Viking

Companies who were paying high taxes in the US are immediate big winners; shareholders are also big winners. Yes, some of the windfall may be competed away over time; we will see. In the longer term, this also makes the US much more competitive. All of Trump’s trade rhetoric will also have an effect over time (motivates executives to grow in the US). If you are a company looking to expand your business the US is becoming a much more desireable country to do business. Lower taxes. Less regulation. Great optics with current administration. Countries like Canada and Mexico are clear losers. The political risk right now is quite high. What would motivate an executive to build any new factories in Canada or Mexico since the Trump election with all the uncertainty over what the trade agreement will look like between the 3 countries. If your choice of country is close of course you will pick the US.

I have also learned over the years to stay away from industries that are shrinking or facing disruption (newspapers being a great example). This is not to say that money cannot be made, it is just much more difficult. One of the keys to investing success is to invest in sectors and companies that have lots of positive tailwinds. As time goes by surprises tend to be positive and this drives the share price higher. Time is your friend. In struggling industries, the surprises tend to be negative and this results in lower share prices. Time becomes the enemy of a patient investor.

Petec, no offense taken. Two people can look at the same situation and come to two very different conclusions; does not mean one is right and one is wrong. It often comes back to what ones objectives are and investing style. Dalzel/cigarbutt, regarding the large amount of cash at the holding company, yes, it will be interesting to see what FFH does. Prem has clearly stated that he feels the shares are cheap and buybacks are likely. I wonder if they will wait and see if there is a bit of a hard market as we start 2018 and therefore an opportunity to grow the business organically. I think he has stated another large acquisition is not likely. I would like to see them start to get the share count down. You can see all the shares that have been added the past 10 years on the one page summary at the beginn8ng of the annual report. If I had to guess i think they will end up using the excess cash to reduce the share count; if this happens we should see a nice jump in the shares. This is another reason I bought shares recently (I got concerned they would not stay cheap). Shares also go ex dividend Jan 17 and this will net shareholders US$10 per share a week later.

Petec, I think the difference is a year later we all have a little more information. FFH has largely monetized ICICI Lombard. FFH has monetized First Capital. I think the size of both of these gains was much, much larger than most expected. I think they may have $2.5 billion in cash at the holding company when they report Q4 results and this is much more than a year ago. FFH India has performed exceptionally well driven by the extraordinary gains of the Indian market. Again, I think performance was much better than most people expected at the start of the year. Many of FFH large equity holdings also outperformed over the year: BlackBerry and Resolute come immediately to mind. The re-positioning of the massive bond portfolio (moving to low duration) continues to looks like a very smart move. The one blemish all year was the underwriting performance of Allied and Brit; This will need to be monitored moving forward. However, if all the hurricanes in 2017 results in a hard market there may be some benefit moving forward. When I weave it all together, from my perspective, a lot of very good material things have happened at FFH in 2017. And as a result, 2017 YE reported book value will be significantly higher than 2016. Perhaps US$435 versus $367? Where have the shares traded In mid January each year? 2018 = US $524 2017 = $470 2016 = $486 2015 = $505 And when you look at the FFH of even 18 months ago (and how it’s investment portfolio was positioned with all of the equity hedges) the changes are even more stark. I have been very lucky with my investments in FFH over many years (from 2003 to 2009); these investments put me in a very good situation financially. One of the key reasons I invested in FFH is I felt I understood (somewhat) and liked how they were invested. This confidence allowed me to be patient and take advantage of the volatility (loading up on shares when they got crazy cheap). Since 2012 I have not liked how FFH was invested (especially the massive equity hedges). And yes, this stopped me from holding the shares for many years. Much has changed at FFH in the past 18 months and as a result of these changes my opinion of owning the shares has also changed. I now own a small position. If the shares get cheaper I will likely buy more :-)

