StubbleJumper

Nobody is right every time. But the question is how to you manage risk, and how do you choose your position sizes? There's a big difference between dropping $100m on something like Resolute and pumping $1.3B into Blackberry. They are both risky investments with a considerable risk of a permanent loss of capital. But, in the first case, if you get your ass handed to you, it might cost you $80m of capital, while in the second case, it might cost you $1B if you get your ass handed to you. In both cases you were wrong if your ass was handed to you, but in the first case your position size was more appropriate in the broader context of your investment portfolio. Bank of Ireland, which was an unambiguous success, was a position size of ~US$500m and that was already plenty large for the inherent risk of a permanent loss of capital. Working from memory, the credit default swaps were a collective position of less than US$400m. So, irrespective of your level of conviction about an investment, proper risk management requires appropriate position sizing. Nobody is going to agree with every investment that FFH makes. And nobody should expect 100% success from any investor. But we should expect that the risks being taken are not reckless. SJ

Please do not regret in any way your initial post. It was a worthwhile observation and has stimulated discussion. That in itself is of considerable value. You are right, of course, that FFH is ultimately a jockey-stock. Either you have confidence in the jockey or you don't. You've maintained your position because you have confidence in the jockey, and I've had various levels of investment in FFH and its subs since 1998, so that should tell you something about my view of management's capabilities. That being said, we should not put Prem up on a pedestal. In addition to the savvy investment decisions and the clever moves in 2003 and 2004 to keep the company alive, he sometimes does things that are plain old wacky or that are abusive of minority shareholders. When too many of those wacky things are done over a short period, he loses long-time shareholders. If you are curious about the sorts of things that might be viewed as wacky, here are a few: -The repeated increases in capital dedicated to Blackberry (RIM) despite demonstrably poor returns was baffling. His flirtation with purchasing the firm outright, despite FFH's dearth of expertise in the industry were bizarre. His decision to accept a position on RIM's board of directors which effectively limited FFH's ability to divest the position was a strange thing to do. And finally, the overall size of the Blackberry investment in the context of FFH's investment portfolio was ridiculous. All of this occurred during a period when US banks were a no-brainer and BRK was demonstrably cheap. There was large cap value in plain sight, and he chased a failing tech company with our capital. -The sizing of the equity hedges and particularly the inflation hedges was baffling. Without a doubt, I shared (and still share) FFH's concerns about current valuation levels and the risk that poses to FFH. Hedging was a reasonable and thoughtful thing to do. But what FFH actually did went far beyond hedging and entered into bald market speculation. The entire equity portfolio was hedged, and if my memory serves me correctly, the inflation hedges had a notional value of ~70B or so, which far exceeds any reasonable level of protection that FFH might require. And the flimsy argumentation for closing the hedges was beyond weak, even though closing the position was the correct thing to do. -I like the idea of investing in Greece, but once again, position sizing is the key consideration. There's a big difference between taking a flyer for $300m and dropping $1 billion on a high risk investment. Again, this was done at a time when any value investor could see that JPM was cheap or BRK was cheap. Anyway those are a few of the wacky things that were done using truly baffling position sizes. So kudos for the good work in India, management of the actual insurance companies' underwriting has been outstanding, and the majority of the insurance acquisitions have worked out. But, my take is that the wacky stuff has badly hurt investor confidence. Here's to hoping for a more orthodox approach going forward. SJ

