Value Investing – Page 35

Sorted Weekly Tweets

Posted on 23 March 2013 by David Merkel

Pettis / China

Modified Pettis: Peripheral country depositors will remember Cyprus & it will affect their future credibility w/deposit guarantees $$ Mar 22, 2013
Pettis: the idea that urbanization creates growth may have the causality backwards. It is far more likely that growth causes urbanization $$ Mar 22, 2013
Parsing the Words of the New Premier http://t.co/KggvVUZ0bf Li Keqiang: We need to leave to the market and society what they can do well $$ Mar 22, 2013
Closer Look: Parsing the Words of the New Premier – http://t.co/8LIiTxxqi0 Previous quote taken from Pettis, led me to this article $$ Mar 22, 2013
Li Keqiang: The reform is about curbing government power. As a self-imposed revolution, it will require real sacrifice and will be painful $$ Mar 22, 2013
Pettis: It turns out that we?ve seen record growth in debt. Is it really a surprise then that [China’s] economy is still growing quickly? Mar 22, 2013
Pettis:It isn?t until you write down the debt associated with the second bridge that you end up with a more meaningful measure of GDP. (3/3) Mar 22, 2013
official measures will have them contributing the same amount to GDP, even though the former creates real value & the latter does not (2/2) Mar 22, 2013
Pettis: If you spend $100 million each on two separate bridges, one of which is actively used and the other rarely used, (1/2) Mar 22, 2013
Biggest Solar Collapse in China Imperils $1.28 Billion http://t.co/yYgYpSpjAv Even w/subsidies solar is an inefficient technology $$ #duh Mar 21, 2013

FOMC

FED Optimistic Forecasts… http://t.co/MjilXrTSX1 The FOMC is always overoptimistic; they consider that 2b a part of their jobs $$ Mar 22, 2013
Wrong:US economy needs a third term of Ben Bernanke http://t.co/fStUDLjy7g A lunatic praises a dangerous lunatic leading US 2 Stagflation $$ Mar 22, 2013
That’s all folks! #FOMC $$ Mar 20, 2013
FOMC Central Tendency for Year end Fed Funds forecast: 2013 0.29%, 2014 0.55%, 2015 1.30%, Long run 4.01% $$ #FOMC Who can tell? Mar 20, 2013
FOMC Central Tendency 4 PCE inflation fcst since December 2012: 2013 1.55%, 2014 1.75%, 2015 1.93%, Long run 2.00% $$ #FOMC Way 2 optimistic Mar 20, 2013
FOMC Central Tendency Unemployment rt fcst since December 2012: 2013 7.35%, 2014 6.77%, 2015 6.20%, Long run 5.57% $$ #FOMC Way 2 optimistic Mar 20, 2013
FOMC Central Tendency for real GDP since December 2012: 2013 2.53%, 2014 3.17%, 2015 3.25%, Long run 2.43% $$ #FOMC Too optimistic 2014-5 Mar 20, 2013
FOMC Central Tendency Change in Fed Funds fcst since December 2012: 2013 -0.11%, 2014 -0.05%, 2015 -0.11%, Long run -.03% $$ #FOMC Mar 20, 2013
FOMC Change in Appropriate Timing of Policy Firming fcst since December 2012: 2.49 yrs, which shortens by 3.4 months $$ #FOMC Mar 20, 2013
FOMC Central Tendency Change in PCE inflation fcst since December 2012: 2013 -0.20%, 2014 -0.03%, 2015 -0.01%, Long run no change $$ #FOMC Mar 20, 2013
FOMC Central Tendency Change in Unemployment rate fcst since December 2012: 2013 -0.13%, 2014 -0.15%, 2015 -0.08%, Long run -0.03% $$ #FOMC Mar 20, 2013
FOMC Central Tendency Change in real GDP since December 2012: 2013 -0.10%, 2014 -0.32%, 2015 -0.13%, Long run -0.03% $$ #FOMC Mar 20, 2013
I am shocked that the Fed doesn’t have estimates on deposit insurance subsidies. That’s either a lie, or they should have that estimate $$ Mar 20, 2013
@pdacosta Good questions on Cyprus & deposit insurance subsidies $$ Mar 20, 2013
Go Pedro! Mar 20, 2013
Federal Reserve, Expected to Continue Stimulus, Tries to Reassure Investors http://t.co/DuoAg3hYTv Doing the same, expecting different $$ Mar 20, 2013
Bernanke Tightens Hold on Fed Message Against Hawks http://t.co/JyGTM0gP1f Wondered when this would happen; naive academic focuses power $$ Mar 20, 2013
Insights from Former Fed Chairmen http://t.co/q3RbM7sm9e Greenspan, meh. Volcker says some interesting things regarding removing stimulus $$ Mar 18, 2013
Fed’s Fisher: Too-big-to-fail banks are crony capitalists http://t.co/t65lN4kaaU Break them up & eliminate their funding advantages $$ Mar 16, 2013

Companies & Industries

Proto Labs seeks 1st acquisition shuns 3D printing http://t.co/56KeW8j4In Instead of creating by layers, start w/a block & cut away $$ $PRLB Mar 22, 2013
Old Tech Stocks, New Value: Santoli http://t.co/jfDtkOAwwX Tough part: estimating moat & probability of obsolescence, margin of safety $$ Mar 22, 2013
Health Insurers Warn on Premiums http://t.co/zzZI2s1s2h Wrote about this b4 law was passed. Was accused of bias $$ http://t.co/WCECEQYuns Mar 22, 2013
Plywood Becomes Hot Item in Housing Recovery http://t.co/2LMfLI43L1 4 confirmation, look here: http://t.co/HbnVnGdJmO Plywood on fire $$ Mar 22, 2013
As Crop Prices Surge, Investment Firms and Farmers Vie for Land http://t.co/B1ESXEnefd Presence of a large amount of borrowed $$ = bubble Mar 22, 2013
Intuitive Robosurgery Training Seen Lacking in Lawsuits http://t.co/VgyqOZqLMD Accidents r common & significant training of MDs needed $$ Mar 21, 2013
Gold Giants Shrink to Fit as Paulson Pushes Breakup http://t.co/9yXUb9Z11s Miners tend 2 overpay for marginal mines w/high variable costs $$ Mar 21, 2013
Americans Cut Restaurant Spending as Taxes Bite http://t.co/VAZELXMwM2 Less $$ available for small luxuries like eating out. Mar 20, 2013
Electronic Arts Ousts CEO as New Game Consoles Await http://t.co/QMDjN8uZmN Game systems shift away from use of PCs; $EA doesn’t adjust $$ Mar 19, 2013
Revealed: The Fragility of US Wireless Customer Loyalty http://t.co/j8U5wZ9GvT May be few choices, but wireless customers r not sticky $$ Mar 18, 2013
Corporate Cash Piles Grow to Record $1.45 Trillion, Moody?s Says http://t.co/0M84CE0tRi How much is domestic & not held 4 margin $$ Mar 18, 2013
Intermediate hold co debt has none of the protections of sr unsec parent co debt, or operating subsidiary debt. Not worth risks, avoid $$ Mar 18, 2013
$HRG Announces Debt Offering by F&G Life Hldgs http://t.co/APQvmAECv3 Total desperation w/intermediate holdco debt; Avoid, avoid, avoid $$ Mar 18, 2013
Private Equity?s $36B Retail Bet Not Going So Well http://t.co/xdQ9NzdAPs Retail does not work well w/leverage aside from mortgage debt $$ Mar 16, 2013

