TwoCitiesCapital

ok. but this tends to happen every 30 or 40 years. And it just happened 5 years ago. So is that a wise bet? I see a two tiered market. I see massive overvaluation in a growing number of "hope and change" type companies. And I see reasonable valuation in many good companies like msft, apple, qcom, aig, lots of small financials, etc. It's funny that these once in 30-40 year events actually seem to happen way more regularly than that... As Gio pointed out, 2000 there was a 50% decline due to the tech bubble. 2008 there was a 50% decline due to the housing bubble/over leveraged financial system. By most historical measures (Shiller P/E, Tobin's Q, historical margins and current P/Es, etc), we are anywhere between 30-50% overvalued. Whose to say in 2018 there won't be a Chinese property crisis since there are literally multiple empty cities and credit has continued to expand.... Or an escalation of Europe's problems as at the end of 2011...but without the quick resolution since the main tool proposed then has since been determined illegal. Did you know that interest rates doubled in Spain, Ireland, and Greece in a matter of weeks during this period? We are literally a matter of weeks away from these countries bleeding if rates shoot to 10% for any significant period of time. Or anothe recession in the U.S.? Or a contagion from worsening conditions in emerging markets? My point is, a crisis may or may not come. But there is a serious amount of risk in the system with unprecedented debt levels at the global level, unprecedented connectedness within the global financial system, an obvious capital spending bubble and debt bubble in China, Europe/U.S. constantly on the brink of 0 growth/recession, and unprecedented levels of speculative liquidity driven by central bank injections. Maybe we fly though all of this without a scratch on us. Maybe we crash and the results are devastating. Just because you made it to your destination safely doesn't mean it was stupid to wear your seatbelt. I'm just glad Fairfax is wearing their seatbelt and driving slowly. Nobody is forcing people to buy the stock. If you don't like the current state of the hedges, don't buy it until they take them off.

I find the below notable: 1) Insurance and investment income was 563M pretax in a mediocre environment (insurance market not particularly hard and interest rates relatively low). Keep in mind that the insurance end could double capacity. Insurance is going to be a much bigger piece of this company (even without hedges) and its very good progress to see these companies growing and becoming profitable 2) totally digging the increase in deflation hedges. I know this is a point of contentionon this board, and the hedges are unpopular, but this is precisely what makes my portfolio robust and anti fragile. Imagine if equity markets fell by 50-70% and Fairfax has billions in cash when it happens. the whole global QE, the moral hazard of bailouts, unprecedented amounts of debt, and the interconnectedness of the global financial system make me uneasy. Debts are generally being refinanced at lower rates which generally allows for, and encourages, more borrowing delaying the day of judgement. That just means when it does come it's that much bigger. Maybe there won't be a crisis and everybody gets along and manages massive loads of debt forever...but I guess I just don't have that much faith in people...and for good reason! I've lived my entire life surrounded by them! 3) I know it's pointless to say "what if", but had they not been hedged, they would have earned nearly $2B on a $9 billion market cap. I'm ok with those types of returns (and larger) once the generalized hedging ends. This is just a way for us to see the true earnings power that the company is capable of.

I believe you both are being very quick to write off a firm that who has been largely successful in risk parity AND alpha generation AND has better understanding of global macro scenarios then the Federal Reserve. As mentioned above, risk parity is based on volatility, leveraging asset classes to the same volatility, and a very large amount of diversification. Its not as simple as stocks and bonds. Throw in precious metals, real estate, futures, domestic and foreign equities, currencies, high yield, corporate bonds, sovereign bonds, etc. Secondly, I'm sure we all agree that risk parity has generally benefited from the bull market in bonds. In general, a reversal will result in higher volatility in bonds which will result in less leveraged exposure to them as an asset class meaning that they will be far less of a counterweight then they were a boon if the strategy is implemented correctly. Seriously, Bwater is the worlds largest hedge fund for a reason and it's for a whole lot more than "the bull market in bonds".

2000 was absurdly overvalued by any historical precedent. It was literally a "tulip mania". Given how far of an extreme it was, I think suggesting we're only overvalued when we get to that point makes it a useless indicator. It should only be a lesson to investors how absurd things could become; not a event to be considered likely again. i think when we're talking tens of trillions, this wouldn't matter. Traditionally GNP should be used though given that U.S. companies earn a lot abroad and aren't so constrained by the U.S. geographical area.

