Friday File: Stop Losses Everywhere, But so Much I ALMOST Want to Buy

by Travis Johnson, Stock Gumshoe | December 21, 2018 4:42 pm

Updates on the Real Money Portfolio and my Big Picture Thinking for our last 2018 Friday File

The response was pretty overwhelmingly positive when I started sending out those “Trade Note” emails this week… so I’ll stick with it for a while, at least, and see how this goes.

What does that mean? Same day buy/sell notes about my Real Money Portfolio will be sent to the Irregulars going forward, in hopes of providing more granular and timely information than is currently possible in a weekly format. I’ll keep writing the Friday File, of course, but all of the little “bought a little more of X” or “sold half of Y on a stop loss” notes will be released on the day they happen instead of waiting for the end of the week.

These emails will not be extensive or frequent, I doubt there will be more than a couple most weeks and often the Friday File will be that week’s only update (some weeks I buy and sell a lot, some weeks none), and I will try to make them clear enough that you can get the gist without clicking through to the site… though I’ll always leave a link so you can read my full comment and participate in the discussion if you like.

Let me be clear, though, at the risk of being far too repetitive: These are not buy/sell recommendations for you. These are updates to my Real Money Portfolio, which I share with you in the interest of both disclosure and education (and which is actually REAL MONEY that matters to me and my family’s future). I hope you can learn something from the way I construct and think about and explain my portfolio and my analysis of the decisions I make… and by writing about each trade, I hope to learn something more about myself as well. Accountability is good, and if you have to describe something to a few thousand of your friends each time you make a trade, that gives some extra reason to make sure you’re being as thoughtful and rational as the moment allows.

So that’s our plan, at least for now. And yes, for the small minority of folks who don’t want more emails, I hear you — I will build some sort of filter in so you can opt out of the daily trade notes, but please give me a little patience — it might take a little time.


This week, to recap, there were three Trade Notes — One on Monday when I stopped out of Teladoc (TDOC) shares[1], and two yesterday — one when I added slightly to my position in iQiyi (IQ)[2] after the research I did to update my thinking after covering a teaser pitch from The Complete Investor that pointed at that stock, and another one late yesterday when Markel (MKL) hit another buy point for me around $985[3] and I nibbled a little more.

Here’s my initial big picture thinking for you during these wild days, just to share my mindset and the way that I’m thinking about my portfolio.

We are not in a market of shares of companies, we are in a market of change… I think traders are not all that interested in how well or poorly a company is doing in real-world terms right now, they are obsessed with any variation from the expected narrative, and with how their returns will look in a few weeks or months, and the number of people speaking with absolute certainty about whether the economy will “be fine” or “grow” or “collapse” next year is getting truly overwhelming. It’s the perception change that matters as we try to run to get the sails lined up with the source of the hot air, and we all get the dopamine rush we crave from taking bold and decisive action so that we can feel like we’re managing that change. What is the change in earnings next year? What is the change in interest rates? In expectations for future interest rates? In trade policy? Politics? Will the federal debt ever matter again? Will that make things go up by 5% or down by 5%? Even if you feel like you have a rational answer to those questions, that knowledge is probably still not going to help your portfolio over the next six months.

The only path to sanity, at least for me, is having a mindset that I’m building a portfolio of companies that I think are strong and likely to be stronger in the future, many years from now, and I want to add to that portfolio when the prices at which the stocks trade seem to me to be discounting the future earnings power of those companies too much. There aren’t a lot of shocking bargains around after a 10-year bull market, not even with the market down sharply from its highs of late, but you also don’t want to miss years of returns because of stubbornness, so sometimes you hold your nose and buy a little bit even though it’s expensive… and sometimes you get a little too ebullient and buy too much when it’s too expensive. You’re human, after all (me, too). “Portfolio building” doesn’t have to mean “buy and hold forever” for every position, sometimes it means you have to take down part of a wall because you put it up crooked after having a few beers at lunch.

I’m terrible at selling tops, but sometimes these stocks become traded as momentum names and shoot much higher, getting so pricey that it’s hard to justify the valuation on fundamentals, and that’s when I pay particular attention to stop losses… but if I still like the company’s path and still see a likely strong future, I will often use the stop loss to reduce positions and take partial profits, not eliminate them them entirely. I don’t sell as an automaton, nor do I buy as one — if you’re going to act like a computer, you’ll lose to the computers: They’re way better at it.

And yes, to be clear, when I write about my Real Money Portfolio this is actually my family’s money, in a mix of regular brokerage accounts and tax-deferred accounts. It doesn’t represent a “model portfolio” that I think fits for everyone, and it’s certainly not specifically appropriate for any other individual, it’s just the most honest way for me to share my perspective and my stock analysis with you — telling you what I think is one thing, and I’m happy to do that with most stocks I write about, as you’ll see me opine briefly about teaser stocks most days… but telling you what I’m actually willing to buy and sell with real money is something else entirely. And yes, I need this money. I’m young enough to make some of it back if I have terrible and persistent losses, but I’m counting on these savings that we’ve accumulated over 25 years, and are still accumulating… this isn’t “play money.”