Cyprus

It?s Up to Putin Now: Cyprus Looks to Russia For Love?and Money http://t.co/CJdlAmyM5A Many Russians would lose $$ in Cypriot Bank default Mar 22, 2013
Just Let the Troubled Banks in Cyprus Fail http://t.co/0lSyyTjWIJ @carney gets it right. Protect small deposits, wipe out equity, etc. $$ Mar 22, 2013
ECB May Cut Emergency Funding to Cypriot Banks after Refusal http://t.co/jssqb7og4u If Cyprus’ banks fail, will anything else fail? $$ Mar 21, 2013
Cyprus banks dwarf economy thanks 2funds from wealthy foreigners http://t.co/GbElR3bcTP Countries w/large financial sectors tend 2b risky $$ Mar 20, 2013
BlackRock CEO Fink Says Cyprus Instability Will Be Resolved http://t.co/E3RYIDQENi The politics r pretty toxic; time 2end euro experiment $$ Mar 20, 2013
Outcry over Cyprus bailout taxing bank accounts http://t.co/kQ7DJgUN7P If it can happen in Cyprus, it can happen where you are too $$ #boo Mar 20, 2013
Daylight robbery in Cyprus will come to haunt EMU http://t.co/HsrbbJUVKk Imagine the US grabbing a portion of bank deposits in 1933 $$ #yuck Mar 20, 2013
Deauville Zombie Strikes as Cyprus Tax Inflames Crisis http://t.co/pkStGZyh5M Hard 2 believe confiscation of deposits wouldn’t lead 2runs $$ Mar 19, 2013
The Cyprus precedent @FelixSalmon http://t.co/EXBLMXj3by Taxing via confiscation doesn’t affect incentives, except the incentive 2 hide $$ Mar 18, 2013
Cyprus: What Were They Thinking? and some other notes http://t.co/LJPQ7FRSaT Try 2tax depositors, esp Russians, trigger a bank run, great $$ Mar 18, 2013
Cypriot authorities in revised deal talks http://t.co/f7NXFf5B9S This is getting desperate. Remember when they said subprime was small? $$ Mar 18, 2013
Dejected official: ?If this is successful then it will be used in the future… If this is not successful then who cares about Cyprus.? $$ Mar 18, 2013
Depositors Pay Price in Cyprus Bailout Deal http://t.co/CssNI6QUXK Imagine waking up one morning & 10% of your bank deposits r gone $$ #augh Mar 16, 2013

Energy

Sierra Club blasts new plan to improve fracking http://t.co/izJx8axguf Really depends on how much CO2 truly affects climate, jury is out $$ Mar 22, 2013
Ethanol Slumps Against Gasoline on Speculation Imports to Climb http://t.co/nFGWml3HBZ Profitable to import Brazilian ethanol caps prices $$ Mar 22, 2013
HEARD ON THE STREET: Chevron, Shell and Big Oil’s Big Divide http://t.co/zcrclj78XS FD: + $CVX | Smart move was focusing on crude oil $$ Mar 20, 2013
Wow, North Dakota, That?s a Lot of Oil http://t.co/NzKU4rhswH Up ~1000% in 10 years, would b more w/better transport (pipelines) $$ Mar 20, 2013
Consumers to Pay $13B Price as Ethanol Upends Refiners http://t.co/qRr3ZnGPnB Ethanol an expensive fuel; we would not use it w/o govt req $$ Mar 19, 2013
Valero Cancels Sale of California Refineries http://t.co/tu1lXOLBe4 Now better 2 retain them, if cheap oil can b sent there via rail $$ $VLO Mar 19, 2013
Suntech Said to Get Default Notice on $541M Unpaid Bonds http://t.co/hiA8ZfvW2K Equity likely 2b wiped out, even w/some willing 2 4bear $$ Mar 17, 2013
Canada Wonders Why Crude Oil Is Coming From Texas http://t.co/aIKRNA7UoT This is the price of not permitting pipelines; US oil by tankers $$ Mar 16, 2013
Three Years After the Spill, BP Gets Bullish http://t.co/owgnHfH9w5 FD: + $BP | Lots of valuable assets, but has the culture changed? $$ Mar 16, 2013

Financial Sector Issues

JP Morgan to Issue Its First Mortgage Bond Since 2007 http://t.co/M38KF7463e Reps & warranties weakened; harder 2 put back 2 originators $$ Mar 21, 2013
?In money management what sells is the illusion of certainty.? http://t.co/iiqXAHTRZ8 @researchpuzzler comments on words of @John_Hempton $$ Mar 22, 2013
SumZero Honors: 14 Top Buyside Analysts http://t.co/cZRnfBQJVd @sumzero does a study of buyside analysts to find the best quietly working $$ Mar 22, 2013
Proxy sites dump 1-click vote button on SEC concerns http://t.co/nycHC62TUa Levels the playing field a little bit; mgmt has 2 much power $$ Mar 21, 2013
Masked by Gibberish, the Risks Run Amok http://t.co/bKvbpCRyvZ Floyd Norris can write me 4 clarity, or read this: http://t.co/bhJwuegzP5 $$ Mar 22, 2013
Buffett Says Bet on Natural Juices of Market http://t.co/gyGA34vVMP USA is the most flexible place in the world, but stocks aren’t cheap $$ Mar 21, 2013
DeMarco pushes for 5-year wind down of GSEs http://t.co/aApiRMzoIK Don’t c how politics work here; pols don’t like 2 give up piggy bank $$ Mar 20, 2013
Could gold be the next Libor scandal? | Business http://t.co/gstTm7EWQA Looks like real trades take place, so it doesn’t seem the same $$ Mar 20, 2013
Workers Saving Too Little to Retire http://t.co/tWMYk3cpg8 I know of few people who save 20% of their incomes over 40 years $$ #prettytough Mar 19, 2013
Stock Bulls Get New Member of Club http://t.co/qEOMyG47WM I dunno, this makes me nervous. But 3% more upside in 2013 is no raving bull $$ Mar 19, 2013
Quantitative easing does little to boost gold prices http://t.co/o42EZUMk3T Gold prices react to inflation adjusted cost of carry $$ Mar 18, 2013
Traders Short Junk-Bond ETFs as Gains Top 100%: Credit Markets http://t.co/4CmFy3ebaC Short interest = 11.5% of total outstanding shares $$ Mar 18, 2013
Wrong: Want to Fix the Deficit? Get Real http://t.co/3fuRoKKw6S Increasing the deficit from here would worsen our long-term problems $$ Mar 16, 2013
Boo! Derivatives, Japan, $$ demise, pension defaults, debt jubilee RT @StockTwits: Zombie Swans from Outer Space http://t.co/jcNoTTzolI #boo Mar 16, 2013
How to Safeguard Your 401(k) http://t.co/HRCNqz1RkJ If plan has annual match, do not count on it. Avoid employer stock; know plan rules $$ Mar 16, 2013
Company Insiders Are Dumping Shares! Or Are They? http://t.co/D5cgLmM902 Best to look at what insiders do, not the large outside holders $$ Mar 16, 2013
If third-party custody fails in any significant way, i.e. bigger than what happened w/MF Global, all public investing will b ruined $$ Mar 16, 2013
Are Your Assets Safe?No Matter What? http://t.co/vWvSVno7JC @jasonzweigwsj talks about custody; strong incentive 4 present system 2 work $$ Mar 16, 2013
Golden State Hits Golden Age Of Bank M&A http://t.co/WLFhPq8jFC Higher capital requirements create demand for banks 2 merge in California $$ Mar 16, 2013

Rest of the World

Is Emerging Market Debt Undervalued? http://t.co/8hSOukeOKf I tend 2 think so, but performance so far this year has been subpar $$ Mar 22, 2013
Bank of Japan vows ‘all means available’ to smash deflation http://t.co/AJ27okuZFZ Difficult 2 have inflation w/shrinking population $$ Mar 22, 2013
BRICs: a Slowing Dilemma http://t.co/furMgL5VTO The BRICs r not a natural group; very different econ, but as GWP growth slows, so do they $$ Mar 21, 2013
RAHN: Where will the next financial crisis begin? http://t.co/x2rBMqCJUG Numerous countries r poised 2 lead global tailspin; I pick EZone $$ Mar 21, 2013
Spanish Banks Cut Developers as Zombies Dying http://t.co/CxRucV5Y7h Bottom not yet found for Spanish Real Estate $$ #bringoutyerdead #thud Mar 21, 2013
Europe?s work is far from over http://t.co/JfIY5PRW4f This is a colossal example of government management of the economy gone awry $$ #endit Mar 20, 2013
Canadian Household – Drowning in Debt http://t.co/XsdSDPBUn8 Canada: poster child 4 Central Bank-induced bubbles, amid good fiscal policy $$ Mar 20, 2013
BRICs Abandoned by Locals as Fund Outflows Reach 1996 High http://t.co/Xv4QZrNmSX Locals r throwing in the towel on stocks; time 2 buy? $$ Mar 16, 2013
Argentina Debates Pope’s Political Past http://t.co/FY25FtCCF2 Probably one where the truth will never b known; hard to fight a dictator $$ Mar 16, 2013

