Arnold Van Den Berg – Thinking about Bears, Bulls, and Inflation | Notes on his Google Talk

We came across a fantastic Google Talk with Arnold Van Den Berg. He is a value investor who founded Century Management in 1974 and is noted on the list of SuperInvestors at the Graham Doddsville blog - http://www.grahamanddoddsville.net/?page_id=825#vandenberg

The whole talk is worth a watch for two reasons: 1) He talks about his interesting life story and the evolution of his investment philosophy and 2) He walks through some very interesting periods in investing, specifically being a bull when everyone is a bear (and vice versa) and how inflation affects value multiples like P/E.

Arnold Van Den Berg discusses the following topics during his talk: · How he developed his investment philosophy and principles · How his experiences in the ...

Our Notes - #1 “The Death of Equities”

Whether it is a bubble or a bust, you usually get some fun headlines. Case in point is BusinessWeek calling for the “Death of Equities” in 1979. Of course, it is easy to say in hindsight that it was obvious (find me a Pets.com believer), but when you are in the thick of it you need a philosophy to get through. We, of course, focus on value just like Arnold.  

As an aside, The Economist has also been wonderfully wrong about oil throughout the years. They have an uncanny ability of having their cover stories mark the peak of bullish and bearish sentiment of oil.

How does inflation affect market P/Es and stock prices? How does inflation creep up?

Money is free. Inflation is benign. COVID-19 aside, we are in a Goldilocks moment where things are just right, and everything is fine! Well, at least when you look at market multiples that is the case with the Googles of the world trading at 30x+ P/Es (i.e. a <=3% earnings yield) and mediocre businesses multiples making us queasy. And maybe everything will be just fine, but when you buy a stock at lofty valuations you have to have things go fine for a while to be OK. Pandemics and record deficits be damned! Buy baby buy.

Many investors today are too young to recall the inflation issues of the 1970s. Arnold has an excellent chart, shown below, of how something is not a problem until suddenly it is.

And how can inflation affect what someone is willing to pay today for a dollar of earnings (what the P/E ratio means fundamentally)? Well with low rates and benign inflation, like our Goldilocks world, multiples in the 20s make sense. At higher rates of inflation? Not so much. Assuming equal earnings, a change in inflation assumptions from today to the 70s would get you an average 66% decline in the average P/E stock. Something worth keeping in mind.

The Story of Blue Chip Stamps by Mohnish Pabrai

Mohnish Pabrai – “In investing, one should look for situations where you get the combination of very low risk and very high uncertainty. When you when you see an example of the two together the odds are very high that you can make a lot of money.”

Fans of Warren Buffett and Charlie Munger usually know the story about See’s Candies, the delicious chocolate company Berkshire Hathaway bought and now advertise shamelessly at their AGMs. Superfans usually also know about Blue Chip Stamps… But the details are often forgotten, including some of early Berkshire’s mistakes diversifying into things like department stores.

Thankfully, Mohnish Pabrai put together a thoughtful talk a few years ago at the University of California’s business school. It is a great reminder of the importance of making big bets when the odds are really in your favor, and how far a few bets can take you. Well worth a watch!

Few Bets. Big Bets. Infrequent Bets. In his talk at the University of California at Irvine's Paul Merage School of Business, Mohnish discusses five decisions...

Quick Note: Why hasn’t Warren Buffett bought stocks? – Thoughts from John Huber on the Acquirers Podcast

We have followed John Huber of Saber Capital for a few years now. We enjoy his interesting articles (he used to run Base Hit Investing but rolled the blog into his fund) including one on financial panics in hindsight (TLDR: Go for a walk!) - http://sabercapitalmgt.com/market-panics-in-hindsight/

 He recently did an interview on the Acquirer’s podcast with Tobias Carlisle. It’s a good watch and it also covers a question we have been pondering – Why didn’t Berkshire buy stocks in this downturn? They were actually a net seller, getting out of all the airlines.

John’s thoughts:

I think Buffett is cautious because I think he doesn't want to see the boat that he's spent 50 years building start to develop holes when he's 90 years old. Many times in the past he's talked about all sorts of different debacles like the LTCM (Long-Term Capital Management) debacle in the late 90s, which was a famous example of sort of greed gone haywire or greed on steroids or something, where so much leverage was used by extremely smart people to produce more money that they didn't need. He's got this quote that basically says you know once you're already rich you don't need to get rich again basically.

And so I think the issue with Berkshire right now is he could, and this is just my complete speculation - I don't know that this is the case, but I think he could be looking at the environment and seeing potential for significant litigation in business interruption insurance, potentially workers compensation, which Berkshire is a big underwriter of. In fact there's one court case in in France last week where AXA is going to have to - basically the French Court ruled that they are going to have to reimburse certain restaurants for two months of revenue. I think if you if you start to violate contract law and even if it's clear that these contracts do not, you know, pandemic is carved out you - if you're just going to start to override that then then who knows. How do you handicap that, who knows what the lawsuits could be – it could be a hundred billion. I think Buffett has said before that Berkshire is fit to withstand a $250 billion dollar hurricane season or even more, which would be multiples of the worst hurricane ever. I forget what damage Katrina caused but it would be multiples of that, and Berkshire wouldn't even see its see any hit to its capital, so it's an extreme fortress. I don't think there's any doubt it still is an extreme fortress but I think when you have the uncertainty of the pandemic possible litigation it's hard to know what the what the claims will end up being when the dust settles from this.

The other thing Buffett said, it didn't get a lot of publicity, but I think he tipped his hand a bit when he said there's no law that says a major storm can't come during a pandemic. So if you have a Katrina this summer and you combine it with all of the possible claims from the pandemic it could be it could be sort of a once in a 500-year flood and I think he just wants to be prepared for that. And I think he probably views that as a tail risk that's probably got one or two or three percent or even lower odds, but he said before that he doesn't want to take even a 1% chance of something bad happening so I think that's more likely the reason why he wasn't more aggressive in buying stocks.

Worth the full watch!