StubbleJumper

If only it were $10b here and $20b there.... So far, it's been more like $1b here $500m there. I guess we'll soon see whether he has stepped on the gas pedal. SJ

StubbleJumper & alwaysinvert, How do you feel and think about the whole thing today Monday? - In a time context, your posts was just after the Berkshire 10-Q was released. Now we have had ongoing discussion during the weekend and analysis of the 10-Q, and it has come up that about ~USD 15B has been allocated to financials during 2018Q3 [- of the ~USD 15 B ~USD 6 B allocated to BAC -], on top of the share buyback of ~USD 1 B in the quarter. Furthermore considerations/speculations [ time will tell ] that more capital has been allocated to perhaps BK, USB & GS, perhaps even new positions in financials. Personally, I was a bit disappointed just after the release of the 10-Q, too. After a couple of nights sleep on it, I have a good feeling about this here Monday morning. The upward trend in liquidity surplus has been turned, and Berkshire is still the Rock of Gibraltar. All in all, not that bad, because it's actually able to generate good earnings and cash flow as it is. John, Since the beginning, I have been skeptical of the Apple position because it struck me as outside of WEBs circle of competence and it has always struck me as a desperate move to deploy a large amount of cash. The catalyst for that move has never quite been obvious to me -- what has Apple done in the past 12 or 18 months that suddenly merited such a large chunk of shareholders' capital? The price didn't plunge rapidly to make it a 50 cent dollar. Nope it was bought on fundamentals and operating results. But, after racking up $110B± of cash it looks like brk is grasping for reasons to not initiate a healthy sized dividend or to not buy back a large slug of shares. Turning to the purchase of large US financial companies (banks), nearly everybody on this board took a high conviction position about 5 or 6 years ago and we have made out like bandits. The banks are still a buy, IMO, but are not as cheap as when we were all pounding on the table about BAC or JPM back in '11 or '12. So why is brk suddenly taking a high(er) conviction position in the banks right at this moment? A what point during the past five or so years were the US banks not an obvious purchase? To be blunt, it was value in plain sight. How did brk accumulate $110B± of cash when the banks have been an obvious outlet to deploy cash for the past 20 or so quarters? The actions of the past year or so have struck me as a desperate effort to deploy cash and deny a basic reality. That reality is that cash from ops is basically $40b per year. Take off something for maintenance capex, new plant and equipment, and opportunistic acquisitions and you're looking at reasonably reliable cash surplus of about $20b per year. The opportunities to deploy that much capital on an ongoing basis are not available in sufficient quality and high enough expected return to continue retaining 100 percent of earnings. SJ I'm sorry for the dense quotation above - Here I'm going back to this particular post by StubbleJumper from about two months ago, which was a direct reply to me, which I somehow managed to miss to thank you for StubbleJumper. So, thank you StubbleJumper, & please accept my apology for a very late reply here. - - - o 0 o - - - Here, this is particularly for me about Berkshire's position in Apple. Yes, it's in a way "controversial" to me, too. I've been thinking a lot about it lately, and have also felt forced to do some work on the company to get a better understanding, simply because of the size of the position for Berkshire. -And yes, then comes in the recent events with Apple... I'm in my early innings with Apple, still, but I like it. What has happened while Mr. Buffett has built the position - now to the largest one - is so far to me like a page intentionally left blank. So I have tried to do something about that, by just looking at some data, in a structured way, yet without getting into some real tinkering with data. So the file contains right now just a pile of data, but on the tab "Interim overall assessment" I have structured them to give a visual overview for the first three quarters of 2018. [Data for building the position for 2016 & 2017 I just consider history - but important data for understanding Berkshire's cost of the AAPL position]. Just by looking at the structured data for the three quarters, I feel quite confident, that Mr. Buffett hasen't been buying at wrong prices in 2018Q4, because he hasen't bought much in 2018Q3 on its way up. At least that feels comforting. [Personally, I'm totally indifferent towards the wild gyrations in the stock lately - but the cost of the position matters to me long term]. Some time ago I posted here in this topic some calculations of what Mr. Buffett max. could pour into AAPL, based on EOP 2018Q3 market prices [uSD ~50 B], which I ref. above feel confident hasen't taken place in 2018Q4. - - - o 0 o - - - The liquidity of the AAPL stock is much better than BRK.A/BRK.B - So how do you think Mr. Buffett has instructed the broker to buy AAPL during the first three quarters of 2018? - Let me hear you, and I'll start tinkering the data. - - - o 0 o - - - File attached. John, Thanks for the note. I tend to be very cynical about management teams and suspicious about the alignment of their interest with that of smaller shareholders. I expect that when the numbers come out we will see more of the same from BRK. The Apple position will be larger, the large slug of financial companies will almost certainly be a larger slug, and the BRK buybacks will be trivial. IMO, this is a crying shame. With BRK<$200 these days, it should be a no-brainer to buy back shares to increase SV for continuing shareholders. IMO, it's a case study of a misalignment of priorities. SJ

