So Whos makin money?

[Myth465]

What a story.

[rranjan]

What a story.

 

+1

[Uccmal]

So Whos makin money?

 

While my returns since the start of 2011 are only in the high single digits, I have a mile high of tax losses to carry forward. 

 

BAC in black, so to speak.

 

lol, me too, on the tax losses.  Carry back up here.  And the Bac in black.

[finetrader]

BAC in Black!  here too!  makes me wanna Shout it out loud but I'll stay humble.

[ERICOPOLY]

So Whos makin money?

 

While my returns since the start of 2011 are only in the high single digits, I have a mile high of tax losses to carry forward. 

 

BAC in black, so to speak.

 

lol, me too, on the tax losses.  Carry back up here.  And the Bac in black.

 

Your carry back is a great and fair thing.  I have a feeling though that in the next 6 months I will be able to use up my tax losses  8)

[compoundinglife]

You've got me reminiscing.  Anyway, so that's a bit of that.  Cheers!

 

Great story! I came across this board after attending an ITEX annual you attended as well and have really enjoyed it reading it. Thanks to you and all the contributors. Some of the best things in life manifest from actions that at the time seem very small.

[bmichaud]

BRK doesn't have to care about general market risk for two reasons: (1) they have free cash flow generated from operating companies that operates as a periodic inflow of money and (2) their wholly-owned companies are marked at book values as opposed to (what I assume you meant to write) market value.  Those are fair statements, but it kind of goes against the whole BRK Buffett doesn't care about market valuations theory.  In fact, he might still care, but it's irrelevant to him because of (1) and (2).

 

That's exactly what I'm saying - he has basically set up BRK to be a massive version of BPL, where the "total portfolio" if you will is invested in A) Controlled Businesses, B) Equities, and C) a safety cash position. When he's buying equities, he doesn't care about the market because the rest of the "BRK Portfolio" is invested defensively. If Buffett was just investing equities (i.e. did not own controlled businesses), my guess is that it would not be 100% invested in the market - if it was, then I would be dead wrong about how he views general market valuation.

 

I would disagree that there is a "stark difference" between the two types of operations.  I mean, even you say that "over the very long run" the investment should work out the same.  That's sort of the entire thesis of Graham and Dodd, right? The question is whether short-run deviations from the long-run matter... They might.  They might not.  I fall in the latter camp...

 

Perhaps there is no difference. If there isn't, then I would wonder why BPL Buffett would bother buying a control stake in companies when other opportunities were available in the open market (particularly when you consider the small amount of capital he ran).

 

I keep going back to AMEX, but if he was really worried that AMEX might decline further after his purchase, then 40% is quite a large allocation, no?

 

AMEX is a great example. Buffett is buying a business that is attractively priced regardless of what the general market is doing or what the macro outlook looks like. In other words he thought the "bottom" was in for business specific risk, or that he was being compensated for any potential business risk at the price he was paying. But he also acknowledged that even if you buy something at 12 times earnings, in a general decline that PE can drop to 8 times. Thus he engaged in "pairs trading" - i.e. buying a 10x business and selling short a like business going for 20x - in order to offset the risk of a general decline.

 

AMEX was part of his category "Generals - Relatively Undervalued", which was his "pairs trading" category. I have no idea "why" he was worried about market risk - but if he truly wasn't, I don't see what the need was for offsetting the AMEX position with a short.

 

Additionally, I think the fact that he was in 100% Treasuries could mean that he either (1) couldn't find a place to invest $500 million in a $13 trillion equity market or (2) couldn't find a good deal in a $13 trillion equity market.  The two have the same phenotype (outward appearance or outcome) but vastly different genotypes (inward cause)...

 

Semantics. When I say he couldn't find a place to invest I am implying he couldn't find a good deal.

 

And, of course, lastly, he might not have had his money 100% in Treasuries because markets were "expensive" but rather because "risk was rampant."  The two often coincide, but they need not be a 100% overlap.

 

Buffett is constantly saying how there are always unknowns and uncertainties out there, and if you pay the right price you shouldn't worry about them. Obviously I am the only one with this opinion (which probably means I should strongly re-evaluate my thinking), but given how small $500MM is relative to $13T and his penchant for concentrating his bets, I would think he should have been able to find something....

