Viking

For those interested in souce documents, here is the link to the piece by Fisher "The Debt-Deflation Thoery of Great Depressions" that is referenced in the article. I have just started and it is relatively easy, short read (21 pages). fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

2008 = +17%; 2009 = +29% Lesson 1: importance of capital preservation Lesson 2: keep things simple (invest in what you know and what works) Lesson 3: concentration works Lesson 4: be very, very patient (given time, logical analysis will usually work out) Lesson 5: keep learning (history does not repeat exactly, but it does usually rhyme) Uccmal, I am in a similar situation as you; my investments are now large enough that I do not need to have a day job (but not large enough that I can officially say that I am retired). In the past, I have gone as high as 80% in FFH (when it fell to $70 years ago and a second time when it fell to $100 a couple of years back). I am doing my best to not be so concentrated as I no longer am comfortable with the risk/return. FFH juiced my returns in 2008; I backed the truck up in Q2 & Q3 when they were sitting on all the CDS and long US Treasury gains. My FFH gains covered over some smaller lossed from earlier in the year like SFK Pulp). In 2009, I loded up on ORH - 50% - this year. The big difference versus 2008 is I have had a number of smaller winners earlier this year. Moving forward I will continue to try and limit my best positions much more (perhaps to 25%)? Bottom line, the last three years have been great years... I look forward to the coming years. I am of the opinion that: 1.) we continue to be in a bear market rally 2.) the economy will get worse before it gets better 3.) deflation will emerge as the primary concern (over inflation) And this will keep me cautious.... I will need very fat pitches to get me to risk my capital.

No nub, thanks for clarifying... in my haste I obviously did not understand what I was reading! I will still give it a test drive for the first 12 issues as I can cancel whenever I want...

For those interested, the Economist is offering a Professional Discount Rate in Canada of CAN$15.00 for one year (12 issues and access to their on-line site). I have not subscribed before and decided to start a subscription. The get the special rate you need to go to www.economist.com/mail/ca and enter promo code 99C3 You also will automatically be signed up for their automatic renewal so will need to call in 12 months to stop service. If you are not able to access, please let me know and we can remove the post.

hy, I have been rewarded tremendously over the years with a very simple strategy of basically buying stuff that people hate (buying low) and then selling when it comes back in favour. Rarely have I held any position for more than a year and in some instances my holding period has been weeks (FFH a couple of times). Yes, March was the mother of all buying opportunites and I was fortunate enough to participate wth purchases of BRK, WFC, GE, AMEX & FFH. And yes I sold, with hindsight, too early. And thanks to ORH I have had one of my best years ever. (The icing on the cake has been the appreciation of the CAN$ (living in Canada); with it approaching $0.95 to US$ my cash now buys much more - compared to US investors - than a few short months ago when the rate dropped below $0.80.) And the past is now in the past. My thinking is now focussed on what to do moving forward. What is it that people hate today? Stocks are up 60%. Bonds yields are again approaching historic lows. Commodities have had a good run. Gold is up dramatically. About the only think people seem to hate today is the US$. Bottom line, I do not see any fat pitches (I mean really fat). Greed is again taking over. I believe the current downturn is not behind us. What if the Japan experience is in our future? What if our stock market averages are down 70% from their peak 20 years later? Buy and hold? I keep telling myself to be patient and simply wait for something I understand to go on sale.... it has worked for the last 10 years. I see no reason why it will not continue to work. (I also try and continue to learn from the past and tweak what I am doing...)

ERICOPOLY, first up, what do you think of the book? I have been thinking alot about forecasting (and forecasters). Bottom line, I think it is normally pretty unreliable. What does one do when various (reliable, respected) people are making very different calls? Things today (and the past 18 months) are about as murky as I can remember... I am in cash. Two organizations I greatly respect (FFH, BRK) are largely invested. Follow the money? I am content to wait for a fatter pitch (brought on by a broad based sell off). Time will tell if that forecast pays off...

I likely will be moving back next year, so there is my bias to bigin with... When you look at the 'metrics' real estate in Vancouver is clearly overpriced. Who knows were it goes from here. In the short term, the Olympics is clearly distorting things (construction, employment etc). I think what happens with commodities also will play a role (i.e China rocks, BC and Vancouver benefit big time). Last fall fear was in the air and the real estate market in Vancouver was a mess. My read is the worst is yet to come. There is a decent chance that after the Olympics (and unemployment skyrockets) and the US enters part two of their double dip recession, the economy & real estate market in BC get ugly again.

