I Worry About "The Shot Heard Around The World"

[jay21]

I think the bond market is more out whack than the equity market.  It's not like every single stock I am looking at is that expensive.

 

I am worried that lending standards are weakening and yields are at historic lows (spreads are approaching lows).  Every market except mortgages seem to be thawed and the market is probably bordering on (or is) loose.

[Kraven]

I'm totally confused here.  What is it exactly that people are predicting?  Is it another financial crisis which would lead to a stock market decline, or is it just a stock market decline?  What drives me crazy about predictions is the time element.  We all know that the stock market will suffer a serious decline at some point in the future.  It will also reach insane frothy levels as well.  When will each of these things happen?  A prediction just that they will occur is no prediction at all.  Think about the broken clock. 

 

Further, for those who "know" the market will crash imminently, why hold any stocks at all?  Why not sell everything and wait to re-load?  And why the constant refrain from many about only holding BRK and FFH?  I don't understand it.  If the market tanks, they will likely tank just as much as anything else - more than some, less than others.  Perhaps if one is predicting another financial crisis I could see wanting to hold "arks", but if you know its coming, why not sell it all and wait to buy in cheaper?  If it's just a pricing decline, then how is holding BRK and FFH which are closer to IV than many other stocks better than holding something that's at rock bottom?  Because remember, in this case we're just talking about prices, not the actual business environment.

 

I think people are mixing up their predictions.  Some say the economy is moving along, but there will be a crash.  Then we get all the talk about market cap to GDP, profit margins, etc.  That sounds more like a business slowdown discussion.

 

At the end of the day, I don't love a market that just goes up either.  I'd be lying if I said it didn't make me think, but I'm just not sure exactly what people are predicting here and what they propose to do about it.  These threads pop up everytime there is no recent drop in the market.  An imminent downturn has been predicted since the Fall of 2009 at least.  So if it happens now is that prediction accurate?  Guaranteed, the second we are down 2% all of the "I told you so's" will come out, just as they did a few months ago.  Of course since that was an awful 3% decline it didn't last too long.

 

I predict nothing other than people will make a bunch of predictions that don't make sense to me.

[PLynchJr]

Well said Kraven.

 

:)

[berkshiremystery]

The ratio is not perfect, as explain below. But it was good enough for Warren Buffett in 2001, who wrote:

 

The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment.

 

Source: http://money.cnn.com/magazines/fortune/fortune_archive/2001/12/10/314691/index.htm

----

 

Buffett was using the measure to explain how he saw the Dot.com bubble developing the late 1990s. The question is can we use the stock market to GNP ratio to spot new bubbles in advance?

 

Note on GNP versus GDP:

 

Buffett compares the stock market to GNP. Most analysts use Gross Domestic Product (GDP) instead. In theory this should matter a lot. GDP is defined according to location, being the goods and services produced by a country. GNP is defined by ownership, as I’ve explained above. In practice though the two numbers are very close for the US, and the US is the only country where this ratio seems to be regularly computed. So like others, I use GNP and GDP interchangeably.

 

 

 

Someone should just imagine how weird would it be to accurately measure the stock market valuation (Market cap vs GNP or GNP), if our planet earth just joins the StarWars galactic universe of a zillion inhabitants. The galactic capital planet Coruscant alone would have a 1 trillion citizens, and our planet earth in the outer rim has become some diminished Roman Empire, and only have maybe some 0.00000001% of something of a market. Would someone instantly value Coca Cola by 200 trillion dollars immediately, only "maybe" every stormtrooper "might someday" slurp a Coke. Oh,... just kidding,... so don't take me too serious.  ;D  I personally only stick to my circle of competence to measure a market, while other investors might have other measurements that I can't understand.

 

Of course, I only refer to the general market. Some individual stocks are still certainly or relatively compared to others cheap.

 

I predict nothing other than people will make a bunch of predictions that don't make sense to me.

 

But I know myself that this discussion already leads to too much senseless noise.  ::)

Kraven is right  ;)

 

[Guest bengrahamofthenorth]

I'll add my two cents here. Those holding cash at 50%+ levels just seems like market timing to me. I don't think anybody would make the case that we are in a giant equity bubble here.

