returnonmycapital

Ericopoly, Your assumption about HWIC suggests that an inferior investment manager purchases ORH's operations/float/investments. What if Berkshire Hathaway bought it? What if Markel bought it? What if... another competent manager bought it? The value of the operations is in the eye of the acquirer, you suggest. And a competent manager would see terrific value in ORH's underwriting. Heck, anyone should.

Viking/Cardboard: Amen. Ericopoly: HWIC as ORH's investment managers, are as tied into ORH as its own underwriters are. As a rational individual, if the historical performance of ORH's investments have averaged at least 10%/yr for a long time and I have no reason to believe that anything should change in the next while, AND those investments are financed at no cost (in fact, at negative cost in ORH's experience) then I would have no real trouble paying $1 for every $1 of investments as an acquirer. With competent investment management, No cost float is equivlent to equity. And dare I say, negative cost float is even more valuable.

Much like StubbleJumper, I saw 20%+ current yields in preferred stocks earlier this year. Cash paid out yields from solid businesses that would be amongst the last to suspend in a worst case scenario. I compared those yields to the current and prospective earnings yields or comprehensive income yields for the same or similar companies' common stock (retained or paid out) and couldn't find better. So, thinking a bird in the hand and all that, I bought preferreds. I decided it might be a good idea to buy the preferreds on margin since yields were paid out quarterly and I was onl paying 3.25% in CAD and 4.25% in USD. The spread was almost 18% for WFC-L alone. By using margin I also effectively hedged any foreign currency exposure. This allowed me to use equity cash to buy common stock in the same businesses for the long term. The combination was pretty powerful. The analysis was the same for both, only the implementation was different.

I do not like the price offered. It's a steal at 60. My capital will now be moved to a watered down 15% from 20%, with no real adjustment in value to compensate. And, with the issuance of FFH shares, the intrinsic value of my portfolio as a whole declines. While I do reasonably well immediately, I am worse off long-term. I will vote against this transaction. I would have expected better from Fairfax; this seems a little bit of a cheap shot to me. If 60 is the price which works for the vast majority, which I would hope it doesn't, why not finance it with some cash and even some of that debt just issued? they have enough to go around, especially with the prospective dividend from ORH at year's end that they can control with 100% ownership. Viking, an important rule of financial success: don't take advice from intermediaries, no matter what titles they hold. It does your pocketbook no good to lay responsibility with others, so don't give yourself the opportunity to do so. I have read your posts with interest. You are much more capable of than the vast majority of professionals. And I know this 'cause I'm one of them.

As Munger might suggest: You'll make a lot of mistakes by keeping to one extreme or the other.

Mpauls, absolutely. Unfortunately, the regulators, as much as I feel for them, do not dare institute "spirit"-based rules. Instead, relying on "to the letter"-rules which make us all sound like we are out to make money off of investors instead of for them, or even better, with them.

Eric, FFH has averaged high cost float over quite a few years. ROE at FFH has averaged 14% for just as many. That is why I mentioned dilution by less desirable business returns; both ORH and FFH share the same investment returns (more or less). Add to that $400 million of reasonably high cost new debt capital at FFH and the struggle continues. As for life companies; please name me one that produces a combined ratio below 100%: Suggesting a cost to their float. I'm not entirely sure it is my logic that is flawed, but no insult intended.

I mentioned the ORH premium due to high ROE. I also mentioned, perhaps more poignantly, that if an insurance\reinsurance business can generate no cost float, the value of that float should be treated just like shareholders' equity. In effect, ORH's true book value is = float + common shareholders' equity, which comes close to $8 billion. Also meaning that ORH is trading below 1/2 true book value. I also mentioned precedent with this type of math in the GenRe acquisition by BRK. I understand that it's nice to see a quick pop in a takeover target's stock price. But, as they say, then what? I would much rather leave my capital in ORH generating tax-deferred returns of 20% per year than have a quick 30% pop and have my capital prospectively diluted by less desirable businesses generating less attractive overall returns on my capital for years to come. If a takeover of ORH should happen, it should reflect such a difference for future years. Prem, of course, knows this. Does no one else?

I am happy to let my capital compound at 20% in ORH. So, yes I think 65 would be, to quote a real estate term, a stink bid. By holding FFH, or NB, I enjoy\ed about 15% compounded. To paraphrase the words of most competent investors, I'll take a lumpy 20% over a lumpy 15% any day. In addition to which, a company that can grow shareholder capital at 20% is even more highly prized than one that generates 15%. Meaning, ORH should attract a premium valuation to FFH\NB regardless.

