Earnings are out

[goldfinger]

I am completely hoping to be able to buy FFH shares cheaper so I am certainly not going to be too optimistic here..It is possible that they will become up to 80% or maybe more of my portfolio if things keep unfolding the way they are. Most individuals only last one cycle in the business of dealing with money in the stock market....why is that? Thats because  they have not endured the pain and Fear that coincides with the end of a cycle. As mr. Buffett has stated Fear is immediate and moves stocks downward in a hurry where Greed takes place over a long period of time...thats where we are now.  The idea of Stability creates instability. Look at the oil sector...I saw it first hand  with friends in the industry and while I did not short it I did not touch it in the last two years because of blatant greed...

The commodities rout has taken $5 trillion out of the global economy...its hardly even mentioned...because no one wants to talk about the money they have lost..they do want to talk about their winners.

 

I do not have time to go through the glaringly obvious signs of where we are in this cycle...but i will mention the biggest single sign that I see and it is in some of the posters here as well.

 

They are "now" changing their view...because in their opinion companies that have gone up so much and remained at certain prices now have stability....this is a Wall street fallacy...just look at the chart its safe here blah, blah, blah...buy quality and hold it forever...

 

It 's easy.

 

"Those that think investing is easy are stupid"

Charlie Munger

 

Fairfax gives me an opportunity to make 20% to 50% in a market that will drop likely 20% to 30%...so a 40% to 80% outperformance in a stock market that is running the second longest bull market without a 20% correction in history...I am not sure I will get those probabilities anywhere again with so little downside risk. i.e.

 

If nothing happens Fairfax will likely still "out perform" the market because we will gain higher interest income from larger US treasury holdings and we will have positive events in the equity portfolio as we have over the last 30 years. They have realized gains at $11.6 billion! from a standing start investment portfolio of about $5m in 1985.

 

Those that do not know how well the insurance companies at Fairfax are performing have not done their homework...these have been great buys of high quality...

 

Berkshire has a market cap of $354 billion! I worship Warren Buffett he is my hero in investing and in life...but how much upside is there? In a correction will Berkshire hold? yes better than the rest of the market with his largest war chest of cash ever (his cash levels rise dramatically at these times in the cycle so he is able to buy in the down cycle)

Sorry but...if god forbid...Mr. Buffett was too become sick or in capacitated Berkshire stock would drop 20 to 30% on the news...unfortunately, the probabilities of this are rising.

 

Fairfax vs Berkshire is a no brainer here.

 

I am a contrairian investor and i am not professing to be able to time the market as it is impossible. But i really like the odds and probabilities that I have been given here... for those that remember the dark days of 2008...Fairfax was the third best performing stock in the world! In "times of calm" and pain over the last 30 years their performance is also astonishing as they have weathered many cycles. This one will likely be as rewarding as the last one...as they will have dry powder to buy the great companies that everyone is professing to be finding and buying at significant discounts to today's prices as will I.

 

Dazel.

 

What are you doing with Altius in such an environment?

 

[Guest Dazel]

 

 

Goldfinger...thanks for asking.

I can't comment too much on Altius however, that experience has been paramount in seeing what we see...world demand for everything has dropped off a cliff. Altus will win from this because we will see the commodity cycle bottom out here and they will be at the top of the food chain.

 

Dazel

[petec]

Warren Buffett ... with his largest war chest of cash ever (his cash levels rise dramatically at these times in the cycle so he is able to buy in the down cycle)

 

 

He's got a bit less now!!

[tombgrt]

 

They are "now" changing their view...because in their opinion companies that have gone up so much and remained at certain prices now have stability....this is a Wall street fallacy...just look at the chart its safe here blah, blah, blah...buy quality and hold it forever...

 

It 's easy.

 

 

This so much. Many seems to gravitating to (acquisition) compounders. Hardly any valuation happens because many are happy to simply extrapolate past growth ad infinitum, hooray! Let's just buy quality at fair prices any price and get market beating returns without any work at all. Should work great!

 

[Guest Dazel]

http://www.reuters.com/article/2015/08/11/us-markets-global-idUSKCN0QG00F20150811

 

China's devaluation raises currency war fear as Greece strikes deal

 

funny how quickly things change! The ripple effect of China's move which has been feared for sometime is exporting deflation to the US...Nothing is immediate but the market will look ahead to first quarter now of next year and ask a question.