To give you some idea of where I’m coming from and what colors my perspective: I’m 48, I started actively paying attention to investing in the years leading up to the dot-com bubble, and after actively thinking about and analyzing investments for a decade or so as a hobby, I quit my safe tenure-track job in 2008 to dedicate more time to Stock Gumshoe… so I’m not completely risk averse. Mrs. Gumshoe has a great job and it’s none of your business how old she is, and I have some little Gumshoes who will want to go to college in the next 5-10 years… and I probably won’t want to work until I’m 80… though this work here is kind of fun, maybe I’ll be doing this forever — last chance for lifetime subscriptions at $299 is this weekend! 🙂


Any news on our portfolio stocks that catches the eye this week, beyond those buys and sells I already noted?

Ligand Pharmaceuticals (LGND) raised 2018 guidance a little for material sales, not enough to be meaningful… and introduced 2019 guidance for the first time, which I imagine will disappoint some (though it’s right in line with what analysts had as their estimates estimates). Here’s what they said:

“Ligand expects revenue in 2019 to be at least $212 million, with up to an additional $40 million of potential milestone and license payments. Approximately two thirds of the $212 million of revenue is expected to be royalty revenue, and the remainder is expected to consist of contract payments and material sales. With projected revenue of $212 million, adjusted earnings per diluted share for 2019 is estimated to be approximately $5.50.”

That shouldn’t change the story at all, really, since $5.50 was more or less the baseline expectation. It could rise if they buy back more shares or receive some milestone payments (those are the chunkiest parts of their revenue, and the part that’s hardest to predict and time — contractual payments when a program reaches a particular milestone like FDA approval, different clinical trial initiations, etc.) … I’d guess that they will continue to be pretty conservative in forecasting that stuff, but the royalties are growing and still look good to me. I’d buy more as it dips lower, but, as is my mantra these days, it’ll be ‘nibbles’ as I remain worried about the broad market failing to find any real support, particularly for growth stocks.

And, of course, Ligand isn’t actually a growth stock at this rate — they say they’ll earn $6.63 per share this year (thanks to that Wuxi windfall payment and some other milestones), and $5.50 for 2019 and the projected $6 or so for 2020 are both, well, lower than $6.63. So it could come down further.

It’s still a royalty stock, with good upside possibilities for many years into the future, and those tend to be priced fairly lavishly… but it’s unlikely to grow earnings next year, so it’s hard to guess what investors will think, a lot will depend on whether early year sales of Promacta and Kyprolis continue to boom in 2019, and whether the company can get any meaningful revenue from their other royalties… which doesn’t seem so likely just yet, but hope springs eternal and there are some candidates inching closer to contributing. I have it penciled in for an average of $6 a share over the next few years, and think a royalty company with upside beyond that is worth 25X earnings if you’re thinking about a small speculation… and a bigger investment if it’s down closer to 15-20X earnings (when I took profits on most of the position a few months back, it was over 30X earnings), so we’ll see if it gets there. I added slightly when it started to come into my “more reasonable range” around $150 a few weeks back, the next point when I’d think about adding is in the $125-130 range if it falls again… I took a ton of profit off the table on this one when I sold earlier in the year, so now I’m thinking of it as a small speculation that I can nibble on as prices appeal again, giving it quite a bit of wiggle room.


Facebook (FB) continues to lead the market in embarrassing stories and ham-fisted apologies, but my is the stock getting cheap to reflect that. It’s now trading at only 16X current year earnings (it was 17X when I started writing last night). Of course, analyst estimates for next year have been slashed over the past six months as Facebook has talked up the many ways in which they’re going to spend billions on making the platform more secure and friendlier and less of a cancer on society, so the prediction now is that they won’t really grow earnings next year (though nor will earnings fall)… but that’s also the investor and pundit perspective, that’s apparently not the conversation that’s taking place among the vast majority of facebook users.

We sometimes have a hard time wondering how users value Facebook, but I think the fact that usage and user numbers have not declined precipitously this year, at least so far, indicates that we think it’s pretty valuable, even though it’s free. I have grave concerns that social media is undermining our ability to be a democratic nation, and it’s taking us time to educate ourselves about how manipulated we can be, but it also does a lot of wonderful things in creating community and keeping families and friends in contact… not all evil things are just evil, the world is full of nuance.

There have been a few studies that tried to assess how valuable Facebook users think the service is — and the conclusion has generally been that the users (usually college students, since that’s who’s usually available to take part in academic research studies) would demand payment of anywhere from $500-$2,000 to quit using Facebook for a year.

That’s not necessarily widespread, of course, and perhaps sentiment has changed since those studies collected their data… but it gives you an indication: Economists want to turn everything into a number to represent human sentiment, and their best guess now is that it would take at least $500 to wrest a user away from Facebook (and presumably toward your platform). So… would killing Facebook and stealing its two billion users cost a trillion dollars? (OK, it would be less — lots of those users are outside the US and Europe, and many of them will never see $500 all at once in their lives).

