MKL - Markel Corp

[Guest hellsten]

the largest generators of wealth in America historically have been, first, real estate (investors have the option at the expense of the banks), and, second, technology (which relies almost completely on trial and error).

 

I find this hard to believe without further context. Without technology we would live in trees. Is the quote from the book "Antifragile"?

 

Yes! From the paragraph “Life Is Long Gamma”, page 185 of the hardcover version of the book.

 

Anyway, I don’t know if he is right about real estate and technology. I believe, though, he is quite right about banks! ;)

 

giofranchi

 

Yes, I agree about the banks. But I still own a few of them as they just recently blew up. With the help of randomness they might blow up again very soon :)

 

http://www.empiricalzeal.com/2012/12/21/what-does-randomness-look-like/

[bargainman]

years ago I read a book or article on the richest people in the US.  At that time it basically said that the majority of millionaires made their money via realestate, and then the rest made it through running their own businesses.  It makes sense given the optionality and the high amount an individual can leverage themselves.  I think I read this book before the 90s tech boom though, so I'm sure some things have changed.

[Junto]

the largest generators of wealth in America historically have been, first, real estate (investors have the option at the expense of the banks), and, second, technology (which relies almost completely on trial and error).

 

I find this hard to believe without further context. Without technology we would live in trees. Is the quote from the book "Antifragile"?

 

Yes! From the paragraph “Life Is Long Gamma”, page 185 of the hardcover version of the book.

 

Anyway, I don’t know if he is right about real estate and technology. I believe, though, he is quite right about banks! ;)

 

giofranchi

 

you would be very wrong then, as it relates to banks. It is flashy to say that and if you look across the spectrum, but on an individual bank level massive amounts of wealth have been created in the banking sector by prudent and solid operators.

[jay21]

At first glance, this deal appears really good.  ALTE may even be a better underwriter than MKL so ALTE with MKL's investing may be more valuable than stand alone MKL.  Anyone done any digging on the underwriting?

[WhoIsWarren]

At first glance, this deal appears really good.  ALTE may even be a better underwriter than MKL so ALTE with MKL's investing may be more valuable than stand alone MKL.  Anyone done any digging on the underwriting?

 

I had a little look at ALTE's underwriting, though not finished yet.

 

Max Capital (Alterra's predecessor) was only set up in 1999 or so, so we only have a little over a decade of numbers.  It naturally took Max Capital a number of years to ramp up.  I don't have the figures in front of me now, but I think it was 2003/04 before NPE started to kind of level off.  So from 2000 to 2003/04, combined ratios were well north of 100% as operating expenses were spread over too-few policies ratio.  I didn't get a chance to see how the expense ratio behaved in those early years, but what I'm trying to say is that we don't have a lot of years to judge Alterra's success, especially given the nature of the insurance they write (60% reinsurance, 40% long-tailed).  Anyone disagree?

 

I looked at the reserve development over the years.  They had mostly reserve deficiencies up until 2005 or so, and mainly reserve redundancies since then.  Perhaps there's a reason for this particular pattern, but it's similar to many companies I look at.  Overall, adding up all the deficiencies / redundancies since 2000, they've had net redundancies.  Then again, given their deficiencies came at a time when their premiums written were small, that's what you would expect.  In conclusion, their reserving looks ok, but I wouldn't have thought in the same league as Markel (or Fairfax).  That's more or less what was said on the conference call.

 

Markel have undoubtedly done their homework on Alterra's underwriting and reserving, presumably they're very happy.  In underwriting, the devil is in the detail: the policy terms and conditions, levels of customer service etc.  I trust the guys at Markel to be honest and competent in their analysis and valuation of Alterra.  I'd still like to know more about why this deal happened.  Why Alterra? Is there something really special about the company?  Did Markel look seriously at other companies and did Alterra talk to any other suitors?  Did Markel feel they needed more scale / a broader scope?  Or was this opportunistic, a reflection of the insurance sector's cheapness?

 

Anyone anything else to add?

 

 

[twacowfca]

At first glance, this deal appears really good.  ALTE may even be a better underwriter than MKL so ALTE with MKL's investing may be more valuable than stand alone MKL.  Anyone done any digging on the underwriting?

 

I had a little look at ALTE's underwriting, though not finished yet.

