Ask Packer - No Seriously, Ask Him Anything (AHA)!

[racemize]

Thanks Packer, very interesting.

 

You probably already knew this, but I just put your annual numbers in my cash allocation model (some of the reason I'm asking this question), and holding any amount of cash would have been detrimental, assuming you would have only used it in 2008, and otherwise held it.  If there had been two of the 2008s, it might have been closer.

[gary17]

Racemize

I haven't been following your models - but I think what you are finding is that the risk of lost opportunity for growth far out weights the risk of a deep market correction.... so even if 08 could repeat at anytime, it's far better to stay invested as fully as possible than try and time the market for a correction..... ?

[wknecht]

Man...would obviously need to run the numbers to confirm, but looks like another member of the 1mm sigma club.

[racemize]

Racemize

I haven't been following your models - but I think what you are finding is that the risk of lost opportunity for growth far out weights the risk of a deep market correction.... so even if 08 could repeat at anytime, it's far better to stay invested as fully as possible than try and time the market for a correction..... ?

 

That's what I'm working on, and you can see some results/discussion in the "Why Hold Cash?" thread.  I'm almost done with data collection, but it'll take me a while to write the essay.

 

Mostly, what you said is correct, but for some volatile portfolios (e.g., occasionally for Pabrai), holding cash does make sense.

[yadayada]

hmm isnt that like a 41% return or something (assuming your constantly evenly invested)? Very nice.

You think you could prevent some of those losses in 2008 in hindsight? Any important lesson you learned from that? Maybe see what sentiment is like and try to pick less risky stocks when everything is overheating.

[siddharth18]

2003        58.4%

2004        30.1%

2005        20.4%

2006        49.3%

2007          56.2%

2008          -51.4% (ouch)

2009          108.9%

2010          26.7%

2011          8.3%

2012          63.6%

2013 (YTD) 140.3%

 

Very impressive Packer! That's like 30x in 10 years - did I calculate it right?

 

Did you ever feel (around 2006-2007) that things were very overvalued and that you'd rather hold SOME cash instead of all equities? That of course collides with the idea that a person running <$10M would always have something, somewhere that's undervalued he can buy.

[Packer16]

It is 30x but it is over 11 years and the first year coincides with the bottom of the tech/telco bust. 

 

No I held a number of O&G stocks and financials and they did not look expensive on a valuation basis but come to find out the underlying economics of both (high and rising O&G prices and low default rates in financials) were at peak values.  I should have normalized the earnings and probably would have seen more of the overvaluation.

 

As I look at my portfolio toady I have hopefully adjusted for peak earnings.  This is part of the rationale for selling SD.  The autos have nice demand now but my calcs there is still some more pent up demand to work through.

 

Packer

 

[gary17]

Packer

I'm wondering what are your thoughts on Buffett's buy and hold strategy.

 

If you look at some of the "good " companies that you have owned...and assume you don't sell them and use margin or your other source of income to fund new ideas, would you have done worse, better or the same?

 

Thanks

Gary 

[Packer16]

I think it the best strategy for large sums of money because the growth in BV or CF is the most important factor driving stock prices.  If you can find a good capital allocator with a large enough focus market these can provide great returns.  My portfolio is no where near the size that would favor this approach.  I like to take advantage of my small size when I can.

 

There are some contributors here like gio who look for these types of companies.  There is also the index developer by Murray Stahl who tracks owner-operators.  They have a tendency to be fairly values and are only bargained priced in general panics (2008).  The leverage BRK has via float makes this good strategy great.  I would not consider any of my holdings having both a good capital allocator combined with market with a long runway.  I have tendency to not want to pay high prices in excess of 10x FCF or 7x EBITDA so these firms are rarely in my sweet spot and when they are I usually can find something cheaper.

 

I have considered using something similar the Morningstar Moat ETF as a cash alternative when I can't find something to invest in.

 

Packer

[investor-man]

It is 30x but it is over 11 years and the first year coincides with the bottom of the tech/telco bust. 

