ERICOPOLY

Ok, so do you see too rapid a P/B expansion right now? Cheers, Gio No, I didn't sell it this time for that reason. I said that I sold it last year for that reason. This time, I see that I've made a 12% return from where I bought it in a couple of months. I weighed the chances of whether I'd make another quick 10% return or whether it might slip back to where it was. I couldn't come up with anything convincing either way. I thought about missing out on 15% a year book value growth, but then I looked at where we are with interest rates and I think about risk to bond prices. I think about the equity hedges hedging out capital gains. Bonds could soar further, but I don't feel particularly bullish that they will. I don't know, I'm just not trembling with greed and I have a high tax basis and some capital losses to absorb from selling VRX at a loss. There is nothing really compelling me to own the stock at the moment. Crash (don't want it) Muddle through (won't miss out on much) Devaluation/Revaluation (wash) Interest rates (if rates were a lot higher the float would be super valuable, but rates aren't a lot higher) The engines that drove the legendary book value growth just seem to be powered down right now. It's great to look at the book value growth over their entire 30 year history, but let's cherry pick a few things about today's environment that make me sad 1) long term rates declined significantly over 30 year history. That gave them enormous capital gains. How many more years of this juice is left? Maybe, a few, but looking at where we are today with rates I think a lot of it is played out. They were right for a very long time -- well played, but perhaps played out. Perhaps not. 2) interest rates were high, and with their huge float leverage, this was sizzling. 3) capital gains from equity investing -- but they are all hedged away at the present. The reason why the past 5 years have sucked overall are IMO for those missing 3 ingredients that allowed them to smoke the S&P500 over the long term. I feel like the gas tank on long term interest rates engine is getting low, the low interest rates are robbing their float income away, and we're still hedged on equities so nothing spectacular is going to occur (but it could!)

The float is worth a lot more in a high rate environment, so there are worse things to worry about.

Stock is now basically no longer discounted at 10x earnings, with rate hike priced in. 10% a year still isn't terrible, but anything more than that is now based upon P/E expansion beyond 10x.

Allowing your CEO to margin up his company stock... Do this unwittingly create an incentive for him to focus on managing the stock price not just over the long term, but now over the short term as well?

+1 Then what? 1) You are not worried about a crash at all and you are 100% invested, 2) You are worried about a crash that might come soon and you hold cash, 3) You are worried about a crash that might come some years from now and you hold FFH, 4) You are worried about a crash, but you don’t know when it might come, and you hold both cash and FFH. Which of the 4 cases? Is there a fifth? Cheers, Gio 5) I get worried when rapid P/B expansion in FFH can be followed by a reversal, crash or no crash. That rapid expansion late last year overwhelmed me with fear of a reversal. I just don't feel an overwhelming amount of greed to stick around for a potential reversal. The prior 4 or 5 years they had only compounding book value at something like 2% or 3% annually. That kind of backwards looking performance can make a momentum player bored, in which event the valuation can sag again. It looked like some sort of momentum stock how it jumped up so quickly.

The bold part sounds nice, but doesn't the italic part contradict the bold part? I.e. if you have a group "discussion" (read: argument), the fundamental premise of argumentative theory starts playing a role: your goal is to win the argument, not to reach the correct solution. The group as a whole may or may not reach the correct solution. But it seems very likely that the participants of the argument are more likely to dig in and try to persuade others of their POW rather than change it because of the discussion. (There's numerous examples of that in this forum too ;)). I wonder if responses to this post will be a meta example of the point above. The thing that I questioned about the article is that people defer their own judgements to an expert. I didn't see the article addressing this. We don't argue enough with the expert to fit the theory. A group needs to make a decision and move along and not spend it's resources quibbling forever -- that's how I'd explain the deference to expert testimony. I still found it interesting -- their theory fits within an argument between relative equals. This is likely what they meant. I think a lot of harm is done when an expert is consulted and his strong opinion is followed unquestioned -- that leaves us victim to his confirmation bias. We usually don't get enough experts together to duke it out for this theory to work -- maybe because it's too expensive from a time and resources point of view. And of course there is danger in not consulting an expert -- usually it's best to consult with them. People make their way through life with different abilities and develop different specializations -- we can't all be a master of everything, so deferring to the area expert is best perhaps.