Berkshire increase in book value per share: 5 year = 7.34% 10 year = 6.9% 15 year = 15.98% (they has one hell of a run from 1994-1999) 6.9% is quite good given what the S&P has done. It is not anywhere near close to what Buffett produced in previous years. Oldye, Buffet is good but the law of large numbers are beginning to work against him. 10% growth in BV every year is a massive number for a company that size. Their size is also a strength. Wonderful company. I simply think that because of their much smaller size FFH has a better chance of outperforming BRK over the next 10 years.

We have had this discussion before and it went something like this: What do you prefer: blondes or brunettes? My simple answer is it depends on what your risk/return profile is: - FFH: smaller, more volatile, much less diversified, much higher risk, larger potential return over next 10 years (12 to 15% growth per year in BV is possible) - BRK: larger, less volatile, much more diversified, much lower risk, smaller potential return over next 10 years (8 to 10% growth per year in BV is possible) Assumption: my guess is equity markets will grow 4 to 6% per year over the next 10 years. And I am trying to be conservative but realistic with all my growth numbers.

I just finished re-reading the Van Hoisington Q2 report. I believe their crystal ball is closer to what we will see in the near term - deflation will re-emerge as the dominant concern for the next few years. [ftp=ftp://www.hoisingtonmgt.com/pdf/HIM2009Q2NP.pdf]www.hoisingtonmgt.com/pdf/HIM2009Q2NP.pdf[/ftp]

DR put our a 22 page report today that I really enjoyed reading... well thought out. To get the full report you need to sign up (no cost): [ftp=ftp://www.gluskinsheff.com/]www.gluskinsheff.com/[/ftp] His conclusion: "HOW TO PROTECT THE PORTFOLIO IN A FALLING USD ENVIRONMENT" Remember, this is a premise. We are just conjecturizing. But it is interesting that the dollar is the only financial metric that is at the same level today as it was two years ago, and we are of the view that the risks are high that the greenback will be on a significant downward path in the coming year. In addition, it does look as though Asia’s secular growth dynamics are intact, and that is also critical to the constructive view on commodities and the Canadian dollar. With that in mind, investors should be thinking of how to hedge or protect the portfolio against this not-so-remote possibility, namely: 1. Commodities 2. Gold 3. Canadian dollar 4. Resource sectors of the stock market 5. U.S. sectors that have high foreign exposure (materials, tech, staples, health care) 6. Canadian sectors that benefit from lower import costs (consumer stocks) but lose export competitiveness (manufacturers) 7. Canadian bonds (a higher Canadian dollar will keep inflation low, hence reinforcing positive fixed-income returns)

I have a hard time understanding where inflation will come from when you have so much plant capacity not utilized and unemployment so high and rising. To me, the risk of inflation is some unexpected exogenous shock like Japan selling Treasuries or China buying much less (possible but low probability). Living in Canada, most of my assets are in Can$ and this is perhaps my 'hedge'. I have invested in gold in the past (Sprott Precious Metals Fund) and did quite well with it. The problem I have with gold today is it does not look to me to be dirt cheap. I like to buy stuff that people hate (that is why it is dirt cheap). That is not to say that gold will not move much higher. If I bought gold today it would be because I want 'store of value' because I suspect there is a decent probability (perhaps as high as 5% that we are approaching the abyss). I cannot buy gold today at current prices because of my understanding of supply and demand for the metal. Gold for me, at current prices, goes in the too hard pile (not that I don't think about it from time to time). Does that make me a closet gold bug?