 

No I held a number of O&G stocks and financials and they did not look expensive on a valuation basis but come to find out the underlying economics of both (high and rising O&G prices and low default rates in financials) were at peak values.  I should have normalized the earnings and probably would have seen more of the overvaluation.

 

As I look at my portfolio toady I have hopefully adjusted for peak earnings.  This is part of the rationale for selling SD.  The autos have nice demand now but my calcs there is still some more pent up demand to work through.

 

Packer

 

I'm curious, did you sell SD and buy FIATY? After T-bone1's post about SD I've been losing sleep over my SD shares, especially given their drop since they released earnings

[twacowfca]

I make alot of mistakes.  As to losses, I think the best way to think about them is pre-2008/2008 losses and post 2008.  The pre-2008/2008 losses where primarily in subprime finance, options on sub-prime finance and small oil and gas companies.  I guess I was the guy who ran though a dynamite factory with a match and only got a burned hand.  What preserved my capital at the time was Fairfax, Berkshire, Western Sizzlin and some larger RE finance firms like Redwood.  I was down 51.4% in 2008.  My loss rate (losing positions) was pretty high close to 100% on sub-prime finance and oil and gas.

 

After 2009, the losses can from LEAP ideas that did not work out (FTR, NRG and EXC calls), LNET (30% loss), FRE/FNM Preferreds (this was a panic mistake - now I am in at higher price), Oi (got out with a 3% loss) and Oil and Gas (I recently sold SD to buy a better prospect).  I did not invest much in the LEAP calls (they were a 100% loss) however I did take about a 25% loss on about a 3% position (SD) and a loss on and a 50% on about a 4% position in the FRE/FNM pfds.  Note that these were losses generated in bull market and if the market declines I expect much higher losses.  So lets say 4 errors out of maybe 25 top holdings so that is about 16% - but this is in a bull market.  Only one had a loss of greater than 50% (FRE/FNM preferreds). 

 

As to volatility here are my returns since 2003:

 

2003        58.4%

2004        30.1%

2005        20.4%

2006        49.3%

2007          56.2%

2008          -51.4% (ouch)

2009          108.9%

2010          26.7%

2011          8.3%

2012          63.6%

2013 (YTD) 140.3%

 

It looks alot more like Munger's/Guerin's partnership returns than Buffett's in term of volatility.

 

Packer

 

Yes, but the saving grace is that you avoided margin, unlike Guerin, and didn't get wiped out in the downturn.  The leaps gave you upside and a floor.  Thus, you lived to fight another day.  Congratulations.

[Green King]

I make alot of mistakes.  As to losses, I think the best way to think about them is pre-2008/2008 losses and post 2008.  The pre-2008/2008 losses where primarily in subprime finance, options on sub-prime finance and small oil and gas companies.  I guess I was the guy who ran though a dynamite factory with a match and only got a burned hand.  What preserved my capital at the time was Fairfax, Berkshire, Western Sizzlin and some larger RE finance firms like Redwood.  I was down 51.4% in 2008.  My loss rate (losing positions) was pretty high close to 100% on sub-prime finance and oil and gas.

 

After 2009, the losses can from LEAP ideas that did not work out (FTR, NRG and EXC calls), LNET (30% loss), FRE/FNM Preferreds (this was a panic mistake - now I am in at higher price), Oi (got out with a 3% loss) and Oil and Gas (I recently sold SD to buy a better prospect).  I did not invest much in the LEAP calls (they were a 100% loss) however I did take about a 25% loss on about a 3% position (SD) and a loss on and a 50% on about a 4% position in the FRE/FNM pfds.  Note that these were losses generated in bull market and if the market declines I expect much higher losses.  So lets say 4 errors out of maybe 25 top holdings so that is about 16% - but this is in a bull market.  Only one had a loss of greater than 50% (FRE/FNM preferreds). 

 

As to volatility here are my returns since 2003:

 

2003        58.4%

2004        30.1%

2005        20.4%

2006        49.3%

2007          56.2%

2008          -51.4% (ouch)

2009          108.9%

2010          26.7%

2011          8.3%

2012          63.6%

2013 (YTD) 140.3%

 

It looks alot more like Munger's/Guerin's partnership returns than Buffett's in term of volatility.

