StubbleJumper

You've hit it bang-on. There's no "just kidding" about it. Some of us have trouble forgetting 2003. Frankly, SAC helped me make a pile of money, so... Same with John Hempton. However, I do agree with posts that ridicule Fabrice Taylor!!!

I'm not actually convinced that any facts about the crime rate make much of an impact on consumers' decisions about installing an alarm (or taking any other sort of defensive measure such as not allowing your kid to walk to school or buying a hand gun). The decisions get made based on the perception of risk rather than any objective measure of risk. In many cases, it's truly an irrational, emotional decision. Many of my friends and colleagues have monitored alarm systems that cost anywhere from $300-$500 annually. Unless your community has a demonstrably high break-and-enter rate, that's basically wasted money. Canada's national break-and-enter rate is about 700 per 100,000 annually, implying that on average there's a very small probability of your house being hit. If your house does get hit, most people have basically nothing of interest to the crack-head perpetrators (ie, maybe a small amount of cash, some booze, or a couple bits of electronics), so your losses to theft are likely going to be small in any case. And if your losses do actually amount to something significant due to accompanying vandalism, then you just make an insurance claim. So, in essence, every year my friends and colleagues are incurring a 100% probability of losing $300-500 to mitigate a 1% probability of losing a couple thousand bucks. Crime rate be damned! SJ

Okay, so Sanj is making gentlemen's bets on how much capital that BAC will return to shareholders. To give everybody a chance to bet, I've created a poll. SJ

I use the BRK shareholder equity of 184.602B that omits the non-controlling interest line and wind up with a buy-back price of $89.40. Good catch. That's more conservative.

My spreadsheet says $91.55, but that's close enough to $91.53!

Me neither. I wouldn't put 100% of my assets in BAC. I just don't have ERICOPOLY-sized balls! I did, however, decide that the warrants are a sufficiently attractive opportunity that they merit nearly 100% of my Tax Free Savings Account. For my cash account and my Registered Retirement Savings Plan, I only purchased a "healthy slug" of the common. If things work out like I expect, I will have a good chunk of tax free money in 4-6 years! SJ

There's nothing wrong with BRK except that IMO it's not as attractive as BAC. In fact about two weeks ago, I liquidated the BRK that I had in my RRSP and in my TFSA to buy BAC and BAC.WS.A respectively. The messaging coming from BAC has been so ridiculously clear, the situation has really become binary - either I'll make a ridiculous bucket-load of money in the next few years or Moynihan is extremely incompetent (or a liar) for providing very bad guidance. IMO, the ridiculous bucket-load of money is a far more compelling explanation, so I more than doubled-down my exposure a couple of weeks ago. I still like BRK, but I just do not foresee it providing 30%+ annual returns over the next 3-6 years. Since BAC.WS.A looks like it can do that, my TFSA is now 95% BAC.WS.A and 5% cash. It's only been about two weeks since I dumped the BRK and bought the warrants, but I am already regretting the 5% cash. ::) SJ

Do the girls call you Stubble, or Stubby? You could always take some short positions if the world is supposed to end. Actually, it's the Jumper part that they tend to like. ;D

BAC and FFH. On the other hand, since the world is supposed to end on December 21, 2012, I might be just as well to keep it in cash to spend on hookers and blow.... SJ

I suspect that the reason is that not everybody wishes to hold FFH for a decade like you and me. Some people are more active investors and want to pick up a 50-cent dollar and then turn around and sell it for 80-cents in a year or two. People who are able to do that reliably can have a better return than just holding FFH or BRK for lengthy periods. I suspect that people are now looking at FFH as an opportunity to buy very cheap and sell a little bit less cheap sometime during 2013 for a quick 20%. As an observation, back when ORH was still publicly traded, many of us made good money by flipping back and forth between FFH and ORH depending on which looked more attractive. For whatever reason, the relative valuation of the parent and subsidiary would swing perhaps 30% back and forth a couple of times per year so you could play the relative valuation while retaining a long-term exposure to the basic P&C business and to the investing prowess of Prem et al. Too bad we can't do that anymore! SJ

