wknecht

Any day now... The algorithm just became much simpler: 0) buy/sell call/puts in advance 1) hack some known twitter account/news site 2) publish news to the upside/downside 3) profit 4) repeat We should see much more of this in the future. I might add 5) go to prison disgraced and broke

It's not directly related to investments but I thought this commencement speech by David Foster Wallace was wonderful so figured I'd post it here: I've only read a couple of Wallace's essays, but he strikes me as an incredibly intelligent and interesting person, so definitely worth looking into for those looking for some non-investment/business reading. Thanks to Frank Voisin, I found this on his site.

Maybe part of the problem is I don't buy their deflation bet. I don't believe that United States is similar to Japan. Japan, like Depression Era United States, had a problem with businesses being heavily in debt. This is not the same as consumers being in debt. You can't fire your wife. Consumers don't react the same way to huge debts as businesses do. Business engage in fire sales and fire workers. This causes deflation. Consumers on the other hand just keep consuming or slightly reduce consumption. You don't get deflation. The deflation options may be ok but AFAIK they are also completely hedging equities. Or have they altered this policy. I always thought the equity hedge was part of their deflation bet. Sorry I should have been clearer - was playing devil's advocate for second on labeling the deflation bet as speculation by virtue of being related to macro economics. Will definitely leave the specifics of deflation itself to others more familiar. I had meant the CPI derivatives specifically, but yes the equity portfolio is still hedged. They've mentioned they expect unrealized losses on both to reverse when the "grand disconnect" disappears. So you're right in that there's a connection between the two in terms of a possible macro-economic scenario from their standpoint.

I feel like deflation is still based on fundamentals though. It's definitely not my game but if the bet is ultimately based on fundamentals, I think it's probably possible to have a roughly correct view on the probabilities from time to time. With everyone focusing on the inflationary impact of the QE's and not the Japanese experience, the probabilities implied by option prices could have gotten way out of whack. Enough out of whack that their was a margin of safety? Definitely too hard for me to say, but is it too hard for anyone to say? E.g., the Fed itself must view the probability of monetary contraction as not negligible, no? In any case, I'm glad they used options instead of swaps! I think the worst case from here is another $3.75 a share in after tax losses (bringing the total to ~$14.60 after tax). Written off in my mind.

Someone paid for lunch.

I'm curious, when did Buffett mention vice stocks? Past AGMs? Don't recall this, though have heard him talk about how many letters from gamblers he gets (when talking about state lotteries).

It's not so much the interest expense as the non-interest expenses (e.g., salaries, occupancy etc) being spread over a smaller deposit base that drives the cost so high.

Kraven, here is what I wrote to Christopher1 just yesterday: Have you ever made a comparison between BNP Paribas (or any other large bank) and Fairfax? BNP Paribas has a ratio total assets vs. tangible equity of 26, for Fairfax that ratio is 3.4. It means that BNP Paribas has put to risk $26 for each $1 it owns, while Fairfax has put to risk $3.4 for each $1 it owns. Moreover Fairfax has put those $3.4 to risk through HWIC, which is a very small corporation, and therefore very easy to manage and control. Doesn’t it strike you as a comparison between two utterly different risk profiles? I also tend to compare the equity of an insurance company to the equity of a bank corporation, the float of an insurance company to the deposits of a bank corporation (though their costs are demonstrably different), and the debt of an insurance company to the debt of a bank corporation. And that is because both float and deposits are liabilities whose risk profile is much safer than long-term debt. Now, please consider, for Fairfax total assets are funded this way: 29.3% equity, 60.8% float, 9.9% debt. Instead, for BNP Paribas total assets are funded this way: 3.8% equity, 29% deposits, 67.2% debt. If Fairfax and BNP Paribas are both black boxes, they certainly are two very different black boxes! :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes Gio, your points are well taken, but it's a bit of a strawman argument. BNP is a weaker bank, so you've compared two things are extremes. I could say look at VERF compared to FFH. VERF is a tiny community bank with about $4 of tangible assets for each dollar of tangible equity. It is almost completely funded with deposits and only $5 mil in debt. Of course it's impossible to buy. I am not saying banks and insurance companies or FFH, in particular, are identical investments. But my point stands. If a bank is a black box, so is an insurance company. It doesn't matter to me that one might be more leveraged than another. Balance a bowling ball on a pin and some level it doesn't matter how thick that pin is (unless it is not really a pin at all but something else with a point on the end). So BNP and FFH may be different kinds of black boxes, but at the end of the day one still has to rely on the numbers as they stated in the financials. Nothing more or less. I agree. Still I believe simple heuristics like “skin in the game” and “small is beautiful” (because small is easy to manage and therefore to control) go a long way in business. Then, hey!, I have learnt: “you don’t know what you cannot know”, right? ;) Cheers! giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes At least in the context of banks and insurance companies, I'm not sure I would agree with this. Cost of float is key to the economics of both of these businesses. The smaller the institution, the lower base over which costs can be spread and the higher the cost of float. I spent a fair amount of time looking at community and smaller regional banks, and it seemed many had a very high cost of deposits. With 4.0-4.5%+ cost of deposits and long-term treasuries at 3.1% these banks did not look very attractive to me, even at sizable discounts to book. Would be curious to know how other folks think about this, or about economies of scale generally.

