returnonmycapital

A few weeks ago I mentioned that I was to be out with a Toronto condo developer. I wanted to report back to the board on my discussion but found it to be so pathetic that I couldn't bring myself to jot any of it down (all the reasons for continued health were listed in the articles in this thread, especially immigration). Yumm, that Koolaid tastes good.

I should have added that I do agree with Moore's performance argument, when dealing with very small sums. My comments were directed toward investing OPM.

Actually Moore, I think the circumstances change dramatically when you manage other people's money as well. Probably far greater difficulties arise from that than actual portfolio size...especially if you have short lockups or no lockups. Managing your own portfolio, you can easily take bigger swings at ideas, because you know only you will redeem the capital. You suffer volatility for a couple of years, and some of your less-tempered partners will pull their capital because they get worried. Just a whole different game managing other people's money. Cheers! How does that pertain to segregated accounts? If managing a fund, wouldn't having a closed-end fund, with subsequent capital raises, deal with the non-lock-up problem? I think most managers would prefer to suffer inferior performance than sacrifice AUM. Subconsciously or otherwise. AUM doesn't matter to investors. Investors care about results. And so does posterity.

Hear-hear, this is the way to think.

Oh absolutely, perhaps I've been misunderstanding him, but I thought he was also talking about individual's ports, from the context of the other thread. I would not have done what I did with OPM, though it would be reproducible up to large sums. I do not think investing other people's money should be any different than investing one's own. Legal and size issues with respect to OPM are manageable. If NormR is referring to legal issues with respect to maximum concentration limits, they do not pertain to "accredited" investors. And there is nothing stopping a manager from closing his/her fund/segregated account business if size becomes a performance issue. For a manager, with all his/her own savings in a fund he/she manages, it cannot be too great a hindrance to limit it to accredited investors and a performable size.

BAC preferreds are through par. If you remember, 4th quarter 2011 prices drifted down to 65% or so. It appears the market is recognizing safety in the balance sheet already. Next stop, tangible common equity.

Is there a concise description/article on monetary and fiscal policy during the great depression anywhere? Try: A Monetary history of The US by Friedman and Schwartz. But make sure that your coffee table is sturdy. It's definitely heavy reading. However, it's got a nice pullout that's a good summary chart. :) What about "The Lords of Finance"? Or, how Montagu Norman and his gold standard caused the Great Depression.

I think what may have happened is that he felt he owned too many of the warrants. The diversification rules suggest that derivatives be treated notionally. If the fund owned 100 warrants, it should calculate its exposure as if it owned 100 underlying shares. Reporting mutual funds, as the Chou funds are, should limit exposure to a single issuer to no more than 10% of fund net assets, at time of purchase. If a fund should go over 10%, the manager has a reasonable amount of time to correct the situation. That may be what transpired.

Here-here!

That's what we did in 2004. It was so obvious that there was a huge bubble in Spain that we sold our apartment after doubling the money we paid for it, rented a nice villa (paying a 1% rental yield), read a bunch on books on value investing and started managing the money from the sale. We've done pretty well since then, despite this being the worst environment for investing since the Great Depression. House prices have gone down by almost 50% in our area in real terms, but they still have a long way to go (rental yields are still ~3%, I am pretty sure they will eventually get close to 10%, as it happened in the 80's ) so we keep renting and enjoying life. As a value investor I am reluctant to short anything. But since 2007, the stock prices of Spanish banks and real state companies heavily involved in the housing bubble have gone down by a huge amount. The pattern in Canada (and for instance in Brazil) is starting to look the same. So I am trying identify the Canadian equivalents of Metrovacesa and Banco de Sabadell to keep an eye on them. I am happy to find a value investor in Spain. I too have a connection to your country, having recently bought a piece of development land outside of Puerto Banus (Pedro de Alcantara playa) for about 10% of the market value of land in central Toronto, on a square metre equivalent basis. At least I think I bought it, I am still waiting for the registry. All the local and Euro problems have created a buyers' market like I have never seen. One can successfully name their own price in such inefficiency. My offer was 40% of the ask (which was already down 40% from 2009 ask) and I had to wait only 4 months for the seller to acquiesce. Rental yields are helpful when the market is functioning but probably somewhat limited in a market like Spain's today. Toronto condos are overdone and I too would like to find a way to exploit the over-supply. On Wednesday, I am out with a condo developer. I will try to see where the weaknesses are. I suspect, like in the last real estate correction (1990-95), it will be the developers themselves. The large financials in this country have a tendency of gliding through these things. Questions from boardmembers for the developer are welcome but I will not be pen-in-hand. More like putter-in-hand.

