Tepper

[giofranchi]

I would also point out that Marks has described the current market as neither high nor low. In any case, I have cash incoming for any drops in market prices, so I can be full in without too much of a concern for them.

 

What kind of entity tricks its citizens into paying higher and higher prices to buy stocks?

 

The Baupost Group on the morality of the Fed

 

Fortunately, my firm also generates fcf that I can go on investing, whatever happens to the stock market. But, its yearly fcf is just 12% to 15% the capital I have invested in the stock market. I believe my firm’s investments will do significantly better than the market, should any correction come. But a 30% decline in general prices would anyway mean that the fcf generated by the work and efforts of an entire year will be wiped out… Not so sure my partners will enjoy the ride…

 

giofranchi

 

And yet that would be the perfect time to add to your positions. I think a perfect example to point out to your partners is as bad as it was a few years ago look what a buying opportunity it also turned out to be if you had cash available. Are the partners family or private investors? Sophisticated or not?

 

Both family and private investors (mostly friends). And not very much sophisticated... they are all engineers...  ;D

Really, I have control on my company… that’s not what worries me! I just don’t like to be “all in” all the times! Do you know of any Poker player who plays that way?!  ;D

Dry powder is important. Cannot believe otherwise…

 

giofranchi

[racemize]

This appears to be the excerpt from Templeton regarding the Yale Plan (Gio correct me, if not):

 

In simplest terms, the “balance” of the investment fund is shifted gradually step-by-step away from stocks and into bonds when the stock market rises and then subsequently back from bonds into stocks when the market declines. The result is a moderate growth in the invested funds over each completed market cycle, without the need for any predictions of trends or turning points. An investment plan incorporating these principles assures you that you will be ready and able to buy stocks in periods of gloom when others are selling and that you will be selling when prices are reaching new high levels and optimism abounds.

 

This of course seems the right thing to do, but properly identifying the rise and fall seems hard to do.  I tend to think Marks guidance is the most useful for this, and as I said above, each time he's been asked in the last few years, he's said, "neither too optimistic or too pessimistic", or something along those lines.  I tend to think that ignoring the macro is the thing to do, unless it is in the extremes (very high or low/very low)--if it is in the middle, stick with micro!

 

racemize,

let’s think for a moment at the history of debt super-cycles and where we are today. As the Keynesian Endpoint I posted in the Macro “Musing” thread shows (I think very well), the last time we were so close to the “Detonation Rate” was 1941. Mr. Watsa has repeated many times that the last comparable period in modern history, to the period we are living trough, are the ‘30s and the ‘40s in America (or the ‘90s in Japan). Now, if you read “The Great Depression, A Diary”, you will find that almost nobody got the 1937 “extreme” right, probably because the 1937 extreme was way below the 1929 extreme. And on a 10-year cyclical-adjusted P/E basis the 1937 extreme was exactly where we find ourselves today!

I don’t mean to say the stock market will decline in 2013. Actually, I don’t believe that! Instead, it will probably still go up, like Mr. Tepper believes! Maybe a lot!

What, on the other hand, I want to say is that to get only the extremes right is very much difficult. Sir John Templeton didn’t believe he was able to do that. Remember Mr. Graham who has said: “anyone who wasn’t defensively positioned by 1925 would have been wiped out during the 1929 crash!”. Or something like that…

Mr. John Hussman keeps saying the market is in the worst 1% or 2% of all weekly observations in a century of data. Mr. Jeremy Grantham forecasts no return for US large caps and a negative return for US small caps for the next seven years… who really knows if we will get the chance to see even more extreme valuations?

Remember 1968: valuations were not much higher than they are right now, S&P Composite P/E10 of 24 vs. a P/E10 of 22 today. And we know that on an inflation adjusted basis the market declined 63% from 1968 to 1982.

I think it is very risky to call both a top and a bottom. Adjusting gradually, you might forfeit some gains, no doubt about that! But I think it is much easier and less risky to do.

 

giofranchi

 

so perhaps I wasn't as clear as I meant--I didn't mean calling the tops or bottoms, but rather, as Marks says, paying attention to market sentiment and adjusting to more cash when the market is optimistic and equities when it is pessimistic.  At the moment, people are very aware of the concerns and there are good reasons to be--this is why I think Marks keeps saying it isn't either optimistic or pessimistic.  In such situations, I think sticking with micro is the way to go.  I agree with your comments on the super debt cycle, but I find it extremely difficult to use that information in a good way.  I do have an 18% position in FFH, should it go that way, however.