Right now I am back to 100% cash (CAN$, being a Canadain investor). I really have a hard time hedging. My returns have been good enough over the years (and again this year) that I can be patient. Will we have deflation or inflation in our near future? My guess is deflation. What will the government do (direction of public policy)? They absolutely want inflation... makes me wonder if deflation will not be the result in the end. I try to keep things as simple as possible. What is dirt cheap right now (at 10,000 feet)? - stocks? No - government bonds? No - corporate bonds? No - commodities (incl gold)? No - real estate (in Canada)? No (still in a bubble) None of these asset classes are selling today at a 50% discount (my evaluation anyway). I also believe that there is a very good chance that what we are seeing right now is a bear market rally. People remain complacent and greedy (although they now are scared out of their wits due to what they experienced in the stock market and economy at the end of last year). Many people are now exceptionally skittish... another fall in the markets could get ugly as fear permeates though the system and everyone heads for the exit at once. It would not surprise me to see things get ugly enough that many small investors walk away from stocks for many, many years... VERY NORMAL AT THE END OF A BEAR MARKET. Right now all I hear a lot of bullish talk on this board. Greed is rampant. Yes people are concerned about stuff (inflation/deflation/earnings etc) but I get the sense that many want to be where the action is, with the crowd, and be largely invested (yes things have gone up a lot fut they are still 'cheap' becuase.... (fill it in with your own reason). I don't see any $20 bills lying on the street right now. Perhaps I have been spoiled the last 24 months when blood was flowing fast and furiously and many things got crazy cheap. Right now, I am content to sit in cash and wait. If I am wrong, I finish the year with a 29% return (largely due to ORH; thank you AGAIN FFH). If I am right, and things get ugly, let the good times roll (once again)...

I think this article sums the current situation up pretty well. Once FFH completed the ORH transaction they will still be flush with cash and surplus. To grow their reinsurance business what they need is for a large hurricane to hit or for financial markets to sell off... http://seekingalpha.com/article/160355-cloudy-forecast-for-global-reinsurers?source=yahoo Should financial markets continue higher FFH will be in a position to harvest significant equity gains. Should BV continue to grow at 15% per year I expect the next big move we will see from FFH in the coming years are significant repurchase of FFH shares. Amazing turnaround the past two years!

I am learning to be highly suspicious of academics... Efficient Market Theory comes to mind. Personally, if I had simply bought and held FFH in 2002 when I first learned about the company I would have done OK but not nearly as well as I have done since then by buying and selling once or twice during the year. ORH is another great example (buy at 0.8xBV in April/May and sell at 1.15xBV in Sept). Hamblin Watsa are also macro market timers. Their time horizon looks to be 3 to 5 years. Look at the short term concentrated bets they have made over the years (long US Treasuries, CDS, muni bonds and now equities). That is not buy and hold investing. Personally, I have no appetite to follow Buffett's long term buy and hold strategy. I much prefer something more along the lines of Watsa/Templeton... buy stuff people hate (that is in your circle of competence, selling for $0.50 but worth $1.00) and when it comes back into favour (trading closer to $1.00) sell... repeat as often as possible. I love the line in the Rothschild book on bear markets..."there is always a bear market somewhere".

I also decided today to sell all my ORH shares. The price was $62.50 and being Canadian was not liking continued large exposure to the US$. I also had 50% of my net worth in ORH (before Q2 results) and will sleep better tonight. Fortunately all shares held were in non taxable accounts (RRSP, RESP & TFSA) so I do not have any tax consequences. Having sold my FFH shares a few weeks ago, I am now back to 100% cash. Just like others have metioned, time to find another fat pitch... Which probably means wait for the markets to sell off and put it back into FFH at 0.9xBV...

FFH has invested an enormous amount of energy to set the table to take ORH private. If the independent committee recommends a higher offer and FFH says no they lose their ability to take back ORH. What happens? As has been posted, BV for ORH today is about $52 + $3 = $55. Add in ICICI Lombard and it is closer to $56 or even $57. Valuations for insurance companies will likely increase the end of October as we get through slow (so far) hurricane season. A hard market in insurance is coming at some point in the next year and ORH is ideally positioned to materially grow their business. Early next year there is a very good chance that BV of ORH will be over $60 and re-insurers/insurers will trade at a multiple above book (perhaps 1.1x). Bottom line, early next year ORH will likely trade higher than $60. If FFH walks today how do they come back to the table to do a deal in the future? And what do they do with all this $ they have raised? They will look silly if they do not get this thing done. Having said all this I have no idea if their takeout price will be higher. I will be very surprised if the indepedent board approves of the $60 offer. Also relevant... NB was taken out in Canada. ORH is being taken out in the US. I think litigation risk in US also supports higher takout price than $60...

Reminds me of Jim Rogers line about how to make money in investing (something like this): "when you see a $20 bill lying on the ground you pick it up". This also has a very large element of luck... timing is pretty much impossible to get right even some of the time. Ladies & gents, lady luck was also smiling our way on this one...

If FFH was to say that they want to purchase ORH at a discount due to the fact that their 20% ROE was due primarily to HWIC then I would understand the low valuation. They are not saying this. Based on the release they are saying that they are paying a fair price at $60 for ORH. Period. I am not a securities lawyer. Perhaps parents are allowed to take out subs with low ball offers (and justify it in many different ways). I just hope that they put this in the prospectus when they spun off ORH in the IPO.