 

Packer

 

Sorry about before. This is some great insight and experience thx.

[siddharth18]

It is 30x but it is over 11 years and the first year coincides with the bottom of the tech/telco bust. 

 

No I held a number of O&G stocks and financials and they did not look expensive on a valuation basis but come to find out the underlying economics of both (high and rising O&G prices and low default rates in financials) were at peak values.  I should have normalized the earnings and probably would have seen more of the overvaluation.

 

As I look at my portfolio toady I have hopefully adjusted for peak earnings.  This is part of the rationale for selling SD.  The autos have nice demand now but my calcs there is still some more pent up demand to work through.

 

Packer

 

 

Congrats on that's an insane rate of return. I can't help but be amazed at the power of compounding. I'm just going to shoot some questions; feel free to answer none/some/any/all:

 

Did you dabble in distressed debt or overseas equities at any point?

 

After 10 years of successful investing, what sorts of challenges (if any) do you face at this level? Has spotting opportunities gotten easier over the years compared to your early years? Do you HATE any aspect of investing?

 

Do you wish you had access to a certain market where you see (or previously saw) opportunities but couldn't invest for one reason or another? (Like Indian equities that's limited to Indian residents or institutional access so you could buy credit default swaps or over-the-counter derivatives)?

 

What are your plans for the next 10 years? Do you hope to open a hedge fund? Do you plan on retiring after hitting a certain net worth?

[Packer16]

I currently have been looking overseas as there appears to be more bargains there than in the US today.  In the past, I have invested in Brazil and some Russian oil companies and now have holdings in Italy and Greece and am looking at firms in Australia and S. Korea.  I have not bought distressed debt but have purchased some equity of firms who have gone through BK (NTL, Magellan Health, RCN and Hawaiian Telecom) and equity of some of these holders (AIQ an Oaktree holding).

 

Same challenges as 10 years ago -  buying when others don't like a company.  I do have some purchase constraints on some microcaps that have small amounts of volume but my sweet spot is higher on the market cap scale.  The issue I have had with microcaps has been getting out.  My best performing microcap (Acme Communications) was a liquidation so that was not an issue.  I don't hate any aspect of investing per se but the hardest part is watching a good idea getting cheaper (which happens most of the time with me) if the market is going up.

 

In terms of market access, I have switched brokers so now I can buy most international equities that I did not have access to previously.  At this point, my universe is large enough and not totally explored. 

 

Next 10 years I don't know.  At some point I may start a fund but I need to get my 2 kids through college first.  In addition, I like what I do with folks I enjoy working with so retirement is a way off yet.

 

Packer

[plato1976]

Packer, may I know which broker you are using for international investing ?

Thanks!

 

I currently have been looking overseas as there appears to be more bargains there than in the US today.  In the past, I have invested in Brazil and some Russian oil companies and now have holdings in Italy and Greece and am looking at firms in Australia and S. Korea.  I have not bought distressed debt but have purchased some equity of firms who have gone through BK (NTL, Magellan Health, RCN and Hawaiian Telecom) and equity of some of these holders (AIQ an Oaktree holding).

 

Same challenges as 10 years ago -  buying when others don't like a company.  I do have some purchase constraints on some microcaps that have small amounts of volume but my sweet spot is higher on the market cap scale.  The issue I have had with microcaps has been getting out.  My best performing microcap (Acme Communications) was a liquidation so that was not an issue.  I don't hate any aspect of investing per se but the hardest part is watching a good idea getting cheaper (which happens most of the time with me) if the market is going up.

 

In terms of market access, I have switched brokers so now I can buy most international equities that I did not have access to previously.  At this point, my universe is large enough and not totally explored. 

 

Next 10 years I don't know.  At some point I may start a fund but I need to get my 2 kids through college first.  In addition, I like what I do with folks I enjoy working with so retirement is a way off yet.

 

Packer

[Packer16]

I use Fidelity.

