woodstove

Maslov's hierarchy of needs is related to motivations to work. Sounds like the janitor mentioned works for self-actualization. Someone else of same age and in same role, but less savings or other-source income, might be working for shelter. I advise (not in systematic way) next generation to focus on a pair of adjacent needs - ie food & shelter; shelter & family; family & security; security & self-actualization. That way the transitions are easy, do not have to make a decision when to shift from goal #1 to goal #2 as it is not all-or-nothing. But, for instance, if the concern is food & shelter, don't worry excessively about family (education), security (pension) or self-actualization (job that complies with personal priorities such as being green). An observation of perhaps contemporary relevance, re social safety net, is that fixed-cost health care can foster entrepreneurialism. When I had to make decision to start my own business, after 20 years working for others, having Canadian public health system made that an easier decision. If I were to get sick, my business would fail, but would still have essential care necessary for life. Safety net allows for sensible risk-taking. Insurance concept. And we need entrepreneurial thinking nowadays, to restart economy after the parasites get finished stripping out the accumulated wealth. Ah well, I'm getting political. Sorry for the rant.

My only thought is that Berkshire and Fairfax maybe should be givens. They are my #1 and #2, so little additional info comes from me telling my top 3. Better maybe to look at my top 5, discard Berkshire & Fairfax, if trying to get any ideas from my portfolio. Likely true of others too.

Not very systematic, but what I look for - in a long term investee - is what I call a culture of making profits. There are companies which should be producing profits, but somehow just never seem to be consistent. I think what happens is, once the money starts being in surplus, they expand their scope somehow, eg more marketing trips, more non-practical R&D, drill more dry wells, pay executives more, whatever. Whereas other companies seem to produce profits, even in tough times. A shortfall is temporary for them.

All the back-and-forthing with Fairfax's ORH ownership percentages, as well as the Northbridge IPO/secondary/buyback, has been harmful to Fairfax's long term positioning. Profitable near term (2-3-4-5 years maybe) but not building the base for a bedrock financial institution. What I think might be best, would be for Fairfax to do something like XOM/IMO relationship, which is targetted at 69.6 pct ownership. For example, Fairfax might target to own 73 pct of ORH (or whatever). Establish a stable dividend policy for ORH to make it a safe haven for those in US markets looking for income and store of value. Genuinely excess capital in ORH can be used for buybacks, in which Fairfax participates pro-rata to maintain its 73 pct ownership. The result is long term ORH share price appreciation, which perception strengthens the perception of Fairfax. With consequent benefits should there be a need to raise capital. If ORH needs additional capital, provide it thru Fairfax via joint participation - similar to how XOM will take some part of an IMO-managed project as well as its 69.6 pct participation via IMO ownership. The above takes time (decade or more) and discipline to resist impulses to do near-term financially advantageous shuffles. But if/as Fairfax grows to become one of the pillars of Canadian financial structure, it must draw in participation from diverse groups of investors, including those individiuals and funds seeking income and store of value. (And that is why I think Northbridge buyout was a strategic error. Cut off participation from an important segment of investing public.)

Thanks MPauls for that capacity utilization info. OK, so normal is 80-pct-ish and recent is 65-68-ish, so economy is running at 80 pct of normal. Should put employment at 80 pct of normal, which might be 95 pct say, or about 77 pct of available workforce. Less maybe due to job substitution - ie, people taking jobs less than their skill sets, working part time etc. Still significant social disruption. Website resources ... www.federalreserve.gov/releases/G17/ and http://en.wikipedia.org/wiki/Capacity_utilization Regarding the choice of investments, commodity prices, inflation vs deflation ... my take on it ... two approaches, trading or store of value. For stores of value, one has choices of currency equivalents (including bonds and preferred shares), or operating businesses, or tangible assets. Some diversification seems in order, because cannot predict any particular future very well - currency, commodity demand, etc - and there may be unusual pricing when one wishes to draw down some value from storage for redeployment or consumption. Commodities represent an alternative currency, is another approach to thinking about store of value. For example, Imperial Oil is about 10 pct of my portfolio at present. Plan to trade around the edges of that position, based on price flux, but the core position is based upon viewing IMO as a long term call on oil futures. Reserve life for IMO recently went up significantly due to decision to proceed with Kearl River project, so now calc says IMO has 20 years of reserves ... but all that really happened is that a firm decision was made to swap $8 billion for extraction in future years, not even coming onstream for several years. That is, IMO is a short-currency long-future-oil position. And because the company will increase production rate with Kearl and other projects, the reserve life calc is likely not 20 years either. Nonetheless, having about 10 pct in IMO feels like a safe-enough store of value, combined with Fairfax and Berkshire which are value stored in astute financial operations, plus a significant slice of US business economic processes. None of those positions - IMO, Fairfax, Berkshire - needs to be interpreted in terms of anticipated inflation/deflation for valuation. Each has characteristics, such as skilled management and financial strength, which will render them robust value in the face of fluctuations in currency/stuff exchange rates. Catching the peaks and troughs of pricing of their shares in the market can be profitable, but that is another aspect - trading not store of value. The impact of inflation/deflation expectations on trading is more trying to figure out how the news of the day will affect the flow of funds into/from securities.