 

Max Capital (Alterra's predecessor) was only set up in 1999 or so, so we only have a little over a decade of numbers.  It naturally took Max Capital a number of years to ramp up.  I don't have the figures in front of me now, but I think it was 2003/04 before NPE started to kind of level off.  So from 2000 to 2003/04, combined ratios were well north of 100% as operating expenses were spread over too-few policies ratio.  I didn't get a chance to see how the expense ratio behaved in those early years, but what I'm trying to say is that we don't have a lot of years to judge Alterra's success, especially given the nature of the insurance they write (60% reinsurance, 40% long-tailed).  Anyone disagree?

 

I looked at the reserve development over the years.  They had mostly reserve deficiencies up until 2005 or so, and mainly reserve redundancies since then.  Perhaps there's a reason for this particular pattern, but it's similar to many companies I look at.  Overall, adding up all the deficiencies / redundancies since 2000, they've had net redundancies.  Then again, given their deficiencies came at a time when their premiums written were small, that's what you would expect.  In conclusion, their reserving looks ok, but I wouldn't have thought in the same league as Markel (or Fairfax).  That's more or less what was said on the conference call.

 

Markel have undoubtedly done their homework on Alterra's underwriting and reserving, presumably they're very happy.  In underwriting, the devil is in the detail: the policy terms and conditions, levels of customer service etc.  I trust the guys at Markel to be honest and competent in their analysis and valuation of Alterra.  I'd still like to know more about why this deal happened.  Why Alterra? Is there something really special about the company?  Did Markel look seriously at other companies and did Alterra talk to any other suitors?  Did Markel feel they needed more scale / a broader scope?  Or was this opportunistic, a reflection of the insurance sector's cheapness?

 

Anyone anything else to add?

 

I think some of their long tail reserves may need strengthening. But that's often the nature of the beast with things like A&E, workers comp etc.  A&E losses industry wide are flatlining instead of declining as some courts are starting to allow claims by people who MIGHT sufferin the future from asbestos exposure many decades ago.  I suppose the next phase will be cases where plantiffs will claim damages because their chromosomes were exposed to asbestos in utero as a result of their parents exposure to asbestos decades before they were born. 

 

Evidently, Markel thinks the reserving issues are manageable and not a big deal compared to what they can do by revamping Altera's portfolio to include stocks in their asset mix.  They hinted on their recent conference call that Alterra is going to follow Markel's guidance and begin that asset makeover even before the acquisition is completed.  The acquisition is almost certain to go through.  No one appears likely to top Markel's offer.  I think it's a good deal for Markel, assuming that reserving issues are minor.

[ShahKhezri]

I'd really like to see when it becomes available, if anyone else was interest in ALTE as well.  I don't doubt MKL's dd.  I read the transcript, the presentations and the William Blair review of the transaction (nothing earth shattering).

 

Valuations for the P&C group is bifurcated right now, you have CB, RLI, MKL, HCC, WRB, RNR, ESGR, TRV , ACGL, ACE (barely) trading above P/B and and all of the others at .5-.8x. 

 

I think about Lynch and what he said about Exxon in One Up on Wall Street.  You have BRK buying shares at <1.20x.  Y and TRH last year, MKL and ALTE, FSR recently, I wouldn't be surprised if there is more consolidation.  MRH went up 6% as a result of this news.  1.  You take out capacity, 2.  If you think you have superior investment acumen and you can repair a portfolio from a sub 2-3% total return to 4-6% the math starts to make sense. 

 

The Company doubled it's size overnight and if you think exposure is growing and pricing per unit of exposure is stabilizing...it's a no-brainer.  WRB would be my next guess to acquire. 

 

I'll be selling my positions in AAP and BBY over the next 30 days to double my position in MKL. 

[giofranchi]

the largest generators of wealth in America historically have been, first, real estate (investors have the option at the expense of the banks), and, second, technology (which relies almost completely on trial and error).

 

I find this hard to believe without further context. Without technology we would live in trees. Is the quote from the book "Antifragile"?

 

Yes! From the paragraph “Life Is Long Gamma”, page 185 of the hardcover version of the book.

 

Anyway, I don’t know if he is right about real estate and technology. I believe, though, he is quite right about banks! ;)

 

giofranchi

 

you would be very wrong then, as it relates to banks. It is flashy to say that and if you look across the spectrum, but on an individual bank level massive amounts of wealth have been created in the banking sector by prudent and solid operators.

