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Have any of you guys seen the video "Civilization" by Niall Ferguson? It provides some great historical context about the rise of China and the decline of the West. Packer

I don't see the 10% inflation except for a fleeting period where prices will decline if the economy cools off. Really high inflation is caused when large inputs into the products and services we consume go up. Most of the value of things we consume come from labor and other inputs whose prices are going down. In third-world countries this different bacuse thier basket includes larger portions of commodities. With cash though you would get a good return in either scenario so I can understand the recommendation. I still think there are cheap niches and derviative (LEAP calls and puts) values out there. Packer

Sanj, How do you get comfortable with the premium implied in the puts (is it too high or low) and where relative to the current price have you typically purchased the puts? Thx for sharing this idea and concept. Packer

I think the other area is restructured real estate (like what KW is doing). Another question I asked Brian is why they did not have deflation swaps on the yen and he stated they were too expensive. So the US and Euro swaps were in part bought becasue they were cheap and there was no expectation of deflation. Packer

This storyline was pieced together from various places. The key in my mind was from Howard Marks new book "The Most Important Thing" were he observes that when prices go up and you buy, the overall expected return is lower. I think this is also true in the oil market for prices over the marginal production cost as oil is a "commodity". This premium is reflective of the bullish bias (the expected impact of peak oil and China hedging) of the non-consuming portion of the market as outline by VAL9000. The real question is do you believe this future consensus that is reflected in prices. I currently do not and would stay away from O&G until the pricing is closer to the marginal cost of production. Packer

The increase in price comes from investors and China trying to either buy on the peak oil thesis or lock in oil prices for use in the case of China. Packer

My understanding is that there are new institutional "investors" in the market (college endowments, etf, mutual funds) that are driving the futures up based upon the thesis of peak oil. In addition, you have a centrally controlled systems as in China "hedging" future needs. This increased level of futures has driven the prices as well as production up based upon the ability to hedge that higher price today. What has in essence happened is that the future oil price increase due to future expected supply/demand imbalance which is reflected in today's prices. If the "peak oil" thesis plays out as expected, the returns to oil will be nominal (because it is already reflected in the price). If peak oil is delayed or does not materailise like what happened in the gas (increased supply) or the investor or China demand declines or doesn't increase as fast, the market price will decline to the average marginal cost to produce $60/$70s level as described by the Exxon CEO. As a matter of fact if prices start to decline they may overshoot on the downside as in 2008/2009. The only way for a sustained increase to is for marginal production cost to increase. The difference between the price and the marginal cost is the "spectulative/hedging" premium. From what I have seen, the marginal cost may have increased versus historical cost but is declining due to better extraction technologies. Just my 2c. Packer Packer

But you must remember that HAL 9000 is programmed and controlled by Mr. Market humans. This can lead to automated behavioral issues. Packer

I know a number of folks want to get into the investment industry but why not invest what you have from your current job and continue to learn and experiment on your own in niches of the market the institutions can't touch. There are many areas that are too small for institutions to get involved with and if you get a job in the industry you will be working for the most part with large money constaints and competing with a much saavier group of investors. Just my 2c. Packer

I have read the recommended books and value some of these for my job but Myth's explination is how I look at an option (buying cheap leverage). Some others use options to buy synthetic stock if the call and put volatilities are too far apart and others have sold puts at prices they would like to buy stocks at. The BS and other models give you some idea of value but I have not found them useful in using options for investing because the inputs specifically volatility cannot be precisely determined. Just my 2c. Packer

oec, Very good observations. I need to do more of looking at actions and less at marketing. As value investors we should be good at cutting through the balony. When I look at Obama's foreign policies associated with terrorism and the wars, I see very little substantive difference than Bush's based upon actions. I could see Bush doing the same actions. However, the marketing spin is totally different. What has changed is my assessment of how much of this we have to do given that we are borrowing so much from foreigners to do this. Is the money spent on smart bombs for Libya well spent money? Will it make that much of a difference? I think catagoirzation can be useful but I need to be careful not to mis attribute some views to folks that do not have them. It is alot like cognitive bias in investing, we think we know the answer by the pattern we have seen before but need to be sure it is the case before jumping to conclusions. Packer

