Viking

Jack, here are a couple of comments: "BTW, I asked a question a month or so ago about how the TARP gives money at 5% and banks loan at 5% and how this seemingly confused math gets us out of our economic slump, I got a few answers that were all wrong and no right answers which suggested to me that no one here actually understands banking." If you are asking, yes, I am not an expert on banking. That is one of the reasons I like this board... a chance to learn some things I didn't know. "I know WFC and Warren Buffett understand banking. I know from their actions that our government (FED and Treasury and even Congress) understands banking." Perhaps I am taking you out of context, but from the little that I think I know, is the Fed, Treasury and Congress not largely the reason we are in such a mess (i.e. took interest rates to 1%, removed the regulations, allowed the leverage, allowed the derivatives, turned a blind eye to the obvious excesses...)? You may want to read some of John Hussman's stuff... he is not such a fan of what these three groups have been doing recently. But he may not understand things so well either...

Here is my take. Please feel free to point out my errors or overly optimistic assumptions: 1.) Underwriting: CR = 98 = $50 million 2.) Interest & Dividends = 5% x $7.9 billion = $380 million 3.) Operating Income = $430 million 4.) Net Gains on Investments = 4% x 7.9 billion = $316 million 5.) Interest Expense = $33 million 6.) Other Expense = $20 million 7.) Pre-tax Income = $693 million 8.) Tax Rate = 33% = $229 million 9.) Net Income after Taxes = $464 million = $7.70/share = 17% growth in BV 10.) Shares Outstanding = 60,243,000 11.) Book Value per Share (Dec 31) = $45.37 12.) Share Price (Apr 27) = $38.00 To be even more safe, let's knock growth in BV down from 17% to 15%. Looking out 5 years, the market will finally appreciate the ORH business model and will give it a book value multiple of 1.2. In 5 years this gives us a stock price = $109.51. With the stock trading today at $38 (0.85 x book) this would provide a compound annual return of just under 24%. Not too shabby. I believe the downside risk (stuff I have missed) is about the same as the upside potential (being too conservative). Also, given the (small) size of the company, I will limit my position to a max of 15% of my total portfolio. Odyssey Re has the ability to pull $544.8 million in dividends in 2009 from Odyssey America (sub) if they so chose. I believe they plan to leave the cash with the sub and to utilize to grow their business as the markets harden in the future. Bottom line, this value is not built into the above analysis (i.e. they could pull this money up and buy back another 10 million shares to grow shareholder value). See p. 83 of ORH AR. Regarding estimates, I am looking for a 5 year average and I am trying to be reasonably conservative: 1.) Underwriting = 98%. My guess is the market begins to harden in 2010 or 2011. This should give ORH a 5 year average CR of 98. - Adverse Development: since 2001 ORH has had favourable = $868.4 million and unfavourable = $174.2 or net favourable development = $694.2 million. The issues regarding adverse development are really for accident years prior to 2001. Most importantly, since 2004 the cumulative development has been decreasing each year and was +$10.1 million in 2008. Bottom line, looks to me that the adverse development issues are largely behind us adn one could reasonably expect for positive development on a cumulative go forward basis. See p. 22 of ORH annual for more details. 2.) Interest & Dividends: From the Q4 conference call 'As a result of this portfolio restructuring, the yield on our overall portfolio at Dec 31, 2008, was projected to be 4.1% or 5% on a tax equivalent basis.' The yield in Q4 was only 2.75%! 3.) Net Gains on Investment: Since 1986, Hamblin Watsa Total Return on Avg Investments has been 9.8% (see p 142 of FFH Annual Report) and for the past 10 years I estimate it has been 9.1%. If we assume similar returns (to 9.1%) going forward and the current portfolio yield is 4.1% we could reasonably assume a Net Gain on Investments going forward of 5%. For this analysis I went with only 4%. Further, one could assume with with all the stock write downs in Q4 and the fact that most purchases have been made 50% (or more) off from recent market highs that the Total Return on Avg Investments should outperform over the next 5 years the performance of the past 10 years (i.e. a 10% total return is not a crazy number). Other notes: FFH Asia: ORH also owns 26% of FFH position in ICICI Lombard. It is carried on the books at $67 million. I think their share is worth perhaps twice that meaning BV is understated by perhaps $0.50 to $1.00. See p. 123 of ORH AR. Balance Sheet: ORH has low amount of debt ($489 million) and no maturities are due before 2013.

