Viking

I am not a fan of minority governments. They result in frequent elections. And as we all know, an important part of getting elected is to make lots of (expensive) promises. In the old days we had inflation (with election promises); with constant elections and minority governments we have hyper inflation. Over time our strong fiscal position will be eroded. I much prefer that one party get a majority and a 4 year mandate to govern; early in their term they can make the hard (necessary) decisions. If they abuse things they will get voted out after 4 years. I am not a fan of proportionate representation (like many European countries). My fear is you simply would get interest group politics (i.e. special interests) running the agenda and an even more disfunctional political system than the current minority system. We would have more regional parties (the Block is good for Canada?) and ethnic parties would also likely form; given our crazy diversity I am not sure we would like what we got. Having said all the above, the Conservatives have had every opportunity to build a stronger coalition and easily obtain a majority. Unfortunately, they are so focussed on keeping their base happy they keep pissing everyone else off. If they do not get a majority they only have themselves to blame. My guess is Jack Layton may well be the next Prime Minister. The Conservatives will get the most seats and will be asked to form the next government; not sure if the Block will have enough seats to help the conservatives to a majority. If not, the NDP and Liberals may actually form the next government. If it looks like this may happen watch Bay Street have a heart attack (as the NDP platform is built on repealing the Conservative tax breaks to businesses). Monday may be quite the historic event in Canadian politics.

Canada's economic situation looks quite good if resources are your business. With the CAN$ increasing from $0.62 to $1.03 I am not sure how manufacturers are coping (who tend to be in Ontario & Quebec). My guess is the manufacturing base will continue to shrink is size. Being Canadian, currency has been my greatest challenge as an investor. I have a hard time investing in commodity companies (who can forecast what is going to happen to commofity prices)? Over the past year I have been gravitating to large cap US companies where 8 to 10% returns look pretty reasonable; the challenge is the CAN$ appreciation is offsetting the gains of a basket of US stocks. How much higher do board members see the CAN$ going? I see it perhaps increasing to $1.10 over the next year... but wonder at what point to Canadian manufactuers throw in the towel.

I think Canadian economic prospects are firmly tied to what happens in China. I think China is still early in its development so the resource sector in Canada will continue do well (with expected ups and downs). China looks to me to have another 10 or 20 years of strong growth ahead of it. As the Canadian dollar continues to climb it is hurting the manufacturing base in Ontario/Quebec (my guess is it is shrinking). I am not saying "this time is different". We have a country with a population of over 1 billion people rapidly industrializing... when was the last time that happened in the last 200 years? All this tells me is the current commodity cycle may get a little more frothy than past cycles. Will it correct at some point? Of course. Bubbles are possible to predict; timing of the bursting is pretty much impossible to predict. Being Canadian, the persistent strength in the Canadian dollar is hurting my US$ investments. As a result I am now looking for a higher margin of safety when purchasing non CAN$ assets to protect against a strong currency. My guess is the current trend will continue and the CAN$ will continue to go higher over the next year or two.

I am looking into Cameco or an index that tracks the uramium producers. The current situation reminds me of last year after the Horizon sinking and the backlash that hit everything oil. Most importantly, China is the primary driver of new nuclear plants and I do not see them slowing down at all as a result of this (yes, they likely will posture to drive uranium pricing lower). Scroll to the bottom of the link to see a summary of who has facilities and who is biulding. www.euronuclear.org/info/encyclopedia/n/nuclear-power-plant-world-wide.htm

I think FFH wants to get into the public domain all the material involved with this story as it paints a very poor picture of the hedge funds involved. They are highly secretive and hate bad press. Unfortunately, this is the best one can do in situations like this. FFH understands there is a low probability of collecting cash.

Q1 and Q4 are 'normally' the quarters insurers/re-insurers make their money... could be an intesting year should catastrophes in Q2 and Q3 (i.e. hurricanes) also come in on the high end.

