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Advice For Portfolio Transition to Jockey Stocks/ Owner- Operators and Insurance


tripleoptician
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I would love to get the input from fellow board members on how to proceed with my current portfolio issues.

I started investing 3 years ago with lots of excess cash flow but limited knowledge base. I knew only the basics of personal finance and had a bias towards value investing.

I therefore found an advisor who has been good and my mutual funds (Third Avenue and a few other value funds) have produced a CAGR of about 12% over 3 years. My portfolio is now 7 figures and the MER fees are getting very excessive.

 

My knowledge base has increased to the point where I am comfortable planning a largely passive portfolio similar to Giofranchi's of good capital allocators ( FFH, BRK, MKL, BAM, LUK etc) as a solid core. Over time I may have a small portion in individual securities if I can expand my circle of competence and improve my individual security analysis skills.

 

The dilemma is some of these capital allocator holdings are somewhat above a price I would like to pay if I was just looking to buy with my dry powder. Would people just fully switch across to the capital allocator holdings at less than ideal prices knowing that at these prices they are likely better than continuing the current mutual fund holdings?

Or only buy the securities that are cheap or fairly priced currently up to their portfolio % allocation and leave the rest cash until the prices improve for the other securities? This could mean I'm close 60-70% cash based on my current assessment of what is cheap enough to buy now. I'm worried I may end up sitting in cash for too long in a market that I consider fairly valued. I would likely leave myself with 20-30% cash allocation regardless for future price improvements on the desired holdings.

 

Any advice would be greatly appreciated. Thanks in advance.

 

 

 

 

 

 

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Why not keep the money you cannot deploy in stocks in those mutual funds for the time being and slowly reposition opportunistically? Buying something you think is too dear just to construct a portfolio composition you want seems like a recipe for low returns.

 

If you thought the fees for the mutual funds were OK before and still think they will perform well, I don't really see why you need to overhaul the entire portfolio so quickly.

 

On the other hand, I can't quite wrap my head around how you would value the great capital allocators without a working toolbox of valuation techniques for different companies without those kind of attributes. Merely extrapolating their historical returns and evaluating deals with hindsight bias is fraught with problems. The leap of faith element seems far too great for me.

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Sounds like you need reinforcement of your decision to hold cash.

 

Buffett's biggest mistakes have been ones of omission, i.e. missed opportunities. The  mistake people make when they read this is saying to themselves, "Well I won't have that happen to me, I'm going to grab those opportunities!". Then they reach too far and perform poorly.

 

Instead, you should consider it a good problem to have! After all, if you have something in common with Warren Buffett, isn't that a good sign?

 

Value investing is very price dependant. If the prices don't work, no amount of rationalization can make it work. The price is what it is. Buffett and Munger have held cash/cash equivalents for YEARS before prices made sense to them.

 

More importantly, just because prices make sense to someone else doesn't mean they make sense to you. This is an important lesson as well.

 

I would advise if you can't find good values, keep looking. Do not compromise!

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I agree with the previous comments. It's a good idea to take your time before entering into new investments.

 

But with many of these companies (Fairfax, Leucadia and Lancashire in particular), I think most people who are familiar with them consider their current valuation reasonably attractive.

 

              P/B        P/TB        P/E      5 Yr Average ROE

FFH.TO    1.0          1.1        13                  7%

LUK        1.0          1.4        11                  9%

LRE.L      1.6          1.6          9                  19%

BRK-B    1.4          1.9        17                  7%

MKL        1.8          2.4        18                  5%

BAM        1.3          2.5        20                  7%

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I agree with the previous comments. It's a good idea to take your time before entering into new investments.

 

But with many of these companies (Fairfax, Leucadia and Lancashire in particular), I think most people who are familiar with them consider their current valuation reasonably attractive.

