured against paper currencies.

A good time saving tip for Italy is say you want to go to a museum in Florence or the Vatican in Rome, go online to buy your tickets ahead of time, either before your trip for the attractions you are sure you want to see, or even just buy and print at your hotel the evening prior to seeing the attraction. That way, the next day you just stroll in and avoid the huge ticket buying line ups (eg, 1-2 hour wait to buy your ticket into the Vatican). I would do this for the handful (say 2-3 places in Rome and 2 in Florence) of really popular attractions, rather than every place you intend to visit. Its pretty hard to go wrong in Florence and Rome. A couple nice day trips from Florence are Pisa and Sienna if you have the time (about 1 hour and change each by train).. but Florence itself is beautiful to enjoy for quite a few days. In Copenhagen, if you are a foody, or just don't mind paying for a tremendous dining experience, try getting reservations at Noma - one of the top restaurants in the world. Kinda have to plan ahead for this, but who knows... https://en.wikipedia.org/wiki/Noma_(restaurant)

Agree. Not sure if you have tried Westvleteren as its availability is more limited, but it goes down surprisingly smoothly for a 12% beer. I mean it feels like 6% but with unbelievable tastes and a smooth finish. They would have it at certain beer stores and restaurants/bars in Brussels for sure; I believe I also picked some up at a beer store in Bruges. Anyway, surprisingly light/smooth.

I am not sure about Greece, but I am pretty sure the best Belgian beer is Westvleteren 12.

Gold has benefited from a multi-year run of low real interest rates and money printing. The latter is continuing with China, EU and Japan. In the US they are attempting to get off zero. Not sure if you are aware, but gold has done well in the last year or so against most currencies except the $US. So Gold and the $US have been among the strongest currencies of late. Gold is money, its not an industrial commodity.

The write-up of $15 billion would be reduced by a tax liability equal to the percentage tax rate multiplied by $15 billion. So call that around a $12 billion increase in book value (rather than $15 billion).

Uh no.... IBM's market cap is $165 billion with a "b". Buffett's largest purchase to date is less than a quarter of that. If the market value dropped by 50-75% then maybe...But at $165 billion, its a definite "no".

I agree - all I need is an options market in the stock I want to buy. I've done it with BRK, done with FFH in the past, done with ORH, and now doing it with VRX.

Yup. Sugar is a killer ...as are processed foods which, very non-technically expressed, effectively breakdown into sugar in your bloodstream. No way for the average person to get in awesome shape in your late 30s / 40s / 50s without focusing on this. Not to derail the thread but I think that all carbs (even the non processed ones such as potatoes and rice) break down into sugars essentially. The sugar intake might affect health or brain function but as far as fat/lean tissue composition goes I'm fairly convinced that getting into good shape at that age is still a function of macronutrient intake portioned in a specific way coupled with exercise! The only difference is metabolism and maybe lower testosterone (speaking to men) at the upper end of the age distribution you listed. Agree. Almost all carbs are bad, however certain beans and lentils do not spike the glycemic index. If you are working out hard and often, some of these types of low glycemic index carbs become more necessary.