Liberty

Anecdote: Trying to buy a sleigh for the kid on Sears.ca because they had the best price on that particular item. I can't buy it. Either there's a bug in their system that prevents me from completing checkout (price of item goes to zero and it says it's not available anymore), or there's a bug in their inventory system that says the item is 'in stock' on the site but it really isn't (by they don't offer me to order it anyway and way, or say how long it'll be until they have more). I'm basically hitting a brick wall while trying to buy this thing from Sears... Now looking elsewhere.

Homeschooling probably widens the range of outcomes tremendously, both in good and bad directions. In a regular school, if you have a bad teacher, well, that sucks but you'll get tons of other teachers, some of whom might be good. If you have a bad parent-teacher that homeschools you across all disciplines and over years, filling your head with garbage nonsense, well, the damage will probably be a lot more severe than what any bad teacher(s) can do at a regular school...

Gio, if you look at the share price movement of Allergan since VRX announced interest, do you think that the asset was fairly valued before and is now extremely overvalued at the price that Actavis is paying for it, or do you think that Pearson had identified an undervalued asset (even though it is a very large public company that everybody else could look at)? A lot of what Valeant buys is private companies in developing markets (indonesia, vietnam, etc) or assets that were part of larger companies. There are multiple trillions of those around the world. They are pretty much always the only bidder. I don't think running a screen (who knows what the criteria are) of US public companies necessarily tells you how many bargains Pearson and his team can find in these very different markets. Sure it's nice to deploy a big chunk of capital all at once, but they have a long track record of doing dozens of these smaller deals that add up to real money. There's no hurry to do another big public company, they can do quite well just with lots of small bolt-ons and some mid-size deals like B&L once in a while while they wait for a fat pitch to come along. Especially if organic growth stays this high.

Thanks for sharing. Instrospection is important to find the path to happiness.

Rainforesthiker, what you say makes sense to me (I was also heavily concentrated in AIG and BAC, though I got in later than some others here, so I didn't make as much), but giving examples of this stuff succeeding always works better in hindsight. There are big mistakes that people make that, if you could go back in time and ask them their thesis and level of confidence at the time, they'd tell you similar things to what people said about BAC and AIG. Sometimes what seems like a sure bet no-brainer doesn't work. Sometimes you think you know enough about a situation, but you don't (unknowns unknowns). Etc. That's where not going to extremes of concentration - but still being concentrated enough so that your best ideas make a difference - can save you heartaches.

I wouldn't touch anything that exposes me directly to the canadian housing market, especially not at this point (super high debt levels, houses almost costing twice what they cost in US, oil crashing, mining doing badly for years, US economy doing better which means Canada might be forced to follow US in raising rates at some point even if things are worse here, etc). I know a lot of people who like this business a lot, and I haven't done the work on it, so maybe I'm missing something, but to me it gets thrown in the "too hard" pile because of the housing bubble, which will no doubt damage all kinds of things that are close to the epicenter in all kinds of unforeseen ways.

To me, the importance of showing organic growth on the 'durable' part of the business (and not on things that have been explicitely bought as run offs) is to show that they are indeed durable under the Valeant model (even with lower R&D than is typical), and that putting back in the amortization is warranted. If things stop growing after the cuts and restructuration, it probably means that their model is damaging the assets, and that totally changes the long-term value of the business, regardless of the IRR of new acquisitions (since, except in a merger-of-equals situation, the total value of existing assets will always be much bigger than the value of acquired assets, so more of the value is found there, and they need those existing assets to perform well to finance those attractive acquisitions).

I agree with Gio on organic growth. Only caveats are that periods of lower organic growth can be expected and it doesn't mean the model doesn't work, especially if there's some external factor at play (ie. Industry-wide slowdown), and you have to separate organic growth on durable assets and tail products that were never expected to grow anyway (and were bought at an appropriately discounted price to produce high IRRs despite this). This should be easier now that they have beefed up disclosure. Those tail assets seem to have really confused the market so far. If that changes, I expect multiples to change too.

http://brooklyninvestor.blogspot.ca/2015/01/the-perils-of-market-timing-iii.html http://brooklyninvestor.blogspot.ca/2015/01/overvalued-market.html

jmp8822, I'd like to ask you a question. Can you give us the name of some of the stocks that you've held and had great success with in the past with your concentrated approach? No need to divulge your current portfolio if you are not comfortable with that (though that would be even better), but I'm curious to see what you consider businesses that are safe enough to put almost all your net worth into and yet that have potential to get superlative results.