 

Thank you Junto, you really stirred my curiosity! If you have read some posts of mine, you know what I look for while investing my firm’s fcf. And I am always on the lookout to find other investments that might match my criteria. And I would be much grateful, if you could provide some suggestions in the banking sector! Maybe starting a new thread titled: “Owner-operators with an outstanding track-record in the banking sector”. Or something like that… I guess it could interest almost everybody on this board!  :)

 

giofranchi

[frith2012]

The banking owner operator at Buffett always discusses in Omaha is Bob Wilmers of M &T bank. If nothing else, his annual letter is always worth a read.

 

[giofranchi]

The banking owner operator at Buffett always discusses in Omaha is Bob Wilmers of M &T bank. If nothing else, his annual letter is always worth a read.

 

Thank you frith2012, I will surely check it out!

 

giofranchi

 

 

[twacowfca]

the largest generators of wealth in America historically have been, first, real estate (investors have the option at the expense of the banks), and, second, technology (which relies almost completely on trial and error).

 

I find this hard to believe without further context. Without technology we would live in trees. Is the quote from the book "Antifragile"?

 

Yes! From the paragraph “Life Is Long Gamma”, page 185 of the hardcover version of the book.

 

Anyway, I don’t know if he is right about real estate and technology. I believe, though, he is quite right about banks! ;)

 

giofranchi

 

you would be very wrong then, as it relates to banks. It is flashy to say that and if you look across the spectrum, but on an individual bank level massive amounts of wealth have been created in the banking sector by prudent and solid operators.

 

Thank you Junto, you really stirred my curiosity! If you have read some posts of mine, you know what I look for while investing my firm’s fcf. And I am always on the lookout to find other investments that might match my criteria. And I would be much grateful, if you could provide some suggestions in the banking sector! Maybe starting a new thread titled: “Owner-operators with an outstanding track-record in the banking sector”. Or something like that… I guess it could interest almost everybody on this board!  :)

 

giofranchi

 

That would be a very short list indeed.  I have a deceased relative, a great uncle who lived to be over one hundred years old  who would be on it, but that's it.  Family lore was that he wouldn't make a loan unless you could prove that you didn't need it.  My father, who had been a bank examiner in his 20's and I, along with my sister, invested in a local start up bank at an opportune time in the 1980's. It became a ten bagger after it was acquired, and we sold our shares in 2000.  Later the acquirer got caught up in the 2008 meltdown and lost most of their equity.

 

There is a book, 100 to 1 in the Stock Market, that describes hundreds of companies that increased their market value 100 times or more during rolling periods from the 1930's through the 1970's.  There are a number of insurance companies in that elite group, but not one bank.

 

Here's how the deck is stacked against bankers.  I have an acquaintance who owns a few small banks in a mostly rural or small town state.  His banks were well run with few bad loans and none of the toxic mortgages that caused the meltdown.  The FDIC increased his required contribution to the FDIC insurance pool by $1.5M, ten times his former rate, to pay for all the banks that went broke.  Then, he had to come up with $15M out of his own pocket to strengthen the capital of his banks even though there was nothing wrong with his balance sheet and his loans were performing satisfactorily.

 

And the beat goes on.  That's why I like (some) insurance companies better than banks, despite our family's modest history of investing in banks.

[giofranchi]

Family lore was that he wouldn't make a loan unless you could prove that you didn't need it. 

 

twacowfca,

that quote of yours is a wonderful Xmas present!  ;)

 

There is a book, 100 to 1 in the Stock Market, that describes hundreds of companies that increased their market value 100 times or more during rolling periods from the 1930's through the 1970's.  There are a number of insurance companies in that elite group, but not one bank.

 

I will purchase that book right away, and read it asap!

 

I have a deceased relative, a great uncle who lived to be over one hundred years old 

 

May you follow in your great uncle’s footsteps!  :)

 

giofranchi

 

 

 

[Green King]

Family lore was that he wouldn't make a loan unless you could prove that you didn't need it.

 

I too think this is a great rule to live by and one that is as solid as it gets.

