Uccmal

Scorpion, That was the point I was making if you read the whole post. Things are not easily obvious or predictable at the time.

If we look at the last two biggest bubbles Nasdaq and US/European housing we could observe that they were building over a period of years. In 1996 Greenspan spoke of irrational exuberance in the markets. They (Nasdaq) kept on their peak like trajectory for 4 more years after his observation, and a multiple of other alarm bells. The full deflation of this particular bubble took another 2 years, and arguably just ended this past year with the demise of Nortel. Housing: This was becoming obvious as early as 2001. In Toronto Real Estate Agents were setting up storefronts everywhere. I was in San Diego in 1998 and things were getting absolutely nuts down there, then, 8 years before the final pop. So from inception to the final deflation has taken nearly 10 years. Anyone care to bet against a bubble that is not readily apparent right now, knowing it is probably 6 years at least before it deflates? That's a long time to run a hedge. Taking gold for example. It could concievably keep going up on an ever increasing trajectory for 3-4 years. There is nothing to suggest that once a bubble takes hold it may not reach 3000, 5000, or 10000. By then my mother will want to buy another ounce like she did when it reached 800 all those years ago. I'll leave it to Prem et al to identify the next one. They have the luxury of being able to be real early and also being able to write or obtain contracts in a way that minimizes opportunity cost and ongoing rehedging needs. It is very disconcerting to purchase puts and watch their value go to zero for a year before they start to make you any money at all. I have some experience in this area.

I dont see any obvious suspects at the moment. It will be readily noticeable to everyone on this board and when it happens and you will get many more responses. The closest I can see is gold, but I would be inclined to wait to short it until it gets closer to $2000 US.

To be fair you need to remove the first year of FFHs operation (180%) and call it a fluke. Also if you smoothed it for the effects of financial engineering you will probably find that FFH and BRK have identical records of return on equity. To clarify this and to Frog03s point FFH has issued shares at 3 x book and bought back shares at below book, neither of which Buffett has ever done (at least not in those extremes). I dont think this is an ethical or integrity issue - just value investing. If Prem can generate institutional interest at such huge p/b then go for it, I wont be buying. I am not going to work it out because it is a waste of time. Suffice to say FFH and Berk continue to be very good investments. I personally think FFH has greater, or perhaps faster, upside in the near term, while Berk will periodically get caught by the large numbers rule.

I thought Snowball was quite good. Because she had access to the details of his early business it was by far the most interesting and detailed of all the biographies I have read. Some of the family stuff is a bit dreary. A close second was Lowenstein. He would have done a better job if he had access. But WEB obviously has a weakness for attractive young women which is not a bad thing....

Frog03, I wasn't asking your forgiveness. What you said about Prem lacking integrity was ridiculous. My comment regarding performance was that hindsight is 20/20.

Well, Hindsight is 20/20. Your Item 2 is utter bull__t. Buffett issued stock above book two weeks ago (define fair value). The separate voting class was necessary for Prem to keep his company. When FFH started Prem was not rich and not able to hold more than a few percent of the total float, unlike Buffett who had millions from his partnership money to solidify his position.

Sorry haven't seen the article you are talking about and cant access it.

I may be confusing something Phil, sorry...

and now the good news.... ffh made a killing on cre in 91-92 so they already know the terrain.

Yes. I hold a good chunk of GE - Jan 2011 Leaps; I am waiting for the 2012s to come out and hoping the stock will languish until then. These options are so liquid that the spreads are usually about 10 cents and they trade thousands per day. GE has been cleaning up the balance sheet rather rapidly by: 1) 8 billion this year from cutting the dividend 2) 30 B from the sale of NBC 3) 1.8 B from the sale of a division to UTX a couple days ago. 4) downsizing GE Capital

1) Dividend and interest income is 700 m per year and growing continuously. This same number a year ago was 560 m. 2) The stocks they hold are nearly universally undervalued right now. 3) If this persists we are looking at a company with a value of 16 B - yes - and so, Bershire is worth 170 B or whatever - That gives alot of run time. 4) The bulk of Berkshires growth came from skillful use of the insurance flloat. That is why Buffett has kept buying insurance companies 5) Insurance itself is in a soft market. When there is a hard market FFH will write at least double the business. Suppose they write 12 B per year of business at a profit margin of 4% after tax - That's 500m + 700 + 560 M per year (I used the old number as an assumption that interest rates may be lower) = 1700 M per year. Of course the 700 + 560 will still be compounding. All of the above excludes capital gains completely. 15% a year should be easily doable for 10 years forward.