Will we have growth and inflation or will growth slow and will we have deflation?

 

Well we know that US exports have slowed on the strong dollar...China has just started a currency war out of desperation which will have all of asia joining in...at a time when Europe has QE...

 

I just can't find a better way to be situated than in Fairfax...if someone sees something better for low cost insurance against a correction and solid growth without it please let me know.

 

My probabilities just went up exponentially with today's events...Greek stability and the world seeing why the commodity markets have been demolished as China is slow down is real and scary.

 

 

[original mungerville]

http://www.reuters.com/article/2015/08/11/us-markets-global-idUSKCN0QG00F20150811

 

China's devaluation raises currency war fear as Greece strikes deal

 

funny how quickly things change! The ripple effect of China's move which has been feared for sometime is exporting deflation to the US...Nothing is immediate but the market will look ahead to first quarter now of next year and ask a question.

Will we have growth and inflation or will growth slow and will we have deflation?

 

Well we know that US exports have slowed on the strong dollar...China has just started a currency war out of desperation which will have all of asia joining in...at a time when Europe has QE...

 

I just can't find a better way to be situated than in Fairfax...if someone sees something better for low cost insurance against a correction and solid growth without it please let me know.

 

My probabilities just went up exponentially with today's events...Greek stability and the world seeing why the commodity markets have been demolished as China is slow down is real and scary.

 

Agree. This traps the Fed further by potentially adding fuel to the currency devaluations in Asia, maybe including Japan. The Fed is already out-of-the-picture - they can raise or delay but they can't ease at this point. With the $US relatively strong, the US stock market is exposed with no Fed to rescue it (finally) in the short term.

 

No need to worry too much though, they will come with QE4 at some point once there has been enough/some stock market pain (which is why my hedges now include not only stock market hedges but also silver and gold miners - both of which in my view provide significant asymmetry, especially from these price levels). At some point, a) either we will face massive persistent deflation, or b) people will realize its looking like QE to infinity. Basically, I don't think the debt of the developed world will be repaid.

 

Finally, its probably more productive to ignore this macro stuff, I am pretty sure that is a good rule because getting the timing of this is almost impossible. But at the same time, when currencies start jumping around like they have in the last year while commodities tank, and emerging stock markets follow, with Europe and Japan not that strong, at some point you have to ask yourself a question or two - even if you are a value investor. Having said this, I have been very negative for some time (not unlike Watsa) - more or less ever since I heard Greenspan speak when I first started value investing in 1999. He didn't take long to scare me so much on the macro side, that I thought hedges were important - even as a value investor. I have probably over-hedged and, if measured currently, my performance suffered significantly. At the same time, however, 1999 was a peak in valuations as was 2007 - and today we can't be that far off from a top (at least in real terms because under my "b)" scenario who knows where this stock market can go), so I'll take another measurement in 3-4 years and will be able to see whether these hedges were productive or not (they sure seemed productive measured in 2008/9). In any case, the key lesson I have learned is low cost/asymmetry is  critical to long-term sustainable hedges. And in terms of further reducing the long-term costs, some sort of strategy on when to press them a bit and when not to, while very difficult because it gets into timing to a degree, may be something to attempt - this however is still work in progress (I nailed 2008/09 moving to full hedges in the summer of 2007, however I have been too negative over the past few years).

 

Sorry for this personal ramble. I just thought I would share to ensure nobody thinks I am saying with certainty that the stock market is exposed to a correction in the short-term here. I have been wrong for some time now.

 

[Guest Dazel]

http://www.cnbc.com/2015/08/04/short-seller-who-called-financial-crisis-sees-calamity-ahead.html

 

Thanks OM.

most here remember Fleckenstein...he is reopening his short fund...he agrees with you.

 

No one is calling for a crash..a slow down will help he rational people of the world get back to some kind of normalcy.

 

 

[original mungerville]

http://www.cnbc.com/2015/08/04/short-seller-who-called-financial-crisis-sees-calamity-ahead.html

 

Thanks OM.

most here remember Fleckenstein...he is reopening his short fund...he agrees with you.