[rjstc]

I would also point out that Marks has described the current market as neither high nor low. In any case, I have cash incoming for any drops in market prices, so I can be full in without too much of a concern for them.

 

What kind of entity tricks its citizens into paying higher and higher prices to buy stocks?

 

The Baupost Group on the morality of the Fed

 

Fortunately, my firm also generates fcf that I can go on investing, whatever happens to the stock market. But, its yearly fcf is just 12% to 15% the capital I have invested in the stock market. I believe my firm’s investments will do significantly better than the market, should any correction come. But a 30% decline in general prices would anyway mean that the fcf generated by the work and efforts of an entire year will be wiped out… Not so sure my partners will enjoy the ride…

 

giofranchi

 

And yet that would be the perfect time to add to your positions. I think a perfect example to point out to your partners is as bad as it was a few years ago look what a buying opportunity it also turned out to be if you had cash available. Are the partners family or private investors? Sophisticated or not?

 

Both family and private investors (mostly friends). And not very much sophisticated... they are all engineers...  ;D

Really, I have control on my company… that’s not what worries me! I just don’t like to be “all in” all the times! Do you know of any Poker player who plays that way?!  ;D

Dry powder is important. Cannot believe otherwise…

 

giofranchi

 

I understand. I have a brother who is an engineer in the wood products industry. He built plants for CZ, then Plum Creek. Smart, smart guy. But he gives you a blank look when you are discussing something other than MDF business etc.

[enoch01]

The Marks quote sounds great (I try not to miss what he writes), but then after you think about it for a while, it's really hard to know what to do with it.  For example:

 

How high is the market?  Too high?  Which market?

What is a general decline in prices?  Which prices?  Prices of everything?  Stocks?  Houses and autos?

What does it mean to say "unaffected"?

 

Now I agree that, probably, it is easier to make money when you find a really cheap stock when the overall market happens to be cheap too.

 

So maybe you are recommending to wait for:

(1)  A certain really cheap stock

(2)  A cheap overall market

Both (1) and (2) = great returns

 

But what about:

Either (1) or (2) = good returns

 

There's nothing wrong with focusing on (1), and letting (2) be an extra kicker, especially when you haven't the foggiest idea when or if you will get (1) and (2) together.

 

enoch01,

I agree with you! And I am always in the stock market! It is just that I am not always 100% in it with my firm’s capital. As I have already written in this thread, Sir John Templeton’s “Yale Plan” still makes a lot of sense to me. And it is a very easy and actionable way to “follow the pendulum”, like Mr. Marks is used to saying.

First, I want to know how much stock market exposure is reasonable and safe, then, with the capital I have decided to keep invested in the stock market, I look for bargains.

Furthermore, I do not believe only in the extremes. Anyone who has studied Sir John Templeton knows he advocated a gradual shift from stocks to bonds + cash, when general stock prices were increasing, and a gradual shift from bonds + cash to stocks, when general stock prices were declining. Because he never believed a second neither in speculation nor in forecasting.

 

giofranchi

 

I respect your thought process, and think you have reasonable conclusions.  Oh, and I'm an engineer too!  8)

[giofranchi]

In order to improve your game, you must study the endgame before everything else, for whereas the endings can be studied and mastered by themselves, the middle game and the opening must be studied in relation to the endgame.

- Jose Raul Capablanca, Cuban chess player who was world chess champion from 1921 to 1927 and one of the greatest players of all time

 

History suggests the endgame for stocks is S&P Composite P/E10 of 10 to 12 in the coming years. When, of course, nobody knows. What will cause the decline in prices, of course, nobody knows. Will it be a gradual contraction in P/E, or will it happen all of a sudden? Of course, nobody knows. Even if you don’t believe that history will rhyme, and instead you believe this time it is different, you should ask yourself: can stock prices really stay elevated forever? What are the implications? Well, the most obvious implication is that we will never see a new secular bull in stocks again. Because the only true reason for a secular bull in stocks to begin is that their prices are very much contracted.

So, if today you hold a lot of cash (or some put options, or some short positions), it means you believe in endgame n.1. Vice versa, if today you are 100% invested in the stock market, it means you believe in endgame n.2. But, please, don’t tell me the endgame is irrelevant, because, like Mr. Marks has said: “if you don’t follow the pendulum, and understand its cycle, then that implies you always invest as much money as aggressively.”