I don’t know, but maybe it’s a useful exercise to think like that — Facebook has gotten awfully sticky, no matter how much we hate it, and the advertising still works, so advertisers are still pouring money into Facebook’s accounts. Regulation is probably coming, and it might be tough, but regulation would also probably serve to give Facebook a huge anti-competitive moat — they can afford to manage essentially any level of regulation that comes up, but the next guy starting an idea in his dorm room can’t… and the $500 million startups in social networking, or even the bigger competitors like $20 billion Twitter (TWTR), will be hard pressed to keep up with whatever spending Facebook has to do to become compliant with new regulations and governmental oversight.

Facebook might go away someday, most things do… but they might also be cemented into place by a regulatory regime that prevents the next Facebook from emerging in this space. It’s pretty clear that people want online social networks, and that personalized advertising works — sometimes you just have to face those simple facts, and maybe think about buying companies that seem evil when they get cheap enough. Or, of course, you can express your displeasure by selling — it feels better, but you don’t often see huge companies with rapid revenue growth selling at market multiples, so you really might be missing an opportunity.

Me, I sold out of about 3/4 of my FB shares last year and earlier this year… but I still hold some. My investor brain is telling me to buy more as I see $125 tick by, but I don’t really want to… so I haven’t done so, and the wrestling match continues in my brain, I’ll let you know if that changes.


I’m similarly tempted by Amazon (AMZN) in the $1,300s to think about rebuilding that position, by the way, since we’re just about to dip under a 3X sales valuation for the first time in a year (earnings valuations for Amazon haven’t made sense for ten years or more, so I don’t look at them). Amazon traded at an average of about 2X sales for almost 15 years, give or take (sometimes far higher or longer for a long time, to be clear), and 2X next year’s estimated revenues would be about $562 billion… just another signpost to keep an eye out for (that would be a share price of about $1,150). Somewhere between $1,380 and $1,150 I’m guessing that I would find another buy compelling, but I’ve had a hard time justifying the buys I made even back in early 2017 at $800, so time will tell. Amazon has always been a hard one for me: Fantastic company with obvious and unbeatable dominance, but always valued at absurd valuations by most conventional measures so the price is abnormally determined by swings in sentiment and expectations. Right now, the drop in AMZN shares is very similar to the 30% drop they had at the beginning of 2016… buying then worked out very well, but, well, the future ain’t quite so easy to predict as the past.


Speaking of big tech, I’d be remiss not to mention Apple (AAPL) again, always the cheapest of the FANG stocks… and even cheaper now. The latest news is that there are yet more rumors about iPhone production being slowed down, and this week we also heard about their failures in India, which is putting more doubt into investors and spurring more “can Apple still grow iPhone sales?” questions.

India is the world’s most important emerging smartphone market now, mostly because they’re coming from behind and racing fast — only about a quarter of Indians have smart phones, and the country is rapidly digitizing and internet access is growing more important and expanding quickly, almost entirely via mobile devices and thanks to heavily subsidized low-cost smart phones by competing telecom providers who are trying to take share. Indians are reportedly buying up smart phones at a rapid clip, they’re just not buying iPhones[4] — which shouldn’t surprise us in a country where income and prices are far lower[5] than they are in China (India has generally had the lowest per-capita income of any BRIC country for a long time — though with dramatic income disparities that may not mean as much, the urban white collar workers who are still the first wave of consumers live a far different life from rural farmers).

The iPhone maker has now lost complete control of its own “story” in the market, now we see Indians won’t pay up for iPhones, and upgrade cycles are lengthening, and rumors continue to swirl about whether Apple is going to cut back on orders again… and the stock is down another 20% just since I stopped out of much of my position at $190. And that wasn’t much more than a month ago.

This is getting a little ridiculous, but it’s a good reminder of how stocks work: Business doesn’t usually change that fast, but perceptions about business change almost overnight. A little global growth fear, some trade wars, a frightening realization that the Federal Reserve is not just a stock market support provider, a little rumor scariness, a few suspicions that Apple is keeping secrets about how bad iPhone deliveries are, a step backward (for Apple, at least) in its patent/licensing fights with Qualcomm (QCOM has won injunctions against some older phone model sales in Germany and China now), and before you know it the world’s most valuable company ain’t anymore… it has dropped below Microsoft (MSFT), and even pays a higher dividend yield than Microsoft now. Heck, if Amazon (AMZN) hadn’t had a crappy couple weeks, too, then Amazon would also be bigger… with Alphabet (GOOG) not too far behind.

And when you’re in “perception change” mode and it’s time to panic to the exits so you can go relax with your family over the Christmas to New Year’s week, when pretty much all commerce stops (other than gift card usage, movie attendance, and returning strange shoes that your aunt bought you), then you don’t look twice at fundamentals… you just click sell sell SELL so you can go on vacation with a clear head.