Is this an industry wide issue? TEVA has also had similar issues.

Given the extreme level of government (i.e. fed) involvement in financial markets I am having a hard time making sense of things. I underestimated the markets reaction to Quatitative Easing by the fed; seems reasonable to me to expect some downside risk when fed announces it is done. Lots of nervous people with itchy trigger fingers...

I have always enjoyed reading Montier's stuff but I think I liked this article the most... he seems to have distilled Graham, Buffett, Keynes and Templeton thinking into his 7 laws. And then he overlays this into what we are seeing in the markets today. Bottom line... he says likely a good time to raise some cash and be patient and wait for the next fat pitch.

zippy1, I still (5 years later) struggle a little with explaining to people what I do in a way they can understand. Most are so financially illiterate that they are not able to understand; I am sure many think I must have some 'under the table' income that I am not telling them about. It is also hard because we are always heavily involved in our kids activities (coaching, managing, sitting on various executives etc) and we see how time starved most people are; I also do not want to come accross as being boastful or Mr Perfect with all sorts of time on my hands. I find talking to people about 'work' to be a fine line to walk. I have also learned over the years that when you make big decisions the 'problems' are relatively easy to pick out. I have also learned over the years that many 'unintended positive outcomes' happen that are not contemplated when the big decision is being contemplated (versus only a few 'unintended negative outcomes'). This tells me that if you focus on the big decision and think it through well, if the positives outweight the negatives then it likely is a go (and the positive unintended consequences that subsequently happen make the decision a slam dunk a few years later). I am reading Hill's 'Think and Grow Rich' classic and it sounds very much like your thought process creates your reality (not the other way around). I think this is an important factor in the net worth number that people come up with when considering 'retiring'.

shalab, this is actually the only issue I have encountered. The key is what both spouses do with their time. If you are both in the house all day long, yes, friction easily develops. It is also hard to keep a relationship 'fresh' when you are with each other too much of the time. The key is to have enough outside/different interests that each of you get out of the house each day. One thing I do is print much of my reading (i.e. companies I am invested in) and head to any number of local Starbucks to relax and read (I like to print most reports as I highlight stuff and write comments in margins etc). I much better appreciate what retired couples go through...

Erciopoly, interesting question; a topic I have also thought about. My kids are 10, 8 & 7 and I have not 'worked' for the past 5 years (my wife since our first was born). Fortunately, I was in sales/management for two large multinational companies and my kids know what my last job was and the products I sold (we eat them every day). They also understand my current job is 'managing our investments' which has lead to a number of questions and discussions. My wife and I are both very involved in many not for profit organizations (sport/school) coaching, organizing etc so we are quite busy with the kids. Bottom line, the kids can see our work ethic; we just don't hop in the car each morning. We also likely have more time to talk about 'work stuff' with them than most parents (too busy'stressed out with other things). I guess the key is how much time you are able to spend with your kids and what you are doing with them. I definitely wouldn't change anything about the past 5 years. Let's hope the next 5 are as good! :-)

This board has had a life changing impact for me and my family. FFH has been over the years a literal gold mine. Thank you to Sanj and the many individuals who have taken the time over the years to post (bsilly and many more come to mind). Funny what life serves up when you decide to board the train...

I think there are times, outliers, when things a so nutty paying attention to the macro makes some sense (very rare). I also think trying to get too cute with the macro and trying to predict too much is nearly impossible. A key learning for me since the crash is to get back to simple value investing (which Sanj outlined earlier with his 4 points) and too stop trying to predict things too much (so I do not read D Rosenberg or J Hussman as much these days). As the market rises higher and positions become fully valued (and sold) it becomes more difficult to find value and cash (as a percent of the portfolio) will rise; you don't need to predict the macro so much as manage your holdings appropriately. I know, easily said but hard to do...