If Ackman is taking this to heart, I would like to see him make this a 40% position the way that Buffett did with AMEX during the salad oil scandal. Perhaps they are trying to leak to the market the progress of their internal investigation -- that from what they can tell, nobody at the top of Valeant is implicated (yet) in whatever it is that we're all afraid of.

Was it a mistake? We only see one version of history. The smart money bought at -50% in the Great Depression too, only to see another -80%. Fairfax (and Hussman) may have rightly played the odds and just just been beat by a lucky draw. Yes, it was 100% a mistake. I expected them to load up and they didn't. I admit my mistake. I shouldn't have made assumptions about what they would be doing, instead I should have sold it and just bought them all directly. I didn't say they made the mistake. I said that I made a mistake in remaining with FFH under the assumption that they were loading up. I effectively only had 50% of my capital in the stock market when I had imaginings of much, much more..

Example: do you research a cure for a rare hereditary disease that afflicts relatively few or do you research a drug that will block the deposition of fat in a woman's butt? I think if you run a drug company for maximum financial returns, you'll cut the R&D on the former and focus those dollars on the latter. So maybe it's better to have companies that blow their entire wad on R&D with targeted budgets instead of cutting all the research that isn't going to meet high financial return hurdles. Anyways... whatever, we should talk about something else.

Wouldn't you say focusing too much on price increases of certain drugs suffers from this very same syndrome? short-termism? Well, I feel like raising the temperature of the Earth 1% every X years out to infinity is going to ruin our planet for sure. But I'm not certain that Pearson's drug price increases are leading to an increase in R&D spending. I know that companies have a lot of "fat" in R&D spending that is being cut by Valeant. Maybe there would be greater R&D spending in the aggregate if we had more "fat" in the industry and less Valeant? I don't know. Perhaps "wasteful" R&D spending leads to cures that don't turn much of a profit?

This is gonna be a long one guys....5+ years. But I think hes right. This has to be done in the light. I think that even they [the board, CEO, Upper management] don't even know whats going on. Its hard to comment on something when you dont know the extent of the wrong doing. Remember....from what i can gather this isnt even Valeants doing. So We know that there is a moral wrong somewhere, I absolute agree with this, but where that "Moral Aggressiveness" (that charlie munger talks about) lies is still under debate. Some say it lies with Bill, hes the stock "owner" ofthe business. Some say its with the CEO of Valeant, hes the captain of the ship, the ultimate responsibility for the crew lies with the captain. Fair enough, perhaps nobody high up at Valeant knows what's going on at Philador. Impossible for them to comment before investigation has been done. It wasn't hard for them to say "standard collections dispute" -- yet they don't understand Philador well, so how did they say that? Don't they need to wait for the investigation to be over before they are certain either way that the pharmacist might have discovered something?

The external costs are not priced into fossil fuels -- the market price is not the efficient price. The market does not price in external costs -- it only happens when governments intervene. Clean energy should be subsidized because fossil fuels are subsidized by short-term thinking. How do you put a price on completely destroying the planet? I'm fairly certain that clean energy is more economical than fossil fuels at pretty much any price point. People today just haven't arrived at a consensus yet as to whether we should optimize our economy for today at the expense of future generations. Look, if we warm the planet by just 1% every 500 years, that is really going to screw up the planet one day. But none of that is priced in -- we just think it's efficient to save money today and screw the future.