Well, 2015 and 2016 were tough years to be a FFH shareholder and, based on some of the comments on this board and the lack of attendance at Sanj's annual supper, many long-term shareholders sold out. They were tough years because financial performance was limited by the equity hedges, which were abruptly dropped after the US presidential election, and in 2015 Prem usurped minority shareholders' rights by changing the provisions of his multiple voting shares. It's tough for a shareholder to endure poor financial results and then accept a 180-degree change in investment philosophy based solely on the faint hope of liberalization of the US economy by a new president. And its tough for a shareholder to accept that our "managing partner" doesn't trust us enough to let us continue with our unfettered voting rights. Frankly, I'm not particularly surprised that many long-time shareholders were unhappy and sold out. If Sanj organizes another supper in Toronto this spring, it will be interesting to observe the level of interest. I'd say that many people voted with their feet and will not re-establish a large position in FFH. Personally, I have held my nose and maintained my position over the last number of years. After having marked time for the past 5 years, the investment portfolio looks like it is well positioned to make some decent returns in the coming years. Even FFH's ridiculous "error of commission" in the sizing of its Blackberry position seems have been redeemed (now they just need to find an exit-strategy). So, things are looking somewhat positive, but that comes after 5 or 6 years of some head-scratching decisions. SJ

I don't think that person exists. I think it exists for certain vacuums (insurance, op biz, stock investments). If it were me (ha!), I would institute a dividend or repurchase program. Then, priority of capital goes Jain>Abel>T&T. I'd say that the person might exist, but you kind of need to break him into the job slowly. Even if somebody has the intellect, judgement and patience to be a good capital allocator, it is reasonable to start him off with a $100B+ war chest supplemented by annual cash growth of ~$20B? No, I'd say let the guy start making modest moves of $5B and $10B before handing over the keys. If the guys arrives and has a ridiculous pile of cash, it puts a hell of a lot of pressure on him to find ways to spend it. SJ

StubbleJumper, Here is my morbid-bid on your ask: [and no, I don't think I'm stuttering] Probability of 87 years old man to die this year ~ 12.48% Probability of 93 years old man to die this year ~ 22.49% Thus, probability of both Mr. Buffett and Mr. Munger being a live at 2018 year end = [100% - 12.48%] * [100% - 22.49%] = 67.8% Life expectancy of Mr. Buffett: 5 years Life expectancy of Mr. Munger: 3.2 years. Source: For Mr. Buffett.For Mr. Munger. Yep, 33% chance that one of them will make his way to the big reading room in the sky and about a 3% likelihood that both will be gone. It's high time that a concrete succession move is made. If only they would initiate a capital management plan to deal with the excessive cash.... SJ

Good move. It was overdue. Munger is like 94 and Buffett is 87. What's the probability that both will be around this time next year?

"Already" $198m in gains? I hate to say it, but we've been waiting 6 or 7 years to see those gains! ;) But seriously, for a long time, this one was looking like a permanent loss of capital, so it's nice to see it back in the black. SJ

I'd love to see a store like that just for the experience (kind of like how I like to visit a large Ikea store once). But, after visiting the store on vacation, could you imagine yourself using the store on a regular basis? Seriously, 52 aisles is not grocery shopping, but rather it's your trip to the gym. In my neighbourhood, I have a number of grocery options within about 3~ish miles of my house, but I invariably end up using only two. Both stores are 15,000 or 18,000 square feet, which was about right during the 1980s, but is about half of today's standard. For most of my grocery needs, I am happy to visit the smaller stores as long as they are appropriately priced because I mostly use the peripheral aisles and I don't really want to walk a mile to buy a a couple of steaks, five pounds of potatoes, milk and a loaf of bread. And I really don't want to walk an extra 100 feet as I pass by clothing, dishes and other housewares. I just want to buy the ingredients to make supper and then to get the hell out of the store. Am I alone here? SJ

The universal shelf prospectus doesn't necessarily mean that there will be a share issuance or a debt flotation. It's just a filing to enable that possibility just in case they actually want to, or just in case it becomes attractive to do so. FFH files one for the holdco every year. SJ

Well, based on a couple of threads from a few years ago, I came to the understanding that many people access COBF posts through an RSS feed. Is it possible that the reader-count goes up automatically when a post is delivered to an RSS feed even if the recipient never bothers to read the info? SJ

