Martin Capital Management 2013 AR

[matjone]

I am guessing that is a forward earnings yield?  I'm looking at shiller's data and the current earnings yield is 94.63/1836=5.2%.  10 yr AAA corp. bond rate on yahoo is 3.3% so it's only a 1.9% advantage.  I know the ERP is measured against treasuries but I used that because I have seen Graham use that many times to value the market.

 

Of course you have been finding stuff that you believe have 20% fcf yields and I agree it would be silly to pass that up because of the price of an index.  I believe that with the # of securities in the world there is always something mispriced enough to be worth investing in, it is just a question of having the ability to find it.

[frommi]

And the reason, I believe, was that combination of historically very high debts and very high asset prices I have just referred to. The moment that combination is gone, they most probably will be back to business as usual!

 

When you look at the history of us debt levels you would see that current levels are not that high. Around 1945 we had a similar situation when you only look at the numbers and the next 20-25 years were very good for stocks. So its possible that you have to wait a long time until that situation is gone. And the crux is that as the debt levels hit a low of 20% of GDP the stock market crashed in 1973. http://www.multpl.com/u-s-federal-debt-percent/

Thats probably because fresh money is not flowing into bonds when interest rates are low, its going to stocks.

[Packer16]

I don't think of these guys are market timers either (except Martin).  Klarman returns cash to investors which in my mind shows he is a value hunter not an asset allocator.  When he can't find bargains that meet his margin of safety criteria he holds cash and returns cash when he thinks he will not be able to deploy his cash.  If you look at Graham's margin of safety recommendation then followers will be investors only when there is a 33% margin of safety or a 10% earnings yield  with a normal earnings yield of 6.7% or a PE of 15 (assuming a 3.3% earnings growth rate using his PE = 8.5 * 2G). 

 

Graham recommends allocations between 25% to 75% stocks with portion dependent upon the psychology of the investor.  Martin although a good commentator I think is doing his investors a disservice because he is doing market timing. 

 

Packer

[yitech]

In terms of the comparison I think over the LT you can expect an additional premium of 4 to 5% per year.  I don't think earnings yields are 2% (50 P/E) or you would be right.  The 10-yr bond is at 2.7% and the SPY P/E is at 15.3 or earning yield of 6.5% so an implied ERP of 3.8% for all stocks.  So the ERP cost of holding bonds is 3.8% per year and 6.5% per year for holding cash.

 

I think of these investors as opportunistic investors and will only be "invested" when the can find bargains (large in size in the case of Buffet and Klarman) with a margin of safety.  They not being invested only means they cannot find large in size bargains not that stocks are poor choice versus bonds or cash.  To make that decision you need to understand the opportunity cost of holding cash and bonds versus stocks.

 

Packer

 

Packer

 

I agree. I believe Buffett mentioned that he would be always fully invested if he has only $1M or $10M since he can always find opportunities. It's due to higher opportunity cost of holding cash for smaller asset base versus where he is now. If one cannot find enough opportunities to deploy cash (i.e. tens of billion dollar funds like Baupost), it makes more sense to return the "extra" cash to the investors rather to ask them to pay negative carry (management fees) on the cash. In my opinion, 70%+ cash is a bit outrageous. It's okay to be risk-averse, but having 70%+ cash for 2 or 3 years makes me wonder whether the fund manager worries too much about the-end-of-the-world scenario.

[Kraven]

Here's a value investing nerd drinking game. Read the MCM letter out loud and everyone is required to drink each time Buffett's name is mentioned. If anyone is standing after page 3 I'd be shocked. I finally realized why I can't stand Millers letters. He fancies himself quite the Buffett disciple and has clearly attempted to emulate his style. The problem is that while he has largely perfected the didactic tone, he has none of the charm and wit that Buffett possesses. I can never read one of Miller's letters in one sitting. They have to be broken up into a few pages at a time.

[Guest wellmont]

he was not greedy when others were fearful. he was fearful. :)

[ERICOPOLY]

he was not greedy when others were fearful. he was fearful. :)

 

Pretty much sums it up right there.

[T-bone1]

Hey gio, don`t be upset :). Your time will come and being a lonely rider is not the worst position to be in the investment world. The problem is only that you are not so lonely as you think when you look outside this board. At the moment i feel that being a bull is a lot harder after the last year. Anyway, FFH is probably the only reasonable portfolio hedge one can think of and it was you that convinced me of that.