 

Here's how the deck is stacked against bankers.  I have an acquaintance who owns a few small banks in a mostly rural or small town state.  His banks were well run with few bad loans and none of the toxic mortgages that caused the meltdown.  The FDIC increased his required contribution to the FDIC insurance pool by $1.5M, ten times his former rate, to pay for all the banks that went broke.  Then, he had to come up with $15M out of his own pocket to strengthen the capital of his banks even though there was nothing wrong with his balance sheet and his loans were performing satisfactorily.

 

Interesting maybe there is a opportunity open for major consolidation of these great small community operated banks but Berkshire or Leucadia National Corp. or a good firm value firm seeing partial ownership and create a holding company to make it more efficient. (correct me if i am wrong i know nothing this is only instinct.)

 

Merry Xmas twacowfca

I've learned a great deal from your high quality posts.

 

[Green King]

There seems to be misuse between aggregate and individual return over time for stock, companies and money managers.

 

Umm something to add in as a guard to watch for when other are trying give certainty statistics.

 

There seems to be a confusion between

IV determines prices But Price dose not determine IV as shown in other posts

 

twacowfca

Can one say

Occurrence of event determine Aggregate statistical results

 

But Aggregate statistical results dose not determine occurrence of results

 

In the social world.

 

Or should it be

 

But Aggregate statistical results dose not always determine occurrence of results

So be careful

 

Which one should be the exception and which the rule ?

[giofranchi]

Article on Seeking Alpha:

 

http://seekingalpha.com/article/1080301-markel-bargain-opportunity-presented-by-arbitrageurs?source=feed

 

giofranchi

[twacowfca]

There seems to be misuse between aggregate and individual return over time for stock, companies and money managers.

 

Umm something to add in as a guard to watch for when other are trying give certainty statistics.

 

There seems to be a confusion between

IV determines prices But Price dose not determine IV as shown in other posts

 

twacowfca

Can one say

Occurrence of event determine Aggregate statistical results

 

But Aggregate statistical results dose not determine occurrence of results

 

In the social world.

 

Or should it be

 

But Aggregate statistical results dose not always determine occurrence of results

So be careful

 

Which one should be the exception and which the rule ?

 

Causality is presumed to be unidirectional with the arrow of time, although not necessarily so in math models.  You might enjoy "A World Without Time", The Forgotten Legacy of Godel and Einstein" by Palle Yourgrau.

 

Practically, there are sometimes logical reasons that indicate which came first, the chicken or the egg.  :)

[HJ]

 

Family lore was that he wouldn't make a loan unless you could prove that you didn't need it. 

Reminds me of the line by Mark Twain:

 

"A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain."

 

Is this acquisition also a back door way for Markel to get a Bermuda entity, and therefore can conduct some serious tax arbitrage going forward?

 

 

[Guest rimm_never_sleeps]

I think it's pretty simple. insurance stocks are cheap. the smart players are growing Aum (alleghany markel). the underwriting cycle is favorable. and interest rates are going to go higher eventually.

[twacowfca]

 

Family lore was that he wouldn't make a loan unless you could prove that you didn't need it. 

Reminds me of the line by Mark Twain:

 

"A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain."

 

Is this acquisition also a back door way for Markel to get a Bermuda entity, and therefore can conduct some serious tax arbitrage going forward?

 

 

 

Not really, Tom Gaynor stated in their conference call that they may consolidate some of the merged companies operations in the US.  I think their Lloyd's operations will merge and have more clout with greater size.  Markel is definitely not going to redomicile offshore.  :)

[ap1234]

"Family lore was that he wouldn't make a loan unless you could prove that you didn't need it."

 

"I too think this is a great rule to live by and one that is as solid as it gets."

 

I have really been enjoying reading this thread on Markel. In particular, I was fascinated by the recent discussion on banks/insurance co's and what is an acceptable levels of risk for the business.

 

I actually have a diffferent interpretation on Buffett's view of risk/return. If he was running a bank, I do NOT believe he would only extend loans to customers who didn't need them. In fact, I would guess that Buffett would say that a bank that takes no risk is not a better bank than one that does. I think the question that Buffett the banker would ask himself before extending a loan was: "are you getting paid for the risk?" If you are being compensated for the risk AND you can make many of these loans, it is ok to lose your principal on any individual loan.