First off, I do not at all appreciate the tone of that comment. Turning to the actual issue, is it your sense that there is currently a lack of liquidity? Clearly an insurance company needs plenty of liquidity to manage tail risks in their operations. So, currently consolidated cash and t-bills are what, $109B? That strikes me as more than healthy, unless there is a legitimate expecation of making like a $40B acquisition in the near future. With respect to free cashflow, do you doubt that cash from operations will exceed $40 billion by 2022? Seriously, it has never really crossed my mind that cash from operations wouldn't continue to grow. So, yep, you do need something for maintenance capex... But, with $40B of cash from operations, there's plenty of room for a healthy dividend. And, with current cash balances being what they are, I can't imagine any problem starting with a divvy of ~$20b and growing into it. Remember, my motivation is to keep the next management teams from having the current ridiculous cash inflows and desperately looking for a way to deploy it. Finally, what is your view of Berkie's current capital structure? Are you of the view that the more capital intensive business are not in a position to float debt for major capital projects? Respectfully yours, SJ

Warren is 87 years old. How much longer do you want to wait? At this stage, his chances of still being around in 5 years are 50:50. Berkie has what, $100+ billion of cash sitting around and not being deployed? That strikes me as plenty for an elephant hunt, if that's what Warren and Charlie want. At this point, institute a healthy dividend (perhaps $20B per year) and stop accumulating cash. It's virtually certain that the next management team will be far worse capital allocators than the current team, so institute that healthy dividend now so they'll have less cash available to waste. As we know, once a divvy is in place, they can be pretty tough to roll back.... SJ

You can always convert A to B. And without taxable event I think, but I am not an accountant/etc. Yes, the A shares can definitely be converted to B shares, which would enable holders to more easily sell a portion of their holdings rather than being obligated to sell in tranches of $300k. But, the bigger issue in my mind is that the ownership becomes less concentrated when the original geezers finally take that long dirt nap. An owner with $100m in shares splits it amongst his four kids at $25m each. Then, what often happens is that the first generation that actually works to accumulate a fortune tends to be quite thrifty and rarely sells, but the second generation that inherits a fortune has a tendency to fritter away the money. Those major owners (some of whom are on the board of directors) may not be a source of stability if the second generation partially fritters away their inheritance. At this stage, Warren's life has gone into extra innings, and good for him. But, I'd love to see a $20B annual dividend initiated in an effort to limit the annual cashflow that the next management teams can mismanage. SJ

Interesting comment: Eurobank is “in a very sound financial position,” Watsa said. The lender’s shares have risen 23 percent since the e-auction, recouping a part of the losses since July when the International Monetary Fund said that Greek banks will need extra capital. “For this size of bank, it’s a very low price. It has a market capitalization of 1.6 billion euros and more than 60 billion euros in assets,” the Canadian investor said. If the 60B are actually good assets, then that bank definitely looks cheap. A decent bank can get a normalized ROA of 0.75%, a crappy bank maybe 0.5%. So, if normalized earnings are 300m or 450m, then the market cap of 1.6 billion is cheeeeeap. thanks for sharing the article.

Well, not to put too fine a point on it, but what WEB says is pretty irrelevant. The next CEO (or two or three CEOs in the future) can simply change the Owners Manual. AFAIK, there's nothing legally binding about it. Similarly, I'd be surprised if any of the assurances that Warren extended to previous owners was ever written in a purchase contract -- it was likely a gentlemen's agreement. He'd be bonkers to make a legally binding promise to never sell an asset. If a future CEO is somebody of dubious personal integrity, then all bets are off. SJ

Sure, that might be true for something like Nebraska Furniture or Borsheims. But there's nothing that I know of that would prevent a spin of Mid American, BNSF, Dairy Queen, Sees, or many of the other subs. And, the original owners of the businesses that WEB bought are not spring chickens either, so they'll be croaking too in the not too distant future. At a certain point, the original family won't have much involvement in the management of their former company. SJ