 

Again, there's nothing I disagree with here, except for the following -- implicit in your example of a company that falls by 50% and has to generate 100% is a theory that generating 100% is a hard, possibly Herculean, task.  And generally that statement might be true.  However, I think the numbers suggest a "logic" that is out of touch with... "reality" logic.

 

If I buy ABC for $20 a share, and I know that its intrinsic value is $40 a share, that's a pretty good deal.  If the price then drops to $10 a share, I've suffered a 50% loss, and you're correct that I need a 100% gain just to break even.  And yet, we are not quite operating in a vacuum, because while it sounds difficult to get a 100% gain, the stock's intrinsic value is still worth $40 a share or 400% the current share price.

 

Does that make sense?  I re-read it, and I'm not sure it's all that clear to anyone other than me.  When you're looking at just the stark percentages on their own, then it does seem like a 50% drop is terrible because it requires a 100% increase to break even -- however, that doesn't take into account the magnitude of undervaluation.  Sure it might take 100% of increase to break even, but that seems somewhat meaningless if you're looking at a 400% increase from the 50% initial drop, no?

 

Now, a permanent capital loss of 50% is an entirely different story, but I'm not sure that's what we're talking about at this juncture, but please correct me if I'm wrong...

 

On an individual company basis I agree 100%. I'm thinking about it from a total portfolio perspective. Monish is the best example - he's a master at finding 50-cent dollars, but he went from a cumulative return of 365.2% as of 12/31/2007 down to 90.1% as of 12/31/2008, and now back up to 451.2% as of 12/31/2010. If you look at the graph on the attached letter, it took over 3 years (from June 2007 to December 2010) to make up for the losses in 07/08/09. That entire rollercoaster he was finding 50-cent dollars. What if by chance the Fed hadn't come in to manipulate the market? All I'm trying to point out is that from a total portfolio perspective, it's difficult to make up losses. Yes, someone could have put 100% of the portfolio in McDonalds back in the fall of 2008 and doubled his/her money while the market flat-lined, but nobody only invests in one stock or has the ability to anticipate such a return with such accuracy.

 

Perhaps Berkowitz can come back - he probably will. But let's say his hurdle rate of return is 15% over 5 years (I'm making this up, so bear with me) - he just lost let's say 30%, now he has 4 years left to achieve his goal and he is now starting with $70 versus $100 at the beginning of 2011. So $100 compounded at 15% over 5 years is $201 - in order to get to a 15% average return, he now has to compound at 30% over the next 4 years in order to reach $201. I'm not saying it's not doable, it just gets very difficult to hit a particular rate of return when starting from such a low base.

12.31.2010.pdf

[moore_capital54]

Parsad that is a fantastic story!

 

And while I agree with most of what you said relating to making the board an open forum for dialogue, I really do wish there was a way to at least "Bold" certain posters.

 

For example, after seeing merkhet's last post, I really wanna know every time he posts and like some of the other posters I sometimes don't check in for a few weeks.

 

Maybe just think about it? or put it up for a poll? It will only strengthen the board imo and make it more efficient.

 

Cheers!

[SharperDingaan]

The 'value' here is the internet as the medium. Pre internet, you learnt how to apply by pretty much getting hired by, or talking to others in the desired circle of competence - if you were lucky enough to have access. You were all from the same geographic area, with maybe a rung or two of status difference, all at a similar stage in life, & everyone thought alike because they all came from the same place. What university, college, etc you went to mattered - because of where their alumni worked, & your ability to access that privileged circle.

 

The broader the range of views, difference in life, & occupation, the more liberating & better for all. Yes, a Heinz57  ;) investor can be scrappy at times - but it is their presence that counters the often incestuous bias of the 'old' days, & keeps everyone healthy. If that investor wasn't present - would you have heard that view any other way? even if it is only 1 in 20 times - or less.

 

We would love to hear more from those in other than NA. It is also hard to believe that there is not at least one other Parsad out there doing something similar - but in spanish, or mandarin, etc. They just cant recognize each other because there is no common language!

 

Great story.

 

SD

 

 

[ericd1]

Parsed,

 

Not only a great story, it's inspiring.

 

Eric

[stahleyp]

I have no idea what the market is gonna do. I can't wait to (hopefully!) get to read Klarman's letter though.

[keerthiprasad]

Nice story.  Thanks for sharing Sanjeev.