I don't doubt it one bit.

No major surprise here, but this morning FFH declared its typical US$10/share dividend. I had been holding out faint hope that they might suspend it and instead spend the quarter-billion on buybacks, but I understand their reticence to take that course of action. https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Declares-Annual-Dividend/default.aspx SJ

I like Atlantic Power prefs in general. Management has simplified the story by telegraphing very clearly the debt reduction schedule and giving an idea of the EBITDA reduction schedule. The revenue is largely guaranteed under contract, the debt is locked in (subject to covenants), so all that's left is operational execution. In 4 or 5 years, this thing will be pretty much entirely de-leveraged and about all that will be left will be the few prefs that are not bought back in the interim. It's nice to have one that doesn't get tossed on the "too hard" pile. SJ

Lots of good companies have gotten wrecked. The Canadian banks are trading at relatively low multiples and their divvies are approaching 5%. Even BRK has been administered a haircut. At this point, should we begin to consider FFH to be a dividend stock? ;D The good news is that I have no doubt that FFH will be buying back shares, hand over fist, if they can scrape together a bit of cash. SJ

I was wondering if someone could help me understand something I noticed with FFH's goal to hit a 7% investment return. The average investment portfolio allocation (2000-2017) with respect to cash & short term investments/bonds/stock is the following: 28%/52%/18% (2% in real estate and preferred shares). The 2017 allocation is 49%/26%/23% (2% in real estate and preferred shares). Their 10 year stock return was 4.2% as per their annual report. Assuming a 1.5% return on cash and 2.8% return on bonds. The total investment return is in the order of 2.4% currently. This is significantly far from FFH's goal of 7%. So I did a little digging into their 2017 annual report and came across pg 174 which describes their investment portfolio returns since 1986. Taking their total return on average investment, I calculated their investment return based on the business cycles. What I got was this: Time interval Geometric Return Since inception 8.02% Last 5 years 1.79% Last 10 years 5.12% Last 15 years 6.50% Business Cycle 1986-1991 10.8% 1991-2001 8.9% 2001-2009 10.4% 2009-2017? 3.9% So historically, their returns were above their target 7%. With the last cycle performing poorly (due to the hedging activity). There was a change in accounting practice whereby at least on the table, 2007 to present is IFRS and before that CGAAP. But included in the table are columns that include "Change in unrealized gains/losses on investments in associates". This is the difference between the Fair value less carrying value of T+1 and FV less carrying value of T0. I notice that over time, there has been a progressive increase in unrealized value over time which is contributing to the total return. I am a bit conflicted with respect to whether this is too aggressive (ie counting your eggs before that are actualized) or whether this would be appropriate given FFH's tendency to seemingly build value in its associates over time (eg Thomas Cook, First Capital). An investment in FFH is really a bet on their ability to improve their investment returns over time. If the inclusion of their unrealized fair value gains is kosher, than perhaps the probability of FFH achieving their average return of 7% would be slightly less far-fetched. Interested in hearing your thoughts on this manner. Jerome I tend to think of the investment return as something which excludes the private investments which are not readily marketable, but others may wish to include them. Turning to the publicly traded investment return, I'd say that 7% is not a ridiculous hurdle over the longer term. The 10-year treasury rate has been exceptionally low for about the past 10 years, but it seems to be slowly trending up. For an outfit like FFH that must hold a large portion of its reserves in the form of sovereign debt, such low rates kneecap their longer term ability to achieve a weighted average of 7% (but in the short term, when prevailing rates decline and Bradstreet shifts from 10-year to 2-year rates, there's a benefit). Thinking forward a year or two, if we return to a world where financial repression no longer exists and the 10-year treasury returns to say 4% or 4.5% and if you believe that equities have a long-term return of 9 or 10%, it doesn't take a lot of imagination to get to a weighted return of 7% (you wouldn't need much alpha to get there). SJ