 

Anyways, this is just my interpretation and I could be completely offbase. I actually had a very similar discussion with a friend of mine a few years ago on a related topic. I have copied and posted my response to my friend below. I'd be interested to hear everyone else's thoughts on this topic.

------------------------------------------------------------------------------------------------------------------------------

 

"You reminded me of a section in The Snowball which describes Buffet's investment in National Indemnity. I believe the previous owner of the insurance company (Jack Ringwalt) had an expression that went along the lines of "there is no such thing as a bad risk, only bad rates." This became the basis for Buffett's insurance philosophy (i.e. nothing wrong with insuring high risk events if you are compensated for it). I guess the exact same thing is true when it comes to investing in any asset (stocks included). Higher risk investments (i.e. higher probability of permanent impairment of capital) are fine just get paid for it.

 

Now that I think about it, Buffett's insurance philosophy and "current" investment philosophy are somewhat opposed (although both are extremely successful in their own right). In insurance, he makes asymetric bets, buys a basket and is more then compensated for the individual losers by the overall total return from the winners. Perhaps an analogy is to think about his insurance business like a portfolio of stocks with each individual insurance policy being a single position. I presume in high risk re-insurance, you are guarenteed to 'lose' money on any individual insurance contract. However, if you get attractive premiums and you write a lot of insurance contracts, the asymetric returns from the collection of insurance policies outweight the losses from any individual insurance policy that might lose money (i.e. you have to payout the claim) . In other words, you are almost guarenteed to lose your entire 'principal' on any individual contract but as a basket of them, your total return is attractive.

 

This seems to be a good investment approach: look at risk/returns, handicap probabilities and if you do decide to accept high risk bets - make a lot of them and get paid for it. However, in Buffet's investment portfolio, he seems to follow his Rule # 1: Never lose money. Today, my sense is that he is unwilling to suffer permanent impairment of capital on any individual stock and as such turns away mispriced bets if he feels there is even a reasonable chance he could lose capital. Also, I'm sure size restrictions, etc. have have had huge impacts on his current investment approach.

 

Actually, all this discussion reminds me of this exchange of letters between Buffett and a Microsoft executive that I came across recently. In the late 1990s (time of the letter), there is clearly no way that Buffett would invest in Microsoft given the lofty valuation multiples. However, after reading the letter, I got the sense that Buffett would not invest in Microsoft at any price. It doesn't seem to be because of his lack of understanding of technology businesses (it sounds like quite the opposite). The following quote really stood out.

 

"I feel 100% sure (perhaps mistakenly) that I know the odds of this continuing-again 100% as long as cola doesn't cause cancer. Bill (Gates) has an even better royalty- one which I would never bet against but i dont feel i am capable of assessing probabilities about, except to the extent that with a gun to my head and forced to make a guess, I would go with it rather than against. But to calibrate whether my certainty is 80% or 55%, say, for a 20-year run would be folly. if I had to make such decisions, i would do my best but I prefer to structure investing as a no-called-strikes game and just wait for the fat one."

 

I guess Buffett's ultimate holding period is forever and he would not own a wonderful royalty business if he knew that at some point in the future this business could not survive. This has been a fabulously successful strategy for him but I'm not sure I would be as stringent with this for my own personal investments. After all, I agree with your recent decision to buy X stock during the financial crisis even if there was a higher chance of permanent impairment of capital although this seemed like a low probability event and the risks appeared to outweigh the rewards."

 

 

[HJ]

Not really, Tom Gaynor stated in their conference call that they may consolidate some of the merged companies operations in the US.  I think their Lloyd's operations will merge and have more clout with greater size.  Markel is definitely not going to redomicile offshore.  :)

 

Wasn't thinking of re-domicile per se.  I haven't heard the conference call, so don't know if they touched on it, but suppose they re-insure a lot more to the Bermuda entity, and result in paying lower tax on the reinsurance profits in Bermuda?  I don't know the details of what kind of exercise tax this might trip up.  I do remember hearing Berkley complaining of the uneven playing field of the Bermuda insurers vs. the onshore ones forever.  Interesting to note that as successful as Markel has been, they never went to Bermuda.