I've already had a small position in Gazprom from the last time it was these levels. Am considering adding to it or buying some Lukoil. Also beginning to research CEFs in this space to see if any can be had at sizable discounts. Bought more SAN today. Second largest position behind Altius at this point.

Saltybit: You are on the right path! I still have some NTE, and my family is HEAVILY invested in it still. Unfortunately, they have a moderately profitable positions instead of tremendously profitable positions. One family member has been in NTE since it was OTC in the early 90's... I would suggest that you take a look at Deswell Industries (DSWL). This is now a net-net stock. I have been following it since the 90's also. Much like NTE, I suspect their real-estate is worth SIGNIFICANTLY more than what it is carried on the books for. This could be a multi-bagger if the company is liquidated OR turned around. Meanwhile, you are paid 9%+ to sit & wait for either eventuality. This has been a mixed bag for me. I am ahead in some positions, behind in others...As the years pass, the dividend can & will help me out. Another one is not technically a Chinese company, but a casino company in Macau. Emperor Entertainment (EPETF, 0296 HK). I've been in this one for a while now. I should have backed up the truck when I established my initial position. I believe this to be a quality company, and is still undervalued even after it's tremendous run. I'm looking for another dividend increase... There are several others that I have small positions in, or am simply investigating further. You certainly have to be careful & skeptical, but there is tremendous opportunity for those who are willing to do the work and are patient. What kind of work did you do to make yourself comfortable that the reported numbers, cash flows, assets, and etc. were accurate? I was burned once by reverse mergers and it just taught me that I really have no way of really knowing if the reported figures are accurate. I've read about the various pros and cons of using Chinese tax docs to back into profits/losses but it didn't seem like there was a reliable consensus on this either.

It appears to me if they're swapping the exposure. They use to have 51 million common shares with an average price around $14. Then they bought another 50 million or so through convertible debt with a strike of $10. They've swapped their exposure into high yielding debt that is convertible into the same underlying shares with a lower average cost then their current holdings. They accrue more upside potential, get paid a handsome coupon to wait, AND can take around a $150M tax loss on the shares that they sold due to FIFO...Brilliant. I doubt they'll sell all 51M of their common at this point, but I wouldn't be surprised to see them do that over time. It reduces risk from a concentrated position in a troubled tech co, allows for tax write offs, establishes a lower average cost, and they will still maintain their 9.9% via the converts and a handful of shares.

Thanks for your responses. That mostly makes some sense to me. I'm having trouble investigating loan loss reserves. I know that reserves are a contra asset that reduces loan assets on the balance sheet and they are increased/decreased each year by loan loss provisions and charge offs. Are banks required to report the total amount of loan loss reserves they currently hold? Where is this typically reported? I can go back several years and see all of the provisions and charge offs and get an idea of the net change; however, that does nothing in establishing a total value of reserves to give me an idea of how much is set aside against bad loans. I can't seem to find this item in the annual reports of the banks I'm looking into.

Plan's website is great and has been the place I recently started in building a circle of competence around financial institutions. I have a quick question - Santander has mentioned recently that a large % of their NPLs are still "performing" in that they're still receiving cash for them. I also saw Berkowitz mention in his analysis of Wells Fargo that their NPLs were still yielding 6.1% (when the prime rate was at 6%). My understanding is that an NPL is a loan that hasn't received interest and/or principal in the past 90+ days. Once payments resume, the loan is considered performing again even if the balance isn't up to date (debtor is still "behind"). So my questions is, if NPLs are reclassified when they begin paying again, how can an NPL have a cash yield? Is it as simple as borrowers paying interest only which would still classify the it as an NPL while yielding cash? Is there more to this?

Ray is brilliant but has been wrong before. He knows this. You don't see him making large concentrated bets. His firm makes tons of small bets that in aggregate work out to be great returns. I think he is one of the people who understands the economy best, but he's also had his fair share of mistaken predictions. Seems like there is a macro based fanaticism on this board. I get caught up in it from time to time too and am recently just coming off of a 2 year stint where I was using macro predictions to manage my portfolio exposure (much to my detriment). I think for us value investors, we're better off ignoring macro concerns and focusing on index valuation levels and cheap companies. Those are easier to predict, time, and understand.

