StubbleJumper

Is there a mechanism somewhere to short Blue Jays tickets? ::)

Too complicated. Borrowing from Monish Pabrai, there's really a very simple decision tree: Heads I win, Tails I don't lose very much.

Haven't we always known that Yahoo Boards were crap? At least there's decent thought by most posters on COBF, and there are precious few cheerleaders blindly pumping names.

You don't actually need to teach them very much. What you need to do is instill a few basic principles of how to live, and supplement that with a bit of knowledge. There are two principles that I learned from my parents: Principles of life: 1) From my father: Don't be a hot dog and don't worry about what the other guy is doing. Ever. In all aspects of your life, do not show off. Play your own game in a controlled and humble manner and don't worry about showing off to "the other guy" how good you are or how flamboyant you are. This has been important for me, as I have never felt the need to display wealth. It meshes nicely with the Millionaire Next Door's observation of "big hat, no cattle". I don't focus even slightly on the Joneses in large part due to my father's admonitions when I was a little kid. I have never chased the sexiest investments and mostly avoided the tech-wreck due in large part to the preference to not be a hot dog, and instead quietly play my own carefully planned game. 2) From my mother: Live according to below your means. Always. Money does not burn a hole in your pocket and there's no need to spend every penny. You never know when you'll need the little bit of money that you've accumulated (or the lot of money!). Knowledge: You don't need to transmit much knowledge to kids. If they are at all curious, they can figure it out themselves: 1) It's been said already, but I will repeat it: How does compounding work. 2) What are shares, bonds, and GICs, and how do they work. 3) In the particular legal, social, cultural and economic environment where you happen to live, what are the relative merits of investing in residential real estate either for personal use or as a rental. (residential real estate is a great investment in some circumstances and a poor investment in others) Personally, those few principles, a few bits of knowledge and my curiosity have served my well in life. I have to say that when I read Veblen's Theory of the Leisure Class, I almost crapped my pants that my father had intuitively figured out most of it without any formal education in the area. SJ

Judging by some of the threads in the FFH section of the board, it would appear that several long-time partners subordinated shareholders have divested their position. A great many of the "I'm out" type of comments appeared in Dec/Jan after the epic shift in hedging practices. If it's true that a large percentage of people who viewed FFH as a jockey-stock are out, then it's hardly surprising that they are not travelling to Toronto to attend the annual meeting and the supper that Sanj organizes. For non-shareholders, it's pretty tough to justify spending a whole business day and $1,000+ to fly to Toronto and spend a night or two in a hotel just for the annual supper (although for those who actually live in the GTA, it's a no-brainer to drop the $100 for supper because it doesn't even cost you a day of your time). SJ

The article is pretty silly. I've rarely seen a business that functioned in any way other than constant upselling, and trying to persuade clients to buy things that they don't need. The last time I bought a car, they tried to sell me a more expensive model, and they pushed the undercoating and extended warranty (don't even get me started on the service department). The last time I went out for supper they tried to convince me to order another pint, and to buy dessert. That's life as a consumer. The CBC does people a disservice by leaving the impression that banks are behaving any differently then they've done in the past -- if you were stupid enough to accept the posted interest rate, you've always gotten hosed (but that's true of Bell and Rogers too). Tempest in a teacup.

In Canada, if you are the victim of a tort, you can definitely sue. In general, you should only expect to receive an award equivalent to your demonstrated economic losses, plus your litigation costs. Unlike the United States, punitive damages are very unusual in Canada. So is that a good thing or a bad thing that punitive damages are rare? In the US, there have been some pretty high profile cases of class action suits with damages that are eyeboggling, particularly the $4.9 billion award against General Motors to the families of six people who were killed by exploding fuel tanks. Awards with large punitive damages certainly result in companies being more careful, but it does encourage people to treat relatively minor incidents as "lottery tickets" resulting in a bit more of a litigious society. So is that good, bad, or some of each? SJ

Agreed, there won't be any meaningful adverse outcome for TD. The regulators at OSFI might get a little bit pissy with them, but that will blow over pretty quickly. The legal aspect is even less relevant in Canada for TD than for WFC in the US. In theory, it might be possible for a group to get a class certified to sue TD, but in Canada, it's really tough to get a settlement for anything more than actual economic losses, which will be very small. As with WFC, almost nobody is going to bother moving their business away from TD. It's too much of a pain in the ass, and there are too few people directly affected to have a meaningful impact on TD's business. Perhaps a few executives will be shit-canned, but that'll be about the extent of the damage. SJ

