TwoCitiesCapital

Finally finished the rolling of FCAU into LEAPs...missed a little of the upside today, but since I'm nearly 2x levered on that exposure now, it wasn't so bad. Interesting, could ya elaborate what's the expiration day of those FCAU LEAPs. thanks! January 2018 w/ a strike of $3. Just did it to free up some cash to buy other things while maintaining/incrementally increasing share exposure to FCAU (increased by about 15%). End result is basically the same upside potential for FCAU with incremental exposure added to Fairfax, FNMAJ, and PDER for a leveraged, but more diversified, allocation. Keeps the upside, has the potential to cut my downside through diversification and floor on FCAU related losses, and the "cost" of the leverage was around 3.25%. Seemed like a reasonable bar to outperform given that PDER's dividend exceeds that, Fairfax's dividend gets you 2/3 of the way there, and FNMAJ was in the midst of a major rally (up 30-40% since I purchased). Since margin isn't available to me in my retirement accounts, seemed like a cheapish way to get leverage and immediate exposure for the immediate opportunities I saw in Fairfax, FNMAJ, and PDER.

For all of you who have been pounding the table and hating the hedges, this dramatically increases Fairfax's earnings capability which should be massively bullish - especially since it's down some 10% over the last 5 days. I don't personally like the move, but I have to say - I did the same thing. I removed all my short hedges yesterday. Not because I think the markets are in any less danger, but because I think Trump's cutting the corporate tax rate and repatriating billions to the U.S. at 10% could be the "blow off top" that supports equities at a higher level for the near term before we see the drop I've been anticipating. I didn't want to be short and managing the margin calls if the equity markets went higher by 10-15% so I closed everything out and am sitting on my hands watching now. Surprised to see this about-face turn in Prem though. It's easier for me to be tactical with the thousands that I trade. I'm blown away by how quickly they changed their minds on how a multi-billion portfolio was positioned. I guess it's a good thing they can still turn on a dime.

A 1% to 2% move is non-trivial. On a 30yr it translates to a -19% to -28% return due to its approx 19yr duration. The 30bps to 35bps move in US 10yr and 30yr in the past two days is a huuge move with much higher implications on actual returns. The other issue is for a P&C, the investment leverage is always >1 and in FFH's case, its around 3x, so the implications on ROE for FFH are even more dire due to this. Kudos for him to have had the sense to come out of them. I'm aware of how duration works - we've seen nowhere near a 1-2% move in rates. I thought the prior comment was referencing the notional value of the bonds since rates have only moved 20-30 bps. Which would have been about a 2% move on 10-year bonds in terms of gain/loss to Prem's portfolio. I agree on your point that this is a big move for 30-year Treasuries, but Prem's duration has generally trended around 10...so I don't think he owned $10B in 30 years to begin with. Who knows what he buys back into, but 20-30 bps doesn't strike me as the type of rate move that is going to drive him back into bonds unless if he immediately reverses his concern about rising rates under Trump and moves back to deflationary considerations.

Finally finished the rolling of FCAU into LEAPs...missed a little of the upside today, but since I'm nearly 2x levered on that exposure now, it wasn't so bad. Purchased more PDER and increased FRFHF by 10% with the cash.

My guess is they haven't done anything with it yet - Prem doesn't strike me as the kind of guy who was concerned about a 1-2% move nor do I think a 1-2% move is going to be the evidence he wants to see regarding whether he was right/wrong.

Anthem was good but I wasn't into the dystopian fiction at the time. I still had hard time reading the Hunger Games even though my wife loves it. Fountainhead did it for me. I would read it every year but I was a sheltered teenager then. It took me a while to figure out the inefficacy of the propaganda. Fountainhead was good. Less preachy than Atlast Shrugged. I like both books and generally agree with the overarching theme, but am not as radical with it as most. Still agree with a progressive taxes policies, social safety nets, etc. - just approach it from a "less is more" mindset and prefer any governance that can be done at the local level to be left at the local level.