I think there is some fairness to that comment, but you've really got a family over the barrel if they have a sick loved one and they have to choose between helping him and selling the house, or watching him suffer. Even men on the front lines who've seen a lot of war can come across a situation and say :"wow, that's some really cold shit". There are plenty of diseases currently where there is no known cure. In a free market system, however convoluted the money flow and however questionable the morality appears on the surface, there is potential hope that eventually a cure can be found. No other system offers that and in a price control scenario, we might not even know and miss what we didn't invent. I am not talking abt a hypothetical child here, but my own, who suffers from multiple conditions currently incurable. I want to look him in the eye and say, this system offers us the best chance that eventually there will be something invented to make your life better than the current prognosis. It maybe pricey initially, like stents in heart surgery were, but eventually the system will make sure it is affordable. Existence of cure however pricey, does more for humanity, than absence of cure in the long run. There are plenty of ways to pay for expensive cures, if they exist. While there maybe heart wrenching stories of children dying because the family couldn't afford the cure, there are plenty of children (multiples of the first scenario) who die each year because there is no known cure available at this time. I guess as a society we find it easier to rationalize the later. I sincerely hope there is lot of excess money to be made for investors in this industry. That will ensure attraction for new money to fund new R&D and thus new cures. I find it deeply immoral to muzzle potential future life saving inventions in order to save a few bucks now and make sure some hedge fund investors don't get rich. I agree that you don't want to dis-incentivize drug development. But these are drugs that were developed already for a given price point. The R&D was already deployed. Therefore, the R&D happened and the drug was developed. .... Then the drug was bought by VRX or whomever and the price skyrocketed overnight. Let's say that the drug's price was capped at the level it was selling for before VRX bought it. We know for certain that the drug development happened, and it was undeterred by that previously far-lower price point. It could just be that the prior manufacturer had morals that led to "inefficient" pricing. VRX is exploiting that inefficiency that exists in within the law yet outside of morality. And it doesn't impact R&D to just leave pricing within the bounds of morality -- because after all, the drug was developed wasn't it? I don't believe that the following counter argument holds, but I think Pearson would argue: -the original company wouldn't have worked on said drug unless they saw the opportunity to be bought out by a big player like VRX -M&A activity drives capital into R&D -M&A activity exists partially because of the opportunity to exploit " price inefficiencies" Clearly that is wild stretch of an argument particularly on moral grounds, but you could point to a similar dynamic in the tech space. People are building apps and websites that have little hope of paying back the original investor unless they are bought out by a larger firm that can integrate them, charge higher prices for them, or load them with ads. Again, I dont really believe the argument is a strong one, but I think that is how Pearson would try to justify it. And I think my argument has lots of implementation weaknesses because it may encourage firms to introduce drugs at much higher initial prices if there are regulators that are approving incremental price hikes. Well, the market may take care of Pearson/Valeant anyhow -- we'll see.

I think there is some fairness to that comment, but you've really got a family over the barrel if they have a sick loved one and they have to choose between helping him and selling the house, or watching him suffer. Even men on the front lines who've seen a lot of war can come across a situation and say :"wow, that's some really cold shit". There are plenty of diseases currently where there is no known cure. In a free market system, however convoluted the money flow and however questionable the morality appears on the surface, there is potential hope that eventually a cure can be found. No other system offers that and in a price control scenario, we might not even know and miss what we didn't invent. I am not talking abt a hypothetical child here, but my own, who suffers from multiple conditions currently incurable. I want to look him in the eye and say, this system offers us the best chance that eventually there will be something invented to make your life better than the current prognosis. It maybe pricey initially, like stents in heart surgery were, but eventually the system will make sure it is affordable. Existence of cure however pricey, does more for humanity, than absence of cure in the long run. There are plenty of ways to pay for expensive cures, if they exist. While there maybe heart wrenching stories of children dying because the family couldn't afford the cure, there are plenty of children (multiples of the first scenario) who die each year because there is no known cure available at this time. I guess as a society we find it easier to rationalize the later. I sincerely hope there is lot of excess money to be made for investors in this industry. That will ensure attraction for new money to fund new R&D and thus new cures. I find it deeply immoral to muzzle potential future life saving inventions in order to save a few bucks now and make sure some hedge fund investors don't get rich. I agree that you don't want to dis-incentivize drug development. But these are drugs that were developed already for a given price point. The R&D was already deployed. Therefore, the R&D happened and the drug was developed. .... Then the drug was bought by VRX or whomever and the price skyrocketed overnight. Let's say that the drug's price was capped at the level it was selling for before VRX bought it. We know for certain that the drug development happened, and it was undeterred by that previously far-lower price point. It could just be that the prior manufacturer had morals that led to "inefficient" pricing. VRX is exploiting that inefficiency that exists in within the law yet outside of morality. And it doesn't impact R&D to just leave pricing within the bounds of morality -- because after all, the drug was developed wasn't it?