Well, they've had a mechanism to do this for a very long time. It's called a chequing account. When you want to transfer money from your account to somebody else's account at a different institution, you write them a cheque which they then deposit. For smaller amounts of money, you can use an Interac E-transfer. Given the great strides towards electronic bill payments, there are darned few consumers who write many cheques anymore. For most people, a landlord-tenant relationship would be about the only situation where a cheque would be required due to the absence of other easily used options for electronic payment. So that would be perhaps a dozen paper cheques per year for a renter, and fewer than a dozen for non-renters? Are switching costs any higher in Canada than in other countries, such as the US? I can attest to the fact that the existence of payroll deposit and recurring automatic electronic bill payments is a real disincentive to switch banks. But is it really any easier to switch your payroll deposit in the US than in Canada? Is it really any easier to switch the electronic payments for electricity, natural gas, water/sewer, insurance, and telecommunications in other countries? It strikes me that it's probably a real PITA pretty much everywhere. The Canadian banking system is a nice cozy oligopoly underpinned by a large federal mortgage insurance agency, and aggressively supervised by highly conservative federal banking regulators. The whole system is about as conservative as I've ever seen, and for the banks, the modest amount of competition makes them nicely profitable without incurring much risk. SJ

Market cap (update) FANG: $1.44 Trillion BRK: $431 Billion Rationality be damned! Oh wait, we haven't been here before, have we? ;) Yes, nearly 17 years ago, a full year before the epic tech-wreck, Sanjeev posted the following about Canada's tech-darling, Northern Telecom: "Icemann, what do all these companies have in common? Last QuarterTicker Revenues Earnings Market Cap.BBD 3.3B 147M 15.7BBNS 4.6B 465M 17.6BBM 4.8B 497M 17.0BCM 5.9B 676M 15.7BL 4.3B 77M 11.9BPOW 4.0B 132M 6.4BTD 5.4B 41M 21.7BRY 5.6B 578M 23.0B If you combine all those numbers you get total quarterly revenues of 37.9B, total quarterly earnings of 2.613B, and a total market capitalization of 129B. Nortels numbers ending the same quarter look like this: revenues of 6.8B, earnings of -128M, and market capitalization of 167B. For almost one quarter less you could buy all big five banks, the largest grocery chain in Canada, the largest investment firm in Canada, and the bluest of the blue industrial companies. In the short-term the market is all about style, in the long-term it is about substance. As amazing as NT's growth has been, and it's emergence coincided with an information revolution, it is extremely overvalued. When this humpty dumpty has its fall, all the kings horses, and all the kings men, will not be able to put it back together again! So don't feel so bad that you missed the boat on NT. There are many good companies out there, that are trading at undervalued levels. Some of the ones from above are worth looking at! Many investors, including indexers will suffer the consequences, when NT has an earnings shortfall in the future, and the market rapidly removes the enormous premium applied to its market price. Cheers!" It was obvious then, and it's obvious now. Thanks again, Sanj. SJ

I'd say that FFH is so geographically diversified that there are few cats that would really affect their consolidated CR. Maybe if we had another Katrina, or if we had a repeat of the four horsemen of the apocalypse (Charlie, Frances, Ivan and Jeanne), it would make a difference. But what was the impact of the wildfires in Fort MacMurray? Pretty small, despite the devastation.

Still not sure what to think about the economics of firearms companies, but thanks to all for their insights. It's a rare gun thread that adheres to economics and market prospects rather than partisan silliness. SJ

I've never understood the firearms industry. My understanding is that a gun is basically good forever, unless you are the type of person who shoots a ridiculous number of rounds every week, or you don't maintain it. So where's the demand from? Is it from a growing US population which increases demand for firearms? Is it from an increasing penetration of firearms (ie, the percentage of households who have a gun)? Is it from increasing the number of firearms per owner-household? It really strikes me that this should be a pretty mature industry with not much demand. Now, contrast that with the auto industry which I understand better. Cars wear out and need to be replaced. The number of drivers increases with population, and the number of cars per household has gone up. So, is there anybody who knows about the firearms market who can shed some light on market prospects? SJ

Oh, c'mon. Everybody knows that a cigar butt tastes better than McDonalds!