I can't see how a break-up wouldn't be in shareholders' interests 10 or so years after WEB passes. As investors, we constantly face a plethora of agency costs, many of which WEB has railed against in the past (CEO compensation, options abusers, etc). With WEB's large ownership, he has effectively functioned as a benevolent dictator, and to a large extent, our minority shareholder interests are well-aligned with his. To his credit, he hasn't paid himself a $50m annual salary nor has he granted himself options which dilute us by 1% or so annually. So, we've been fortunate to have this thing headed by one of the best capital allocators on the planet who has chosen to not exploit his minority shareholders. What about the next guy? Or more likely the second or third guy after WEB? Despite all of the rigmarole of having Howard on the board of directors to try to maintain the culture, eventually BRK is going to end up with a self-interested, Machiavellian son-of-a-bitch as a CEO. With a $500B+ market cap, it will be tempting as all hell for a future management team to issue "just a few options" to themselves. It will be tempting as all hell to award themselves a salary "commensurate" with the significance of their role of managing a $500B+ company. Given the ridiculous amounts of cash that is gushing in, it will be tempting as hell to make value-destroying acquisitions just for the prestige of so doing, or to make value-destroying acquisitions to impart additional volatility to the shares. When the CEOs and management teams of the subsidiaries sees this, how will they react? WEB leads by example which exerts a certain discipline on both capital allocation and executive compensation in the subs. But, if the holdco management starts lining up at the trough and starts making silly capital allocation decisions (ie, pet projects, or vanity investments), you know very well that the subs will start doing the same thing. To a large extent, this is a problem with a wide variety of listed companies, but it risks to be a larger and incorrigible problem for Berkie. Larger because of the ridiculous annual cashflows and the stupendous market cap. Incorrigible because there's no legitimate threat of a takeover. The threat of takeover disciplines the management of a poorly managed company, because they know that an activist shareholder or a corporate raider can step in and clean things up. But with a market cap of $500B+, there's no chance of a takeover, and once WEB's shares are donated and some of the other original shareholders croak, there's not much concentration to facilitate an activist shareholder. Nope, my sense is that we will probably get lucky with the next guy and we'll get good management. But by 10 years post-WEB, there's a good chance that shareholders will be desperately dreaming of spin-offs and equity carve-outs to regain some semblance of control over management. Enjoy current management while it lasts -- it's too good to be true! SJ

He talked about still managing berkie in 10 years? There's a high likelihood that he'll need to communicate his management and investment decisions with the aid of a Ouija Board...

Not sure how ffh makes any money from this. The federal government has been subsidizing the track, passenger service and the grain export terminal in Churchill on and off for the last 50 years. The line and the rolling stock were bought by omnitrax who never seemed to make any money from it. At some point in 30 or 40 years when climate change performs it's magic, the shipping season for Churchill will be extended (for non-canadian readers, the problem is ice is present for most of the year in Hudson's Bay), but then the railway will struggle because the ground will be frozen for less of the year. This purchase reminds me of locations in my city where a restaurant goes bankrupt and changes owners every year or two, resulting in certain sites having cycled through 7 or 8 different restaurants over the past 15 or 20 years. Each successive owner thinks that the last guy was a bad manager and that he'll succeed where the last guy failed. The truth of the matter is that the location is poor which drives bad economics for anybody wanting to operate a restaurant in that specific site.

