Uccmal

Yes Omagh, Anyone who has ever bought ORH stock has had this outcome as their major margin of safety. If you bought ORH at the original issue price (was it $20), then you are getting bought out with an implied ROE of about 15%. Pretty damn good for the last 8 years I would think. No one on this board would have bought ORH not knowing this was the likely outcome. My annualized return on this my purchase will be 250% (25% over a month) - ahh, only if investing actually worked that way.

I expect part of the reason that FFH has not offered the details of their share sale is that they are expecting to have to raise the offer by a couple of a hundred million when all is said and done. The share sale at FFH will be an interesting event. The dilution factor for exisiting shareholders could be up to 20%. On the other hand this is offset by the value of the asset received so the price of the shares should not drop. It may bring in other large shareholders. It will certainly prevent FFH from going private in the near future which was looking like a potential concern to me at least. IF FFH drops temporarily my ORH shares should offset this. If it actually rises which may happen then thats gravy.

Well, based on the speculation here I bought 2000 shares a couple of weeks ago at about $47.00. I did not expect this quick a turnaround. Price for ORH is cheap but they can easily point at the trading range. I expect they will be pressured to raise it somewhat. The reasons for the stock issue reflect the complexities Cardboard has presented I expect. Fair Friendly Acquisitions does not seem to include the word generous or they would be Fairfag Financial Holdings. Viking, I second the motion. I cant imagine that a financial advisor could be of any use to you whatsoever even as a second opinion.

I infinitely prefer this mode of growth to the purchases of huge existing insurers with decades of liability of their balance sheet. This way FFH gets to really know the operations and participate in their growth with future capital infusions such as is being done with ICICI, Advent.

Whenever I make money too easily in the market, it is often when it stops. I had the same feeling back in June 2007 and unfortunately I did not pull out. This time around, I am not hesitating to trim positions getting close to fair value. Cardboard, Quite Frankly, there was absolutely nothing easy about the money I have made since March. It was unpleasant and stomach churning to dive into megacaps when people were predicting GE was on the verge of bankruptsy. I bought well over a hundred SPY options that lost money into early March. I sold the higher strike ones at a loss and bought lower strike positions. There was definitely nothing easy about it. That being said I have been trimming many of my option positions as the market goes higher. At some point in the fall there will be a downside adjustment. I am looking more in traditional value areas now with common stock.

Best way to describe it: They are the GE Capital Fleet Services of the ship rental business. They have the ships built, lease them to pre-booked clients for long lease terms, and collect the cash. It's a good business as long as your clients are reliable and Seaspan leases mostly to Asian clients of good reputation.

The 220 k purchases were done in mid August. 1.375 Million spent by Mr. Washington in August. They look very committed to the stock and the dividend at the present price is still about 6%. The last report indicated that they have delayed some of the ships for a small price. They had been asked by a couple of their minor carriers to drop the rental prices but declined. The major carriers have not made any similar requests.

As Crip alluded to above the hurricane season does not work according to a normal curve. The last significant El Nino year showed very similar patterns of Hurricanes forming off Africa and heading northwest. Nothing of significance appeared in the Gulf. 2006. This appears to be a repreat. We are now into the peak of the season when some of the big ones would normally be heading into the Gulf. This of course does not preclude any kind of outlier which could happen, as we all know. Stubble: Have a look at the 2006 Hurricane tracks.

The other thing of interest that the Barron's article mentioned was the effect of closing a Sears on a mall. A mall with a run down, or closed anchor store very quickly starts to lose its caveat. This in turn will get reflected in the real estate values of the mall based stores. What if Sears has to constantly buy out multi-decade leases at substantial losses? The net result in a landscape of excess real estate space and a CRE recession is that the value of Sears real estate is probably alot lower than many pre-recession estimates. I would say EL has a real conundrum on his hand. The Buffett quote about bad business; good management probably applies. With Sears a case could be made for bad business and bad management under EL. As mentioned above being a great investor does not make one a good manager or even a passable manager. There is definitely value in the repair franchise that can be calved off but I am dubious about the other brands or the real estate.

