returnonmycapital

I'm surprised that CIBC, in their note on the MW report, didn't mention that MW chose only FFH's closely-held investments where fair value exceeds carrying value. What about those that trade publicly whose fair value exceed carrying value... like FIH? Taking my estimate for YE BVPS and adding to it the difference between fair value and carrying value for ALL closely-held investments and incorporating an appropriate haircut for taxes on the difference, FFH's FMBVPS ($987) is more like 8% higher than reported BVPS ($914). The IFRS change argument is ridiculous as all insurers are faced with the same set of accounting rules. It may work better for long tail liabilities than short in a rising interest rate period, but FFH didn't make up the rule to suit its balance sheet and it will suffer relatively if rates decline. What kind of market responds positively to this standard of analysis? How is Brett Horn still employed? So many questions.

Perhaps I'm thinking incorrectly, but I think of assets and the capital backing those assets in terms of spread. Assets need to have a positive spread over the capital backing them. Given the situation currently, FFH is showing a materially negative spread on their variable rate preferred capital. Should the situation continue, it would seem rational to exit that situation. I agree that it is best to do so in the open market, given the current discount to par prices but if they come right up to the date of redemption and there is still some variable-rate preferred outstanding on a negative spread, I'm not sure that I'd be furious with management if they redeemed.

I'm curious about these variable rate prefs., especially the Series D & F which are redeemable in 447 days (1.2 yrs) and 537 days (1.5 yrs), respectively. Using current yield, they offer 10.8% and 11.2%, respectively. At par, they currently cost Fairfax 8.3% and 7.3%, respectively. Their dividends are paid with after-tax earnings, making them closer to 10% cost to FFH on a bond-equivalent basis. Those levels compare poorly to interest cost on FFH borrowings and I challenge those who would suggest that FFH assets will return higher over the next year or so. This is expensive capital. Is there something that I am missing? Why wouldn't a rational FFH redeem them? I suppose the answer is that we don't know that things will remain equal in one year's time. But in the meantime we clip attractive cash "coupons" at preferential tax rates (for Canadian tax residents) and if things do look somewhat like today in one year's time, we could very well see a redemption and that would equate to a "yield to maturity" of 36% and 48% per annum, respectively. I know of no investment currently offering that level of yield/YTM combination, let alone one that is money-good. I am making assumptions: That things don't change much and that FFH acts rationally. I see those as perhaps a better risk/reward than on the common.

I like the same variable rate preferreds (series D/F/H/J) that Mr. Bradstreet has been buying. Fairfax has announced their dividends for the 4th quarter and they show current yields of around 11% (annualized) across the different variable-rate series. The series D is redeemable at par at the end of 2024 (F in March 2025, with H/J following in Sep and Dec, respectively). Based on the current declared dividends, the variable rate prefs are quite expensive for Fairfax (between 7.32% and 8.31% at par) and yield as much as double their fixed-rate equivalents. Of course, interest rates could always decline between now and the end of 2024 but they would have to go done a good deal to bring them back into line with the fixed-rate series. They're not easy to trade but given their cost to Fairfax, my thinking is Mr. Bradstreet sees a probability of redemption and, if so, the annualized return on today's prices range from 28% to 42%.

But what will Fairfax do about C.) Consolidated? Don't mean to be a downer but returns on capital have been almost non-existent for the group. Last year, operating earnings (pre-interest expense) were something less than $3/share. Things don't look a lot different this year and any interest expense/taxes aren't part of those figures. Equity is valued at almost $100/share. With things looking decent everywhere else, surely some attention will come to this basket. With the take private, will Fairfax's treatment of Atlas be to consolidate or do they stick with equity method?

My approach was to invest everything that I had outside of personal-use real estate in the same fund as my clients, on the exact same terms. So I didn't treat them differently. I was investing my money and if others cared to join, they did so on my terms. Of course, I had to make it attractive for them to take the risk, so I followed the Buffett/Graham partnership fee model (0% fixed, 25% of profits above 6% annualized return). This put the cart where it should be, firmly behind the horse. The result was defensible. Think of Jack Bogle, when he said: "Investment management used to be a profession, now it is a business." My attempt was to be a professional, not a business. To make money with my investors rather than just off them. I wouldn't recommend the approach unless you can afford to starve for a few years. A track record takes at least 3 years (more like 5 years), and a good track record takes something else than time. But it feels good.

