StubbleJumper

Pete, we are definitely looking at BB and SSW differently. You seem to looking at them from a base case perspective based on some sense of probable free cash flow. It's facile to say it, but it's obvious that if everything goes well then everything will go well. I rather look at them as businesses that have a wide range of potential outcomes. Some of those potential outcomes are good, and some are not. With BB, we can take cold comfort in the fact that there's a pile of cash on the balance sheet. That's great. So, is there an indenture in the debt that FFH holds which prevents BB from burning that cash? The history of the tech industry is littered with the carcasses of companies that made value destroying acquisitions in a vain attempt to maintain/regain market position (the RedHat acquisition comes to mind!). Cash in the tech industry can disappear very quickly. The value of the tech that a company holds can also shift very quickly. The basis upon which FCF is generated is mere intellectual property that can be (and often is!) supplanted by a superior offering from some other company. If you put money into an outfit like BB, you need to handicap it's potential outcomes. Is there a 10% likelihood that it'll be a home run, 40% likelihood that they'll muddle through and a 50% likelihood that there'll be no enterprise value in 10 years? Or is it a 20% likelihood of a home run , 60% likelihood of muddling through, and a 20% likelihood of a permanent loss of capital within 10 years? However you handicap it, history of the tech industry and BB's current positioning in the industry demand that you assign a non-trivial likelihood to the permanent loss of capital. And that's the problem with an inappropriate position size for that type of investment. Turning to Seaspan, I understand your hypothesis for considerable FCF in the foreseeable future. That's why I like the fact that FFH dumped some capital into the outfit. The reason why I view their $1b position as being on the frontier of what would be wise is that the nature of the shipping industry is that it is subject to considerable risks too, and Seaspan itself has relatively high financial risk due to its capital structure. That's okay, but then you need to do the mental handicapping exercise again. So, taking into account all of the bad things that have happened in the industry over the years, what's the likelihood that Seaspan blows up? I'd say there's a real possibility of this becoming a permanent loss of capital. Is it a 60% likelihood of a good outcome, 30% of muddling through, and 10% likelihood of a permanent loss of capital? It's hard to say, but when you pile $1b into an outfit like Seaspan you absolutely must remain cognizant about that negative scenario. I certainly would not want to see FFH dump $2b into Seaspan (ie basically full ownership). Over the past number of years, I have been beating a dead horse on this. But, my sense is that nobody will pay an appropriate BV multiple for FFH as long as Prem keeps making wacky decisions without heed for the management of risk. FFH is in a position to kick out considerable EPS in the next few years through strong underwriting and making plain-Jane investments. If they stop taking such daring positions, maybe the market will finally recognize that the company is worth 1.3x BV. SJ

As for position sizing, as I’ve said before it’s important to distinguish between what’s convert and what’s equity. From an equity downside perspective Blackberry is under half a billion. That may still be too high for some tastes, but it’s not a billion. Same goes for Seaspan, even after the coming warrant exercise. I don’t see a risk in an oversized position in value cyclicals because they’ve been so clear that they still see macro threats. They didn’t go all in in the February sell off and I doubt they’re doing it now. I hope I’m right. I don't at all buy the argument that the position size is mitigated because part of the position is on the higher portion of the capital structure (ie, debt). For both Blackberry and Seaspan, if operations should happen to deteriorate, how does FFH exit their debt position? The obvious answer is that the bonds will come to maturity and they'll simply be repaid, right? So where does the cash come from? Let's get real. For Seaspan in particular, if FFH hadn't loaned them money, *nobody* would have loaned them money. For FFH to be repaid in cash, Seaspan or BB need to float new debt to somebody else and use the proceeds to write a cheque to FFH. So, who is going to loan $500m or $1b to either of those companies so that FFH can repatriate its capital? IMO, the current answer is nobody. If nothing changes between now and when that debt comes due, FFH will likely end up having to roll it. If you want to go down the extreme road of financial distress, being slightly higher on the capital structure is better, but then again, recovery prospects are still typically only pennies on the dollar. So, let's hope that everything goes well with the investments that constitute a large position size! SJ

It's a legitimate concern. FFH has demonstrated poor risk management on a recurring basis by taking inordinately large position sizes in some of its investments. I personally am not even looking at GE for my portfolio, but I wouldn't be up in arms if FFH conducted some analysis and decided to drop $50m or $100m on GE. My concern is that it might not stop there. IMO, the problem is that it would not be a shocker to see FFH take a $1 billion position in a company like GE, which is the sort of thing that exposes shareholders to the risk of a permanent loss of capital. As I have opined on previous occasions, FFH really just needs to execute a simpler plan. Continue the solid underwriting, roll the short-term treasuries into higher interest rates as they mature, and the operating income will appear. Focus the equity investments on large cap value in plain sight, and limit the position sizes of some of the riskier investments. There should be no problem at all to reliably generate eps of $80/sh in a few years. But, to get to the promised land, Prem needs to find the discipline to manage risk better through appropriate position-sizing. How much has the inappropriate position sizes of Blackberry and the equity shorts cost shareholders? There was nothing wrong with throwing a few bucks into Blackberry, but the position size was clearly inappropriate for the riskiness of the investment. Similarly, there's nothing wrong with using equity hedges if you are nervous about markets, but in which parallel universe does it make sense to hedge your entire portfolio (or, in FFH's case, on occasion, the shorts were more than 100% of their long position)? Even Seaspan strikes me as being at the limit of what would be considered to be an appropriate position size. At a certain point, the word "reckless" comes to mind. On a going-forward basis, let's hope for a focus on execution and risk management. The earnings will be there if FFH stops shooting itself in the foot. SJ