Personally, I have an idea where the pendulum will be a few years from now, and I think the following quote is crystal clear:

 

And so right now, it's very important not to reach for yield because if you do reach for yield, if you put money into the stock market at these prices, you could suffer permanent losses. We'll take temporary losses, but we don't like taking permanent losses.

Prem Watsa, FFH Conference Call Q3 2012

 

giofranchi

 

[giofranchi]

I understand. I have a brother who is an engineer in the wood products industry. He built plants for CZ, then Plum Creek. Smart, smart guy. But he gives you a blank look when you are discussing something other than MDF business etc.

 

Well, I guess it was in “The Forgotten Man” that I have read Mr. Mellon disliked Mr. Hoover because: “He is too much of an engineer.”

Engineers might be very smart and very good technicians, but to invest successfully you must first of all be “wise” and be a “deep thinker”. I know very few engineers who qualify…

Of course, enoch01 and I are wonderful exceptions!!  ;D ;D ;D

 

giofranchi

[rjstc]

:P

I understand. I have a brother who is an engineer in the wood products industry. He built plants for CZ, then Plum Creek. Smart, smart guy. But he gives you a blank look when you are discussing something other than MDF business etc.

 

Well, I guess it was in “The Forgotten Man” that I have read Mr. Mellon disliked Mr. Hoover because: “He is too much of an engineer.”

Engineers might be very smart and very good technicians, but to invest successfully you must first of all be “wise” and be a “deep thinker”. I know very few engineers who qualify…

Of course, enoch01 and I are wonderful exceptions!!  ;D ;D ;D

 

giofranchi

 

Absolutely!! ;) :o ;)

[txitxo]

  Gio, nice to see you quoting Capablanca. He was truly an artist.

 

  I fully agree with Howard Marks, and he was vindicated by 2008-2009. But I am very reluctant to hold large amounts of cash. I've looked a lot into timing systems, and I think I've found a very good one but I am still skeptical about it because there has only been a couple of bear markets to test it. And I've done many backtests which prove that unless you time exceedingly well your entry and exit points, your performance will be inferior with respect to buy and hold. 

 

So putting together macro and micro, the optimum strategy should be to buy cheap stocks in cheap markets. You do your  favorite variant of value investing, either mechanical investing as I like, owner-managers which is your specialty, Grahamesque cigar-butts, or Buffett-like palaces with moats. But you buy those stocks in markets which are statistically cheap according to all the possible indicators you can muster. You only go to cash if all the markets in the world become expensive at the same time.

 

Right now my model indicates that sometime before the end of next quarter, US, Canadian and Australian stocks are about to start a big decline. The UK market is pretty rich too. This is a statistical prediction, and I have no idea what will be the actual detonator of the decline. But if that does not happen, this time will be truly different.

 

On the other hand, Euro-zone markets are very cheap and buying value stocks there should work very well in 2013. It is a pity that there are no real equivalents of LUK, BRK, MKL, FFH, etc. in the Eurozone. That would simplify the life of the part-time investor significantly...

 

 

[LongTerm]

In order to improve your game, you must study the endgame before everything else, for whereas the endings can be studied and mastered by themselves, the middle game and the opening must be studied in relation to the endgame.

- Jose Raul Capablanca, Cuban chess player who was world chess champion from 1921 to 1927 and one of the greatest players of all time

 

History suggests the endgame for stocks is S&P Composite P/E10 of 10 to 12 in the coming years. When, of course, nobody knows. What will cause the decline in prices, of course, nobody knows. Will it be a gradual contraction in P/E, or will it happen all of a sudden? Of course, nobody knows. Even if you don’t believe that history will rhyme, and instead you believe this time it is different, you should ask yourself: can stock prices really stay elevated forever? What are the implications? Well, the most obvious implication is that we will never see a new secular bull in stocks again. Because the only true reason for a secular bull in stocks to begin is that their prices are very much contracted.

So, if today you hold a lot of cash (or some put options, or some short positions), it means you believe in endgame n.1. Vice versa, if today you are 100% invested in the stock market, it means you believe in endgame n.2. But, please, don’t tell me the endgame is irrelevant, because, like Mr. Marks has said: “if you don’t follow the pendulum, and understand its cycle, then that implies you always invest as much money as aggressively.”

