bizaro86

I'm not sure a mostly male, highly logical driven group of value investors is a good place to go for advice on which brands are hot. I don't think clothing brands will die, but I do accept I have no way of predicting which will succeed. That's practically the definition of outside my circle of competence. I buy dozens of pairs of black socks all the same every few years, so I don't have to think about them, and they all match, which makes laundry faster.

As an Albertan, I actually wouldn't be opposed to us having a separate currency from the rest of Canada. Since the oil shock our terms of trade have declined precipitously, and that has affected the value of the CAD, as Albertan exports are material to the whole country. If we were in a currency union with the US, the safe haven USD strength would have removed the currency related safety valve that has reduced the pain in Alberta, to the point that we would be in big trouble here. It would lead to political unrest in the first oil bust after the currency union, for sure.

Post from another forum I thought was interesting. Data not sourced, so YMMV. Here is a Chronology of CMHC rules & mortgage data: 1954-1990- Somewhere along this time, 10% became minimum down payment. 1990- 5% was introduced as a trial run, officially accepted in 1999. 2001 – Genworth (GE Capital) enters the Canadian mortgage insurance market 2001 – CIBC offered below-prime mortgages. Pre-2003 – CMHC: 5% down with price limit depending on area, 25 yr amortizations, no price limit if 10% or more down Sep 2003 – CMHC: 5% down, 25 yr amortizations, removed all price ceiling limitations. Now any mortgage would be insured regardless of the cost. Mar 2004 – CMHC: Flex-Down product allows 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured) Mar 2006 – AIG enters the Canadian mortgage insurance market Mar 2006 – CMHC: 0% down, 30 yr amortizations (Genworth announces 35 yr amortizations) Jun 2006 – CMHC: 0% down, 35 yr amortizations, interest only payments allowed for 10 years Nov 2006 – CMHC: 0% down, 40 yr amortizations, interest only payments allowed for 10 years Oct 2008 – CMHC: 5% down, 35 yr amortizations, investors need 5% down. April 2010- CMHC did some minor tightening of their guidelines, investors need 20% down. March 2011- CMHC only allows 30 yr amortizations, restrictions on pulling equity out 2012 - CMHC only allows 25 yr amortizations, insured mortgages limited to $1 million, home equity refinance drops from 85% to 80%. The amount of credit expansion and loosening that occurred from 2003 to 2006 was crazy. Any wonder home prices almost doubled in 30 months? Calgary SF Median (January 2005) +/-$240,000 Calgary SF Median (July 2007) +/-$440,000

If net worth to income is up, and debt to assets is constant, its necessary that debt to income is up as well. Debt servicing to income might not be since interest rates are down, but that makes any shock from rising rates worse.

I love Calgary, live here, and own investment RE here. (Sold >50% of it in 2014, so that worked out) Anyone who tells you 1MM people on the prairies is a global city is either 1) an idiot or 2) trying to sell you overpriced real estate there. (Or possibly both). Calgary is wonderful. Great access to mountains, rivers, outdoorsy stuff. Good parks, restaurants (best Vietnamese food outside Vietnam, IMO), healthcare and schools. But it's not going to attract the super-rich looking for a place to personally live. The arts and culture and selection of high end dining are insufficient for that, and the climate hurts us. (Although this winter has been great). Rents here are declining (I took a call from a tenant today who wanted a reduction, which I granted), and I expect them to continue to do so. Interestingly, my highest priced rental unit is rented to two students from China who took high school here and are now taking post secondary.

That is interesting to me. I knew about non-recourse in Alberta (I looked into it extensively when I was buying foreclosures in 2009-2010, as I took on a lot of debt at that time, and wanted to know my downside). I was under the impression the only exception to the non-recourse law was insured mortgages, but if you can put a personal guarantee in that would make me more interested in doing 2nd mortgage lending, especially in this real estate environment. One more question, (sorry!) do you have a third party appraiser you trust or do you form your own opinion of collateral value for real estate? Hey, no problem. It's an interesting business, and I'm happy to talk about it. I just checked the most recent mortgage we did and there's only a passing mention of a personal guarantee. Basically it says this loan is guaranteed by 'x' property and by a personal guarantee from the borrower. Not sure if that's put in there as a scare tactic to make the borrower think they're responsible or what. If it never goes to court and the borrower isn't educated on their rights, I can see how they could be convinced to come up with a shortfall even if they're not legally obligated to. I've always worked under the assumption that if there wasn't plenty of equity in the property, I wasn't interested. The personal guarantee was just more of a margin of safety. Maybe the lawyer was blowing smoke up my ass or I misunderstood. Who knows. Every now and again we'll ask our Realtor to value a property, but for the most part we just go over and eyeball it. Usually we insist on signing the forms at the borrower's kitchen table just to make sure the house is worth about what we think it is. Thanks! I agree about there not being much downside to putting in the personal guarantee line. I paid for independent legal advice on the subject, but I seriously doubt the average person consolidating debt would even consider it.