But we always want to be slow and rational, so let’s dip back into those fundamentals, shall we? I’m wondering if Warren Buffett might even be doubling down on Apple, though there are certainly plenty of other “the sky is falling” stories where he could be selectively deploying Berkshire’s $100 billion in cash (looks like he jumped the gun a bit in buying up more Apple and more bank stocks last quarter)… and Apple itself could easily be buying back another few million shares here and there (they’ve bought back about 750 million shares over the past three years, reducing their share count by more than 14%… and they say they’re still planning to buy back a lot more).

But what does the business look like to an outsider? Well, it looks like a surprisingly profitable consumer products business that has fairly tepid revenue growth but very high consumer loyalty. Underlying that is the risk of being in the technology sector, where there is always the threat of “creative destruction” in the form of a newer, better, cooler device… but despite the fact that Apple is not the technology leader in phones (they aren’t usually the first to release a whiz-bang new hardware feature), they remain the customer experience leader thanks to a tightly integrated software system, an unusual ease of use instilled in them from Steve Jobs’ DNA, and an “ecosystem” of services and content that makes customers feel tied to their product (the iTunes purchases, the apps, the storage of photos, etc.). There are other options for everything Apple provides, often better or more powerful options, but not many are consistently easier and in possession of a strong brand image. I’ve never heard a middle school kid ask for a phone… they ask for iPhones.

That’s all subjective, though, and even though that’s a big part of the reason that Berkshire Hathaway came in as the biggest Apple shareholder over the past couple years (Warren Buffett loves consumer brands and “stickiness” and recurring revenue businesses… see Duracell, Gillette, Coca Cola, etc.), it’s not enough to make investors give them the benefit of the doubt when they’re in the first months of what looks like it has been a disappointing product launch and holiday season (we don’t know, of course, but that’s the perception).

So what would be enough to make me add more to my Apple holdings? What appealed to me the first time I bought Apple shares was the stark undervaluation… people were talking about investing in the Apple suppliers who would benefit from surging iPhone demand, and yet Apple itself was trading at an ex-cash PE in the single digits. It was nutty.

And a similar financial situation is setting up now… yes, Apple is having trouble competing with low-end phones from China, particularly in the price-sensitive Chinese and Indian markets where they have had (in China, anyway) a huge amount of success in past years… but they’re still extremely profitable. Over the past year, they’ve earned $59.5 billion in profit. That’s the most profitable year Apple has ever had.. and by far the most profitable company on earth, at least if you restrict it to profits from actual operations. (Berkshire had profits of $60 billion, but that’s mostly just from writing up the investment portfolio — each dollar of paper profit has to be counted as “earnings” now — the only real operating companies that come close are Samsung at about $36 billion and AT&T and Verizon in the low $30s. $60 billion in profit is a ludicrous amount of money).

Could that number drop next year? Sure. It has before — Apple’s net income dropped more than 10% in 2013… and 14% in 2016 (only 10% per share, as the buybacks had already begun then). Each time, the recovery to a new high took more than a year. And investors are not dummies, at least not as a whole, the stock price predicted that drop in net income each time. The orange line is trailing twelve month (TTM) net income, the blue line is the stock price. This is the decade leading up to the end of 2016.

AAPL Chart[6]

And if you bring the chart up to today, the pattern looks pretty similar… it’s just that we haven’t yet seen the drop in net income that the stock is predicting (yet). Will we? I don’t know.

AAPL Chart[7]

Since the end of the financial crisis (I went back to December 2010, just to skip over the collapse and the “snap back” in the market), this has worked almost exactly like you would think it should: The net income has risen 257%, the stock price has gone up 242%:

AAPL Chart[8]

But what if you look at net income per share? Thanks to the huge buybacks over the past few years, that’s the red line:

AAPL Chart[9]

AAPL[10] data by YCharts[11]

My time frame is pretty arbitrary in those charts, you can make a chart say pretty much whatever you want if you’re controlling the time period and the criteria, but something similar shows up no matter how you slice the long-term chart — if you include the buybacks and look at per share earnings, then Apple was at a “fair” price a few months ago, the stock price had risen about as fast as per-share earnings for a very long time. If you don’t include per share earnings and just look at the less impressive absolute returns, ignoring those hundreds of billions of dollars of buybacks… then Apple looks fairly priced now.

Of course, that logic would also tell you that Apple was very undervalued in 2013 and 2016, when the stock was trading with long-term returns that were well below the increased income levels for that same time period. And was overvalued for late 2017 and most of this year. In retrospect, that seems pretty reasonable… though, again, looking at old charts can convince you of almost anything.

Today? Apple still has about $20 a share in net cash (assuming no massive buybacks since the quarter ended), and if you back out the cash then Apple is trading at 10X expected 2019 earnings and 11X trailing earnings. That’s arguably a rational valuation for a stock that isn’t growing and isn’t likely to grow earnings, but it’s a silly valuation IF the analysts are even close to right about Apple’s earnings growth in future years.

