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Looks like most of the loss incurred in Q2 was related to writedowns on bond holdings due to rising rates as well as unrealized losses in Greece (I'm guessing here on this particular point). Not too worrying IMO. Looking forward to the conference call to get some more color on this.

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Guest Dazel

Fairfax has become the cash machine we all hoped it would as the insurance companies are firing on all cylinders...they continue to have favourable reserve development ($150m) in the first six months. This is a complete reversal of years past...where the company was viewed as a hedge fund with a poor insurance business. The temporary move in mark to market of investments are masking a good insurance company becoming great. Berkshire Hathaway was built on this premise as the insurance float is the "rocket fuel" that allowed Mr. Buffett to take Berkshire to the moon.

The bond mark to market loss of approx $650m has already subsided and it looks like they have added a little more than a billion dollars to bonds with the higher rates...we would like to see more of the $6b in cash they have deployed. If we can line up investment returns with the strong underwriting performance Fairfax will become  a global name that will be an alternative investment to Berkshire as Markel has during their remarkable run. Shareholders are un happy with some of the common stock investments that have been made recently however, this will pass.

 

the opportunity that is being underestimated:

Fairfax has been busy buying up insurance companies....Brit etc but also including Odyssey Re (crown jewel) and Northbridge at great prices over the last decade...they have added great quality.

 

deflation is great for insurance claims

 

$1.7b in hedging on individual securities....likely Tesla, Amazon, Netflix etc

It has not worked to hedge Blackberry but it will...they have done it before during the 2000 tech crash.

 

Russel 2000 hedge

 

USD dollar call...they have managed currency better than anyone else we have seen....this would include their call on buying and holding US treasuries and US Muni's.

 

China's speed bump...they have called...the deflation hedges do not need huge deflation they need the expectation of it. As with the credit default swaps in 2008...the deflation hedges are insurance and if there is a deflation "scare" the contracts will leap higher in value because others will want to buy that insurance contract to protect themselves as they did in 2008. Fairfax was able to sell their CDS contracts to those who bid them up for their own insurance.

 

The bond portfolio would also rise significantly with a deflation scare...

 

We expect many to buy Fairfax to hedge their own portfolio's as we did in 2008 and as we are doing again now...except it will be large institutional money that will move the shares higher.

 

Dazel

 

 

 

 

 

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Guest Dazel

 

The world economy is slowing down dramatically....the fall should be pronounced in the fall...Oil's fall and USD's rise will benefit Fairfax the most of any company that we see. There is "no" crash coming just a good old fashioned recession that will take the investments very much higher....and we will see a deflation scare but we do not see pronounced deflation coming...Fairfax is a USD, US Bond (we suspect they have increased these bets more than the $1b that they added in the second quarter) and a deflation bet...their short trades will far out perform any common stock losses...Greece can"t get any worse !!!!

 

They were very early in their hedging and deflation trades but we are about to reap the benefits...happy summer! hoping FFH keeps dropping.

 

Dazel

 

 

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Fairfax is a USD, US Bond (we suspect they have increased these bets more than the $1b that they added in the second quarter) and a deflation bet...

 

Dazel,

I have no doubt you might be right… But when should I admit I were wrong and call it quit?

 

I am absolutely no macro investor, yet in 2010 I got worried about what I thought back then was a very unique and dangerous situation: high asset prices and high levels of debt almost everywhere.

 

Fairfax was the best way I could find to hedge against the potentially calamitous consequences of that situation.

 

5 years forward: some deleveraging has occurred and some asset prices have come down (mostly commodities)… but what has actually happened is a much more gradual process than the one I had anticipated.

 

Now, of course you can always make the argument the worst is still in front of us… But, really, when enough is enough? When should I admit my fears were misplaced? 5 years… A meaningful period of anyone’s life… Whatever happens in the fall, I think I have waited enough.

 

What I am sure about is that a bet on the USD, on treasuries, and on deflation is not the way I want to make money.

 

Cheers,

 

Gio

 

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Guest Dazel

Gio,

 

Not sure if you remember but have been very bullish for the most part since 2010...I have been critical of the huge FFH loss on the hedges...why was I bullish?

