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/

Great list. I preferred Lowenstein's book to Schroeder's, but whatever. I would add "The New Buffettology." Dodgy author, maybe, but she understands Buffett's process.

If 2013 BVPS comes in around $131,000 and reported earnings/OCI/investments grow at 7% in 2014, P/BV is 1.1X 2014 BVPS. I know it's based on assumptions and it is not the latest historical value that Buffett will use for repurchases but it is not all that far-fetched. Based on the same 7% growth rate for pre-tax operating earnings (ex-insurance), I estimate IVPS (investments per share + 9 X pre-tax operating earnings) at more than $220,000 for 2014. Using Equity + deferred tax + float, I get to $224,000 at the end of 2014 (that assumes 0% growth in deferred taxes/float). Estimated 2014 BVPS = $149,000 (14% YoY). At 0% growth in reported earnings/OCI/pre-tax operating earnings/investments/float, I get: BVPS = $147,700, IVPS = $203,000, Equity + Def. tax + Float = $223,000. It would take a pretty mediocre operating/investment year to ruin 2014; not that it hasn't happened before. Those values represent bigger discounts to current market price than I can find elsewhere for quality productive assets.

Have you heard of Toronto Brigantine? It is a charitable organization that gives kids independence and teaches them real life-skills through adventure. Two tall ships sail around the great lakes all summer long with kids between the ages of 13 & 18. Many are from less fortunate backgrounds and their trips are paid for by donations. We try to get at least twenty bursaried children out on the water for between 1 week and 2 week trips each summer. The kids are responsible for sailing the ships, rigging, repairs, cooking, cleaning, you name it. Only the captain is older than 18 (and not by much). My older kids have sailed on the boats over the last two seasons and they love it. I am on the board and my wife and I support the cause financially. Check it out: http://www.torontobrigantine.org We can use all the help that we can get.

5M$ AUM is consistent with my own calculations for a full fund structure to break even after a reasonable salary/incentive for the investment manager. The quotes I received for setting up a full fund structure in the BVI are similar - 20-30K$ initially, and around 15K$ annually. Needless to say with such costs you might have a few rough years in the beginning and I would advise to start with at least 300-500K$ AUM. However, 90% of success is showing up - so don't be discouraged. Can you walk me through your numbers? In terms of expenses this is what I see to hit a $100k salary. I say $100k because that's a reasonable analyst salary, why take on all this risk with all the work if you are making 50-75% of what an analyst is making? $100k salary $20k health benefits (for a family, maybe $10k for an individual) $15k SSN/Medicare $15k ongoing fund expenses $150k in fees to provide the same $100k income. On a $5m fund that's a 3% expense ratio. The issue I have is you can bend the numbers to make this work if you hit the hurdle, and if the fund is clearing the hurdle every year everything seems to work fine. It's what happens in a lean year, or a 2008 when it might be 2-3 years before the hurdle is met again. So say you have $5m and hit 2008 and lose 40%, you're down to $3m in AUM, and 1% on that is barely enough to cover ongoing expenses and health care, looks like it's food stamp time. A lot of people have clearly done well managing money, it's great to make money with other people's money, and I congratulate all of those who have started small and persevered. The route just seems tough, and everything looks great with ideal numbers. Personally I would rather have the numbers work on the worst case scenario and in the best of times cut the management fee or rebate it to clients. But I'd hate to set up a business that works if everything works in a perfect scenario, and in the worst case I'd be better off making minimum wage at McDonalds. I was talking to my fund's administrators last night. They said that the independent fund management business is just like any other: 80% fail within 5 years. I would imagine that those 20% that succeed studied the potential pitfalls closely. But more than that, they are probably people who, like Sam Walton said: "Get at it and stay at it." The future is unknown, it will always be so. There is only one time to start your dream and that is yesterday. Mind you, 3 years of annual living expenses in savings will likely get you over the bumps. Also important to remember, without your spouse/life partner on board, you may end up single.

Communication is important. Like Fisher said, your menu will attract a certain customer. If it changes, your customer base will get confused and it will change. Your menu (your letters to investors) should be consistent. Imagine your perfect investor and write your letter to him/her. You'll get the customers you want and avoid those you don't want. I think that my letters actually rub some people the wrong way, but that is not a bad thing.

Hi returnonmycapital, Just curious. how's your track record? Where do u normally find your ideas (i.e gurufocus)? 15%/yr net (18%/yr gross). For ideas, I like all you folks the best. Otherwise: newspapers, industry studies, other investors, and sometimes just plain old luck. You know, all the regular stuff. I never listen to or read sell-side research. My wife is my retail analyst; she's friggin' sharp with money.