Chrispy, I agree with Dalzel that in Bradstreet, FFH has one of the best bond managers so at an inflexion point like we are at right now in the bond market (from long term bull to bear market) I think you want to go with the firms that have the best people and trust that they will get it (mostly) right. I have been reviewing what FFH has done with its bond portfolio since Q4 of 2016 and they look like they have absolutely nailed it (shifting out of long dated bonds to short term maturities). Below is the change in US interest rates just in the past 14 months. Amazing. If the Fed raises 4 times this year, yields will be climbing (short and long end). Who is going to want to own long dated treasuries moving forward? I am very interested to see what FFH has done with the Allied bond holdings when they report Q4 results. Nov 1 2016 Jan 9, 2018 1 year. 0.65 1.78 2 year. 0.83 1.98 10 year. 1.83 2.55 30 year. 2.58 2.88 In terms of what bonds to buy today, as I said earlier, Gundlach said 2 year treasury was the place to be. He said the yield differential (2 year versus 10 year) is not large enough to offset the risk of much higher rates (of 10 year). The 2 year has a decent yield; hold to maturity and reinvest in two years at likely much higher rate. You will not make a killing with this strategy. However you will make a positive return. Gundlach feels there is a reasonable chance the 10 bond yields will rise to 5-6% in the next 4 years. If this happens investors who hold 10, 20 or 30 year bonds will get killed. If Fairfax’s competitors are not careful losses on their bond portfolios may be material (potential catalyst for hard market in insurance?).

I assume this is USD , not CAD ! thanks:) How do people think about goodwill when calculating book value?

One of the questions to Gundlach yesterday in his call was “what bond would you buy today” and his answer was the 2 year treasury. He said if the US 10 year yield moves north of 2.63% then yields likely will keep going to 3% this year. We are at 2.58% today so getting close. He thinks the 3% level is the one to watch on the US 30 year; if yields move higher he said you can call the end of the 35 year bull market in bonds. If is time to review what FFH is doing with their bond portfolio. Their positioning there may be setting them up for the next big investment gain. Everyone is looking at FFH and looking for gains in stocks as the next big catalyst in the share price; perhaps we are looking at the wrong asset class.

Gundlach, in his conference call Tuesday, identified ‘commodities’ as a top investment idea for 2018. He said that late in the economic cycle commodities tend to significantly outperform equity market averages. So how does an investor get exposure to ‘commodities’? Is there an ETF or a fund that serves as a proxy? I am not looking to play oil or agriculture or metals... rather I am looking for something that captures the price change in the underlying commodity prices and aggregates everything together (i.e. I am not trying to pick the sector winners).

Of the big US banks I think JPM is recognized as the best run. CEO Jamie Dimon’s shareholders letters are recommended reading by Warren Buffett.

Calculated Risk, the blog I have followed the past decade for US housing and economic info, recently just finished publishing his 10 Economic Questions for 2018 with a few predictions: - http://www.calculatedriskblog.com He also references a post by Tim Duy: - https://www.bloomberg.com/view/articles/2017-12-28/5-questions-for-the-fed-in-2018 Bottom line, it sounds like most economists expect the US economy to grow a little more quickly in 2018 compared to 2017. Let’s hope so.

Happy New Year to everyone; hope you all have a healthy and profitable 2018! Special thanks to Parsad for starting and continuing to run this board. :-) My current financial position and lifestyle has benefitted in a material way from the ideas posted on this board over the past 15 years; many thanks to all those who have taken the time to post their ideas and thoughts. Like Bsilly and his posts back in the dark days of 2003-5.

30% total return; stock picks were up 38% and currency was -8% (as Can$ was up about 8% versus US$). Big US bank stocks were the gift that kept on giving all year; I continue ie to like US banks as we start 2018: 1.) tax reform will materially increase reported earnings (after sizeable one time charges are taken in Q4 2017) 2.) US and Global GDP growth will fuel revenue growth; growth may accelerate in US 3.) Fed tightening in Dec 2017 and 2018 (consensus is 3 increases) will increase net interest income 4.) regulatory environment in US continues to improve; changes in how the rules are interpreted will be beneficial to banks and increase their profitability 5.) all big US banks will likely be approved to return 100% of earnings when CCAR results are announced in June; dividends will also increase materially (there is some talk the Fed may approve dividend payout ratios of 40% Down the road) and buybacks will continue to be large (removing 5-7% of shares outstanding depending on the bank).

