thelads

Hi Spekulatius, On the spread side, there are very liquid derivative instruments he is probably using just to have DV01. Beyond that, I suspect he has a bunch of analysts looking for corp. bonds that were priced in 2016 through mid 2018 that went into the ECB and other non-fundamental buyers, to see if there is anything that jumps out. As he finds names that look fishy, he can just short them outright...Just a suspicion...

Hi Muscleman, I just wanted to give you a quick note of congratulations. It is incredibly difficult to come to a public forum and admit things didn't go as you might have pleased. My experience likely doesn't apply here, but I will relate from it anyhow. I have seen plenty succeed and many more fail. Universally, the failures related to a lack of alignment between the approach taken by the person and their emotional/psychological makeup and how that led them to respond to events. Temperament is no joke and you have to be honest with yourself. For whatever it is worth, I think realizing this is half the battle. As others have stated, there are many ways to approach markets. Indexing has worked very very well. Or look at Paul Singer at Elliot. He went down the route he took after some early failuers with styles that didn't fit him. Klarman uses a mix of private and public securities. This gives diversification but also reduces reported volatility. No doubt in my mind that will suit him. Then you look at other ends of the spectrum, with more Vol, say at Druckenmiller (though few losing periods) or a Pabrai who is fine with large swings. His friend, Mr. Spier appears to be less comfortable with such volatility and manages things differently. I don't think there is a right or wrong answer. There is just the right and wrong fit for you. There is absolutely no harm in doing other things if investing has lost its appeal. I know many full-time folks who have quit the industry and are blissfully happy. I know many who have remained who are also happy. And both of those sets of people were pot committed. Sorry - most of the above is probably stating the obvious and just repeats the same points made by others. But I really just wanted to say you deserve great credit for listening to yourself and realizing what does not work for you. I wish you the best for the future.

Long time not posting on here. Apologies if the following seems naive our out of place. I am far from an expert (on anything)! But I think the topic has real merits here. I think some part of the mess that has happened the past 8 months or so on the Auto and Supplier names is down to China. A lot is down to WLTP too, the new emmissions testing rules in Europe. This created a real bottleneck in production. I may be wrong, but certainly in some conversations I have had, people have conflated those two, and I think that is inappropriate. Of course, there could be real problems from China if a trade war goes full blast. Or in general if we are at the top of the LVP cycle. Though I think much of the latter is priced in. Those certainly seem like the real risks to me. However, if the trade war fears abate, and if you believe WLTP is mostly a temporary phenomenon (I do) in Europe, then this is a reasonable opportunity. The points raised in earlier posts about capital intensity and concerns around true distributable owner earnings are completely valid. In addition, there are some big potentially very capital intensive bets being made on Autonomy. Those could go well, or go poorly. I know for some of the German OEM's they have scrapped billions in investment quietly and moved the R&D burden onto suppliers. The problems were much greater than they expected and the skill set internally didn't match that required. Perhaps the US OEM's do the same? Ford seems to be very far along, and from what I know has a decent lead over GM and others (despite the Cruise investment). But who knows if they can make it stick. I certainly don't. Ford still has legacy issues anyhow. Anyhow - I thought I would mention a couple of names as alternates that have less of a capital intensity issue. Both are tier 1 suppliers to OEM's worldwide. The first is Autoliv, which makes airbags, seatbelts and some other sundry safety equipment. It is not a sexy business, but they have 50% market share in certain products and no viable alternatives available. It is extremely well run and has a good growth runway for the next 3 years which is largely assured. it is not as cheap on a P/E basis as some of the other names mentioned, but at 9x P/E it is still far too cheap in my opinion. The other company is Gentex. There is a short thesis out there on it. I will let you all decide if that makes sense. I think they are in a more questionable spot strategically. They are dominant in rear view mirrors. They have done well with R&D and have incredible margins for a company supplying Auto OEMs. There are some questions around their results, and also around whether mirrors will be replaced by screens. It is also cheap vs. its historical norm and has a heavily involved owner operator CEO. I just thought I would mention the two for anyone interested in the topic. Happy new year to everyone.

Yes I could not agree more on the roach motel you suggest in EM - and the likely opportunities that will come. It could be fantastic. As for HY - I agree there also. Even options on CDS in HY indices are aggressively priced, which I find remarkable.