I recall reading some time back that someone - I believe Seth Klarman - had the same fear that TIPS wouldn't capture inflation as the indices are controlled somewhat by the government. Buying out-of-money puts on bonds was his thought to circumvent this potential problem (a lot of government intervention in the bond market these days too though). Buffett has always made the argument that a good business is the best hedge. Think it was the '79 - '81 letters where he got into more specifics. Might be worth a re-read if worried.

Am I missing something here, it seems like this is trying to be spun into something bigger than it is. Although I admit I am not aware of how it is all to be structured, as far shareholders of the banks. Wouldn't a person lose everything over the 100K CDIC guarantee here. Not sure what the limit is in the States. So I would think that anyone with large deposits would be thankful for only a 10% haircut in that instance. Or should it all just fall on the taxpayers like the US did. From what I read, depositors with less than 100k are getting a 6.75% haircut also. Sets a pretty scary precedent.

http://www.amazon.com/Dynamic-Hedging-Managing-Vanilla-Options/dp/0471152803/ref=sr_1_5?s=books&ie=UTF8&qid=1363367180&sr=1-5&keywords=Taleb Haven't read all of Taleb's book, but what I have read was good and from a practitioners standpoint. http://www.amazon.com/Wilmott-Introduces-Quantitative-Finance-Series/dp/0470319585/ref=pd_sim_b_3/191-1068126-2724102 Paul Wilmott's book is a descent theoretical intro as well, comes with spreadsheet examples and things (and fewer formulas).

Thanks for posting. Really interesting.

giofranchi, That is almost entirely due to the CDS gains. I do not see that happen in a market crash going forward. I am referring to the fact that if Fairfax did not have CDS gains I think it would have declined along with BRK, LUK, etc. I have benefited a lot from Fairfax during that period but I do not expect a repeat performance. Also I think Market would probably give us some time to load up on Fairfax if any deflation hedges look like they would be a home run. Hence, my preference for cash as a hedge instead of Fairfax. I could be wrong but that is the only way I can sleep well with my portfolio. Vinod Well, in 2008 FFH gained $2,080 million from equity hedges and $1,290 million from CDS. So, when the markets really melted down, FFH actually gained more from its defensiveness than from its macro call. :) Anyway, I understand what you mean, and I like your barbell type portfolio! ;) giofranchi Vinod is likely right. FFH was way down in March 2009, giving an excellent time to invest, if one had the cash. This was despite the fact they were booking billions in gains. In a heavy market sell off FFH will drop too, probably not as much as the S&P, but it will drop. This likely has little to do with FFH and more to do with shareholders being forced to sell at disadvantages prices to pay for margin calls. It is only after the dust settles that the gains will bring FFH to new highs. It is not a perfect portfolio hedge with the time lag. The closest thing to a perfect hedge is cash. I think it can be seen as an economic hedge if not a perfect market price hedge. If the price doesn't follow the value then one can take advantage of this obvious error (as long as Fairfax has not become overvalued prior to this hypothetical and one has cash).

+28,107.42 :P To the efficient market folks, that's like, a million sigmas.

It is only possible because of this board, but anyways here's what Fidelity is telling me for the RothIRA -- they have, as of the end of January, been tracking my performance for exactly 10 years: Whoa.

I feel like Buffett has been pretty consistent with the dividend policy for decades (Principle #9 in the owners manual). Will be interested to see how much he elaborates.

I haven't heard of one. This is pretty straightforward to do in word already though right? I guess it would save a few steps, and maybe make it a little more convenient to look over multiple years.

Michael Wacek (Odyssey CRO) making a few open market purchases. http://www.canadianinsider.com/node/7?ticker=FFH

The Uniform Bank Performance Reports are very useful if you're one to look at banks (https://cdr.ffiec.gov/public/ManageFacsimiles.aspx). The FFIEC site has a user guide to help understand the accounting assumptions, peer groups, acronyms etc.

Any major changes since year end other than the $10 dividend and the stock portfolio volatility? On the portfolio: BBRY, JNJ, RFP, USB, IRE are up. LVLT, SD are down. The net gains for those holdings look to be around $5.50 +/- after tax per Fairfax share.

The table on pg 2 of the press release has the realized/unrealized break out of the net investment gains.

Good call! Doubtful Bloomberg and company would sell, but I wonder if Buffett considers that business in his circle of competence. Probably a little smaller than HNZ, and maybe too much tech. I'd be pretty interested to take a look under the hood there.

http://business.financialpost.com/2013/02/12/fairfax-sells-off-all-chorus-aviation-shares/ I hadn't even heard of this small investment, but looks like the proceeds from the sale will be around $4.30 a share. Not sure what the cost was. EDIT: I meant $4.30 per Fairfax share.

Might be right in the short term, especially if the market continues marching higher. But the stock price seems to reflect this sentiment, and I personally wouldn't bet against them in the long run.

How does one go about betting on deflation? Short gold or something like that? Fairfax uses derivatives linked directly to inflation indices. Buying lots of bonds, or bond options, could also work.