One of the stats that's floating around in news articles is capacity utilization of 65 pct. I assume that's industrial/manufacturing capacity. Probably does not refer to retail/distribution capacity, or office organization capacity - though the latter would be affected by state/local govt slowdowns. Maybe overall economic infrastructure capacity utilization of 80 pct? Whereas 90-95 pct might be normal?? I wonder if there is a similar calc re labour capacity - ie some calc of capability of people to do productive work, vs actual productive work being done (considering underemployment of skills as well as full unemployment). Might give another way to look at economic activity. Bet this is already done, and I just am not aware of the statistics. Any take on that? Just wishing for another way to look at the economy, instead of focus on every tweak of a volatile number like new unemployment claims.

The debentures look reasonable, but there might be an appealing discount available in future. The units are speculative, but trading around a core holding of debentures might make money. The warrants are too new, likely will be sold down in next six months. Thereafter ... maybe. As options on future equity of the company, the units are more realistic as de-facto options. The free cash flow from company is likely to go entirely to debentures not the units though. Re "turn" in economy, I'm still expecting further slowdown, impacting particularly on furniture and appliance retailing. De-leveraging has not yet run its course. Sales per square foot may be a measure that would give an indication. Perhaps trade pubs in furniture & applicance retail would give some insight. There are some bargains, opportunities to get on board even prior to the turn, but my guess is that good prospects will have already eliminated or soon will eliminate their debt/leverage, will have brought their operating ratios back into line (inventory/sales, sales/employee, etc), and will have their fixed costs adequately covered. Those which are not yet robustized will likely see further selldowns in their security prices, hence not yet time for outsider to buy in.

Yes, I agree with ignoring most of the quarterly and annual accounting losses/gains from derivatives - there will be lumpiness. Although for most companies I like mark-to-market discipliine, because they get overleveraged and mark-to-market imposes a robustness constraint that they are otherwise unlikely to stay within. But when there is a plan, as with Berkshire, combined with the durability to hold on until that plan matures, then mark-to-plan seems reasonable. That is, value company based upon the numbers determined from the business model. Looking at the GE and GS investments as re-deploying the float, as you suggest, seems very tidy. I like that a lot! My own calc on the values of the four categories of derivatives: Using your info. I don't actually worry about the details of these deals, trusting Mr Buffett to have done a good job protecting and investing shareholders' assets just as he always has. - Equity puts. I believe this is pure profit. No downside in my opinion. Present value $4.9B equal to the premiums collected. - Credit default insurance on index of 100 companies. Received 3.4B, paid 0.6B, and company's reserves for future loses are 3.4B over next 4.5 years. Suppose 2.0B paid out soon, balance of float 0.8B held 3 years for 0.2B income, then payout 1.4B balance of reserves. Present value -0.4B. - Credit default swaps on 42 corporations (don't know which, but info is presumably available if one wanted to do detailed analysis). Believe that the upside is that Berkshire will get a say in reorganization of some of those companies' capital structure. That is, Berkshire ends up retroactively buying their debt at par. This is a great way to acquire some good businesses, I imagine - along with some from which the opportunities have diminished, no doubt, but mostly good lines of business just poor capital structures or not robust enough for economic turmoil. Net gain, and get paid $4B in premiums to make purchases. Effectively almost pure profit, say $3B present value. That's ignoring opportunity to take significant ownerships, if desired, in various business operations which get into trouble. - Muni bond insurance contracts. There will be some defaults, but likely not huge numbers because of economic damage - Fed will blink, eg, re California, after poliltical will coalesces to demand federal guarantees of state and municipal obligations. There is signficant risk to Berkshire, because of moral hazard - encouragement to default - as discussed in the annual report. Assume value of 7x 2008 premiums, or $4.2B. Basically long tail reinsurance. So the total portfolio estimates at 4.9 - 0.4 + 3.0 + 4.2 = 11.7B. More or less created from "nothing" except ... capacity to write those insurance agreements, and being credible counterparty for writing them. And we have allocated our capacity - have reduced capacity until some of the uncertainty starts to clarify, additional cash flows in, etc. That will surely happen. And commentators will wonder why Berkshire share price increased, do lots of backward looking analysis to explain it was obvious!