Depends on how you choose to disect the votes. But, yes, part of reason of Trump's win was due to sexism (btw, perhaps you don't realize that women can be sexist against women too). And yes, the white racism also played the part. Read Nate Silver's site slicing of the votes. I'm aware the women can be sexist, but to make the claim that 40% of the women are sexist, you're going to need a little more data than a single women candidate losing an election...especially when there are other explanations that do a FAR better job of tying together the diverse groups that supported Trump. I'll repeat myself: let's see how many of these Trump will even try to resolve. Sure. I'm not saying he will or won't. I'm just saying it was clear Hillary wouldn't, which is why the anti-establishment candidate won. Had the DNC selected Bernie - the DNC would have had a chance. But just as the pre-convention polls showed, Hillary lost to Trump.

Aside from the gratuitous ad-hominem (bullying and insulting Democrats for being bullying and insulting), I think you're actually right about the general concept. Both candidates were unpopular and controversial, so many people didn't want to deal with the BS they might have to go through if they admitted that they liked a candidate. Hence, the high number of undecided, and potentially a lot of people lying to pollsters. (And really, it doesn't even have to be that high. The swing states often had a sub three percentage point difference. So if you're polling the typical 1000 people, that's only 30 people lying to you during a really controversial campaign.) Plus, the other thing is that I think by the end Nate Silver gave Trump just under a 1 in 3 chance of winning based on the data from the polls. So, has anyone here ever rolled a die and had it come up 1 or 2? Did you think that die was rigged? What about rolling a 7 with a pair of dice? If you believe the polls, that's all that had to happen for Trump to win. The crazy thing is, Trump supporters were painted as racist, sexist, white men for the entire election process. The newsflash from voter demographics is that's simply not true. Slightly more than half of white men voted for Trump (which means slightly less than Half supported Hillary) Around 30% of women voted Trump. Around 30% of Latinos voted Trump. A group that represents 1/2 of white men, 30% of all women, and 30% of all latinos doesn't sound like a group that can be labeled as a bunch of bigoted, sexist white dudes who are terrified of strong, successful women and immigrants. The only vote that appeared to go straight down race lines was the african american vote which was close to 90% to Clinton. I think the results are pretty clear - this election wasn't about race or sex like the Democrats would have us believe. It was about an anti-establishment vote from voters who are pissed off after 17 years of stagnant wages, sub-par growth, soaring healthcare premiums, an exploding wealth/wage gap, a massive run-up in Federal Debt with little progress to show for it, constant foreign wars new threats from the Middle East, and a general fed-up attitude towards the outcomes being the same from establishment Democrats and Republicans over the past 16 years. We saw the anti-establishment vote support Obama as a relative young, "outsider" who promised Change. When he failed to deliver, we saw the movement grow and move further to extremes in support of Bernie, Trump, and 3rd party candidates. The DNC knew that Hillary didn't have the support of millennials and independents. She was projected to lose against Trump for that very reason BEFORE emails leaked, before the FBI's investigation results, and before the DNC selected her as the nominee. They picked her anyways. A tactical error.

I don't think the U.S. knows what it just elected. Lol. He hasn't had anything of substance to say outside of trade policy and building that damn wall...but it certainly didn't elect a traditional conservative. Many Republicans despise Trump too - it may be easier for him to get some things done with a red Congress, but I don't think it's just going to be Trump running the show willy-nilly given how little he is liked by both sides. But, given that he hasn't promised much, he can't be accused of flip-flopping much. He can take whatever position needs to be taken to get a deal done. We'll see how productive he actually is.

Increased FNMAJ just shy of 30%. Attempting to roll my FCAU shares into LEAPs deep in the money to get get some leverage and free up some cash for more PDER purchases.

