2017 Annual Letter

[petec]

Some of these holdings are attractively priced now... if they don't repurchase them, what will I be led to believe?

 

Do you think they have a lot of capacity to add equity exposure? I fear they’re close to their practical limit. The selloff they need is in corporate and long dated bonds.

 

That wasn’t the point I was making.

 

They said that they will try not to repeat the costly mistake.  How else can they avoid further opportunity cost than to buy them back?

 

They bought these equities initially and then stated something about how they had learned to hold high quality shares for the long term.  Then they sold soon afterwards and now they say they have learned a lot about how much the sale has cost the shareholders.

 

So if they don’t buy them back, what am I then to think?

 

I understand your point. Mine is that to buy them now they’d likely have to sell something else they like. It’d be a two-part decision, not a one-part decision. Which makes it harder to make inferences and for you to decide what to think.

[ERICOPOLY]

Some of these holdings are attractively priced now... if they don't repurchase them, what will I be led to believe?

 

Do you think they have a lot of capacity to add equity exposure? I fear they’re close to their practical limit. The selloff they need is in corporate and long dated bonds.

 

That wasn’t the point I was making.

 

They said that they will try not to repeat the costly mistake.  How else can they avoid further opportunity cost than to buy them back?

 

They bought these equities initially and then stated something about how they had learned to hold high quality shares for the long term.  Then they sold soon afterwards and now they say they have learned a lot about how much the sale has cost the shareholders.

 

So if they don’t buy them back, what am I then to think?

 

I understand your point. Mine is that to buy them now they’d likely have to sell something else they like. It’d be a two-part decision, not a one-part decision. Which makes it harder to make inferences and for you to decide what to think.

 

The comment in the 2017 letter is somewhat bizarre if they both regret selling, and yet are at the same time believing that their current holding are more appropriate going forward.  Why not just say they made the right choice?

 

A year ago, one might have read their comments and wondered if the valuations were simply too rich for them.  I'm feeling rather confident that valuation won't be the reason if they decide not to go back into USB and WFC at this point. 

 

Anything can be sold to reinstate those positions.  It's either the right thing to do or it isn't.  If if isn't, then what's up with their comments about regrets?

[ERICOPOLY]

In summary, I feel like they are sending mixed signals.

[petec]

 

The comment in the 2017 letter is somewhat bizarre if they both regret selling, and yet are at the same time believing that their current holding are more appropriate going forward.  Why not just say they made the right choice?

 

 

I don't see it that way. Even if the valuations are the same the alternatives are different. Clearly it was a mistake, for example, to sell JNJ and buy Eurobank. However several years later selling Eurobank to buy JNJ might be just as big a mistake, even if JNJ is on the same valuation as it was back then, because Eurobank's prospects might look different now.

 

I think they're saying they should have held onto those stocks for a lot longer, not that they are necessarily the best things to own today. If they buy stocks like that again I expect them to hold for longer. That's all I infer.

 

I may be wrong.

 

[ERICOPOLY]

They said they were 'required' to sell these holdings --why required to sell these holdings?:

 

Another cost of our hedging, and why it is extremely unlikely that we will repeat this in

the future, is that it required us to sell some wonderful long term common stock holdings, as shown below:

 

 

EDIT: Were these holdings in particular posted as collateral for the hedging?

[petec]

They said they were 'required' to sell these holdings --why required to sell these holdings?:

 

Another cost of our hedging, and why it is extremely unlikely that we will repeat this in

the future, is that it required us to sell some wonderful long term common stock holdings, as shown below:

 

 

EDIT: Were these holdings in particular posted as collateral for the hedging?

 

As I recall the hedges required them to post cash collateral on a regular basis. So they weren’t required to sell these holdings particularly, but they chose to. Again I may be wrong but I remember a lot of debate on the board at that time as to whether these sales had been motivated by the cash calls and it seems they were.

[ERICOPOLY]

They said they were 'required' to sell these holdings --why required to sell these holdings?:

 

Another cost of our hedging, and why it is extremely unlikely that we will repeat this in

the future, is that it required us to sell some wonderful long term common stock holdings, as shown below:

 

 

EDIT: Were these holdings in particular posted as collateral for the hedging?

 

As I recall the hedges required them to post cash collateral on a regular basis. So they weren’t required to sell these holdings particularly, but they chose to. Again I may be wrong but I remember a lot of debate on the board at that time as to whether these sales had been motivated by the cash calls and it seems they were.