Yeah. Might require a tender offer instead of just using the normal course issuer bid. SJ

The silver lining might be the potential buybacks. For the past year or so, we've all been chatting about whether the share price was 1.1x or 1.0x adjusted book value, and whether this might present a good opportunity for buybacks. Well, at today's price of $US431 is clearly lower than the basic reported book, and much lower than adjusted book. Perhaps we are around 0.9x adjusted BV as reported in Q3. If you think this thing is worth more alive than dead, a buyback should be a no-brainer. I just wonder whether FFH has found a way to scrape together perhaps US$1B to take full advantage of the current silliness. Has anyone looked carefully at the premiums:surplus ratios of the subs to get a guesstimate of the theoretical dividend capacity? I'm pretty sure that there's plenty of capital that could be dividended to the holdco, but if there was ever a time to scrape together some cash and deploy US$1B, it's now. Wonder if Prem would consider suspending the FFH divvy this year and use the quarter-billion for buybacks instead? SJ

I don't recall having seen any reference to European CDS in FFH's recent filings. Have I missed something? I do recall there being CPI derivatives for a broad range of geographics, and FFH floated some Euro denominated notes, but can't recall anything else. For the CDS, were you thinking of sovereign debt, or corporate? SJ

You're at $204.10? Good, now I can penny you! :P SJ

I'm not sure that I would get too jumpy about the yield curve. It's not exactly inverted, even if a couple of journalists decided to make a bit of hay from the two-year being a shade higher then the five-year: https://www.bloomberg.com/markets/rates-bonds/government-bonds/us It might end up fully inverting, but the morning the only rate relationships that were "wrong" is that the 2-year yields 2.82% and the 5-year 2.81%. Not a panic just yet, imo. SJ

If you aren't totally aware of the potential variance in outcomes, how can you even reasonably make an assumption in how the outcomes are distributed? If you are going to use Monte Carlo, you must normally make some assumption about the distribution from which you wish to make your random draws. Some people automatically assume that a standard normal distribution should be used, but that's a bad assumption (could be log normal, could be poisson, could be some other non-symmetric distribution, could be anything, who knows). Heavens, didn't LTCM go bust mostly because they failed to consider the possibility that their distribution of returns might be leptokurtic? They went bust because of the fourth moment of the distribution, let alone the issue of appropriately characterizing the first two moments. For investing, if I need to model something, I usually chuck it into the too hard pile. For me, value should be obvious and I mostly I don't even bother with a DCF model. The only purpose for which I've ever bothered to use Monte Carlo in my personal life is to help me thing about portfolio survival during the withdrawal phase in life. For that purpose, it's quite an instructive tool because it shows clearly the nature of sequence of return risk, even if that risk is poorly parameterized. SJ

Did anyone else notice the reports today that the first VIA passenger train just headed north to Churchill? Looks like the tracks are in good enough shape for a light passenger train, so after a full freeze-up, presumably the tracks could accommodate a heavier freight train. SJ (I didn't know that it takes 45 hours to take the train from Winnipeg to Churchill...I think I'd be ponying up for a plane ticket!)