By great comments, do you mean like, um, you know, oh... what was I saying?

1) Tarp warrants (A) combined with series L preferreds. 1.11X leverage. Meaning, 83.5 common shares per par equivalent pref. Total cost of warrant + pref = 97.9% of par with an annual cash yield of 7.4% (done in Nov/Dec 2011). 2) Underlying common position combined with the sale of out of the money puts at an annualized cash yield of 14.4%. Yes I will have to buy more common if the stock price declines 15% from here, but I am okay with that (done recently).

You get a gold star. :) And I wasn't being facetious. :) That's actually what too many people miss about Buffett and other super-investors. They are so good not because they have special tricks to crunch the numbers, they are so good because they make sure to really understand the business not only on a quantitative, but also on a qualitative level, and to stay away as much as possible from things they don't understand. When Warren says that he doesn't understand a business, what he means is that he doesn't understand how that business is almost guaranteed to make good money for many years, even decades, that will be available for the shareholders or wisely reinvested with high returns on capital employed. Combine this with a price that ensures an attractive return on your own capital and you have value.

I believe people think JPM is special because Dimon tells them so. Most people would rather die than think...

pof, I am interested in hearing more about IB. What do you mean by foreign security cost basis? Wouldn't your administrator calculate the cost basis in local currency based on your trade confirm and translate that back into CAD/USD or whatever your base currecy is using independently sourced F/X rates anyway? Or do I misunderstand? Otherwise, what kind of financing rates in CAD/USD are you able to get through IB? Is it Libor based or prime, or...? What spread off Libor/prime? What sort of commission rate do you pay on North American stocks/warrants? What do you pay on non-North American stocks/warrants? What sort of fixed income markets can you access through IB? What are the spreads like on a typical bond trade? Is there a minimum annual cost for IB prime which is offset by commission/interest expense?

What jumps out is the improvement in the combined ratio. I know it is only one quarter, but 102.6% is good number. Especially with earned premiums down year on year.

Yeah, that was a little cheeky.

At the bottom of the first page of the annual letter, Prem writes: "The $1 billion in catastrophe claims in 2011 cost us 19.3 percentage points on our combined ratio versus an anticipated cost of approximately six percentage points in an average year." They're combined ratio for 2011 was about 120% (if you use the consolidated income statement). Does that mean they anticipate a combined ratio of 106% in an average year? If so, that would imply an anticipated yearly average cost of float of approximately 2%.

However, Fairfax has a third source of funding for the investments i.e. interest bearing debt that needs to be accounted for. Best, Ragu Also, Fairfax's cost of float is nowhere near costless. By my calculation, cost of float at Fairfax has averaged 9% since 1998. It has been 4%, on average, over the last 5 years and 8% in 2011 alone. Fairfax is a long way away from being worth its net investments (i.e. investments less debt and preferred equity).

(1) In the past, Buffett himself has said that an insurance business that shows an underwriting profit on average, over time is worth its investments. Add to that a multiple of 10 of the pre-tax operating earnings (outside of insurance) and you have intrinsic value. The multiple of 10 pre-tax is like 15 post-tax, the average of the S&P 500 over time. Tilson adds underwriting profit to the pre-tax operating earnings in method (1). Probably too liberal. (2) He has also said that value can be gotten by using the right side of the balance sheet. All capital that is costless is akin to equity and therefore of value. So, Berkshire's float, its deferred tax liabilities associated with its investments, and its common equity are all costless over time and therefore considered a measure of intrinsic value. Either way, you come up with the same number at the end of 2011. Under (1) 168,266 and under (2) 168,003 That's a 70 cent dollar.

