TwoCitiesCapital

Yea...he bought an entire company over a 1% difference in payout from what he'd been told to expect on a tender offer so he could fire the CEO. He certainly had a chip on his shoulder at the time. That story always amazes me and doesn't necessarily leave one with warm fuzzies. I think Buffett is a genius. He extended the concepts of value investing beyond the original template that Graham had provided. He pioneered the use of leveraged, captive funds in using the insurance business to fund his investment portfolio. His contributions to the field may be less appreciate by the "little guys" who can't necessarily mimic his strategy, but it's a brilliant view on investments, captive capital, and leverage that should definitely be recognized. Warren is probably cleaner than most, but he's not the nice guy you see on television. He's obsessed with making money and being liked - and when the two conflict he seems to choose the money.

This makes more sense. Once you had adjusted for the fair value of their associates, the stock only traded at 1.1x book from what I could calculate back of the envelope. Hardly an expensive price for a company that seems like it will do moderately well no matter what environment.

I don't agree (but I am not a lawyer :)). One way is to partially nationalize which would dilute the common to the hilt. It's impossible to dilute preferreds. To make prefs worth less than par, you have to go through formal recap in which case they come before common, but might be worth little and common might be worth nothing. In general though, I think most arguments in this case are emotional or mind-screwing variety from people with ownership agenda (i.e. people holding securities that are possibly worthless will argue anything to prove they are right and other side is wrong). Personally, I am on the government (and Munger/Buffett) side on this: if government would not have backstopped Fannie/Freddie, they'd be BK and worthless now. So IMHO from common sense, government should have nearly 100% ownership in remaining entity. Legal case might have completely different result though - common sense is not what the law is about. ;) There's an argument against this - most of the losses experienced by Fannie and Freddie were accounting losses - not real cash losses. MTM accounting was discontinued for banks during this period. If Fannie and Freddie had received similar treatment, they wouldn't have been insolvent on paper or in practice. The reversal of these "losses" is why they've been so profitable in recent years.

This is the usual macro bear argument that people have been repeating from 1980s and possibly before (I have not been around before that). There are couple issues with that: - By being in cash/etc. you are horrendously underperforming for couple years now. So it might not matter that your portfolio will drop only 30% in a crash compared to 50% of someone who is 100% in equities. Your long term result will be worse. - You are assuming that Dalio will perform better in a crash. So far a lot of algorithmic shops collapsed during the crashes because their models were not crash proof. Pretty much no value investor every collapsed during a crash. Or they recovered. - You have a mental model of what will happen. This is very dangerous. I can almost guarantee that you don't know what will happen and pretty much nobody else does. Hey, Buffett has been wrong about inflation for 20+ years. That being said, I am fine with people holding Graham-like portfolio of having 20-50% money in bonds as long as this is not a market call, not a macro call, but forever philosophy independent of the market/macro etc. Just don't expect the 100% equity returns. In all fairness - Dalio was up 14% in 2008 relative to the massive drop most indices, assets, and funds experienced...the man knows what he's doing.

It's nice to see these things moving. Looks like the markets might agree with Merkhet that this gets resolved before the Obama administration leaves. I wouldn't mind a 10x pay day in amount of time :) Fingers crossed.

The value investor in me doesn't like those fees. Just buy more Fairfax: each share has quite a bit of exposure to the Indian economy/stocks if you consider their 74% of Thomas Cook, the 26% of ICICI Lombard, and the 300M they have invested in this fund, and the fees they'll generate for the AUM in the fund.

Deflation hedges pulled in 116.4M gain in the 4th quarter for a total of +17.7M for the year. This means that the swaps were literally up some 95% in fair market value just in the fourth quarter alone on the decline in oil. Many are expecting headline deflation in 2015 due to the slowing of economies and cheaper oil working it's way through the supply system - we don't need much to get us to breakeven on these swaps. 1-2 years of negative headline inflation in the CPI could result in a nice payday of a few hundred million. As a reminder, every 1% beyond the 2.45% needed to breakeven in the US would result in a net gain of 527M. I wouldn't be surprised to see them continue building these positions though - they've expanded them aggressively over the past few years at prices more attractive than the original position was purchased at. 2010 - 34.2B in notional (cost 302M) 2011 - 46.5B in notional (cost 421M) 2012 - 48.4B in notional (cost 454M) 2013 - 82.9B in notional (cost 546M) 2014 - 111.8B in notional (cost 655.4M) From the original position in 2010, Watsa has committed 116% more capital to increase the exposure by 226% AND adjust the strike price upwards. Averaging down seems to have worked out well. I'm thinking these might actually pay in the next year or two.

