twacowfca

There's gotta be a pony in there somewhere! :)

Well put as a turn of phrase! :)

Interestingly, a study published recently showed that companies whose CEOs received bonuses greatly underperformed companies whose CEOs did not in the following years. Another example of the "cursed by rewards" phenomenon. Sorry, no citation available. :)

In what way is underwriting more important than the way capital is managed and how do you get 1.2-1.5? My 2 cents: there are a few exceptions eg BRK & FFH, but excellent underwriting earnings that are consistently good are thought to be more reliable and thus higher quality than high investment earnings that may be the result of one off situations and may not be as reproducible going forward.

Here's a rhetorical question. If WEB was willing to bid book value last summer for one of the less desirable Bermuda Re companies (IPC), what's wrong with buying the best Bermuda Re co at .9 • BV or an above average Bermuda Re co at .7 • BV? Considering the quality of these businesses, shouldn't they be valued at a substantial premium to BV, compared to IPC? Is not their current pricing compared to other companies more reflective of Mr. Market's fickleness, than their IV? This is not to say that they couldn't be bought at an even greater discount in the future, given bearish sentiment or hurricaneophobia. Comments?

Your take on Aspen is accurate. They are an above average reinsurer. Their big plusses are: Bermuda domicile = no Corp taxes on the majority of their business that is offshore. Relatively low hurricane and earthquake exposure, compared to the most exposed Bermuda Re cos. A huge balance sheet bargain: Current BV ~ $34+/sh Price $24/sh.

"Discounting premiums" can be in the eye of the beholder. Markel, Berkley and others not for attribution say or strongly hint they are doing this. AIG says an impartial investigation concludes they are not. Lack of pricing discipline might be a more accurate term. In any case, what they are doing is good for cat reinsurers because they appear to be paying a nice premium for laying off some of their cat risk.

The Carnegie bio published not long ago describes how the Carnegie family were scrambling to rise out of poverty in Pittsburg when Andrew was a young teenager. The panic and recession hit, and money and employment for monetary gain mostly disappeared in their social strata. However, that didn't stop them and the other energetic people around them from working for bartered goods and services. They dipped into their meager personal possessions and found things of value they could use for exchange. The Carnegies and most of their neighbors made out surprisingly well. There is no account of mortgages being called; so whatever financing arrangements were in place evidently were, I guess, less demanding if they existed, possibly like rent to own agreements for sub sub prime credit is today. Food prices dropped quickly to dirt cheap levels, purchased with bartered goods or labor, and then the economy bottomed out and made a quick recovery.

Their returns have been less volatile than most P&C cos. They farm out the management of their portfolio to Gen Re. To the best of my memory they didn't lose money on the investing side during the financial crisis and like Lancashire produced steady although modest investment returns.

Tech cos typically hoard any cash they accumulate. If an activist investor covets them, an easy defense is to spend their cash to buy R&D or to buy a related tech co. Tech cos love to keep cash to provide a cushion for when they may lose their edge.

I would buy HCC in a heartbeat if we had a more diversified portfolio. There's no better pure P&C insurance company in North America IMO. ( except a couple of you know who's that shine investing their float ). :)

Bought a small amount of Lancashire last week on the dip. Have ton of cash now. Midway through the hurricane season will probably load up if it looks like a low loss year. Currently very happy to have the cash to take advantage of unusual opportunities with the recent volatility. Cash position is up nicely as we closed out our puts for a nice gain, although we still have a sizeable SPY option arbitrage position open that hopefully will produce a profit at or just before the June options expire. :)

The 1837- 1844 recession was almost certainly prolonged because it was triggered by the closing of the Second Bank Of The United States, the equivalent back then of today's Fed. After that bad depression, the economy bounced back relatively quickly after most of the banking panics during the remainder of the 19th century. The reason for that resilience is probably Keynes view that depressions typically end when people run out of cash at the subsistence level and stop saving. If you gotta eat, people will then pull money or gold or silver out of the mattress and put this back into circulation. Or they will borrow or barter or steal or whatever it takes. Then the multiplier kicks in if there is still a banking system left, and the economy takes off again. Andrew Carnegie's biography describes a good example of how this process of sharp price deflation and recovery often moved rapidly when most of the economy wasn't very dependent on a banking system. However, doing away with the Fed now in our credit supported economy certainly would cause a depression that would "curl your hair".