Making a tender offer for a controlled company is almost certainly a waste of time (and professional fees!), but it would shake things up a bit I bet. You'd probably get slightly better capital allocation...

That is interesting to me. I knew about non-recourse in Alberta (I looked into it extensively when I was buying foreclosures in 2009-2010, as I took on a lot of debt at that time, and wanted to know my downside). I was under the impression the only exception to the non-recourse law was insured mortgages, but if you can put a personal guarantee in that would make me more interested in doing 2nd mortgage lending, especially in this real estate environment. One more question, (sorry!) do you have a third party appraiser you trust or do you form your own opinion of collateral value for real estate?

I have a number of HELOCs from large banks (both personal residence and rentals) that are floating rate, currently 3.2%, which seems like a reasonable rate to me. But I have a good job/credit rating, and the LTVs are at 80%. They're mostly undrawn, but I like to have access to cash if bargains come up (especially RE, where sometimes a cash quick close gets you a deal). I'm not sure how that compares to the US, but a prime credit can access tons of money in Canada, imo. Hard money would be for people who don't qualify at a bank, bad credit, etc. I'm considering it as a spread business (borrow on my Heloc at 3.2%, lend at 8-10%). I'd be curious, Nelson, how bad is the credit of your typical client? Presumably they have jobs, but do you pull credit? If so, what do you look for?

We are not a bank. We don't attract deposits or anything like that. We're just guys who lend money. There's no licence needed. We're the only lenders in town, which helps a ton. If you were competing with other private lenders my advice would be give great service to brokers. Do stuff like make quick decisions. Brokers want the path of least resistance. Like I mentioned above, a loan fee gets added onto the principal. Total fee of $3k is what we usually do, with $1k to us for lawyer's fees and $2k to the broker for doing the loan. If the loan is smaller (between $10k and $20k), the broker will usually take less. We've evolved to the point where we don't do many broker deals anymore. The one mortgage broker in town quit, lol. Tempted to get into the game, but I'm not especially bullish on real estate in general. Thanks a lot! Have you ever thought of becoming a bank, attract deposits and grow into a bigger lender? I shouldn't speak for Nelson, but the hurdles of starting a bank are pretty high in Canada, my impression is higher than the US. There are very few small banks here. Nelson, I'm curious, how do you compete against places like the cash store/money mart? It seems like that would be what people would think of first and it would be more convenient. Or is your town small enough not to have that? I've often considered going into this business (in Calgary, where I live) but have never pulled the trigger. Do you find yourself getting smaller, loans from brokers as well? I'd be interested, but for diversification/portfolio size reasons probably wouldn't want to lend more than 20k to one borrower, which wouldn't cover a mortgage refinance, obviously. Do you write second mortgages as well?

You're welcome. If you find anything you like, I'd be very interested in hearing what you picked and why.

Www.prefinfo.com has a pretty good list

Scott that is a great quote for this topic. I'm sure the number of people in the developed world who would agree with that is quite small. I enjoy owning a couch, a good reading chair, a computer desk&chair, and a bed. I really can't imagine living without any/all of those things. A good reading chair is one of life's great pleasures, imo. So you can count me in the "most everyone" who would disagree with the 'no furniture' statement.

I've done something similar with oil producers in the past, I think the strategy is generally sound. If you think the business would be a good one without the commodity downside exposure, then hedging it out makes sense. Would you be willing to share the names you're interested in?

That's probably Christmas related, imo. It is very common for Canadian rigs to shut down before Christmas and start back up after New Years. The couple rigs I'm involved with both did, and they'll be back drilling on Monday...