 

No one is calling for a crash..a slow down will help he rational people of the world get back to some kind of normalcy.

 

Yes, Fleckenstein - who is very level-headed - sees similar downside exposure for the stock market. He is also long precious metals and miners as he does believe the Fed will come back in.

[petec]

 

No one is calling for a crash..a slow down will help he rational people of the world get back to some kind of normalcy.

 

This is the one thing I disagree with.  Seems to me plenty of people are.

[Guest Dazel]

 

Fairfax does not need a crash to do very very well.

- the bond portfolio is ripping since quarter 2 end

-individual equity hedges are likely to have a large component geared toward commodity based companies that are levered as they did in 2008 as their bet is "against" china and commodities

-deflation hedges I will leave to the other thread...they are cheap insurance

 

Hoisington (Fairfax follows) believe a 2% 30 year treasury is in the cards and we will get there on this pace (it hit 2.4% in the first quarter) with China demand falling as they were the only demand left globally for "things"...with that we will see a "correction" in most companies as they are projecting china growth (Apple) in their own sales numbers....the equity hedges will work well..."they made as much on equity hedges in 2008" as they did from credit default swaps in 2007 and 2008...

 

I would expect we will get a global margin call after this historic China event...so the next few weeks will be important to avoid cross collateral forced selling (look at the commodity complex)...this would stall the September rate hike from the FED and allow the fed some wiggle room to talk of easing in October as they did last year to stop the 10% correction at that time.

 

I am not technical trader however we had a "death cross" today that we have not seen since 2011 where we had a 20% correction following it...and bond market spreads above treasuries also indicate an equity pull back!

 

Fairfax may get their wish here...but if nothing happens they will still do very well....

 

Dazel

[petec]

Do we have any visibility on the size of these?

 

-individual equity hedges are likely to have a large component geared toward commodity based companies that are levered as they did in 2008 as their bet is "against" china and commodities.

 

Do we have any visibility on the size of these?

 

 

"they made as much on equity hedges in 2008" as they did from credit default swaps in 2007 and 2008...

 

And is this true?!

[tombgrt]

 

They are "now" changing their view...because in their opinion companies that have gone up so much and remained at certain prices now have stability....this is a Wall street fallacy...just look at the chart its safe here blah, blah, blah...buy quality and hold it forever...

 

It 's easy.

 

 

This so much. Many seems to gravitating to (acquisition) compounders. Hardly any valuation happens because many are happy to simply extrapolate past growth ad infinitum, hooray! Let's just buy quality at fair prices any price and get market beating returns without any work at all. Should work great!

 

Damodaran hits the head on the nail in his latest blog post:

 

Don't just buy and hold: The other piece of advice you get from value investors is buy great companies and hold them forever. This advice does not hold up either, since the essence of investing for value is that you buy an asset for a price that is less than its value. A consistent version of value investing would push for you to buy a a stock when the price is below value (with perhaps a margin of safety built in) but you should sell the stock when the price exceeds value (perhaps, using the same margin of safety in the other direction), even if you have held it for only a short period. If Apple continues its drop below $100, I will be buying Apple for the third time in four years and if Facebook sees a dramatic drop off in price to $60 per share or lower, I will buy it for the second time. 

 

http://aswathdamodaran.blogspot.ca/2015/08/narrative-resets-revisiting-tech-trio.html

[Guest Dazel]

 

 

Petec,

 

Yes they made over $2b on equity hedges in 2008

and the have $1.7b short against individual securities

 

more importantly in the last month and half the bond portfolio has likely appreciated  over half a billion dollars in mark to market...

 

Its a good day for Fairfax....many here do not know their portfolio....and the investment community does not. Huge difference between now and the past is that the insurance business is now a very good business for Fairfax it was not in 2008 it was an ok business then.

 

Dazel

 

 

 

[Guest Dazel]

Fairfax Realized gains hedging gains in 2007 and 2008 were $2.435 billion in credit default portfolio and $2.23 billion in their equity hedging program see below. More importantly they bought about $5 billion worth U.S Muni's at a 7% yield in November 2008 as well as many very profitable equity positions...and they were mostly guaranteed by Berkshire Hathaway. Fairfax flourishes in corrections and during and after a market crash....bring on the blood bath in the market!