 

              P/B        P/TB        P/E      5 Yr Average ROE

FFH.TO    1.0          1.1        13                  7%

LUK        1.0          1.4        11                  9%

LRE.L      1.6          1.6          9                  19%

BRK-B    1.4          1.9        17                  7%

MKL        1.8          2.4        18                  5%

BAM        1.3          2.5        20                  7%

 

Where are your numbers from?  MKL's definitely looks off.  Also, better to look at change in BV than ROE for most insurers due to securities gains being in OCI.

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I would love to get the input from fellow board members on how to proceed with my current portfolio issues.

I started investing 3 years ago with lots of excess cash flow but limited knowledge base. I knew only the basics of personal finance and had a bias towards value investing.

I therefore found an advisor who has been good and my mutual funds (Third Avenue and a few other value funds) have produced a CAGR of about 12% over 3 years. My portfolio is now 7 figures and the MER fees are getting very excessive.

 

 

The fees as a % haven't changed right?  You just have a larger notional and are more sensitive to the fees because it looks like a larger number?  If you are happy with the funds process, managers, and results and the fees haven't changed as a %, why do you want to switch your allocation?  Do you think you will be able to do better than funds returns net of fees?

 

 

The dilemma is some of these capital allocator holdings are somewhat above a price I would like to pay if I was just looking to buy with my dry powder. Would people just fully switch across to the capital allocator holdings at less than ideal prices knowing that at these prices they are likely better than continuing the current mutual fund holdings?

Or only buy the securities that are cheap or fairly priced currently up to their portfolio % allocation and leave the rest cash until the prices improve for the other securities? This could mean I'm close 60-70% cash based on my current assessment of what is cheap enough to buy now. I'm worried I may end up sitting in cash for too long in a market that I consider fairly valued. I would likely leave myself with 20-30% cash allocation regardless for future price improvements on the desired holdings.

 

Any advice would be greatly appreciated. Thanks in advance.

 

 

These are personal questions and ultimately you will have to do what is comfortable.  I think that quite a few of the companies mentioned are compelling values and I continue to buy more.

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I got the numbers from FT.com. Feel free to correct them.

 

For MKL, I calculated a  1.24 P/B based on 3.31 BV and their annual report puts their 5 CAGR BV at 9%.

 

The others don't seem off to me at first glance so thanks for posting.

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Thanks alwaysinvert!

 

I would say I have been comfortable holding the mutual funds when I didn't know of any superior options. MER's in Canada are high and my funds are 2-2.6%. ~ 1% of this goes to the advisor for financial planning which I don't need any longer. This is equating to more than $10,000 in cost with no real benefit.

I would say I think these funds are better than average but I believe that the capital allocator portfolio will produce a better long term CAGR.

I understand your point regarding valuation skills being required to analyze the capital allocator holdings. I would say most are easier to value than something like Banks/telecoms because the valuation is often tied to book values or NAV that can be compared to historical premiums.

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Thanks constructive, LC and jay21

 

Thanks for your thoughts. I also consider FFH, LRE , LUK and MKL to be reasonable to buy at this level.

 

I would like OAK, BAM, BRK, FRMO to be somewhat better pricing, but the I think that a 5 yr CAGR for these will likely beat out my mutual funds and the balance between the different holdings will fair better than the long global equity mix that makes up 100% of my current allocation within the mutual funds.

 

I have TPOU and GLRE at close to goal portfolio allocation already.

 

I guess I'm saying I think I can get 6-7 out of 10 holdings at a fair price range but not a " jump in and load up" level. I do think these holdings will have a better long term performance than the mutual funds and will likely hold up better in the next down market whenever that is. I think I will transition the majority of the portfolio to what is reasonable to buy And keep the rest in the mutual funds for now. I'll keep building excess cash flow reasonably well and can either use this to add opportunistically or sell down the mutual funds further.

 

Thanks again for the advice!

 

 

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I'd say Berkshire is probably at a reasonable valuation - a little on the high side but maybe close to what its appropriate valuation should be. So an investment here would probably (but not surely) result in long-term returns approximating the growth in the business (ie without any expansion in the price relative to the business).