If that was the end, I don't think you'd get many complaints. But the fact of the matter is that the rest of Canada pays higher taxes to pay for excess spending in Quebec. Both Federal spending well in excess of receipts from QC, as well as direct transfers through equalization. If your choices only impacted your taxes, I wouldn't care. But as an Albertan paying higher than otherwise taxes for QC social programs while QC environmentalists block my livelihood.... And when we have to pay for the environmental disaster that you Albertans refuse even to acknowledge... And if we talk about historical equalization, you have received money before oil, and if we talk about the stupid choice you make when you have surplus, you send little 100$ check to all your citizen so they will buy rationally more F150, and when oil price plunge, you don't have anything because you are too stupid to plan that it is a cyclical commodity...come on with the Quebec bashing, I can bash Alberta a lot if you ask me too. The amount of money Alberta received in the distant past is so nominal as to be insignificant. Alberta's govt sent cheques to everyone a couple of times with surplus oil revenue from our resources. Quebec sends 100s of dollars to its citizens every year in the form of overly generous programs and subsidized hydro prices. They also use Alberta revenue. Which seems more fair to you? Not sure what you're talking about regarding the crash. Oil is pretty low right now. Alberta isn't receiving any equilization, so we seem to still be OK. On the other hand, QC is receiving over $11 billion this year, roughly $1300 for every man woman and child in the province. You're welcome. Amusing for a defender of QC equilization to be bashing Albertan spending. Those who live in glass houses... Sorry everyone for the digression :) Fair enough. But it is not my fault or your fault that the equalization is setup the way it is. And we both know that the amount wouldn't change no matter what is our level of public expanse in Quebec. Even if we wre to cut in our social programs, we would receive the funding. I am not saying it is good or bad, I am saying it is that way now. Equalization is based on the relative richness, with a somewhat strange formula. Cost of living is not included into that. Petrol is such a unique asset that is distorting it all, and making you Albertans far richer than everyone else for now. Still, you don't pay for everything just in Alberta by the way. But I don't accept the idea that hydro is subsidized, our real cost of production are infinitesimal, thus the low rates. Nothing else. Should we change the equalization, probably? But it is not easy, isn'it? The Canadien federation is a strange beast, we all know that. Quebec would probably have to adapt if the equalization changes, but overall, the whole idea is to redistribute money among Canada, and as far as I know, we are part of it. To SJ: Hey, I know we have historically benefited from oil as a society (I mean, the humanity as a whole), but there is no way this is our future. This is part of what I am telling. I am not to refuse that money, because I think we should use that money to build a better future. I like the way Norwegians deal with it. They know it won't be a panacae forever, so they plan accordingly. And I work hard here and pay taxes, to both governments, and I do not agree to many decisions, but it is the way it is. And I will continue to say to everyone, Quebecois like Albertans that we need to stop our petrol junkiness, that's it. No. You personally delivered a sermon. You have a choice. You can take the money from the oil sector which is channelled to Quebec through equalization and through per-capital financing of social transfers and you can be happy and quiet. Or you can be a hippocrit and accept the money while delivering a condescending sermon to the people who worked their asses off to generate that money. And that's the problem with the intelligensia in Quebec. They simultaneously want money from western Canada to build their "advanced" society with low cost daycare and low cost tuition AND they want to criticize and undermine the very petroleum industry that funds their "paradise". Choose one. Either reject the money that originates from the petroleum industry (send it back to Ottawa with a note that says, "Va chier s'il vous plait, nos principes sont plus importants que votre argent sale") or quietly accept the money that funds your glorious social programs. Anything else is hipocracy. Either take the money and shut-up, or reject the money and deliver the sermon about Quebec's moral superiority with respect to the environment and climate change. SJ

For English speaking readers, in the post above, I chose some unusual words that have direct French conjugates to ensure that native French speaking readers understand fully my intention. As an example, they use the word "sermon" and we do not, but nonetheless everyone understands the relationship between the giver and receiver of a sermon. I would be quite happy to deliver the same missive in French, but it's an English board. SJ