That looks like free money to me. 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

The exact level of buybacks might not be clear, but what is clear is that it amounts to bugger-all in the context of BRK's cash balances. The finished the quarter with, what, $95 billion in cash and short term investments? So dropping a bil on buybacks hardly constitutes an aggressive, high conviction move. I say either get serious about deploying some of that cash on buybacks, or institute a considerable cash dividend. Buying Apple sharss soaked up some cash, but it really doesnt inspire confidence in management given previous observations about circle of competence. SJ

I wouldn't take Prem's categorical statements too strongly. He probably is well intentioned when he makes them and probably plans to adhere to them, but then sometimes things change. As a result, FFH has flip-flopped over the years more than a fish out of water. Ffh apparently desperately needed its subs to be listed on the exchange, so we had LM, NB and ORH to unlock the value....until we apparently didn't need it. Ffh desperately needed to be listed on the nyse until it apparently didn't need it. Wfc, jnj, USB and kft were going to remain core holdings for a long, long time....until they were no longer considered core a few years later. There were good reasons for each of those flip-flops. IMO, all it would take for Premium to flip-flop on his holdco cash balance declaration would be a good reason. "Ffh share price was ridiculous, we had plenty of liquidity in the subs, so we decided that we could moderate the holdco cash balance to take advantage of the displacement in the market for FFH shares, blah blah blah...." I'm not sure that the current price would be attractive enough to trigger a flip-flop, but I have little doubt that US$375 would be irresistible. SJ

Yes, I wonder how ffh views the current market. Their own shares look quite cheap, but I wonder whether they will find something else that's been beaten up even more. In any case, US$500m would buy back a considerable chunk of outstanding shares if the price would remain low enough for long enough. SJ The two aren’t mutually exclusive. Buybacks ought to be from earnings, not float. Float can be put to work. Most certainly they are not mutually exclusive. However, the decision of whether to buy back shares or acquire a new sub that might have been unfairly beaten up by the market over the past month is largely a question of current cash balances at the holdco level as well as subsidiary dividend capacity and the ability of the holdco to potentially borrow more. From my perspective, the holdco had somewhere between US$500m and US$1b of excess cash available at the end of Q2. Some of that might notionally have been earmarked to buyback minority positions, but that might have changed with the drawdown in markets. So, does FFH throw, say, US$750m of holdco cash at buybacks, or is there a new great sub out there somewhere that's been getting killed due to the market drawdown and the silly panic about the hurricanes which have already hit? Do they juice the divvies from the subs to enable either a larger buyback or an opportunistic acquisition? Or do they hold the line and just continue the Brit/Allied purchases? The question of what to do with float is a bit of a different question. My sense is that barring a drastic repricing of equities, FFH will likely hold the line on their strategy of holding short term fixed income. That current strategy provides an obvious operating income win over the next year or two while not overcommitting to an equity market which is still historically expensive. But, I guess time will tell. SJ

Yes, I wonder how ffh views the current market. Their own shares look quite cheap, but I wonder whether they will find something else that's been beaten up even more. In any case, US$500m would buy back a considerable chunk of outstanding shares if the price would remain low enough for long enough. SJ

Well, at least FFH won. The money is bugger-all and, even if it's actually collectible (that's a big if), it probably doesn't even come close to covering FFH's cumulative legal expenses. But, at least it silenced the short-and-distort crowd. SJ

You saw $6B? I saw a couple of reports of $4.5B. I kind of figured that the insurers got a bit lucky that Michael hit a region that wasn't too populated. Florence was even less, probably because it was mainly a rain event. Would FFH's share of Michael losses be $200m or maybe $300m? Plus a bit more for Florence? Call them cats, but they weren't really bad cats... SJ

Agreed, and made a little fix for you. SJ

Most jobs that family and friends could get for you are not professional jobs. Sure, family and friends can get you a minimum-wage-plus job, but jobs like that are not commensurate with the education level of a large swath of immigrants. No, I'd say that newcomers face some of the same challenges that befuddle educated Canadian graduates. The degree means only a bit more than diddly-squat. It might get you on the door for an interview, but soft skills will determine who gets the job. Personal presentability, communication skills, manners, listening skills and general street smarts are required to supplement that Masters or PhD. There are plenty of we'll educated, but clueless Canadian born people who will never achieve much more than a Starbucks job because they lack the soft skills. It just takes one or two awkward moments or boneheaded comments to sink you during a job interview. Some immigrants lack communication skills and do not understand cultural cues, which sinks them right off. So how do they improve their cultural sensitivity and communication skills so they can make the cut? Some actively listen, learn and integrate for a few years while others focus their attention on their expat community and ghettoize themselves. Whose failure is that? Sj