Started a fund in 2007 with own money. Now bumping up against $30m. Performance fee only.

Correct. When setting up such a structure as we have, you can't widely distribute shares. You're limited to around 50 shareholders and can't go on soliciting widely - you have to limit the offer to select private investors. Otherwise, you definitely need to set up a full fund structure with all the bells and whistles to appease local regulators. The way to deal with this limit is to list the company on a stock exchange at some point when assets reach 5-10M$. This way you can widely distribute shares, gain permanent capital and shareholders retain liquidity. But until then you have to abide by certain limitations. Repeat - this is not a traditional structure. Use with caution :) I like that idea. Do you know what the expenses of listing and staying listed on a stock exchange are? I have heard of some listing in Ireland but don't know the costs involved.

I'm state registered (Oregon) and costs are very low. Maybe I paid $500-800 in startup, ongoing is maybe $500 / year. I do separate accounts, not a fund. Managing separate accounts is a lot easier. In Washington state (one of the strictest) you need to pass a Series 63 test to be a Registered Investment Advisor. It is wise to create an LLC for the management company, which will cost a few thousand bucks to set up. Annual fees are just $70 for the LLC and FINRA dues which are probably $200. Capital requirements are $10,000 or $35,000 if you have custody of assets. The management company is not required to be audited. No insurance required. Starting a fund is a lot pricier. Initial offering documents are 10k to 35k. You are required to have the fund audited (12k to 30k). Outside administrator is strongly suggested. That is another 8k to 20k. Independent party (lawyer or accountant) to authorize all disbursements adds $200 to every disbursement including management fees or redemptions. Same capital and insurance requirements. We expected to launch with $3 million and only had 150k. Being optimists we went ahead. Small size means you either cover the overhead or face quite a headwind (2 to 5%). I couldn't afford to cover the overhead and take virtually no income so we faced the headwind and survived. Then 2008 happened. Wouldn't have made it without some seed investors willing to take a chance. That makes sense to me and good on you for toughing it out. I don't know how much of a grip big institutions have on your fund industry but up here in Canada, our 5/6 banks control just about all of it by now and have huge marketing budgets. For fellows like Parsad, it has been no easy feat staying alive with performance only fee structures and some rough markets. Edward, you might look into registration wherever you reside. And be careful how you distribute your investment company shares. In the US/Canada/UK, and probably the rest of the developed world, an investment company is considered a fund, much like any group investment structure (or "scheme" in the UK). By distributing your investment company's shares to others, you are likely seen by regulators as advising. From a regulatory point of view, it also matters where those owners reside. If you solicit or are seen to be soliciting in any country that requires adviser registration, you could be forced to register in that country or face penalties.

Thank you for the compliment! ;D Not really if you do it frugally. We launched our company with about 150K$ initially. It cost 7K$ all in all to set up and costs around 3K$ to maintain annually, including all fixed costs. Actually, thinking about it, knowing what I know today I could do the same thing for 3K$, and 2K$ in annual maintenance. No need to go for expensive fund structures before you have at least a few M$ AUM. Hi Edward, The $3K doesn't include your audit costs does it? Do you do the books yourself? What about K-1's for the partners and the fund tax return...do you do them? Way to keep it lean! Cheers! 3K$ annually is a very minimalist structure. No auditor fees (as substitute we attach the bank and broker balance statements to the financials as these include 99% of all assets). No trustee, no administrator. What it does include is annual company maintenance fees, and fixed annual bank/broker fees. No general/limited partners structure - we incorporated in BVI as a "C" corporation with one class of shares. As a result we do not deal with tax authorities on the behalf of shareholders as a company but advise shareholders to file their own returns in their country (as the company is a separate corporate entity). The upside is that there are almost no expenses/hassle in general. We set our own rules and avoid unnecessary expenses. Essentially, we leapfrogged towards the "Berkshire" structure without first going through a limited partnership route. The obvious downside - it makes for a harder "sell" to prospective investors and advisers who are used to traditional, domestic, full fund structures. Also there are some possible international taxation repercussions that vary from country to country and these have to be carefully examined before attempting this setup. I am curious. With such low overheads, are you exempt from registering as an investment manager or adviser? In Ontario, I cannot professionally advise (or market) a fund, no matter what the fund structure, if I am not registered with the Ontario Securities Commission. Registration requirements include: annual registration dues ($1,000), liability insurance ($3,000), annual audit of the management company ($4-5,000), and minimum working capital at the management company ($100,000). Annual expenses of at least $8,000 and a constant existence of $100,000 of unencumbered capital. I understand the annual expenses are much higher in the US, and the UK requires a professional address for the management company (or, at least, it used to).