Parsad

According to Elizabeth Warren, Chairperson for the TARP Congressional Oversight Committee, half of commercial mortgages outstanding will be underwater by the end of 2010. Cheers! http://www.cnbc.com/id/36085517

I think there were several errors in Overstock's development. Early on, they built the system to handle far more customers than actually appeared. Roughly two and a half years were lost retrenching and resizing infrastructure. The second mistake early on, and not corrected until the downsizing, is that they were trying to do too much direct business and not enough fullfilment/affiliate business. The margins are better on the latter with far less capital involved. You are now seeing cash flows hit the bottom line. They will be profitable in 2010. Is it sustainable long-term? Depends on the moat, management and the quality of people they put in place. Online retail is extremely cut-throat. Tough to maintain moats and Overstock's isn't large enough yet...but there's potential. We have owned Overstock equity three times in the last four years. We've owned Overstock debt as well in the last year. We've made money on every investment in Overstock. It's been a trading stock, because of the number of mistakes, short-selling and co-ordinated campaigns against the company. It's been very volatile for five years now. Cheers!

Always great information in Francis' letters. I encourage everyone to read them, in particular Chou Associates, Asian and Bond fund letters. Cheers!

Over half of the delinquent home owners that received loan modifications defaulted nine months later. Cheers! http://www.bloomberg.com/apps/news?pid=20601010&sid=aVYxPZ56vjys

SEC is investigating short sale trading at Appaloosa and Carlson Capital. Cheers! http://finance.yahoo.com/news/SEC-eyes-trading-in-two-hedge-rb-3092428936.html;_ylt=AraexmrGvwLLpW9mciU596i7YWsA;_ylu=X3oDMTE1OHY1MDEwBHBvcwM1BHNlYwN0b3BTdG9yaWVzBHNsawNzZWNleWVzdHJhZGk-?x=0&sec=topStories&pos=3&asset=&ccode=

Hi James, We do single year, and it is cheaper than comparative year. You can always send the investor previous year annual reports and they can do their own comparative. The audit is there to provide the partner with an unbiased view of the year's results and to make sure controls are in place when the accounting is done. Anything else is as Buffett and Munger say...esthetics! By the way, we don't have any pictures in the report, nor will we ever...and it's in black & white. Cheers!

Thanks Twa! But it's really the group of people we have on here that makes it. You take a look at that post by "collegeinvestor" and see how helpful people are, and you know we have a good, polite group of boardmembers. Cheers!

There are alot of strange things under GAAP accounting. Over time, the more financial statements you read, the more amazed you'll be by all the stupid things you see and the stuff people get away with. Enjoy the board! Cheers!

Don't worry about the questions. It's how we all learned. In regards to the increase in depreciation...yes it is directly correlated to the increase in PPE. Cheers!

Wednesday April 21st - Evening Fairfax Financial Shareholder's Dinner Our annual Fairfax Financial Shareholder's Dinner is coming up again. Last year, Francis Chou of the Chou Funds came...Francis has been at all of our dinners! Fairfax Financial sent Sam Mitchell, Brian Bradstreet & Wayne Cadwallader. It was an amazing opportunity to ask questions and listen to answers from some of the best investors in North America. Joe Badali's 156 Front Street West Toronto, Ontario Drinks: 6:30pm Dinner: 7:00pm Q & A: 8:00pm-9:30pm RSVP: sanjeevparsad@shaw.ca Admission: $5/head with all proceeds going to the "Crohn's Colitis Foundation of Canada" in memory of Jo Ann Butler (Corner Market Capital Corporation will match all admissions). Please let me know if you are coming, so we can make appropriate preparations with Joe Badali's. So far, we have attending: Sanjeev P. Alnesh M. Andrew C. Paul R. Tarn C. Frank F. William D. Greg D. Mayur K. Stephen K. Alex K. Wayne P. William M. Ken R. Norm R. Keith S. Bryan S. Nicholas S. Bob T. Glen V. Martin V. Thanks very much! Cheers!

Hi Daniel, Just wondering if you could do me a favor. I've been receiving emails from friends and other SNS shareholders who have noticed the huge amount of garbage being spewed on the Yahoo SNS board about me. I have no idea who SNS Supertramp is, nor do I want anything to do with that person. I have nothing to do with Steak'n Shake other than as a shareholder. I run a very small fund in the U.S. and one in Canada, as well as this message board. I noticed that you use this board and that one. Could you please exclude me from any discussion you have with some of the people on there. I would hope you could do that as a member of this board. I wouldn't have asked, but I noticed that you are including me in some of your posts as well, and I thought I would just set the record straight. You've written a book on Berkshire, and as a word of advice as a fellow boardmember, you are probably better off not interacting with many of the nutjobs on that message board. I don't know any of the other people on there, other than Randall Tidd (Tiddman) who posts on there on occasion, so I thought I would ask you. Thanks very much! Sanjeev

Yup, that's correct. You can find other ways to avoid the taxes, but there is always the chance that the IRS or CRA will deny you the way you treated the income. We would rather play well within the rules, than run the risk of our partners getting reassessments years later. If you could control the emotions of the average investor and get them to invest only when markets are down, then naturally that would be to their benefit. Unfortunately, human psychology doesn't work that way and investors often want to invest after big runs in markets. The cost of doing that is they may be purchasing some unrealized gains. The corollary is that some investors who buy when the fund is down, may be benefitting from unrealized losses that actually discount their shares. Partners should contribute to their accounts somewhat regularly (monthly, semi-annually, bi-annually). That will eliminate some of that bias over time. Cheers!

