dartmonkey

I like how the deal is structured in a way that lets FFH pay cash if they discover that they've bought a plum or pay in shares if they discover that they've bought a lemon. Prem's a pretty slick operator. SJ It doesn't make much difference how you pay for it - if you've overpaid, you've overpaid, whether you decide to use cash or your own shares to finance the purchase. The flexibility that I like is that it gives Watsa the opportunity to use FFH shares if their value rebounds a bit, or if raising more cash suddenly becomes more difficult, or he can use cash if FFH shares stay at low prices or if he has no worries about Fairfax's balance sheet. dm

Everyone should agree that it makes no difference which you own, FFH.to or FRFHF otc, since in both cases, you own one share of Fairfax. The major difference, apart from the much more limited liquidity of FRFHF and the wider spread, and the fact that FRFHF is not marginable, is that FFH is denominated in CAD and FRFHF in USD. Any difference in past returns is a result of the ever-changing exchange rate -currently, USD$1=CAD$1.35, which is higher than it has been in a couple of years, resulting in a higher Fairfax price in CAD$ (i.e.FFH) than in USD$ (i.e. FRFHF). If the CAD were to rise to par with the USD again, FRFHF would far outpace FFH, just as it has underperformed in the last few years, but this would make no difference to the returns you make as an investor.

It really is pretty amazing. Yesterday, before this TERRIBLE news hit the wire, shares were at $765, and market cap was $16.99B, let's say $17B CDN. Now they announce they are raising $735M, maybe $845M if overallotments are exercised, at $735/share. Now I don't like to have my shares diluted any more than the next guy, and I don't much like new shareholders getting $30 off the price the market was assigning to my shares, but I presume this bought deal, arranged in the last few weeks, could have happened at $735 even if shares had recently dropped to $700, so that's just the luck of the draw, good luck for people who signed up for the share issue, bad luck for ongoing shareholders. But how bad is it? The new shares amount to a little under 5% of the capitilization, pre-issue, to the value of my shares does drop, by about 5% of the difference, in other words, $1. When I saw the share price this morning, I wondered what terrible thing had happened to my shares. Now I see that all that has happened is that they are worth $1 less, plus whatever credibility Watsa and his team have lost. Which is zero, for me, since I trust his judgment about the fact that acquisitions in process and perhaps future acquisitions require a bit more cash than what is on hand and available. If anything, it shows great timing, since he could have raised cash a couple of months ago when the acquisitions were announced, ICICI Lombardi on Oct 30 (shares closed at $644) and Eurolife on Dec 22 (shares closed at $659). So he seems to have done a great job minimizing dilution by issuing at a historic high price. Good grief, what a temper tantrum! At least I was able to get 10% more, at $717.

I hate these articles. I saw this exact same thing in Motley fool Canada that suggested Fairfax could make 109B too - the only way that happens is if the world ends and money means nothing.... Realistically, even in a very, very favorable scenario for Fairfax, they'd only make 15-20B over the course of several years. That's assuming we get the same amount of deflation that was seen over the decade following the Great Depression. No way he makes anywhere near $109B... I think what we'll see is that he makes WAY more money from the TRS hedges than he does from the deflation swaps, but the deflation swaps could still turn out to be great investments even if they only return 1-2B given the cost basis being $650M and a current carrying value half of that. It just blows my mind how clear and open he's been with the details of these swaps and yet the media still misunderstands them years and years later. Obviously the suggested $109B gain for Fairfax, in the event of deflation, is ridiculous, but I asked myself the same question: for a given level of inflation, how much will the notional $109B return? For instance, if we get a drop to the CPI level where the positions were opened (about 2-3% below today's levels), and then another 10% drop, can we assume that we will get 10% (pre-tax) of the $109B notional exposure? In other words, is the return linear? I would assume so, but I could not find anything in Fairfax's reports that actually estimate how these things work. Brooklyinvestor (https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwi84em8xf3KAhVovIMKHVO7CpwQFggkMAE&url=http%3A%2F%2Fbrooklyninvestor.blogspot.com%2F2015%2F01%2Fwatsas-massive-bet.html&usg=AFQjCNH7gf6kiJGUKy3Mt8ScoQ64ST4PIg&sig2=eoSYaTP3cOjT5v2el_7I3w&bvm=bv.114195076,d.amc) seems to be assuming it is linear, but doesn't say how he knows; does anyone have anything more definitive?