So you are thinking about playing it through a paired-trade with the idea that the valuation gap will close (hopefully in your favour!)? That makes good sense. I did not do any paired-trades with ORH prefs. I loaded up on ORH prefs when the yield-to-worst was in the teens. A reinsurer is always a risky investment, but my YTW was relatively high and there was always the prospect that the ORH prefs would return to "par". That prospect seemed pretty distant in 2009, but I eventually unloaded my ORH prefs for ~$26/sh which exceeded my wildest expectations. Did something similar with BMO's Harris Bank prefs. More generally, I'm not watching the preferred universe too carefully these days, but nearly everything that I have glanced at looks like its fairly valued. SJ

So, is your thesis that the FFH prefs are currently undervalued and that Mr. Market will come to his senses and re-value the shares at some point in the next year or two? Or is it the case that you have observed that the FFH prefs have dived over the past month and you are speculating that there will be a dead-cat bounce from which you can profit? If it's the former, you'd get your ~10% if you collect up the divvy for a year and the price rises by ~$1 during a year. But, I guess my question would be, "Why would the market price FFH prefs at a YTW of 5.3% in today's interest rate environment?" Because that's what it would take for the price to rise by $1. If it's the latter, I'd say it's not my investing style, but if it works for you more power to you. My only observation is that I'd think hard about waiting to pull the trigger in later December when tax-loss selling might be at its peak. It should be a no-brainer for pref-holders to sell their shares prior to the end of 2018 and re-buy some other pref from the same company (ie, if you have an unrealized capital loss on XYZ.pr.a, you sell it to crystallize your loss and you immediately re-invest the proceeds in XYZ.pr.b). SJ

I was involved with the Cs, Ms and Es around 2016, still had the tickers on a watchlist but had not noticed the recent trend. Thanks. These tend to be illiquid so expectations for lengthy discussions here should be tempered. I disagree slightly with SJ (SJ, it reads as if you're angry at a security which is something that you may want to look into). The prefs risk profile is different and the coverage seems secure under most scenarios (something that cannot be said for the common). Also, the investing "crowd" is different as it almost feels like there are cyclical "rotations" that don't tightly fit with fundamentals and that can affect the risk premium. Presently, a big underlying issue is the direction of Canadian interest rates. Reflecting on this, I was following very closely Fairfax when those preferred securities were issued. If I remember or understood correctly, Mr. Bradstreet was behind the rationale for this capital raise initiative. Retrospectively, this was a very shrewd financing move IMO as 1.46B (CDN)of essentially permanent capital was raised with a cost running at around 4.1% in CDN dollars. They really nailed it with their take on CDN interest rates and the embedded conversion features. Another strong aspect is that they are unlikely to need to redeem them if interest rates rise (unless short term rates rise ++). Not angry about a security. I have my views about FFH, but I don't diminish the bad characteristics and focus only on the good. The bad is what can either slowly erode shareholder value or, in the worst circumstances, result in a permanent loss of capital. Turning to the question of the FFH prefs, is it your view that the current valuation offers a reasonable risk/reward proposition? As I suggested up-thread, the yield-to-worst is less than 6 percent. There is some potential upside if general interest rates decline (IMO, unlikely in the near term) or if FFH racks up ridiculously good results and company specific risk spreads tighten. However, that upside is not enormous (ie, ~20% if the prefs make a return to $25), and unless interest rates head south, it's hard to imagine the prefs soaring. And then there's the risk of permanent loss of capital from some unknown event or decision. So, looking at the entire universe of securities out there, how do the FFH prefs slot in? If a fellow were dead-set in favour of buying a pref, why would you buy an FFH pref at <6% YTW when there are any number of chartered bank prefs and life insurer prefs available with a similar YTW? We know that a P&C insurer has an inherent risk of financial failure, and my take is that a lifeco or a supervised Canadian bank do not. So why take that risk when you are not really paid for it? Going a step further, if an eligible Canadian dividend is the main attraction along with the potential for some upside, why would you buy an FFH preferred (or any bank or lifeco pref) rather than the BNS common? Given that Canadian chartered banks do not cut their dividends as a rule, you could hold the view that the BNS common has a YTW of 4.71% today, with some growth highly likely in the divvy and a solid prospect of a capital gain. And again, a permanent loss of capital is nearly inconceivable with the BNS common. FWIW, the only Canadian pref that I hold is something that I bought 18 months ago that I will likely hold for another 5-ish years, but I have every expectation that it will return 10%+ over that time. At that return, I am being paid for risk. SJ