I think there is some fairness to that comment, but you've really got a family over the barrel if they have a sick loved one and they have to choose between helping him and selling the house, or watching him suffer. Even men on the front lines who've seen a lot of war can come across a situation and say :"wow, that's some really cold shit".

Yes, I am out of the stock still. I think I should do something like that (call options) if I do something at all but I haven't.

I'm inclined to agree but I still say that you can't argue, in this instance, that prices rises are moral because they optimise resource allocation. In many instances they are highly immoral because they do precisely the opposite. And they are often (as you allowed) certainly bad business practice. I think it depends on what you are raising prices on. Let's say it's a drug that critical for the treatment of a child that is dying or suffering a terrible long term disease. You raise the annual price of his treatment from 10,000 to 200,000, because you argue, that's what the market will bear. His family's copay goes from 4,000 to 80,000 per year. Now, look deep into the child's eyes and explain that what you are allowed to do by law has nothing to do with morality. Keep in mind that the drug was developed by some company with a 10,000 price point in mind -- so presumably that was a price point that justified the R&D. So I don't know how you could argue that capping further insane price hikes after a new investor buys the drug would deter R&D and drug development. It would already be a fact that the drug was developed, R&D was done, with only 10,000 in mind.

What you do know for certain is no money has been pulled out of VRX. Exactly the same number of dollars are being put in by investors as are being taken out of it. Call it desperate buying or desperate selling. Or stalemate (maybe a chess term for that?). What headline plays best?

I agree with that. However it's not a reason for me to own the stock because based on that logic I might as well put that portion of my portfolio in cash. The reason is because they aren't compounding at a high rate while hedged, and I strongly believe FFH will go down a good deal in price in a generalized market collapse (driven by deflation or whatever). So I feel like it's picking up nickels in front of a steamroller. Rather just not stand in the road at all if the steamroller is my worry. It's not quite nickels by the way... not the best analogy. It's more like if the crash happens several years away, then FFH is better than cash quite likely. But if it happens next quarter (or in 18 months) before any significantly offsetting low-rate compounding, then I think cash is way better.

Actually, since they're on the board, it's significantly more difficult for ValueAct to just cut and run. With boardmembers like ValueAct, why is this a company that gives quarterly EPS forecasts and has a reputation of half-truth powerpoint presentations? I mean, doesn't ValueAct want things presented in a more straightforward way? I'm not making any insinuations, but it should frustrate them just as much as the next guy and if you have a couple of seats on the board you've had ample opportunity to say to Pearson: "Enough of this bullshit, it's eroding investor confidence." How does ValueAct track the performance of the individual acquisitions via the 10-K? They must see AZ_Value's point, but for whatever reason things are the way they are.

Seems to me it raises the odds that R&O pharmacists isn't nuts. But doesn't confirm it. OptumRx's September cease-and-desist letter cited a breach of its contract with Philidor, the sources familiar with the matter said. It isn't clear what billing irregularities caused OptumRx to send the letter, the sources said. In the months that followed, OptumRx recognized that drug reimbursement claims filed with the identification numbers of four other pharmacies could be traced to Philidor, the sources said. Starting in January, OptumRx sent cease-and-desist letters to the pharmacies, which worked in a network run by Philidor, the sources said.