Personally, I have an idea where the pendulum will be a few years from now, and I think the following quote is crystal clear:

 

And so right now, it's very important not to reach for yield because if you do reach for yield, if you put money into the stock market at these prices, you could suffer permanent losses. We'll take temporary losses, but we don't like taking permanent losses.

Prem Watsa, FFH Conference Call Q3 2012

 

giofranchi

 

I waffle on this line of thinking. The problem is timing. Chess is a relatively short game; you can be pretty sure that you will make it though a game in a day or two. The problem with investing is that it is long term from a human lifespan perspective. The stock market can stay high (have a higher than average PE10) for a decade or stay low (a lower than average PE10) for a decade. Can you really wait out a decade while inflation, no matter how minimal, eats away at your capital? Not to speak of the fact that other investors are actually making money while you hibernate. Perhaps this is feasable if you are investing your own money, but I think VERY difficult if you manage others'.  The beauty of the Templeton approach is that it doesn't go for the gold ring; assets are gradually shifted between stocks, bonds and cash following an almost mechanical rule. Thus the human penchant for DOING something is, in some way at least, sated, while at the same time no market predictions are used outside of reversion to the norm.

 

As to 'the endgame', I don't see things as black and white as you do. Even though I tend to agree with your view of the pendulum and where it is today, I am still heavily invested; I try to focus a good portion of my portfolio on special situations that are not as dependent on market fluctuations. In fact, I have to say I try NOT to have a view on where the market will be in a couple of years because I find I am invariably WRONG! My market timing has mostly to do with whether I find 'bargains', as I define them, or not. When I can't find anything that meets my investment criteria, I am in cash, but unhappily so as I know that inflation is slowly eating away at my capital. Don't get me wrong. I generally follow the Klarman rule of having a good portion of my portfolio in cash (10-20%) because I always think that a great 'bargain' may persent itself tomorrow and I want to be ready. Of course, this is in the context of a private investor, not someone managing others' funds.

 

longterm

[giofranchi]

I've looked a lot into timing systems, and I think I've found a very good one but I am still skeptical about it because there has only been a couple of bear markets to test it. And I've done many backtests which prove that unless you time exceedingly well your entry and exit points, your performance will be inferior with respect to buy and hold. 

 

I want to make clear that I don’t think Sir John Templeton’s “Yale Plan” is a timing system. Sir John Templeton followed the “Yale Plan”, BECAUSE he did not believe in timing systems!

 

But you buy those stocks in markets which are statistically cheap according to all the possible indicators you can muster. You only go to cash if all the markets in the world become expensive at the same time.

 

In fact, Sir John Templeton was among the first investors to look at stock markets all over the world. Even if he truly was a global investor, there were many times when he preferred to hold a lot of cash and bonds.

 

Right now my model indicates that sometime before the end of next quarter, US, Canadian and Australian stocks are about to start a big decline. The UK market is pretty rich too. This is a statistical prediction, and I have no idea what will be the actual detonator of the decline. But if that does not happen, this time will be truly different.

 

On the other hand, Euro-zone markets are very cheap and buying value stocks there should work very well in 2013. 

 

I just don’t see the European markets shoot up, while the S&P Composite sinks… My best guess for 2013 (but who cares!!!  ;D ): S&P Composite will go up, maybe not as much as in 2012, and European markets will outperform.

And I will hold protections and I will underperform again!!  >:(

 

giofranchi

[txitxo]

My market timing has mostly to do with whether I find 'bargains', as I define them, or not. When I can't find anything that meets my investment criteria, I am in cash, but unhappily so as I know that inflation is slowly eating away at my capital. Don't get me wrong. I generally follow the Klarman rule of having a good portion of my portfolio in cash (10-20%) because I always think that a great 'bargain' may persent itself tomorrow and I want to be ready. Of course, this is in the context of a private investor, not someone managing others' funds.

 

longterm

 

Actually the number of deep value stocks (e.g. any of the Graham screens) is a mildly successful timing indicator.

 

[txitxo]

I just don’t see the European markets shoot up, while the S&P Composite sinks… My best guess for 2013 (but who cares!!!  ;D ): S&P Composite will go up, maybe not as much as in 2012, and European markets will outperform.