 

Sure there could be a pullback but when did we ever try to predict short term movements. Even Buffett has admitted that with the Fed's liquidity moves, the risk of inflation occurring could be much higher than people expect. To those that are big on cash, what happens if markets continue to move higher and then inflation starts ticking up? You can't just jump back in.

 

That's my concern, it really looks like Bernanke is trying to monetize the US debt and cash savers could be left holding the bag. Don't get me wrong I have about 16% cash ($US) but it seems holding a huge chunk of cash is market timing and  ownership in strong undervalued companies like (Wells, AIG, BAC, FFH, MKL, BRK.B) will do quite well over time.

[txitxo]

I'm totally confused here.  What is it exactly that people are predicting?  Is it another financial crisis which would lead to a stock market decline, or is it just a stock market decline?  What drives me crazy about predictions is the time element.  We all know that the stock market will suffer a serious decline at some point in the future.  It will also reach insane frothy levels as well.  When will each of these things happen?  A prediction just that they will occur is no prediction at all.  Think about the broken clock. 

 

Further, for those who "know" the market will crash imminently, why hold any stocks at all?  Why not sell everything and wait to re-load?  And why the constant refrain from many about only holding BRK and FFH?  I don't understand it.  If the market tanks, they will likely tank just as much as anything else - more than some, less than others.  Perhaps if one is predicting another financial crisis I could see wanting to hold "arks", but if you know its coming, why not sell it all and wait to buy in cheaper?  If it's just a pricing decline, then how is holding BRK and FFH which are closer to IV than many other stocks better than holding something that's at rock bottom?  Because remember, in this case we're just talking about prices, not the actual business environment.

 

I think people are mixing up their predictions.  Some say the economy is moving along, but there will be a crash.  Then we get all the talk about market cap to GDP, profit margins, etc.  That sounds more like a business slowdown discussion.

 

At the end of the day, I don't love a market that just goes up either.  I'd be lying if I said it didn't make me think, but I'm just not sure exactly what people are predicting here and what they propose to do about it.  These threads pop up everytime there is no recent drop in the market.  An imminent downturn has been predicted since the Fall of 2009 at least.  So if it happens now is that prediction accurate?  Guaranteed, the second we are down 2% all of the "I told you so's" will come out, just as they did a few months ago.  Of course since that was an awful 3% decline it didn't last too long.

 

I predict nothing other than people will make a bunch of predictions that don't make sense to me.

 

 

  Kraven, I don't how other people do, but I always see these things probabilistically. There are lots of evidence which tell me that, based on the previous behaviour of the markets, a crash in the US is very likely. They also tell me that if there is a crash, the drawdown may be devastating. Am I 100% certain that there will be a crash? Not at all. Nobody knows that because it is intrinsically unknowable. So I just try to estimate odds and place my bets accordingly. Timing the market is impossible but knowing whether a market is expensive or not is straightforward.

 

  If there is a major world crash, everything will go down, but the odds are that both Europe and FFH will go down by less than the US market (I don't know about BRK). So if there is a crash, I get to buy companies which are even cheaper than the ones I have (you sell the P/E=7 stocks to buy the P/E=3 stocks, as Buffett says) and therefore I win. And if there is no crash, and the market keeps going up like crazy for another two years, I win too, because I am fully invested. What do I lose?

 

  The only thing you can do is estimate probabilities as accurately as possible (sometimes you can't even do that) and then position yourself accordingly. The rest is up to Goddess Fortuna: 

 

O Fortuna

velut luna

statu variabilis,

semper crescis

aut decrescis;

vita detestabilis

nunc obdurat

et tunc curat

ludo mentis aciem,

egestatem,

potestatem

dissolvit ut glaciem...

 

 

 

 

[Ross812]

Supply and demand. Money moving out of other assets is finding a home where the best return can be had, Equities. Only the relatively small universe index listed equities has the liquidity to absorb this money, and the indexes continue to march higher. You have few choices: get small and find companies ignored by the index and ETFs that have a predictable revenue stream going forward; enjoy the rise and realize that it will one day come to an end and unrealized gains will be lost. If you selected your companies carefully and are value investing, not trading on value stock volatility, the company will be much more valuable in 5 years and next time prices rise the gain will be even sweeter; get in and out: use models, post of message boards, try to catch the gains with a stop-loss, and lose some sleep.