 

Fairfax 2007

credit default swaps 

$1.145b

 

equity hedges

$.143b

 

Fairfax 2008

 

Credit default swaps

$1.290b

 

equity hedges

$2.08 b

 

[Jurgis]

Damodaran hits the head on the nail in his latest blog post:

 

Don't just buy and hold: The other piece of advice you get from value investors is buy great companies and hold them forever. This advice does not hold up either, since the essence of investing for value is that you buy an asset for a price that is less than its value. A consistent version of value investing would push for you to buy a a stock when the price is below value (with perhaps a margin of safety built in) but you should sell the stock when the price exceeds value (perhaps, using the same margin of safety in the other direction), even if you have held it for only a short period. If Apple continues its drop below $100, I will be buying Apple for the third time in four years and if Facebook sees a dramatic drop off in price to $60 per share or lower, I will buy it for the second time. 

 

http://aswathdamodaran.blogspot.ca/2015/08/narrative-resets-revisiting-tech-trio.html

 

Although I am against buying great companies at any price, I think Damodaran is being naive that you can make great money by darting in and out of a stock in a great company. He may make money on Apple now, but that approach missed most of the gains in Apple or Google or Microsoft for 10-20 years when huge returns were made. To get that you really had to buy and hold.

[petec]

Fairfax Realized gains hedging gains in 2007 and 2008 were $2.435 billion in credit default portfolio and $2.23 billion in their equity hedging program see below. More importantly they bought about $5 billion worth U.S Muni's at a 7% yield in November 2008 as well as many very profitable equity positions...and they were mostly guaranteed by Berkshire Hathaway. Fairfax flourishes in corrections and during and after a market crash....bring on the blood bath in the market!

 

Fairfax 2007

credit default swaps 

$1.145b

 

equity hedges

$.143b

 

Fairfax 2008

 

Credit default swaps

$1.290b

 

equity hedges

$2.08 b

 

Thanks - I know them pretty well but had forgotten the hedging (as opposed to CDS) gains and didn't know about the $1.7bn in individual hedges. 

 

*Totally* agree about the insurance business.

 

[TwoCitiesCapital]

Damodaran hits the head on the nail in his latest blog post:

 

Don't just buy and hold: The other piece of advice you get from value investors is buy great companies and hold them forever. This advice does not hold up either, since the essence of investing for value is that you buy an asset for a price that is less than its value. A consistent version of value investing would push for you to buy a a stock when the price is below value (with perhaps a margin of safety built in) but you should sell the stock when the price exceeds value (perhaps, using the same margin of safety in the other direction), even if you have held it for only a short period. If Apple continues its drop below $100, I will be buying Apple for the third time in four years and if Facebook sees a dramatic drop off in price to $60 per share or lower, I will buy it for the second time. 

 

http://aswathdamodaran.blogspot.ca/2015/08/narrative-resets-revisiting-tech-trio.html

 

Although I am against buying great companies at any price, I think Damodaran is being naive that you can make great money by darting in and out of a stock in a great company. He may make money on Apple now, but that approach missed most of the gains in Apple or Google or Microsoft for 10-20 years when huge returns were made. To get that you really had to buy and hold.

 

As someone who held Google for years, I respectfully disagree. Google's multiple varied pretty wildly since I started buying it in 2008. And it's a great example that you don't have to "dart in and out" and simply make intelligent purchases and sales every once in awhile.

 

Let's consider a history of Google's prices and trailing 12M EPS multiple from 2006 and on:

 