The positive side is that the further along we get in this deleveraging, the less of it's drag there is ahead of us. What deleveraging? The US is, a little (total debt down from ~390% of GDP to 340%). But the world overall has added 30% to its debt load since 2007. Private sector debt carries higher financing costs than public sector debt. So you may scoff at 390% vs 340%, but I think the difference is more significant than that. Let's say you take a private citizen that was paying 6% interest on his personal debt, and you tell him instead that he only has to pay 3% interest if it is moved to the public sector. There's obviously short term benefits to doing such; however, I would say there are long term negative consequences. 1) this distances the cost from the buyer. Theoretically, if you're the one paying the money the. You're aware of the cost and you limit consumption to maximize your utility. When you divert this cost to the government, it separates you from the expense. When you pay your taxes, you might think they're too high but it's not easy for you too tell if this is due to educational expenses, military expenses, debt service, entitlements, etc. etc. etc. Because the cost isn't directly borne by those who pay it, it becomes a lot easier for costs to get out of control. In this case, that means borrowing more in aggregate then we would have borrowed individually. 2) this creates class warfare. Most of the deleveraging occurred due to defaults. Most of the government bailout money went to save institutions that were largely affected by these defaults. Thus, you could say that it is generally the less credit worthy people (those who defaulted or needed extended welfare benefits) who transferred their balances to the government. Secondly, generally, credit worthiness and income levels are correlated. So, in general, the less credit worthy people are the ones who pay little to no taxes transferred their balances to the remaining 50% of the population that does. I can tell you as someone who has strived to remain debt free my all 24 years of my life, that I'm not terribly happy that 50k of my net worth is my proportional debt owed to the government for services that largely benefits other people. 3) this delays the inevitable. There is a certain point where there is too much debt in the system. In the long term it can be measured against collateral and assets that can cover the debt. In the short term it can be measured by the income coverage ration. You obviously hit the short term threshold much quicker when rates are at 6%, but that means your debt/assets ratio is relatively lower than it would be when the short term ratio is hit at 3%. Hitting the wall sooner actually increases the odds of long term viability while delaying it and lowering the rate/increasing the threshold pushes you closer to the brink of insolvency. I would have rather gone through the deflationary spiral in 2009 then the next one with a higher proportion of debt to assets which is what inevitably happens when you don't let these things take their natural course. People will eventually be conditioned to think 150% (or whatever the rate is) debt to assets is normal and make extrapolations of debt levels from this elevated base. These bubbles build generationally because it takes a long time for this effect to occur, but when they bust it is a spectacular occurrence. I'm not convinced 2008/2009 was that spectacular occurrence given that it doesn't appear to have changed people's perceptions on debt by that much.

Beware of false patterns. Sometimes our intelligence (i.e., ability to recognize patterns) works against us. Let me show you another series of years seeing large drawdowns in a particular country's stock market: 1905 1909 1942 1945 1971 1992 1993 Do you notice how those tend to cluster, and have nice 30-year cycles? Would it surprise you to know that the source was the excel random number generator from 1900-2000?(This was the first series that popped up... I didn't wait for any unusual clustering). In fact just for kicks I pulled together the second set of random numbers. You see how it "proves" that things are getting more clustered more recently? Surely a sign of increased economic interconnectedness and vulnerability! 1913 1935 1950 1979 1993 1994 1997 The fact that there was a crash in 2008 doesn't make it any more likely that there will be a crash today. It does change the general perceived likelihood of such a crash, however, but I'd argue that's a behavioral bias. (That said, for all the usual reasons--e.g., Hussman--I do think the market is pretty frothy right now). You using random unrelated numbers that happen to cluster to explain to dismiss the detection of a possible pattern that is generally reflective of events that are very much related. What happened in the economy in 2009 very much influences what happens in the economy today via policy responses (higher taxes, Lowe interest rates, QE) and its weakening effect in the economy's flexibility (higher debt, higher unemployment, lower wages, etc). I think that a crash in 2009 pit the globe and shaky ground and very much increases the probability of future crisis in the near term. The better argument would be to say the stock market is wholly unrelated to the economy and is simply random blips. We all know that this can occur over the short term, but you wouldn't be on a value investment board if you truly believed that persisted in the long term. I thinking looking at trends over a decade long period qualifies as long term and we can be relatively certain that they were somewhat related events. Further, long term bear markets have started when interest rates were began trending higher AND multiples were high. It may not happen in the next 2 years but rates will eventually get higher, margins will eventually compress, and multiples will eventually compress. The things that happen today are directly related to the time frame in which this will occur which is why these things tend to cluster.