If the Pakastanis can't figure out why they are driving a taxi instead of working in a professional field, then they deserve to drive a taxi. Hint: it's got nothing to do with racism or xenophobia. Learn the culture and figure it out. Christ, Prem and Francis started at zero. SJ

Then the Russians are fools. Churchill has a shipping season of 90 or 100 days without foolish government intervention in the form of breaking ice for a few thousand miles. If we wanted to get into that business, we'd be further ahead breaking ice on lake Superior and running a pipeline to thunder Bay. At least there's a 280 day shipping season there on the lakes. But both of those concepts are unrealistic. For an oil pipeline, you'd need 300 days at a minimum. I agree with all of the sentiments about the Eco freaks and the influence of foreign money. SJ

Only in your dreams. I am a pipeline proponent but Churchill is not the place for a deepwater petroleum port. Just take a look at their shipping season and you'll agree. If climate change kicks into high gear, then maybe in 100 or 200 years Hudson Bay could be free of ice for 300 days per year and your pipeline might be feasible. But, not any time soon. SJ

Let's hope that it doesn't become an albatross around the neck. Nobody has wanted those assets for the past five or so years, and now FFH is the "Victor" in the battle to obtain them. Good luck competing against Thunder Bay for pulse exports to Europe, the middle East and the Indian subcontinent.

Share price is sliding again. Another couple days of this and maybe FFH will be able to repurchase shares at adjusted book value? It's the gift that keeps on giving! SJ

I actually liked the quarterly results -- well, I don't love the bottom-line EPS number, but that's not the most relevant. We knew that number would bounce around a lot more with unrealized gains and losses, but the decrease in BB's share price is pretty irrelevant to how well FFH did during the quarter (because the BB decision was taken well in the past, and as I have opined previously, it's not a position that can be realistically exited. Therefore, call it a "sunk" decision and ignore that part of the results!). The good: 1) Net written is up 10% YoY. This is quite good and gets lost in shuffle. 2) The CR of 96.1 is actually pretty decent. I would have liked to have seen 95 or lower, particularly after Prem's observation that some lines were getting decent price increases after last year's cats. But, 96.1 is pretty good, particularly in the context of 10% growth in net written. When you dig into the numbers a wee bit, you see basically the same accident year CR being reported, but lower reserve releases in percentage terms this year. Well, part of the lower release reserves in percentage terms is due to the fact that the denominator has grown as a result of increases in net written. There's a saying in the P&C industry that you cannot outrun the tail because it will eventually catch up to you -- but if you systematically report favourable developments, it's a good thing when the tail eventually catches up with you! 3) Nice to see a decent CR from Allied. That was a point of concern and uncertainty in previous quarters and FFH guided that poor CRs in the past were the result of one or two policies going sour. This quarter's results might provide some support to that viewpoint. 4) Capital is bouncing around between cash equivalents and bonds, but the duration has obviously declined from last year. That's a good thing, IMO. At this stage, a brave analyst might pencil in an underwriting profit of US$500 and interest and dividends of US$500, which puts FFH on track for basic operating income of ~US$1 billion. That's a pretty solid base for building an EPS number which would be appropriate for a higher share price. It's also not hard to foresee the interest and dividends trend up to US$750 or US$800 as interest rates rise. Not much execution risk there. 5) Nice to see the increase in the Brit position. Perhaps another US$300m would finish the job? 6) Nice to see some shares re-purchased, particularly since most were probably bought back around 1.1x adjusted BV. Let's hope that opportunistic repurchases continue. Steady as she goes. SJ

Yep, it's nice to have days like this. I wish we would have more of them! SJ

Thanks for posting that article. I had no recollection of ~US$80m being invested in a convertible instrument in the Irish insurance sector -- either I never knew about it or I had forgotten entirely. As I opined earlier this year in the buy-back discussion, I would be very surprised if Prem's past behaviour of being a serial-acquirer ever changes. Adding an Irish insurer to the mix would seem to fit right into FFH's operations. The remaining 80% of this one looks like it could be added for <US$500m, so it wouldn't constitute much more than a light snack for FFH! SJ

There's more to "Scholar" than just science. In fact, I rarely seek journal articles in the areas of natural science from Scholar. SJ

I like a buyback much better than piling more capital into Apple. SJ

Don't look now, but the US 2-year bond rate is now bouncing around 2.60%. FFH's bond port is overwhelmingly short-term, so there should be a favourable kick to EPS as the bonds get rolled over. What's an extra 0.25% applied to $12B of short term bonds, US$300m per year or something? That's only like $10/sh.... SJ

The last quote that I saw a few minutes ago was US$531. And Q1 adjusted BV was what, a shade better than US$490? So, we are at less than 1.1X BV, and taking into account Q2 it might be more like 1.05X. That's pretty cheap.... SJ