US Politics & Policy

Stockton Creditors Face Long Odds to End City Bankruptcy http://t.co/WcEuHjJft1 Think Stockton’s gambit will lose $$ cc: @munilass Mar 22, 2013
Gingrich-Santorum ?Unity Ticket? Almost Toppled Romney http://t.co/8jBjvs868Q G+S-> 0+0 = -1. Romney= -2. All R candidates fatally flawed $$ Mar 22, 2013
Getting the CIA Out of the Drone War http://t.co/kWcxz4mooN It matters less who does it, because there is no moral basis for it $$ #enditnow Mar 22, 2013
Mary Pat Christie Juggles Roles as Political Facilitator http://t.co/04VJb6UcbD Interesting background piece on Chris Christie’s wife $$ Mar 22, 2013
Postal Service Can?t Cut Saturday Delivery, GAO Says http://t.co/3BbcJ1arge Loss of Saturday would b start of end 4 USPS> less relevant $$ Mar 21, 2013
Rotten Tomatoes for a Billion-Dollar Farm Payout http://t.co/8FMfZnvqZC Ag is doing well in the US. Time to shut down much of the Ag Dept $$ Mar 21, 2013
California Nonpartisan Districting Ousts Life Incumbents http://t.co/1edUiXyizM Minimize internal boundaries subject 2 law requirements $$ Mar 20, 2013
Army Carbine Program May Waste $1.8 Billion, Report Finds http://t.co/WQOhHRZ5Mw Another area of DoD waste. Insiders tell me -> lots more $$ Mar 20, 2013
The Smarter Healthcare Consumer Myth http://t.co/BSdzrzQmMu Many underinsured people do not go to see a doctor when they are sick $$ Mar 19, 2013
Puerto Rico slides toward insolvency http://t.co/WaOVo1dWUa Puerto Rico exists to make California look responsible & Illinois honest $$ Mar 18, 2013
Or, as the late Bob Casey (former Governor of PA) once said, “You can’t lose if you are a pro-life Democrat.” $$ Mar 18, 2013
RNC Issues Scathing Analysis of GOP http://t.co/CsROwzkNxT Sounds dumb. Does not grasp the reliance of the GOP on moral issues voters $$ Mar 18, 2013
It’s a Lonely Quest for Land-Tax Fans, But, by George, They Press On http://t.co/yt8tPEVgjV Candidate 4 dustbin of history, dying hard $$ Mar 18, 2013
Republicans Foil What Majority Wants by Gerrymandering http://t.co/h2gMnsO5cp I live in MD, w/Democrat Gerrymander http://t.co/9ORTUnVjo9 $$ Mar 18, 2013
Roadkill May Reach Montana Menus Under Bill Allowing Fare http://t.co/5UsoOXeAsr Interesting 2c differences in state policies 4 roadkill $$ Mar 17, 2013
Obama Will Use Nixon-Era Law to Fight Climate Change http://t.co/HxRrpdoajr Expands National Environmental Policy Act to Climate Change $$ Mar 16, 2013

Other

The Beatles vs. the Taxman: A Former Manager Recalls Yesterday http://t.co/wNikAvMAdh Union of music,culture &finance cc: @reformedbroker $$ Mar 22, 2013
The Odd, Enduring Power of D?rer’s ‘Praying Hands’ http://t.co/QzEQsRYalP An idol 2b destroyed; far better 2 pray, regardless of hands $$ Mar 22, 2013
‘The Croods’: Making the Cartoons Sing http://t.co/Pj50Vytvuo As a musician, I find this article makes me optimistic on popular music $$ Mar 22, 2013
‘BioShock Infinite’: A Videmeogame With a Political Philosophy http://t.co/NzxQqrTXkM Americans r exceptional; doesn’t mean they r good $$ Mar 22, 2013
The Branding of ‘Liger’: Tiger Woods and Lindsey Vonn http://t.co/AW1CGnYHLh Two attractive sports stars dating? A marketing opportunity! $$ Mar 21, 2013
Inside the Art of Handling Negative Online Reviews http://t.co/vzsenUcvjq When negative reviews come, act quickly, it could wipe you out $$ Mar 21, 2013
Silicon Valley looks to Amy Andersen for love, at $50K a pop http://t.co/yVj37tUL9C Awkward men seeking wives need tailored personal help $$ Mar 20, 2013
How To Quarantine Java Like The Disease That It’s Become http://t.co/uhUcbRhFqh Sadly, I have to keep Java 4 my trading platform $$ #poison Mar 19, 2013
Study: Delaying marriage hurts middle-class Americans most http://t.co/ynHKcN4m4x Putting off marriage often means marriages don’t happen $$ Mar 18, 2013
Helmets Preventing Concussion Seen Quashed by NFL-Riddell http://t.co/FF4Gh6Viyn Long story on how conflicts of interest led2 concussions $$ Mar 18, 2013
With Speech, Cardinal Set Path 2 Papacy http://t.co/rDDOXEwCA2 Argued RC Church was 2 introspective, better 2b out doing good, short talk $$ Mar 17, 2013
The New Unmarried Moms http://t.co/1hnxyrE67R Teen pregnancy reduced, childbearing outside wedlock rising among 20-somethings $$ #bad4kids Mar 16, 2013
New York Is Sterilizing Its Rats. Here’s How http://t.co/qryyCDiLoK Tasty stuff for rats that renders them infertile in 4 days $$ #whoknew Mar 16, 2013

Replies & Retweets

Could work $$ RT @steve_hanke: @AlephBlog @carney or try a swap. Here’s how we did it in Latin America: http://t.co/fvT6V6dX9u| #Cyprus Mar 22, 2013
@SconsetCapital In China, if the gov’t builds two bridges in a BOGO deal, I don’t think you’d want the free one 😉 Mar 22, 2013
@Donald_Shekels No, not with the Asian operations Mar 22, 2013
@Donald_Shekels I could have said worse than I did, but I worry about getting sued. Mar 22, 2013
@JPDesloges You are off to a good start at Financial Iceberg. Keep it up. Mar 21, 2013
@agnestcrane Global Inequality is dropping, though. Global wages converging. “Rethinking Comparable Worth” http://t.co/qBWe9kxnim $$ Mar 21, 2013
Get well soon! RT @StockTwits: StockTwits Is presently down. Apologies for the inconvenience. We should be back up shortly. $$ Mar 21, 2013
@exMBB No. But title insurers had a rough time after housing bubble. Fraud drives most title insurance claims. Title insurance is complex Mar 20, 2013
@exMBB It’s all heavily depreciated. Not an issue. Mar 20, 2013
Commented on StockTwits: You’ve got it, Charles. Where IB is good it is very, very good, & where it is bad it is … http://t.co/o4fpUt2j66 Mar 20, 2013
@sleepyhungry It’s like a barrier option. Once it is breached it is over — this is only the 7th time I have done this. U made me smile Mar 20, 2013
Doing what their targets do RT @rcwhalen: Foreclosure Processor Prommis Holdings Files Chapter 11 http://t.co/mE30yP1gtj $$ Mar 19, 2013
But I think he is running out of options $$ $HRG RT @Nonrelatedsense: @AlephBlog continually amazed by Falcone. How does he do it? Mar 18, 2013
Extracts purchase price, retains control, kills bond buyers RT @Nonrelatedsense: continually amazed by Falcone. How does he do it? $$ Mar 18, 2013
I liked the photo RT @fundmyfund: @ritholtz what are you looking at in the new blog photo – a bird, a plane, or superman? Mar 18, 2013
RT @Royal_Arse: Mr. Merkel @AlephBlog is far more diplomatic than I in his tweet regarding pipeline construction. https://t.co/HIE2ngC4A3 Mar 16, 2013
@pdacosta 2 create a synthetic, u need 2 speculators: yield hog who wants a security @ a high yield, & a speculator who wants 2 short it Mar 16, 2013
@pdacosta If that ever had to happen, would b a crisis b/c synthetics r more numerous than organic. They can b & were created @ will. Mar 16, 2013

FWIW

My week on twitter: 54 retweets received, 2 new listings, 31 new followers, 58 mentions. Via: http://t.co/cPSEMLXpb8 Mar 21, 2013
Here’s my NCAA Bracket: http://t.co/ZK22T2bKnV #BlindfoldBracket2013 I’m no great fan of College Basketball, but I gave it a try $$ Mar 20, 2013
David Merkel (AlephBlog) on Twitter http://t.co/PsixuvsqiX Here’s a shout-out to my 7000th Twitter follower, Peter Saris @BMCA2461. Thanks! Mar 20, 2013

On Insurance Investing, Part 5

Posted on 14 March 2013 by David Merkel

The Squishy Stuff

I think I have just one more post left after this one, and this series ends.? This post deals with qualitative factors, which are harder to ascertain than the quantitative factors, and require more experience in order to learn.? But maybe I can aid my readers with a few pointers so they can learn faster.