[merkhet]

 

That's exactly what I'm saying - he has basically set up BRK to be a massive version of BPL, where the "total portfolio" if you will is invested in A) Controlled Businesses, B) Equities, and C) a safety cash position. When he's buying equities, he doesn't care about the market because the rest of the "BRK Portfolio" is invested defensively. If Buffett was just investing equities (i.e. did not own controlled businesses), my guess is that it would not be 100% invested in the market - if it was, then I would be dead wrong about how he views general market valuation.

 

 

One thing I'd point out is that we must be careful to attribute the cash position and/or the recurring cash inflows to market hedging.  After all, Berkshire is an insurance company that requires liquidity to fend against large cat losses.  It's very difficult to know for certain how much to attribute to market hedging and how much to attribute to insurance requirements.

 

 

Perhaps there is no difference. If there isn't, then I would wonder why BPL Buffett would bother buying a control stake in companies when other opportunities were available in the open market (particularly when you consider the small amount of capital he ran).

 

 

If you have a control stake, you can make things happen for yourself.  For instance, some of us on this board own companies that have large cash positions and are overcapitalized.  If you're a passive investor, you're essentially trusting in management to release and/or deploy those cash positions.  If you're a control investor, then you get to call the CEO and say that they're going to release and/or deploy those cash positions, or they're going to polish their résumé.  Recall what happened at Sanborn Maps with the collection of securities that they had -- Buffett seized control and was able to get them to distribute the securities in their investment portfolio.

 

 

AMEX was part of his category "Generals - Relatively Undervalued", which was his "pairs trading" category. I have no idea "why" he was worried about market risk - but if he truly wasn't, I don't see what the need was for offsetting the AMEX position with a short.

 

 

Well, a pair trade is a different animal than a market hedge.  Buffett did both.  (http://buffettfaq.com/#i166)  I have no problem with the logic of pair trades, though I don't engage in the practice myself.  However, we're now back to the question of whether Buffett hedged market risk because he viewed it as a "risk" per se or whether he did so because he wanted to blot out volatility for his investors.  Now that I'm thinking about it, this would be a great question to ask at the Annual Meeting if one of us gets the microphone.  :)

 

 

On an individual company basis I agree 100%. I'm thinking about it from a total portfolio perspective. Monish is the best example - he's a master at finding 50-cent dollars, but he went from a cumulative return of 365.2% as of 12/31/2007 down to 90.1% as of 12/31/2008, and now back up to 451.2% as of 12/31/2010. If you look at the graph on the attached letter, it took over 3 years (from June 2007 to December 2010) to make up for the losses in 07/08/09. That entire rollercoaster he was finding 50-cent dollars. What if by chance the Fed hadn't come in to manipulate the market? All I'm trying to point out is that from a total portfolio perspective, it's difficult to make up losses. Yes, someone could have put 100% of the portfolio in McDonalds back in the fall of 2008 and doubled his/her money while the market flat-lined, but nobody only invests in one stock or has the ability to anticipate such a return with such accuracy.

 

 

I'm only marginally familiar with what happened to Mohnish in 2008, but I think he had a few permanent capital losses.  So that's a different situation than the one I originally posited.

 

Assuming he did not have permanent capital losses, then what he may have done in 2008 is horse trade a little.  After all, let's say you're down 70% -- actually, let's make it 75% so the math is easier.  Simple math shows you have to be up 300% just to break even -- again, a seemingly tough prospect.  However, if you own A, B, C and, as a basket, they fall 75% and should be worth 2x what you bought them, you're probably still alright over the long-haul provided that your investors stick with you.  It's also logical at that point to look around and find companies, say X, Y, Z, that have possibly fallen 90% during the same period, that are also worth maybe 2x from where they were before the fall.

 

Assuming that the Fed doesn't step in, then at some point, I think we still get back to normal.  The question is how long this takes and whether your 25 cent dollar will provide you with a good enough return.  Here, I think we see the divergence in usefulness between cigar butts and fallen growth stocks.  If you're a cigar butt and it takes longer to get to intrinsic value, then yes, you are somewhat screwed.  However, if you're buying Charlie Munger-type growth stocks, then they only get better over time.  If you're buying a company with a return on equity of 10% that grows 10% a year for half of book value, then it's merely coiling your spring for the eventual return to intrinsic value, no?