Speaking anecdotally about Sears Canada: - Cashiers are hard to find - 2/3 of the fitting rooms are closed. - selection is muted or not available at all We tried to buy a play pen for the new little one and they had one on the floor for about $100.00. A reasonable price. The staffer who tried to help us recommended the type that was on the floor. We said we would like to buy it. She looked it up and found they had only one left. She went in the back and couldn't find the one left (presumably it was the floor model). At this point I am sure Mrs. Blumpkin would have sold us the floor model at half price but we left empty handed from Sears. We went to Toys R Us and bought the exact same thing ten minutes later at the same price. The Sears in question is one of the anchors at one of the most prestigious malls in Toronto. In the past year I have tried to buy jeans and not found my size... I am not an awkward size; and had to walk half a mile to find a fitting room and then back to the rack. Then serching for the cashier. I almost walked out with the stuff in my hand figuring at least I might get service. Bad scene. I would not touch Sears Holdings stock with a barge pole if this is indeed the result of Lamperts efforts. It is perhaps worth its real estate but that is out of my comfort zone. I also dont like the way he operates his hedge fund. He is spread to thin. His best ideas are going to the hedge fund, not into Sears. Then there is the issue of the interim CEO. The only reason anyone would allow themselves to be called an interim CEO is if they were so concerned about the company going under that they could easily place the blame elsewhere and suggest that they were only caretaking for Eddie. Bankruptsy's look bad on a resume. The stock buybacks are being financed out of working capital somehow. My guess is the inventory issues I have highlighted are what is financing the buybacks. Now it strikes me that in a recession it is very smart to build customer relationships not desroy them, and lacking inventory and staff is a sure way to permanently impair them. Nuff said.

Your numbers appear solid to me now that I see where you got them from, except perhaps for the HWIC estimates. But you have covered that off by valuing the longterm subs at 1.1 or 1.2 book. If I applied a value of 1.3 x book (take out value for NB) to each long term sub I would get a similar number and would leave HWIC out. More than one way to skin a cat. HWIC as an independent franchise would be easy to value. Comparable numbers could be obtained using Sprott or Gluskin-Scheff both of whom recently went public. Both are trading at 500 M market cap in a depressed environment. Assumming HWIC could line up money to manage (which they could) they could probably IPO next year, or last year, at 1 Billion. If I do that though I would back that value out of the value for NB, C&F, and ORH since they need to be treated as reasonably well run, but not exceptional enterprises. I think I already said that in reverse. The HWIC buy-in was done to give the principals their existing shares of FFH. John Templeton helped them value the company. You could also take that value and prorate it by 15% per year.

Just pushing them out. Debt with FFH is like equity.

Hi Brian, I have normally done something similar. It was easier to value when NB was still a public company. With your method I am trying to get my head around a couple of your numbers. Why are you adding 355 M to FFH Asia? Where does the 500 M Runoff come from? Are you assuming this to be the holdings at Holdco not accounted for by RE, ORH, C&F, and NB? If so, are these assets not already included in Holdco Marketable securities? I am not clear if this is a double count? Under the more aggressive secenarios you assign a value to Hamblin Watsa? How did you get this value? Is it not double counting if the results of HWICs actions are already in the values of the subs? HWIC employs a couple of small rooms of employees who have a high value but I am not sure they are worth 800 M? I am hoping I am not nitpicking. As I said I would value it in a similar way. I would actually apply 1.3 x the value of each long term subs book since this is what they bought NB in at. The results would be similar to your base case. We benefit from the extreme amounts of details Prem provides in the reports. Thanks, A.

Mark, Save the beer for Sanjeev... For all the beers I owe him for this message board we could keep him drunk for a year. I actually bought another 20 leaps after I wrote that. I think GE went down for a couple of days. I sold some SPY, SBUX, and AXP leaps and bought the GE leaps. The game is getting a little tougher. I am thinking we are going to see a 10% or greater correction coming soon to a US market near you. A.