It makes sense, but obviously wished they would have sold back in June/July when treasuries were hitting their record lows and offered less value than after one of hte largest bond sell-offs in history. Granted, Trump was guaranteed the presidency then, but "Brexit" and other nationalistic movements around the globe should have suggested probabilities were strong and the value in Treasuries, even relative value to other gov't bonds, had all but disappeared following "Brexit". That would have been the time to sell...not once bonds returned to pre-Brexit levels. Anyhow, I'm not overly concerned about the move. I just thought it bizarre that they'd sell the Treasuries now and not 4-5 months ago. Did you think it was bizarre that they weren't selling at the time, or is this hindsight speaking? Not getting at you, just interested. Because while I agree, I wouldn't have got the timing right either so I can't criticise them ;) A little of both. Obviously, I wasn't forecasting a return to pre-Brexit levels or that rates would move up significantly in the worst sell off we've seen in years, but markets almost ALWAYS overreact and correct in the days following shock events like "Brexit". 30-year Treasuries went pretty close to 2% flat and the yield advantage from overseas investors buying Treasuries on a hedged basis disappeared - absolute value was much changed after a 20-25% rally AND Treasuries lost almost all their relative value on a hedged basis removing demand from Japanese and European investors who had been a major source of demand. I put my money where my mouth was. I owned a 25+ year zero coupon bond fund for maximum duration exposure and dumped it in July. I tend to agree with his macro calls, but dont' mind shorter term trading. Given the reasoning above, I didn't want to be greedy after clearing 20% in a bond ETF in fewer than 6-months so I took my profits and held the cash and waitied for better rates to re-enter the position (haven't done that yet). I'm nowhere near as sophisticated as Fairfax is when it comes to bonds - just seems odd they would sell now instead of bakc then given his reasoning. Brexit and other nationalist movements should have been the flag that Trump had a chance AND the bonds had just gone through a major rally to set record lows in terms of U.S. yields! Record lows! Trump threat? Check. Bonds the highest valued in their history? Check. It's just weird that they held then but are selling now. The only thing that's changed is that bonds have become more attractive. Well kudos to Prem! I may not have understood the timing, but he wasn't wrong! 10-year yields up 13 bps to the highest levels since March. That'd be another $100-$150M or so loss in a single day across the $10B in treasuries and we may not be done yet.

Well, you were right for about an hour.... Dow futures were down as much as 750-800 pts when it was first looking likely he'd win. I'm blown away by this morning's market action.

So, do we all still think Scott Adams is just a lucky wacko? Or did he call the election correctly before any of the professional forecasters?

Wrote puts on VRX @ $10 for $0.45. Not particularly bullish on the name and wouldn't want to own the stock outright. Just part of my regular strategy to sell puts against hated names after massive drops that has previously included DB, CHK, ACI, etc to earn a decent return on my growing cash balances. 4.5% for 5 weeks protection against a drop in excess of 31% seemed fair. Also, sold about 1/3 of my CNXC position and in-the-money covered calls against all of my CLD position. Looking at about 150-200% in profit on these names over the course of the year and a Hillary win isn't too supportive of coal assets. Don't want to get too greedy with these things.

It makes sense, but obviously wished they would have sold back in June/July when treasuries were hitting their record lows and offered less value than after one of hte largest bond sell-offs in history. Granted, Trump was guaranteed the presidency then, but "Brexit" and other nationalistic movements around the globe should have suggested probabilities were strong and the value in Treasuries, even relative value to other gov't bonds, had all but disappeared following "Brexit". That would have been the time to sell...not once bonds returned to pre-Brexit levels. Anyhow, I'm not overly concerned about the move. I just thought it bizarre that they'd sell the Treasuries now and not 4-5 months ago. Did you think it was bizarre that they weren't selling at the time, or is this hindsight speaking? Not getting at you, just interested. Because while I agree, I wouldn't have got the timing right either so I can't criticise them ;) A little of both. Obviously, I wasn't forecasting a return to pre-Brexit levels or that rates would move up significantly in the worst sell off we've seen in years, but markets almost ALWAYS overreact and correct in the days following shock events like "Brexit". 30-year Treasuries went pretty close to 2% flat and the yield advantage from overseas investors buying Treasuries on a hedged basis disappeared - absolute value was much changed after a 20-25% rally AND Treasuries lost almost all their relative value on a hedged basis removing demand from Japanese and European investors who had been a major source of demand. I put my money where my mouth was. I owned a 25+ year zero coupon bond fund for maximum duration exposure and dumped it in July. I tend to agree with his macro calls, but dont' mind shorter term trading. Given the reasoning above, I didn't want to be greedy after clearing 20% in a bond ETF in fewer than 6-months so I took my profits and held the cash and waitied for better rates to re-enter the position (haven't done that yet). I'm nowhere near as sophisticated as Fairfax is when it comes to bonds - just seems odd they would sell now instead of bakc then given his reasoning. Brexit and other nationalist movements should have been the flag that Trump had a chance AND the bonds had just gone through a major rally to set record lows in terms of U.S. yields! Record lows! Trump threat? Check. Bonds the highest valued in their history? Check. It's just weird that they held then but are selling now. The only thing that's changed is that bonds have become more attractive.