Before we go, this series published at The Street.com University is an excellent start for any analyst, and includes many insurance examples.? But now for the rest.

Some products cannot be underwritten.? Anytime the insured knows more than the company, that is not a policy to write.? As an example, I toss out Long-term care policies, where the insurance industry has lost and lost again.? The insureds know their likely claims far better than the insurers do.? I feel the same about credit and mortgage insurance, where losses are so correlated that in a real crisis the insurance company fails, and those relying on the insurance fail as well.

I feel the same way about variable annuity living benefits at present — a rising market sets up the losses for when the market falls.

Avoid investing in companies where the law of large numbers does not apply.? This is true of all financial coverages.? If there is one big macro factor that drives your business it is not a safe place to be.

On Management

Management teams should be reliable.? They should always give complete and consistent answers to all questions, and demonstrate that they are managing the business, with underwriting being profitable.? They also should be willing to let results fall short of analysts’ estimates when it is true.

Though the short-term stock performance will be bad, the honesty will support the stock nearer to book value.? Investors appreciate honest companies, even when they do badly.

Finally if management has any sustainable competitive advantages (rare in insurance) they will use the advantages, and describe them in general terms so hat other insurers don’t reverse engineer them.

Be sure and read my series listed above.? It offers far more than what I have written here.

Neglected Stocks Are Typically in Strong Hands

Posted on 13 March 2013 by David Merkel

Neglected stocks — I measure it by the ratio of market cap to average dollar volume.? 15% of my portfolio is allocated to such stocks, but I would be happy for it to be 50%, if not more. Many of my companies have a single large holder or group — Industrias Bachoco, National Western Life Insurance Company, CVR Energy, and?Berkshire Hathaway.? These companies have few analysts; there is no way for a brokerage to make money off of them.

Yes, there is a control discount for such companies, because they can’t be taken over, except by the dominant owner.? But if they are well-run, they can be great places to invest.? The dominant investor has his interests aligned with yours over the long haul.? This means that in good and bad times, a large amount of the stock is locked up, and is not available to be bought or sold.? Strong hands hold the stock, which is typically a good place to be.

I like holding cheap, illiquid companies, where there is no hint of financial stress, and they are earning decent money.? I don’t care if they are in dull industries.? If they are compounding their earnings at a decent clip, the stock will eventually catch up.

The point is to own good businesses at good prices.? That’s what I aim to do.

Full disclosure: long BRK/B, CVI, IBA & NWLI

Sorted Weekly Tweets

Posted on 9 March 2013 by David Merkel

Rest of the World

West Australia Set to Stay Liberal Highlighting Gillard?s Plight http://t.co/8Vp0mjPjJt Some Labor policies r perceived 2b anti-mining $$ Mar 07, 2013
Top Stock Kroton?s School-Loans Growth Decelerates http://t.co/NrmeHL4hP9 Brazil goes down the student loan path US has. Better results? $$ Mar 07, 2013
Merkel Looks East for Austerity Allies in Hollande Talks http://t.co/3uSJ5frCcm Austerity is getting 2b a tougher sell; when does it end? $$ Mar 07, 2013
Saudi Next Generation Has US Imprint as King Picks Leaders http://t.co/GBReGpuS2x Wahabiism won’t accept cultural reforms; 2 optimistic $$ Mar 07, 2013
Impotent Mursi Losing Grip on Egypt as Unrest Prompts Reversals http://t.co/tsm8FzIs5x Anarchy rules as Mursi putters; no 1 2 replace him $$ Mar 07, 2013
EU Unemployment: Titanic in Perspective http://t.co/StpmdeBEm7 ~12% unemployment across the EU & still rising. Sound like a success 2u? $$ Mar 06, 2013
Pound?s World-Worst Drop Seen Growing in Pimco Math http://t.co/4yqRnOldzj Everyone wants a cheaper currency in the race 2 the bottom $$ Mar 06, 2013
China ‘fully prepared’ for currency war http://t.co/cdR7AWWTHw Brave words from a country w/an immature financial system $$ Mar 06, 2013
Japan’s Economic Bad Mix : Yen, Oil and China http://t.co/ELaLyiQe9e Not a question of Japan getting into trouble, only what catalyzes it $$ Mar 05, 2013
Reforms Stall in Athens as Troika Considers Next Aid Tranche for Greece http://t.co/P0n3aSAe9u Still don’t c how Greece avoids leaving EZone Mar 03, 2013

Energy

Chevron Shale Bet Down Under Makes Senex Target http://t.co/GnfWLIKi98 That’s why gas found in Australasia is so valuable FD: long $CVX $$ Mar 07, 2013
Ethanol Outpaces Gasoline on Longest Supply Drop Since 2010 http://t.co/FluutBbaoa Margins r wide enough shut capacity reopens $$ FD: + $VLO Mar 07, 2013
Conoco Says US Should Consider Allowing Oil Exports http://t.co/D6FqHkZIvO Now that we make more than we consume, y not sell excess? $$ Mar 07, 2013

Other

When ‘Jazz’ Was a Dirty Word http://t.co/cpipuRDcNi Fascinating 2c how jazz musicians rejected the label, but played w/great enthusiasm $$ Mar 09, 2013
Making a Liberal-Arts Education Pay http://t.co/Ob8wZyKb7Z Trouble w/liberal arts: not enough science & math; written by an English prof $$ Mar 07, 2013
Stress at Work: Why Women Feel It More Than Men http://t.co/AeLwohdPvL Women tend 2 ‘Tend and Befriend.’ Men tend 2 fight/act or leave $$ Mar 07, 2013
Rice Glut Expands With Farms Poised for Record Crop http://t.co/6M5bUdEQyF I’ve heard there r animal feed shortages, can rice b used? $$ Mar 06, 2013
In Geology, Old-Timers Can Be Worth Their Weight in Gold http://t.co/4c7TP8TKxg They analyze plants, animals, not just computer analyses $$ Mar 05, 2013
Many Avoid Tough Path to Citizenship http://t.co/9HEiMYmQTf Costs time & $$, effort from studying, hiring a lawyer, etc. Mar 05, 2013
As Pirates Run Rampant, TV Studios Dial Up Pursuit http://t.co/KdBMYEIpOg Story of television trying to eliminate piracy and not winning $$ Mar 05, 2013
Glad that Venezuela does not have to suffer through more of Chavez, but sad 4 him. Now, what will the election result be? $$ Mar 05, 2013

Companies

Icahn Unbound Takes Activism to New Peak in Deal Fights http://t.co/M2eAw3DLWc He’s having a lot of fun going after poorly planned deals $$ Mar 09, 2013
Why Vodafone Should Head for a Verizon Exit http://t.co/0FusnV2ZzG $VOD should make $VZ pay up, they have less need 2 act | FD: + $VOD $$ Mar 07, 2013
Boeing Said to Boost 787 Battery Tests As Carmakers Aid http://t.co/yOqFiyGlx0 2 Many batteries passing “quality control” @ manufacturer $$ Mar 07, 2013

Market Impact

Wrong question. by @ReformedBroker http://t.co/jzY7UcQYuS Tie your hands w/asset allocation. Give yourself limited movement re fear/greed $$ Mar 07, 2013
Proof the Fed is Juicing the Markets http://t.co/6RDGyEDueG Correlation is not proof, but the monetary base is highly correlated w/DJIA $$ Mar 07, 2013
Welcoming, and Worrying About, a Record Market http://t.co/K3fdzRpOJ6 Last inflation adjusted DJIA high was not Oct-2007, but Jan-2000 $$ Mar 06, 2013
Young Adults Retreat From Piling Up Debt http://t.co/FRIgpI8ELb Saving is the secret to getting the big ticket items 2 make life pleasant $$ Mar 06, 2013
Qualified Private Activity Bonds Come Under New Scrutiny http://t.co/LHNuPoAWjQ Corporations have access to issuing tax-exempt bonds $$ Mar 06, 2013