Bargainman, yes the 'margin calls resulted in much forced selling. On the other hand 'financial innovation' and leverage for years drove a lot of earnings that simply were not real. Bottom line is I think it is difficult to really understand much when you have an economy built on steroids. I like the comment from Microsoft about the economy needing to 're-set' at a lower spot from which we will stabilize things and start to grow (at a more nomalized rate).

I just finished reading their April 20 letter. They feel the lows have been hit and it is clear sailing ahead with stocks clearly positioned to outperform all other asset classes for the next 10 years. A very different perspective than Van Hoisington! Interesting...

For those history buffs, here is the link to the Fisher article referenced by Hoisington: http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

What is the least expected outcome with most people? Deflation. I like reads like Hoisington because nobody believes it will happen (including Prem!). Clearly, what is happening right nos is MOST SIMILAR to what happened in '29 and during Japan's '89 crisis. Why do we not expect a similar protracted (10+years) of pain? Why do we think the government has the power to change things? Didn't work in Japan! My dilemma is Buffett clearly is of the opinion that all this stuff being done by the Fed/Treasury/Gov't will be inflationary at some point... If I had to make a call today, I would vote for deflation (actually, I did! Thanks Grenville)!

Uruhu, I should point out that FFH gains over the years have covered up a number of smaller losses (although my long return is about 18%). Also, with FFH, I never went from zero to 90% on one purchase. I always started buying when the stock looked cheap and as it kept going lower I always bought more. And when it got insanely cheap (i.e. $100 a couple of years ago) I went pretty much all in. If FFH went under at the same time the stock price was cratering I would have been pretty much cleaned out. Also, during the short periods when I was 'all in' it was very difficult for me to keep things together mentally. High risk... high reward. Gambling? Stupid? I do not have the answers. Bottom line, I have learned that I do have a predisposition to do something that is quite dangerous (go overweight). I am trying to get better at getting a little more diversified but not too much (as I believe concentrated portfolios are the best way to go). And despite having a pretty good long term track record I still am not sure if it is skill or luck! I just try and keep reading and learning and getting a little better every year...

My weightings have varied from 90% to 0%. When the stock fell to $220 18 months ago and it was positioned so well with its CDS and long US treasury positions I backed up the truck and moved to 90%. I went to a similar weighting a couple of years ago when it fell to just over $100. I also reduced my position to 0% each time after purchase the stock went up significantly (as fears proved false or investment results smoked). I have never planned to go so heavy. And I got VERY lucky in that the bottoms were temporary and the stock made very significant moves upwards shortly thereafter. My net worth is now large enough that I do not want to take on the additional risk of concentrating on one company. Currently I have about 12% in FFH (of my investable assets) with my avg purchase being about CAN$285 (I was at 0% at the start of the year). On a go forward basis I doubt that FFH will trade as cheaply as it has in the past. I will be happy to buy when it falls below 0.8 x BV but will limit my exposure (perhaps 25%). I will also continue to lighten up as the stock appreciates... I like the company alot and feel it will perform quite well looking out 3 to 5 years. And the results will be lumpy. I will get more excited about FFH once the insurance market begins to harden...

"Fairfax regrets Abitibi, CanWest deals" "Prem Watsa says he underestimated the effect of the recession on newspapers" http://www.globeinvestor.com/servlet/story/RTGAM.20090415.wfairfax0415/GIStory/ Similar comments to those from Francis Chou and this helps me understand things better. It is one thing to buy great companies that are trading cheap and to be early with your purchases as over time you will likely still do very well. Buying troubled companies early carries very different risks when you are early and their business model continues to deteriorate. For those of you who were at the AGM, can we assume that both Abitibi and Canwest were largely written down in Q3 & Q4 or will their be further large write downs in Q1?

I am in the process of reading 'Investing the Templeton Way' and also like the book very much. The book provides many historical examples of that Templeton did at various times which I am especially enjoying. The book is also a simple read (i.e. likely targeted for novice value investors). My key take away is I wonder if Prem's style is not closer to Templeton than Buffett: - Prem invested heavily in the Indian stock market a couple of years ago - Prem also is buying international insurance operations (i.e. India) - Prem is very much an active investor (buy low and sell high) not buy and hold forever - Prem will take large short positions

Milton obviously is an incredible salesman... The real question is who continues to fund this train wreck? When they restructure who is it that will continue to buy the new bonds and/or stock? I thought about Westjet as an opportunistic investment....