They might not be, sadly, they do make mistakes… and there can always be a huge turn (like, say, a shocking reduction in revenue because phone sales collapse) that makes all the analysts look like idiots. But if the analysts are correct, and they have been very close to spot on before this latest iPhone cycle (it’s only been a few months… I know, it feels like four years), then Apple is trading at 9X forward (FY2020) earnings (ex cash) of $14.58.

This is all an expectations game, and I have no idea how it will play out — but Apple didn’t suddenly become dysfunctional or release a terrible product or lose thousands of employees or announce a terrible quarter… they are one of the best companies in the world, they sell products that consumers love and keep buying, and they make a ton of money that they are using to reward shareholders. They’ve just had the whipsaw of a perception change among investors and analysts who are watching every scrap of news for evidence of what is happening in the real world, and they gave up the premium that they were gradually granted over the past year because of some growth optimism (and, let’s be honest, because of Warren Buffett’s huge endorsement).

That has happened before, with similar causes (see Carl Icahn in 2015), and as long as you didn’t buy at the top and sell at the bottom it has worked out just fine… and the very least we can say now is, “it’s not the top.” Over the past decade, almost all of those whipsawing negative reactions to Apple news have been terrible times to sell, and good times to buy. That doesn’t mean that’s the case this time, but down at $150 a share I’m getting awfully tempted to put more money back into Apple. Or, if I’m feeling nervous, into Berkshire Hathaway so Warren Buffett can buy some more Apple shares for me (Berkshire has quickly fallen to tickle my $190 “buy below” target again). Haven’t done it, to some degree I’m just a little frozen in the face of these drops that beget drops, but the temptation is there.


We started out talking about India before getting into that Apple stuff, right? Yes, that income divide that’s part of the reason for iPhone sales disappointing is a huge political issue in India, too — which has a big impact on how much one might want to “bet” on India in general. The promise for decades has been that embracing capitalism will be good for India and will lift Indians out of poverty, and that has certainly had a big impact in the cities… but the farmers are hurting, and India is still overwhelmingly a rural country. We’re seeing that with farmers protesting in the streets this week, and with the increasing risk that Narendra Modi will face real competition for leadership early next year — which is probably the biggest issue worrying investors in India.

This is a country that should be a superstar — a young population, relatively well educated, rising middle class, huge potential, but it clearly requires a lot of kick starts to get the benefits of economic growth to “trickle down,” and squabbling democracy is not nearly as effective at spurring and directing economic growth as is totalitarian control (see: China). Modi has been embraced by foreign investors because of his reforms to the stifling bureaucracy and promises to streamline India’s economy and finally get real infrastructure investment to the levels that are needed… he obviously is flawed, like all leaders, and he has done lots of things that people don’t like, but if he’s replaced by a leader who investors believe will undo those reforms, or who doesn’t “believe” in the power of capitalism to help enough Indians, investors will freak out.

Which brings me to the one substantial investment I’ve made in India, my holding in Fairfax India — which, like Fairfax Financial Holdings, its parent, has been a weak part of my portfolio this year. I’ve gotten a few questions in recent months along the lines of, “why do you own so much Fairfax, dummy?” And that’s a fair question — overweighting Fairfax Financial (FFH.TO, FRFHF) in particular has been my biggest mistake over the past year or two, in terms of the negative impact on my portfolio, so let me take a quick look at both… I’ll start with Fairfax India (FIH-U.TO, FFXDF).

Fairfax India is an investment holding company that is managed by Fairfax Financial and its on-the-ground Indian investment team. Shares have been falling over the past six months after a very strong surge about a year ago, so now over the past few years the performance is quite similar to the broader Indian stock market… and Fairfax India shares now trade almost exactly at their book value — book value was last computed on September 30, so that will change, but the broader Indian market is actually up a hair since then, and Indian small caps are up almost 5%. Their biggest publicly traded holding, IIFL, is roughly treading water…. their second biggest holding is their controlling stake in Bangalore Airport, which I think they carry at substantially less than its real value but whose value won’t be realized for a long time.

The risk, beyond just “India risk,” is that they are concentrated and levered (they borrow money on term loans — about $500 million in debt overall, though that is, of course, accounted for in book value), so they could be making terrible investment decisions. Since the last quarter ended, they completed their acquisition of Catholic Syrian Bank, which I expect will end up being a solid earner as India’s banking sector improves, but we won’t know for a long time. I find their infrastructure and financial services investments really compelling, and expect them to do very well if and when India resumes growth. And since one of the huge costs for India is oil imports, I’m wondering whether folks are maybe discounting that growth a little bit too much these days, with the recent drop in oil prices.

Here’s what Fairfax India shares have looked like compared to the broad India ETF (INDA) and the Indian Small Cap ETF (SMIN) over the past six months:

FIH.U Chart[12]

That looks like “buyable underperformance” to some extent, right? It’s getting washed out too much?