[merkhet]

 

For example, after seeing merkhet's last post, I really wanna know every time he posts and like some of the other posters I sometimes don't check in for a few weeks.

 

 

Well, I don't know how useful that might be.  It's possible that I'm just a blind squirrel that finds a nut every once in a while...  :P

[Santayana]

 

 

Some posters have said that hedging is always wrong, no matter what.  I've always been of the opinion that it's more about the individual's risk tolerance than anything else.

 

 

Santayana and bmichaud,

 

I don't know if you guys are individual investors or if you're managing OPM.  I'm sure you indicated one way or the other in the long thread about market values, but to be completely honest, it was very long and I wasn't terribly interested in the discussion, so I only skimmed it.  :P

 

The one thing I'd point out is that I think you both might share a sense that thinking about market valuation or macro is about risk tolerance.  It's not.  It's about volatility tolerance, and that's a separate thing entirely.

 

If you're managing OPM, then thinking about volatility tolerance might be good -- depending on your client base.  If your clients are flighty, then you might want to blot out volatility.  If your clients are not, then you might not want to bother.

 

If you're managing your own money, then the analysis is the same.

 

Hmmmm, that is a very interesting point merkhet.    How you do differentiate the two?    I agree that some of what I'm hedging against is volatility, but I'm not entirely sure how to separate risk vs. volatility, especially if you're talking about timeframes of 10 years or more.    If I take a position that loses 50% of it's value, and it then takes 15 years to recover, is that just volatility?

[merkhet]

 

Hmmmm, that is a very interesting point merkhet.    How you do differentiate the two?    I agree that some of what I'm hedging against is volatility, but I'm not entirely sure how to separate risk vs. volatility, especially if you're talking about timeframes of 10 years or more.    If I take a position that loses 50% of it's value, and it then takes 15 years to recover, is that just volatility?

 

 

Risk tolerance, to me, is about the risk that you'll have a permanent capital loss.  That could mean that the equity becomes worthless (worst-case scenario) or that intrinsic value crosses below your purchase price.  Volatility is any fluctuation in the market price that does not implicate those two situations.

 

It's tough to discuss this in a vacuum, so in the situation you pointed out, you'd have to describe the company. 

 

If you buy a cigar butt that has no growth (worth maybe 8x to 10x) for a 50% discount, and it falls 50% upon purchase, then the market price is at a 75% discount.  If it takes 15 years to reach intrinsic value, then your rate of return would be okay but not spectacular, right?  Doubling every 7.5 years based on Rule of 72 indicates a slightly less than 10% return.

 

If you buy a growth company (worth somewhere above 10x, maybe 15x to 20x) for a 50% discount, and it can compound its intrinsic value at 10%, then you have a wholly different story.  You'd be purchasing a company whose intrinsic value @ initial time + 15 years would be roughly 4x the intrinsic value @ initial time.  However, because you were purchasing the stock at a discount to the intrinsic value @ initial time, you'd be getting an 8x return over 15 years.  That's about a 15% annual return, which is much more respectable.

 

That said, I'd be willing to bet that a growth company that can compound its intrinsic value at 10% does not stay undervalued for 15 years -- volatility notwithstanding, someone realizes after 4 years that the intrinsic value is at ~1.5x the initial value, and the market value would likely converge quickly thereafter.  FWIW, if it only takes 4 years to converge, you'd get about a 30% annual return.

 

So I guess my reply is that if it takes 15 years to recover, it's possible it's just volatility.  But I think it's unlikely that anything stays undervalued for 15 years.  Though I haven't really studied Japanese equities, and I'd guess that if it's happened before, that's the place where it'd have happened.

 

I'd also like to note that there's nothing "wrong" per se about hedging volatility.  If you're the type of person whose emotional brain gets triggered when they see a stock they own trade down 20% over two days, then perhaps you want to hedge out that risk.  It's like Odysseus tying himself to the mast.  If you know that the sirens will call at some point, then it makes sense to plan ahead for that.  However, I believe it's quite difficult to hedge correctly/intelligently, and for some with higher volatility tolerances, it's pointless to spend time thinking about hedging volatility.

[bmichaud]

Well said Merkhet - this is actually a very useful discussion, and it certainly has me thinking.

