TwoCitiesCapital

I've been accumulating SAN/BSBR the whole way down through additional purchases and reinvested dividends.

Rand Paul is out Guess that means Gary Johnson...

So for how long does XXX has to underperform to be able to shit on it without being judged as harsh? "This guy is a really great investor! He has underperformed for 20 years only! Wait a bit, he's gonna show you!" If you're invested with a value manager who is truly sticking to value sticks - then it's basically a guarantee they're going to underperform over a decade where value underperformed growth, and the benchmark, for basically 9 years in a row. If you wanted their performance to be better, you're literally asking them to charge a fee to stay in cash or to experience style drift. You could argue for the later, but it seem someone in here was pretty upset at the perceived "style drift" when the results really suggest they stuck with their bread & butter.

Welcome to the dark side Eric.

+1 Also, it's really easy to shit all over the value guys when growth has outperformed for the last 9 years.... Value is dead! Long live value!

Source? I'd say there's a reasonable argument that 2008 was a contradictory indicator depending on your interpretation of events. Not to get sucked down into this argument, but I find it hard to blame 2008 on a free market when you're talking about the most regulated industry in the world and where government sponsored agencies, like FNMA and Freddie Mac, were also involved.... Not to say that greed, which is present in free markets, didn't play a factor, but you're really stretching here....

Purchased Jan 2017 SPY puts @ 170 for $6.84. Now straight short about 7% of my portfolio and synthetically short with puts another 17% for ~25% total notional exposure. Fairfax is also about an 8-9% position for me to and I include that with my "bearish" bets even though it's much more than that and could decline in a market sell-off. Sold the JAN 2017 SPY puts @ 170 for $9.45 - about a 38% profit. Purchased JAN 2017 SPY puts @ 140 for $3.75. (~2x the number of contracts as the initial trade) I understand most of you don't think a 50+ percent decline is likely, but that's is what I'm buying protection. It doesn't bother me that prices have to fall so far for the puts to be in the money. Recognizing my inability to predict Fed and market moves, I booked some profits to remove cash on the table while still increasing my ability to profit from a large decline - profits will actually be greater from this trade if the S&P goes below ~1100.

Fairfax has increased BVPS at a CAGR of 6.5% since the end of 1999. That is after fees AND after taxes. As we can see in the picture in attachment, the S&P500 has returned 3.73% compounded annual since March 2000. This of course doesn't consider dividends (neither those distributed by Fairfax nor those distributed by the S&P500). Not quite the spread you are looking for... But not bad! Also the Malone's family of business should have performed pretty well... though I don't have the precise numbers. Cheers, Gio Well, you have to include dividends. Fairfax doesn't make it, once you add dividends in. They add >2% to S&P returns, much less to FFh returns over the whole period. I dont know anything about Malone's companies. Buffett is often lauded for his stock investing but he started with control positions in his late 20s, and wholly owned by his mid 30s. He wasn't a pure investor for very long. hmmm....well then, I'd like more of the impurity working on my money. We have someone who increasingly / willingly gave up "pure investing" 50 years ago, has a record like none other and did that by taking control-to-whole ownership. I suppose we need another 50 years to prove that this is perhaps the one way to outperform the index. It may be the one way to outperform when your managing collectively hundreds of billions of dollars over decades... Buffet has consistently said he'd make higher returns if he stuck with pure value investing. Also, he said when he changed over and shut down the partnerships that the new platform for investing would likely have lower returns with the same risk - he recognized that it was less efficient, but that's the cost of ignoring volatility for permanent capital. There weren't publicly trade hedge funds at the time so buying operating companies and investing the cash flow was pretty genius - especially using the insurance float prior to the regulation that would prevent current companies from investing a similar amount in equities that Buffett used to have. This is a lower stress form of operation - the capital is permanent, he can invest in whatever he wants without fear of periods of underperformance, and can simply be less time intensive and less stressful because now he only has to have the idea and not necessarily nail the market timing. Current value managers are struggling because we've been in an environment where value stocks have underperformed growth stocks for years. When your main strategy tilt is underperforming for multiple years then you're playing with a handicap because your starting universe is already doing significantly worse than the average. These things move back and forth - in the part of the cycle when value outperforms, these guys will likely kill the market enough to make up for the years of current underperformance. Fairfax's story is different - for them to outperform over the long-term track record going forward, we need a significant impairment in their benchmark that isn't experienced by their portfolio. That's certainly a possibility, but it wouldn't be enough for Fairfax to remove the hedges and simply outperform going forward to save their 10year, and possible 15 year, performance figures.