Their bond portfolio would have done very well in the 4th quarter. We might even see a reversal of some prior losses on the deflation hedges with the collapse in oil and the drop in global rates. BBRY was up some 10% too which isn't trivial across the ~1B invested in it though it's given it all back so probably won't count for much outside of making the earnings appear better. I think it will be a good quarter, but not a spectacular one.

http://www.bloomberg.com/news/articles/2015-01-30/euro-area-prices-extend-slide-in-sign-ecb-late-to-deflation-game Even the U.S. is expected to see nominal, headline CPI deflation in 2015 - largely due to lower energy costs and how that flows through to most goods produced. Just as a quick summary of what we need to see for these to be profitable. As of 9/30/2014 U.S. EUR UK FRANCE Weighted Strike price 232.19 111.24 243.82 123.85 Nominal (in billions 52.75 36.775 3.3 2.75 Current CPI 238.03 117.43 257.6 124.85 Delta to breakeven -2.45% -5.27% -5.35% -0.80%

Interesting. The velocity of money is still multidecade lows. Down from 2.2 to 1.5. That means dollars are being "recycled" through the economy less frequently and now the supply of money is reducing as well. Fewer dollars being recycled through less often sounds like a recipe for slower growth than even the dismal numbers that have been put up. I do wonderif this is the beginning with all geopolitical risks, the deflation in commodities, and now this. Might be time for me to deleveraging the portfolio some.

It just feels like a great depression for those who own oil stocks. And coal stocks, and copper, and iron, and timber, and corn, and etc. This isn't limited to a single commodity - almost seems like a majority of them are well within correction territory. My guess there is a problem with aggregate demand...and it won't end soon. If im wrong, I have heavy exposure to commodities through Altius. If I'm right, I have heavy deflation protection through Fairfax.

I sold out of my small holdings in Russia earlier this year to add to Altius and FNMA as they tanked. I'm looking to get back in when I roll my 401k over into my Roth IRA. I do have a concern though that I wwas hoping the board could help me with: 1) what would happen to ADR holders in the US if there were some sort of financial sanctions that prevented foreign ownership OR the US simply makes it illegal to transact in Russian investments. Would that simply mean no more buying/selling or would I be forced out of the position and liquidated? Any supporting documentation for similar occurences? 2) I saw commenters on seekingalpha.com claiming they could no longer purchase the shares through fidelity and other US brokers as recently as November. Any of you having issues purchasing/selling shares.

I'd argue that the failure is a bit of both material and candidates - more people taking it who are less prepared due to the popularity of the program and having companies pay it for you and because the complexity of material has increased. I know a CFA grader with a PhD in Finance and the CFA designation who has commented that the course work and materially is substantially more difficult then it was when he took it. Harder material + a much larger audience of candidates = increasing failure rate Certainly glad the CFA has improved so much with their materials though. Even the last four years I've seen pretty large improvements.

I wish you the best of luck but would caution against confidence. The 1 exam that I felt confident about prior to exam day is the 1 that I failed due to lack of preperation. Howard Marks expounds investing scared. I would encourage you to test scared when it comes to these exams. There's a reason only 30ish% pass.

It's not just oil - many commodities are significantly off too. Unfortunately, unless if it affects housing/rents then I have a hard time seeing how it will significantly impact the index. Fuel is a low % of spending for most so it will be a low weight in the index. I do believe that the weakness that were seeing across most industrial commodities/services is supportive of deflationary pressures - this isn't limited to oil production shifts. Iron, copper, shipping, oil, lumber, natural gas, etc are all down significantly year over year.

I had thought I read an interview or earnings call commentary with Watsa where he said they had $1 bilion earmarked for India. If this fund is only 500M, then I imagine we'll be seeing an acquisition announced soon.

Lol. Fingers crossed. How could he miss such an opportunity?

I really HATE articles like that one! I have spent the time needed to read 20 pages of statistical reasonings, trying to convince me of what?... That the very same valuation metrics we use to gauge if our investments are undervalued, fairly valued, or overvalued: - Price / adjusted earnings - Price / sales - Price / replacement cost cannot be applied to a portfolio of 500 companies… And why? Because they inevitably entail some errors and show some lack of precision! Well, thank you very much, but I already knew that valuation is an imprecise art! And I don’t need anyone to write such a complicated article to remind me of how much future returns calculated on the basis of valuation metrics could deviate from the actual truth! But I also know that (Price / adjusted earnings), (Price / sales), and (Price / replacement cost) are the best metrics we have at our disposal to at least try assigning a valuation to our portfolio of businesses. In fact, do the author of the article suggest something better? Absolutely not! And you know why? Because there is nothing which is better! So, do you want to have an idea where the pendulum is at any given time? Do you think valuations might be useful in that regard? If the answer to both questions is yes, then (Price / adjusted earnings), (Price / sales), and (Price / replacement cost) is what you should use… And to the results you get you should apply whichever margin of safety you deem appropriate! To finally draw one of these conclusions: undervalued, fairly valued, or overvalued. In other words, value investing applied to a portfolio of 500 companies! I like Hussman because his analysis makes a lot of sense… surely not because I think his numbers are 100% correct! ;) Gio I actually enjoy these well thought out arguments. Much of what he says is well reasoned, and often contrary to what I have generally accepted. That being said, it seems most of the anays IS more complicated and time consuming and it generally doesn't suggest much different. For example the CAPE article suggests that with the proper adjustment we're only 20-25% above long term averages instead of 60% as reported by the CAPE. I understand that there is a difference but I'm ok with being "approximately right" without having to spend all of my time making these adjustments. I'm doing this kind of stuff after work and don't have the time to spend doing all of these adjustments and comparisons - I'd rather just have a quick and dirty analysis with the knowedge that it's slightly flawed.