Thanks MPauls - that's very interesting. I'm still reading, plenty of food for thought. The various derivatives seem to allow plenty of scope for hedging until maturity, as prices of the related securities or economic outlook fluctuates - wildly, most likely. Much of the analysis in media seems to assume that Berkshire will be buy-and-hold; although that has been true in many cases in the past, it's not mandatory if opportunities arise. Berkshire has been in and out of stuff fast-action in the past, where is it a financial investment not a business building block relationship. On the one hand, I want to say the derivative positions represent only say 5-10 pct of estimates of Berkshire's value, so are not material in terms of making a decision whether the company's stock is substantially undervalued or overvalued in the stock market. But on the other hand, handled astutely (which we can most certainly expect from long past history), the derivatives can form the basis of a very profitable hedge book. Consider what Fairfax was able to do the past few years. And Berkshire is being paid to run its hedge book. So from that viewpoint, the derivatives positions represent far more than 10 pct of potential increase in value over next decade or so. I suppose, poorly managed, they represent a corresponding large potential exposure. But I think that's where manager skill really matters. For someone who wants to invest with the "next Warren Buffett", maybe that guy's still available under the same name!

Well, the raw data - particularly insurance stuff going back decade - was interesting. For several years I've resisted being drawn into the value of Berkshire calc. But reading thru this report prompted the following: Insurance biz - value at net assets $114b Mfg,serv,retail - value at 16x $4b earning power = $64b. Utilities - value at 16x $1.85b earning power = $29b. Financial services biz - value at 16x $1.0b earning power = $16b. Derivatives book - value at $10b (pull out of hat, no worse than other crap estimates made above). = $233b / 50m B shares = $4700/B share, "risk free value". ==> Safe-enough purchase price at 50 pct of RFV = $2350/B share. One other comment - pie chart on page 7 - about 2/3rd of the earnings sources are new in past 10 years. That is, earnings power tripled over past 10 years. No particular reason to expect similar tripling is out of the question for next 10 years for company. Past decade was difficult for Berk's investing, due to high P/E ratios in market. Next might be more opportune.

SFK filed a couple of conduct documents on Sedar, July 26th - updated - re code of conduct, and re insider trading. They are models of how to do things ethically. Very impressive. Whatever the business situation, there is much to admire.

Yes, thank you -- the report has a wealth of detail re industry context, reserve triangles etc. There is one thing though, that stands out right away, and might want some amendment. On page 2, the share count is stated as 1.057m which appears to omit B share entitlement. And the following figure of market cap $92,261m appears to be based upon that share count. So who knows where else the share count percolates thru the report's tabulations? It seems prudent for reader to check share-count-related figures against other info sources. But I really appreciate the tremendous operational and industry detail they've collected. And I wish them well!

News this morning re SFK credit covenants. My guess is they were hoping to have negotiations for covenant changes completed before June 30th, hence delay, but were unable to finalize that fast, and have put out current-status news release to provide disclosure. I've still got some exposure to SFK via debentures, failed to sell all of them last time as I intended - forgot some in another account. So it is a hold, for me. Not particularly keen about the outlook; there is so much debt overhang vs debentures + units, that some dilution seems inevitable - or perhaps a high interest rate that effectively dilutes future earnings potential. But it is an opportunity for Fairfax, should they wish to provide additional financing. The way to play SFK's long term potential, I believe, is by owning FFH shares. Short term maybe nimble traders can pick up some profits, but I prefer companies which have little debt, or are on a clear path to retiring (or stabilizing terms of) their callable debt. We are in a balance sheet recession.