Surely it could. But will it be a permanent pick up, or just a fluctuation around a downtrend? “The one big idea” Watsa has been talking for a while is that we will have a secular downtrend in inflation until this global deleveraging is over. We will see. Cheers, Gio And he's been absolutely right, year in and year out. We've seen an absolute collapse in inflation in the developed world - even in Japan where their currency has halved cannot seem to generate any inflation. He's been "wrong" about deflation so far in that appears he was a few years early, but he's been right on the money about a declining global trend in inflation. It's just unfortunate that the trade was structured as inflation swaps instead of inflation floors. He might have made some serious money already had been the other way and he would've been able to build into deflation swaps at a lower rate. I guess hindsight is always 20/20, but it does seem strange that he'd structure the entire bet around negative inflation and not bet anything on declining inflation until much later. Hardly - breakevens are still pricing in positive inflation of over a percent a year for the next 10 years. That's hardly a "mainstreet" view for deflation. When breakevens get close to zero, or negative, then I'll be inclined to believe that deflation has become a mainstream thesis. Equities are still near their peak and bonds are well off their lows - it's hard to say that deflation is priced in.

Sure, and Peter Schiff has been performing terribly. But Dalio has generally performed in the pure Alpha funds no matter what the market environment is so it's probably worth listening to him, no? The man has been wrong before, but he didn't build a $160B hedge fund by being wrong often and letting it impair returns.

+1 Also, to add to the discussion, I normally carry $100-200 with me in bills, but use my credit cards for 90% of my purchases. If there's a cash discount, I'll pay cash. Also, many places in NYC require a $20-$25 minimum for credit cards, so I like to have cash for those instances as well.

Probably negligible impact given that the majority of the damage was done last year, no? I haven't looked up the dollar amount these positions would have been carried at as of 12/31, but my guess after the massive equity writedowns that occurred/will occur in 2015 there won't be much left to write down to offset hedges. The big one will be Blackbbery given that's is off its highs by 30% is a massive chunk of the equity portfolio, but even that will likely pale in comparison to the gains on TRS swaps and deflation hedges. They had nearly $6B in TRS at the end of Q3 - that will likely be a higher notional amount at the end of Q4 given the rally in equity markets so we're looking at close to $600-700M just from equity hedges and also assumes that they didn't increase the amount in light of the Fed rate hikes and the August/September warning signs. Obviously that's offset by equity losses like the $175M lost on Blackberry and RFP since the beginning of the year, but it won't take much in the way of fixed income gains and insurance to get us to being very close to a $1B quarter if everything just stays as it is for the next two months. If things go lower, Fairfax is likely to do better.

http://www.cnbc.com/2016/01/20/bridgewaters-dalio-feds-next-move-toward-qe-not-tightening.html

Yes. Let's discuss what happened last time housing got cheaper by 50%... Falling prices don't always hurt the economy and they certainly don't always help. If they fall due to efficiency gains - it's good. If they fall due to oversupply, malinvestment, or a deleveraging consumer, it's a bad thing.

Oh really? There is quite a long thread on deflation hedges that started back in December 2014. I encourage you to take a look at the first few posts. That thread pretty much proves my point. It was opened in december 2014 when oil prices where down ~40% year-on-year and the GSCI index was down ~30%. There's been a few on here supportive of the deflationary thesis long before there was a market sell-off in oil - though there were some bandwagoners after oil's decline. What's important to see is that oil is down another 50% from late 2014, other commodities have continued to fall, the trend in headline inflation figures and long-term interest rates for most of the developed world continues to be downward, and still everyone thinks deflation is a pipe dream and that equity markets offer good value. It's hard for me to buy that this thread's macro predictions reflect the last 12 months when most people seem to be bullish and accumulating and are very critical of Fairfax's equity hedges and deflation bets. I was just out of high school in 2007 so I am not very familiar with the complex financial events of the day, but it does seem similar to 2007 where the mortgage market was clearly falling apart and CDS prices continued to move against the buyers. It seems like every year is a confirmation of the deflationary threat and yet prices for the swaps continue to move in the wrong direction.