Q4 2006: EPS $5.00    P/E ~ 48

Q2 2007: EPS $5.94    P/E ~ 43

Q4 2007: EPS $5.91    P/E ~ 44

Q2 2008: EPS  $7.69    P/E ~ 33

Q4 2008: EPS $6.71 (or ~$8.20ish w/o AOL write down)    P/E ~ 22

Q2 2009: EPS $7.24 (OR ~$8.75ish w/o AOL write down)    P/E ~ 26

Q4 2009: EPS $10.17    P/E ~ 26

Q2 2010: EPS $11.53    P/E ~ 21

Q4 2010: EPS $12.87    P/E ~ 24

Q2 2011: EPS $11.63    P/E ~ 24

Q4 2011: EPS $15.37    P/E ~ 20

Q2 2012: EPS $12.62    P/E ~ 25

Q4 2012: EPS $16.48    P/E ~ 24

Q2 2013: EPS $17.11    P/E ~ 25

Q4 2013: EPS $19.97    P/E ~ 30

Q2 2014: EPS $20.59    P/E ~ 28

Q4 2014: EPS $20.36    P/E ~ 26

Q2 2015: EPS $20.50    P/E ~ 33

 

A simple rule based formula of buying it around 20x and selling it around 30x would have yielded great results. You would have avoided it in 2006 and 2007 (prices around $350-$400) and been buying it at it's lows in late 2008 and early 2009 (prices around $130-185). You would have bought more in late 2011 (prices around $300-320) and you would have held all of the way through late 2013 (prices around $550-550). All in all, you're return would've killed it.

 

Initial purchases compounded somewhere between 22% and 33% per annum depending on starting and ending prices. Purchases at the end of 2011 compounded at  25-50% depending on starting and ending prices. People who purchased at the beginning of 2006 at $200 have only compounded around 10-15% per year. Even if you were fortunate enough to purchase Google at the lowest price ever, right after it's IPO, your compound annual returns are likely less those who purchased/sold thoughtfully with respect to the underlying value. BTW, that compound return would have been about 20-25% per annum. That return would be significantly higher had they sold back in 2004ish/2005ish, and used the cash to repurchased in 2008, 2009, and 2011, and then sold again in 2013. We're not calling tops and bottoms here - simply buying and selling within a range.

 

So, what would've happened if you held in late 2013 instead of selling. When you'd have about an additional 20% --- all of which was delivered in the last month. Returns from 2013-2015 were negative until July and we only got to positive earnings by Google obtaining the loftiest multiple it's had since the 2008 despite growth levels being much lower than they were back then. I think now, more than ever, is the time to be using your simple, multiple-based rule to be selling the position and to pick it back up once prices revert to 20-22x.

 

 

[Jurgis]

Sorry, but I think you are just cherry picking the data looking backwards.

 

Edit: it is easy to say now "A simple rule based formula of buying it around 20x and selling it around 30x". But actually if someone waited for 20x, they would have waited until 2011. So you would say "no, I meant around 20x and that includes 22x". But why 22x? why not 30x? ;) It's easy to do this now. Same with "sell at 30x". It fits the data nicely. But if you looked at something like NFLX, you'd have to make a different story.

 

So, sorry, but I don't believe this works going forward as nicely as it works looking back.

 

Edit2: There's another issue with the Google story above. You assume someone would have held cash (or what?) through 2006 to 2008 and then pounced. That looks great looking back, but there are at least couple issues with this. First, holding cash is huge opportunity risk (and if you held something else, you would have to account for selling whatever you held in 2008 at the bottom). Second, the only reason there was opportunity to buy Google at 22x PE in 2008 was the once-in-generation market crash. What if there was no crash? Would the someone held cash to 2011? Third, if we are looking for great returns starting to buy in 2008, then Google is possibly one of the mediocre ones...

 

Anyway, I think I should shut up, since I might persuade someone that buying great companies at any price is the way to go. ;)

[TwoCitiesCapital]

Sorry, but I think you are just cherry picking the data looking backwards.

 

Edit: it is easy to say now "A simple rule based formula of buying it around 20x and selling it around 30x". But actually if someone waited for 20x, they would have waited until 2011. So you would say "no, I meant around 20x and that includes 22x". But why 22x? why not 30x? ;) It's easy to do this now. Same with "sell at 30x". It fits the data nicely. But if you looked at something like NFLX, you'd have to make a different story.

 

So, sorry, but I don't believe this works going forward as nicely as it works looking back.