 

If you are sitting on a pile of cash, realize you are better off than 99% of the world, smile, and swing when a deal comes along!

[mcliu]

Is there an archived version of this board? Would be interesting to see what topics people were debating about in 2006/2007. :)

[ubuy2wron]

I'll add my two cents here. Those holding cash at 50%+ levels just seems like market timing to me. I don't think anybody would make the case that we are in a giant equity bubble here.

 

Sure there could be a pullback but when did we ever try to predict short term movements. Even Buffett has admitted that with the Fed's liquidity moves, the risk of inflation occurring could be much higher than people expect. To those that are big on cash, what happens if markets continue to move higher and then inflation starts ticking up? You can't just jump back in.

 

That's my concern, it really looks like Bernanke is trying to monetize the US debt and cash savers could be left holding the bag. Don't get me wrong I have about 16% cash ($US) but it seems holding a huge chunk of cash is market timing and  ownership in strong undervalued companies like (Wells, AIG, BAC, FFH, MKL, BRK.B) will do quite well over time.

 

Market timing vs margin of safety are basically the same side of the coin. My personal out performance vs the S&P for the last 13 years has to be at least partially the result of finding myself with lots of cash when valuations are rich. This is the first time I find myself aggresively hedged or short but that is because I see the tail risks as being frankly scary as hell. If any one thinks that a Japanese or major European government default is just a small or insignificant risk then I suggest you have your head in the sand. This type of event while not certain is certainly possible, the knock on results of that type of magnitude 10 financial earth quake will make Lehman look like a cake walk. Prem understands the risks so by the way does Warren , Warren just will not talk about it in public.

[berkshiremystery]

Is there an archived version of this board? Would be interesting to see what topics people were debating about in 2006/2007. :)

 

Nope, unfortunately nothing exists anymore from the old predecessor board.

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/old-msn-berkshire-hathaway-shareholder's-board-archive/

 

 

[tombgrt]

Couldn't it be that some people here (not pointing fingers at all!) unconsciously try to act contrarian just for the sake of it? Sometimes it's just pretty hard not to have an opinion on something that occupies our mind a lot.

 

Herding is another factor that could be in play here. The fact that this topic has 110 replies in two days should say something. And how much of your opinion is formed by the posts, thoughs and opinions of others? That's why one poster rightfully kept away from FFH's AGM for two years. Seek up those that have different opinions than yours, not those that solely agree with your views.

 

 

Anyhow... I have nothing of real value to add, I'm simply clueless. :)

[berkshiremystery]

Couldn't it be that some people here (not pointing fingers at all!) unconsciously try to act contrarian just for the sake of it? Sometimes it's just pretty hard not to have an opinion on something that occupies our mind a lot.

 

Herding is another factor that could be in play here. The fact that this topic has 110 replies in two days should say something. And how much of your opinion is formed by the posts, thoughs and opinions of others? That's why one poster rightfully kept away from FFH's AGM for two years. Seek up those that have different opinions than yours, not those that solely agree with your views.

 

 

Anyhow... I have nothing of real value to add, I'm simply clueless. :)

 

Oh,... you mean Uccmal. This didn't went unnoticed by me,... but he was at this pre-pre-dinner event and that was for me quite informative with some rare stock idea. So in a sense he didn't miss everything. He probably only wanted to keep his head much clearer as he said, so he missed something but not everything.  ;)

[Parsad]

Couldn't it be that some people here (not pointing fingers at all!) unconsciously try to act contrarian just for the sake of it? Sometimes it's just pretty hard not to have an opinion on something that occupies our mind a lot.

 

Herding is another factor that could be in play here. The fact that this topic has 110 replies in two days should say something. And how much of your opinion is formed by the posts, thoughs and opinions of others? That's why one poster rightfully kept away from FFH's AGM for two years. Seek up those that have different opinions than yours, not those that solely agree with your views.

 

 

Anyhow... I have nothing of real value to add, I'm simply clueless. :)

 

I think if you make independent decisions, then this is irrelevant.  I've attended every Fairfax AGM since 2005, and I was fully invested in 2009 and 70-90% invested in 2010, 2011, 2012...we're still about 65-70% invested in 2013.  If an investor is swayed by other investors or what they hear on the news, then they've got a problem, because they are going to partake in things that will not have the full confidence of their own analysis.  Cheers! 