And I will hold protections and I will underperform again!!  >:(

 

giofranchi

 

  I know. My intuition tells me that Europe looks awful, that none of the important problems have been solved, that we are bound to have another crisis next year, whereas the US, with all the QE and the housing market rebound should be much better; it certainly looks as if Tepper is right. But the numbers tell a very different story...so keep up those protections...

 

And remember that what moves prices is the difference between current perception and future reality. The US will probably grow more than Europe in the next year. But if the market is too optimistic about the US and too pessimistic about the EU, EU stocks will go up and US stocks will go down.

 

[giofranchi]

My market timing has mostly to do with whether I find 'bargains', as I define them, or not. When I can't find anything that meets my investment criteria, I am in cash, but unhappily so as I know that inflation is slowly eating away at my capital. Don't get me wrong. I generally follow the Klarman rule of having a good portion of my portfolio in cash (10-20%) because I always think that a great 'bargain' may persent itself tomorrow and I want to be ready. Of course, this is in the context of a private investor, not someone managing others' funds.

 

longterm

 

Actually the number of deep value stocks (e.g. any of the Graham screens) is a mildly successful timing indicator.

 

Maybe… But I don’t know how to act on that timing indicator. Take, for instance, my firm’s portfolio: 9 companies that I consider to be not only great businesses, but also great bargains right now. And I could double my firm’s exposure to anyone of them, without fear of being too concentrated in a single investment (with the exception of FFH, which already is 30% of my firm’s portfolio). And I could be 100% invested in them right now, holding no overvalued (or even fairly valued) stock.

So, how could the number of deep value stocks help me? I still can actually find at least 9 bargains! The “Yale Plan”, instead, is very clear and very actionable: first, know which market exposure is safe and choose the percentage of your assets you want to invest in stocks, then look for bargains.

 

Please, understand: I am not saying it is the right way to go! What I am saying is just that it is the way that most suits my personality… and my personality is full of flaws!!  ;)

 

txitxo and longterm, thank you both very much!

 

giofranchi

[txitxo]

 

Maybe… But I don’t know how to act on that timing indicator. Take, for instance, my firm’s portfolio: 9 companies that I consider to be not only great businesses, but also great bargains right now. And I could double my firm’s exposure to anyone of them, without fear of being too concentrated in a single investment (with the exception of FFH, which already is 30% of my firm’s portfolio). And I could be 100% invested in them right now, holding no overvalued (or even fairly valued) stock.

So, how could the number of deep value stocks help me? I still can actually find at least 9 bargains! The “Yale Plan”, instead, is very clear and very actionable: first, know which market exposure is safe and choose the percentage of your assets you want to invest in stocks, then look for bargains.

 

Please, understand: I am not saying it is the right way to go! What I am saying is just that it is the way that most suits my personality… and my personality is full of flaws!!  ;)

 

txitxo and longterm, thank you both very much!

 

giofranchi

 

  Gio, I think it is wise to hold cash right now, specially if your investing universe is mainly the US, but I would backtest the Yale Plan or at least have a quick look at a Shiller P/E plot to see where your entry and exit points would have been if you had followed it during the last decades. For instance the Shiller P/E ratio got into its higher 20% quintile in 1996 and only left it in 2009...would you have been comfortable being <30% invested in the market during all those years? BRK-A went up by 800% during that time and you would have captured only a small fraction of that return. For a timing system to work properly, it has to produce very few signals.

 

  The Shiller P/E is useful because it tells you in which phase of the bull or bear market you are and whether you are at risk of a a major crash and therefore warns you to pay attention to timing indicators. Even following a dumb 200 day SMA starting on 1996 would have saved lots of money to most investors, whereas it mostly produced useless signals between 1982 and 1996.

 

  Intuitively, I think it would be much more robust to use something like the Yale system individually. That is, split your portfolio into 10 "golden" companies and assign money to each stock using the historical valuation (P/B or Shiller P/E, or 10yr FCF, etc.) of each company.

 

 

 

 

 

 

 

 

 

 

 

 

[giofranchi]

For instance the Shiller P/E ratio got into its higher 20% quintile in 1996 and only left it in 2009...would you have been comfortable being <30% invested in the market during all those years? BRK-A went up by 800% during that time and you would have captured only a small fraction of that return. 