None of this is new. Fairfax has had at least a couple of wholly owned businesses outside insurance in the past. Midland Walwyn brokerage, Lindsay Morden come to mind - both disastrous. They have also had people on boards such as Russel Metals (Hartog, Griffiths), ICO (Sam Mitchell). They are no stranger to operating businesses. It is just not something that has been a priority. Shalab, I dont expect the law of large numbers to catch up to them anytime soon. That applies to Buffett, Microsoft, Walmart or GE, when making 5 B acquisitions more every year no longer moves the needle. Fairfax will only appear on the Fortune 400 companies list for the first time this year. This may be a worry in 15 years but not right now. They can always forestall the day by dividending out pieces of the business along the way as Leucadia has done. Upside from here is 15% per year average (at least) until Prem says otherwise. That means book value a year from now could be 425. I personally expect the growth will be much larger for two to three years as the investments made in the crash bear fruit. With a couple of minor exceptions I now deliberately stay away from companies that FFH invests in. They are using diversification to protect the downside. I dont have the luxury of spreading things around that much. I will break this rule for something they have held all the way to the coffin lid, that is surviving and they are still holding (sfk.un). OEC, I expect that the only place that FFH will place a company will be in the holding company(s) which are cash limited. For wholly owned companies they wouldn't use insurance float due to liquidity concerns. I believe this is the model that Buffett uses as well for wholly owned or majority owned businesses. If I am wrong on the last assumption please let me know!

I am not sure that the discussion about slow steaming is meaningful. Seaspan leases container ships to several shipping lines but the majority so far are the large Chinese carriers. Not all of these ships are doing the transoceanic route. In fact, I will bet that the majority are staying in the Asia-Pacific/Mediterranean region. If your trip is only a few hundred to a couple of thousand miles there is probably minimal benefit from 'slow steaming' especially if you are expected at port at a certain time on a certain day for loading/unloading. Other issues with perishable goods are also a concern. I will also wager that the largest usage of container ships is for food. You dont want to be sitting around on the Ocean too long with a ship full of New Zealand Apples headed for Europe that are ripening as you go.

If anyone hasn't read this book I highly recommend it. There is some amazing lore about Buffett's earlier days that isn't in any other biographies. The book starts to drag about midway through with family stuff that is kind of tedious.

Well I hope they leave a few hundred million for Fairfax when all this is said and done. What is the expression: "Where there is one cockroach...

For the psychological reasons Dazel mentioned I think that Fairfax needs to split the shares and keep them in the 30-60 range. If I split it ten for one the recent price moves would have looked like this: Nov: 08 - 27; Feb 09 - 32; mar 9th - 21; sept 30 - 37. The range for one year has been from a low of 21 to a high of 37. This stock is definitely not particularly volatile when compared on a split basis. It has moved around much less than most in the past year. And yet we act as if it is extremely volatile. That is the illusion given to us by the high dollar value of the stock. I for one get periodically pissed at the share price. Sure its a deal at this price. But then it has basically been a deal for 4 years. I have bought all I ever want. Anymore is irresponsible without hedging. So I would like to see the price go up alot. At this point a high share price would be much more useful to Fairfax as a currency than one that is below 2 x book. As has been suggested previously on the board part of Fairfax's book value growth has come from issuing shares at high prices and buying back at low prices (financial engineering if you want). The greater liquidity after a share split, may allow for greater volatility, which would certainly let FFH do more financial engineering. It has nothing to do with reality and everthing to do with perception. One perceives a move from 280 to 350 as more volatile than 28 to 35. or 2.80 to 3.50 (I have stocks that do this on a near daily basis). It also has nothing to do with loyalty or trading cost anymore.