 

My main concern with Berkshire's current valuation, however, is that corporate profits relative to GDP are really off the charts. So all earnings of the S&P 500 may be inflated currently including Berkshire's. Berkshire may be somewhat less exposed to this in its rail, pipeline and P&C insurance businesses but may nevertheless be affected to a degree should corporate profits return to their historical average.

 

(I believe that this topic actually briefly came up at this year's BRK annual meeting: Munger said something like a return to the average is not necessarily going to be the case just because of a formula Warren used 20 years ago; Buffet said something like, we'll have to talk through that one at lunch or something...in any case, suffice it to say that if Buffett and Munger disagree, its probably a toss up ... so I would assume the worst case. If it was not for this issue, I would tell you to definitely add Berkshire now as you are getting an average valuation with Buffett at the helm for another 10 years.)

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Buy everything you want to own in .5% or 1% increments. Every time the company moves 10% down, double your position. Keep your mutual funds for now, since you are likely to only have 5-15% of your account in owner operators. Your portfolio would look something like this:

 

10% - Owner Operators

 

30% - Cash

 

60% - Mutual Funds

 

When you have cash you will continue to hunt and using a formula means you will lower your cost average over the next couple years or capture upside in the companies you pick.

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Buy everything you want to own in .5% or 1% increments. Every time the company moves 10% down, double your position. Keep your mutual funds for now, since you are likely to only have 5-15% of your account in owner operators. Your portfolio would look something like this:

 

10% - Owner Operators

 

30% - Cash

 

60% - Mutual Funds

 

When you have cash you will continue to hunt and using a formula means you will lower your cost average over the next couple years or capture upside in the companies you pick.

 

I agree in general with this approach.. Who says you need to buy all at once.  One guy at the fool I used to listen to, who had years of experience and was very successful at holding many many stocks over years, talked about buying in thirds.  I think it's a good approach  Buy a core, never sell position.  Then buy another third when it reaches a good valuation, and another trading position.  It's averaging in.  You never know if the stock will come down to your required valuation, and if you like the manager, time is the friend of the great business...

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I would love to get the input from fellow board members on how to proceed with my current portfolio issues.

I started investing 3 years ago with lots of excess cash flow but limited knowledge base. I knew only the basics of personal finance and had a bias towards value investing.

I therefore found an advisor who has been good and my mutual funds (Third Avenue and a few other value funds) have produced a CAGR of about 12% over 3 years. My portfolio is now 7 figures and the MER fees are getting very excessive.

 

My knowledge base has increased to the point where I am comfortable planning a largely passive portfolio similar to Giofranchi's of good capital allocators ( FFH, BRK, MKL, BAM, LUK etc) as a solid core. Over time I may have a small portion in individual securities if I can expand my circle of competence and improve my individual security analysis skills.

 

The dilemma is some of these capital allocator holdings are somewhat above a price I would like to pay if I was just looking to buy with my dry powder. Would people just fully switch across to the capital allocator holdings at less than ideal prices knowing that at these prices they are likely better than continuing the current mutual fund holdings?

Or only buy the securities that are cheap or fairly priced currently up to their portfolio % allocation and leave the rest cash until the prices improve for the other securities? This could mean I'm close 60-70% cash based on my current assessment of what is cheap enough to buy now. I'm worried I may end up sitting in cash for too long in a market that I consider fairly valued. I would likely leave myself with 20-30% cash allocation regardless for future price improvements on the desired holdings.

 

Any advice would be greatly appreciated. Thanks in advance.

 

Hi tripleoptician,

I think I have just expressed my views about some topics of yours on this other thread: The 13th Labour of Hercules.

Anyway, let me tell you that I believe FFH is great value today… but of course it seems I am the only one to have this view about FFH on the board… so, take my words with a grain of salt! ;)

 

giofranchi

 

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