Wouldn't deflation have to be "significant" for all these bets to pay off in a meaningful way? U.S. CPI is currently at 202 I think that depends on your view of what "meaningful" is. The current U.S. CPI index is in the mid-230s. It would take deflation of less than 2.5% over the next 8 years for us to break even on this position. Every % point beyond 2.5% nets $588M. Not an insignificant sum! European figures are around 118. We need European deflation of about 6% over the next few years to breakeven. Every % past 6% nets $445M. The 2015Q1 report says that US notional $46.2B has a weighted avg strike price of 231.32, and the index was at 236.12 on March 31st, so gains start with only a 2.0% drop in the index. Another $12.6B notional has a floor rate of 0.5% per annum, and a strike price of 238.30, with the index then at 236.12, so they are only 0.9% out of the money, and they make money if inflation is less than 0.5% beyond that strike price. The other big chunk is on European inflation, with $39.5B notional at a strike price of 111.52, with the index now at 117.20, so in that case, we are 4.8% out of the money, meaning that we really would need a significant deflation before that part starts paying off.

Maybe you should wait and see how you feel as a consumer when you have actually experienced deflation, instead of basing your opinion on how consumers behave when their whole life has been in times of inflation.

You mean risen so much

We don't know what kind of arrangement Fairfax has made with OMERS, but there is no reason to assume that Fairfax will have to pay more for the last 30%. This looks more like a loan than a sale.

I have about 25% of my portfolio in FFH (that number is a fair bit higher today than it was last week) so I indirectly have about 0.5% in FIH as you say. It is easy to see why getting 1.5 and 20 is attractive from the FFH side, since it immediately adds a minimum of $15 million going straight to FFH (albeit 30% of that is going from one FFH pocket to another). Why do I find it attractive from the FIH side? There can not be a more pure jockey play than investing in a billion dollar fund that is as yet entirely undeployed. So the only possible explanation is my high regard for Watsa in general and for Fairfax's Indian operations in particular, and the chance that a small, highly regarded fund with extensive local connections may be able to find good opportunities for investing capital in India, particularly with a business-friendly regime in place and a lot of catching up to do with other less developed countries. Combining that with the complete absence of Indian investments in my portfolio (apart from FFH), and my concerns that equity markets in North America may be overvalued, I added 2% of directly held FIH to my indirect 0.5% stake via FFH.

Remember the 15% is local fx, including inflation. The real numbers are going to be different. Exactly. Indian rates have exceeded US rates by about 6-7% in the last 15 years, and by 8-9% in the last 5-6 years, so a 15% nominal return would get FIH only about 6-7% in USD. Of course, there's still the 1.5% management fee. Investing in FIH is tantamount to expecting at least 2.5% alpha. If FIH gets 17.5% in INR instead of 15% in the SENSEX, that might be 9.5% in USD, and FIH would pay FFH 1.5% + (9.5-5)*20% = 2.4%, and FIH would break even with the Indian market index; higher alpha is gravy. Assuming, of course, that the Indian market continues to do what it's done before ;) Admittedly, there are a lot of assumptions here, but the assumption that the Indian market might go up 15% a year, or 6-7% in real terms, is not a heroic one. This is almost exactly the average real total stock market return, according to Siegel.

Remember the 15% is local fx, including inflation. The real numbers are going to be different. Exactly. Indian rates have exceeded US rates by about 6-7% in the last 15 years, and by 8-9% in the last 5-6 years, so a 15% nominal return would get FIH only about 6-7% in USD. Of course, there's still the 1.5% management fee. Investing in FIH is tantamount to expecting at least 2.5% alpha. If FIH gets 17.5% in INR instead of 15% in the SENSEX, that might be 9.5% in USD, and FIH would pay FFH 1.5% + (9.5-5)*20% = 2.4%, and FIH would break even with the Indian market index; higher alpha is gravy.