 

You want to take a look at what happened to FFH in 2008.  I love the company and management, but as they are currently positioned, I find it hard to justify owning the stock.  If the market goes down, FFH will certainly go down in the short term.  If the market goes up, FFH will decline in value.

 

I would rather own cash that is earmarked for FFH and buy it once the market declines . . . if the market doesn't decline, I would rather hold cash than FFH.

[Orange]

Here's a value investing nerd drinking game. Read the MCM letter out loud and everyone is required to drink each time Buffett's name is mentioned. If anyone is standing after page 3 I'd be shocked. I finally realized why I can't stand Millers letters. He fancies himself quite the Buffett disciple and has clearly attempted to emulate his style. The problem is that while he has largely perfected the didactic tone, he has none of the charm and wit that Buffett possesses.

 

While I agree, this is true with almost any random piece of value investing related writing these days.

[Uccmal]

Hey gio, don`t be upset :). Your time will come and being a lonely rider is not the worst position to be in the investment world. The problem is only that you are not so lonely as you think when you look outside this board. At the moment i feel that being a bull is a lot harder after the last year. Anyway, FFH is probably the only reasonable portfolio hedge one can think of and it was you that convinced me of that.

 

You want to take a look at what happened to FFH in 2008.  I love the company and management, but as they are currently positioned, I find it hard to justify owning the stock.  If the market goes down, FFH will certainly go down in the short term.  If the market goes up, FFH will decline in value.

 

I would rather own cash that is earmarked for FFH and buy it once the market declines . . . if the market doesn't decline, I would rather hold cash than FFH.

 

That makes perfect sense to me.  In a market decline a certain portion of FFHs shareholders will get forced to sell, the same as they (me) were in March 2009.  However, I didn't redeploy in Fairfax since other, better opportunities were vastly cheaper.  SBUX, GE, AXP etc. 

[giofranchi]

And the reason, I believe, was that combination of historically very high debts and very high asset prices I have just referred to. The moment that combination is gone, they most probably will be back to business as usual!

 

When you look at the history of us debt levels you would see that current levels are not that high. Around 1945 we had a similar situation when you only look at the numbers and the next 20-25 years were very good for stocks. So its possible that you have to wait a long time until that situation is gone. And the crux is that as the debt levels hit a low of 20% of GDP the stock market crashed in 1973. http://www.multpl.com/u-s-federal-debt-percent/

Thats probably because fresh money is not flowing into bonds when interest rates are low, its going to stocks.

 

frommi,

the first picture in attachment clearly shows 2 things:

1) Total US debt today is still extremely high;

2) The last time it was very high (still lower than it is today), it was in the mid-30s’ and a process of deleveraging went on until the early 50s’.

Furthermore, we all know that stocks bottomed in 1949, almost exactly when the process of deleveraging came to an end. No wonder for the next 19 years stocks had a wonderful run! (see picture n.2 in attachment) In 1949 the US had the exact opposite combination we have today: that’s to say, low debts + low valuations.

This being said, Mr. Shilling thinks that during the next 4 to 5 years the process of deleveraging we are living today will finally be over. I wouldn’t be too surprised if 2019 will turn out to be 1949 all over again! ;)

 

Gio

US_Private_and_Public_Debt_as_a_%_of_GDP.bmp

[giofranchi]

Hey gio, don`t be upset :). Your time will come and being a lonely rider is not the worst position to be in the investment world. The problem is only that you are not so lonely as you think when you look outside this board. At the moment i feel that being a bull is a lot harder after the last year. Anyway, FFH is probably the only reasonable portfolio hedge one can think of and it was you that convinced me of that.

 

You want to take a look at what happened to FFH in 2008.  I love the company and management, but as they are currently positioned, I find it hard to justify owning the stock.  If the market goes down, FFH will certainly go down in the short term.  If the market goes up, FFH will decline in value.

 

I would rather own cash that is earmarked for FFH and buy it once the market declines . . . if the market doesn't decline, I would rather hold cash than FFH.

 

Of course, this makes no sense to me. What I see follows:

In a market correction FFH's equity hedges will appreciate faster than its equity investments will decline, interests rate will come down because people will flee towards the safety of government bonds, and insurance operations might still be profitable. Therefore, FFH will make money on its equities portfolio, on its bonds portfolio, and on its insurance operations. FFH’s BVPS after a market correction will be much higher than before.

 

Gio