I am getting closer to $700 for FMBV (using a 26% tax rate on the difference between FMV and accounting value).

Post auction, Q3 BVPS is $609 and BVPS @ FMV, using a 26% tax rate, is $675. So the stock is trading between .75X & .83X and that does not include Q4 MTM or Digit.

The Odyssey transaction was in a new security, not for common stock held. Could that mean that the transaction will not incur a capital gain or an increase in common shareholders' equity ?

I don't know this for sure but I don't think there is anything wrong with managing a family member's brokerage account as a "trading authority." But as LL writes, as soon as you take remuneration, you are deemed a professional, an adviser and therefore subject to regulation/registration requirements. It doesn't matter what kind of way you manage (through a fund or SMAs), it is the taking money for it that counts. I'm not even sure you could manage a fund at zero fees without being registered as you might have arm's length investors in the fund (i.e. non family). I imagine that the regulators wouldn't allow you to manage money for arm's length investors without registration, even at zero remuneration.

Being remunerated for managing other people's capital (advising, in regulatory parlance) has regulatory implications. The first being licensing. You must become licensed as a portfolio manager or investment fund manager. In order to be licensed, certain prerequisites are essential: experience and education. Education is typically earned through the CFA Institute exams and eventual charter. In order to get a CFA charter, a minimum of 3 years' worth of relevant investment analysis/management work is required. The regulators will expect some, if not all, of this to be realized prior to considering granting a license. Meaning, you may have to work for another registered firm prior to setting up on your own. The operating expenses are only somewhat onerous and mainly comprise: 1) Setting up of a management company (licensing requires a legal entity) ($500 setup and then ongoing registration fees with the regulator of at least $1,100/yr - depending on entity revenues); 2) Production of a Policies and Procedures Manual (PPM) for the legal entity and any of its employees ($a lot); 3) Hiring of an auditor for the management company ($7-10,000/yr); 4) Setting up a trust or LP for the investment fund ($5,000); 5) Producing an Offering Memorandum ($15-25,000?); and 6) Hiring administrators, auditors, compliance consultants, and legal advisors to help with the ongoing admin/compliance of the investment fund (other than the administrators & auditors, which charge the fund directly, probably $10,000/yr). If you get past all this and you want to charge an absolute hurdle (6%) performance fee, your investment fund will need to be a non-reporting issuer fund (Prospectus funds can only charge fixed fees (% of assets) or hurdle rates based on a reasonable benchmark (i.e. S&P500 TR Index)). This means that your fund will only be accessible to "accredited investors." Accredited investors have a minimum annual income requirement, or minimum liquid investment funds, or minimum asset size, etc., etc. The market for such investors is small and competitive. As longlake95 suggests, it is daunting but not impossible and, if successful, worthwhile.

If what Benhacker is saying is true in the US, Canada is different. Here, if you buy a fund at the end of the year, income and/or gains earned prior to your investment are not "distributed" to you. You would only receive a distribution if you had invested and then income and gains had accrued on your investment. Otherwise, why would anyone invest after Jan. 1?

https://www.franklintempleton.ca/en-ca/public/funds/price-and-performance Templeton Internation Stock Fund, since 1989: 6.49% per annum.

In addition to an incomparably fairer "hedge fund" fee structure, Buffett's partnership days' activism was in controlled companies, not like today's green-mail sabre rattlers with their minuscule percentage ownerships. And in terms of taxes, Buffett is not saying one thing and doing another: he follows the rules. He says it is the rules that need changing. Nuanced? Hardly. Finally, Buffett has made the vast majority of his fortune with his investors, not off them (the standard for hedge fund managers).

http://www.theglobeandmail.com/globe-investor/investment-ideas/strategy-lab/how-too-much-information-can-sink-your-portfolio/article19274159/