US and China would print money to no end to prop up their economies...they have done that except for a brief period where

the US government fought over the debt ceiling...do you remember the US down grade? the market lost 20% in a blink. However, the FED was there to help....

 

Here is the scenario...the FED is caught...they are terrified to raise the interest rates a quarter of a point!!!! Can you

imagine that? But they are on record that they may tighten...what does that mean to me?

 

I KNOW THAT THEY ARE NOT THERE TO "HELP" IF WE GET A CORRECTION IN THE MARKET. UNLESS  IT GETS UGLY...they are the "support" for asset prices that are outrageous right now (for the most part)....but they have pulled that plug. Call it Taper tantrum or whatever you want to...but there is no support or liquidity under the stock market for the first time in a long time.

 

China pulled the plug on their support...commodities have been demolished as a result...forget their stock market...look at the drop in demand on that support drop...they used climate control as an excuse but it was out of control.

 

I do not have time right now to go through what it feels like to loose 50% in a company like Tesla in a month...little less loosing 35% in a stock that could not go down like Disney...these investors get margin calls and look for someone to help!!

 

Fear moves quickly and the run for the exit becomes a stampede...and Investors normally look for a rate cut to stop the fall...but in this case not only is the FED caught by being in tightening mode they have no ammunition to stop the fall other than QE. As we all know you need large losses before that happens...and that is where we are in the cycle. It will be harder

to push through QE now with an election next year etc...take a look at year 4 in the presidential cycle...does 2008 come to mind? The 2011 correction was headed into into year 4 of the presidential cycle...Jeremy Grantham thinks the presidential cycles actually start earlier now...

 

Why the fall it just happens to be where we are in the cycle in my opinion...the FED cannot tighten in my opinion and

they need a bloodbath in the market to keep propping up the economy with a helicopter full of cash. Another $30 billion dollar pharma deal to an American company into a foreign country for taxes is not what the FED wants they want plants

built and jobs created. Its time for a recession...and a reset to a new cycle...

 

Texas must already feel like they are in Recession....I know Calgary is..nobody saw $40 oil....nor are they expecting a recession that's the way it works.

 

Dazel

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Dazel

why not look at good businesses like Apple, constellation software, priceline, etc

      the whole macro thing is just got too many unknowns and i'm not understanding why it make sense to make money the most 'challenging way'.... 

 

I am still not sure why FFH got out of WFC and went to Eurobank... what a mess it has been LOL

 

Gary

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Dazel

why not look at good businesses like Apple, constellation software, priceline, etc

      the whole macro thing is just got too many unknowns and i'm not understanding why it make sense to make money the most 'challenging way'.... 

 

I am still not sure why FFH got out of WFC and went to Eurobank... what a mess it has been LOL

 

Gary

Stuff like that is what keeps me from buying FFH. It's not really cheaper than BRK and BRK has better insurance companies imo and doesn't do blunders like that. So I always end up buying BRK instead of FFH. The only thing I see with FFH is that it's much smaller and maybe has a longer runway.

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I know about IRE - I bought

I also did buy Eurobank but got out early

I also did buy BB - one of my largest holdings at one time. 

 

I admire FairFax and  have bought some shares; but I just don't like to frame an investment thesis on macroeconomics.  I like to focus on the underlying business: have a more positive view of the world - what can we all do to make the economy better, get people working, and have a better quality of life.    I don't like negativities and very concentrated contrarian bets that read interesting as headlines but not sure what to make of them...  my 2 cents.

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I know about IRE - I bought

I also did buy Eurobank but got out early

I also did buy BB - one of my largest holdings at one time. 

 

I admire FairFax and  have bought some shares; but I just don't like to frame an investment thesis on macroeconomics.  I like to focus on the underlying business: have a more positive view of the world - what can we all do to make the economy better, get people working, and have a better quality of life.    I don't like negativities and very concentrated contrarian bets that read interesting as headlines but not sure what to make of them...  my 2 cents.

 

OK, fair enough.

 

Like rb said, if Buffett was 20 years younger and BRK was at 1/10th market cap, we'd buy BRK rather than FFH. ;)

I am buying both, but I can see where FFH is not like BRK.