jmp8822, the reason why I wouldn't go again into extreme concentration (I currently have about 15 positions (and many of those are businesses that own many other smaller businesses), with my biggest one being 20%, so I'm still fairly concentrated --but at some point I had 2-3 positions) is because investing isn't like chess. There's a big luck factor, and even the best poker player in the world wouldn't bet their net worth on 1-2-3 hands. Put options can definitely mitigate that, but in a universe of thousands of businesses to pick from, I think I should be able to find 10-15 ones that are good enough for me. Maybe your hurdle rate is much higher than mine, though...

The question was for 'household' expenses, so that would include you and your girlfriend (so 24k, if you split down the middle).

grasshopper, is this what you did/what you are doing?

I thought this was interesting, especially the graph on page 3: http://policyschool.ucalgary.ca/sites/default/files/research/kneebone-unemplfinal.pdf Found via:

For lots of things, you can spend as much as you want. The thing is, a lot of the 'value' in the very expensive stuff is positional. It's about signalling your wealth to others. The things themselves are often only marginally better functionally than much, much cheaper alternatives, or better but in ways that don't matter that much in the grand scheme of things... If you spend $10k on a handbag, it's all about intangibles. It won't hold your stuff better, and you can get top quality materials and workmanship for a lot less than that. So if like me you don't give a crap about social hierarchy and signalling wealth and all that, the super-luxury things are not worth it. Buffett doesn't live in the same house and drive old hail-damaged cars out of sacrifice to make a point; he just doesn't care about that crap, it doesn't rank high on his inner scorecard.

I'm sure it's true for many. I know that if I made millions a year, I would have no problem spending 500k or whatever; my goal is to be independent, not to spend as little as possible. I'm not sure what I'd spend all that money on, as I don't have expensive tastes (technology has made most of the coolest things in life inexpensive... a top of the line iPhone and Mac, a fast internet connection, a good stereo, and all the books I can read.. not a very expensive proposition). I'd probably just get a really nice house in a quiet spot, get a Tesla, a cook, a helper for the kid, I'd add a few zeros to my donation to the SENS Foundation, and that's about it... But it's also true in general (maybe not on this forum) that many people who make a lot spend everything (and more) and don't have much saved. It's the old Ben Franklin line...

I don't know what those acronyms are, so probably not. But I'm guessing they are programs/goals that the frugal community uses? I'll look them up.. For me, the gist is: When I moved out of my parents' place and had to start paying for more of my stuff, I spent a while learning about how to be more frugal (and I already was quite money-efficient, mostly because as a kid I valued free time more than money and so didn't want to work at crappy jobs, so I stretched every dollar that I received to avoid having to go work). I got the 'Complete Tightwad Gazette', read The Simple Dollar and other similar blogs that were popular at the time (Mr. Money Mustache became popular a bit later, so I know about it, but I haven't really read it), etc. I don't do all the stuff that they preach, but I've picked up many ideas and concepts that have saved me many many thousands of dollars without any noticeable effect on my wellbeing (I don't feel I'm making any sacrifices). The most important thing is the mindset of always asking: "Is this worth the price? How many hours have I worked to earn that money? How much happiness/dollar does this provide? Would I be happier with the money in my pocket? As happy with a cheaper alternative?" For me the goal of money has never been to buy lots of stuff, it has always been independence, which I value above pretty much all else. Update: For those who, like me, were wondering about the acronyms: http://forum.mrmoneymustache.com/ask-a-mustachian/all-these-acronyms!/

Well, I don’t think I have ever said something like: if Watsa is gone, I will cease investing… Instead, what I have often repeated is: if Watsa is gone, I will look somewhere else… The world is a very large place, full of talented people! ;) Ok, now I think we're misunderstanding each other, because that's certainly not what I meant. All I was saying is that Valeant is what it is in good part because of who Mike Pearson is, not just because of the model that Mike Pearson uses, so I don't think that others can easily copy what Valeant does and that there just will be a bunch of "next Valeants" to invest in the industry because of model-copying once they further prove out their approach. I never said that he was the last good capital allocator on Earth and that if you pass on him you should stop investing altogether (not sure why you'd think I believe that). What I'm saying is a lot closer to your reasons for selling Lancashire after Brindle left. It's not just the model, it's the people, and really top people are rare.