 

txitxo,

I am advocating the “Yale Plan” as a non-predictive method, which enables you to shift gradually in and out of stocks, as general stock markets become less or more expensive. And that, as far as I am concerned, is the way to go. Because, while behaving like owners, we should never forget we are just “partial” owners: no matter how good a business is, no matter how cheap its stock is, when the other partial owners behave irrationally, or simply must sell their shares for liquidity reasons like it happened in 2008, we all are going to suffer the consequences.

But I am absolutely not advocating the “Yale Plan” numbers! Actually, I don’t follow those numbers. And I think everyone should devise his/her own “Yale Plan”, in accordance with the times, the markets he/she knows and is comfortable to invest in, the correlation of his/her investments to the general market, even the currency of his/her country, etc.

Let me explain: right now my firm’s capital is 75% invested in north american owner-operators, which have very low correlation to the general market (sometimes even inverse correlation, like it might very well be the case for FFH, OAK, and LRE), it has 10% in gold and silver, and 15% in short positions. Furthermore, my firm does business which is exclusively Euro denominated, while its investments are all USD denominated. Of course, I must consider the fact that in any stock market decline the USD tends to appreciate against the Euro. So, having USD denominated investments is a protection by itself.

If my assumptions are correct, my firm’s portfolio will suffer no decline, even if the US stock market should experience a 40% correction. Vice versa, in an advancing US stock market I will surely under-perform (like it has been this year and will also probably be 2013).

You see? My numbers are completely different from the ones advocated by the original “Yale Plan”, but the process, the so called modus operandi, is the same. Or, at least, I try to follow its basic idea the best way I can: increase or reduce stock market exposure gradually, as the stock market becomes ever less or ever more expensive.

That is just my adaptation of the “Yale Plan”. But I really believe there is nothing wrong with holding a lot of cash! Take, for instance, Patient Capital of Mr. Vito Maida. From 2000 (inception of the fund) to 2011 he returned almost 250%, trouncing both the S&P Composite and the TSX Composite. Well, from 2000 until 2008 he held almost 80% of the capital in cash! While in 2009 he decreased the cash level to 30%.

Also Mr. Seth Klarman is famous for lengthy times holding a lot of cash.

 

giofranchi

[txitxo]

Take, for instance, Patient Capital of Mr. Vito Maida. From 2000 (inception of the fund) to 2011 he returned almost 250%, trouncing both the S&P Composite and the TSX Composite. Well, from 2000 until 2008 he held almost 80% of the capital in cash! While in 2009 he decreased the cash level to 30%.

Also Mr. Seth Klarman is famous for lengthy times holding a lot of cash.

giofranchi

 

OK, you had me worried with the Yale Plan :)

 

But remember Warren Buffett:  "If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money." Seth Klarman is running >23B.

 

Anyway, let's retake this discussion a year from now, by then we will know whether the US market has crashed, Europe has imploded and/or Japan has gone the way of Zimbabwe...

 

Cheers and happy new year!

 

Txitxo

 

 

 

 

[giofranchi]

But remember Warren Buffett:  "If I was running $1 million today, or $10 million for that matter, I'd be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I've ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It's a huge structural advantage not to have a lot of money." Seth Klarman is running >23B.

 

You very well know it is always dangerous to quote Mr. Buffett and follow blindingly in his steps… for two reasons:

1) He is Mr. Buffett,

2) What fits his personality, and is right for him, might not be right for you. There is not just one way to be a successful businessman and investor!

Think about it this way: would you invest in a company that has zero cash on his balance sheet? Or in a company that does business without buying some insurance? Or in a business which, regardless of market conditions and regardless of the nature of its operations, always keeps the same amount of cash and always buys the same insurance? Or in a business that, just because its most successful competitor keeps X in cash, just follows suit, holding X in cash too? Instead of judging and understanding the situation professionally, accepting that what applies to its best competitor might non be the best strategy for itself?

One thing I am sure about: Mr. Buffett as an investor needs much much much less protection than me!! Some things, that are general, I dare say “universal”, concepts about investing, apply to me as they apply to him. Other things simply don’t.

 

Thank you very much again: it is always a great pleasure to discuss matters about investing with you! And yes! May 2013 be a happy and prosperous new year (although I already know I will badly underperform!!  ;D ;D ;D )

 

giofranchi

 

[giofranchi]

One last thought:

 

I just finished reading a book called “Mellon’s Millions”. In all their business ventures they conservatively built up huge cash surpluses during time of prosperity. When a panic came they were able to absorb competitors for a song. During prosperous days their corporations advanced steadily but during depression they advanced by leaps and bounds. They showed rare business judgement.