I did not expect MKL to outperform FFH... my smallest position of the three and doing best so far this year (which is of course rather meaningless).

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Guest glavacem

Gio,

 

Are you thinking of exiting your Fairfax position?

 

Mike

 

 

Fairfax is a USD, US Bond (we suspect they have increased these bets more than the $1b that they added in the second quarter) and a deflation bet...

 

Dazel,

I have no doubt you might be right… But when should I admit I were wrong and call it quit?

 

I am absolutely no macro investor, yet in 2010 I got worried about what I thought back then was a very unique and dangerous situation: high asset prices and high levels of debt almost everywhere.

 

Fairfax was the best way I could find to hedge against the potentially calamitous consequences of that situation.

 

5 years forward: some deleveraging has occurred and some asset prices have come down (mostly commodities)… but what has actually happened is a much more gradual process than the one I had anticipated.

 

Now, of course you can always make the argument the worst is still in front of us… But, really, when enough is enough? When should I admit my fears were misplaced? 5 years… A meaningful period of anyone’s life… Whatever happens in the fall, I think I have waited enough.

 

What I am sure about is that a bet on the USD, on treasuries, and on deflation is not the way I want to make money.

 

Cheers,

 

Gio

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Dazel,

please hear me: I AM ALMOST SURE I WILL BE THE PERFECT CONTRARY INDICATOR HERE!

 

Your reasoning makes perfect sense to me and you surely must know how much respect I have for Mr. Watsa & Co.

 

But after 5 years I feel compelled to make a choice: should I go on worrying about the fact we are living in a “once in a lifetime” and “very dangerous” situation, or should I go back doing what Mr. Vanderbilt suggested commenting one of the most terrible financial panic in history (the panic of 1873):

I’ll tell you what’s the matter – people undertake to do about four times as much business as they can legitimately undertake… There are a great many worthless railroads started in this country without any means to carry them through. Respectable banking houses in New York, so called, make themselves agents for sale of the bonds of the railroads in question and give a kind of moral guarantee of their genuineness. The bonds soon reach Europe and the markets of their commercial centers, from the character of the endorsers, are soon flooded with them…

When I have some money I buy railroad stock or something else, but I don’t buy on credit, I pay for what I get. People who live too much on credit generally get brought up with a round turn in the long run. The Wall Street averages ruin many a man there, and is like faro.

 

I think I am going back to the simpler activity of buying great businesses at attractive prices when I have some cash…

 

Why now? Because after 5 years I wouldn’t know when else to stop worrying and go back to what I call “business as usual”.

 

But, once again, I am full aware of the fact this might be exactly the worst time possible to make such a choice!

 

Cheers,

 

Gio

 

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I don't really understand this discussion.

 

Fairfax isn't a macro bet.  The deflation swaps are worth virtually nothing but have upside if things go bad.  That's not a bet, that's insurance.  The equity hedges could cap some more upside, but they don't stop the shares rerating if the whole market does. 

 

Fairfax also make investment mistakes.  Shock, horror!  So do all of us.  They also have big winners and a better-than-average long term equity and bond performance record.

 

Finally, if the alternative is just buying good companies at fair prices...what's wrong with Odyssey, Brit, Zenith, Fairfax Asia, and endless others in the Fairfax stable?

 

I see Fairfax as a high-quality, well-run company with an admirably long term perspective which, as a bonus, will do extremely well if we get a period when everything else is doing poorly.  And for this I pay roughly 1.1x BV which, even allowing for Ericopoly's point about not wanting to pay >1x for goodwill, is a reasonable valuation, especially set against a market where a lot of things appear expensive.

 

I also think this conversation would have a VERY different tone if things were looking crap - e.g. 6 months ago, when CPI was falling briefly.  I don't see why selling Fairfax is any less of a macro call than owning it, because both the following statements are true: bond and equity markets provide a positive return over time and it doesn't pay to be a pessimist, and both markets usually provide pretty paltry returns when current valuations are the starting point.  Whichever statement you favour, it's a macro call.

 

Each to their own, but I can't see why this wouldn't have a place in a portfolio - unless, of course, you simply have a lot of better ideas which you feel you understand to a similar depth, but I don't.