The price is perhaps high but I would think that Buffett has worked it all out. The economics of a dominant railroad must be pretty good right now for the first time in about 90 years. Buffett has had about 60 years to get familiar with the economics of railroads since reading Ben Graham. Fuel, and greenhouse effect were mentioned above. Higher fuel prices make railways more viable. Similarly railways must do well if the greenhouse effect is monetized. There is more to this than meets the eye. What do you need to spend to keep a railway going? 1) Occasionaly replacement of engines and cars - Depreciated away 2) Labour - 2 people to run a mile long train - a few people in stations - repair staff 3) IT and logistics - much of this is picked up at either end of a trip. 4) Fuel - priced on to the user. Alot of free cash. I expect Buffett has waited for this one for about 50 years.

That is correct. Anti-trust regulators in the US scuttled the deal. Should not be a problem for BRk.

Well, I got here first: http://www.bloomberg.com/apps/news?pid=20601087&sid=afhVyux5O0Cc&pos=1

Rather frigging tortorous isn't it? ???

I just checked and FFH holds 16 million shares of USB, not 69 M. For a total value of 350 M. Agree its a fine position. Pays a good and probably growing dividend as well. The thing that I find most interesting is the Total Return Swaps. I am just working my way through the quarterly report and I am amazed at the amount of detail. They have disclosed how they get the prices of all of their positions in great detail and described somewhat how the total return swaps behave. If your a FFH shareholder or interested in the company read these reports in detail. There is a plethora of risk management information, and investing strategy in each one. This gang has moved far beyond the days of G&D investing into a whole different realm.

I'm a big FFH fan but how do you figure that the $0.7B interest/dividend income is guaranteed? Also, I think you have to expect FFH's EPS to be lumpy. Are the big gains of the last year likely to occur each and every year? I doubt it. I'd be more than pleased if they occur every few years. Hi Norm, Agreed on the lumpy results... So give it a PE =12 or something. It will still be very cheap. 185 Million per Quarter of dividends and interest: We have to go to the source which are bonds, and certain stocks. That gives me 740 ... reduced to 700 to be conservative even though it is more likely to rise. So what are the sources: JNJ, PFE, USB, GE, and other stocks - many of these will raise their dividends as time goes. I am thinking unless they become very overvalued FFH will keep them indefinitely. This is new to their portfolio as a recurring item. Several of these will raise their dividends back up, some by megajumps as their earnings recover. Money in special corporate financings (i.e. Megabloks, Mullen Group) - often earning 10%). Money in safe bonds Munis, Gov't bonds. That's why I think of it as perpetual

if you look at this on an earnings basis, it seems extremely cheap, or am i missing something. mranski, do you have a penchant for understatement or what? - PE = 6 x; - p/b =0.95; - debt to equity either 20% or zero (debt so far out as to be equity); - a fortress of cash - growing at > 15% per year. - gauranteed interest and dividend income of 700 M per year. - and now stock portfolio is partially hedged above where the market closed today. They are being priced as a Deep Value stock. If this were three, or twelve years ago this would have been in the 800s - 1000 US range.

Well my prediction of 700 M after tax wasn't far off, and I just guessed. :P The companies are obviously reining in their underwriting to a high degree, but at a certain point they must be writing some shit to get the cash through the door. Anyway, there is lots of room for growth in that area. When the hard market comes they will be able to issue multiples of the present premiums. I also think the problem with comparing Fairfax to others on underwriting on a Q over Q basis is the same as comparing their overall results on a Q by Q basis. FFH is writing business with extensive geographical and business line diversity. Most other companies have more concentrated business that may just happen to be profitable at the moment. Come payback time you may see a dramatic difference in what has to be paid out. A CR of 80 or 90 could very quickly become a CR of 180 where there is concentration. Another example of Buffett's swimming naked. Whereas FFHs cr of 98 may become 107 for a quarter or two and then they can really write business. One of the most compelling items is the 175 M per Quarter from interest and dividends versus a former 130 M. This offers really good cover for tough underwriting. As some of those investments start to raise their dividends this line will become really interesting. We are starting to see the magic of compounding where more cash is begetting more cash. Care to place bets on the stock movement tomorrow?