[Santayana]

I think the other scenario that can result in permanent capital loss is if you need access to the capital during a period where volatility has you sitting on a loss.  For the professional managing OPM that could arise from redemptions, or for the individual investor just from a need to generate cash for living expenses, especially upon retirement.  In a well diversified portfolio this might not be as much of a concern, but many on this board talk about taking large focused bets.

 

To go back to what started much of this discussion, how much effect do macro issues have on the IV of a company?  I would say that it depends, with some companies especially financials, being very sensitive.  So if I have a large position in a company or sector with high sensitivity to macro issues, and I hedge, I think I'm hedging against both volatility AND risk.  If the PIGS all default within the next 5 years, I believe that the IV of many companies will be permanently impacted and I want to protect against that.

[merkhet]

 

I think the other scenario that can result in permanent capital loss is if you need access to the capital during a period where volatility has you sitting on a loss.  For the professional managing OPM that could arise from redemptions, or for the individual investor just from a need to generate cash for living expenses, especially upon retirement.  In a well diversified portfolio this might not be as much of a concern, but many on this board talk about taking large focused bets.

 

To go back to what started much of this discussion, how much effect do macro issues have on the IV of a company?  I would say that it depends, with some companies especially financials, being very sensitive.  So if I have a large position in a company or sector with high sensitivity to macro issues, and I hedge, I think I'm hedging against both volatility AND risk.  If the PIGS all default within the next 5 years, I believe that the IV of many companies will be permanently impacted and I want to protect against that.

 

 

If you're not managing OPM, then capital access is another scenario where you could create a permanent loss from a temporary condition.  If you're managing OPM, you're not going to get a permanent loss from a temporary condition due to redemptions as the manager -- well, actually, you might have some "loss" based on lost opportunity from incentive fees, but that depends on your definition of loss.

 

I actually also agree with you in terms of macro issues.  If you buy a shipping company and China hits a wall, then you might have problems, right?  I mean, sure, over the long-haul, shipping will probably pick up again, but it's also possible that you don't live long enough to see that because you trip a convenant or two in your debt agreements.  So macro concerns do come into play with certain investments through interaction with both the income statement and the balance sheet.

 

The question for me isn't whether you should consider macro, but rather how you should consider macro.  One way to consider macro, in the example above, is to not purchase a shipping company where that's a possibility.  Another way to consider macro, in the example above, is to find a shipping company that has non-recourse leverage to each ship with long-dated or at least spread out maturities on their debt.  Another way is to hedge it out on your own terms either by hedging the company itself, similar companies, a basket of similar companies, broad market exposure, etc.  (In terms of most narrow to most broad, which I believe also matches a continuum of most directly correlative to less correlative.)

 

That said, does anyone know how long it took Argentina, Mexico, Russia, the Asian Tigers, etc. to clear up their issues after default?  Neither the natives (Argentinians, Mexicans, Russians, the Asians) nor us, the Americans, are in particularly dire straits as a result of their respective defaults.  It turns out that life goes on even after "armageddon" and "catastrophe" so long as you didn't die in the storm.  (Jim Collins' new book "Great by Choice" has some interesting insights into companies that grow slowly and hold lots of cash -- they tend to do well in chaotic environments because they can survive.)  In fact, as your competitors die off in the storm, you may find yourself the recipient of market share growth.

 

So can intrinsic value of companies take a hit initially if the PIIGS default?  Sure, that's possible.  It depends on the company and how they do business.  If you're buying See's Candies @ 50% of intrinsic value, though, it would be silly to spend time wondering if the PIIGS will default, leave the Eurozone or riot.

[PlanMaestro]

That said, does anyone know how long it took Argentina, Mexico, Russia, the Asian Tigers, etc. to clear up their issues after default?  Neither the natives (Argentinians, Mexicans, Russians, the Asians) nor us, the Americans, are in particularly dire straits as a result of their respective defaults.  It turns out that life goes on even after "armageddon" and "catastrophe" so long as you didn't die in the storm.  (Jim Collins' new book "Great by Choice" has some interesting insights into companies that grow slowly and hold lots of cash -- they tend to do well in chaotic environments because they can survive.)  In fact, as your competitors die off in the storm, you may find yourself the recipient of market share growth.