Who the hell cares whether he's a separatist? I have far more respect for the true separatists in Quebec who are prepared to go their own way, for better or for worse, than the weasels in Quebec who do not truly want to separate but just want to use the threat to try to extort money from the other provinces. Those particular weasels happily accept equalization money which is funded by oil extraction, but then refuse to permit the exploration of shale gas in Quebec along the St. Lawrence (ie, for them, petroleum money is good, as long as it's not related to development in their own backyard). Those are the people who are effectively on welfare and refuse to take a job even when there is an obvious job available. Those weasels are worthy of our disdain. The true separatists who are prepared to go their own way, come what may, are worthy of our respect. They at least have principles. They are telling us to stick our equalization transfers where the sun doesn't shine, and they'll happily accept the consequences. SJ What I was reffering to was that Albertan governments have been quite stupid through the years to not build a more resilient economy. When petrol goes up, they are planning like Alberta will be rich foreover, with oil projection at the top for a long time, when petrol goes down, they are not ready, and it's the same every time. And some Albertans might be stupid too, as they do not prepare also for the driest times, or to prepare the after-petrol. And some Quebecois are stupid too, for sure. I am not a separatist, at least not a fervent one. I am neither a fervent federalist. I do not believe that there is such a thing as Canada, as BC is one thing, Alberta a different world, Ontario another one, Quebec another one, and so on. WE happen to be together, we might as well try to make it works, but if Quebec separates from Canada some day, I'm fine with that also. We do receive some money from your oil because it is the way it's done with this equalization thing that is part of what the Canada is. But a time will come when Alberta may need some money and it will flow through the Canadien federal government also. Actually, equalization is not all, and if you look at the bigger pictures, everyone pay taxes and receive some services or money, sometimes less, sometimes more. And we pay a lot more taxes in Quebec, we are not just living from federal cash. You can make those choices also if you want. And I will do whatever I can to reduce our oil dependency, and Albertans should do that, or they will have some hard moments in the years to come. The issue is not the stupidity of Alberta's governments. The issue is not whether you are pur et dur (but I wish you had that courage). The question is whether you are part of the weasel population of Quebec that is quite happy to take equalization money generated from petroleum extraction to fund your $10/day daycare while having the audacity to deliver a sermon to those Canadians who actually conduct the work to provide that money. A principled Quebecker would either not deliver that type of sermon, or he would lobby his government to reject the portion of the equalization payment that is attributable to the petroleum industry. Somebody who is unprincipled (une putaine) would take the money and still pretend to be pure. So the real question is, where do you stand on equalization attributable to the petroleum industry? Should le gouvernement du Quebec send a portion of the equalization payment back to Ottawa with an indignant declaration that Quebec's principles are not for sale? Or is it collective hipocrisy? Frankly, the people that I respect best in Quebec are the pur et dur. They have principles and they know what they want. They do not waste our time giving us a sermon about their moral superiority. SJ

Who the hell cares whether he's a separatist? I have far more respect for the true separatists in Quebec who are prepared to go their own way, for better or for worse, than the weasels in Quebec who do not truly want to separate but just want to use the threat to try to extort money from the other provinces. Those particular weasels happily accept equalization money which is funded by oil extraction, but then refuse to permit the exploration of shale gas in Quebec along the St. Lawrence (ie, for them, petroleum money is good, as long as it's not related to development in their own backyard). Those are the people who are effectively on welfare and refuse to take a job even when there is an obvious job available. Those weasels are worthy of our disdain. The true separatists who are prepared to go their own way, come what may, are worthy of our respect. They at least have principles. They are telling us to stick our equalization transfers where the sun doesn't shine, and they'll happily accept the consequences. SJ

Am I alone in reading that buddy had studied to death the fruit flies to the point of earning a Nobel, and was whining because nobody would continue to fund the exploration of well-tilled ground? And none of the top-tier journals wanted to continuously publish articles that were spawned from work done in the 80s? That's how a meritocracy ought to work in my opinion. You disinvest in well-tilled ground and you invest in exploring elsewhere. But it was a worthwhile article to read. SJ

Getting money out of China is not easy. I understand that people are only allowed to transfer out US$50k per year. To buy a house, a legion of lawyers and consultants is required to grease some palms, arrange to use 30 or 40 people's annual allocation to move the money, or create some sort of fraudulent business transaction that enables a "payment" to look like it's not the movement of capital. This is all worthwhile to buy a house in Vancouver for Cdn$2 million or Cdn$3 million, but it's not very compelling to effectively commit a form of fraud just to buy a $300,000 car. It's much easier to lease it or to take a car loan for that sort of "small" transaction. There was a great article in the New Yorker about these Chinese kids in Vancouver: https://www.newyorker.com/magazine/2016/02/22/chinas-rich-kids-head-west SJ