no_free_lunch

No you're not. Greatly appreciate your analysis.

Decent article by morningstar on Berkshire valuation. I am just putting in the end numbers but quite a bit of details if anyone is interested. http://news.morningstar.com/articlenet/article.aspx?id=715603

HTR in Jan 11, 1990 was $3.41 adjusted for dividends. Today it is 21.71. So it is 6.36x where it started at. It probably IPO'd at no discount to NAV so if you standardized nav discount it is up about 7.4x. SPY, from Jan 11 1990 to today is up about 6.78x. So SPY beat HTR strictly speaking but by a small margin. Compared to the NAV adjusted value HTR beat SPY. If you standardized the PE on SPY (because I think it is a higher PE today than Jan 1990) then HTR beat by an even larger margin. So they have proven they can at least match the market. I think the average CEF, however, significantly under performs so I won't be buying baskets.

Yes, that is probably a better way to look at it. It is also structured such that it should outperform the S&P in the event of a severe downturn.

I am thinking of HTR. It is run by brookfield which is a huge plus in my mind. According to yahoo finance since inception in 1990 it has more or less kept up with the SP500, I think the S&P beat it by a fraction of a percent but regardless it has held it's own and validated the investment over the long term. There is a 15% discount to NAV which is not fantastic but not bad. So I guess you buy with the intention that you get S&P like returns + a one time bonus of 10-15% as it re-prices closer to NAV.

Best of luck to you, will probably buy more on Monday if still at these levels. It did go ex-divvy the other day which is part of the drop but still very cheap. Dividend yield is 16.5% and 50% to get back to NAV. I just keep wondering if there is some news I am not aware of. Other BDC's arent' crashing.

txitxo, These are great results and really just fantastic on such a large portfolio. Can you comment on your investment process?

The fairfax hedges are on the headline CPI so it is good to know that it is more volatile. So this is slightly to fairfax's advantage I guess. It is possible you could have some quick deflation before the fed can react. However, if headline CPI dipped and fairfax didn't sell their options it could all disappear when the CPI reverts back up. In 08 they probably wouldn't have made money because I don't think it fell enough that they would have sold. I would prefer a fairfax that just equity hedges.

Thanks! I appreciate the detailed response. Nothing to add, I stand corrected.

This is for most recent quarter. Earnings before income tax : 5,846 Income Tax: 1,739 That works out to 29.7% tax rate. I don't know the financials that well, maybe there is a reason for a lower rate on the operating income?

Thank pupil. Great analysis. Based on your analysis it looks fairly compelling at these prices. Looking through it, the only thing I see is you use a tax rate of 25%. I see a 30% rate on the company as a whole, just wondering why you chose 25%?

We really didn't have massive deflation in 2009. There was a spike up during 2008 of about 5%, which completely reversed by the end of the year. 2009 saw the CPI end within a fraction of a percent of where it started. Here are the end of year CPI numbers for the US: 2007: 210 2008: 210.3 2009: 215.9 2010: 219.1 2011: 225.7 2012: 229.6 2013: 233.0 2014: 234.8 I guess I can't say with absolute certainty we won't have deflation but we really didn't have any sustained deflation during the 08/09 crisis and there wasn't any in japan over the past 20 years. That is all I am saying, we have to really get speculative that this will happen.

I wasn't aware that they were referencing other numbers, good to know. I guess the problem then is they are bench-marked to the official CPI numbers where the government is motivated to be cautionary. Even if the real deflation is -1 or -2%, if the official CPI number is 0 then that is what the hedges work off of. I have been thinking about this deflation debate in general and it seems to me that deflation is what would happen if the government didn't interfere. In 08/09 it sure looked like deflation was going to happen and when it didn't the deflationists blamed it on government cronyism, can kicking, deficit spending, propping up failed banks, etc. I think the deflationists were right on the theory but ignored that government wouldn't stand idly by. That same issue will exist going forward. It just seems governments have so many tools to fight deflation, they can run deficits, the federal reserve can print money, they can lower taxes, enact stimulus programs, etc. All of these things are arguably bad in the long-run but I think we have enough evidence now that that is the way it will go. If the government can just make money appear, is that not all inflationary and shouldn't that at some point push up prices?