IMO, that's not a great risk/reward proposition. Prem Watsa has already come within a hair's breadth of crashing FFH into a wall. He continues to take bizarre, inordinate risks with shareholder capital, much to the chagrin of common shareholders. So, the question is why would an investor buy FFH prefs? Why would one expose himself to the risk that Prem ultimately drives it into a wall when your yield-to-worst on those prefs is currently <6%? In the most optimistic case, maybe prevailing interest rates decline and maybe FFH does wonderfully well and the prefs return to "par" which would give you a 15% or 20% kicker over some period of time (if it returns to $25 in 6 months, you're laughing all the way to the bank, but if it takes three years, your return would be 10-12%). So, your best case might be a 10 or 12% return, your base case might be a shade better than 6%, and you are exposed to some level of risk that you will incur a permanent loss of capital. No thanks. If you want to invest in FFH, you should buy the common in my opinion. At least you have the potential for the fabulous upside that could occur from the risks that Prem takes. SJ

I disagree heartily about programming it yourself. You can set up a basic Monte Carlo simulation model in Excel in less than 30 minutes. You can easily set it up such that every row in the spreadsheet can be a trial and then drag down 1,000 rows to run 1,000 simulations. IIRC, you can hit F9 to recalc to re-run your 1,000 simulations as often as you want, which gives you an idea of the range of outcomes you might expect. In my opinion, whenever you are doing Monte Carlo (or any stochastics) you should spend 90% of your time worrying about whether you have your model parameterized properly and only 10% of your time worrying about whether its appearance is elegant or whether you've run enough trials. Your biggest fuck-up is likely to be caused by choosing the wrong mean/standard deviation if those are the two principal parameters that you use. You can fuss and fuss about your model, but it's likely that your choice of parameters will be your most significant failing (ie, you've selected a standard deviation of a security's return based on data from year 2010-2017, but those years no longer reflect reality for the company today). Go ahead and parameterize your model the best you can, and then spend lots of time asking yourself what the impact will be if your parameters are not valid (ie, run it many time with different parameters to get a notion of sensitivity). Then after you've done this, toss your model out the window and just spend your time thinking. SJ

FFH announces an investment of CDN$250m in Stelco and then the market cap this morning is down by ~CAD$150m. SJ

I don't mean to restart this debate (useful though it was) but I forgot to mention something that people might find interesting. I don't know if there are such indentures in the BB debt issue. But there are at least two useful protections in the SSW one. First, SSW can't increase the dividend without compensating FFH for the value thus detracted from its debentures. And second, the price of getting FFH to agree to early exercise of the warrants (which is what took the commitment to $1bn) was that Fairfax got the option to ask for the debentures to be repaid within a year. As such they have been reclassified as ST debt (although FFH has waived its option for this year, so they're back in LT for now). In effect this option means SSW can't do anything that imperils its liquidity or FFH would have them over a barrel. It's not quite a capital allocation veto, but it's useful nonetheless. Yes, the main risks currently faced by SSW are not internal to SSW, but rather external (fuel costs, counter-party risk on contracts, the demand for shipping as manifested through GDP/trade growth, environmental regulations, risk/security of transit in international waters, state sponsored competitors, etc). SSW currently doesn't have scads of cash to burn, so the internal decisions have limited scope to cause FFH grief. On the other hand, once FCF starts to really roll in, that's when the cash allocation decisions become really important -- repay debt, buy a bunch of new ships, buy a subsidiary, buy back shares, etc. Hopefully FFH will have an exit strategy to repatriate its capital in a profitable way as the FCF rolls in! SJ

A company which has declared bankruptcy in the past, in an industry that is subject to new US tariffs on steel and is being bought at the top of the economic cycle. Perfect. What could possibly go wrong? SJ