US Government & Economic Policy

Yale Suing Former Students Shows Crisis in Loans to Poor http://t.co/nhc0JjmEj5 Loan programs seem cheaper in the short run, deceptive $$ Mar 07, 2013
Tom Coburn?s Campaign Against Government Waste http://t.co/SeIO1CIQI5 Coburn fights for what is right regardless of what the GOP thinks $$ Mar 07, 2013
Nurses Spar With Doctors as 30 Million Insured Seek Care http://t.co/jgCNVanub3 These fights will be more common as Obamacare proceeds $$ Mar 06, 2013
S&P Credibility Seen Eroded by Complicity in Soured Deals http://t.co/VsYxQL4wfw Where r the complaints about regulators forcing ratings? $$ Mar 06, 2013
Warren Buffett Sees ‘Hair Trigger’ When Fed Shifts Stance http://t.co/28nIn3rDiw Right. Now if he would spend time speaking truth 2 power $$ Mar 06, 2013
US Sequestration : Market Impact on financial assets http://t.co/6zUZXo2yWq Would nitially b deflationary, but lead to growth later IMO $$ Mar 05, 2013
Dr Copper and his funny friends dont agree with SP500 – Divergence ! http://t.co/TpmemT4Ai6 Real economy not doing as well as S&P 500 $$ Mar 03, 2013
US Restaurant Index and US Consumer Confidence http://t.co/4Bc83xsrbU Restaurants r sensitive indicators of consumer behavior: weak now $$ Mar 03, 2013
Federal Reserve: What Happens When It Runs Out of Ammo? http://t.co/F2jHPEROU3 What happens when they need2tighten & reaction is violent $$ Mar 03, 2013
Two Scenarios for Future of ‘Big Finance’ http://t.co/DdQwk7Jyj6 Finance still needs 2 shrink, the economy needs total debt 2b < 2x GDP $$ Mar 03, 2013
US Incomes Fall, Spending Rises http://t.co/ldYgPDETEc What do you expect when you add back the payroll tax? $WMT takes a hit also $$ Mar 03, 2013
Druckenmiller Sees Storm Worse Than ?08 as Seniors Steal http://t.co/A0eSwqZYab It is very bad, but I don’t get the $211T number, too big $$ Mar 03, 2013
Obama Orders Cuts That Will Be ?Slow Grind? on Economy http://t.co/lgzqxK8iWw Next stop, 3/27 when the spending authorization expires $$ Mar 03, 2013
Obama Makes Cuts Personal in Strategy to Bend Congress http://t.co/AqjKaD865f May try to mismanage sequester to embarrass Republicans $$ Mar 03, 2013

Markets

Edge: Milevsky, Ritholtz, Zweig, Ferri & More http://t.co/N5CIsbv4x4 This year?s Edge Q is What *should* we be worried about? I’m in it 2 $$ Mar 05, 2013
Kass Takes Buffett?s Challenge to Present Bearish Questions http://t.co/WEmq4Y57Cn @DougKass gets fun of poking holes in Warren’s theses $$ Mar 05, 2013
Buffett’s Advice to Apple’s Tim Cook: Ignore Einhorn http://t.co/5z6QEoMBAm Warren tells him to manage for the long haul. Wise words $$ Mar 05, 2013
Investing methods that beat the market http://t.co/1CFvZQMwLf Momentum, small cap, value, yield — can all be mimicked through ETFs $$ Mar 05, 2013
Birinyi Says Buy Mining, Technology Shares as Bull Ages http://t.co/ywui2NoQwL Yes 4 tech, but miners have over developed, poor profits $$ Mar 05, 2013
How much do stocks really return? http://t.co/J3u19M5AmP Good article, but I think the advantage of stocks over inv grade bonds is ~1%/yr $$ Mar 05, 2013
Say Goodbye to the 4% Rule for Retirement http://t.co/AhWrDqfOdy Better rule: Ten-year Tsy yield +2% if bullish, +1% neutral, +0% bearish $$ Mar 05, 2013

Other

In Florida, Sinkhole Risks Grow With Urban Expansion http://t.co/VRX7vsSqDr West Central Florida has a sinkholes, could lose 4 counties? $$ Mar 07, 2013
Imagining a Post-Bundle World for Cable TV http://t.co/U86Jducpeg Popular shows/networks would do better, less popular would suffer $$ Mar 03, 2013

Replies & Retweets

Why should the companies you listed pay 6%, when all of them could issue senior unsecured for less than that? http://t.co/Shc5Rq4c8F Mar 07, 2013
@The_Analyst They would give up that much to avoid being sr unsec liability?? Mar 07, 2013
Bigtime MT @BarbarianCap: $PRU >Annuity Fees Would Make Bankers Dance http://t.co/brvonxtRHS >> CEO touting how expensive their products r Mar 07, 2013
You can say that again RT @munilass: This is beautiful. The use of drones is finally getting the attention it deserves. Mar 07, 2013
Good one! RT @JMucken: @AlephBlog It would be metaphorical to give the winner a “gold” medal. Mar 06, 2013
I agree w/that, as it says in Romans 3:8 http://t.co/wYE9utGxjD RT @cogent_rambling: Bad doesn’t erase good. http://t.co/6yCqpHp405 Mar 06, 2013
RT @agnestcrane: I’d say credit markets feel pretty good about banks ahead of stress tests. BofA, GS, MS CDS spreads have more than halv … Mar 06, 2013
I use that when I worry about retailer spam RT @cullenroche: On a more serious note, why in the world do I still use my Yahoo email account? Mar 06, 2013
Maybe we could turn competitive devaluation into an Olympic sport. Send all finance ministers & central bankers 2 Sochi w/a 1-way ticket $$ Mar 06, 2013
@Fullcarry Thanks for the info, helps Mar 05, 2013
Jesus will surprise him RT @mattrixDOTinfo: re: Chavez and being sad. It’s a shame Chavez will now have 2b held accountable to our Maker. Mar 05, 2013

FWIW

My week on twitter: 39 retweets received, 2 new listings, 90 new followers, 36 mentions. Via: http://t.co/cPSEMLXpb8 Mar 07, 2013

A Few Notes from the Berkshire Hathaway 10K

Posted on 5 March 2013 by David Merkel

Letting the document speak, here are a few notes, starting with with the most significant part of the risk factors:

Investments are unusually concentrated and fair values are subject to loss in value.

We concentrate a high percentage of our investments in equity securities in a low number of companies and diversify our investment portfolios far less than is conventional in the insurance industry. A significant decline in the fair values of our larger investments may produce a material decline in our consolidated shareholders? equity and our consolidated book value per share. Under certain circumstances, significant declines in the fair values of these investments may require the recognition of other than-temporary impairment losses.

A large percentage of our investments are held in our insurance companies and a decrease in the fair values of our investments could produce a large decline in statutory surplus. Our large statutory surplus serves as a competitive advantage, and a material decline could have a material adverse affect our ability to write new insurance business thus affecting our future underwriting profitability.

Buffett does very well, but I know of no other insurer that invests so much in equities funded by insurance liabilities.? There is a real risk that if the markets fall hard, a la 1929-32, 1973-4, 2007-8. that BRK would be hard-pressed, particularly if there were some significant disaster like Katrina or Sandy, or set of disasters like 2004 or 2011.

And a note on the accounting change that Buffett mentioned in his letter, but did not decide to describe:

Underwriting expenses incurred in 2012 increased $586 million (21.1%) compared with 2011. The increase was primarily the result of a change in U.S. GAAP concerning deferred policy acquisition costs (?DPAC?). DPAC represents the underwriting costs that are eligible to be capitalized and expensed as premiums are earned over the policy period. Upon adoption of the new accounting standard as of January 1, 2012, GEICO ceased deferring a large portion of its advertising costs. The new accounting standard was adopted on a prospective basis and as a result, DPAC recorded as of December 31, 2011 was amortized to expense over the remainder of the related policy periods in 2012. Policy acquisition costs related to policies written and renewed after December 31, 2011 are being deferred at lower levels than in the past. The new accounting standard for DPAC does not impact the cash basis periodic underwriting costs or our assessment of GEICO?s underwriting performance. However, the new accounting standard accelerates the timing of when certain underwriting costs are recognized in earnings. We estimate that GEICO?s underwriting expenses in 2012 would have been about $410 million less had we computed DPAC under the prior accounting standard and that, as a result, GEICO?s expense ratio (the ratio of underwriting expenses to premiums earned) in 2012 would have been less than in 2011.