 

And here is what they said in the 2013 letter -- no mention of a 'requirement' to sell.  It has migrated from 'concern' to 'required':

 

Given our concern about financial markets and the excellent

returns we achieved on our long term investments, we reluctantly decided to sell our long term holdings of Wells

Fargo (a gain of 125%), Johnson & Johnson (a gain of 47%) and U.S. Bancorp (a gain of 135%).

 

[petec]

They said they were 'required' to sell these holdings --why required to sell these holdings?:

 

Another cost of our hedging, and why it is extremely unlikely that we will repeat this in

the future, is that it required us to sell some wonderful long term common stock holdings, as shown below:

 

 

EDIT: Were these holdings in particular posted as collateral for the hedging?

 

As I recall the hedges required them to post cash collateral on a regular basis. So they weren’t required to sell these holdings particularly, but they chose to. Again I may be wrong but I remember a lot of debate on the board at that time as to whether these sales had been motivated by the cash calls and it seems they were.

 

And here is what they said in the 2013 letter -- no mention of a 'requirement' to sell.  It has migrated from 'concern' to 'required':

 

Given our concern about financial markets and the excellent

returns we achieved on our long term investments, we reluctantly decided to sell our long term holdings of Wells

Fargo (a gain of 125%), Johnson & Johnson (a gain of 47%) and U.S. Bancorp (a gain of 135%).

 

Yes - they definitely didn't admit at the time that the sale was to finance the hedges. Someone on here figured that out - can't remember who.

[shalab]

There are two issues with this sort of thing:

    - they are less than forthcoming in a lot of places - I believe they still have their CPI hedges on in the US. Any orangutan living in the US could have said that wages and prices are increasing. Even in Canada, the house prices have been going through the roof totally out of sync with incomes. So has been the case with income in US and especially so in Canada.

    - the level of criticism leveled at FFH for their behavior is very very low in this board than warranted

They said they were 'required' to sell these holdings --why required to sell these holdings?:

 

Another cost of our hedging, and why it is extremely unlikely that we will repeat this in

the future, is that it required us to sell some wonderful long term common stock holdings, as shown below:

 

 

EDIT: Were these holdings in particular posted as collateral for the hedging?

 

As I recall the hedges required them to post cash collateral on a regular basis. So they weren’t required to sell these holdings particularly, but they chose to. Again I may be wrong but I remember a lot of debate on the board at that time as to whether these sales had been motivated by the cash calls and it seems they were.

 

And here is what they said in the 2013 letter -- no mention of a 'requirement' to sell.  It has migrated from 'concern' to 'required':

 

Given our concern about financial markets and the excellent

returns we achieved on our long term investments, we reluctantly decided to sell our long term holdings of Wells

Fargo (a gain of 125%), Johnson & Johnson (a gain of 47%) and U.S. Bancorp (a gain of 135%).

 

Yes - they definitely didn't admit at the time that the sale was to finance the hedges. Someone on here figured that out - can't remember who.

[petec]

There are two issues with this sort of thing:

    - they are less than forthcoming in a lot of places - I believe they still have their CPI hedges on in the US. Any orangutan living in the US could have said that wages and prices are increasing. Even in Canada, the house prices have been going through the roof totally out of sync with incomes. So has been the case with income in US and especially so in Canada.

    - the level of criticism leveled at FFH for their behavior is very very low in this board than warranted

They said they were 'required' to sell these holdings --why required to sell these holdings?:

 

Another cost of our hedging, and why it is extremely unlikely that we will repeat this in

the future, is that it required us to sell some wonderful long term common stock holdings, as shown below:

 

 

EDIT: Were these holdings in particular posted as collateral for the hedging?

 

As I recall the hedges required them to post cash collateral on a regular basis. So they weren’t required to sell these holdings particularly, but they chose to. Again I may be wrong but I remember a lot of debate on the board at that time as to whether these sales had been motivated by the cash calls and it seems they were.

 

And here is what they said in the 2013 letter -- no mention of a 'requirement' to sell.  It has migrated from 'concern' to 'required':

 

Given our concern about financial markets and the excellent

returns we achieved on our long term investments, we reluctantly decided to sell our long term holdings of Wells

Fargo (a gain of 125%), Johnson & Johnson (a gain of 47%) and U.S. Bancorp (a gain of 135%).

 

Yes - they definitely didn't admit at the time that the sale was to finance the hedges. Someone on here figured that out - can't remember who.

 

The CPI bet is valued at virtually zero. There’s no point selling it. It’s what the equity hedges should have been all along: a low probability high return holding.

 

House prices rising ahead of incomes is likely to be deflationary at some point, all else equal. The buildup of debt is exactly what they’ve been worrying about. They badly misjudged how long it could continue (and, perhaps, whether it would eventually lead to inflation not deflation given fiat monetary policy).