Also, sold all of my OUTR and converted to LEAPS @ 35 for twice the exposure. Cut my dollars at risk in by 2/3 and doubled my exposure sharewise.I feel better about this - If I'm wrong, I'll lose quite a bit less money. If I'm right, their current FCF at 40-50% of the market cap and flowing into buybacks should drive the price substantially higher than $35. They've got 12 months to prove themselves.

I just checked Value Line sheets for HSY, JNJ, UL, DEO... Margins I see are maybe a tiny bit high... maybe 10% over average by eyeball? I don't see a huge margin problem. Where do you see high margins? I'm talking in aggregate. It's been all over the place for the last 2 or 3 years. Here's a screen cap I found on Google in 5 seconds. Corporate margins in the U.S. are about as high as they've ever been and they started turning down last year. http://static4.businessinsider.com/image/5612a31d69bedde3458499ce-480/barclays-margin.png Long-term average is around 6-7%. We were closer to 10%. Falling back to 6.5% would erase about 30-40% of the S&Ps earnings, but you'll notice that when reverts it generally goes below the average. This is why John Hussman calls it "mean inversion" instead of "mean reversion". If you get profits that fall by 30-40%, you can be almost positive you're going to get multiple contraction on top of that. If multiples fall from the current 17x to 12x, you're talking about a 55% decline in stocks to get what is still a reasonable multiple on average margins. This is what I've been pointing for the past two years. We don't need a depression. We don't need a recession. We don't need a collapse of the financial system. A 50-60% decline occurs if we only go back average margins and average multiples. You're setting yourself for long-term failure in U.S. stocks in my opinion.

Sold 2/19/16 BBRY Puts @ 7 for $0.56

I guess I should also clarify that the majority of my negative sentiment is targeted to American equities which are ridiculously pricey. I've been in European, EM, and commodity related equities for the last year or so given the relative value there. I can definitely see the negative sentiment in Europe to some extent as Santander is down 50+% from its highs even as profits have improved. Leaves me scratching my head and I'm still adding to that. Another post I almost completely agree with. Only one thing: I don't see any negative market scenario in which inflation is going to pick up (aka stagflation). Where should inflation come from? Money supply? Not with this huge credit contraction going on. I'm in the deflation camp, but realistically inflation can move either direction from where it's at now and it's likely negative for asset prices. Look into Crestmont's Y-chart - equities do well when there is price stability (from 0-2%) but suffer when inflation get's outside of that range on either end of the spectrum. We're solidly in that 0-2% range.

Perhaps you should really look at some stocks. WMT,KO,JNJ,PG,CL for example (this where just the first 5 stocks i had in my mind). All have declining or stable margins in the last 5 years. Even for AAPL the margins are pretty stable. Commodities going down is what they have done the last 250 years. Global growth slowing - yes ok thats a valid point, and the USD apprecation is not helping. But its a temporary problem. Market technicals - nothing to worry about at the moment. If we take out the August 2015 lows we are in a different game. Reason not to short: Wrong time. I never short in the winter months, you are just playing against the odds. Most corrections in winter are over very fast. But who knows, maybe i am wrong. The market is sometimes a bitch. That's what makes markets. Only time will tell which one of us ends up being right.

I just built a diversified large cap blue chip portfolio with 45 names. None of them was overvalued. Maybe there are overvalued names in the indices, but at the current point at least half of the market is fair or undervalued. And at the same time the sentiment is more negative then it has ever been in 08/09, thats the recipe for a big rally. I don't know how things are at where you're at, but sentiment is nowhere near where it was in 08/09. I work for a large investment manager that is still recommending credit allocations because they do not see a recession on the near horizon and credit spreads have blown out to levels not seen in years. In 2008/2009, people were literally talking about the end of the financial system and markets as we knew them. "Buy credit" <> "End of financial system" when it comes to sentiment. Secondly, you only think blue chips are cheap because their profits are inflated. Margins could drop 30% and still be above their historical average - what happens to your P/E when your profits fall 30%? Your P/E increases 50%. Stocks you thought you were buying for 15x earnings now trade 22x earnings. And that's if we stop ABOVE the historical average margin level. I can't predict when or what will cause the change in margin or if it will be a confluence of higher wages, higher dollar, lower demand, etc. etc. etc. but I do know that margins have always reverted and I cannot buy an argument that suggests they'll stay 50% above their long-term average into perpetuity. On top of this, general multiples on those margins are elevated. The stock market has massive convexity relative to changes in margin at this price point - collapsing margins on collapsing multiples is a recipe for equity disaster and is what I've been concerned with for the last year or two. We're living in a time where equities were priced for perfection - high margins, high multiples, and low inflation. There's literally only 1 scenario where we could hope equities continue to do well - another massive lapse in valuation judgment like what occurred in 2000. Otherwise, I can't imagine a scenario where profits and multiples keep going up. All it takes is for one of those to fall to get mediocre results. If both fall, beware. Reasons to short: High margins (which have started to decline) High multiples (which appear to be declining) Liquidity leaving the system and interest rates rising The best inflation environment you could ask for - price stability. (i.e. it can only get worse from here) Relative value in other countries is huge Global growth is slowing Commodities flashing massive warnings signs and now you have technicals moving to favor bears. That's a lot of current to be swimming against.