As boardmembers have come to appreciate, FFH tends to be a very volatile stock (although not as much as when they were listed on NYSE) as they tend to zig when the market zags... Furtunately, they have enough disclosure (i.e. 60 page quarterly reports) for most investors to get a general feel for how their underlying business is performing from Q to Q. My preferred investment approach with FFH (and similar to a few other investors on this board I think) is take advantage of the volatility and think about buying when it trades at 0.9 x BV and when it is sitting on significant unrealized gains on investments (resulting in a nice pop in BV when it then reports Q results). Currently, shares are trading at around BV and they are likely sitting on losses in their investment portfolio (meaning mark to market BV is likely lower) given strength of equity markets in Q1. I would like to see the FFH stock price lower (0.9xBV) and stock markets correcting 10 to 15% before getting too excited about getting back in.

biaggio, I am hopeful that you are correct regarding reserving at FFH (overly conservative). However, if this was the case (overly conservative) I would expect this to also have been a past practice and I do not see large reserve releases (like other conservative insurers/reinsurers such as WRB, PRE, RNR etc). Or perhaps FFH is more conservative today than they were in past years? When I see the range in CR's being reported by different companies it does make me wonder who is swimming naked; I have a hard time believing it is FFH given their reported numbers. Interesting times!

Results look to be just about in line with what we discussed in January http://cornerofberkshireandfairfax.ca/forum/index.php?topic=3612.0 And I do want to thank benhacker for taking the time back then to post some thoughts on the hedges; it helped me better understand what FFH was doing and the loss potential given the rise in interest rates and the rise in the equity markets. Looking at 2011 we can estimate: 1.) Underwriting income = -$300 mill 2.) Int / Div Income = +$800 Operating Income = +$500 3.) Net Gains on Invest = ???? 4.) Interest Exp = -$200 5.) Corporate Overhead = -$100 6.) Runoff = -$50 Pre Tax Income (before Investments) = +$150 As usual for FFH, the key is investments. With bond yields rising AND equity markets rising, in the very near term things do not look good. To be fair to FFH they do not buy investments with a one or two quater time horizon so we can't say they are wrong. We can only say that reported book value will decline further in Q1 should current market trends continue.

Agreed. I also enjoyed reading his article on Greece www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds-201010 Getting context certainly helps get a better understanding of what is going on in each country.

Here is the news clipping from WDC's earnings release yesterday: "BANGALORE, Jan 18 (Reuters) - World's No. 2 hard-drive maker Western Digital Corp (WDC.N) surprised investors with its quarterly results, indicating hard-drive sales remained robust, but warned excess inventory could hurt third-quarter sales. The company's shares, which have been among the worst performers on the S&P 500 index .SPX in 2010, rose 5 percent after the earnings beat expectations but pared most of the gains on the weak sales outlook. Western Digital expects third-quarter revenue of $2.20 billion to $2.25 billion compared with analysts' expectations of $2.27 billion. "Despite a reduction of about 2-3 million hard drives in the PC supply chain, there is still an inventory in excess of 6-8 million units in the PC manufacturers pipeline," Chief Operating Officer Timothy Leyden said in a conference call. The inventory warning indicates that Western Digital could see a return of the supply glut that hit its results in mid-2010.

I also have a number or insurance companies on my watch list (FFH, WRB, PRE, RE). Given the recent move in bond yields (especially muni yields) I expect BV to take a hit when they start to report Q4 results (some more than others). And with excess capital everywhere pricing trends still look ugly which mean underwriting results will suffer (especially if reserve releases slow even further). It appears we are in the midst of an ugly 'death by a thousand cuts' for many companies. When I add it all up I see too much risk to BV and valuations (what multiple Mr. Market is willing to pay) so I have chosen to stay on the sidelines. But I am watching things closely should we get one more big leg down...