 

 

[twacowfca]

Not really, Tom Gaynor stated in their conference call that they may consolidate some of the merged companies operations in the US.  I think their Lloyd's operations will merge and have more clout with greater size.  Markel is definitely not going to redomicile offshore.  :)

 

Wasn't thinking of re-domicile per se.  I haven't heard the conference call, so don't know if they touched on it, but suppose they re-insure a lot more to the Bermuda entity, and result in paying lower tax on the reinsurance profits in Bermuda?  I don't know the details of what kind of exercise tax this might trip up.  I do remember hearing Berkley complaining of the uneven playing field of the Bermuda insurers vs. the onshore ones forever.  Interesting to note that as successful as Markel has been, they never went to Bermuda.

[twacowfca]

"Family lore was that he wouldn't make a loan unless you could prove that you didn't need it."

 

"I too think this is a great rule to live by and one that is as solid as it gets."

 

I have really been enjoying reading this thread on Markel. In particular, I was fascinated by the recent discussion on banks/insurance co's and what is an acceptable levels of risk for the business.

 

I actually have a diffferent interpretation on Buffett's view of risk/return. If he was running a bank, I do NOT believe he would only extend loans to customers who didn't need them. In fact, I would guess that Buffett would say that a bank that takes no risk is not a better bank than one that does. I think the question that Buffett the banker would ask himself before extending a loan was: "are you getting paid for the risk?" If you are being compensated for the risk AND you can make many of these loans, it is ok to lose your principal on any individual loan.

 

Anyways, this is just my interpretation and I could be completely offbase. I actually had a very similar discussion with a friend of mine a few years ago on a related topic. I have copied and posted my response to my friend below. I'd be interested to hear everyone else's thoughts on this topic.

------------------------------------------------------------------------------------------------------------------------------

 

"You reminded me of a section in The Snowball which describes Buffet's investment in National Indemnity. I believe the previous owner of the insurance company (Jack Ringwalt) had an expression that went along the lines of "there is no such thing as a bad risk, only bad rates." This became the basis for Buffett's insurance philosophy (i.e. nothing wrong with insuring high risk events if you are compensated for it). I guess the exact same thing is true when it comes to investing in any asset (stocks included). Higher risk investments (i.e. higher probability of permanent impairment of capital) are fine just get paid for it.

 

Now that I think about it, Buffett's insurance philosophy and "current" investment philosophy are somewhat opposed (although both are extremely successful in their own right). In insurance, he makes asymetric bets, buys a basket and is more then compensated for the individual losers by the overall total return from the winners. Perhaps an analogy is to think about his insurance business like a portfolio of stocks with each individual insurance policy being a single position. I presume in high risk re-insurance, you are guarenteed to 'lose' money on any individual insurance contract. However, if you get attractive premiums and you write a lot of insurance contracts, the asymetric returns from the collection of insurance policies outweight the losses from any individual insurance policy that might lose money (i.e. you have to payout the claim) . In other words, you are almost guarenteed to lose your entire 'principal' on any individual contract but as a basket of them, your total return is attractive.

 

This seems to be a good investment approach: look at risk/returns, handicap probabilities and if you do decide to accept high risk bets - make a lot of them and get paid for it. However, in Buffet's investment portfolio, he seems to follow his Rule # 1: Never lose money. Today, my sense is that he is unwilling to suffer permanent impairment of capital on any individual stock and as such turns away mispriced bets if he feels there is even a reasonable chance he could lose capital. Also, I'm sure size restrictions, etc. have have had huge impacts on his current investment approach.

 

Actually, all this discussion reminds me of this exchange of letters between Buffett and a Microsoft executive that I came across recently. In the late 1990s (time of the letter), there is clearly no way that Buffett would invest in Microsoft given the lofty valuation multiples. However, after reading the letter, I got the sense that Buffett would not invest in Microsoft at any price. It doesn't seem to be because of his lack of understanding of technology businesses (it sounds like quite the opposite). The following quote really stood out.

 

"I feel 100% sure (perhaps mistakenly) that I know the odds of this continuing-again 100% as long as cola doesn't cause cancer. Bill (Gates) has an even better royalty- one which I would never bet against but i dont feel i am capable of assessing probabilities about, except to the extent that with a gun to my head and forced to make a guess, I would go with it rather than against. But to calibrate whether my certainty is 80% or 55%, say, for a 20-year run would be folly. if I had to make such decisions, i would do my best but I prefer to structure investing as a no-called-strikes game and just wait for the fat one."