IB has told me they won't do it. If anyone knows different I'd be very interested in hearing it.

If you have oil stock, the Liberals promise to eliminate CEE for successful O&G exploration (while maintaining it for Toronto/Vancouver headquartered mining firms!) is not a good thing. http://www.cbc.ca/news/politics/canada-election-2015-oilpatch-1.3268951

Aint that the truth... I identify more as a liberal but am happy to see the Consevatives keep a good number of seats. Maybe we can get the Progressive back in there without Harper. We made need them after 5 yrs. I want the good old oxymoron party back. I certainly identify conservative, but I dramatically prefer a Liberal Gov't to an NDP gov't. I'm hoping we get more of a "Cretien Liberal" vs "Pierre Trudeau Liberal" Government, but we'll see.

I agree that a lot of funds aren't great investments. I was just so surprised out how poorly the "Goldfarb 10" performed. I'm assuming a lot of value managers (hedge funds included) haven't done all that well. I'm not saying it would change the thesis any, but it may also help to realize that we've been in a market that has treated value stocks poorly for the last several years. Value as a whole (defined as low P/Es and low P/Bs) has underperformed the market for the last 3-4 years. I think you have to give the cycle more time to complete to see the full result. The end result may still be the same though. I totally agree with two cities. I think there is a lot of money chasing yield in the markets. And definitely value investing is the flavour of our era. You can see that by the way WEB is almost defied. So there are a lot of individual investors chasing value stocks through these funds. And these fund manager are smart and original thinkers but they are making a crowded trade. That coupled with the fact that value is out results in the above mediocre results. I've given a some thought to curreen capital. Did you know the fund at last count had 5 (!!!) stocks. There are a lot of guys running small value funds like that I think their trade is crowded also. That said I think value investing is the right way to go, but you just have to apply it in more original ways. And it being crowded you have to wait longer........ How can value investing be crowded and out of favor at the same time?

I'm pretty sure the acquisitions don't change the book value of BRK. If he spends $100 in cash on an acquisition, he trades that cash for a new business. The $100 in cash will come off the current assets line, and new assets will be added elsewhere. Maybe $10 net working capital, $20 PPE, $70 goodwill, or something like that. Wherever they sit, there should be $100 in new assets replacing the cash.

I'll be voting my pocketbook, which means conservative. The Liberal promise to cancel CEE (for O&G but not mining firms!) puts them out of contention for me.

Fair enough. Although I don't own any gravel pit stocks (most seem to be privately owned) I do buy gravel in my day job, which I pay relatively high prices for due to remoteness of the operation. If there was a legitimate substitute, I'd be interested. Although the prices are high for gravel, they're low for almost any other material, which means that most substitutes wouldn't be economic. I'm trying to grow as investor into the "good businesses at fair prices" which has not been a historical strength of mine. When I think about ratings businesses, I try to go through Porter's five forces. It seems to me that the customers could have a lot of market power if they wanted it. If a few big banks/card issuers decided to get together and build a FICO competitor, what would stop them from doing so? Just the fact that FICO isn't actually that expensive for them to use? Anyway, just trying to learn as past results suggest these businesses are profitable to own...

This is an interesting paragraph to me, (I disagree, but that's what makes a market). I'm curious what type of technological change you think would cause humans to stop using gravel pits? It seems likely to me that we'll still need roads and concrete structures well into the future, and I would observe that technological change seems to be affecting ideas and information much more than large physical items. As an example, in the last 20 years small scale electricity (electronics) has changed dramatically, whereas large scale electricity (transmission lines) not so much. It seems to me that Berkshire Hathaway's utility businesses have much less to fear from technological change than a consumer device company. (Although distributed generation and electric cars are both potential disruptors). I don't see a potential disruptor to gravel pits or garbage dumps, although improved recycling could dent the second slightly.

Businesses where there is a natural monopoly provided by location/transportation costs, but the market size isn't big enough for two competitors (natural monopoly). Once the monopoly is established, the business can charge prices just low enough that nobody else enters. Trash collection in smaller centres, gravel pits, recycling plants all meet this definition.

Congrats! After all the money I made on MHY.UN, I don't know why I didn't just auto-buy this one after I saw a sculpin post in this thread.