 

Pete

 

 

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Pete,

I know very well what you mean...

 

I have made a large investment 5 years ago in Fairfax, because I wanted something that would do well in a difficult environment, while performing "not bad" in a muddle through scenario...

To say I was not worried about macro would be a lie... Because I actually was! And because in general I don't like the insurance business much...

 

Insurance of course could provide you with cheap and safe leverage... But then it clearly depends on how that leverage is going to be used! Imo Dazel is right: the only way I see Fairfax making lots of money is if treasuries yield goes down, if we have a severe market correction, and/or deflation... Otherwise, I don't see how they can make lots of money...

 

Instead, I can see how other businesses might go on making lots of money much more clearly.

 

That's it imo. The present picture, as I see it. But it will surely change in the future! ;)

 

Cheers,

 

Gio

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Pete,

I know very well what you mean...

 

I have made a large investment 5 years ago in Fairfax, because I wanted something that would do well in a difficult environment, while performing "not bad" in a muddle through scenario...

To say I was not worried about macro would be a lie... Because I actually was! And because in general I don't like the insurance business much...

 

Insurance of course could provide you with cheap and safe leverage... But then it clearly depends on how that leverage is going to be used! Imo Dazel is right: the only way I see Fairfax making lots of money is if treasuries yield goes down, if we have a severe market correction, and/or deflation... Otherwise, I don't see how they can make lots of money...

 

Instead, I can see how other businesses might go on making lots of money much more clearly.

 

That's it imo. The present picture, as I see it. But it will surely change in the future! ;)

 

Cheers,

 

Gio

 

Yeah, that's fair enough.  I see them chugging slowly along (which is actually what I want of most of my holdings) and making a lot if we *don't* muddle through.  That's fine for 20% of my portfolio.  I don't call that a macro bet, because 99% of my confidence in the company is based on 8 years worth of work understanding the culture, the insurance businesses etc.

 

I suppose the only place I'd disagree is that I do like insurance: it'll always be needed, and done well it's profitable.  I think these guys are starting to do it well.

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I don't really understand this discussion.

 

Fairfax isn't a macro bet.  The deflation swaps are worth virtually nothing but have upside if things go bad.  That's not a bet, that's insurance.  The equity hedges could cap some more upside, but they don't stop the shares rerating if the whole market does. 

 

Fairfax also make investment mistakes.  Shock, horror!  So do all of us.  They also have big winners and a better-than-average long term equity and bond performance record.

 

Finally, if the alternative is just buying good companies at fair prices...what's wrong with Odyssey, Brit, Zenith, Fairfax Asia, and endless others in the Fairfax stable?

 

I see Fairfax as a high-quality, well-run company with an admirably long term perspective which, as a bonus, will do extremely well if we get a period when everything else is doing poorly.  And for this I pay roughly 1.1x BV which, even allowing for Ericopoly's point about not wanting to pay >1x for goodwill, is a reasonable valuation, especially set against a market where a lot of things appear expensive.

 

I also think this conversation would have a VERY different tone if things were looking crap - e.g. 6 months ago, when CPI was falling briefly.  I don't see why selling Fairfax is any less of a macro call than owning it, because both the following statements are true: bond and equity markets provide a positive return over time and it doesn't pay to be a pessimist, and both markets usually provide pretty paltry returns when current valuations are the starting point.  Whichever statement you favour, it's a macro call.

 

Each to their own, but I can't see why this wouldn't have a place in a portfolio - unless, of course, you simply have a lot of better ideas which you feel you understand to a similar depth, but I don't.

 

Pete

 

+1.

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For what it is worth, I am in complete agreement with Dazel on the potential for a market problem soon. And Petec.

 

Gio, I think you are making a mistake here.

 

You should look at it as a stable very slow grower until we face very unfavourable market conditions for equities. When the rest of your money is in other businesses that will be negatively impacted by these conditions, it makes sense to have exposure. Furthermore, you could not establish similar hedges yourself for the same price. To me its a no brainer from a portfolio risk reduction perspective. I am not going to comment on the business itself, just the macro/portfolio context and costs/opportunity cost of that. ie. you give up less opportunity cost here (due to moderate business growth) relative to hedging say 15% of your portfolio some other way (as you get no business growth from that). In fact, at a minimum you are getting paid by the market for the hedge here rather than the other way around. There are worse things in life than not only getting a free option, but getting paid to hold one.