I do mot know what NB's long-term avg. ROE was, but ORH's is close to 20%. Assuming a fair value opinion suggests a required rate of return of 10% on market capital, that would value ORH at close to 2X book anyway. FFH would not offer far below that value given their penchant for fairness. IV for ORH is closer to 90 than 65.

I would argue that a takeover of the remaining shares of ORH should be considerably more expensive than just a 25% premium to its recent market price. If an insurance\reinsurance business enjoys cost-free float over the long-term and has every reasonable prospect of remaining as disciplined in the future, its true value should include float as part of shareholder's equity. In addition, if the investment of that float has been defensible and is expected to continue in a similar fashion, the business is worth at least the value of its investments. Based on these notions, ORH's true value is more than $8 billion today. That is more than twice its book value. And before you berate me for such fanciful musings, that is the valuation metric used by BRK in its acquisition of GenRe, no? That being the case, a slow takeover of ORH through repurchase of its own shares makes much greater sense. It also highlights to me just how undervalued ORH remains.

My children were given an Xbox but they must mark its value to market every year. They ain't too impressed with it lately. That and they are not allowed to use it during the school year or on sunny days. I, too, read to my children - even still to my 12 year old. They have all picked up reading and it is a sight to see. Broxburnboy, I read Titan on John D. Rockefeller but don't remember reading how he educated his children financially. Can you remember where you read it?

My eldest (12 yrs.) started a personal balance sheet at 11. On it, he lists all his belongings, including some stock gifted to him. He marks his assets to market on Dec 31 each year. As an incentive, if he does this and if he writes a letter explaining how the year went, he gets paid a bonus of 10% of any increase in his net worth. He gets a really crappy allowance but can earn money by doing odd jobs around the house. He is beginning to see the difference between depreciable and appreciable assets. He struggles, though, with how a stock price represents the health of an underlying business and how they do not necessarily correlate in the short-term. But, then, who doesn't? Last year, he earned enough money to invest on his own. He chose common stock. In making his decision, he asked many of the right sort of questions. I acted as his analyst. My next child has also started a personal balance sheet and will go through the same motions. We will do this for all of our children. My reasoning is that no matter what they eventually choose to do, there is no reason to be money-stupid. Even a little savings can add up if dealt with responsibly.

According to MSN, only two institutions held more than 1.4 million shares as at March 31, 2009: Marshfield Associates with 2,854,700 shares and Renaissance Technologies with 1,847,700 shares.

2.45 million shares traded today (according to Google Finance). Average volume 195,000. That's some difference.

NormR, remember that the CFA designation only comes with at least 3 years of relevant professional experience.

I don't know anything about US tax law since I am Canadian. But in Canada, if your partnership vehicle is a "registered investment" you can use tax deferred savings as capital in the vehicle. In Canada, it is quite simple to apply for registered investment status with the Canada Revenue Agency and doesn't cost anything 'extra'. Again, I don't know about legal issues and costs associated with starting a partnership vehicle in the US, but if it is anything like Canada, it can be done on a shoe-string. I refer to Canadian requirements and process: First, securities commission registration. For this, you need to have certain qualifications that the commission deems appropriate for managing other people's money professionally. I think the CFA designation would be sufficient, for example. But other qualifications, such as professional experience &/or other professional designations may do the trick. If you apply for registration yourself, you don't pay any helper fees. This was my route. I think I paid a total of CAD1,300 to the securities commission for initial registration. Annual fees are around CAD700. Second, you need a partnership vehicle. I chose a unit trust arrangement. As I understand it, a unit trust offers a little more freedom in registration categories in Canada. I'm not sure this is relevant in the US. The total legal cost of setting up the trust was CAD1,500. Third, I set up a management company to act as adviser to the partnership vehicle. This was a simple incorporation and cost somewhere around CAD250. Fourth, I contratcted an independent administrator to handle investor cash, back office admin., accounting (including tax), etc. Initial cost for this arrangement, CAD4,000. Ongoing cost 0.2% of net assets or less. Fifth, audit. This is a requirement for registration in Canada for the management company (adviser to the partnership vehicle). Initial cost of opening balance sheet for the management company, CAD700. Ongong cost is anyone's guess but mine is CAD4,000. So, total initial set up costs come to CAD7,750 or so. And ongoing operating expenses are somewhere in the neighbourhood of 0.25% of net assets per annum for a fund of less than CAD10 million (costs decline if assets grow over that figure). Given the benefits of the partnership/fund route to both investor and manager, as I have highlighted in another post, it seems to me to be a small price to pay. Other considerations, in Canada, are the need for a minimum amount of liquid capital within the management company (in Canada it is CAD25,000, adjusted for insurance deductibles) and the need for professional liability insurance, which may cost CAD3,000 per annum. I hope these figures are a good ballpark for the US. I am led to believe they may be a little under what is expected of budding managers there, but perhaps Parsad can offer his experience. I believe he has a US set up. Good luck to you!