I think to say this is hypocrtical as you did below this comment is disingenuous. It's not like Prem is pumping up their short term results. He's simply staing that the massive loss that was reported was reversed in a mere two months of positive equity performance. This is a very valid example that a short term lense of 1 quarter or 1 year doesn't give an accurate depiction of their results. There absolutely should be. When Prem said he was buying 10 year contracts, why are people assuming that he's wrong (and have been for the last two years) when only half the time has elapsed? Funny how 1 in 100 year events happen far more often than that. 1929-1932 - peak to trough of 90% over the course of TWO massive market drops (this is what Prem is concerned about) 2007-2009 - peak to tough of 54% 1937-1938 - peak to trough of 52% 1973-1974 - peak to trough of 46% 1939-1942 - peak to trough of 39% 1968-1970- peak to trough of 36% 2000-2002 - peak to trough of 34% Notice in the last 100 years, there were 7 instances of a 30+% corrections. You'll also notice that they all seem to cluster together with 3 occurring from 1929 through 1942, 2 in 1970s, and 2 in the 2000s. Now, I'm a betting man and I see a world that has more debt than any historical precedent, politicians who prefer to paper over the problems with bailouts and moral hazards, and a world that is more interconnected and susceptible to external shocks than it has been in the past....and because we haven't seen a major decline in stock indices in 5 years it means Prem is an idiot or has lost his touch?No. It means he has a better knowledge of history than you. That's not to say he'll be right. It's simply to say to hedge against what he fears occurring means to hedge for the better part of a decade. It's common knowledge that he's hedged and the duration of the contracts should have told you something. If you don't like it, you're more than able to sell your shares. It's that simple. I for one am glad he's hedged (provides catastrophe insurance for my own portfolio) and I'm increasingly glad to see improvements in the underwriting without having to worry about equity market performance on their capitalization ratings and regulator scrutiny. I fully expect them to increase premiums in a major way if the market keeps hardening and we will see massive insurance gains and increases in float which will support increased leveraged equity exposure when he deleveraging has occurred (traditionally takes 10-15 years). Heres to the long term success of Fairfax and their patient investors. Cheers!

I think I had read somewhere that when he was buying Coke back in the day, Berkshire was responsible for 20-30% of the daily volume.

Thanks for this! I just signed up and will hopefully get to check them out soon. Even if foreign market access is limited, this would be helpful for my investments in more liquid and domestic names. For those of you who don't use Scottrade, they allow for commission free reinvestment through their FRIP service. It allows you to reinvest dividends from most any equity you hold into any equity you hold (excluding ADRs and OTC listed foreign shares) commission free.

I agree with this statement, but the material suggests that it shouldn't matter what the absolute level of the numbers is or continuous play. Basically the idea is you display a loss aversion bias that is "irrational" if you would play this game continously but not once. Same goes for if you'd play it for $75,000,000 and not for $75. This argument seems like BS to me though and the use of the utility function makes sense to me.I'm not going to much happier with 100M than I am with 75M but I'd certainly be super disappointed 3 out of 4 times walking away with nothing by taking the gamble with the "higher expected value". It definitely seems at some point that the "bird in the hand being worth two in the bush" is a very very reasonable and even rational approach. I'm not trying to disprove the CFA material so much as I'm just trying to understand how most people think about this, what their decision would be, and what #'s would force them to change. More of out of curiosity than anything else.