 

Going all in on business/stocks has worked very well since 1980 - a time when interest rates dropped all the way along and the economy was more robust with the Fed easing everytime there was an issue, and debt burdens were lower. We have none of that right now going forward over the next 10 years. Furthermore, as Dazel pointed out, the Fed, for the first time, is out of the picture (can hike, or wait but can't ease) while market breadth is breaking down, junk bonds are close to new recent lows, key momentum stocks are getting trashed (Apple, media, tech, even healthcare starting). Anyway, there are better times than the present to be 100% long stocks. Doing so is actually speculating on the US dollar not rising, markets continuing to muddle through, commodities rebounding, financial conditions not tightening. Hedging is not speculation, not hedging is speculating. If you don't agree, certainly you can agree for 15% of your portfolio.

 

Again, I do not want to comment on the business, just the portfolio aspects of this (not that I am a big believer in portfolio theory, etc).

 

 

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Guest Dazel

I am completely hoping to be able to buy FFH shares cheaper so I am certainly not going to be too optimistic here..It is possible that they will become up to 80% or maybe more of my portfolio if things keep unfolding the way they are. Most individuals only last one cycle in the business of dealing with money in the stock market....why is that? Thats because  they have not endured the pain and Fear that coincides with the end of a cycle. As mr. Buffett has stated Fear is immediate and moves stocks downward in a hurry where Greed takes place over a long period of time...thats where we are now.  The idea of Stability creates instability. Look at the oil sector...I saw it first hand  with friends in the industry and while I did not short it I did not touch it in the last two years because of blatant greed...

The commodities rout has taken $5 trillion out of the global economy...its hardly even mentioned...because no one wants to talk about the money they have lost..they do want to talk about their winners.

 

I do not have time to go through the glaringly obvious signs of where we are in this cycle...but i will mention the biggest single sign that I see and it is in some of the posters here as well.

 

They are "now" changing their view...because in their opinion companies that have gone up so much and remained at certain prices now have stability....this is a Wall street fallacy...just look at the chart its safe here blah, blah, blah...buy quality and hold it forever...

 

It 's easy.

 

"Those that think investing is easy are stupid"

Charlie Munger

 

Fairfax gives me an opportunity to make 20% to 50% in a market that will drop likely 20% to 30%...so a 40% to 80% outperformance in a stock market that is running the second longest bull market without a 20% correction in history...I am not sure I will get those probabilities anywhere again with so little downside risk. i.e.

 

If nothing happens Fairfax will likely still "out perform" the market because we will gain higher interest income from larger US treasury holdings and we will have positive events in the equity portfolio as we have over the last 30 years. They have realized gains at $11.6 billion! from a standing start investment portfolio of about $5m in 1985.

 

Those that do not know how well the insurance companies at Fairfax are performing have not done their homework...these have been great buys of high quality...

 

Berkshire has a market cap of $354 billion! I worship Warren Buffett he is my hero in investing and in life...but how much upside is there? In a correction will Berkshire hold? yes better than the rest of the market with his largest war chest of cash ever (his cash levels rise dramatically at these times in the cycle so he is able to buy in the down cycle)

Sorry but...if god forbid...Mr. Buffett was too become sick or in capacitated Berkshire stock would drop 20 to 30% on the news...unfortunately, the probabilities of this are rising.

 

Fairfax vs Berkshire is a no brainer here.

 

I am a contrairian investor and i am not professing to be able to time the market as it is impossible. But i really like the odds and probabilities that I have been given here... for those that remember the dark days of 2008...Fairfax was the third best performing stock in the world! In "times of calm" and pain over the last 30 years their performance is also astonishing as they have weathered many cycles. This one will likely be as rewarding as the last one...as they will have dry powder to buy the great companies that everyone is professing to be finding and buying at significant discounts to today's prices as will I.

 

Dazel.

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Thanks Dazel

I think market is very rich now

But pcln and Msft, appl , csu all survived the last cycle.  And have done better in the last 10 years than Ffh.  I only have a few decades in my life.