The point is that BRK’s underwriting result would have been very good without the accounting change.? The accounting change was a good thing, though.? Companies trying to inflate profits look for every marketing expense that they can deem an “investment.”? All of those costs would be spread over the life of the policies, rather expensed in the current year.? The new accounting standard limits what costs can be expensed to those that are truly marginal to the business produced.

Final note: They lost money on annuity reinsurance and retro at Berkshire Hathaway Reinsurance Group [Pp 34-36].? Retro sprang from new claims.? On annuities:

The annuity business generated underwriting losses of $178 million in 2012, $118 million in 2011 and $114 million in 2010. Annuity underwriting losses reflect the periodic discount accretion of the discounted liabilities established for such contracts as well as adjustments for mortality experience.

I am not sure I would want to reinsure annuities; I’m not sure that it is possible to insure long term investment guarantees, no matter how truncated.

Full disclosure: long BRK/B

Sorted Weekly Tweets

Posted on 4 March 2013 by David Merkel

Berkshire Hathaway

$BRK.B The preferred has 2 other features that materially increase its value: at some point it will b redeemed @ a significant premium price Mar 01, 2013
…the preferred also comes with warrants permitting us to buy 5% of the holding company?s common stock for a nominal sum $$ FD: + $BRK.B Mar 01, 2013
Buffett to Update His Acquisition Hunt http://t.co/OHzvc2xQBW Buffett has more than enough $$ to buy what he wants; free cash flow is huge Mar 01, 2013
We Want Your Questions for Warren Buffett http://t.co/7GiMfdYbst Mail in your questions for Warren Buffett & do it here. I wil do so. $$ Mar 01, 2013

Full Disclosure: long BRK/B

Monetary Policy

Federal Reserve: What Happens When It Runs Out of Ammo? http://t.co/F2jHPEROU3 What happens when they need2tighten & reaction is violent $$ Mar 03, 2013
Fed Could Slow Bond Selloff http://t.co/HifHyKx4Su And so they dream, not realizing tightening cycles r proportionate to loosening cycles $$ Mar 01, 2013
Bernanke Says U.S. Must End ?Too Big to Fail? Bank Subsidy http://t.co/ScBqYKo3oG Easy2do: keep raising deposit ins prems till banks balk $$ Feb 28, 2013
Kuroda?s Inflation Failure Seen in Long Bond Rally http://t.co/EuDTpe0kPd Most nations of the world r trying voodoo economics, Japan most $$ Feb 28, 2013
Bernanke?s Stimulus Spurring US Employment in Housing http://t.co/GYhrkyWGI8 I would be more optimistic if new sectors were prospering $$ Feb 25, 2013
Trade protectionism looms next as central banks exhaust QE http://t.co/M5jJDSbxrD Weakening your currency can give a temporary advantage $$ Feb 25, 2013

US Economy

Dr Copper and his funny friends dont agree with SP500 – Divergence ! http://t.co/TpmemT4Ai6 Real economy not doing as well as S&P 500 $$ Mar 03, 2013
US Restaurant Index and US Consumer Confidence http://t.co/4Bc83xsrbU Restaurants r sensitive indicators of consumer behavior: weak now $$ Mar 03, 2013
US Incomes Fall, Spending Rises http://t.co/ldYgPDETEc What do you expect when you add back the payroll tax? $WMT takes a hit also $$ Mar 03, 2013
Obama Orders Cuts That Will Be ?Slow Grind? on Economy http://t.co/lgzqxK8iWw Next stop, 3/27 when the spending authorization expires $$ Mar 03, 2013
Obama Makes Cuts Personal in Strategy to Bend Congress http://t.co/AqjKaD865f May try to mismanage sequester to embarrass Republicans $$ Mar 03, 2013

Rest of the World

Reforms Stall in Athens as Troika Considers Next Aid Tranche for Greece http://t.co/P0n3aSAe9u Still don’t c how Greece avoids leaving EZone Mar 03, 2013
Ivory Coast?s Women Reject Equality in Household Debate http://t.co/1AuTdZTb9r Equality means men don’t have to support their households $$ Mar 01, 2013
Japanese Revival Seen in Honda?s First Plant in 49 Years http://t.co/oKo5aBuxhA $HMC new factory comes just as weak yen boosts prospects $$ Feb 28, 2013
Wrong: Berlusconi?s Surge Shows Why Europe Needs a Deeper Union http://t.co/f3dQLVA6zB Rather, it shows why the Eurozone should fold $$ Feb 28, 2013
India May Curb Widest BRIC Budget Gap for Rate-Cut Room http://t.co/kqhBm895gt BRIC should not b a group; problems r very dissimilar $$ Feb 28, 2013
Asia s Huge Debt Growth Problem: Remember 1997? http://t.co/dZ3nAnFyXe Bank lending/GDP in Asia exceeding levels at 1997 crisis $$ Feb 28, 2013
$20 Phone Stars at Mobile World Congress http://t.co/mbKdgSMwso And it can go 35 days without charging; $NOK – hero of developing world $$ Feb 28, 2013
Ruchir Sharma: China Has Its Own Debt Bomb http://t.co/DaoTuJGO17 China is so bad off that no one would want to be in their position. $$ Feb 26, 2013
China?s premature overheating http://t.co/2YBgqsA365 Need to free the economy, end force-feeding of credit to glutted sectors & cronies $$ Feb 26, 2013
Canadian Economy Tumble http://t.co/sDbAj0uajE Compilation of articles showing the slowing Canadian consumer, & its effect on the economy $$ Feb 25, 2013
Has Spain?s Economic Contraction Become Self Perpetuating? http://t.co/XOSFgBL6yb Population shrinkage from migration kills entitlements $$ Feb 24, 2013
Pettis: Countries w/higher external debt levels r constrained in their ability2wage currency war w/countries w/lower external debt levels $$ Feb 24, 2013

Financial Sector & Pensions

Two Scenarios for Future of ‘Big Finance’ http://t.co/DdQwk7Jyj6 Finance still needs 2 shrink, the economy needs total debt 2b < 2x GDP $$ Mar 03, 2013
Druckenmiller Sees Storm Worse Than ?08 as Seniors Steal http://t.co/A0eSwqZYab It is very bad, but I don’t get the $211T number, too big $$ Mar 03, 2013
McGraw Fighting U.S. Justice Recalls AmEx Battle to Save Company http://t.co/R6likSWxrk He fights valiantly against those who r evil $$ Mar 01, 2013
Rule Split to Put U.S. Banks at a Loss http://t.co/BUAORxUyjt This is overstated; the real cash flow happens through statutory accounting $$ Mar 01, 2013
Gatsby, Galbraith and the Myth of Coolidge?s Crash http://t.co/prutRWBzHS The Crash caused by debt over-accumulation, like current crisis $$ Feb 28, 2013
Payday Loans Get US Consumer Bureau Scrutiny as ?Debt Traps? http://t.co/cfYHHUPsX7 This is one area where I would favor fiduciary stds $$ Feb 28, 2013
Providence, R.I. claims firm missed $10 mln in pension costs http://t.co/GgHm2FAIIT Suing the actuarial firm for liability miscalculation $$ Feb 28, 2013
Wells Fargo Credit Profile Hurt by Heinz Deal, Moody?s Says http://t.co/ND3APjqqfk | FD: long $WFC I think the $HNZ loan is well-proected $$ Feb 26, 2013

Other

Imagining a Post-Bundle World for Cable TV http://t.co/U86Jducpeg Popular shows/networks would do better, less popular would suffer $$ Mar 03, 2013
Assembly-Line Pizza Draws Hungry Fast-Casual Investors http://t.co/cozthTImDm Pizza to order will be available at reasonable prices $$ Mar 01, 2013
Too Much OIL http://t.co/PLBMRD24Vw Provides one useful tailwind for the US economy $$ Feb 26, 2013
Joel Kotkin: America’s Red State Growth Corridors http://t.co/ydjK0zKPyf Pro-business states tend to attract more biz & population $$ #texas Feb 26, 2013
Dennis Gartman: Selloff More Than a Rumble http://t.co/Y9IBBPHAyf Sometimes when weak holders arrive, an event like Italy trip them up $$ Feb 25, 2013
Generic-Drugs Court Decision Irks Businesses http://t.co/RJEEWut9Cs I don’t think this precedent will stand after the appeals process $$ Feb 25, 2013
I finally wrote my “big think piece” regarding security pricing. Here it is: http://t.co/hE6EGgjcJZ Death 2 Modern Portfolio Theory! $$ #FTW Feb 24, 2013
You’re Not as Good an Investor as You Think You Are http://t.co/2caH2rv5Rf We deceive ourselves to feel good $$ by @jasonzweigwsj Feb 23, 2013