Yes, have a very Merry Christmas everyone :-)

My portfolio is large enough that I do not have a day job (I tell people that I am a financial planner with just one client). As my portfolio grows in total value my thinking is starting to shift a little from total return to preservation of capital.

Thanks to everyone who have shared their thoughts... great to get lots of different perspectives. My experience is every couple of years I will get an opportunity that, from my perspective, is very high probability (80%) of going up 50-100% in a couple of years. These ideas are typically very big companies. One example was Apple when it fell to $60 about 4 or 5 years ago. A second example was the big US banks starting about two years ago. I am comfortable going with a very high concentration (sometimes 100% for 6-12 months). People tell me I need to diversify my portfolio. The problem is I do not have other ideas I feel will come close to making the same high probability return. I did the same thing with FFH (high concentration) a number of times in 2003-2010 back when its price was being driven all over the place when it was listed on the NYSE. I am trying to reconcile in my mind how being 100% invested in Apple or BAC for 12-36 months (buying when they are out of favour and the stock is selling dirt cheap) is more risky than the many people whose net worth is tied up in a small business.

I have been thinking about portfolio concentration for many years. On the one side of the fence is the investment industry that requires/advises a portfolio to be diversified in 15 or more stocks, bonds etc. On the other side of the fence are many small business owners who may have their entire net worth tied up in one business (the business they own). There is also the middle ground; Buffett has talked about how 6 decisions over a lifetime can make an inverstor very successful; once you find a great opportunity ‘back up the truck’ (concentrate your portfolio). Let’s take two scenarios: 1.) Small business owner who’s entire net worth is tied up in their business (let’s assume the business is the average business in the small business universe) 2.) Investor whose entire portfolio consists of Berkshire Hathaway Which choice carries more ‘risk’ to the investor?

Rb, I think Druckenmiller’s concerns with interest rates and QE is they are creating bubbles in many asset classes (or at a minimum very inefficient distortions). The best personal example I have is real estate pricing in Vancouver (clearly a bubble). People are blaming foreign buyers and calling for government help to allow young and low income people to buy which creates very poor public policy. My view is if you want to address housing affordability in Vancouver you need to start by normalizing interest rates (perhaps a 5 year fixed rate of 4 to 5%). Of course this cannot happen as it would crash the housing market and remove the only pillar of growth (for Canada). Crazy low interest rates are possibly creating the mother of all bubbles in many financial assets. Until the ECB and Japan end QE and get rates normalized the party will continue; all the money they are injecting into the system will be put to use. However, it does look like we are coming to the end of the game (or at least this chapter) possibly in the next 24 months. While it has been fun on the way up, it likely will be very uncomfortable on the way down.

Interesting comments. Thanks for posting the link to the video. Some of my takeaways (feel free to correct any errors as I watched the video earlier today): 1.) going back 700 years inflation averaged 1%; inflation was much higher in the 70’s but perhaps that is the outlier. Perhaps current rate of inflation is perfectly normal. 2.) current phase of innovation (greatest in over a century) is likely what is resulting in low inflation and this is not a bad thing. 3.) if current low rate of inflation is normal Fed policy of low rates and quantitative easing is wrong. He feels fed should normalize rates/Fed balance sheet as soon as possible. 4.) by June of 2018 we should start to see some impact of all the central banks reversing quantitative easing. 3.) current low global rates and global QE is creating bubles in all financial markets. Free money will tend to do that.

Randomep, I included the old post on purpose... now I am not sure how accuarate my notes were or how representative they were of his overall discussion... but I think you want to be careful about putting too much stock in any final forecasts (or summaries provided by posters like me :-) I have been wondering lately where the US is in the current economic cycle. Gundlach provides lots of great detail on this. It appears to me that the US should start 2018 in very good shape.