 

So can intrinsic value of companies take a hit initially if the PIIGS default?  Sure, that's possible.  It depends on the company and how they do business.  If you're buying See's Candies @ 50% of intrinsic value, though, it would be silly to spend time wondering if the PIIGS will default, leave the Eurozone or riot.

 

Amen from a Chilean that lived through the 1982 crisis, married with a Mexican that lived through the 1994 crisis. A little history can put some perspective on "end of the world" premonitions. It was bad but we recovered, and the companies with the right balance sheet and cash flow lived and prospered.

[Ben Graham]

Ten years ago, I wasn't running a fund.  I started a message board with 9 of my friends so that we could just talk about Berkshire Hathaway...I didn't know Francis...I didn't know Prem...and I barely knew Mohnish...and I certainly didn't know all the wonderful people that have come and gone on here. 

 

 

And just to be curious, as I'm not aware of the answer, what was you full-time job back then Sanjeev, before the fund?

 

When I started the message board, I was a supervisor for Loblaws!  I quit that year and started working as a mutual fund and insurance dealer because I wanted to get into the financial industry after meeting Buffett.  I had no idea how, and I quit university after my father died when I was 21, so that was my stepping stone into the business.  But over the next few years I was really frustrated with the incestuous relationship between the dealers and brokers in the industry.  They do a complete disservice to the investor! 

 

It wasn't until 2006 when I started the fund...the best thing I ever did.  And it would never have happened if I didn't have lunch with Prem, who said just start the fund with whatever money you have saved and can raise...build a track record!  But that lunch only occurred because we contacted Fairfax regarding the short attack in 2003, which we only noticed because a handful of us Fairfax shareholders had gathered on this board and were wondering what the hell was going on!  Very funny how little things can make a big difference in someone's life and how interconnected they all are!  ;D 

 

That first time I went to Fairfax's office was incredible!   Francis and JoAnn just spent the whole day taking me around to everyone's office, and then I was allowed to sit with each person in their office and ask questions for about 20-30 minutes.  You name them, I spent time with them that day...Fairfax executives, vice-presidents, Hamblin-Watsa principals and analysts.  I also got to see their archive room, where they have an actual part-time librarian who catalogs and organizes all of the historical annual reports Prem has accumulated through the years...thousands and thousands!  I saw the trading desk where Frances Burke constantly executes their trade orders directly from.  In the middle of all that, I had a nearly two-hour lunch with Prem in the boardroom...Indian food!  I barely ate anything because I was so busy asking him questions and listening to what he had to say. 

 

Every year, I would go visit the office and spend some time there.  I remember one year I was supposed to meet Francis for a while, so JoAnn arranged for us to meet him in the smaller boardroom at Fairfax, since he had already left his vice-president position and was now solely at the Chou Funds.  We sat there and talked for about four hours making little cappucinos from the automated coffee machine Fairfax has in their kitchen!  ;D  Francis, my friend Dr. Ajay Desai, our director Andrew Cooke (whose father JoAnn originally worked for before joining Fairfax), Alnesh and myself...four hours plus just sitting there and talking about investing!  JoAnn would come in and check up on us every half hour and see if we needed anything.  She was fantastic!  That's why I do the dinner in her memory now, and why we raise money for "The Crohn's & Colitis Foundation of Canada".  You've got me reminiscing.  Anyway, so that's a bit of that.  Cheers!

 

WOW! A dream come true. Value Heaven. Great story.

[ourkid8]

After returning 14% in 2011 so far YTD my portfolio is only up 2.3%.  (I know much less then most board members as BAC is only a 2% position in my portfolio)

 

Thanks,

 

S

[biaggio]

ourkids, nothing wrong with 2%, at least you have 2 % + not sucking your thumb like I am...just think it might grow to 4% by x mas (noting wrong with that)

[ourkid8]

When you say sucking your thumb, are you 100% in cash?

 

ourkids, nothing wrong with 2%, at least you have 2 % + not sucking your thumb like I am...just think it might grow to 4% by x mas (noting wrong with that)

[biaggio]

When you say sucking your thumb, are you 100% in cash?

 

ourkids, nothing wrong with 2%, at least you have 2 % + not sucking your thumb like I am...just think it might grow to 4% by x mas (noting wrong with that)

 

No. ~35% cash

Meant that I was looking at BAC in december but did not buy, now crying sort of speak. I was really "smart" + held small amounts of FTR , SHLD, JOE that have been pounded.