Just disappointed it happened so quickly....was planning on tripling my position when I roll my 401k over in January.will probably still add, but not as significantly now that it's up over 15% in just a few weeks.

Maybe I'm a bit more optimistic (or pessimistic) than most. I see deflation being a very real possibility. Debt is deflationary and we have unprecedented levels of debt. Eventually, some of this principal will have to be reduced - the world can't just continue to roll higher and higher debt balances. The only ways to reduce it is to print a lot (massively inflationary long term) or to pay it back/default (deflationary). I think we'll see a mix of both and that deflation will come before the inflation. We've seen a global expansion of massive amounts of credit. Any reduction of these levels will be massively deflationary (given that printing/increasing debt by trillions is barely keeping us even). I can't place % on the probability, but I do think that prolonged deflation is a lot more likely than most give it credit for. I also think that Central banks are given too much credit in their knowledge and ability to avert crisis - keep in mind the Fed missed the massive implications in early 2008 and the ECB and Japan don't seem to be getting the results they're hoping for.

Agreed. Markel has been the better performer in the last few years, but it is Fairfax's international exposure (especially India) and their conservative positioning that has had me really excited to be an owner. The Asian side of the business has been very profitable and growing at a nice rate. Only a matter of time before is contributing meaningfully to earnings. If the Indian market blows up we'll have a lot of exposure there too. Things could be really exciting for Fairfax over the next 5 years.

Maybe it's a bit premature, but I'm trying to think of ways we could lose while still winning th court case. Is it feasible that the government would convert the preferred to common at some price other than the $25 or $50 face value? Is there precedent for a preferred to common conversion at some value other than face? How likely do you think it is for the government to simply release the GSEs from conservatorship and issue a ton of equity at current prices to make up for the capital shortfall (as opposed to retaining earnings and selling fixed income assets) to dilute the benefit of a legal victory? What would occur if another recession occurred prior to release resulting in GSEs seeking more capital since the govt has allowed for them to retain any? I'm getting more and mor comfortable with the legal aspects of this. I'm trying to wrap my head around other ways we could still lose this.

No, no, no uccmal. You will die! ::force lightning::

A. Gary Shilling believes that in 4 years we'll be back to our normal long-term rate of GDP growth. He is aware of all the issues you've raised. So even though they sound convincing, there are other things to think about as well that are also important. For one thing, I doubt the debt has to be repaid as you suggest (one form of repayment is to issue more debt as the old bonds mature). You just need to grow it slower than GDP and you're golden long-term. So you can run deficits in perpetuity and yet still be deleveraging at the same time. There was also a boatload of malinvestment over those 19 years. Did that contribute to the slow growth (and relatively poor market returns) that we've seen? I imagine it didn't help. Could the next 19 years not have this drag? Shiller is certainly smarter than me so I would probably go with his analysis if I were you. I'm just too skeptical to get there myself. Its hard for me to reconcile that there hasn't been massive malinvestments over the last 5 years and that it wont continue until a market correcting event. Its hard for me to believe that politicians will suddenly get fiscally responsible after decades of overspending or that the American voter will actually demand real change. I think we'll get back to a good place eventually....after exhausting every alternative and being forced to by things events outside of our control (debt crisis, inflation threat, two decades of 0 growth, war, etc). It's a very cynical view, but it has thus far been supported year after year of continuous massive deficits, constant manipulations of market participants (malinvestment), constant war, and politicians who regularly prove how inept they are on both sides of the aisle, etc.

I agree with this sentiment mostly regarding prior returns seeming reasonable when compared historically. My only problem is considering the big picture - we have had 2 decades of below average returns despite being fueled by an unprecedented expansion of debt and historically high margins. Debt has to be paid back in the futureand margins generally compress. This suggests that growth will be even slower, and earnings possibly lower, going forward. Future market returns are a function of current value (reasonable to high, depending on what metrics you consider) and future growth (doesn't look good if debts are to actually be paid). Its not unprecedented to have a market have negative returns over a 20 year period - negative is a long way down from 6.7% annualized. That being said, ZH used to actually have decent articles that covered topics more in depth, and far in advanced, relative to the mainstream media. They were talking about the London Whale long before the trade blew up and lost JPM billions. Now it seems to be mostly fear mongering.