Comments & Retweets

@PScatterpatter I posted a link to a smaller document with last night’s blog post http://t.co/ndWwIgtwPC Mar 01, 2013
@PScatterpatter Ernst & Young put it together to teach their own people Feb 28, 2013
@kyles09 I don’t see anyone willing to outbid & pay breakup Feb 28, 2013
@applehead72 enough refining, but not in right spots, also not enough transport abilities Feb 28, 2013
@Nonrelatedsense Didn?t know that, thanks. Feb 26, 2013
Anyone else have a problem that the latest Java 7 release (update 15) causes some programs to fail, like IB’s TWS? Feb 25, 2013
“Josh, if you have 4-6 hours to read it, the book “Once in Golconda,” gives the flavor of the?” ? David_Merkel http://t.co/jaZDnLqKvt $$ Feb 24, 2013
“Well done, from dyed-in-the-wool fundamentalist. As an example, Buffett has a bin on his desk?” ? David_Merkel http://t.co/1rAp8LeP85 $$ Feb 24, 2013

FWIW

My week on twitter: 24 retweets received, 117 new followers, 37 mentions. Via: http://t.co/cPSEMLXpb8 Feb 28, 2013

Full Disclosure: long BRK/B, WFC

Comments on the Berkshire Hathaway Annual Letter

Posted on 2 March 2013 by David Merkel

I’ll let Buffett speak, and I will add a few comments.

When the partnership I ran took control of Berkshire in 1965, I could never have dreamed that a year in which we had a gain of $24.1 billion would be subpar, in terms of the comparison we present on the facing page.

But subpar it was. For the ninth time in 48 years, Berkshire?s percentage increase in book value was less than the S&P?s percentage gain (a calculation that includes dividends as well as price appreciation). In eight of those nine years, it should be noted, the S&P had a gain of 15% or more. We do better when the wind is in our face.

To date, we?ve never had a five-year period of underperformance, having managed 43 times to surpass the S&P over such a stretch. (The record is on page 103.) But the S&P has now had gains in each of the last four years, outpacing us over that period. If the market continues to advance in 2013, our streak of five year wins will end.

One thing of which you can be certain: Whatever Berkshire?s results, my partner Charlie Munger, the company?s Vice Chairman, and I will not change yardsticks. It?s our job to increase intrinsic business value ? for which we use book value as a significantly understated proxy ? at a faster rate than the market gains of the S&P. If we do so, Berkshire?s share price, though unpredictable from year to year, will itself outpace the S&P over time. If we fail, however, our management will bring no value to our investors, who themselves can earn S&P returns by buying a low-cost index fund.

I appreciate Buffett & Munger not changing their metric.? They could have said that the market return beat the S&P in 2012, but they didn’t.? Buffett is a compounder.? He figures that if he compounds net worth at an above average rate, he will beat the market returns of the S&P 500 over the intermediate term.? I agree; building intrinsic value will almost always lead to outperformance, unless the stock was significantly overvalued at the beginning.

On Searching for Acquisitions

Our luck, however, changed early this year. In February, we agreed to buy 50% of a holding company that will own all of H. J. Heinz. The other half will be owned by a small group of investors led by Jorge Paulo Lemann, a renowned Brazilian businessman and philanthropist.

We couldn?t be in better company. Jorge Paulo is a long-time friend of mine and an extraordinary manager. His group and Berkshire will each contribute about $4 billion for common equity in the holding company. Berkshire will also invest $8 billion in preferred shares that pay a 9% dividend. The preferred has two other features that materially increase its value: at some point it will be redeemed at a significant premium price and the preferred also comes with warrants permitting us to buy 5% of the holding company?s common stock for a nominal sum.

Once again, we don’t know all of the details, but it really looks like Buffett got the better part of the deal, and by a decent margin.? He continues:

Our total investment of about $12 billion soaks up much of what Berkshire earned last year. But we still have plenty of cash and are generating more at a good clip. So it?s back to work; Charlie and I have again donned our safari outfits and resumed our search for elephants.

As many expected, Buffett has more than enough cash to deploy if he sees the right deal.? With valuations being high, I don’t see how they fire the elephant gun, unless a company with protected boundaries wants to sell.

Though I failed to land a major acquisition in 2012, the managers of our subsidiaries did far better. We had a record year for ?bolt-on? purchases, spending about $2.3 billion for 26 companies that were melded into our existing businesses. These transactions were completed without Berkshire issuing any shares.

Charlie and I love these acquisitions: Usually they are low-risk, burden headquarters not at all, and expand the scope of our proven managers.

The tuck-in acquisitions of BRK are particularly valuable.? Done out of the spotlight, they get done at reasonable terms, and grow BRK organically.

The new investment managers, Combs and Weschler, did well in 2012, and Buffett is giving them more assets to manage.

As noted in the first section of this report, we have now operated at an underwriting profit for ten consecutive years, our pre-tax gain for the period having totaled $18.6 billion. Looking ahead, I believe we will continue to underwrite profitably in most years. If we do, our float will be better than free money.

Now interest rates are low, and underwriting standards are far tougher across the industry than if we were in a high interest rate environment.

Let me emphasize once again that cost-free float is not an outcome to be expected for the P/C industry as a whole: There is very little ?Berkshire-quality? float existing in the insurance world. In 37 of the 45 years ending in 2011, the industry?s premiums have been inadequate to cover claims plus expenses. Consequently, the industry?s overall return on tangible equity has for many decades fallen far short of the average return realized by American industry, a sorry performance almost certain to continue.

What Buffett is saying is that his float is unique because:

His company underwrites carefully.
There is a decent amount of long-tailed business.
The short-tailed business (GEICO) is growing, which makes short-dated float feel long — in essence Buffett can borrow short and invest long, for now.

A further unpleasant reality adds to the industry?s dim prospects: Insurance earnings are now benefitting [sic] from ?legacy? bond portfolios that deliver much higher yields than will be available when funds are reinvested during the next few years ? and perhaps for many years beyond that. Today?s bond portfolios are, in effect, wasting assets. Earnings of insurers will be hurt in a significant way as bonds mature and are rolled over.

He is overstating the case here.? Most P&C insurers run short asset portfolios and have already adjusted to the low interest rate environment.

Now regarding the non-insurance operating businesses of BRK, they almost all had good years in 2012.? I’m not going to say more, though I will say that Buffett spent too much ink on newspapers; it is a teensy part of BRK.

Finally. Buffett talks about dividends.? There are two major ideas here:

Dividends are tax-disadvantaged versus buybacks.
If you can compound earnings at an above-average rate, there is no reason to ever pay a dividend.

What this might mean is that when a future CEO of BRK concludes that “there are no more worlds left to conquer” a la Alexander the Great, it would be reasonable to pay a dividend.? That said, he could also:

Centralize HR, legal and other functions.
Streamline subsidiaries, and make fewer managers manage more of BRK.
E.g., turn BRK into a real company.

There would be many ways to reshape BRK post-Buffett.? There are benefits and costs to doing that, but I think the benefits would be significant, unless the new CEO could keep the “hands off” way that Buffett does private equity.

Full Disclosure: Long BRK/B

Two Insurance Questions

Posted on 27 February 201327 February 2013 by David Merkel

First question:

Good afternoon.? I’m an avid reader of your blog and want to thank you for the work that you’ve done. I’m reading through the 10-Ks of insurers to try and educate myself and wanted to see if you can provide some advice.? I’m trying to find a guide/book that can help me understand the mechanics of the loss reserve developments show as an adjustment to each “vintage” year.? For example, I’m trying to understand if these are rolling reserves or if they are standalone on an annual basis.? I’m also trying to understand how changes in reserves flow through the income statement.? If you have a book that you can point me to, I’d really appreciate it.? Thanks for your help and have a nice weekend.

First, to any casualty actuaries reading me, if I get this wrong please correct me.? I am a life actuary by training, though I’ve tried to learn your discipline in broad from outside.