Careful, let’s go back a few years so we can capture the “outperformance” that came before:

FIH.U Chart[13]

I’m still holding Fairfax India, and I still think it’s a good buy at 1X book value (I paid more than that for my shares)… but I don’t want to commit more capital to this unless there’s a real washout in valuation. That hasn’t happened yet, it has just given up the premium, so I’ll keep holding and watching.

And papa Fairfax? That is still a collection of strong insurance companies, and still has very appealing international exposure in both their insurance businesses and investments (including both Fairfax India and Fairfax Africa), it’s just that the confidence level in Prem Watsa’s investment strategy and decisionmaking is not particularly high right now… there aren’t a lot of new folks calling him the “Warren Buffett of Canada” anymore. This confidence (or lack thereof) is a sentiment driver that I think largely controls the valuation Fairfax gets at any given time — the insurance business arguably deserves to trade at a premium to book value, it’s certainly much better managed than it was a decade ago when Watsa was just buying up weak insurance companies… but the conglomerate is discounted because of worries that Watsa has “lost it” or is making poor investment decisions. Memories of his terrible bearish stance from 2010-2016 really linger.

It’s possible that the discount is right, of course, but I think it’s more likely that Watsa is still just “out of fashion” as primarily a patient value investor. He places much more aggressive bets than Buffett on macro trends sometimes, and he will make big decisions that win or lose, always (like Blackberry most recently), but the kinds of stocks he’s most likely to find appealing have not been the market’s favorites for a long time. I expect that to turn at some point, but this is a risk — mostly because it’s very clear from the past decade that although Fairfax can sometimes post excellent returns, it can also show terrible underperformance relative to its most relevant competitors sometimes. Fairfax Financial is a buy at 1X book value, too, which is right where the shares are now, but my position is too big because I was too optimistic a year ago… so I’m holding, not buying here. That’s one of the risks of buying in bigger chunks, which I did with Fairfax earlier, you don’t have the portfolio flexibility to nibble more later on if the valuation gets more appealing.


Speaking of insurance conglomerates, how about the big fella? Berkshire Hathway (BRK-B) has almost hit my $190 “buy below” price, almost entirely because of the falling value of the stocks in Berkshire’s investment portfolio (like Apple, and the big banks). It’s crazy to guess at what the portfolio value might be on December 31, and how that will impact Berkshire’s book value per share, and what Warren Buffett or his investment lieutenants might have been doing with the $100 billion in cash during this market downturn (maybe they bought a lot of stuff, maybe they’re still waiting, we don’t know)… but I’m pretty sure it will work out well for them in the long run.

Yes, Warren’s old… but he’s not doing this alone anymore, and having this much money ready and willing to invest for long term returns, without real pressure to win each quarter, is extraordinary. If market ugliness continues for a few months we might be heading into another of those episodes, like 2008, that gives Berkshire the chance to really load up on some appealing companies or make very one-sided financing deals with companies who need both Berkshire’s money and Buffett’s public stamp of approval, but we’ll see how it goes.

The main reason I bring Berkshire up is that there was a strange event for Berkshire this week: An executive bought shares. Every once in a while a board member buys a few shares, but even that’s pretty rare… most of the SEC Form 4 reports for Berkshire, which tend to be few and far between, are just about how many shares Warren and Charlie and other execs have donated to their favorite causes — like Charlie Munger donating a couple hundred A shares to UCSB recently, or the massive gifts that Warren makes to the Gates Foundation as part of his giving pledge (some of which the Gates Foundation then sells in orderly fashion, to fund their work).

But this week Ajit Jain, the head of Berkshire’s insurance operations, actually bought some shares. He purchased 67 shares, for his own account, presumably with his own money, which immediately generated some headlines in Barron’s and elsewhere, and a minor Twitter storm… those are the A shares, not the B shares, so each one’s about $300K, that’s roughly a $20 million purchase… equivalent to buying 100,500 B shares.

Does that mean anything? I have no idea, but it stands out… and the message I got, at the very least, was that the most famous insurance underwriter in the country, and perhaps one of the smartest, just bought a bunch of stock in his own company. So he, at least, doesn’t seem to think the insurance business is going to disappear because of increased disasters and climate change and self-driving cars — which is encouraging.

It should be an obvious conclusion that insurance against terrible events will be a perpetual need of civilized humanity, but you do hear folks saying that “insurance is over” sometimes (and, of course, that civilization is about to end). I don’t buy it. Property and casualty insurance companies will react to the changing world, and they are arguably in the forefront of reacting to new disaster patterns and climate change by adjusting pricing even if they miss some things… that will lead to fits and starts, but I expect the best companies to be good at adjusting, and it’s good to see that the person who I would picture when you say, “who’s the best insurance person?” agrees enough to bet on his own company. That makes me feel better about my larger Berkshire holding, and it also gives me just a hair more confidence in insurance companies in general… which makes me feel better about Markel and Fairfax Financial (together, those three are almost 25% of my individual equity portfolio, which is probably verging on being irresponsible).

In the big picture Ajit Jain’s buy probably doesn’t actually mean anything… but it’s a hint of sentiment from a really smart guy who we don’t hear from very often, so I found it oddly calming. Breathe in, breathe out, the world is not ending.