Thanks - nice find. The "what" seems probable, but perhaps the "why" is just the article author's guess. Ajit Jain did not comment, it appears. I wonder if pricing is not appealing, vs risk, given lots of liquidity thrown into financial system past 12 months. Wind risk does not seem unusually higher - curious about that. But I would think municipal and state govts having problems paying their fire and police and other services, might increase other types of property risk. And anything long tail is subject to risk of inflation in settlement amounts, lots more claims hitting maxima.

I personally hope Berkshire does not become dividend-paying stock. It complexifies the taxation for many non-US investors, depending upon their own country's rules for foreign dividends. Would change the compposition of the shareholder base. And the case for letting Buffett (& successors) carry on is also compelling. They're doing great job! Don't let theory trump performance. I think the owner's manual paragraph could use some clarification, maybe next annual letter he will discuss / revise?

Nice find - article and the website. Thanks! Yes, I think there is an opportunity. Variety of ways to play it. What I would do, am doing similar wrt oil, is look for a gassy production company stock that has long reserve life for natgas. Hopefully the shares will be underpriced because stock price is not recognizing value of the LT reserves. That is exactly my premise for holding lots of Imp Oil, whose Kearl project go-ahead has increased proved reserves substantially.

What keeps me awake is hearing, month after month, of double-digit declines in US (and Cdn) steel shipments. There was apparently a methodology change in Sept/08 so year over year stats may not be reliable, although the compilers of the stats (Metal Service Center Institute) appear to have adjusted for methodology change. The latest figures, for May/09 shipments, show US 49 pct decline and Canada 40 pct decline. Prior month, April/09, was 47 pct decline in US and 31 pct decline in Canada. And so on. There is demand for steel for capital maintenance - repairs and replacement - but as economy slows down, even that demand fades as usage-based wear and tear on existing infrastructure declines. Looking at steel, US economic activity is decaying with a 12-month half-life. I think basically only govt projects, including infrastructure and military, are holding it up. On the other hand ... stats show auto miles travelled about the same as a year ago, so that suggests a reasonable continuity of commuting and employment activity. And TSX trading stats are up year over year, so the market is perky. Maybe a shift from buy and hold, to trading approaches. Maybe the automated trading systems are starting to run wild again. But ... the good news, actually can sleep very well - just have to read a book, to nod off promptly.

Isn't it the case that the interest on the debentures has to be paid in cash, but the principal on maturity can be satisfied by issuance of units?

Think of it as other side of a hedge and maybe does not look so bad.

Does anyone have a handle on what Calif "bankruptcy", ie some interruption of paying bond interest, might mean to Berkshire's municipal bond insurance exposure? I suppose there is some criterion that an interruption of interest payments constitutes an event of default under a bond insurance policy? Even if fed govt steps in later, after defaults have started to cause system-impact consequences?

Excellent advice - different perspectives - and illustrates there are many ways to be happy with investing outcome. (And also many ways to end up unhappy...!) I certainly agree regarding "The Intelligent Investor", and actually prefer the version without Zweig footnotes because pure Graham is more tentative. Two key concepts are margin of safety, and intrinsic value. MOS and IV can be approached a couple of ways. This is one suggestion: "When calculating intrinsic value, you should look at companies you understand, and then figure out what you would be willing to pay for the business as a whole." MOS is increased by looking at companies you understand, ie depends on viewer! It is also increased by limiting to companies which have a culture of making profits, are competently run, have robust business model, not one-decade fad product, etc. And MOS is increased if purchase at substantial discount to estimated IV. MOS is decreased by over-indebtedness or funky accounting or insider skimming. MOS is decreased by valuing business at peak of its cycle, eg commodity price. MOS is increased by patience, prepare analysis of IV, then wait for a discount. For IV, there are two approaches... - What others would be willing to pay for the business as a whole. P/E is useful for that, especially if use normal-times earnings and expect return to normal. Private business value, in other words. Deducting all debt, preferred, other entitlements which are ahead of the common shareholder. Then expect some discount (say 33 pct) before purchasing, to get MOS relative to other buyers who may enter the stock market at a later date based on their IV estimates. - What it is worth if it were a bond, temporarily ignoring risk of not being bond. Eg, if company has normal earning power of 2.00/sh, no debt, and excess cash of 2.00/sh whereas more usual financial structure would allow it to carry say 4.00/sh of debt, then IV might be estimated at 19x 2.00/sh, a P/E of 16x (bond-like rate of return), plus 3x for surplus cash plus debt capacity. IV estimate of $38 is not something to pay for the company; rather it would be a max price to expect in a rational world, what would be very advisable to sell at, if taxes on capital gains were not a consideration. The point when one would definitely cross over from being an investor, to being a speculator hoping that greater fools would bid stock higher. I like this approach, as it tends to put debt and equity on equal footing. The risk assessment is separated out from the valuation process; not to ignore risk, rather to make it explicit separate aspect of the investigation. Too much risk, just pass on "opportunity", look for something with less risk. Then to require a very substantial discount to risk-free IV estimate, for MOS. By "substantial", something like 75 pct is nice, at least 50 pct is necessary. And if willing to wait patiently, have several companies evaluated in advance and just wait until market comes along with next selloff, maybe 80-85 pct discount will be offered. Whatever you come up with, make it your own method, don't worry about what others are doing. Graham was always searching for new approaches, one of the reasons he is such a great mentor.