A good list, especially the two in the middle, but there are excellent Bermuda reinsurers that are just as balance sheet cheap as CNA and have great long term records. Aspen is a good choice if hurricanes scare you. They don't have much exposure to them. Montpelier Re is so cheap they could take a hit from a hundred year storm and still would be selling below BV at their current price if you believe their new and improved models.

RIG may have great liability if the sworn testimony of an eye witness crewman is believed. Apparently, the RIG supervisor spoke to a group of key people about a plan he and the head manager for BP had agreed on to speed things up by withdrawing the drilling mud prematurely, saying they were in agreement to do this. At that point the BP head guy spoke up and said he hadn't approved that. After an awkward pause, the RIG boss continued telling them about the plan of action. After a minute or so, the BP representative spoke up again saying he didn't agree. At that that point, the meeting turned to ice and the talking stopped. Then, the RIG boss dismissed the general meeting and sent everyone away. He then went into a long private meetin with the BP rep. Afterwards, the general meeting resumed and both the BP rep and the RIG boss were then in agreement on the risky course of action that resulted in the blowout.

Sorry that my remarks appeared to be judgemental. All I know is based on what I pulled up in a quick check of a site that aggregated the reported changes in the holdings. Of their current holdings, do you have an opinion about any that are trading at a large discount to IV? The comments on the website are interesting. Much appreciate your bringing this to our attention. They show a good grasp of value and insights about how the market prices companies. :)

Hugh, I don't think Warren would do such a complicated analysis because that would lead to a false sense of precision, but he would give much weight to the worst things that could happen, referencing the historical record going back at least a century. Here's what he might find: Expropriation as with Russian Imperial bonds and enterprises. If that should happen he probably wouldn't have to fulfill the contract and we would have worse things to worry about than how BRK was doing. Nuclear war? Forget BRK. Where's food and shelter? Hyperinflation as in the Weimar Republic. No problem. Simply scoop up a wheelbarrow full of worthless dollars and dump them at the counterparty's door to pay off the contract. The Great Depression in the US. If he had sold a 20 year put at the peak of the market in 1929, the market would have been back to about the same level 20 years later. Fifteen year puts might have been a little under water two or three times, but significantly so maybe only once. These scenarios are less likely going forward because the puts were sold before the recent market peak, and this gives an extra margin of safety. Japan's two decade bear market. This one could bite a little more, but it may not be as relevant because the Japanese market was extremely inflated in 1989, more so than the US in 1929 or 2007. Even so, his earnings on the float likely would have made up the difference. All in all, Warren might conclude that it's about a .98 probability that his combined ratio on the deal would be zero, and he would get to compound the earnings from investing the premium forever. One percent of the time his cost of float might be less than 5% and 1% of the time his cost of float might be between 5% and 10% per annum. There would be overconfidence in this analysis, but almost all of the very bad unknowns or "unknown unknowns" that might occur would be in situations so bad that what happened to BRK or other financial assets would be irrelevant. This is not meant to be a definitive answer about how Warren evaluated the odds before writing the puts. It is merely meant to be illustrative of the way he may have approached his decision.

Surprisingly, I agree. :-\ There are a few gems. I like the one when he says that all returns are made in bull markets. (most people don't live in Premville). His point is that people should find a bull market somewhere else when every thing is rolling over on them. He mentioned Australia's still booming from 07 - 09 with the continued high demand for ore as most other markets worldwide were turning down.