I am usually fairly active on the discussion threads here at Stock Gumshoe, responding to reader questions or popping in with a note about a stock that I’ve written about before that’s generating news or catching my eye for some reason. I won’t share all those with you and further stuff our word count here, but here are some links to a few of my longer comments recently in case you’re interested:

More ugliness at Overstock, which I don’t own but find fascinating.[14]

What’s that “pre-IPO” pot stock from Ian Wyatt for 51 cents? I don’t know, but here’s my answer to that question[15].

A question: If the P/E is 103 and the dividend is 4%, how is the dividend “safe”?[16] I think the question was about Crown Castle (CCI), and my answer is here[17].


And (almost) finally, I am putting a couple new stocks on the watchlist, both for their eSports connections — for those of us born before 1975, that’s spectator video games, teams of gamers playing your favorite video games in front of arenas full of fans (and in front of millions more viewers online).

Activision Blizzard (ATVI) is a well-known name in gaming, of course, thanks to Call of Duty and Warcraft and Diablo and Guitar Hero and Candy Crush and so many other titles… and has had a truly terrible year as users have dropped a little bit late in the year (probably thanks to competition from Fortnite, partially owned by Tencent but not really directly “investable”). But they also have one of the strongest eSports businesses around, built mostly around their Overwatch League. That business is getting more important, even as most of ATVI’s core franchises continue to do well (thought not quite as well as expected), and at some point I’m not going to be able to resist nibbling.

ATVI shares have been wildly expensive for a long time, but a little weakness in Candy Crush and a few million users dropping out of Warcraft or Call of Duty online have really brought them back to “reasonable” territory. It’s hard to judge when you feel brave enough to step in front of a falling stock like this, with no sign of impending optimism likely unless they announce something fantastic about the holiday season results in the coming weeks, but I’ll let you know if I decide I’m ready to nibble.

And there’s also a special situation that has my eye in Sweden — one of the oldest and arguably most popular eSports series, eSports League (ESL), is effectively being turned into a “pure play” investment for the first time. Modern Times Group (MTG-A or B in Stockholm) is spinning off its nordic cable and streaming platforms (Nordic Entertainment Group) to focus on esports and online gaming. The core company will own ESL and DreamHack, two big “tour” and event operators in esports and similar activities, as well as some game developer studios and a digital video company. Nordic Entertainment Group will effectively be spun off as something like the “Netflix of Scandinavia.”

This is a story I’m really just looking into now, but I find it interesting because of the potential of a relatively small almost-pure-play eSports operator to be nimble and take share and get investor attention next year, and the valuation looks pretty reasonable already for the combined company. I haven’t bought shares yet, but the spin is happening next quarter, most likely, and I’ll be following the story and will let you know if I decide to invest. The presentation about the split is here[18] if you want to start looking into it… their website collecting the split info is here[19].

Modern Times Group doesn’t have a US OTC listing, so I’d have to buy direct (if you ever want to trade directly on foreign exchanges, I recommend Interactive Brokers for the easiest low-cost access… though many brokerages can trade in Stockholm for you for a fee, you might have to do it by phone).


This is the end of the year, and the last time you’ll get a Friday File from me before 2019 (I will send out a Trade Note on the off chance that I buy or sell something in the meantime, and we do have a couple free “year in review” articles coming out next week, so don’t worry — you won’t have a chance to miss me very much), and I’ll leave you with one more bit of big picture blather:

We are accustomed to thinking of life in calendar year cycles, and we are used to the dark days at the end of the year forcing humanity to turn up the lights, turn on the cheer, and enjoy each other’s company as we fatten up and retrench to start the whole thing again in a couple weeks.

But it’s not the end… this isn’t a Christmas movie, where the world changes at the last days of the year and we go home happy, it’s a little slice of a lifetime and we’re all at different points on the timeline. The gyrations of human sentiment over stock prices between Halloween and New Year’s Day don’t mean anything when you stretch out the timeline and look beyond what feels like the end of the story. Just because we’re accustomed to the “Santa Claus Rally” or, a few weeks later, the “Everyone’s feeding their 401(k) rally” in January doesn’t mean that these typical cycles of the market happen every year.

So here’s your final message as we get ready to close out 2018: This is the stock market over the average lifetime (so far) of a Stock Gumshoe reader (assuming that we’re dealing again with the prototypical 60-year-old newsletter subscriber):

^SPX Chart[20]

That’s without dividends, by the way — so the total would likely be as much as 30-50% higher if you reinvested the divedends. It also doesn’t account for inflation.

But that chart, which we’re pretty used to seeing, also really dramatizes the recent performance of the market — the higher absolute numbers of the modern era overwhelm the 1960s through the 1980s in this kind of chart, even though the market gyrations were not that different then. We can get a much better picture of how the market has changed over this hypothetical person’s lifetime if we use a logarithmic scale. This is what that looks like:

^SPX Chart[21]

So see… usually things smooth out over the long term.