Benjamin Roth

 

One of the reason why I like to invest in owner-operators is because they usually behave like Mr. Mellon did. When everyone else is greedy, they hoard cash. Vice versa, when everyone else is fearful, they “absorb competitors for a song”. Then why, when it comes to our business, should we always be fully invested, and despise to “build up huge cash surpluses”?

 

giofranchi

[writser]

I think you sidestep the point. If all you have is < 100.000$ dollar you can probably easily make ~10% a year with some special situations (odd lot tender offers come to mind). Earning the same retuns is much harder if you have 23 billion in AUM. In the first case, the universe of possible investments is much larger and more misunderstood because a lot of these investments just aren't interesting (i.e. too small) for professional investors. Hence the comment from Buffett that he would be 100% invested if he "only" had ten million. Now you could be a billionaire for all I know (would be nice to have one on the board :) ) but statistics suggest that you are not. And it that case you might be better off searching the universe of listed securities looking for individual interesting opportunities and base your cash percentage upon the number (and quality) of these investments, rather than putting a lot of effort in macro-forecasts and Yale plannings.

 

One of the reason why I like to invest in owner-operators is because they usually behave like Mr. Mellon did. When everyone else is greedy, they hoard cash. Vice versa, when everyone else is fearful, they “absorb competitors for a song”. Then why, when it comes to our business, should we always be fully invested, and despise to “build up huge cash surpluses”?

 

An important question here is: do these guys hoard cash because they are afraid of the market valuation in general? Or because they can't find individual good investments? In fairness, probably a bit of both. But I'm sure that if WEB finds a terrific investment he's not going to pass because of the Shiller PE ratio of the market.

[giofranchi]

I think you sidestep the point. If all you have is < 100.000$ dollar you can probably easily make ~10% a year with some special situations (odd lot tender offers come to mind). Earning the same retuns is much harder if you have 23 billion in AUM. In the first case, the universe of possible investments is much larger and more misunderstood because a lot of these investments just aren't interesting (i.e. too small) for professional investors. Hence the comment from Buffett that he would be 100% invested if he "only" had ten million. Now you could be a billionaire for all I know (would be nice to have one on the board :) ) but statistics suggest that you are not. And it that case you might be better off searching the universe of listed securities looking for individual interesting opportunities and base your cash percentage upon the number (and quality) of these investments, rather than putting a lot of effort in macro-forecasts and Yale plannings.

 

One of the reason why I like to invest in owner-operators is because they usually behave like Mr. Mellon did. When everyone else is greedy, they hoard cash. Vice versa, when everyone else is fearful, they “absorb competitors for a song”. Then why, when it comes to our business, should we always be fully invested, and despise to “build up huge cash surpluses”?

 

An important question here is: do these guys hoard cash because they are afraid of the market valuation in general? Or because they can't find individual good investments? In fairness, probably a bit of both. But I'm sure that if WEB finds a terrific investment he's not going to pass because of the Shiller PE ratio of the market.

 

No, I understood perfectly well what txitxo meant! But you must realize that, even if you are able to always find micro-cap stocks that are undervalued, when the market crashes, for you to make money, your micro-cap stocks must swim against the tide, to paraphrase Mr. Marks.

And what I meant is simply that: for me to pretend that I am as good as Mr. Buffett in identifying stocks that can effectively swim against the tide, would be foolish and very dangerous!

 

giofranchi

[ERICOPOLY]

But I'm sure that if WEB finds a terrific investment he's not going to pass because of the Shiller PE ratio of the market.

 

I'm sure he buys on the basis of the expected forward earnings of the investment.

 

Take a bank like WFC which is one that he is buying.  Is it in an earnings bubble?  Of course not.

 

[jay21]

I think you sidestep the point. If all you have is < 100.000$ dollar you can probably easily make ~10% a year with some special situations (odd lot tender offers come to mind).

 

Odd lot tender offers should be something I should consider given my limited bankroll.  Does anyone have any experience or useful information on them?

[twacowfca]

I think you sidestep the point. If all you have is < 100.000$ dollar you can probably easily make ~10% a year with some special situations (odd lot tender offers come to mind).