I like to think myself less as a stockinvestor and more as a part owner in a business... Oh well

Different view points

I hope the best minds in the world will make the world a stronger place. 

Gary

 

I am completely hoping to be able to buy FFH shares cheaper so I am certainly not going to be too optimistic here..It is possible that they will become up to 80% or maybe more of my portfolio if things keep unfolding the way they are. Most individuals only last one cycle in the business of dealing with money in the stock market....why is that? Thats because  they have not endured the pain and Fear that coincides with the end of a cycle. As mr. Buffett has stated Fear is immediate and moves stocks downward in a hurry where Greed takes place over a long period of time...thats where we are now.  The idea of Stability creates instability. Look at the oil sector...I saw it first hand  with friends in the industry and while I did not short it I did not touch it in the last two years because of blatant greed...

The commodities rout has taken $5 trillion out of the global economy...its hardly even mentioned...because no one wants to talk about the money they have lost..they do want to talk about their winners.

 

I do not have time to go through the glaringly obvious signs of where we are in this cycle...but i will mention the biggest single sign that I see and it is in some of the posters here as well.

 

They are "now" changing their view...because in their opinion companies that have gone up so much and remained at certain prices now have stability....this is a Wall street fallacy...just look at the chart its safe here blah, blah, blah...buy quality and hold it forever...

 

It 's easy.

 

"Those that think investing is easy are stupid"

Charlie Munger

 

Fairfax gives me an opportunity to make 20% to 50% in a market that will drop likely 20% to 30%...so a 40% to 80% outperformance in a stock market that is running the second longest bull market without a 20% correction in history...I am not sure I will get those probabilities anywhere again with so little downside risk. i.e.

 

If nothing happens Fairfax will likely still "out perform" the market because we will gain higher interest income from larger US treasury holdings and we will have positive events in the equity portfolio as we have over the last 30 years. They have realized gains at $11.6 billion! from a standing start investment portfolio of about $5m in 1985.

 

Those that do not know how well the insurance companies at Fairfax are performing have not done their homework...these have been great buys of high quality...

 

Berkshire has a market cap of $354 billion! I worship Warren Buffett he is my hero in investing and in life...but how much upside is there? In a correction will Berkshire hold? yes better than the rest of the market with his largest war chest of cash ever (his cash levels rise dramatically at these times in the cycle so he is able to buy in the down cycle)

Sorry but...if god forbid...Mr. Buffett was too become sick or in capacitated Berkshire stock would drop 20 to 30% on the news...unfortunately, the probabilities of this are rising.

 

Fairfax vs Berkshire is a no brainer here.

 

I am a contrairian investor and i am not professing to be able to time the market as it is impossible. But i really like the odds and probabilities that I have been given here... for those that remember the dark days of 2008...Fairfax was the third best performing stock in the world! In "times of calm" and pain over the last 30 years their performance is also astonishing as they have weathered many cycles. This one will likely be as rewarding as the last one...as they will have dry powder to buy the great companies that everyone is professing to be finding and buying at significant discounts to today's prices as will I.

 

Dazel.

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Guest Dazel

 

Gary17,

 

are you sure they have done better than Fairfax over the last 10years?...i would check your numbers...appl probably but not the others.

 

and what you are saying plays into my thesis...do remember Blackberry at $185? If anything in this world is headed for deflation it is MSFT and AAPL...guranteed. what is their share price worth then?

 

$658b market cap for company that sells a deflationary and likely trend product...do you realize how much risk is at Apple with a market cap that high? and how the hell do you move the needle from here? buyback here are crazy yet the Icahns of the world are proving up prices with them...

apple cars really? because we need another car company...and a terrible business.

 

i certainly can be wrong here for awhile...but tech companies at that volume are certain to fall back on the law of numbers.

 

Gary!7 i respect your opinion and I am not trying to be critical of you...but a good business is correct but what you pay for that business is the "only" thing that matters! and it may look cheap today in comparison to "X" but what will sales be like in their in the next 5 years how is it possible to maintain that size and scale when the price of the products drop? Jim Basilie is still trying to figure that one out.