But the expected winnings of a $2 ticket is now greater than $2 right? It is therefore a rationale thing to play it tonight No. Using the Kelly criterion, the optimal bet would have been 1.2 x 10^-8 % of your bankroll on the lottery ticket (without considering splitting). That would have been one $2 ticket if you're worth $17.5 Billion. Lol. The problem with using the statistical expected value of the ticket is that the analysis is almost pointless. Basing your math on probabilities only makes sense if you're going to get enough chances for the probabilities to eventually play out. With the lotto, you're luck if you play a handful of times before there's a winner and the odds reset to something far less favorable. Realistically, the chances in your lifetime of playing with odds like this more than say, 100 times, is probably not very good either..and playing 100 times when your odds are 1 in 282,000,000 still isn't really enough to give the odds time to work in your favor.

Contradict yourself much in one paragraph? 2008-2009 was 50% drop. So was it a generational event or not? Let me clarify - a global financial crisis that cripples the majority of western economies at a single time is likely a generational event. My point is you don't need that for a stock market to fall 50%. There have been plenty of severe market corrections of 30%, 40%, and 50% that aren't accompanied by a complete global meltdown. I'm not banking on a complete global meltdown. I'm banking that U.S. equities are the third most expensive they've ever been. They are significantly over valued on just about every single long-term metric. Just reverting to the mean would result in losses of 50-60%. You don't need a global financial crisis at this point to spark significant losses.

2008 was a generational event. A 50-60% market doesn't require another 2008 and 50+% declines happen multiple times over one's lifetime. Evidently, it can even happen twice in a single decade.

I've been "underweight" to net short U.S. equities for much of the last 12-18 months, but probably would never go net short for my entire portfolio. I made a large move from underweight to short after the chaos in August/September and scaled it up as markets moved higher. I'm straight short U.S. equities by about 8% of my portfolio (mixed between SPY and NFLX) and have about 17% notional exposure to LEAP puts on the SPY. So, about 25% of my portfolio is net short U.S. equities. I have also been selling covered calls, opting to sell puts to outright buying names, and letting dividends accrue to cash instead of reinvesting. I also have about 9-10% of the portfolio in Fairfax. It's not a disaster scenario. It's a respect for history and long-term trends in equity valuations. 1) Margins are signficantly elevated from their historical average. Do I think they can afford to be higher than in the past due to efficiency gains? Potentially. Do I think they sustain at a level 50% above prior historical averages? Not a chance. 2) Multiples are elevated. I know everyone here questions the validity of the CAPE ratio, but it hasn't been the only ratio flashing extreme over-valuedness. Also, the argument on interest rates makes sense theoretically, but is all BS historically. The absolute level of rates has little to no correlation with P/E multiple - mostly just the direction that rates are moving (which is generally determined by inflation/growth). 3) The market action from August on was a massive warning sign. The majority of U.S. equities were significantly off their highs and the market was being held up by 4 stocks...4! 4) No sustained bull market has EVER started from the multiples that were witnessed at the lows 2009. There was only a single time in history where markets significantly exceeded the multiple that we were at in 2014/2015. It seemed highly likely that a correction would occur and then you have the Fed removing liquidity from the system while global growth and inflation slows! So if margins contract back to the average, and multiples contract back to the average, then you're looking at index losses of 60% just to get back to average figures and you do not need a recessionary/depressionary scenario to get there. Just an average scenario. I think it's quite possible losses don't stop when we hit averages and that we spend an extended period below them. So that's what I've been preparing for and that's why I've actually seen a lot of benefit in a portion of my portfolio over the past few months. That being said, my overall returns are still negative given my significant concentration in materials, emerging markets, and energy which is basically where I moved all of my exposure too and all were killed last year.