 

Edit2: There's another issue with the Google story above. You assume someone would have held cash (or what?) through 2006 to 2008 and then pounced. That looks great looking back, but there are at least couple issues with this. First, holding cash is huge opportunity risk (and if you held something else, you would have to account for selling whatever you held in 2008 at the bottom). Second, the only reason there was opportunity to buy Google at 22x PE in 2008 was the once-in-generation market crash. What if there was no crash? Would the someone held cash to 2011? Third, if we are looking for great returns starting to buy in 2008, then Google is possibly one of the mediocre ones...

 

Anyway, I think I should shut up, since I might persuade someone that buying great companies at any price is the way to go. ;)

 

You'll notice that the numbers I reported were only for every 6 months. There were definitely period of time where it traded at 20x, or lower, in this period that aren't captured by the individual points. The low point in Nov of 2008 was right around 15x trailing 12 month earnings. I was merely illustrating the range of multiples that it traded in and not trying to capture the absolute highs and lows of the range.

 

Two, it's not cherry picking an example. It's pretty much exactly what I did.

 

I purchased a massive position in January of 2009 @ $308. I would have bought more, but I was buying BofA between $2.50 and $4.00 at the same time. I purchased more through 2010 and considered adding in 2011 but already had a very large position relative to my portfolio. From that point, I simply waited.  The stock price was basically range-bound for 2010 through 2013 until it exploded at the end of the year. I started trimming at $900 (around 26x earnings at the time) and had sold the last of the shares when it hit $1200 (around 30x earnings at the time).

 

Then I watched the shares do absolutely nothing from 2013 until the last 3 weeks. Not cherry picking. My experience.

 

Maybe it was just luck - maybe Goog will never trade at a 20x multiple again. I will simply say if that is the case, than it's highly likely the returns you'd get elsewhere are more attractive than what you'll likely get out of Google. Google is only worth owning if you can get it at a signficantly lower multiple. People who did this significantly outperformed the buy/hold mantra over the same period of time (not that buying and holding didn't provide satisfactory results)

[petec]

Sorry, but I think you are just cherry picking the data looking backwards.

 

Edit: it is easy to say now "A simple rule based formula of buying it around 20x and selling it around 30x". But actually if someone waited for 20x, they would have waited until 2011. So you would say "no, I meant around 20x and that includes 22x". But why 22x? why not 30x? ;) It's easy to do this now. Same with "sell at 30x". It fits the data nicely. But if you looked at something like NFLX, you'd have to make a different story.

 

So, sorry, but I don't believe this works going forward as nicely as it works looking back.

 

Edit2: There's another issue with the Google story above. You assume someone would have held cash (or what?) through 2006 to 2008 and then pounced. That looks great looking back, but there are at least couple issues with this. First, holding cash is huge opportunity risk (and if you held something else, you would have to account for selling whatever you held in 2008 at the bottom). Second, the only reason there was opportunity to buy Google at 22x PE in 2008 was the once-in-generation market crash. What if there was no crash? Would the someone held cash to 2011? Third, if we are looking for great returns starting to buy in 2008, then Google is possibly one of the mediocre ones...

 

Anyway, I think I should shut up, since I might persuade someone that buying great companies at any price is the way to go. ;)

 

You'll notice that the numbers I reported were only for every 6 months. There were definitely period of time where it traded at 20x, or lower, in this period that aren't captured by the individual points. The low point in Nov of 2008 was right around 15x trailing 12 month earnings. I was merely illustrating the range of multiples that it traded in and not trying to capture the absolute highs and lows of the range.

 

Two, it's not cherry picking an example. It's pretty much exactly what I did.

 

I purchased a massive position in January of 2009 @ $308. I would have bought more, but I was buying BofA between $2.50 and $4.00 at the same time. I purchased more through 2010 and considered adding in 2011 but already had a very large position relative to my portfolio. From that point, I simply waited.  The stock price was basically range-bound for 2010 through 2013 until it exploded at the end of the year. I started trimming at $900 (around 26x earnings at the time) and had sold the last of the shares when it hit $1200 (around 30x earnings at the time).

 

Then I watched the shares do absolutely nothing from 2013 until the last 3 weeks. Not cherry picking. My experience.