Yes, thank you! That Hodges article is thoughtprovoking.

This is an economics question and I hope someone can help me understand. From time to time, an article says such and such country/economy is in trouble, because it needs 4-5 dollars of debt to achieve 1 dollar of growth. Dr Richebacher used to write something like that in his articles, for instance. And recently, Satyajit Das, whose thinking I greatly admire, has written, "The ability to sustain high rates of economic growth, decreed by governments and central bankers, is questionable. The aggressive increase in debt globally resulted in a sharp increase in sustainable growth rates. $4 to $5 of debt was required to create $1 of growth. Approximately half the recorded growth in the US over recent years was driven by borrowing against the rising value of houses (mortgage equity withdrawals). As the level of debt in the global economy decreases, attainable growth levels also decline." (Article title is "Lessons Of The Global Financial Crisis: 3. Built To Fail" I don't really understand how that is measured, debt required to support growth. What statistics go into the calculation? if $4-5 of debt is a substandard zone, then what would be normal amount of debt required to support $1 of growth? Thinking about it in terms of a business, if we are considering simply capital, and there was $1 of growth for $4-5 of capital used, that is a great return, 20-25 pct annually. OK, debt is not capital. But all capital used in an economy is someone's asset and more likely some else's debt, right? Is the question of how much use of debt vs how much retained earnings, just a measure of distribution of asset-ownership vs business-operatorship? I'm very confused! Anyway, would appreciate clarification of what Messrs Das & Richebacher mean.

Very interesting discussion! I learn so much from you guys! My market call starts with what I consider the economic probability, continued deterioration of the real economy: - less discretionary spending, by consumers and businesses - less consumer credit - less small business credit, more expensive mid-biz credit - lower employment - more households in acute distress as reserves run low - more compromises need to be made with necessities ==> Eventual adjustment of stock market outlook to same. - Selloff of various stocks related eg to consumer spending. Investing safe havens: - cash - quality gold & silver stocks (NGD, SLW) - quality oil & gas stocks (IMO) - quality utilities (ACO.X) - Berkshire and Fairfax In particular regarding IMO, gasoline pump prices have been going up quite a bit recently. Not at all clear why based on oil price. But don't have to understand why, just watch the cash flows. Cash flowing into refiners and production companies, not flowing out to drillers, so some must be sticking somewhere in IMO's vicinity. There are some great opportunities outside of the above, but I'm content to wait for economic tide to change its direction before going for broader lower quality choices.

In my view, there is no problem, and maybe some potential risk-avoidance benefit. If disclosure is done in an everyone-hears-at-once, while-markets-closed way, then it is fair. Mid-quarter is fine if management (subject to board approval of process in principle) want to disclose something. Especially if material, since there is ongoing share buyback potential. If management is using some set of numbers for managing business, and it does not harm the business by revealing too much to competitors or disclosing investment intentions too early, then it is much appreciated that they share with us less connected co-owners. If numbers are being calculated and used by management anyway, that is. If it is just an entertainment for shareholders, then would prefer that the money/time be better used. The risk avoidance potential benefit is denying opponents, eg lawsuit defendants, any possible lever to fault the company for insufficient disclose of material information. We previously saw a spurious attempt relating to a hard-to-understand tax transaction.