It makes sense, but obviously wished they would have sold back in June/July when treasuries were hitting their record lows and offered less value than after one of hte largest bond sell-offs in history. Granted, Trump wasn't guaranteed the presidency then, but "Brexit" and other nationalistic movements around the globe should have suggested probabilities were strong and the value in Treasuries, even relative value to other gov't bonds, had all but disappeared following "Brexit". That would have been the time to sell...not once bonds returned to pre-Brexit levels. Anyhow, I'm not overly concerned about the move. I just thought it bizarre that they'd sell the Treasuries now and not 4-5 months ago.

Probably more of the former. Very odd for an insurer to not hold a massive amount in gov't bonds and they haven't sold Treasuries to fund prior acquisitions.

Announced a net loss to common equity for the quarter. $500M loss from bonds, equity hedges, and deflation derivatives which was offset insurance operations which were still quite good.

Not sure I agree with your assessment. Haven't most studies that have been done show that low P/E, P/B, or P/FCF companies typically highly leveraged equity stubs anyways which is why they have a tendency to go kaput or rally majorly? It's because the equity is such a small piece of the EV that if the EV goes up any, the impact to the equity is major. Wasn't this exactly what Graham, Schloss, and Buffett were doing at the beginning (and some kept doing)? I mean, I did a low P/B portfolio this March with a focus on North American and European equities and it was almost ALL highly leveraged oil/gas/coal companies that were hemorrhaging cash. It's up some 45-50% this year (after falling 37% last year) even though most of those companies are still hemorrhaging cash. I've had 3-4 names go bankrupt, but then I've had names like CLD that have gone from $1 at it's lows to $6.60 as of today. I'm pretty sure that's always been the "secret" of low P/E, P/B, and P/FCF investing. You're typically buying ugly, beaten down, noncompetitive companies that no one wants to own which means that you can get an adequate return in the event they don't simply roll over and die immediately because there is no competition from other buyers. The hope is that the ones who don't die immediately and jump 200-300% will outweigh the detraction from the ones that do.

I think Buffett actually compounded at a faster rate when he was doing cigar-butts. Part (not all) of his conversion to quality was driven by the fact that he couldn't do cigar butts when he got to a certain size. I am sure that his "guarantee" that he could do 50% CAGR with smaller sums of money isn't based on compounding quality. Cigar butts is a perfectly sound way of investing, even if it hasn't worked recently (and few value managers have done well recently). If quality was the only way to go, we'd all do it, and quality would get overvalued. When Buffet closed down his partnerships, he gave a nod to his new strategy that would seek out long-term quality holdings. He said himself that he expected returns to be lower without a commensurate reduction in risk.