Basically, we aqre getting two basic kinds of calls: 1.) things are likely going to get worse (Roubini & Taleb) 2.) things are likely going to bottom out in 2H 2008 and get better next year (Bernanke) Bottom line is, more than at any time in the past 50 years, economists (and pretty much everyone else) really doesn't have much of a clue as to what is going to happen in the next 12-24 months. Inflation or deflation? Are the gov't programs helping or hurting? Are the banks solvent or insolvent? U shaped recovery or L shaped depression? Should we care? My answer is absolutely! What does it mean for investing? My 'big' guess is we will see lots of wicked volatility. What this means for me is when the value stuff I really like gets dirt cheap I will buy (and perhaps a lot). And when it runs up 20-50% I will sell. Until I get better visability as to just what the future holds I will be content to hold lots of cash and simply pick my spots with my inverstments and play the volatility. This strategy has helped me largely miss the sell off last year and earlier this year (i.e. capital preservation) and actually generate decent returns.

Who at AIG is thinking long term right now? My guess is morale is bad and people are simply trying to keep things 'looking' good for as long as possible. Assuming AIG is playing for market share and not long term profitability, the question I have is how long would it be until we know if they have been underpricing in their P&C business? Second issue this raises is who would want to buy the AIG pieces if there was a decent chance underwriting discipline was not happening? The next 6 months will be interesting as we continue to learn who has been swimming naked!

Jackriver, do you not agree that many people have sold their businesses to Buffett over the years (Buffett, not BRK). They trusted and like the man. Yes, they are now part of the BRK umbrella but Buffett was the key. I have worked for terrible bosses and I have worked for great bosses. Makes a big difference. Buffett looks to be about as good as it gets. My point is simple... if BRK gets another great manager (or two) to step into Buffetts shoes things will be fine. If they get an average to poor leader performance over time will suffer. I just do not see it as being a slam dunk that when Buffett is gone the company continues on its merry way. Note, I also do not see it is a done deal the company underperforms... I think the risk of underperformance increases. To me this is pretty straight forward and logical. Regarding return, yes, 20% is not realistic (I used that number because that is close to the historical number)... 10%-12% is likely a much more realistic medium term number top use.

scorpioncapital, as I am sure you realized, I am trying to play devils advocate (somewhat). In the near term, yes, what Buffett built should continue to outperform the market averages. However, with Buffett gone it would not take much for a new leader (or two) to simply not meet (lofty) expectations and for things to start to unravel. I will be the first to admit that I do not have a great understanding of the inner workings of BRK. I just get the impression that Buffett is the man. PERIOD. He can handle the complexity (he has grown up with it... it is normal to him). I just can't wrap my head around how things carry on the same way without him. One would be silly not to expect some sort of underperformance from BRK after Buffett is gone.

Here is the question I would like asked at the BRK AGM: "When most anybody today hears about Berkshire Hathaway they immediately think about Warren Buffett and then relax. Warren, you talk about how people can call you up and make a deal in 30 minutes on the back of a napkin. I get how great you are. I have my punch card in front of me and, fortunately, I have a few punches left. Help me understand how Berkshire is going to stay great without you and why I should use up one of my punches on BKR today."

I actually thoroughly enjoyed the article. It made me laugh a couple of times. Yes, it was one sided. But then, the 3 hours Buffett spent on CNBC could hardly be called good investigative journalism (and by the way, I watched all three hours and was glued to my TV!). I recently purchased BRK.B shares representing (now) 12% of my investable net worth which says, I think, something about what I think about BRK's current share price, Buffet and the company's prospects over the medium term. Having said that, the Star article did touch on a couple of points that I do not have a good handle on: 1.) BRK after Buffett: I recently re-read Buffett's address to Notre Dame faculty in the early '90's (great, long article). Buffett repeatedly said private investors should sell to him because he would give his word to them and they would not have to worry about some other perosn or board changing the rules... etc etc. Unless BRK is able to replicate Buffett DNA to their senior team (when he is no longer around) I am not sure how things stay rosy. Imagine if Buffet had passed away last year (I do not mean to be morbid). Think for a second about what the short sellers could have done to BRK; it recently was donwgraded by Fitch with Buffet still behind the wheel. Berkshire after Buffett... if anyone has some insight (or is able to hekp me peel back the onion) I am all ears! 2.) Conglomorates: I apologize as this is tied to 1.). All these aging presidents love to work for Buffett. What do they do when he is no longer around? What do they do when their presidents walk away? Bottom line is I just wonder if Buffett is, simply put, a genious. And when he is gone what remains is a solid conglomerate that will slightly overperform and then over time slightly underperform Mr. Market. What is in place today to ensure that they will continue to perform at Buffett's long term track record of about 20% per year?