I don't think he would touch the Canadian banks. A quick look at TD (a proxy for Canada): CEO: Clark (considered the best in Canada and a sensible sounding man) ROA = 0.9% (10-year average = 0.8% with no financial crisis to bring down the average) Non-interest income (NNI) to non-interest expense (NNE), a measure of efficiency = 67% Provision for credit losses (PCL) to average assets (AA) = 0.2% Now, compare that to USB: CEO: Davis (very sensible fellow) ROA = 1.5% (10-year average = 1.6% with 2009 well below 1%) NNI/NNE = 88% PCL/AA = 0.7% Or WFC: CEO: Stumpf (another sensible fellow) ROA = 1.3% (10-year average = 1.4% with 2008-2009 well below 1%) NNI/NNE = 77% PCL/AA = 0.6% Canada (TD) looks to be a low return environment (ROA), not as efficient (NNI/NNE) and priced for perfection (PCL/AA). Also, USB and WFC require much less leverage to achieve a decent ROE. They are currently running at 10:1 assets to common equity. Whereas Canada (TD) requires a lot more leverage, about 17:1 assets to equity to get to the same ROE. I would hesitate. TD trades at 1.6X 2012 estimated BV, with USB at 1.6X 2012 estimated BV and WFC at a little more than 1.1X 2012 estimated BV. Canada's household debt to disposable income is now over 150% and the US' is now below 120%.

I don't know if it has been mentioned previously here or in the RIMM thread but with Windows 8, Windows phone and Microsoft's presence in the business user market through Offfice, wouldn't Blackberry's relevance be increasingly questioned? I'm not an emotional sort but I can't help feeling a little excited about MSFT's prospects. Whether it only serves to protect its moat or expand it is a different question.

Both are Canadian. One is an original investor in the Chou Funds in Canada. The other is a professional in the industry.

I have found that rental yield is a pretty good valuation indicator for real estate. It is not necessarily the easiest data to collect for an entire nation. But if you can compare the annualized rental obligation on a property (net of property tax & insurance) to that of its then market value, and compare that yield to the yield on a mortgage, treasury bond, equity index earnings yield, etc. you can get a pretty decent idea of the relative attractiveness of real estate as an asset class. The areas worst hit in the US were also the areas where the rental yields were very low. People were buying real estate based on future capital appreciation only - yikes. If it doesn't work as a business, it shouldn't work as an investment. The standard retort is: "People need a place to live." But rational people will tend to rent when rental yields are low. The opposite when they are higher than the cost to own. Assuming the law favours real estate as a business (no strange tenant rights, etc. that make it difficult to have 25% or 30% of a nation's real estate market as rental). My father-in-law learned this lesson recently. Owning masses of real estate in southern Europe where the rental market is anti-landlord and yet rental yields were still almost non-existent. That debacle was pretty easy to foresee. The demand/supply should move with demographic trends. And a nation does not need a supply of residential units that is well beyond its near-term demand. And the missmatch shows up in rental yields. Where I am from, it takes about 1 1/2 years to buy a site, plan/approve, build and move in or sell. So supply can pretty easily keep up with natural demand. At least where I am. Incidentally, where I am from, rental yields on new-build condominiums units (high rises) are between 2 & 3% presently. Factor in 1% property tax & insurance and 1% condo fees and you'll see what I mean by 0% value. But they're still building...

Charlie, Maybe they see the market cheaper than historically, even with a relatively higher p/e (as per Shiller) because of the general level of interest rates. Compare earnings yields (the inverse of p/e) to bond yields and cash yields over time. They tend to move together. Not necessarily at the same level, but they do correlate over time as they effectively compete with one another. Since 1981/2, interest rates have declined and p/es have, in fits and spurts, risen. Meaning earnings yields have fallen in line with other interest rates. But, over the last few years, p/es have declined, moreso than might seem justified given where other interest rates are.