 

Odd lot tender offers should be something I should consider given my limited bankroll.  Does anyone have any experience or useful information on them?

 

JAKKS had a tender at $20/sh earlier this year with guaranteed cash for odd lots, no matter if overscribed.  The market thought the repurchase offer would be overscribed, so the shares traded up to only about $18 or so.  We bought 99 shares in 17 different accounts we manage for a guaranteed profit of about 8% on the investment over a few weeks.  :)

[twacowfca]

  Gio, nice to see you quoting Capablanca. He was truly an artist.

 

  I fully agree with Howard Marks, and he was vindicated by 2008-2009. But I am very reluctant to hold large amounts of cash. I've looked a lot into timing systems, and I think I've found a very good one but I am still skeptical about it because there has only been a couple of bear markets to test it. And I've done many backtests which prove that unless you time exceedingly well your entry and exit points, your performance will be inferior with respect to buy and hold. 

 

So putting together macro and micro, the optimum strategy should be to buy cheap stocks in cheap markets. You do your  favorite variant of value investing, either mechanical investing as I like, owner-managers which is your specialty, Grahamesque cigar-butts, or Buffett-like palaces with moats. But you buy those stocks in markets which are statistically cheap according to all the possible indicators you can muster. You only go to cash if all the markets in the world become expensive at the same time.

 

Right now my model indicates that sometime before the end of next quarter, US, Canadian and Australian stocks are about to start a big decline. The UK market is pretty rich too. This is a statistical prediction, and I have no idea what will be the actual detonator of the decline. But if that does not happen, this time will be truly different.

 

On the other hand, Euro-zone markets are very cheap and buying value stocks there should work very well in 2013. It is a pity that there are no real equivalents of LUK, BRK, MKL, FFH, etc. in the Eurozone. That would simplify the life of the part-time investor significantly...

 

Is your probabilistic prediction entirely based on your observtion that there is an overabundance of expensive junk in the market now, or other factors too?  What factor(s) influence the timing? 

 

Thank you for your interesting comments.

[twacowfca]

I've looked a lot into timing systems, and I think I've found a very good one but I am still skeptical about it because there has only been a couple of bear markets to test it. And I've done many backtests which prove that unless you time exceedingly well your entry and exit points, your performance will be inferior with respect to buy and hold. 

 

I want to make clear that I don’t think Sir John Templeton’s “Yale Plan” is a timing system. Sir John Templeton followed the “Yale Plan”, BECAUSE he did not believe in timing systems!

 

But you buy those stocks in markets which are statistically cheap according to all the possible indicators you can muster. You only go to cash if all the markets in the world become expensive at the same time.

 

In fact, Sir John Templeton was among the first investors to look at stock markets all over the world. Even if he truly was a global investor, there were many times when he preferred to hold a lot of cash and bonds.

 

Right now my model indicates that sometime before the end of next quarter, US, Canadian and Australian stocks are about to start a big decline. The UK market is pretty rich too. This is a statistical prediction, and I have no idea what will be the actual detonator of the decline. But if that does not happen, this time will be truly different.

 

On the other hand, Euro-zone markets are very cheap and buying value stocks there should work very well in 2013. 

 

I just don’t see the European markets shoot up, while the S&P Composite sinks… My best guess for 2013 (but who cares!!!  ;D ): S&P Composite will go up, maybe not as much as in 2012, and European markets will outperform.

And I will hold protections and I will underperform again!!  >:(

 

giofranchi

 

 

Think of the market as a zero sum game like a coin flipping contest.  Your portfolio is $200, half in cash and half in market index fund. Frictional costs and interest income are small and disregarded.  Mister Market flips heads and the stock portion of your portfolio doubles.  You now have a portfolio value of $100 cash +$200 index fund = $300, and you rebalance to 50:50 by selling some of your index investment. You now have $150 in cash and $150 in index fund.

 

Mr Market's next coin flip is tails. The index fund and your $150 investment in the index loses half its value.  The value of your index fund investment is now $75.  The value of your $150 in cash is unchanged. The value of the market index is now back to exactly where it was before the coin flipping game began, but the value of your portfolio is now greater, $75 + $150 = $225 , compared to the $200  portfolio value when the game began.  You rebalance to $112.50 cash and $112.50 in the index fund and wait for the next coin flip.

 

This is a very pleasant game to play.  :)