I think many big pharma stocks qualify. My current favourite is Abbott Labs. Stock yields 3.6% (should announce a 10% increase soon taking yield to just under 4%). Top line should grow at low double digits the next few years. PE for 2011 should be under 12 (unfortuantely, as with most pharma, there is alot of noise - and one time items - in earnings). Stock was trading at current level in Dec 1998. Since then, their earnings, dividend and business have grown significantly. I hold ABT and view it almost like a bond holding (high dividend with great upside as business chugs along waiting for sentiment to change). I also hold a smaller amount of GILD as it is also cheap (PE = 10) and unloved. They do not pay a dividend; they are using pretty much all their earnings (significant) to re-purchase their stock which I like (versus paying huge premiums to buy competitors). I also hold a decent chunk of Teva. They a generic monster (with decent a branded business as well). While not as cheap as ABT or GILD their growth is higher (could be mid teen the next few years). Right now it appears Mr Market doesn't know how to value big pharma in aggregate and therefore is selling all companies in the sector (good or otherwise). I like the current risk/reward tradeoff.

Regarding Q4 earnings, here are some comments. Bottom line is I really am quite lost trying to understand all the hedges FFH has in place. Instead I am just going to assume mgmt knows what they are doing. There are going to be some very large puts and takes this quarter! ICO Sale 1.) $7.35-$3.70=$3.65x22.5 mill = $82 mill gain 2.) does this mean the remaining stake will no longer be captured under Investments at Equity (as FFH will own less than 20%). If so, and holding is valued at mark to market then they will also see a nice $7.74-$3.70=$4.04x22.5 mill = $91 million 'gain'. Equity Holdings: before market hedges gains est = $370 mill (note: I have updated my old excel sheet. In a previous thread it was mentioned that FFH has replaced their KFT, WFC & USB sales with derivatives so in the attached sheet I have not changed their overall position for these three securities. The Canadian holdings in the spreadsheet are quite old and I have not attempted to update quantities although I did add some prices). Municipal Bonds Yields: have spiked 1% in Q4 which will hurt valuations and BV. In Q3 interest rate moves were favourable and bond gains were $400 million. On the positive side, given that more than 1/2 of FFH municipal holdings are insured by BRK I wonder if their yields held up better??? Derivatives: does anyone have a perspective on all the derivative holdings and how they are going to net out? Abitibi: anyone have a perspective on what we might see?

Here is my very rough calculation of what FFH should earn going forward (annualized snapshot). Please correct me as you see fit. I am going to also throw out some stuff regarding Q4 to get the ball rolling in a second update. It looks to me that underwriting for the industry is only going to get worse in 2011. I am assuming FFH earns just under 8.5% on its investments of $22.5 bill (med term avg = 9%). My guess is FFH should be able to earn $50/year. With stock trading at about BV it looks to be a reasonable value. 1.) Underwriting income (YTD Q3 CR = 105) = -$200 mill 2.) Int / Div Income (Q4 $200x4) = +$800 Operating Income = +$600 3.) Net Gains on Invest (5% on $20 bill) = +$1,000 (incl change in realized gains/losses) 4.) Interest Exp (Q4 $50x4) = -$200 5.) Corporate Overhead = -$100 6.) Runoff = -$50 Pre Tax Income = 1250 6.) Inc Taxes (20%) = $250 Net Earnings = $1,000 = $50/share (about) Q3 BV = $401 BV Growth = $50 = 12.5% Note: tax rate is 31%; factor in tax exempt bonds and dividends results in actual rate closer to 20%

Great question. Sounds really simple. Simple answer is... lots. More realistic answer is it depends... probably the two biggest factors are what is your lifestyle (expenses) and how good are you at managing your investments (rate of return going forward). If you have reasonable expenses and above average financial savvy $1.5 million should do it. If you like expensive things and are a terrible investor then you likely do not want to quit your day job...

Very good summary of the bullish case. The comments at the end are also quite good. www.bankstocks.com/ArticleViewer.aspx?ArticleID=6224&ArticleTypeID=2