Dealraker, you could extend your "I have seen this before" to everything in the economy as well. Absolutely nothing is ever new in this game of economics. 3 years ago: 1) we are in a new paradigm - BRIC will save us from ever having another recession 2) Decoupling is the new wave. The US may have a recession but never Chindia. 3) House price can only go up. 4) Twin deficits are going to detroy the economy of the US forever 5) The S&P is undervalued 6) Oil will keep going up because we have reached Hubbert's peak. Today: 1) There is a new world order. The US is a falling empire never to regain any semblance of its former self 2) Housing will never rebound again 3) Twin deficits are still going to destroy the US - Well at least the single deficit and now legacy costs. 4) The American consumer is gone forever. Savings will reign supreme. 5) THE UK is done. How many times has this been said in the last 500 years? The more things change the more they stay the same.

An update... Odds of major Hurricanes seem to be decreasing with each day: http://www.noaanews.noaa.gov/stories2009/20090806_hurricaneupdate.html

Thanks Jegenoff, That was interesting. Crip - Did you confuse this comment by any chance? As has been mentioned on this board recently, there are signs that the current hard market may be artificially hard due to a few issues. Did you mean the market has been artificially soft? A.

There is no tangible reason I can think of as to why Markel for example is 1.4 or 1.5 BV and FFH is 0.9. They are similar operations. Markel's 1st Q was pretty weak on both investing and underwriting. I expect it is just a matter of time before both companies trade at 2x or greater again. A much higher price to book would be very useful as currency right now. Unfortunately, it is not to be at this moment.

KFR - FFH holds 13.5 Million of 79 million shares What a horror show. With alot of FFH investments I see some upside going forward such as ICO, MB, MTL, ABH, Brick but this one leaves my head scratching. Book value is imploding at 30 M a quarter. If it gets cheaper than its real estate value I might be interested. They have some decent media properties but are so badly managed..... arghhhh. The Atkinson trust needs to convert their b shares to common, let someone come in and take the whole business over and fix it properly. A horror show. The Guardian came to my door on Wednesday with no advertising to speak of. I can get a Toronto Star nearly anywhere any day free of charge while the Globe and Mail raises their Saturday rate to $3.00.

They could fire some underwriters, but it would send the message that if you hold on prices and write less business then you will lose your job. It would also leave them shorthanded when the market turns. I agree Eric... Keep the people, pay the salaries and wait it out. Most of the companies that will explode out of this recession will do just that. If I thought I was going to get laid off because there wasn't enough business I would be furiously trying to write it which of course would lead to massively higher combined ratios. Cardboard, please show me a company somewhere that has stability in earnings right now. The reason FFH is not trading up has little to do with any of your observations. It has more to do with being at the start of Hurricane season. As you have said before it consistently ends the year at about 1.25 book value, sometimes getting higher in the meantime.

Cripes, reading these Quarterly reports is starting to resemble the AR of most other companies.

FFH used to re-insure Energy Cat business through NB. They got absolutely crushed and exited the business after KRW. I doubt they have re-entered it.

According to the report, Advent has about 600 million dollars of investments, the vast majority of which is in short-term US treasury bills. Their investment return for the first half was just 0.46%. Can Fairfax just add the 600 million to its pool of investments without restrictions? If yes, this sounds like a great deal even at a price of 150 million dollars for the whole of Advent (I think Fairfax paid quite a bit less than this). No. However, what they can do is exert full control over where the money is invested within the statuatory limits of the operating jurisdiction. So, if they are required to keep 30% in cash and short term they could invest the rest in something more lucrative. Other advantages of full ownership: 1) There are no issues investing capital into Advent for expansion purposes - no need to get approval from other shareholders. 2) If Advent has a statuatory surplus of cash it can be dividended directly to FFH. My suspicion is that all of the international subs such as Advent, Polish Re, The middle east one, and ICICI Lombard will be receiving cash from FFH as the market hardens so they can write more business.