I'm not exaggerating, I'm basically just giving a milder form of what you usually say about the importance of good capital allocators and owner operators ;) So now we care more about relative performance than absolute performance, eh? If the top 25 chess players in the world all die in a plane crash, the #26 will all of a sudden become #1, but does that make him/her as good as the former #1? ;)

Doesn't sound like Ackman will be part of the next attempt at a merger-of-equals... http://business.financialpost.com/2015/01/08/valeant-pharmaceuticals-inc-moves-on-after-allergan-bill-ackman-speedbump/

That follows logically, but I'm not sure things will work like that. As Pearson himself said in answer to a question, there's no secret to the model. Its very simple. Just like Warren Buffett, Tom Murphy, or Henry Singleton's models have been out for a long time. The reason why people don't do it is not because the models are a secret or don't have a track record, it's because it's hard to execute day-after-day, most executives don't want to do those things because they don't find them fun/they aren't in their nature, they don't have the right mindset/skills/incentives, it's hard to get the company culture right, a supportive board, etc. Models can be copied, but talented individuals cannot (yet) be cloned. Otherwise, every company would just copy the Berkshire model or whatever. But in fact, we only have a handful of successful Berkshire clones despite the fact that few companies are as admired by smart business people. So I'm sure Valeant's success will have an influence on the industry (some cost cutting, more inversions, maybe some decentralization (but most managements really don't like giving up control)), but it won't spawn a bunch of Mike Pearsons. Endo is the closest thing because management comes from the Valeant team and they copied the model exactly, but even with that I don't find them as impressive as Valeant. Not to say that there can't be talented followers, but I don't think it's as simple as saying "oh well, I'll just catch the next one". Who's the next Prem Watsa?

That's a good question, though as you say, that's probably pretty small, and the side benefits (extra stickiness, breaking the ice) of making people invest in the ecosystem, especially younger people, no doubt are bigger. Another good question is: How much 'float' does Apple have from iTunes gift cards? People pay upfront and only use them later, sometimes much later, and many must be forgotten in drawers. I know my wife has had a $15 iTunes gift card on her desk for a few months.

Our average (me, my wife, 1 kid) for the past few years has been CAD $37-38k. One third of that is rent. We save multiples of what we spend, which is the way I like it.

As Pearson said, the vast majority of all their acquisitions so far have been small and medium private businesses. That's not changing. They've tried to do a few public companies in the past, and will no doubt try a few more in the future, but I think it's erroneous for people to suddenly expect them to go after a lot more Allergan-type deals all of a sudden and change their strategy. I am not sure I agree with your characterisation Liberty. Would it not be fair to say the vast majority of acquisitions (in terms of numbers) so far have been small/medium, but in terms of capital deployed - at the time it was acquired - Bausch would have been pretty big for Valeant relative to all the small ones up to that point. Similarly, going forward they are going to do a bunch of small/medium ones mainly using earnings power as capital while keeping the leverage ratio stable at these levels (so some debt may be used which will permit a few significant mediums). But at some point, once their stock is high enough, and their leverage is on the low end, I think they will do a large one. I get the feeling it is Pearson's aspiration at some point to do a large one (given last year he mentioned being a top pharma company in short order - although he took that back; also on the conference call today he was asked if he would Valeantacize a big pharma at some point, and he declined to comment instead of simply saying "no"). Having said that, they don't need a large one to be successful and a large one could be riskier than a bunch of mediums. In any case he is very disciplined and rational, as is their major shareholder, and parts of their board. So we are in good hands I believe. I think we're saying the same thing, just differently.

Great post, cwericb. This line is so true: "I felt that if I continued to urge him to sell and then the price recovered I would never been forgiven." That's why I don't want to give specific money advice to friends and family. I'm more than happy to share everything that I know about value investing and asset allocation, portfolio construction, how to read a 10K, what books to read, how to think about risk and value creation and such, but I'm always afraid to recommend company A or B or to recommend buying or selling at a specific time, because I know I'll always be tracking that stock to see how it does and thinking about how that person might be happy/mad about it. Even if things go well, I don't want the mental clutter, and if things go badly and significant money is lost - even if the person claims to understand that it's not my fault and that they made the decision themselves - I know that there'll be bad vibes, even if they're not on the surface or unconscious. The only person I manage money for is my wife, and it's all in Berkshire and short-duration bond index ETFs...