Sanj, You are right about the headline but there is always some lunatic frindge who can get their voice out in the US it is part of the system. I am happy for this event. I think you have misconstrued the dis-approval of the President. Its not because he has done the things you have said. These are what folks want an American President to do. It primarily has to do with the bigger promises made and not kept. If he would not have promised so much and focused on few things that everyone agrees on (like this) versus many (which are controversial), he would be in much better shape and not come off to some people as so partisian and arrogant. Packer

You are right about float. The amount of float and investment returns is one factor is use to determine what the correct P/BV to pay (assuming a break-even underwriting - for which I take a look at the historical underwriting and excess reserves to ensure). Packer

The biggest issue I have with using goodwill & intangibles is internally generated ones are not on the books. If FFH was a collections of acqusitions whose collective goodwill was marked to market then it would be a good measure. In addition, the intangibles are amortized over thier lives and not revalued after an acquisition unless thier value is impaired. That is why I like use tangible BV as it provides a consistent metric across insurers. You can then make your judgement on multiple of TBV based upon historical/projected growth in TBV, quality of underwriting, etc. In my opinion, including goodwill in times BV calc has alot of drawbacks due to consistancy issues historically and across insurers. If someone has a way make this adjustment, I would be interested in hearing it. TIA Packer

I know of a number of folks in NY that do the same thing with Florida. I wonder how these studies capture these folks? Packer

This provides more details but the study is in one state (NJ). I would think that a larger study and sample size could be examined to reach a conclusion. Packer

If you like RE cos you may want to check out KW. They have similarities to FUR buy without a seperate mgmt agreement (KW owns the asset manager) and they have been vetted by FFH. KW reminds of BAM before it was valued as an asset manager. They are selling at about adjusted BV with no value on the asset manager and have orginated about $2 billion of assets in 2010 and have the same size pipeline for 2011. They have had high historical IRRs (mid-30s) and follow a value approach to comm RE development. There origination is proprietary and they do not partcipate in auctions. Packer

This has to be one of the poorest researched peices I have heard lately. The study of movement around NE states is meaningless as most states have high taxes except NH. These guys should have reserached the folks who have left NY including Galisano who have prevented the politicians from raising the taxes in NY to provide a "fair and balanced" piece. Packer

I agree with ERICOPOLY. For insurance companies comparability you need to use tangible book to measure historic growth and to measure a premium to BV. This helps to identify and show the relative value of insurance cos. Packer

This event just makes me more impressed by the team has put together at Fairfax. It is a difficult task to put together a great team but it appears that Mr. Buffet has made a few mistakes and has received alot of praise. However as these issues surface, it looks like he has not put together a team that will last beyond his life or at least there will be a rocky transition upon the arrival of the bus. Packer

Harry, Have enjoyed your picks. Given your systems-based approach, what types of returns have you been able to achieve over the past lets say 5 or 10 years or as long as you go back. I am curious because most "quant" based mutual funds have had a hard time beating the indicies. TIA. Packer

The good news about the Seagate deal is Seagate gets SSD technology with the Samsung deal and the only 3 players left in the HDD space are Seagate, WDC and Toshiba. Does anyone know if WDC is going to get a discount on purchase price due to the earthquake? TIA. Packer

From what I can see and have read when you are in these debt deflation cycles (caused by high debt levels), you can have significant increase in money supply with little or no inflation (like Sweden in the great depression and the US today). What appears to drive overall inflation is wage inflation which is non-existant today in the US. So I would not expect a large amount of inflation but a falling $ as our real (commodity) debt levels are declining. All of this dependent upon the Europeans, Japanese and Chinese not following our reflation. Once they do, it will be a race to the bottom. Packer

I just finished "The First 25 Years of Fairfax" I got at the annual meeting a great read on the history of Fairfax. Packer

Its interesting that I read the article Brian Bradstreet referred me to at the annual meeting (the Irving Fisher article on debt deflation) and Irving's suggestion to stop a deflation is what Bernake did and Irving observed Sweden did the great depression (namely reflation). It appears the Europe is not doing reflation and is probably the prime target for deflation versus the US. It also interesting to note that the derivatives (US and Euro) were purchased not only because there is possibility of deflation (it existing in Japan also) but also because the price was so cheap 1% of notional value. Packer