Hi DocSnowball, Thanks for the HBS paper. I have not seen that. I will read it today. Just based on the title, I think they have the right theme. I don't have figures I can share in an easy format, without putting in a presentation I did for my prior employer, and I would be violating an agreement with them on that basis. Regardless, the general trend for EM corporate debt since 2003 is that it had grown over 10 fold between then and 2015. It has grown further from there. That is true in each of the 3 major geographic blocks. Investment Grade Corporate debt in the Developed markets have just over doubled over the same period, while HY has a little less than doubled. That is an enormous growth rate for EM. What is more, you saw some real abuses with some of the issues that came. Have a look at what happened to the Sugar and Ethanol names in Brazil that all came in 2013, and how quickly they were broken. In that period of growth, the market went from a non-event, that hardly traded, especially compared to Sovereign debt, to a large market in its own right. When you see such explosive growth of debt in a given area (Mortgages, The Energy Space - yes there is overlap here - though less than you might expect) it is usually a sign enthusiasm has gotten ahead of reality. More insidious, think of the people who invested in the space in 2003-2006? Their expertise, etc. It tended to be in narrow areas, and the market was heavily weighted to very high quality credits. That is not the case now. But think about who the PM's in that space are now? What experience they have. They may be very very intelligent. The ones I have met are. But that is no salve. Their experience is of an ever growing market, where, bar the odd blow up, the trend has been up up and away. The best move has been to participate. Given the growth in outright volume, number of sectors, number of companies etc, not to mention number of countries, can they really understand and navigate things. Do you think they really know what they own? I think these are all reasonable questions to ask. I met with lots of people in the space. Spent a fair amount of time in Latam (over a month in different visits) the same in E. Europe and some time in Asia. Anecdotally, from that experience, I would say on average, and certainly at the margin, people do not know what they own. They are not great analysts outright when compared to those looking at DM credit, or equity, and the things they are dealing with are far more complex, and in areas where corporate governance is often terrible. That is what I mean by a bad fact pattern. Another point is that there is virtually no distressed money dedicated to the space. sure, it can come in from the US if things get very bad, but prices would need to be a lot lot lower. Two large well regarded funds I know off have taken some serious licks when they have ventured in here in the past 3-4 years. That will make the hurdle much higher for their peers looking forward. Why does that matter? Well, it means when things break - you don't have buyers step in until prices gap far far lower. Think 90 cents, to 10 cents, in 2 - 3 trades. If that happens on a bunch of names, funds that have thus far looked reasonably conservative start to look like lunatics. Such a sequence of events is unlikely to inspire confidence. Lets say it spreads, and the credit markets effectively shut down, or do so for 80% of potential borrowers; is it reasonable to expect the equity markets will hold up? I think not. Some anecdotal cases you can look at are: OGX (DIP providers lost 100% of their money after the initial default) / OSX 3 (Check out the bonds there - disaster), OGIMK (one of the 1mdb bonds in Malaysia) and the ARALCO and GVO bonds. Those are just symptomatic. There are worse examples. Another anecdote is from Brazil. The Bankruptcy laws were changed in 2006 or so, and updated to improve workouts. It was a good idea. However, a restructuring there will take a minimum of 7 years. Often a lot longer. In addition, equity often trumps creditors, which many foreigners don't fully appreciate. But I digress. If you look at Petrobras or other quasi sovereigns, the bankruptcy law does not provide for such entities. It is akin to Fannie and Freddie in 2009. There was no provision to cover it. I have spoken to dozens of investors in the credit for that company. Only 1 new this point. That is astonishing to me. Though not entirely surprising. The same massive growth, ignorance, complacency, etc have happened in other large debt growth areas, S&L's in the 80's, Cable and Media in the late 90's / early 2000's, Mortgage Product and Structured Products in the mid 2000's, energy debt more recently. That is all I am trying to get at. I hope that in some way gets at your question. You can look at Debt / GDP, etc, and that will have grown. But I don't think it will act as a predictive signal. I think it is country by country. Brazil looked terrible in this regard. Some others look the same. China is somewhat unique and has its own issues. India is entirely different again. Not to say it will be immune, but it has done very little of this, and demographics and other factors seem very favorable to me actually. Though in any calamity, all markets associated with the moniker EM will suffer I believe. For whatever it is worth, I may be quite biased. So take it with a pinch of salt. I had advocated setting up a business with a mild short bias (it is hard to short in the space) and build infrastructure and experience, and local partner relationships ahead of a calamitous event. This was back in early 2015. So far that really hasn't transpired. If this or the coming 6 months are as bad as it gets, then I am simply wrong.