First time viewer. It will be interesting to see what legislation comes out of this in the years to come. It will also be very fun to watch Micheal Moorer take a run at this very juicy topic...

Earnings by financial companies were grossly overstated the past 7 or 8 years. The consumer WAY over consumed the past 5 years and many consumer stocks earnings are therefore overstated. Perhaps commodity stock earnings (i.e. big oil) also experienced peak earnings... I agree that it is hard to look at current S&P earnings (around $30) and understand what they mean. It is also hard to look at S&P earnings for the past 5 years and understand much as well. How low will the S&P go? No idea... could be much higher OR much lower. Eric, I think your point is bang on... we can look at specific companies and better understand THEIR earnings and THEIR stock price and therefore make an intelligent investment decision.

Back in 1999-2000 the optomism was surreal. I still remember reading the Globe &Mail in Starbucks in Toronto in 2000. They had a feature article on Nortel and a full page graph of the stock price which at the time was over $120 and I think it accounted for 1/3 of the TSX market cap. Fast forward to today. Sadly Nortel is going out of business. Lots of good lessons have been given by the market. Bottom line, value investors stand a much better chance of realizing a much better return over the next 8-10 years! From this point in time, I wonder what lessons will given by Mr. Market over the next 5 years or so...

Labrador, thanks for the link. The reporter appeared to be quite prepared and the questions were very good. I have follow Derek Foster and (as has been said previously) wish him well. I am surprised at the about face in his overall investment strategy and also the timing (Feb lows?). Bottom line, I know I would not want to have my every move out there for all to see (and be reported on). Every once in a while I change my mind or decide to do something a little different. Constant process of trying, learning and adapting. Tough enough for me to do on my own...

FFH = 20% BRK.B = 12% ORH = 6% GVC = 2% (Can small cap) Cashable GIC's = 60% In the last couple of days I sold: 1.) smallish positions in WFC, AXP & GE. I bought these a month ago as short term speculation (sorry value guys) and got lucky. 2.) small positions in BRK.UN & CFX.UN as FFH gives me exposure to same names or exposure to sector via other companies. Yes, I took a hit selling these two. Bottom line is I really like how things look with my current portfolio.

I have been reading his weekly newsletter each Sunday night for the past year or so. I find he can get repetitive at times (who has something interesting to say every week?). Bottom line is I really do enjoy his commentary as it is not mainstream, he educates and he explains his logic.

Al, I agree that I do not understand many of the Canadian investments at the prices that were paid... TS, CGS, ABH, IFP.A, SFK, BRK.UN, JAZ.UN, Mega Blocks etc. All are severely under water. Some have lots of debt... Some have pretty poor management... I am just trying to understand what the common theme is and how they are going to pay out over the medium term (i.e. 5 to 10 years). I am not trying to be an armchair quarterback... FFH has made many, many more great decisions over the past two years. Unfortunately, the above names have done quite a job on Northbridge performance the past 12 months.

Sharper, good question... Why do the interview and why now? I was surprised at how angry he said he was at AIG. Obama is reportedly looking into the bonus payments. In this environment, how does AIG keep its good people? I was also surprised he said he expects the economy to bottom this year and recovery to start next year. If things do not play out this way he has set himself up big time (look at how people are quoted from back in the 20's and how silly they sounded after the fact). It is interesting that he is not from Wall Street, leading one to conclude that perhaps he is less biased than most everyone else. Perhaps he is trying to build his credibility directly with the American people so he has the 'political capital' to play hardball with Wall Street interests as this crisis enters its next phase...