We forget how much uncertainty there was at that time. For me, it was exhausting as I was deploying any available cash and lightly margining my accounts. Every day I would go to work, and then every evening I would come home and try to evaluate 10 or 12 excellent new opportunities. I'd be awake at my computer at 1am sorting through opportunities to try to find the best risk-adjusted place for my dwindling cash. Just for a stroll down memory lane, the following is something that I posted on the Motley Fool in February 2009 about Wells Fargo preferreds (WFC-L), and I actually assigned a 5 percent probability that Wells would go under: Very timely thread. I just bought some WFC-L yesterday at about $480. I'm already down nearly 10% in less than one day! Nonetheless, with a $75 divvy, it yields out a shade over 15%. My intention is to hold this for the very long term (10+ years), as I believe I have locked in some seriously good returns. My thinking on my Wells preferreds is that there are four broad outcomes that I will get: 1) Wells is rock solid, makes a pile of money and five years from now we sit and snicker about 2009 -I get the divvies for five years, and the market price heads up to somewhere near par: annual return = 15% for the divvy + about 15% average annual capital gain! 2) Wells survives the next 5-10 years but income is weak as it flounders a bit with Wachovia -I get the annual divvies, but maybe no capital gain: return = 15% for the divvies 3) Wells runs into modest trouble for a couple of the next five years -Perhaps they skip the divvy for a couple of years out of five, so definitely no capital gain, but with 3 years of divvies out of five the average annual return would be roughly 10% 4) All hell breaks loose and Wells goes under -preferred shares probably worthless, permanent loss of capital, but I'll have probably gotten at least a year of dividends before any collapse My reading of the Wells financials is that #1 or #2 are by far the most likely outcome. Wells is best of breed and as long as loan losses do not get too silly they will earn a pile of money in 2009....their regulatory capital level is rock-solid. If loan losses do get silly, #3 is a possibility....they would be forced to chop the common dividend, and it is possible that the preferreds could be chopped for a couple of years. This would be a bad outcome, but not disastrous. I cannot imagine what the environment in the US would look like if #4 occurs. If Wells goes under, what bank would still be left standing? What would the unemployment rate be like if Wells fails? The US dollar would be worth what in those circumstances? It is possible, but I view it to be remote. And my Wells preferreds would probably be the least of my concerns in those economic conditions. So summing it up my expected annual returns for the next 5 years: Scenario Probability Average Annual Return #1 50% 30% #2 30% 15% #3 15% 10% #4 5% -25% Average return across scenarios: 19.5% Seems like a no-brainer. SJ

I am not so sure... Have you ever found an insurance company which was able to "engineer" a CR in between 100% and 102%? In my experience, either you get a good underwriter (CR of 95%) or you get a bad one (CR of 105%). And if I had to choose, I would like FFH to keep underwriting profitably, even if that would mean to grow its float more slowly. Cheers, Gio Isn't that why insurance companies all hire a legion of actuaries? They are the folks who estimate the losses on insurance products based on who is buying them. If the companies choose to underprice their offerings, then you get a 100+ CR. And, that strategy is actually okay. For several years FFH had 100+ CR and they made up for it by Hamblin Watsa shooting out the lights nearly every year. SJ

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees. So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps). It's a nice little addition, but I can't see it really moving the needle. SJ What difference do the boots on the ground make? The expected revenue stream for FFH from managing $1B of other people's money can only be about $10-20m per year. Boots on the ground might mean that they'll do a better job of investing, but it doesn't change the revenue stream. How is it relevant that they have separately invested $300m of shareholders money in this? For the record, I think it's great that FFH is snooping around for value anywhere that it might be found, including Africa. So, they pay some of their guys to find some opportunities and they invest the $300m. The only advantage of going the next step and launching the fund is that they can use the same analysis for other people's money, and collect a modest fee. What am I missing here? Think long-term, not short-term. If a firm hopes to successfully invest in these places, 1) it has to be part of the business culture in these places, & 2) have the runway to let the investments develop. At best its a 5-10 year lottery ticket, that might well not even work - but you have to be in it to win it. It benefits the next generation, not this one. We would suggest that the fees will simply cover the 'boots on the ground' cost of operation during its first 5-10 years, resulting in a zero cost option on business activity in these places. Should these places develop as expected, a known and entrenched 3rd party investment team will be a very valuable asset, & give FFH front of line access to deal flow. The fund itself would grow as well, the same as any other fund in a slowly improving investment climate. It's a fairly standard inter-generational investment technique, & explicitly recognizes that the team is getting old. We use a 'poor mans' version, with much the same generational aim. Never forget that FFH is a family business, that outsiders are allowed to participate in. There is going to be more of this. SD Yeah, I don't tend to think long term about these sorts of things. The returns are too distant and too uncertain, so I value them at roughly zero (ie, their probability of this giving them useful deal flow is probably only 15-20%, and then the time value of money means that I further discount it by 1/(1.07)^10 ) As long as it doesn't meaningfully distract FFH's management from their core operations, then it's all good. SJ

Nope, seeing #1, #2 and #3 simultaneously would be a historical accident. If you get decent investment returns, then the obvious thing to do is to expand your book by underwriting at a loss. As long as your cost of float is reasonable, just keep writing more business to grow the float.