Look at pp 90-91 of the final prospectus, available on sesar.ca. Basically, the starting highwater mark is the NAV at the IPO, i.e. About $9.63 per share. Then NAV + total distributions in the just completed 3-yr period is calculated, the first calculation date being Dec 31, 2017 and then every 3 yrs. The difference between that amount and the current highwater mark is the appreciation. If that appreciation is positive, a performance fee of 20% of the amount exceeding 5% per annum goes to FFH, and the current NAV becomes the new highwater amount. If the NAV + distributions is not higher than the highwater mark, then there is no performance fee and no modification of the highwater mark.

ok thanks everyone. that 1.5% and 20 goes watsa not shareholders i thought?... ok thanks everyone. that 1.5% and 20 goes watsa not shareholders i thought?... The fees go to Fairfax, of course, not Watsa. Fairfax owns 30 million shares in the fund, so for every share of FFH you own, you indirectly own 1.5 shares of FIH. So if you own 1000 shares of FFH, you already own 1500 shares of FIH, and you are paying yourself somewhere between 1.5% (if FIH gets a return of 5% or less) and 4.5% (if FIH gets a 20% return). If you buy more FIH, you will pay more fees to FFH shareholders, but you will not get any more of them as a FFH shareholder. So no, buying FIH shares is not paying from one pocket to the other, and you should be concerned about the fees. Not that that stopped me from quadrupling my FIH stake. The fund seems attractive to me from both sides.

It's not just you. That's the way it is. If you want clean stuff, with no craziness, things like Wells Fargo,and Walmart , Procter and Gamble and Coke, then try Berkshire - it's fully priced, but it will likely give you a steady return with no palpitations. If you don't mind scruffy Irish and Greek banks, failed smartphone and pulp and paper companies, retailers that are borderline (The Brick) or outright kooky (Overstock), along with outrageous macro bets on market valuation and inflation, then we might have something for you here, along with lots of Sturm und Drang.

Great list, ben. I was just looking through the Q3 report and didn't see alll that detail - where are you finding it, if you don't mind sharing? And what is the distinction between Eurobank and Eurobank properties? One thing about the Greek and Irish exposure, it makes the Blackberry investment seem positively mundane! BBRY looks a lot less scary now in any case, but do you or anyone else have some more detail about Eurobank and how badly it may have been hurt by the recent events in Greece (i.e. elections, 30% drop in stockmarket, 10-yr bond rates going from 6% to 10%? Here's what Watsa said in May 2014: “We believe that markets have already begun realizing the significant opportunities existing in the Greek market and the positive outlook of the country, on the precondition of a stable course of implementing a reform program”. I guess we'll know more about that 'stable course' in 10 days...

Do they own land? They seem to have leases on the One Yonge Street building, the Harlequin HQ and the Waterloo paper HQ. Last I checked, they own a big parcel in Vaughn. They only have $6.4 mn on the books for property plant and equipment, but book value rules are stupid for land, it never gets priced up to market, so I suppose they could have bought the land for $5 million and have it worth $50 million now. You would think that would be worth a mention somewhere in the company's financial statements - especially now taht the company is worth about $150 mn ex-Harlequin. Maybe it's there, but I haven't found anything.

Do they own land? They seem to have leases on the One Yonge Street building, the Harlequin HQ and the Waterloo paper HQ.

Another "dumb investment" turns golden for Watsa, with the sale of Harlequin to News Corp for 80% of Torstar's market cap. It won't move the needle at Fairfax, with 18 million shares, but with TS.B shares up .85 today, it's still $15 million. Now the question is, are Torstar's remaining media assets (primarily the Toronto Star and the Metro commuter papers and about 100 regional newspapers) worth $150 mn? They had $75 mn in operating profits in 2012 (a loss last year with a $95 mn write-off), so this may be a cigar butt that doesn't need to give many puffs to be worthwhile. DTB

Yes I thought that was a bizarre and disappointing sleight of hand. The time period has always been 5 years, and here without offering any explanation he suddenly makes it 6 years, which not-so-coincidentally includes 2008 when Berkshire had a huge advantage over the S&P. Berkshire has failed this test, and will surely continue to occasionally do so over time as it has simply become too large, basically I think it will fail to keep up in up markets. This will (or should) lead to a change in the company's dividend policy. I thought it would be better for Buffett to address this while he is still at the helm rather than let his successor break that news, and really thought this was going to be the year that he did it... guess not. I agree that he should have said he was changing the yardstick, instead of just changing it. Maybe having said last year that he WOULDN'T change the yardstick made it harder, but he in fact has, so he might as well own up to it. That said, the new yardstick, I believe, is not 6 years, it is full cycle. Time will tell if the end of this cycle is 2014 or later.