Thanks. It seems like at this point there's two options: 1) They did have ownership but were very close to the line, hence this paper (presumably the case given the previous audits); or 2) They are about to get the case opened again. Sounds like they were quite desperate at the time. I have a bias for FFH since I own a lot of it, but other than blasting her character, I haven't seen any indication of factual mistakes in the article. I'm not positive, but I believe there is a third option. Suppose FFH was in the wrong with this transaction, and, after the fact due to the whistleblower and normal IRS audits the IRS went to the company about this issue. FFH along with PWC and BofA described the transaction in detail to the IRS (honestly disclosing all information and providing their opinion of the transaction), the IRS agents handling the matter listened to FFH and wrongly allowed FFH to tie out those 2003-2006 tax years through closing agreements. The IRS now (in 2012) issues guidance to IRS agents so that no one tries one of these transactions ever again. IRS doesn't go back to FFH to try to reopen those tax years, as FFH was completely honest about what happened/disclosed everything, the IRS just made a horrible call. Any thoughts on this? I think you're bang-on. If an IRS auditor had any concerns about the transaction, he could have asked to see the actual lending agreement between FFH and BAC (it's probably only 4 or 5 pages of legalese). I would be shocked if FFH failed to furnish that document in response to an IRS request. At that point, it was the responsibility of the IRS at the time to decide whether that particular lending agreement met the requirements for ownership. Why do you hope it was an isolated incident? As a shareholder, I want FFH to use all legal means to minimize their tax obligations. As long as they are transparent with the IRS and Revenue Canada, I have no qualms about them using every possible trick in the book. It's up to the IRS and CCRA to interpret the tax code and decide whether to allow any particular avoidance measure. SJ

I'm not so sure. Based on her last article (http://www.nytimes.com/2012/03/11/business/fairfax-financials-400-million-tax-break-revisited.html?pagewanted=all), the E&Y tax opinion was based on representations made by Fairfax (i.e., they did not independently look at the ownership question). Here's the quote from that article: "Ernst & Young’s clean tax opinion, Mr. Kleinbard wrote, was based solely on representations made by Fairfax. The auditor did not independently analyze whether the insurer obtained share ownership. He cited confidential deposition testimony from an Ernst & Young executive who had worked on the opinion. Ernst & Young declined comment." I'm not quite as familiar, was the second opinion you referred to from PWC as part of their regular audits? From the NYT article: When asked for comment on the opinion, Paul C. Rivett, vice president of operations at Fairfax, made this statement: “The I.R.S. guidance advisory was not issued to, doesn’t mention and has no effect on Fairfax. Two separate I.R.S. audits correctly concluded Fairfax owned these shares; moreover, Fairfax has a binding closing agreement memorializing that correct conclusion, and any statement to the contrary is entirely without basis.”

So in conclusion, if FFH materially misrepresented the lending agreement during its discussions with the IRS, then this whole thing could be re-opened. Since it was audited on two occasions, one would hope that the auditors would have asked to see the actual agreement with BAC, so there was really nothing for FFH to have misrepresented. Yawn, time to go back to thinking about the future, not the past. SJ

Divided loyalty is what will stop him. Is he more loyal to FFH shareholders who are bleeding capital from this purchase, or is he more loyal to his colleagues on the RIMM board? Personally, I was happier when it was 100% clear who he was working for. SJ

IMO, FFH effectively cannot sell because Prem is now a board member. What does it say if he dumps those shares? Better to be unencumbered.... SJ

Not sure how much sympathy that FFH will have for US shareholders wrt the fiscal cliff. For every US shareholder who gets a tax benefit from the potential advancing of the annual dividend, there'll probably be a Canadian shareholder whose tax planning gets screwed up by the unexpected lumpiness of dividend income. To a certain extent, FFH can't win on this issue. SJ

I think dshort.com is a wonderful site to keep track of market valuations. Over there you can find on a monthly basis: - The Crestmont Research P/E Ratio, - The cyclical P/E ratio using the trailing 10-year earnings as the divisor, - The Q Ratio, which is the total price of the market divided by its replacement cost, - The relationship of the S&P Composite price to a regression trendline, - The S&P Composite P/E10 ratio by Percentile, among many other market valuation metrics. I highly recommend the site. Of course, I think you know that gurufocus.com provides the market-cap / GDP ratio. Hope this helps! giofranchi +1 for www.dshort.com I also like to look directly at the Crestmont website because, in addition to the regularly updated valuation work, Easterling occasionally publishes an interesting macro piece. Between dshort, Crestmont and Hoisington, you get very good historical context for current valuation.

Can't find a press release with the details, but here's the Globe's report: http://www.theglobeandmail.com/report-on-business/leons-buys-rival-the-brick/article5185175/ Presumably this should work out well for FFH? SJ