I'm sure many believe he's a perennial bear, but his commentary is excellent. Cheers! http://www.theglobeandmail.com/globe-investor/investment-ideas/features/experts-podium/income-still-rules-amid-credit-fears/article1508803/

Thanks very much! Cheers!

That's pretty darn good! I know Francis uses Citibank, and they charge something like 0.2-0.25%, and he's got over a billion dollars and hundreds of investors. I can understand such a low rate for a huge book of business like that, but I'm surprised by how low Commonwealth's number is for less than $10 in AUM. How late was the NAV report on a few occasions? Because we have only 15 days to file from month end, and we need everything provided to us usually in the first week of each month to file on time. Also, do they handle funds outside of Ontario? We file in BC, so I don't know if they do that. If you don't know, that's ok and I can call them. Thanks! Cheers!

I pay 0.2% administration (and that includes everything) on the first $10m, going down to 0.15% on the next and down to 0.1% after $20m. Other fees include $100 per investor annual maintenance and $50 per investor transaction. My fund's audit is only $4,000 per annum. On a fund of $10m+, I pay less than 30bps and do nothing. Hi Returnonmycapital, You use Commonwealth correct? A few questions: - The 0.2% is just for administration...doesn't include brokerage, legal, audit, tax preparation and mailings right? - How do you find their services? - Do they mail out your annual reports as well? - What about filing and reporting of new subscriptions to provincial securities regulators? - How do your partners find their services? - Are you happy with them? - Any problems with them doing the books? Thanks! Cheers!

could you give an example in NAV terms? For example, income from March 1st to March 31st: 10 Partners each have $100K invested: Dividends $10K Interest $10K ST Gains $20K LT Gains $50K Unrealized Gains $100K Simply divide the income totals by 10 and allocate. April 1st...new partner puts in $100K...distributable income is now divided by 11 partners. Does not partake in any of the previous income except for the unrealized gains when realized. Yes, NAV is inflated by unrealized gains, but it does not impact investor unless realized or fund liquidated. Over a long-period of time, the effect is relatively negligible. Cheers!

yeah - not my area of expertise. However, I am still pretty sure what I said is correct. just some quick googling - refer to page 355 & 356 of US Regulation of Hedge Funds Yeah Watsa, if you read the 3rd paragraph from the bottom of the page, it talks about what I was saying. It can create serious problems in how you track the income for your other partners. Also, once elected, you cannot opt out...thus your tax basis is changed forever as long as the partnership operates. Cheers!

Parsad where did you raise most of your assets from? Who are your clients? For the U.S. fund which is domiciled in the U.S., they are all U.S. citizens and accredited investors. For the Canadian fund which is domiciled in Canada, they are all Canadian citizens and qualify for exemptions under our offering. Cheers!

Does this monthly calculation not drive up your audit costs for under $10M Funds? Why not do it like a Mutual Fund and if you buy on April 1st or December 1st, you get the same amount of distributable income, short-term, long-terms gains on or around December 15th. The GP usually advises the investor coming in of the tax issues and the GP can always provide a fair deal for the LP, and all partners, by adjusting the NAV when a new LP comes in. This view is from a small fund perspective as costs are key. Hi James, The increased cost for the audit is minimal, as we receive statements from the broker monthly and the auditor still has to go through each statement and journal entry. Also, we are at the point now where we get money into the fund almost monthly...you never say no because when you do need the capital, it usually stops coming in at that point...so we incur the small increased cost of the audit if it means capital flows into the fund a bit more regularly. It's also more convenient for existing partners and new partners when depositing, and we have no lock-up so if there are redemptions, partners can receive their funds easier also. Cheers!

Parsad and other managers, What is the annual cost (as a % of your net asset size) of audit, legal, book-keeping and accounting for your fund? If you can share the approximate fund size also (for example, a range like $1-3M would be ok if you don't want to share the exact fund size), that would be very useful to me and perhaps others. We will be under 0.8% with $3M in assets (this year) and under 0.5% with $5M in assets for audit, legal, book-keeping, accounting, mailings, and tax preparation. I think we can get it down to about 0.3-0.35% with $7.5M under management. Of course, there are certain shareholder initiatives we will be involved with from time to time, and the expenses will elevate slightly when we are involved in those activities. Cheers!