Also, re-insureres typically trade at a lower valuation (price to book) during hurricane season than after. We are also in a soft market and this is also depressing valuations... As mentioned, ICICI Lombard needs to be factored in as well as quarter to date gains. What about all the surplus capital they are sitting on? How many of their peers have the balance sheet strength they currently have and are poised to grow like stink during the impending hard market? Perhaps ORH should use up some of its surplus and give existing shareholders a one time distribution? What would you pay for a company that has grown BV by 20% per year since 2001 and has a balance sheet and surplus position that is significantly better than any of its peers? If FFH put is up for sale what multiple to BV do you think it would fetch? Add it all together and I believe $60 is a steal.

I am looking forward to the conversation I will be having with my new financial advisor who felt (strongly) that I was too overweight in ORH shares. It will be interesting to see what happens to FFH and ORH shares on Monday. I am surprised a little at the price that FFH has offered... $60 is a steal; if ORH was a stand alone company and put itself up to be aquired it would fetch a much higher multiple. I wonder how the market (and the few large institutional holders) will respond. It would not surprise me to see FFH offer a slightly higher amount (although I do not expect it).

FFWatcher, I hold ORH because I think they are a good value and offer terrific upside: 1.) there is a good chance book value will grow better than 20% this year and 15% in coming years 2.) hard market in insurance will likely come in next 24 months 3.) should FFH continue to grow cash at hold co buying 30% of ORH they do not own becomes more likely (if ORH continues to trade around 0.9BV). I would not own ORH to wait for FFH takeout.

Pushing out the 2012 debt is also a smart thing to do if they are planning to buy back ORH...

T-bone, nice post. I have a question regarding the following comment: "2) I think FFH has a higher combined ratio than some competitors right now because of their expense ratio not their loss ratio. I believe that they are writing good business, they just have an organization that is sized to write more business. I think this is an asset and that when the market hardens, we will benefit both from lower loss ratios and lower expense ratios (because the expenses will be spread over more business) at the same time." Regarding underwriting I simply would like to understand why it appears their numbers at NB & C&F are higher than one would expect given Prem's continuing statements regarding underwriting discipline. I get that written premiums are falling (this is similar to other companies). I still do not know why their combined ratio at these two subs is higher than their peer group. Possible reasons: 1.) peer companies are downsizing their cost structure aggressively keeping their expense ratio lower 2.) peer companies are releasing reserves from prior years to keep reported loss ratio lower 3.) NB & C&F are average underwriters As with much in life we will only find out the answer with the passage of time. It would be nice if Prem would provide a little more clarity on this question in a future conference call.

Sharper, I believe Mr. Market IS now valuing FFH and ORH at as higher multiple when you compare to their peer group (than it was in past years); and, yes, FFH is still trading below the top group (such as Markel). I also see both FFH and ORH getting more press in analyst reports regarding investment gains/losses (not just operating income). The key issue right now with both FFH and ORH valuations is: 1.) insurnace/reinsurance stocks are in a multi-year soft market 2.) credit market has been unfreezing 3.) investment gains/losses in Q2 have markedly improved for most insurers 4.) hurricane season has been a non event (so far) A number of insurers were on the ropes in March. The possible catalysts for a hard market (no access to capital, wosening of financial markets, catastrophes) have not happened. My guess is FFH and ORH will continue to come back into favour over time and move up the insurance food chain and command a higher multiple. One piece (not to beat a dead horse) that I do not understand is why the CR is above 100 at NB and C&F. I am having a hard time understanding that it is simply becasue they are holding on to their good people in anticipation of the hard market. Many other well run insurers have a CR well under 100 and their business is shrinking and they are unlikely to be firing people they need when the hard market comes. My amateur guess is the various companies reserve quite differently. FFH had little in the way of prior year reserve releases to assist CR this quarter. Other companies continue to post solid CR numbers and many continue to have large reserve releases. Perhaps the answer is simply that other companies are dipping in to prior year reserves aggressively to hold up their CR and maintain their operating income numbers (given investment income is falling quite dramatically due to extremely low bond yields). Listening to the Q&A from the WR Berkley conference calls the past two quarters was interesting as old man WR has the perception that more than a few insurance companies are swimming naked (under-reserving) and once the tide goes out (an event happens or enough time goes by) the hard market will be here...