2013 results are out

[Kraven]

If the former, then sure, great art doesn't come around very often.  If the latter, one can always pick up some more gum or diet coke or something.

 

Either art or diet coke, first and foremost I need to KNOW what I am investing in. And in my experience to know a business well is quite difficult; on the contrary, to suffer the illusion of knowing a business well is quite easy.

Not to fall prey of the illusion of knowing a business well, I let my circle of competence grow very slowly over time. Even so doing, I believe there are inside my circle of competence some businesses I don’t know as well as I think.

Among the few businesses I think I know well, none are cheap right now (with the possible exception of the ones I already own a lot of).

 

Gio

 

Gio, you are a true artiste and a gentleman and a scholar.  Me on the other hand, my circle of competence is just things that are cheap.  I slum it.

[TwoCitiesCapital]

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.

 

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. 

[giofranchi]

Gio, you are a true artiste and a gentleman and a scholar.  Me on the other hand, my circle of competence is just things that are cheap.  I slum it.

 

An artiste and a gentleman and a scholar… but no entrepreneur… ah!! That’s a pity… But at the same time it is also very funny!

I know what you mean, and I know you are simply great at what you do.

As for me, I find very hard to recognize the difference between price and value of things I don’t think I know well. I simply lose faith in my judgment too easily… ::)

 

Gio

 

[petec]

There's another aspect here, which is that debt bubbles/busts get worse the longer they go on.  In other words, the longer Watsa is wrong, the more right he may eventually be.

 

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.

 

I am not scoffing at it - it is a very significant improvement.  But I would point out that it is still far above the long run normal, so there will be a lot more deleveraging to come if rates return to their long run normal (and that will be hard given the rising cost of service in that situation).

 

My bigger point though is the global figure.  That, ultimately, is what Watsa is fretting about, as I understand it.  I think he fears a *global* deleveraging focussed on China with all the deflation that entails.

[Grenville]

I'm probably just restating what has already been said, but this line in the recent conference call emphasized the downside of the equity hedging strategy at FFH.

 

The realize loss of $1.4 billion on our equity hedges was due to the sale of common stocks and consequently a permanent reduction in our hedges.

 

Mark to market fluctuations are hurting Fairfax. When they realize their investment gains, they are permanently decreasing their notional hedge. Thus there is no further opportunity to gain the loss on the hedge back. It's realized.

 

If the market drops back to the start of the year, the hedge losses aren't reversed.

 

I guess Fairfax could re-buy the long position they sold, but then they would just reinstate the hedge on it. A longer sort of bet like a long term put similar to their CDS or CPI bet would give them an opportunity to earn that loss back since they still have the notional exposure. Instead here they get no real benefit to picking stocks especially if the hedge doesn't match their bets. (sort of related to Packer's beta analogy)

 

Another worry would be if the markets continue up or even sideways, investors don't really get any benefit from Fairfax's investment ability on the equities. If markets continue up, Fairfax will continue to realize their equity gains and close out the hedge to a point where there is no equity positions and no notional hedge.

[ERICOPOLY]

There's another aspect here, which is that debt bubbles/busts get worse the longer they go on.  In other words, the longer Watsa is wrong, the more right he may eventually be.

 

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.

 

I am not scoffing at it - it is a very significant improvement.  But I would point out that it is still far above the long run normal, so there will be a lot more deleveraging to come if rates return to their long run normal (and that will be hard given the rising cost of service in that situation).

 

My bigger point though is the global figure.  That, ultimately, is what Watsa is fretting about, as I understand it.  I think he fears a *global* deleveraging focussed on China with all the deflation that entails.

 

A. Gary Shilling has been saying that there is about 4.5 years left on the deleveraging.

 

He thinks before 2019 we'll be growing GDP at the normal long term trend growth again.

 

I hear that and I get bullish.  I mean, that's really good news.  It's been a long time since I've heard something so optimistic out of his mouth.  More than ten years ago, in 2003, he said we were facing a decade of deflation.

 

His reasoning is that we've already deleveraged so much.

[Phoenix01]

Let me ask when was there not alot of fragility in the world?  I only see where it is fragile shifting around.  As Kraven's quote says: "If you see cheap stuff buy it and something good may happen".

 

Packer

 

Packer,

ValueLine shows their median stock estimated P/E ratio is 17.8 (it varies between 10.3 & 17.5).  The median stock estimated Div Yield is 2.0% (it varies between 4.0% & 2.0%).  The median stock estimated 3-5 yrs appreciation potential is 35% (it varies between 40% & 185%).

All the needles are pointing to red.  It does not mean that anyone knows when it is going to blow up, but I will be keeping my distance.  It will take a really sweet deal to draw me back in, and I do not see any.

[TwoCitiesCapital]

There's another aspect here, which is that debt bubbles/busts get worse the longer they go on.  In other words, the longer Watsa is wrong, the more right he may eventually be.

 

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.

[Packer16]

Let me ask when was there not alot of fragility in the world?  I only see where it is fragile shifting around.  As Kraven's quote says: "If you see cheap stuff buy it and something good may happen".

 

Packer

 

Packer,

ValueLine shows their median stock estimated P/E ratio is 17.8 (it varies between 10.3 & 17.5).  The median stock estimated Div Yield is 2.0% (it varies between 4.0% & 2.0%).  The median stock estimated 3-5 yrs appreciation potential is 35% (it varies between 40% & 185%).

All the needles are pointing to red.  It does not mean that anyone knows when it is going to blow up, but I will be keeping my distance.  It will take a really sweet deal to draw me back in, and I do not see any.

 

I don't pay much attention to medians or averages I just try to buy cheap stocks.  Most of what I have been finding lately is not in the US so the VL data may be a reflection of that.

 

Packer

[petec]

There's another aspect here, which is that debt bubbles/busts get worse the longer they go on.  In other words, the longer Watsa is wrong, the more right he may eventually be.

 

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.

 

I am not scoffing at it - it is a very significant improvement.  But I would point out that it is still far above the long run normal, so there will be a lot more deleveraging to come if rates return to their long run normal (and that will be hard given the rising cost of service in that situation).

 

My bigger point though is the global figure.  That, ultimately, is what Watsa is fretting about, as I understand it.  I think he fears a *global* deleveraging focussed on China with all the deflation that entails.

 

A. Gary Shilling has been saying that there is about 4.5 years left on the deleveraging.

 

He thinks before 2019 we'll be growing GDP at the normal long term trend growth again.

 

I hear that and I get bullish.  I mean, that's really good news.  It's been a long time since I've heard something so optimistic out of his mouth.  More than ten years ago, in 2003, he said we were facing a decade of deflation.

 

His reasoning is that we've already deleveraged so much.

 

I am inclined to agree with him for the US.  Although I suppose that he could be wrong if rates rise because deleveraging will need to go further.  But I still see potential issues in the rest of the world.  330% banking assets/global GDP in China.  Eek.