Sure, maybe the past 50-100 years are an anomaly and we won’t see another American Century, maybe the world is changing in some other way… but people have been saying that since at least the 1980s, and using that hysteria to sell newsletters and newspapers and, now, to draw readers to CNBC or followers on Twitter. The fact that freaking out about what’s going to happen next is a growth industry doesn’t mean you have to buy in… usually the world muddles along, usually things gradually get better for humanity, and even if that’s wrong, even if things get worse, betting against that probably won’t do you any good — so why bother?

That doesn’t mean we should ignore the market. It doesn’t mean you should go all-in on stocks if you’re 60 years old and planning your retirement. But it does mean that hiding isn’t a plan… so make your plan, understand what risks you can really afford to take, and take them. Personally, I’m betting that the average returns for stock investors over the next five years will be below the long-term average of 8% or so… once you’re at higher valuations, as we still are even after this dip, future expectations should go down. That doesn’t mean we give up on finding good investments, or that we should hide, it just means we should keep our expectations in check.

Have a wonderful, merry Christmas and a happy New Year, and if you don’t celebrate either of those holidays then I hope you still enjoy the general period of peace and quiet that much of the world expects at this time, hopefully with friends or family. I’ll be back with more Friday Files next year.

  1. stopped out of Teladoc (TDOC) shares:
  2. one when I added slightly to my position in iQiyi (IQ):
  3. another one late yesterday when Markel (MKL) hit another buy point for me around $985:
  4. reportedly buying up smart phones at a rapid clip, they’re just not buying iPhones:
  5. income and prices are far lower:
  6. [Image]:,include:true,,&correlations=&securitylistSecurityId=&calcs=id:price,include:true,,id:net_income_ttm,include:true&scaleType=linear
  7. [Image]:,include:true,,&source=false&securityGroup=&calcs=id:price,include:true,,id:net_income_ttm,include:true&displayTicker=false&maxPoints=850&zoom=custom&annualizedReturns=false&legendOnChart=true&quotes=true&securitylistSecurityId=&splitType=single&title=&units=false&scaleType=linear&useHttps=false&annotations=&useEstimates=false&recessions=false&startDate=12/19/2006
  8. [Image]:,include:true,,&securityGroup=&format=indexed&calcs=id:price,include:true,,id:net_income_ttm,include:true,,id:total_return_price,include:false&securitylistSecurityId=&title=&scaleType=linear&securitylistName=&displayTicker=false&quotes=true&units=false&zoom=custom&note=&useHttps=false&partner=&endDate=&useEstimates=false&startDate=12/20/2010&annotations=&annualizedReturns=false&maxPoints=850&legendOnChart=true&quoteLegend=true&splitType=single
  9. [Image]:,id:price,,include:true,id:net_income_ttm,,include:false,id:total_return_price,,include:true,id:eps_ttm&source=false&recessions=false&displayTicker=false&legendOnChart=true&annualizedReturns=false&securitylistName=&endDate=&scaleType=linear&correlations=&securities=include:true,id:AAPL,,&securitylistSecurityId=&securityGroup=&format=indexed&startDate=12/20/2010&zoom=custom&units=false
  10. AAPL:
  11. YCharts:
  12. [Image]:,include:true,,id:INDA,include:true,,id:SMIN,include:true&startDate=&partner=&correlations=&note=&splitType=single&securitylistName=&annualizedReturns=false&recessions=false&legendOnChart=true&calcs=id:price,include:true,,
  13. [Image]:,id:FIH.U.TO,,include:true,id:INDA,,include:true,id:SMIN&title=&units=false&annotations=&startDate=&securityGroup=&quotes=true&format=indexed&displayTicker=false&securitylistSecurityId=&maxPoints=850&recessions=false&calcs=include:true,id:price,,&quoteLegend=true&endDate=&annualizedReturns=false&note=&correlations=&zoom=3
  14. More ugliness at Overstock, which I don’t own but find fascinating.:
  15. I don’t know, but here’s my answer to that question:
  16. question: If the P/E is 103 and the dividend is 4%, how is the dividend “safe”?:
  17. my answer is here:
  18. The presentation about the split is here:
  19. here:
  20. [Image]:,include:true,,id:SPXTR,include:false&startDate=12/20/1958&partner=&correlations=&note=&splitType=single&securitylistName=&annualizedReturns=false&recessions=false&legendOnChart=true&calcs=id:level,include:true,,id:total_return_price,include:true
  21. [Image]:,id:level,,include:true,id:total_return_price&zoom=custom&correlations=&format=indexed&partner=&title=&legendOnChart=true&securities=include:true,id:SPX,,include:false,id:SPXTR&annotations=&source=false&units=false&maxPoints=850&note=&annualizedReturns=false&recessions=false&useHttps=false&scaleType=linear&quoteLegend=true&useEstimates=false&securitylistSecurityId=&quotes=true&securityGroup=&displayTicker=false&securitylistName=&splitType=single

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