Hi guys, I'm studying for the CFA Level 3 exam again and am thinKing about loss aversion and framing biases. An investor is prompted with a scenario with where he can choose a 1 in 4 chance of receiving $400 or $75 guaranteed. Now I know the math. I know that the first has a higher expected value and that generally its considered an irrational bias to choose the $75 as many participants do. My question is on your opinions. In certain circumstances, like this one, it seems that the irrational choice is my preference despite being aware of the "bias". My reasoning is below: 1) this is a one time event and there's no guarantee I'll play continuously 2) in a one time event scenario, there's a 75% chance of me losing with a 25% chance of winning big OR a 100% of me winning a little. So I have two questions for you: 1) which scenario would you choose and why? 2) in your selected scenario, what would the alternative reward have to be to make you switch your choice (cetiris paribus)

The choice is obvious if you're young and single in the U.S. record debt with historically low taxes all around eventually means higher taxes. If you're younger and plan to make more as you get older, then taxes will also go up in the future. I choose Roth.

I work in the Middle Office for a large hedge fund in the New York City area. Working on finishing up CFA exams and moving to role more associated with the actual investment decision making.

The Turkish market is down some 40+% due to all of the political turmoil and Fed tapering fears. It trades at about a P/E of 9 and a CAPE of 9-10 from what I could tell with the few articles I read. That was enough for me to buy into a diversified index. I don't have enough time to research the underlying country and companies to cherry pick here, but this kind of cheapness on a diversified index in a higher growth emerging market was attractive to me to begin a small position. I've been moving my U.S. exposure to Europe and emerging markets over the last years and a half as European and Emerging markets are more favorably priced. This small amount of equity exposure to Turkey (about 1% of portfolio value) is in addition to about 2% exposure to Russia (through Gazprom), 6% exposure to Brazil (through BSBR), and my 20% in Europe (various investments). I also have some debt exposure to foreign economies through my fixed income CEF (DSL).

Made some 2014 contributions to my IRA and used the money to Open Positions in SHLD MKL iShares Turkey Add to Lancashire Banco Santander Brasil And am considering whether or not to add to my large position in Altius or lever my Kami exposure through Alderon.

I think the easy money was made in Dry Bulk. Buying it months ago when they traded at fractions of book value and low single digit earnings multiples made sense. Buying them now at high single/low double digit multiples and right around book makes less. At this point, rates HAVE to rise for you to earn a return in the near term and you're risking money up front if that isn't the case. I got into SB at 5.50 and filed down at $3.20. I've sold most of the position now that it's above 10. I could go higher but it seems possible that ot could also go a lot lower in the short term. My pick is Altius. Have been particularity impressed with this board idea and was able to build a full position just under 10% before it started moving. Hoping for big news in '14.

I'm astounded by the returns on this board. I imagine it's a combination of both the talent on this board as well as a form of self-selection bias as those who have something to brag about are more likely to be the ones to report. I think overall I was up about 4% for the year in my investment portfolio. I was 20-40% cash/bonds for a large portion of the year as I have difficulty trusting the current environment. I had a lot of big winners (GOOG, BBY, SB, MRVL, SAN, MBIA) but those were all offset by my biggest losers (BBRY and AAPL and shorting AMZN) I think the problem I need to work on is learning how to size my positions. I seem to have some decent picks...I just always weight the losers far more heavily than the winners. SB and BBY were about 5% of my portfolio collectively while BBRY was at 16%. The number that really matters (my net worth) is up 40% YoY due to my success in a side business that I invested in building. I don't know how to best to measure the "returns" as not all of them are monetary and my investments were sporadic, but I have put in some $6-7k and 15hrs/month over the past 2 years and have made some 500-600% in net economic benefit over that time. This year I expect add another 500-600% in economic terms as my costs have stayed the same but I have successfully raised my prices. I would love to find stellar stock returns too, but it seems my talent lies elsewhere. I'm beginning to accept that and am building a core/satellite portfolio that will allow me to dabble in my ideas/picks without doing too much damage to my long-term results. I'm counting on you guys to provide some of those picks ;)

Interesting. I have a lot of respect for Kyle Bass, but I thought hedge funds had learned their lessons with Argentine debt....maybe this time he'll be right.