Oh I am glad to hear it was of some assistance Stahleyp! Good to chat to you again.

I am certainly no expert in EM. Grantham may well be, and probably is right, about forward returns 10 years and more further out. However, the path risk is very big. One thing that I have not seen mentioned nearly enough is the growth and structure of debt markets in the various markets / geographies we call EM. Frankly, I think you would be shocked at how little, on average, the debt funds who traffic in EM corporate, or Quasi-Sovereign bonds / debt actually know about the legal standing of their creditor positions. How the restructuring / bankruptcy processes work, and their real rights. As importantly, they seem to have disregarded what may happen in terms of the wait period if you see a lot of defaults. This is just my humble opinion, but most don't know what they own at all (from an accounting perspective) nor their rights (when things really go wrong) and also have the wrong liquidity. This is a market that really only developed in the past 15 or so years (Sovereign / Government Bonds are a different matter). That is not a good fact pattern. The implications of this over a 10 year period aren't neccesarily bad. But for the coming 2-3 years, if things should get bad, or if debt funding is withdrawn it could be catastrophic. Any big decline in such credit products are very likely to affect the end economies and the equity markets associated. It would be naive in my opinion to think otherwise. However, I think that would present an incredible buying opportunity in a lot of names. Please don't get me wrong, there are many many great companies who will have a minor hiccup and just move on. They tend to have survived far worse than what I envision. But their price will get hit for sure. I mention this as people always seem to say, before an event, that they are fine with the vol, and the path risk and what not. They tend to think and behave differently when events happen. It's human nature, I am no different. With that in mind, I fear waving stuff in here in EM - though I know of a few good companies in different geographies. Anyhow - just an opinion, and not a terribly strong or deeply entrenched one. Just based on some minor study and anecdotes.

Hi Muscleman, I see no quotes on Bloomberg for either of these, though the first seems to have full price history indicating it has been trading around. I am probably just not on the appropriate runs. I think the prior suggestion to call the trading desk is the right move. There are some smaller broker dealers who can specialize in more off the run stuff like this. Maybe GMP securities for example. Ashmore, Goldman Sachs and Rochdale are all listed as owners of both of the securities, so you could contact them perhaps, or ask the trading desk to, in order to find a bid. On the first security, Value Partners group also has a reasonable position. So they are another point of contact. If all of that fails, PM me and I will ask a colleague who still looks closely in this area to see if he has runs on both. I imagine he would have them. Best of luck

Hi Munger Disciple, I used to be a subscriber. I stopped 2-3 years ago. I found that most of the interviews at that time were from 3rd party sources. Through Feedly and other feeds I felt like I had read most of the material already before it was printed in value investo insight. Perhaps that has changed since. I am not sure. For what it is worth, I used to subscribe to a bunch of services oneof the best for ideas or just discussion was Grants Interest Rate observer. It is more expensive jab value invoestor insight though. Not sure if this helps at all. Best of luck with things.

Thanks LC - I take your point. I think though that float has grown pretty much continuously since he took control of it, even during the crisis. But I may be remembering that incorrectly. The cost consistently though has been close to or better than zero. He does float into other areas of insurance and I completely agree, focuses on profitability, but even with that, en masse I think the float has grown. The comparison I make with other investors is probably poorly articulated. What I meant to do was to compare to a hedge fund, or other entity that levers its positions. Most often, these players borrow on margin or from facilities akin to margin debt, backed by the value of the securities owned. So in a high vol environment, initial margin must climb and the availability of financing goes down (as cost climbs). Berkshire has no such problem on his financing leg as far as I can see. So while his assets may be correlated, his liabilities aren't. This is a pet peeve of mine on the HF side. So much time and effort is spent on the asset side, the liability side is often an afterthought. Even with their "equity" capital, it is often monthly, or quarterly with some delay. Hardly permanent capital, and for a given expertise area/segment, the equity and debt flows tend to be correlated. Again, just not the case with WEB and Berkshire. I hear you on the big assumption point. How can one be accurate? And this is huge for GEICO given autonomous driving. What will they be underwriting in 10 years? How much could float contract? If the real duration on this liability is a lot shorter than I assumed (say 30 years) then the value of the float vs the balance outstanding would be much lower than the 50% I mention. That to me is the biggest uncertainty. Indeed, on that point, you can stress the value of the float. From the GAAP treatment as 0% benefit, regardless of underwriting profit, assuming it must be or can be gone tomorrow. Or, it can be 30-40 years, etc, which gets you to the 50% (Depending on interest rate used) or more. So I don't think there is a simple answer. We have some assumptions to make on the opportunity cost of finding similar financing, and then how long this can be outstanding and what affects that.