[muscleman]

If we only stick with cheap companies with strong balance sheet and strong buybacks, is it going to be worriesome?

If the market collapse, these companies could buyback shares, and our intrinsic value per share will be much greater.

 

Recently Buffet said the stock market is still pretty fairly valued. Maybe we have 1-2 more years before the next collapse?

[PlanMaestro]

I predict nothing other than people will make a bunch of predictions that don't make sense to me.

 

You can always count on Kraven to make you laugh.

[berkshiremystery]

Personally I never care much about the market sentiment, if you invest with some considerable margin of safety, strong balance sheet, extreme low P/BV, etc.  I'm currently looking at my old Dec. 31, 2008 statement. With a heavily concentrated portofolio, 97% in equities, only 3% cash, I personally finished my account in this harmful year in the black, while all the major indexes had crashed. So on a relative basis, I was for myself, some accidental black swan and did stare with disbelief at my numbers. As a private investor, I was way, way ahead of  99% of all institutional investors (Dec. 31, 2008:  DJIA. -33.84%, S&P  -38.49%, NASDAQ -40.54%). Also currently, I own prudently selected companies with some significant margin of safety. If they would crash all together, I would be very, very happy, because they could repurchase shares cheaply.

[Yours Truly]

I'm totally confused here.  What is it exactly that people are predicting?  Is it another financial crisis which would lead to a stock market decline, or is it just a stock market decline?  What drives me crazy about predictions is the time element.  We all know that the stock market will suffer a serious decline at some point in the future.  It will also reach insane frothy levels as well.  When will each of these things happen?  A prediction just that they will occur is no prediction at all.  Think about the broken clock. 

 

Further, for those who "know" the market will crash imminently, why hold any stocks at all?  Why not sell everything and wait to re-load?  And why the constant refrain from many about only holding BRK and FFH?  I don't understand it.  If the market tanks, they will likely tank just as much as anything else - more than some, less than others.  Perhaps if one is predicting another financial crisis I could see wanting to hold "arks", but if you know its coming, why not sell it all and wait to buy in cheaper?  If it's just a pricing decline, then how is holding BRK and FFH which are closer to IV than many other stocks better than holding something that's at rock bottom?  Because remember, in this case we're just talking about prices, not the actual business environment.

 

I think people are mixing up their predictions.  Some say the economy is moving along, but there will be a crash.  Then we get all the talk about market cap to GDP, profit margins, etc.  That sounds more like a business slowdown discussion.

 

At the end of the day, I don't love a market that just goes up either.  I'd be lying if I said it didn't make me think, but I'm just not sure exactly what people are predicting here and what they propose to do about it.  These threads pop up everytime there is no recent drop in the market.  An imminent downturn has been predicted since the Fall of 2009 at least.  So if it happens now is that prediction accurate?  Guaranteed, the second we are down 2% all of the "I told you so's" will come out, just as they did a few months ago.  Of course since that was an awful 3% decline it didn't last too long.

 

I predict nothing other than people will make a bunch of predictions that don't make sense to me.

 

Spoken like a Superinvestor of BRK & FFH.. Personally, I put more faith in your opinions as well as other 'superinvestors' on this board than scholars like James Montier, Roubini et al

[TorontoRaptorsFan]

I'm curious what Berkowitz's thoughts are on this topic. I have a feeling he's holding a significant amount of cash with the recent sale of shares in CIT and MBIA.

[Palantir]

^ What if they're only slightly below intrinsic value...?

[Uccmal]

Couldn't it be that some people here (not pointing fingers at all!) unconsciously try to act contrarian just for the sake of it? Sometimes it's just pretty hard not to have an opinion on something that occupies our mind a lot.

 

Herding is another factor that could be in play here. The fact that this topic has 110 replies in two days should say something. And how much of your opinion is formed by the posts, thoughs and opinions of others? That's why one poster rightfully kept away from FFH's AGM for two years. Seek up those that have different opinions than yours, not those that solely agree with your views.