Well, I am back with another post on Gundlach. He continues to be one of my favourite commentators. What I really like is all of the detail he provides and discusses in his sessions. I do not listen to trade off of his guesses as to what may happen moving forward. Rather, I really like listening to his logic. Some stuff I use and other stuff I do not. - Dec 5 Total Return webcast: https://doublelinefunds.com/webcast-schedule/ He also has a second conference call in January focussed on what will happen in 2018 (this webcast is on a different web site as it is not Doubleline fund related) - Jan 9 Just Markets: https://doubleline.com/latest-webcasts/ A couple of take aways from the call last week: 1.) the US 10 year yield is being held down by continued QE in Europe and Japan. Until this changes US rates will be held down (from where the market might take them on its own). He still feels the yield on 10 year US treasuries could hit 5 or 6% in 4 years time. As a general rule he said it is not unreasonable to see the 10 year yield match nominal GDP growth. 2.) he likes commodities (as a longer term investment); expects the US$ to continue to weaken (nothing too crazy) 3.) leading indicators in the US are running hot; with tax reform, US GDP growth may pick up in 2018

I have given up trying to understand what is going on with Vancouver (and Toronto) real estate. It looks and feels like a bubble to me. But I said the same thing 7 years ago. First time home buyers have some really difficult decisions to make. The money from Asia (mostly China) continues to pour in. Interest rates are still very low. The economy in BC continues to perform well, lead by the housing market. In a few more years, once my kids are out of the house, I would be happy to sell and rent. I would love to get my hands on my equity and invest it in stocks for the long run.

John, thanks for providing the information and link. Much appreciated. :-)

Dr. Malone; thanks for posting. I really like the following quote "your 6 best investment ideas in life will do better than all the other ones". It speaks to the fact that in a lifetime most investors will get only a handful of crazy good (life changing) investment opportunities. The key is to take advantage of them when they come (through concentration). At the same time you also need to make sure that you are not wrong (and that said concentration does not blow up your portfolio). Very simple. Very difficult to execute over time.

My (limited) read is China is the key. North Korea exists because it is in China's national interest that is exist (as a buffer to the West). At the start of the Trump administration there was much talk about how terrible China was, how unfair the trade deals were and how China would shortly be labelled a currency manipulator. Then North Korea started ramping up their nuclear program. I know the timing was just a fluke. All the negative talk we heard from Trump regarding China has largely stopped. My guess is China has told the US that if it wants help from China to deal with North Korea then the US had better stop the insults, bashing and threat to label China a currency manipulator. Not sure where it all goes from here. I will be watching China. PS: I think Trump's Russian friends are also a player in this game. Trump plays checkers and both China and Russia play chess.... This conflict has been around for 70 years and is all shades of grey and Trump seems to want to paint in black and white.

Cardboard, I agree with your post. My concern with Fairfax is I am not convinced they have 'learned' the lessons from the past 7 years. Prem talks a lot about 'no ego'. I also see empire building and little concern for improving shareholder returns. Having said that, I will invest in Fairfax with my eyes wide open. I think the stock is cheap. Their underwriting is much improved. I will closely monitor what they do with their investment portfolio over time and this will determine how much stock I hold. This was the approach I took with FFH in the past and it has served me well (I have not held a meaningful positioning he company for the past 7 years primarily because I did not like how the investment portfolio was positioned). Dalzel, I am also hopeful that FFH starts to repurchase shares in a meaningful way. Prem used Teledyne as an example. We will see in the coming year if he walks the talk. Here is the quote from page 21 of his shareholder letter in the 2016 Annual Report: "Having said that, we are raising our threshold for acquisitions now so as to benefit from the ones we have already made – and to buy back our stock. Our hero, Henry Singleton, whom I have mentioned before in our Annual Reports, built Teledyne by taking shares outstanding from seven million in 1960 to 88 million in 1972 and then down to 12 million in 1987 – an 87% drop in shares outstanding. Our long term focus is clear."