I started a partnership-like mutual fund in Canada in October 2007. Prior to setting up this fund, I was managing individual accounts. This became cumbersome: individual desires/restrictions of each account holder, difficulty with aggregate performance reporting of even slightly different mandates, the requirement to follow CFA Institute performance standards (as is required by any serious prospective investor), tax reporting, execution across a growing number of accounts, etc., etc. The fund route solved all of my problems and even though I have outside administration and an audit requirement, the benefits outweigh any extra costs. To overcome the problem of one big investor affecting the performance/tax implications of others, I decided to be the fund's largest investor. No shareholder can invest more than I do. To my mind, this solves two problems: 1) it demonstrates an alignment in interest between manager and investor, and 2) it acts to 'lead by example' (I always write shareholders with my own savings plans with regard to the fund). Through this means of operation, you will probably find your investors less eager to retract their funds in times of uncertainty. This may mean that your fund starts small. So be it. In my short experience, the benefits to managing even a small fund far outweigh the individual account route. I would encourage anyone with integrity and some competence to try out this route, it is great fun.

There is a book known as "The Templeton Touch" published in 1983 that may have more details on the man and his methods than found in "Investing the Templeton Way". I noticed on Amazon that it is presently out of stock but they still allow orders.

That strikes me as odd. In my IV calculation I would pay 100% for BRK's float (more likely over 100%) given that it has a negative cost. I would pay 100% for investments that are included in BRK's book value and I would only discount operating earnings of BRK's subs, perhaps for as long as 15 years. I think that is the way WEB would suggest we go about it ourselves, no?

I would imagine it is due to subsidiary earnings, which the discount rate applies to, being only a portion of the IV calculation. I suspect the equity investments are a major part of the calculation and are valued at 100%.

I read the book as well. 10,000 hours, well spent - as mpauls suggests, seems the ticket. My own results improved enormously since I started spending time with the right teachers. I have found 4 such teachers: Warren Buffett (I read and annually re-read all Berkshire Hathaway annual reports), Charlie Munger (Damn Right, Poor Charlie's Almanac and anything else I can find around), Benjamin Graham (I re-read the Intelligent Investor Chapters 1, 8 & 20 annually), and John Templeton (his great niece wrote a good book on his experiences which I have now read twice). You could say Phil Fisher too, but I get less from him than others do. As mpauls further suggests, perfect practice - I pick up new things everytime I re-read these perfect volumes. I get OID as well but I'm not sure it helps me much. I find I have done better by not using other people's ideas (apart from some of the pearls on this board). The theory, if you want to call it that, from the above mentors is enough to show the way and illuminate ideas that are good and obvious, if you are paying attention. Maybe there are others. I have read a lot of books by various authors trying to find them but I don't know of any more. Anyone else?

http://www.ft.com/cms/s/0/331cd12a-4e22-11de-a0a1-00144feabdc0.html I have never tried this, but the above link was in the FT today. I hope it allows access. It adds a little more colour to the already posted FT article about 2009 hurricane season insurance trends. Like Viking, I think ORH looks more interesting on most metrics than does FFH at present. Below $40, ORH seems a pretty easy decision to me. I own ORH prefs. too (mainly series A). I have hedged the USD exposure with USD margin at 4.25% per annum - enjoying an 8% net interest spread so far. I have trouble understanding why ORH prefs should trade over 10%.

Has anyone done a comparison of FFH/ORH Canadian equity/corporate bond holdings? My understanding is that ORH should have less exposure to Canadian investments and therefore a better rate of return on investments since Q1 (in local currency). But does anyone know this for sure?

Oh no. Does that mean we should take profits?