 

Anyhow... I have nothing of real value to add, I'm simply clueless. :)

 

I think if you make independent decisions, then this is irrelevant.  I've attended every Fairfax AGM since 2005, and I was fully invested in 2009 and 70-90% invested in 2010, 2011, 2012...we're still about 65-70% invested in 2013.  If an investor is swayed by other investors or what they hear on the news, then they've got a problem, because they are going to partake in things that will not have the full confidence of their own analysis.  Cheers! 

 

I would think the first rule would be to know thyself.  I also think that "confidence" in ones own analysis is not always a good thing.  So therefore, I try to stay open to interpetation, as well.  That is where the board is helpful.

 

We are all swayed by the news or by the opinions of someone we respect.  It takes a careful balance between hard headedness open mindedness. 

 

I was probably one of the first people on this board other than Francis Chou who held BAC warrants, and having watched the process unfold throughout I am making a killing.  And it was never easy staying the course.

 

I prefer my influences right now to be in print, where they dont have a direct feed to my brain.  TV, video, and live speakers have a way of bypassing the thinking brain somehow.  How else do you explain why people believe Dr. Phil, or Dr. Oz's spew. 

 

To some extent one can train themselves out of this effect but we all have times of weakness.  Given the state of my life right now, I can get overtired and pessimistic (small kids, job, business, etc.).  This can lead me to be influenced.  Whether you like it or not Sanjeev, value investing is an emotional business.  We are deliberately buying when everyone else is selling.  That takes strong feelings.  You can call if confidence in your analysis, if you like, but I think that is just rationalization. 

 

As I started out saying, knowing thyself is probably the most important thing in this game. 

 

[Kraven]

As I started out saying, knowing thyself is probably the most important thing in this game.

 

I would agree with this.

[Kraven]

I predict nothing other than people will make a bunch of predictions that don't make sense to me.

 

You can always count on Kraven to make you laugh.

 

You mean, let me understand this, 'cause, ya know maybe it's me, I'm a little fucked up maybe, but I'm funny how? I mean funny like I'm a clown? I amuse you? I make you laugh, I'm here to fuckin' amuse you? What do you mean funny? Funny how? How am I funny?

[onyx1]

I predict nothing other than people will make a bunch of predictions that don't make sense to me.

 

You can always count on Kraven to make you laugh.

 

You mean, let me understand this, 'cause, ya know maybe it's me, I'm a little fucked up maybe, but I'm funny how? I mean funny like I'm a clown? I amuse you? I make you laugh, I'm here to fuckin' amuse you? What do you mean funny? Funny how? How am I funny?

;D  !!

 

Why that line isn't in AFI's Top 100 Movie Quotes of all time, I'll never know.

[Kraven]

I predict nothing other than people will make a bunch of predictions that don't make sense to me.

 

You can always count on Kraven to make you laugh.

 

You mean, let me understand this, 'cause, ya know maybe it's me, I'm a little fucked up maybe, but I'm funny how? I mean funny like I'm a clown? I amuse you? I make you laugh, I'm here to fuckin' amuse you? What do you mean funny? Funny how? How am I funny?

;D  !!

 

Why that line isn't in AFI's Top 100 Movie Quotes of all time, I'll never know.

 

Seriously, it isn't?  I would have thought top 10 at least.  I mean it's classic.  Right after Bogart says "here's looking at you, kid" to Bergman in Casablanca, this is what he says to her.  Seems as if they've really messed things up here.

[onyx1]

I predict nothing other than people will make a bunch of predictions that don't make sense to me.

 

You can always count on Kraven to make you laugh.

 

You mean, let me understand this, 'cause, ya know maybe it's me, I'm a little fucked up maybe, but I'm funny how? I mean funny like I'm a clown? I amuse you? I make you laugh, I'm here to fuckin' amuse you? What do you mean funny? Funny how? How am I funny?

;D  !!

 

Why that line isn't in AFI's Top 100 Movie Quotes of all time, I'll never know.

 

Seriously, it isn't?  I would have thought top 10 at least.  I mean it's classic.  Right after Bogart says "here's looking at you, kid" to Bergman in Casablanca, this is what he says to her.  Seems as if they've really messed things up here.

 

Yep classic, right up there with "I think you're going to need a bigger boat".