Apologies in advance, as what I am about to propose may well be wrong. But I think of this simply as a choice of liability. It has debt like qualities, and is a source of financing. The point I think Buffett is making is that this is a long lived liability. Like a revolving credit facility, but one that is drawn almost all the time and whose size stays constant or grows. The alternative source of financing could be debt or equity, but both are higher cost. I have no idea what the right average life or duration of this liability should be, though if we look back to 1995, the float has only grown at GEICO, so you can say its at least 20 years. Probably a lot longer, but that depends on your view of automous driving, etc, other things affecting float. But just for arguments sake, lets say the right proxy is a 30 year bond as a replacement for float. What yield would need to be paid on that? Not just today, but in a normal environment? Even if we took a conservative price of say 2.5%, with a 30 year, zero coupon bullet bond, the fair value of such float (if labeled as a bond instead) would be ~50 cents on the dollar. I may be wrong, but I think this is roughly the calculation he is doing, though what tenor as a proxy he uses, and what cost of debt, I don't know. But this also matches his comment that the float value is lower in a ZIRP world. All very intuitive I think also, but with this framework you can at least put a range of value on things. You can build a quick bond calculator to test this yourselves. It is obviously very sensitive to the interest rate you use. Obviously there is substantial value to growth in the float too. The other thing that is really nice about float as a form of financing is that it is uncorrelated to other sources of financing, is non recourse, and doesn't have covenants or knock outs associated (except in a big tail event) - all of which allows WEB to operate counter cyclically even more so than he would otherwise.

it's a very good point on marketing. A disturbing one. In a couple of places I have worked at, the main guy was spending upwards of 50% of all of his time on marketing. It makes a big difference. A competing fund with similar results, but that only got to 1/7th the scale, asked me why it was. The answer was just that the main guy was better at marketing. He came across as more impressive, though knowing them both he was the worse of the two risk takers. So it matters. I'm not sure how much of this relates to TV time though. I refer to time spent pitching directly at investors. So the larger fund for example also had a professional IR staff, whose head was focused on new biz and very good at it. I may be wrong, but I don't think institutional investors are hugely swayed by stuff they see on TV. That strikes me as more retail and some high net worth. But marketing certainly matters. However, network matters too. If you look at Tilden Park, for example, that's a former GS mortgage trader, and an excellent one at that. He is north of $3bn and I think at peak was over $5bn. He didn't do a ton of marketing. This came from GS alumnus and some very wealthy people he knew socially for a few years seeding him. Then it was word of mouth. So it can vary a lot. I don't think he spends the majority of his time marketing now either. Nonetheless, if you were offering me time with Klarman, Tepper, Mitch Julis, etc for 5k, and I could get a few hours, with unfettered ability to ask questions, analyse their former decisions, have them critique mine, and tell me where they see things going and how they feel things have changed, I would do it.

1) Yes - absolutely 2) I would do about a week or two of work before sitting down with him. Would have 5-6 cases I want to look at with him, but first would ask him to tell me his biography. Take me through his 5 best and worst investments. What his process and focus was at the beginning of his career, the middle and now. How he would change the approach now if he were starting out. What area's offer the most promise. What mistakes he would avoid, what flaws he has seen that should be eliminated. I have so many questions....

Hi Porcupine, May I ask what your background degree is in? How long you have been in fund accounting? What subject did you major in? What is your ideal role?

Doodilligence, do you happen to have a link to that blog post?