I agree entirely about the need to probability-weight. But I suspect I do weight the probabilities for these two stocks differently than you do. That's partly due to current business momentum, which can change but is currently improving in both businesses. In Seaspan's case it is partly to do with the existing contract durations and the global order book, which is basically zero in the ship classes where they have uncontracted time - together these make high FCF for the next few years not probable, but highly probable. In both cases it's partly to do with management. FFH skew the probabilities strongly in their favour, in my view, by partnering/picking good CEOs. In Seaspan's case, for example, I find it notable that they do not intend to order new ships simply to maintain the fleet as ships age. They will only do it if they can get decent returns. In other words they'd rather run the business off than invest at poor returns. I suspect, although I cannot prove, that the same is true of John Chen at BBRY. That dramatically improves the probability of the debt being money good. To be clear I'm not advocating an equity position in either, although I am long SSW. I'm simply saying I think the debt portion of both investments is highly likely to be safe and one has to take that into account when debating position size. A $1bn position is 2.5% of the portfolio and 5.5% of equity (I am assuming one should include minorities in this calculation, but obviously that does depend on where the positions are held). I think this overstates equity exposure for reasons given above. As a resut I am comfortable with these position sizes (but they are close to the limit, for me). What would you consider to be acceptable position limits? Finally you may well be right about the p/bv. I don't care. I'm not in this hoping it will rerate, although it is a nice option. I'm in it because I don't have to pay a premium to book value for an asset that I think will compound nicely over the long term. If their investing style holds back the p/bv multiple so I can keep adding as I earn, great. Pete, Position sizing is about managing risk. I actually don't mind large-ish positions as long as they are in investments that have a reasonably narrow range of outcomes, have a very small likelihood of realizing a permanent loss of capital, and are easily exited. As an example, if FFH decides to invest 10% of shareholder capital in a Canadian bank, I don't have a particular problem with that. The risk of a permanent loss of capital is very small, and when you want to exit, dumping $2b of Royal Bank or Bank of Nova Scotia shares on the open market is relatively easy (could you do it over a 10 days or two weeks without much impact on share price?). SJ

I hadn't seen that presser when I drafted my post. It's a bit embarrassing to be musing about the possibility of burning cash when the truth was that the cash had already been burned a few hours earlier. :-[ SJ No, it's been spent. We will find out whether it has been burned over the ensuing few years. I have no opinion on this currently although I look forward to JC's explanations. Incidentally, we haven't discussed one other risk with BBRY, which is that FFH chooses to convert and doesn't sell. Then I would worry about the position size. Okay, you don't like the term "cash burn". Fair enough. It's a pretty commonly used term to denote the usage of cash. Like all cases where companies use cash, it's not immediately clear whether it'll end up being a good thing or a bad thing. I would say that the risk that FFH chooses to convert and then elects to not sell, or simply continues rolling the debt is a virtual certainty. As I have opined in the past, the fact that Prem holds a seat on BB's board of directors makes it very awkward for FFH to dispose of its investment in BB. Frequent open market sales of 50,000 shares here and 50,000 shares there would require recurring insider filings and would likely be frowned upon by BB. So, as we've discussed in the past, that really leaves only a few outlets for exiting the BB position: 1) BB gets taken over by some other company and all shareholders, including FFH, dispose of their position through a cash tender offer; 2) Some large institutional shareholder suddenly gets a hankering to own a large slug of BB and makes an offer to buy FFH's block; 3) At some point in the future, BB is rolling in cash and elects to make significant buybacks. As part of the buybacks, it offers to buy FFH's block for a shade under market price; 4) Prem resigns from his BB BOD position and FFH dumps the BB shares on the market, come what may. Some of those possibilities could be good outcomes, but it certainly strikes me as a situation characterized by a lack of flexibility for FFH. SJ

I hadn't seen that presser when I drafted my post. It's a bit embarrassing to be musing about the possibility of burning cash when the truth was that the cash had already been burned a few hours earlier. :-[ SJ