I have book value of $8.6B USD, shares of 22.265m, so book per share of $387 USD. CAD/USD is about 1.32 so that's $511 per share. So at current price it's 1.16x book value. As far as valuation, it's a tough call. I think if not for the hedges the market would be assigning a higher value and historically it has frequently traded at higher premium's to book. I think that it is a bit over-valued unless their macro thesis plays out.

I found this site which lists the CPI index in Japan. Since fairfax is betting on CPI indices in US & Europe I thought this was relevant. You will have to tweak the graph to get the long term numbers but except for brief periods there has been no deflation, as measured by the CPI, in Japan except for brief periods. Certainly the type of decline that would be needed for the FFH CPI bets to pay off hasn't occurred. So, we would need a deflationary event greater than what has occurred in Japan in order for these things to hit. http://www.tradingeconomics.com/japan/consumer-price-index-cpi

Despite all the market turmoil Fairfax stock (in CAD) is down just a couple percent over the past month. I am trying to understand if that is because the deflation hedges are overwhelming losses in the stock portfolio -or- is the market assigning a higher cost to the defensive benefits of fairfax?

You would think, as rb said, that you could just buy long-dated treasuries or juice it with calls. It makes sense but then treasury prices are flat to down since this whole thing started. I guess China is dumping but this is just one more reason why I am suspicious of trying to time a macro event and then predict the impact on various security prices. I guess if you want to go this route you could find an ETF which tracks commodities and buy puts. Problem is most of these are already down a lot and the VIX is quite high now.

I actually think that the deleveraging is greater than the numbers show. A big part of what has happened is debt has shifted to the government in the US. Government debt is higher grade and thus lower interest so I think the actual interest paid (even if we were to normalize interest rates) is quite a bit less.

I think there has actually been modest deleveraging in total in the US. I think this was covered earlier in the thread. Not to say we aren't still in a real bind, but technically the US has deleveraged. You can look at fed release Z1, where they break out debt by sector. Here are the numbers I see. Total Debt including financial institutions, 2007: ~$50T 2014: ~$56T GDP: 2007: $14.5T 2014: $18.0T Debt / GDP: 2007: 344% 2014: 311% http://www.federalreserve.gov/releases/z1/current/z1.pdf Given this, my concern is when exactly will the deleverage tsunami hit? I thought it was happening in 2008 but it just passed. So it has been 8 years and a hell of a storm but the economy has grown and debt levels have improved marginally. What if we just kind of keep plowing along for another 20 years? I don't know, I am just going to buy good quality companies. Maybe if VIX gets really low again I'll buy some puts but it's really tough to call when the house of cards collapses.

Can you look in the rear-view mirror and point out what the second shock to Japan was that caused their two decade long deflationary trend? I hate to get in the middle of other people's debates but I actually do think there is a fundamental difference between US & Japan, or a secondary shock if you prefer. It's demographcis. A shrinking population is a major impediment to economic growth. You could probably apply that to some European countries as well but the US has relatively good demographics due to immigration.

Thanks for the link. He is holding 25% cash in the associate fund, 75% in the asian fund and 35% in the europe fund. When you look back the cash levels have been high for years. I think it is impressive that he has kept up with most of his index peers (sort of) given how defensive he has kept the portfolio.

I have nothing material to add but have to comment. This is fantastic analysis, I am following it all as best I can. I would just say that I think that 10% return would be fantastic. You need to weigh in the probability of the returns being in that range which is much higher than the probability of some company I can identify that might return 15%. Or in other words, you can come up with a portfolio where the individual components can do 15-20% but full cycle you are likely to be dragged down close to BRK results so why not just put a meaningful (15% for me) amount into BRK? Also regarding the 10%, I just looked at the S&P earnings and peak earnings lately were 105 in 2014. This compares to peak earnings of 85 in 07. So S&P has only grown by about 25% over the last 7 years and that would include the impact of lower interest rates and the ability for companies to have cannibalized at much lower prices. That is what 3% a year earnings growth? I think 10% is a great result, if we get it, in a 2% inflation environment.

That's my pick as well. The author is very level-headed & the analysis is based entirely on data releases. Kind of tough reading at times but that's just the nature of the material. EDIT: I think you have the wrong link, it's http://www.calculatedriskblog.com.

Bought RYCEY in a non-registered account.

I use questrade.