There are two main exhibits for P&C reserving in 10Ks — there are the loss triangles that go by accident year (i.e. the year in which the claim is incurred, rather than paid).? But the triangles show what has been paid, and how the incurred estimate changes over time.? With this, you can see how estimates of losses have proven liberal or conservative over time.

The second main exhibit breaks down reserve setting? for the current year.? It breaks into two main parts:

What reserves have you set for the business written in the current year?
How have you changed your estimate of losses incurred for prior years?

My article last night dealt with the latter of those questions.? What this implies is that good companies are very conservative in setting reserves for the current year, and lets the excess of those reserves release over time.? This may not juice stock performance in the short run, but in the long-run, it will lead to good results, because there will be few negative surprises from reserving.

Here’s the second question:

I?ve been intrigued by the recent reader questions, specifically the last couple questions on insurance stocks (RGA, AIZ and others). It sparked a mini research project this weekend for me and I read through a bunch of your old posts, along with some of the company reports and conference call transcripts. I don?t have in depth knowledge of the insurance industry?. I like the business model and understand the basic business, but am not yet well versed with reading and deciphering balance sheet items and insurance industry specific metrics-although I?m getting there

My question is very general in nature. As a value investor, each month I go through 6 or 7 different screens (basic value metrics like P/E, P/B, P/FCF, etc?). I know you?ve said that insurance stocks tend to follow their book value over time, but can trade in ranges from 0.5 to 2.0 times book? and I?ve read through your thoughts on adjusting book value for intangible items and AOCI. But my question is basically: ?Why is the market pricing so many insurance stocks so far below book value?? I know that the near term outlook for interest rates is that they?ll stay low, and I know the near term outlook for the industry isn?t great, but it seems like the market is pricing these stocks for poor results for years.

I know you can?t answer this question specifically, but I just wanted to hear your expertise on why you think these stocks are so far below their book value. I subscribe to Value Line and was reading the latest section on Life Insurers (section 8 from last month)? Value Line covers 10 or 12 of these stocks- RGA, LNC, MET, AFL, PRU, AIZ among others? and all of them seem to be priced at very low prices to earnings and/or book value. In the stock you like, National Western Life Insurance (NWLI), as I?m sure you know-it?s priced at .44 x book, and 6x forward earnings. Almost all of the stocks I looked at in Value line are single digit current P/E ratios as well.

The other thing I?ve noticed as I looked at the 10 year financial histories of these stocks is this: most of them are successfully growing their businesses (premium income seems to be steadily rising each year with most of them), and most of them are growing their book values. Some had the bad year in 2008, but many of them seem to be growing their book values at 10-15% per year consistently for the past decade.

So you have stocks that are selling at very low P/E ratios, very low P/B ratios (and low relative to their own historical valuations in both those categories), AND they are growing their book values (most of them at least).

I guess I?m just looking for some help as to what I could be missing? What does the market see that warrants these valuations?

Insurance is a mature industry.? It’s not a sexy industry.? Further, the accounting in insurance is complex, and few outside the industry understand it.? I have a huge book explaining the nuances of GAAP accounting for life insurers… it is complex.

Now there are some reserving issues with life insurers.? With secondary guarantees, there is little way to tell that reserving is adequate with Variable Products, or Universal Life with no lapse guarantees.

As such, I avoid the companies that are heavy with these products.? Part of the discount there is the distrust of the accounting, but the taint spreads to the industry as a whole,? and as such, the whole life insurance industry trades at a discount.? Some more so, some less.

That said, well-run insurance companies pay great dividends and compound book value at high rates.? Aside from NWLI, I don’t own any pure play life insurers,? Yes, I own SFG, but it is mostly a disability insurer.? AIZ offers funeral insurance, but it is #1 there, with weak competition.? I own RGA. a life reinsurer, but the issues are very different.

There are concerns in life insurance about crediting rate guarantees that can’t be met.? I don’t own any companies with that problem; that is a real problem.

I’m happy to own the insurers without accounting problems, which have low P/B & P/E ratios.? In the long run, their ability to compound returns will benefit any portfolio — it is only a question as to when serious and large investors realize this.? I am willing to wait for this.

Full disclosure: long NWLI SFG AIZ RGA AFL

On Equity Valuations

Posted on 26 February 201328 February 2013 by David Merkel

From a reader:

I only recently stumbled upon your blog, but I’m hooked. ?I can’t thank you enough for taking the time to share your financial insight, experience and wisdom.

I’m a new entrant to the financial services industry (3 weeks on the job) and feeling ill-equipped without a finance degree. I’m struggling with the application of equity valuation. I’ve read several DCF valuation books and can recite all the valuation ratios, but I still have trouble looking at a companies financial statements and using them to make a judgement on a companies stock price.

Do you have any book recommendations?for mastering fundamental equity valuation??

Any help would be greatly appreciated.?

Any book by Aswath Damodaran on valuation, or Michael Mauboussin’s book on Expectations Investing will give you the theoretically correct view on how to value any sort of company.? Also, this book by James Valentine is very useful.

But I want to make your life easier.? Typically, by industry there is one simple metric that drives valuation at any point in time.? That typically gears off of the maturity of the industry, and its need for additional capital.? For those that are math nerds, there is the true model, but us lesser mortals can’t run it.? But each industry faces constraints that others don’t, and so the true model in a given industry becomes simpler to a first approximation: focus on price-to-sales, price-to-book, price-to-earnings, or the PEG ratio, among other ideas.

These simpler valuation measures focus on what is tough to do.? Can we sell more?? Can we increase our profit margin?? Can we grow our business more rapidly?

This is why sell side analysts in a given industry do not use the full valuation models listed above, but use a partial version of them, as is appropriate to their industry.

It’s useful to know the overarching model, as the above books will give you. But practically, every industry is valued differently, because each one faces different constraints, and that drives their valuations.

On Insurance Investing, Part 4

Posted on 26 February 2013 by David Merkel

This will be a short but important part in this series on insurance investing.? It deals with the accounting, and applies to all areas of insurance.? Insurance accounting is complex. When an insurance policy is written, the insurer does not know the true cost of the liability that it has incurred; that will only be known over time.

Now the actuaries inside the firm most of the time have a better idea than outsiders as to where reserve should be set to pay future claims from existing business, but even they don’t know for sure.? Some lines of insurance do not have a strong method of calculating reserves.? This was/is true of most financial insurance, title insurance, etc., and as such, many such insurers got wiped out in the collapse of the housing bubble, because they did not realize that they were taking one big nondiversifiable risk.? The law of large numbers did not apply, because the results were highly correlated with housing prices, financial asset prices, etc.

Even with a long-tailed P&C insurance coverage, setting the reserves can be more of an art than science.? That is why I try to underwrite insurance management teams to understand whether they are conservative or not.? I would rather get a string of positive surprises than negative surprises, and you tend to one or the other.

There are a couple ways to analyze this:

1) This had more punch when interest rates were higher, because insurance managements were more tempted to compromise underwriting, because they had compelling investment opportunities, but asking the anti-question, “How are you planning on growing the top line next year?” is a good one.

An inexperienced or liberal management team will try to talk about business opportunities.? An experienced, or conservative management team will say, “We don’t target top line growth.? We aim for growth in fully converted book value per share.? We only grow the top line when the market favors that, and ability to write risks at favorable prices is easy.”

Conservative investors should be wary of any financial company that is growing aggressively; finance is a mature industry, and sustainable competitive advantages are few.

2) What is the company’s attitude on reserving?? How often do they report significant additional claims incurred from business written more than a year ago?? Good companies establish strong reserves on current year business, which depress current year profits, but gain reserve releases from prior year strongly set reserves.

So get out the 10K, and look for “Increase (decrease) in net losses and loss expenses incurred in respect of losses occurring in: prior years.”? That value should be consistently negative.? That is a sign that he management team does not care about maximizing current period profits but is conservative in its reserving practices.

One final note: point 2 does not work with life insurers.? They don’t have to give that disclosure.? My concern with life insurers is different at present because I don’t trust the reserving of secondary guarantees, which are promises made where the liability cannot easily be calculated, and where the regulators are behind the curve.

As such, I am leery of life insurers that write a lot of variable business, among other hard-to-value practices.? Simplicity of product design is a plus to investors.

In all things as investors, aim for a margin of safety.? That is the hallmark of value investing.