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knowing the future


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Today, I have been reading Fairfax's 2014 Annual Letter to Shareholders, but this is not really a Fairfax specific post so I'm putting it under 'General'. 

 

The valuation of three companies, Tesla, Amazon, and WhatsApp were used as examples of extreme market excess and they were shorting the market as a hedge because they couldn't believe the 'excess' out there:

 

Here is the quotation from Fairfax's 2014 letter to shareholders:

 

Last year, I quoted a major U.S. bank CEO who famously said, ‘‘As long as the music is playing, you have to get up and

dance.’’ You can see how difficult it is not to dance! And what a party it was in 2013! The S&P went up 30% while the

Russell 2000 was up 37%. As discussed earlier, the high tech stocks were soaring – particularly those with no earnings

and very little revenue. Tesla Motors, for example, sold 22,477 cars in 2013 but commands a market cap of

$31 billion, while Fiat, which we like, sold 4.4 million cars but has a market cap of only $14 billion. Amazon has a

market cap of $167 billion but has not earned more than $1.2 billion in any one year since it went public in 1999.

Facebook has recently made a $19 billion offer for WhatsApp – a company with approximately 50 employees and

$20 million in revenue. This is the poster child for the excesses that prevail in the tech world!

 

Tesla:  because. it only sold 22,477 cars at the time, it couldn't be worth X...  they delivered 367,000 cars in 2019.

Amazon:  it's stock now trades 6x higher just 6 years later

WhatsApp:  Facebook had no footprint with very young users, and this was a strategic acquisition (of unique value to the buyer).  The price tag 6 years later is now $19 per user, not the $54 it paid per user at the time.

 

Anyways, it's hard to know the future, isn't it.

 

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People give great weight to what they see and think today. Do you know how many people who swore Amazon or Netflix where overvalued in 2012-2015 became dip buyers on those names in 2018 onward? What was truly insane was looking at institutional filings for 2019 Q3 and Q4. Basically FANGM for everyone.

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That's why we toil isn't it? Because we don't know the future.

 

That quote from fairfax is nice when you're trying to build a narrative. But I remember other things during that time. After that nice market romp Microsoft was still trading for 10x earnings and Google wasn't far behind. These weren't fantasy companies either. They were companies with solid gold earnings and platinum growth rates. They just chose to ignore those because they didn't fit the narrative.

 

Now the corona virus hit. Do you want to own Google for 13x earnings? How about Microsoft for 10?

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Actually, WhatsApp has 2 billion users today and it was 1 billion users in 2014 -- so Facebook bought them for $19 per user and today it's $9.5 per user.  Facebook has $26 in revenue per user per quarter.

 

This helps explain WhatsApp's value to Facebook:

 

https://www.investopedia.com/articles/personal-finance/040915/how-whatsapp-makes-money.asp

 

Is it Really About the Money Though?

Industry insiders have speculated that part of the rationale behind acquiring WhatsApp was for Facebook to access user’s behavioral data and personal information.

 

With location sharing data, 65 billion messages sent per day and access to users' entire contact lists, Facebook has access to a ton of personal information – all uploaded and saved on its servers.15 While Mark Zuckerberg has previously promised that this data won’t be used to improve consumer targeting in Facebook ads, it will be unless the user changes the settings to not share information with Facebook.

 

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At the same time, if Fairfax had kept their puts and swaps right now, instead of being pressured by the mistake of missing a great bull market, they would have been killing it now and preserving shareholder capital.  They're still going to be doing better than most, but they would have destroyed had they simply stuck to their guns and not been pressured by naysayers. 

 

Many also thought that Vito Maida's capital preservation strategy was foolhardy and looked stupid for several years.  But his clients are going to be very happy compared to the general public, ETF allocators, etc.  They are sleeping at night, and they know that while Vito may not get the gaudy numbers in short-term results...he's going to preserve capital and buy when things make sense.

 

Cheers!

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I've put Mr. Maida's name on a short list as a manager to run part of family funds if I disappear suddenly. It seems that he may not ever produce outlandish returns but is likely to slighty overperform on a long term basis, and he's likely to shine (relatively) during difficult periods.

http://www.patientcapital.com/performance-versus-tsx-and-s-amp-p-500-since-2000#chart1

 

An argument could be made though that his Q3 2019 letter contain passages reminiscent of FFH's 2014 annual report..

http://www.patientcapital.com/news

 

Submitted with humility:

A potential way to reconcile all this (and remembering that 'knowing' the future is impossible): it is reasonable to raise the possibility that most asset classes had become relatively expensive, perhaps given a certain sense of false security (or even complacency?). Black swans tend to reveal those discrepancies. The challenge is that, once a secret is revealed or once it is 'discovered' that the emperor has no clothes, it remains exceedingly difficult to predict how people react. I like Mr. Vaida's (and Mr. Buffett's) way of dealing with this.