While there's room to debate whether the restaurants are shitholes or not, it's absolutely clear that the industry is a shit-industry. There are thousands of participants, extremely low barriers to entry and cut-throat competition. These chain restaurants continuously face pressure on their margins from every little immigrant-run eatery that pops up. While there may be room for both the chains and the immigrant restaurants, clearly this is a shitty place to try to make good money. But, I guess that's consistent with FFH's primary business of P&C insurance, which is also a highly competitive (shitty!) industry where there's little potential to build a moat. SJ As far as I know, the top 25% of restaurant chains returned 279% from 2001 to 2011. The median of restaurant chains returned 113%. The S&P500 returned 33%. “The most valuable business in the world are brand royalty businesses that can grow without capital investment” Bill Ackman on the new Burger King franchise business model. Maybe, Imvescor is not the case, but surely there are some fast-food restaurant chains that are valuable businesses! giofranchi Yep, that's all true. We call that a "survivor's bias." MCD has done wonderfully well, and some others have done wonderfully well. But Pizza Delight is a third-rate (fourth-rate) regional POS in the absolutely worst segment of the restaurant industry, without the scale to be the exceptional success of THI or MCD. Branding and loyalty are of value, but smaller players struggle to get that, especially with undifferentiated products like pizza. Just ask the franchisees of Dunkin Donut in Canada...or the Outback Steakhouse in Canada...or the Olive Garden in Canada. Or any number of failed quick service or restaurant chains. The industry sucks, even if there are a small number of long-term successful participants. Hussein Muhammed Ali who immigrated from Lebanon or Giorgios Giovakis who immigrated from Greece can almost always undercut them on price. SJ StubbleJumper, I just compared an Index, which returned 113%, to another Index which returned 33%. Both are subject to the "survivor's bias", right? My point is simply that to be a franchisee is tough: you must compete with Hussein Muhammed Ali and Giorgios Giovakis... But to be the franchisor might be really profitable. Anyway, I understand your point: not all franchisor are profitable, because competition is fierce, and so you have to offer high quality producs. Products that unfortunately Imvescor might lack! giofranchi The survivor bias comes in because your index covers the top 25% of restaurants which is basically MCD, YUM and THI (in Canada) and that's nicely stable. But IMO, there's absolute CHAOS in the bottom 75% with ridiculous levels of entry and exit, which is unlikely to be the case with the other industries to which the comparison is being made.

While there's room to debate whether the restaurants are shitholes or not, it's absolutely clear that the industry is a shit-industry. There are thousands of participants, extremely low barriers to entry and cut-throat competition. These chain restaurants continuously face pressure on their margins from every little immigrant-run eatery that pops up. While there may be room for both the chains and the immigrant restaurants, clearly this is a shitty place to try to make good money. But, I guess that's consistent with FFH's primary business of P&C insurance, which is also a highly competitive (shitty!) industry where there's little potential to build a moat. SJ As far as I know, the top 25% of restaurant chains returned 279% from 2001 to 2011. The median of restaurant chains returned 113%. The S&P500 returned 33%. “The most valuable business in the world are brand royalty businesses that can grow without capital investment” Bill Ackman on the new Burger King franchise business model. Maybe, Imvescor is not the case, but surely there are some fast-food restaurant chains that are valuable businesses! giofranchi Yep, that's all true. We call that a "survivor's bias." MCD has done wonderfully well, and some others have done wonderfully well. But Pizza Delight is a third-rate (fourth-rate) regional POS in the absolutely worst segment of the restaurant industry, without the scale to be the exceptional success of THI or MCD. Branding and loyalty are of value, but smaller players struggle to get that, especially with undifferentiated products like pizza. Just ask the franchisees of Dunkin Donut in Canada...or the Outback Steakhouse in Canada...or the Olive Garden in Canada. Or any number of failed quick service or restaurant chains. The industry sucks, even if there are a small number of long-term successful participants. Hussein Muhammed Ali who immigrated from Lebanon or Giorgios Giovakis who immigrated from Greece can almost always undercut them on price. SJ

While there's room to debate whether the restaurants are shitholes or not, it's absolutely clear that the industry is a shit-industry. There are thousands of participants, extremely low barriers to entry and cut-throat competition. These chain restaurants continuously face pressure on their margins from every little immigrant-run eatery that pops up. While there may be room for both the chains and the immigrant restaurants, clearly this is a shitty place to try to make good money. But, I guess that's consistent with FFH's primary business of P&C insurance, which is also a highly competitive (shitty!) industry where there's little potential to build a moat. SJ

FFH trades in $Cdn, while FRFHF trades in $US.

That's slightly disappointing. I was hoping that this would be an arrangement through which BRK could deploy several billion dollars of capital, understanding that BAM is typically trying to access capital. But alas, it's just a business arrangement between two businesses with low capital requirements. ???

If the market had a serious haircut of ~30-40%, I'd love a chance to buy high quality very large-caps at "fair" value, so that would be like KO, WMT, JNJ, KFT, MMM, etc. However, for most equities, I'd need a serious haircut to start a new position. For now, I'm still snooping around for the few large-caps that are obviously trading with a good margin of safety... SJ The ones you listed are good names. Then there's the crowd that likes INTC, HPQ or DELL, but I'm pretty shy about tech.

If the market had a serious haircut of ~30-40%, I'd love a chance to buy high quality very large-caps at "fair" value, so that would be like KO, WMT, JNJ, KFT, MMM, etc. However, for most equities, I'd need a serious haircut to start a new position. For now, I'm still snooping around for the few large-caps that are obviously trading with a good margin of safety... SJ