 

Packer

[gary17]

Hi Packer, thanks for sharing all this -

seems like your approach is like Ben Graham but yet I see you noted before you are doing concentration (like Buffett)?  If this is the case, how do you protect yourself from a concentrated position that turns out to be wrong... 

 

In my mind the Graham approach is buying a basket of cheap stocks - and chances are there will be some real good winnings

and then there's buffett who buys concentrated positions on good companies...  Perhaps what you have done is a nice medium between the two if I am understanding this right... 

 

Thanks

Gary 

 

 

I currently have been looking overseas as there appears to be more bargains there than in the US today.  In the past, I have invested in Brazil and some Russian oil companies and now have holdings in Italy and Greece and am looking at firms in Australia and S. Korea.  I have not bought distressed debt but have purchased some equity of firms who have gone through BK (NTL, Magellan Health, RCN and Hawaiian Telecom) and equity of some of these holders (AIQ an Oaktree holding).

 

Same challenges as 10 years ago -  buying when others don't like a company.  I do have some purchase constraints on some microcaps that have small amounts of volume but my sweet spot is higher on the market cap scale.  The issue I have had with microcaps has been getting out.  My best performing microcap (Acme Communications) was a liquidation so that was not an issue.  I don't hate any aspect of investing per se but the hardest part is watching a good idea getting cheaper (which happens most of the time with me) if the market is going up.

 

In terms of market access, I have switched brokers so now I can buy most international equities that I did not have access to previously.  At this point, my universe is large enough and not totally explored. 

 

Next 10 years I don't know.  At some point I may start a fund but I need to get my 2 kids through college first.  In addition, I like what I do with folks I enjoy working with so retirement is a way off yet.

 

Packer

[argonaut]

Hi Packer,

 

I too, really appreciate your sharing this information and have started going through Damodaran's online valuation course (very interesting!)...can you share more of how you decide when to sell one of your positions? When it reach full valuation or ?

 

Thanks,

 

Marc

[Packer16]

I try to focus on above average business in terms of return on capital but not necessarily LT compounders that are cheap.  These firms are generating alot of cash flows and may not have as many re-investment opportunities as LT compounders but I am not paying for the growth so any growth is gravy.  I do stay away from capital destroying industries and firms like retail, steel, pulp and paper and mining.

 

Packer 

[Packer16]

I sell when I can find something selling for at least double the upside.  Today I sold a stock with about a 40% upside for one with a 300%+ upside.  The stock purchased is in a good industry with above average RoC and is located in Greece but has 95% of sales outside Greece.  So there is more location risk for the stock purchased but the price paid more than made up for this risk and the new purchase is in a better industry than the firm sold.  When my stocks have approach fair value, so far I have been able to find cheaper inventory to stock my shelves with.

 

Packer 

[Yours Truly]

How many stocks do you hold on average? And how much weight do you give to your top 3 positions?

[FiveSigma]

Packer, let me guess - it's Coca Cola Hellenic you bought :)

[Packer16]

Right now I hold about 24 stocks with the top 3 representing 42% of value, top 5 58%, and top 10 78%.  Most of my time and value is in the top 10 stocks.

 

Packer

[LC]

Packer, let me guess - it's Coca Cola Hellenic you bought :)

 

That is what I first thought, but I believe they moved their headquarters and listing from Greece to London!

[LC]

Packer,

 

For the high cash flow business model, typical of levered firms such as equipment leasing/telecoms etc. I know you like when those businesses operate within a protected environment such as in Hawaii or Alaska, or under a strong regulatory environment in the case of AIQ. This strikes me as having a moat around those cash flows, so they can safely handle their level of debt.

 

Have you looked at the same business model but replacing this niche/protective environment with the benefits of huge scale? Do you think the same results can be obtained? Something along the lines of URI where they don't operate in a protected environment but instead benefit from some economies of scale instead. I think it is harder to find a bargain this way because these large, scaled-up companies are more visible to investors/analysts and have a higher probability of being more fairly priced. I am wondering your thoughts and what your experience has taught you in this case.

 

Also, what is on your Christmas list?  ;D