 

I guess Buffett's ultimate holding period is forever and he would not own a wonderful royalty business if he knew that at some point in the future this business could not survive. This has been a fabulously successful strategy for him but I'm not sure I would be as stringent with this for my own personal investments. After all, I agree with your recent decision to buy X stock during the financial crisis even if there was a higher chance of permanent impairment of capital although this seemed like a low probability event and the risks appeared to outweigh the rewards."

 

Banking, as opposed to investment banking, is traditionally about avoiding risks and making a small profit on the spread.  Credit card lending with  often high rates to compensate for much increased risk of default is a new development that is dominated by mega banks with the resources to accept that challenge.

 

[jay21]

I actually have a diffferent interpretation on Buffett's view of risk/return. If he was running a bank, I do NOT believe he would only extend loans to customers who didn't need them. In fact, I would guess that Buffett would say that a bank that takes no risk is not a better bank than one that does. I think the question that Buffett the banker would ask himself before extending a loan was: "are you getting paid for the risk?" If you are being compensated for the risk AND you can make many of these loans, it is ok to lose your principal on any individual loan.

 

 

Right.  He would run a bank like WFC or MTB.  Maintain your competitive advantage (low cost through operations and a deposit base) and strong underwriting. You can lose on any individual loan because you have thousands.  You couldn't invest in distressed loans with higher returns or equities because there is uncertainty in the timing of payments.  If you have high quality/well underwritten loans, your competitive advantage will give you extraordinary returns on growing capital.

 

"You reminded me of a section in The Snowball which describes Buffet's investment in National Indemnity. I believe the previous owner of the insurance company (Jack Ringwalt) had an expression that went along the lines of "there is no such thing as a bad risk, only bad rates." This became the basis for Buffett's insurance philosophy (i.e. nothing wrong with insuring high risk events if you are compensated for it). I guess the exact same thing is true when it comes to investing in any asset (stocks included). Higher risk investments (i.e. higher probability of permanent impairment of capital) are fine just get paid for it.

 

I disagree here.  There are bad risks.  If you risk your entire capital base, it is a bad risk regardless of price received.  Also, I think he is fine with concentrating in insurance if he can find good deals.  He just won't risk all his capital.

 

 

[ItsAValueTrap]

I guess Buffett's ultimate holding period is forever and he would not own a wonderful royalty business if he knew that at some point in the future this business could not survive. This has been a fabulously successful strategy for him but I'm not sure I would be as stringent with this for my own personal investments.

I don't think his ultimate holding period is forever.  He will screw around with other things.

- At one point in time, he hoarded physical silver.  Because this trade has no yield, clearly this is a trade where you asset flip.

- He sold out of Fannie Mae and Freddie Mac.  And he has sold out of other stocks before.

- He's done some stuff where he has sold credit default swaps.

 

- He wants to own businesses that a fool can run because eventually a fool *will* run that business.  Unfortunately... sometimes he has to sell stock or fire the CEO.  Some CEOs are just that awful.

- A lot of the businesses that he has owned have not survived the test of time.  Blue chip stamps, textiles mills, the World Book Encyclopedia, etc.

 

On the other hand, maybe Microsoft is not as safe as people may think.  IBM's OS/2 foray, Java, and open source software are all things that Microsoft really worried about.  (The quick rise of the Internet is another one.)

 

In many other industries, you aren't constantly paranoid about inflection points.  If you run a restaurant for example, you are less paranoid about seismic shifts in your industry because they rarely occur. 

 

Berkshire's size and high tax rate favours buying private businesses.  Almost as good is buying publicly-traded companies and holding them for very long periods of time.  Flipping in and out of stocks is difficult due to Berkshire's size and taxes.

 

I guess nowadays if Warren had only $1 million, he would trade quality companies.  (He did trade stocks while running his hedge fund.)  Buying a mediocre company like Berkshire Hathaway (trading below liquidation value) would be a mistake and something he would avoid.

 

After all, I agree with your recent decision to buy X stock during the financial crisis even if there was a higher chance of permanent impairment of capital although this seemed like a low probability event and the risks appeared to outweigh the rewards."

Buffett has made investments which have gone to 0 I believe... e.g. he invested in Irish banks.