 

 

 

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Guest 50centdollars

 

Gary17,

 

are you sure they have done better than Fairfax over the last 10years?...i would check your numbers...appl probably but not the others.

 

and what you are saying plays into my thesis...do remember Blackberry at $185? If anything in this world is headed for deflation it is MSFT and AAPL...guranteed. what is their share price worth then?

 

$658b market cap for company that sells a deflationary and likely trend product...do you realize how much risk is at Apple with a market cap that high? and how the hell do you move the needle from here? buyback here are crazy yet the Icahns of the world are proving up prices with them...

apple cars really? because we need another car company...and a terrible business.

 

i certainly can be wrong here for awhile...but tech companies at that volume are certain to fall back on the law of numbers.

 

Gary!7 i respect your opinion and I am not trying to be critical of you...but a good business is correct but what you pay for that business is the "only" thing that matters! and it may look cheap today in comparison to "X" but what will sales be like in their in the next 5 years how is it possible to maintain that size and scale when the price of the products drop? Jim Basilie is still trying to figure that one out.

 

 

 

 

+1

 

And what would happen to Apple if they could no longer get these wild prices for what is quickly becoming a commodity item?  Will consumers continue to pay 2x to 3x for a smart phone, just to have the Apple logo on it? Bad things could happen, and very quickly, if the cache of the Apple logo wore off anytime soon. Apple likes to increase the size or add some new gimmick to their phone and everyone goes mental for it. This is the Apple customer in a nutshell:

 

And what product would Apple introduce to re-ignite the fire?  Apple Watch doesn't appear to selling very good or else the company would have announced sales last quarter not hide them.

Samsung has already come out with three smart phone watches, and people have responded by, well, yawning.  While a nice toy, they are very expensive and have limited functions as the screens are so small and there is little room inside for hardware. 

 

Why would people buy Samsung phones and not watches but would BUY iphones AND  apple watches?

http://www.idc.com/prodserv/smartphone-os-market-share.jsp

 

Apple Pay is a neat idea, but the retail industry abhors a monopoly, and already the largest retailers in the country has taken a pass on the idea of handing over huge sums of money to Apple.  What the retailers want is something cheaper than Visa and Mastercard, not more expensive.

 

And since Apple only has a minority share of the overall market, places like Wal-Mart can afford to say "no" to Apple pay.

 

In other words, despite this good news for Apple, the company is still highly leveraged as a one-trick pony, like most tech companies.  So long as they can keep selling overpriced phones to an already saturated smart phone market, they can keep succeeding.  But as conquest sales become harder and harder to come by, this may be a difficult chore.

 

With a P/E ratio of 13.34 it is not an overpriced stock - based on current earnings.  But again, we have to hope this one product continues to sell, and continues to sell at a price far higher than the competition, in a market saturated with smart phones.

 

Of course, Apple will stick around, but I don't see a lot of headroom here for the stock to go up much further.  Flashy headlines about "record profits" are fine and all, but they don't address the underlying weaknesses in the company.  Record sales today are fine - does that mean there will be record sales tomorrow?  Or does everyone who has one, already have one.

 

That and I doubt Samsung and the rest of the Android market will sit idly by in the meantime.  The cell phone business is murder in terms of competition.  Ask Nokia, Motorola, Ericsson, and Blackberry.  They'll tell you all about it - and each at one time was at the top of the heap.

 

But I think long-term, in the electronics business, devices start out hot and end up as commodity items.  Televisions, stereos computers, telephones, laptops, video games - you name it.  They were all once "hot" products in the market, and then they come down radically in price as they become more like commodity items.  We've seen this in every other electronic device, and there is no reason cell phones should be any exception to the rule.  Eventually the market becomes saturated with the devices, and then you can compete only on price, for the replacement market.

 

Long-term, this does not bode well for Apple.

 

As for a market problem, I believe tech will have a crash soon. I am well aware of how hard it is to predict these crashes, but I think we are due for one. LNKD, TWTR, NFLX, AMZN, & FB all trade at insane valuations and most barely make any money to justify their market caps. If LNKD & TWTR can't find a way by now to make money I doubt they ever will. All of these companies are shorts in my opinion. If you are buying these companies at today's prices, you are gambling.

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