 

Maybe it was just luck - maybe Goog will never trade at a 20x multiple again. I will simply say if that is the case, than it's highly likely the returns you'd get elsewhere are more attractive than what you'll likely get out of Google. Google is only worth owning if you can get it at a signficantly lower multiple. People who did this significantly outperformed the buy/hold mantra over the same period of time (not that buying and holding didn't provide satisfactory results)

 

Great discussion guys.  But with respect to TCC, you *are* cherry picking an example because you're cherry picking one that worked.  I don't think anyone here would dispute that prices fluctuate around IV and that buying below IV and selling above generates probably the best compound return.  The problem comes in:

 

1) Calculating IV.  I can think of plenty of examples where I've tried and failed to do what you did, because I got the IV wrong.  Things can just change fast.

 

2) Getting a return (or having the discipline to not need one) when you're not invested in the stock you're trading in and out of.

 

I am *not* arguing that one should hold at any price - I definitely aim to sell when things are glaringly overvalued.  But I'd never have had the confidence that 30x was glaringly overvalued for Google because of what revenue accelerations with extraordinarily high incremental earnings can do to profits.  So I think that, most of the time, your experience is tough to repeat (for me at least).

[tombgrt]

The problem comes with calculating IV? Isn't that exactly what you are trying to do when actively investing? Why bother then if you don't have a raw estimate of IV? Sure with high growth companies things might be harder and changing faster but the principles stay the same. This doesn't mean you shouldn't at least try. If you don't you could just as well go for an ETF and sit back no?

 

In the case of GOOG (with very raw numbers): I'd say that at for example a 400B market cap around end Q4 2013 - Q1 2014, I would easily have found better value. Assuming around $13B in earnings in 2013, you'd need 20% earnings growth for the next 5 years and an earnings multiple of 25 to get a double from a $400B market cap. That is a 15% return over 5 years and a very high target for such a large company. I aim for much higher to hopefully get that 15% return over the longer term.

Anyway it's certainly a point where I would consider selling. You get zero return if you get just 12% earnings growth for 5 years and an earnings multiple of 18.

 

I understand there are taxes involved for most but not for me so that makes it even easier.

[TwoCitiesCapital]

The problem comes with calculating IV? Isn't that exactly what you are trying to do when actively investing? Why bother then if you don't have a raw estimate of IV? Sure with high growth companies things might be harder and changing faster but the principles stay the same. This doesn't mean you shouldn't at least try. If you don't you could just as well go for an ETF and sit back no?

 

In the case of GOOG (with very raw numbers): I'd say that at for example a 400B market cap around end Q4 2013 - Q1 2014, I would easily have found better value. Assuming around $13B in earnings in 2013, you'd need 20% earnings growth for the next 5 years and an earnings multiple of 25 to get a double from a $400B market cap. That is a 15% return over 5 years and a very high target for such a large company. I aim for much higher to hopefully get that 15% return over the longer term.

Anyway it's certainly a point where I would consider selling. You get zero return if you get just 12% earnings growth for 5 years and an earnings multiple of 18.

 

I understand there are taxes involved for most but not for me so that makes it even easier.

 

This is my only point. If you followed this strategy, you may never reach a point where you re-enter the position in Google again. If that is the case, it's likely that your returns from whatever you put the funds into likely did far better because it's not a high bar to outperform a 3% earnings yield. If you do get a chance to re-enter Google again, then it's because profits absolutely exploded (possible, but not likely at this point) or because the stock price corrected. The later would be another validation of the strategy.

 

You're either banking on the unlikely explosion in earnings growth or the greater fool theory. I don't like to rely on either which is why I used the strategy of buying around 20x and selling around 30x. I still watch it, but I certainly won't be caught holding it for 5-10 years as the stock price goes nowhere like what happened between 2007 and 2013.

[Alekbaylee]

Fairfax has started a position in Biglari.  ???

 

http://www.octafinance.com/top-fairfax-financial-holdings-can-8-positions-in-q2-2015/160266/

[rb]

It's just half a million. Could be just a tracker, but who knows.

[gfp]

More likely it was for the tender offer arbitrage.  The spreads were large (3% in a couple weeks) and $500k worth is probably all they were able to get.  BH is/was pretty illiquid.  Or maybe they are going to buy more - but somehow I doubt it.  It could never be a meaningful position.

 

It's just half a million. Could be just a tracker, but who knows.