Eric, I absolutely agree with your broad point here and I do think that all multiples will compress in the next crash. I don't expect to make money in Fairfax the first 6 months of a crash. That said, I do think you're picking your dates a bit too carefully! I just (fairly randomly) chose Nov 2006-Nov 2010 to graph FFH CN, and it basically goes from bottom left to top right. The selloff starting March 08 lasted five months, took you back to where you would have been in Sept 07, and reversed rapidly. The same thing happened starting early 2009. So yes, the start of the storm felt shitty both times, and maybe that'll happen again and we'll will get a great opportunity; but all the graph really tells us is that this is a volatile stock that performed extremely well through the crisis. And we all know that what matters far more is how IV trends, and I believe FFH's IV could explode in the next crash if there is a deflationary panic. I think 2008 is not comparable to today in two ways: as soon as the next crash happens people will look to Fairfax, remembering what happened last time, which is bullish; but the starting multiple is higher, which is bearish. P People may look to Fairfax in a crash, but they will be selling none-the-less. The reason is fairly simple: the need to raise money for margin calls, and generalized panic. It absolutely will happan again. Your naive to assume otherwise. Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings. I know because I was buying FFH at the time. Its posted somewhere on this board. I believe that people will see other stocks they love down 80%, and they'll dump FFH to buy those stocks. I've said this before: once you think the bottom is in, FFH is the wrong stock to own. I think they only had like 50% of their book value in stocks in March 2009, and a lot of it was stuff that wasn't all that compressed (JNJ for example). THE BIGGEST mistake I made in early 2009 was smugly believing that FFH would be backing up the truck and loading up on bargains. HARDLY! Not a single share of AXP for example. And MKL? I think the only thing they bought through the crisis was a teensy weensy bit more KMX. So look, there won't be much buying pressure on FFH stock itself if people remember what happened last time. But that was my mistake in misreading them -- they probably were uneasy after dropping their hedges and/or couldn't add more risk being an insurance company.

But if you take the point of view of the argumentative theory, having a confirmation bias makes complete sense. When you're trying to convince someone, you don't want to find arguments for the other side, you want to find arguments for your side. And that's what the confirmation bias helps you do. The idea here is that the confirmation bias is not a flaw of reasoning, it's actually a feature. It is something that is built into reasoning; not because reasoning is flawed or because people are stupid, but because actually people are very good at reasoning — but they're very good at reasoning for arguing. Not only does the argumentative theory explain the bias, it can also give us ideas about how to escape the bad consequences of the confirmation bias. People mostly have a problem with the confirmation bias when they reason on their own, when no one is there to argue against their point of view. What has been observed is that often times, when people reason on their own, they're unable to arrive at a good solution, at a good belief, or to make a good decision because they will only confirm their initial intuition. On the other hand, when people are able to discuss their ideas with other people who disagree with them, then the confirmation biases of the different participants will balance each other out, and the group will be able to focus on the best solution. Thus, reasoning works much better in groups. When people reason on their own, it's very likely that they are going to go down a wrong path. But when they're actually able to reason together, they are much more likely to reach a correct solution.

There's a "tweet" there that quotes him saying something with regards to how people are picking on Valeant but lots of companies did tax inversions. I think that's the only thing on that link related to Icahn defending Valeant.

Eric, I am briefly lifting my self-imposed ban because you are smarter than this. Look at the dates! When was he hired? When did the fraud occur? Hey, I just put out the cliffs notes. I don't subscribe to it -- it's actually pretty funny if you read it. I left out the stuff about the "Enron" person who is head of an audit committe at Valeant. Of course it's all leading type stuff. Tried to save somebody the effort of reading it. Okay, but you missed the headline: * Laizer invents time machine. Commits fraud at MedCo before even being hired. Yes I did. You are correct there.