While I agree, is anyone concerned about a potential trade-off between more opportunities and the time it takes for intrinsic value to be realized from them? Finding opportunities is only half the battle. My understanding is this becomes a double edged sword. I agree with the notion that capital should flow where return is greatest, but as indexing continues unabated, that big capital is increasingly precluded from flowing back and raising multiples. It's like we can't have it both ways. (Unless of course indexing loses favor and sentiment shifts back to active management.) To the extent that value investing is about finding cheap companies and waiting for them to no longer be cheap, doesn't vast indexing remove a powerful catalyst? While it's ideal if stocks re-rate from the second you buy them and you never run out of good ideas that re-rate hte second you buy them, that's not reality. There's a great long-term opportunity in perpetually discounted securities - particularly if they pay dividends or repurchase stock. You can compound at much higher rates, more continuously, and need to do less work to monitor them. If you have a stock at 4-5x earnings that pays a modest dividend (or modest repurchase program) and you can re-invest that dividend at 4-5x earnings for the next 20 years, you're probably not going to be complaining about your results even if the stock never re-rates to more a normalized multiple.

Well, Santander didn't buy any of them, but it wasn't a bad time to be buying them. Below are the returns, not including dividends, since that post. Banco Santander Chile: +23.87% Banco Santander Brasil: +131% Banco Santander Mexico: +30.92% Despite this incredible performance from it's subsidiaries, SAN itself is down -17.53% over the same period currently sporting a market cap of $60B. This has significantly shifted the market implied values of operations in Europe (only accessible by buying a stake in the parent). If we look at it's ownership in its public subsidiaries and the Americas and their market caps, (BSBR - 88.3% OF $26B, BSMX - 75% of 12.59B, and BSAC - 67% of 10.3B, SC - 58.9% of 4B), we see that it's ownership in public subsidiaries is around $42.5B against it's current market cap of $60B. So what that is telling us is that the market implied value of the remainder of U.S. and European operations is only $17.5B - or roughly 4x it's earnings contribution (~4.5B - 1st half of 2016 annualized) while America's trades closer to 15x (~2.8B - 1st half annualized). I still think America's offers decent value with a long runway for growth, but methinks it's time to roll out of the subsidiaries and back into the parent to increase that European exposure. Prior to today, about 1/3 of my exposure to Santander was through BSBR and the other 2/3 via SAN as I anticipated higher returns from BSBR either through an EM recovery or through Santander repurchasing the entire entity. Now that it's rallied quite a bit, and the parent has languished, the repurchasing is less likely and the gains I've received are pretty favorable to roll back into an even larger position in SAN. Totally out of BSBR and back to 100% SAN. Just sold all of the SAN I purchased with proceeds from BSBR at around a 15% profit (depends on the exchange rate/reinvestment rate of the dividend later this month). The position was too large and the increase in exposure via BSBR purchase/rolling into SAN were always intended to be tactical trades "around" the core position and not core themselves. Getting skittish with a potential rate hake coming, the dollar at 7 month highs, and the U.S. election etc. and didn't want to be "risk-on" going into year end. Having exposure 30% above what I wanted my "core" position to be seemed aggressive so I took my gains and will maintain the core.

Bonds are in the worst sell-off in awhile and Fairfax has a lot of duration exposure. There have been a few catastrophes that could impact insurance profitability. Recent GDP/inflation data hasn't supported their bearish view and will likely result in markdowns on shorts, TRS, and deflation swaps. It won't be a good quarter for them..

It really is as simple as if you don't like what they're buying, don't invest. Your vote doesn't count at this company so you either agree with Prem and let him do his thing or you don't own the stock. I'm in the former camp.

IQ is simply a measure of your expected success in academic endeavors. In an economy that become more and more complex and requires more and more education/training to be successful in, it will generally be a better indicator of success; however, you can never take generalities and apply them to an individual. In simplified economies with simpler jobs, IQ will be far less of a predictor of success. Having a lower IQ in a simpler economy like India's isn't a bad thing. As they progress and grow, more people will go to school for longer and IQs, on average, will rise. It's as simple as that. Even in the U.S., I know individuals who tested in the top 5% of students in the U.S. who flunked out of college because they didn't have discipline. I know people who didn't go to college and have found greater financial success than the majority of my peers who did because they did have discipline. In general, IQ might have something to do with overall success in America, but no individual is tied down because of that.