"If you follow Fairfax and Watsa you likely saw a recent article in the Toronto Globe and Mail (Globe) in which Watsa laid out his belief that deflation is all but inevitable. Watsa believes that with interest rates already basically at zero and stimulus spending capability now limited, the United States government is essentially out of ammunition. Note that that article was in August 2011, not 2013. I still like the bet's prospects, long term, but 2 years later it is not working out yet.

So much for that combination - WSJ is reporting that "Mssrs. Lazaridis and Fregin are not working with Fairfax Financial, according to a person close to the matter. The two men have hired Goldman Sachs & Co. and Centerview Partners LLC as consultants on their review process, according to Thursday’s filing." As a Fairfax shareholder, this is one bid for which I definitely wish the competition the best of luck! I will be very happy to take a higher price, plus the breakup fee, and let Mr Lazaridis decide what to do with RIM.

Thanks, that's pretty much what I understood. So FFH and Lazaridis keep their 10% and 6% stakes respectively, and the other 84% get taken out with $1B in new cash equity (21%) plus $3B in bank debt (63%). So Fairfax then would own 10%/(10%+6%+21%) = 27% of the new equity (27%), Lazaridis would own 6%/ (10%+6%+21%) =16%, the new equity holders would own the other 58%. Meaning Fairfax would have levered up its 10% to 27% using bank debt, is that right? If I were the bank, I think I'd want a pretty high interest rate to be part of that $3B, unless Watsa could convince me that there it was guaranteed by assets that were sure to be there is worst comes to worst.

Question for this board: It seems that Watsa has offered $9 a share and proposes that a consortium of private investors, including Fairfax, take the company private. In the event that Blackberry accepts another offer, Fairfax would get a 'breakup fee' of 30c a share, i.e. $157 million. But Watsa has also stated that he will not increase Fairfax's stake above the current 10%. So two questions about this deal have been bugging me: 1. Does this essentially mean that Watsa is proposing to his investing buddies (like Wilbur Ross) that they take out the other 90% of the company's shares, at $9 a share, while he contributes his (ours), currently trading at $8 a share? Or would it be customary for someone in his position to offer to pay the same price as the other investors ($9 a share) ? 2. How does it make sense for Fairfax to obtain a breakup fee of 30c a share (or $3 per BB share that Fairfax owns) in the event of a better offer, given the fact that Fairfax can back out of this agreement with no penalty? This seems almost too sweet to be true. I suppose the answer is that beggars can't be choosers, but this would almost seem to open Blackberry up to a shareholder suit, it seems so outrageous. Any help with answers to either of these questions much appreciated.

Canada is the second largest country by landmass. It also happens to be one of the most beautiful places on this planet. ==== Canada is indeed one of the most beautiful places, except for the other countries I have visited, like the USA, France, England, Argentina, Israel, Switzerland, Austria, Spain, Germany, Denamark, Norway, and Sweden, that is. As for the original question, the only newspaper that comes close to the WSJ level would probably be the National Post, with its financial section, the Financial Post (http://www.financialpost.com/index.html), usually worth reading. In Quebec, Les Affaires (http://www.lesaffaires.com/ ; en français) is about the only place where you will get solid information about small Quebec companies. The Globe and Mail's daily Report on Business, and its monthly version, (http://www.theglobeandmail.com/report-on-business/rob-magazine/), are also worth reading. There is a weekly called Canadian Business (http://www.canadianbusiness.com/) which I have looked at, but I prefer the others. I would be interested to hear others' suggestions or comments.

Perhaps a better way to phrase my question is: why did Berkshire go all the way to Israel to buy Iscar (first acquisition outside the US) rather than buying KMT? Any help here appreciated. I really believe this is a fascinating little sub-industry. Cheers. Iscar owners called Buffett. He didn't go to Israel to buy a tool business, they came to Omaha and offered it on a silver platter. This is Buffett's dream scenario, I'm sure he wishes it happened a little more often.