I am not a CPA, but the one who advised me said it (section 754) can be used for a basis difference related to stocks as well. I just looked up actual internal revenue code, it reads "basis of partnership property shall be adjusted..." and refers to "partnership property." I'm assuming marketable securities are included. Be careful Watsa. I don't think that is correct. Also, just because the partnership has the clause in the agreement, doesn't mean the IRS will view the nature of the income in that way. You could be creating a future tax problem for your partners if you exercise the clause and the application is incorrect. Simplest way is usually the best way to go. Cheers!

Parsad, A current co-worker and I always assume we will start a partnership one day in the future, so naturally I'm a bit curious in the process (capital raising, how they are set up, fees, etc). Do you guys outsource all your back-office stuff (redemptions, deposits, distributions, statement mailings, NAV calculations, keeping track of partnership interests, etc.) If so I'm curious what the ballpark fees would be for that back-office stuff would be, for say a $3 -10 million partnership fund. Do the folks you use charge a percentage of AUM for this service? Was your prime broker very helpful regarding the process of capital raising, suggestions for which firms to use for back-office support in your area, etc.)? Ugh! Capital raising is the hard part. It's rare if you can get off the ground and have the capital at hand right away. Be prepared to work on the side and live off your savings for at the very minimum of two years. We had verbal commitments of $2.5M, but only $400K materialized once we had the LP set up. And the money will come from the least expected places. Forget about friends and family...they know you, so there is a natural bias that you are starting the damn thing. They'll give you money, but very small amounts. You have to keep costs low. Alnesh is a CPA with a Masters in Science and Tax, so we save money by him doing the accounting. Our costs for the fund are limited to prime broker, audit, legal and mailings. You are talking to the back-end support. I do all the statements, administrative work, mailings, discussion with legal counsel, contact with brokerage, and a good chunk of the contact with the auditors. We are now finally getting of size where we feel comfortable to outsource some of the book-keeping work. Probably in the next year at some point. The one tip I can give is find a partner that complements your abilities...preferrably somebody with an accounting background, if you are handling the investment side. I've seen alot of funds start up and go cheap with the brokerage, but hire a high-end administrative company. Even after they ask for my opinion on which broker to use (and I always tell them The Desai Group at Morgan Stanley Smith Barney), they still don't believe me and go with someone like Interactive Brokers and Michael J. Liccar for administrative stuff. You can save alot of money for your partners by doing alot of this stuff yourself. The Desai Group can do some of the back-end office stuff like cut checks, client contact, etc. Alot of times, fund managers get so wrapped up in the glamor of the investment side, they aren't willing to do the dirty work and handle administrative chores. It will be your fund, and you ultimately decide how efficiently you want to run it. I just went through the process of setting one up over the last 6 months. The documents we used for the limited partnership allow the general partner to make "special allocations" of realized gains/losses in situations where there is a large basis difference. In addition, the partnership may make a Section 754 election for a basis adjustment. Isn't section 754 election only for depreciable assets? How can you use that to offset gains from equities or fixed income instruments? Basically, with all of the tax implications, corporate law implications, and security (the partnership interests are considered securities, and you are considered to be selling them) and investment adviser law implications, its near impossible to do this without seeking professional advice. Agree wholeheartedly! You need to do it right...but as Prem told me...just start, whatever you have...just start and build a track record! Cheers!

Sanj... I'm not sure I understand you. As far as I understand, NAV is calculated by taking the LP assets (say stock holding values at the given entering day) minus liabilities. However, those stock values may include large unrealized gains (with their inherent tax obligations), so a new investor's NAV will include those. No? On the other hand, had he entered AFTER the fund realized the large gain, his NAV would have been lower (because of the tax paid). No? Yes, that's correct. But they will only inherit any unrealized and realized gains from the date of their ownership, as existing gains have already been allocated. That was what I referred to in the second part of the answer in the following post. The manager can try and offset gains by losses, realize gains gradually over time, or the investor can average in over time if they believe there will be large realized gains at some point. But there is no certainty in the last choice, since the timing of the gains is completely dependent on the manager. That's part of the risk of investing an investment fund. Investors by their very nature usually buy into funds when they have topped, rather than invest when the funds are near the bottom with few unrealized gains. Cheers!

Sorry Dual_bid, the other portion of your question applying to how to avoid such situations: Unfortunately, if your investment manager is at all successful, you are going to face some realized gains at some point. Investment managers naturally need to try and offset some of their realized gains by losses in other investments if they can, to reduce the amount of realized income that passes through to partners. You can reduce this as a manager, but you can't completely avoid it. Some managers will sell stock between funds to realize losses in a fund that has realized gains. This is common practice for many mutual funds, hedge funds, etc. You can sell positions gradually over time, rather than in one lump-sum, so that the gains are distributed over a period of time. From the investor's standpoint, averaging into the fund may be the better choice if the fund has a large amount of unrealized gains that is likely to be realized. The problem is that the investor may not be able to figure this out easily, and there is no guarantee when those gains were to be realized. Averaging in could actually end up working against you if you are wrong on the timing. Cheers!