I don't get it. Why are they allocating capital to such marginal opportunities? Can you just imagine Prem and Brian Bradstreet in a conference room somewhere: Prem: "Brian, any new ideas for allocating capital after we have finally closed our ridiculously unfortunate equity hedges that I pushed is into?" Brian: "Well Prem, we could buy a large slug of high quality US financials such as BAC or WFC to pursue your favourable Trump hypothesis...or we can allocate $150m to some shitty venture exchange outfit." Prem: "That sounds great, Brian. Since we have about as much exposure to Blackberry as anyone should ever have, and we've run out of low end Canadian restaurants to invest in, let's just go ahead and throw $150m at this venture exchange outfit. What could possibly go wrong? In fact, let's see if we can't use our investment to get Nelson Skalbania onto the board of directors." Brian: "If you say so, Prem. I'd be good with the BAC or WFC, but you're the boss..." Next episode to follow. SJ

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees. So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps). It's a nice little addition, but I can't see it really moving the needle. SJ What difference do the boots on the ground make? The expected revenue stream for FFH from managing $1B of other people's money can only be about $10-20m per year. Boots on the ground might mean that they'll do a better job of investing, but it doesn't change the revenue stream. How is it relevant that they have separately invested $300m of shareholders money in this? For the record, I think it's great that FFH is snooping around for value anywhere that it might be found, including Africa. So, they pay some of their guys to find some opportunities and they invest the $300m. The only advantage of going the next step and launching the fund is that they can use the same analysis for other people's money, and collect a modest fee. What am I missing here?

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees. So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps). It's a nice little addition, but I can't see it really moving the needle. SJ What difference do the boots on the ground make? The expected revenue stream for FFH from managing $1B of other people's money can only be about $10-20m per year. Boots on the ground might mean that they'll do a better job of investing, but it doesn't change the revenue stream.

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees. So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps). It's a nice little addition, but I can't see it really moving the needle. SJ

No, actually it does matter how you pay for it. If you think your shares are fully valued or overvalued, existing shareholders are clearly better off to pay using shares (it's the same thing as issuing new shares when the price is high...if intrinsic value is $100/sh and I issue additional shares at $500/sh, then existing shareholders are better off). If over the next 75 days FFH discovers that it has bought a turd which will impair its share value, then the share exchange price of ~Cdn$614 will likely be higher than intrinsic value and the share exchange is better for existing shareholders. On the other hand, if it is discovered over the next 75 days that Allied is a plum, then pro-forma intrinsic value might well be higher than Cdn$614, meaning that a cash purchase would be better for existing shareholders. The cash purchase is probably better from an intrinsic value perspective, but it is largely a question of whether financing can be obtained and whether the increased financial risk (ie, debt to asset ratio) results in an adverse response from the ratings agency. And it does call into question how they would manage their debt repayment schedule such that they do not have a couple of large slugs of debt maturing in particular years (there is already a large slug of debt maturing in 2021, it wouldn't be helpful to have another billion or so maturing in, say, 2023). SJ

What do you mean exactly? It seems to me that from Zenith to Brit they have made a series of great acquisitions in the insurance field. Their investment abilities in stocks can be very much critiqued of course. Not their abilities in buying good insurance companies at fair prices, imo. By now they have proven many times their focus has rightly shifted from poor insurance businesses for a price well below BV to good insurance businesses for a premium to BV. And Allied seems to perfectly fit this healthy change. Cheers, Gio No, I believe he's referring to the TIG and C&F acquisitions which almost destroyed the company. Correct, I'm referring to TIG and C&F. This is a big acquisition; if it turns out to be a dud - it could hurt them badly. However they've had more practice since these two, and been successful. Obviously, we hope that it continues. That's just the nature of business. SD If I recall correctly, TIG and C&F were both cash acquisitions, which increased the level of re-financing risk that FFH faced. This new Allied deal looks to be a little bit less risky to the extent that it seems like FFH is only obliged to write cheques for US$5 per Allied share, which by my calculations is only a cash use of about US$500m. So, not much risk of needing to re-finance the debt for that. However, there is still the risk that Allied could have some skeletons in its underwriting closet. There is always a possibility that reserves are insufficient, meaning that the loss triangles come back to bite FFH on the ass five years from now. The worst case (highly unlikely) would be the need to bolster reserves. There is no mention of a SwissRe cover for reserves for this acquisition ::) I like how the deal is structured in a way that lets FFH pay cash if they discover that they've bought a plum or pay in shares if they discover that they've bought a lemon. Prem's a pretty slick operator. SJ

What do you mean exactly? It seems to me that from Zenith to Brit they have made a series of great acquisitions in the insurance field. Their investment abilities in stocks can be very much critiqued of course. Not their abilities in buying good insurance companies at fair prices, imo. By now they have proven many times their focus has rightly shifted from poor insurance businesses for a price well below BV to good insurance businesses for a premium to BV. And Allied seems to perfectly fit this healthy change. Cheers, Gio No, I believe he's referring to the TIG and C&F acquisitions which almost destroyed the company.