The public filings of Praetorian capital explain a lot about how the returns were made. From 05 through 08, there were repeated purchases of a handful of microcap stocks. There was only one sale, for about 5 cents on the dollar of a stock of a company that may have failed. Praetorian may have unintentionally supported the price of these stocks to some degree with their purchases. This would not necessarily be problematic if the IV of these companies grew substantially during this period. In the last few months of 08 they stopped purchasing shares in these companies, for what reason I know not. Around this time, the prices of those shares tanked, losing about 80% of their value. Praetorian then liquidated their international fund that owned much the same handful of small stocks as their domestic fund by distributing those shares to those investors. In early 2009, Praetorian resumed purchasing shares in some of these companies at prices much lower than what they had paid in earlier years. For example, they had built up a very large position in Bingo.com as its main insider, paying an average of about $ .30 per share in the period before late 08. In Jan 09 they paid $ .07 per share for that stock. Then they paid increasing amounts for the same stock as they continued buying it through '09 & '10. I don't know if the availability of shares of those companies at a low price was enhanced by forced sales by investors in their international fund that may have unexpectedly had the shares of stocks held by that fund put back to them on the last day of 2008 in the fund's liquidation. Comments? Does anyone know how much the IV of their holdings may have grown in recent years?

Good advice. Interestingly, according to Jim Chanos, aka The Sith Lord, one way to tell if a heavily shorted stock, like SHLD several months ago, may be about to break upwards, is when the premium short sellers are paying to borrow the stock evaporates. This often means that the shorts are unwinding their trade.

Excellent points. Most options probably do expire worthless, but occasionally you can lose your shirt if you write a put; or you may hit a grand slam home run if you buy a put or call. Volatility is generally much more extreme on the downside than the upside. However the long term trend in equity markets is generally up. Thus, buying a long term put may be a difficult way to make money, compared to buying a short term put that may result in an occasional grand slam home run, especially when the implied volatility (a measure of how cheap or expensive an option is) on the short term put is low. A contango with the long term put being more expensive compared to the short term put is the usual situation. However, the contango may mostly disappear in volatile, bearish markets and sometimes briefly even become a backwardation with near dated puts becoming relatively pricey compared to the next month out. Buying puts a few days ago when the implied volatility was very high, especially for short dated puts, could pay off well in a crash, but on average buying puts when the volatility is high is a bad bet, considering that crashes are rare events, even when markets turn down. Eric's second point is excellent advice, Buying a deep in the money option is generally a much better alternative to using margin. The potential loss on the option is definite, while using margin can wipe you out. And the cost of the time value decay of the option may sometimes be no more than the interest forgone on the money tied up in the trade. :)

Agreed. Tuesday AM there was a huge mispricing in the June $120 SPY strike puts vs the July $120 strike puts. At one point the June puts apparently were priced higher than the July puts. By the time we shorted the June puts and bought the same number of July puts there was a small difference amounting to about 1% of the price of either put. The implied vol on the June put was about 45, but the implied vol on the July put was about 26. This trade could lose money, but the risk/reward profile is asymetric-- much more upside than downside.

Um.. what 'classic buy and hold value investors'? usually the classic buy and hold variety are the growth investors and the Bogleheads. The classic value investors sell the stock when it hits intrinsic value! Buy when it's at 50% of IV, sell when it's at 90%. That's the 'classic' Graham Value investor no? Buffett's whole 'buy to hold' bit only came after he was influenced by Fischer and Munger, and after he had way too much money to be trading in and out of stocks all the time. I guess I'm splitting hairs, but I agree with the rest of your statement. Good point!

Consider that it wasn't too long ago where for every put you sold at-the-money in SHLD you collected enough premium to purchase two calls at-the-money. This gave you 100% upside while only taking risk of 50% downside. Moral of the story: never dismiss an asset class. I recall that SHLD opportunity, and regret not entering it. I came very close to doing that transaction but decide to just nibble on the common instead. :-\ I passed as well, but with no regrets. Well, maybe just a little. :). It was nearly identical to the Fairfax trade that we made a bundle on a few years ago: a short attack, but dedicated long term value investors holding most of the good cards. Oh excuse me, most of the stock. The perfect set up for a short squeeze. What disuaded me was the value trap of the underlying business. This was very different than the clear sailing Fairfax was experiencing with fair weather likely ahead as the hurricane season was shaping up to be a zero loss year. Lets be honest with ourselves. We, the active posters on the board are indeed mostly traders with a value perspective rather than classic buy and hold value investors. :)