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At the same time, if Fairfax had kept their puts and swaps right now, instead of being pressured by the mistake of missing a great bull market, they would have been killing it now and preserving shareholder capital.  They're still going to be doing better than most, but they would have destroyed had they simply stuck to their guns and not been pressured by naysayers. 

 

Many also thought that Vito Maida's capital preservation strategy was foolhardy and looked stupid for several years.  But his clients are going to be very happy compared to the general public, ETF allocators, etc.  They are sleeping at night, and they know that while Vito may not get the gaudy numbers in short-term results...he's going to preserve capital and buy when things make sense.

 

Cheers!

 

If Watsa is changing his investments based on what naysayers say then he is not a very good investor.

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At the same time, if Fairfax had kept their puts and swaps right now, instead of being pressured by the mistake of missing a great bull market, they would have been killing it now and preserving shareholder capital.  They're still going to be doing better than most, but they would have destroyed had they simply stuck to their guns and not been pressured by naysayers. 

 

Many also thought that Vito Maida's capital preservation strategy was foolhardy and looked stupid for several years.  But his clients are going to be very happy compared to the general public, ETF allocators, etc.  They are sleeping at night, and they know that while Vito may not get the gaudy numbers in short-term results...he's going to preserve capital and buy when things make sense.

 

Cheers!

 

If Watsa is changing his investments based on what naysayers say then he is not a very good investor.

 

While I was a fan of the deflation hedges and total return swaps, I'd just add that we've not going down far enough for Watsa's call to drop them to have been a mistake.

 

Had he held them, the stock would've gotten crushed in 2019 and it's liquidity issues even worse at this point in time (though that could change quickly). What it would've done was ensure Fairfax's stock was never near $500+ to fall so hard to begin with.

 

At this point, still seems as if Fairfax was better off dropping then when they did and keeping to more conservative investments while monetizing others.

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Today, I have been reading Fairfax's 2014 Annual Letter to Shareholders, but this is not really a Fairfax specific post so I'm putting it under 'General'. 

 

The valuation of three companies, Tesla, Amazon, and WhatsApp were used as examples of extreme market excess and they were shorting the market as a hedge because they couldn't believe the 'excess' out there:

 

Here is the quotation from Fairfax's 2014 letter to shareholders:

 

Last year, I quoted a major U.S. bank CEO who famously said, ‘‘As long as the music is playing, you have to get up and

dance.’’ You can see how difficult it is not to dance! And what a party it was in 2013! The S&P went up 30% while the

Russell 2000 was up 37%. As discussed earlier, the high tech stocks were soaring – particularly those with no earnings

and very little revenue. Tesla Motors, for example, sold 22,477 cars in 2013 but commands a market cap of

$31 billion, while Fiat, which we like, sold 4.4 million cars but has a market cap of only $14 billion. Amazon has a

market cap of $167 billion but has not earned more than $1.2 billion in any one year since it went public in 1999.

Facebook has recently made a $19 billion offer for WhatsApp – a company with approximately 50 employees and

$20 million in revenue. This is the poster child for the excesses that prevail in the tech world!

 

Tesla:  because. it only sold 22,477 cars at the time, it couldn't be worth X...  they delivered 367,000 cars in 2019.

Amazon:  it's stock now trades 6x higher just 6 years later

WhatsApp:  Facebook had no footprint with very young users, and this was a strategic acquisition (of unique value to the buyer).  The price tag 6 years later is now $19 per user, not the $54 it paid per user at the time.

 

Anyways, it's hard to know the future, isn't it.

 

Looking at Einhorn letters and position would make a similar point very well, I think.

 

If I remember correctly, short Tesla, Amazon, Netflix, long GM..

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At the same time, if Fairfax had kept their puts and swaps right now, instead of being pressured by the mistake of missing a great bull market, they would have been killing it now and preserving shareholder capital.  They're still going to be doing better than most, but they would have destroyed had they simply stuck to their guns and not been pressured by naysayers. 

 

Many also thought that Vito Maida's capital preservation strategy was foolhardy and looked stupid for several years.  But his clients are going to be very happy compared to the general public, ETF allocators, etc.  They are sleeping at night, and they know that while Vito may not get the gaudy numbers in short-term results...he's going to preserve capital and buy when things make sense.

 

Cheers!

 

However, that rhymes with being right for the wrong reason.  He was correct that at some point in the future the market would crash.  But he was incorrect as to why.  It has (thus far) crashed only to 2016 levels but his comments were from 2014.

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How would it preserve shareholder capital when those swaps would have pummeled the company the last 2 years when Fairfax's equity investments underperformed so much?

It would have been better if the hedges were in place in 2019..

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