Arb, I guess my answer to that is that the implied leverage in the Leaps I hold allows me to indirectly hold 2 million in stock. The easy upside is 1 million dollars gain... the downside is an unlikely but obvious zero. As Flying Arrow indicated, there is room to hold lots of common stock as well so the downside is not actually zero. It's all about risk management. At some point perhaps today the masses are going to reenter the stock market and drive prices way up, at which point us value investors will be forced out to the fringes again, and the easy pickings will be done. Make hay while the sun shines. These are relatively rare opportunities at extremes. I wouldn't buy options of WFC because the movement from this point upward is likely to be much slower.

A bit of background: I started learning about options from members on this board: primarily Ericopoly, Mungerville, and Numquam Perdo. My first option trades were buying January FFH 2008 Leaps back in the summer of 2006. This was very successful and led me to explore other possibilities. Since then I have held put options on the S&P 500 (options on the SPY etf): The positions were intiated in the spring of 2008 around when BS was imploding. I had a few with December 2009/2010 expiry. I sold most of these at a profit early in the fall of 2008. Had I waited I would have done better, obviously. I actually sold the last about three weeks or so before FFH announced they were removing their hedges. Mine were intended in part to be a hedge and in part to bet that the market was going to go down. Since my initial success with the FFH Leaps I have renewed and advanced the position whenever the stock fluctuates. At higher stock prices I have sold FFH Leaps with short dates and bought back at longer dates when the price drops. At the present time I hold about 30 FFH Leaps for January 2011 and a couple left for January 2010. Sometimes I take a some losses to ensure long term gains using this strategy. Keep in mind that I am doing all of this using US options, but in Canada where there is no distinction between holding periods for tax reasons. I have also bought put options against FFH to protect my gains to avoid taxes. This has not worked as well and I have opted just to hold smaller positions. Last November I started to buy SPY etf leaps. I bought them at SPY 100, 95, 90... and later in March at 85 80, 75, and 70. The initial ones had an expiry of Dec. 2010, later ones Dec. 2011. This is where I will discuss the downside. My earlier purchases, some of which I did not sell into the January rally, were worth zero on March 8th, not a very pleasant prospect, but I had sold some in the winter and on the way down, at a loss, which gave me cash to buy other, cheaper units when the prices got unbelievably low for the Leaps. In the winter I purchased Leaps for the following: AXP, GE, MFC (Canada), SPY, WFC, HD, and SBUX. All are in the money as of today, and all have a 1.5 years to expiry. However, I will never buy another option from a Canadian exchange (there is no liquidity) and the spreads are huge - this is for Manulife which is one of Canada's biggest companies. I have had a few that have not perforned as well that I got out of quickly such as MCO, and a couple that have expired worthless. Like Mark I use Leaps as a proxy for not being able to buy enough common shares of a company, or not wanting to commit as much capital to something, A basic summary: 1) I buy Leaps of companies I would be happy holding anyway 2) I pay careful attention to expiry dates and times. They will almost certainly drop in price when when the next years issue arrives. 3) Buy at the point of maximum market, or company dislocation. This sets one up for a maximum return. Today, I can buy GE Jan 2011 12.50 Leaps for about 2.25. The stock is at 11.70. That gives me a break even stock price of 14.75. What are the odds that GE will not be trading above 14.75 somewhere before January 2011 - My bet is pretty low. I am figuring at least 25 for a gain per leap of at least $10. Unfortunately I wont get that for all of them as I will sell some on the way up. 4) As with common stocks take advantage of absurd price dislocations. 5) Sell on the way up... dont wait for the perfect buy or sell points. As you make money unload the damn things. GE may well reach $40.00 in 1.5 years but I will be out of nearly all my options before then. I may convert a few thousand to shares along the way. 6) I only buy extremely liquid positions. The spreads on GE options are often only 2-5 cents and they trade hundreds of contracts per day. 7) I dont bother with sophisticated math for any investing let alone options. By this I mean options pricing formulas, discounted cash flow, or any other ridiculous formulation designed to explain the impossible to explain. I guess like other value investors, if it takes too much analysis it goes into the too hard pile. Today, I wouldn't buy options on the SPY etf, SBUX, WFC, or AXP or much else that I know well. I would still buy GE, and HD, if I hadn't. I will buy FFH leaps for 2012 when they come out, if the price is still below 300 US. My thoughts and experience only... not advice.