StubbleJumper

Well, I guess Greenspan can call himself a contrarian!

He means that we're soon going to see who's been swimming naked. I'm guessing that it might include a few bankers in Frankfurt...

Manna from heaven. Lindsey Morden was one of FFH's mistakes. If they end up getting the ~$100m for the stake they already sold plus another ~$200-$300m for their remaining stake, that would be a major victory for what has been a pretty crappy sub. Thanks for posting the article! SJ

I'm a little late to this party, but I've never quite understood the fixation with litigation. If they lose a lawsuit, won't they just launch 10,000 appeals which will take until about 2025 to resolve? By then, the financial crisis will be a faint memory and BAC's capital position should be much different. Or am I being too cynical about the US legal system? SJ

Nope. Prem meant that cats normally should account for 6 points of CR, full stop. In an average year, Prem is probably hoping to write a 98 which would include the 6 points. I'd say averaging 102 including the 6 points would be more realistic. SJ

We can live in hope.

I was actually thinking that the rate is not as good as what they obtained in the past. Since the preferred issue is equity, not debt, it's not tax deductible. The cost is 5% after tax, so before tax it would be 5%/(1-tax rate) or perhaps ~7.2%. At this time last year, FFH was floating debt at 5.8%, which strikes me as a much better deal for them than the 5% preferreds. SJ

Just a little question: How do we have any idea how big the entire CDS market is when it is fundamentally an unorganized and unregulated market (OTC)? You and I could enter into a CDS contract on Greek debt (but you should worry about be as a counter-party!), and nobody would ever know. Have I missed the creation of some central registry of these types of contracts or something? SJ

I had pretty much attributed the price rise to some weird meal that Sanj was eating. Chow down, Sanj!

Man do you move fast. What strike/term hedges did you buy? Vinod March $7 and April $6. I simply don't trust the Greek drama. Just for clarification as I'm relatively new to options: is your thinking that if Greece causes a panic in the markets and BAC drops, you can sell your position at $7 or $6 and buy more at the panic price? I have a margin loan -- the hedges protect not only the margin loan, but also provide enough locked-in value to provide for my family in the guns and canned food scenario. So you're long the stock, long some puts and your shorting a bond (by using margin). My vague recollection of the theory of put-call parity is that you've set up a position that roughly mimics a long position in a call. Is there a particular reason why you just didn't buy leaps instead? Just curious.

1) No, I am not making a general case against RIMM. What I have done is offer a perspective on the potential for a loss of capital. I do the very same thing for other investments. 2) Liquidation/runoff/break-up is only a relevant valuation method if you believe that management would actually do it or that management actually could do it. With respect, I would suggest that this view of the would would be patently wrong with RIMM. I'd be very surprised if management liquidated in the face of difficult business conditions. More likely they would throw more money into it. And that's the problem with this type of company. You can fritter away shareholders' capital chasing a market that you've already lost. 3) I never suggested that RIMM is currently worth $0. I simply suggested that a heavy, permanent impairment of capital is a realistic outcome. And I suggested that the stock does not need to go to zero for that to occur (heck, even at $5/sh we'd lose what? Like 75% of invested capital?). Zero is just the very worst possible case, and it does not strike me as very likely. 4) Never say never, but I would probably not buy a tech net-net. A tech company can be a net-net one year and could be far worse than a net-net five years later due to hubris in management. Lack of debt and low share prices do not mean that management will drive a positive outcome for owners. Unfortunately, in tech, it's possible to fritter away large amounts of shareholders' capital quickly. I hope this one works out well (which it might!), but I will not be investing in RIMM for my personal account! SJ

Yep. See post #25. SJ

You are right that all of those companies were levered, but it should be noted that leverage is only one type of risk to which companies are exposed. There is also operational risk, which for RIMM is enormous (ie, if people hate 2 or 3 generations of their products, the company could be toast and 2 or 3 generations might be only 5 years!). Just like with RIMM, all of the previous FFH train wrecks that I listed except ABH were not restructuring, but were rather acquired as going concerns. The market and FFH believed that there was some value there, but ultimately we have seen how it's turned out. With a technology company, it could be argued that there is even less certainty than with the other five companies that I listed, and it might be farther outside of FFH's circle of competence. And I hope you are correct. However, as I suggested, the history of information technology is littered with the carcasses of very successful companies that seemingly had a liquidation value above zero and many of these companies were run by some pretty sharp cats. While the market for smart phones is growing rapidly, RIMM's market share appears to be dropping almost as rapidly. Going forward five years, the market for smart phones will be much closer to its saturation point....and then what happens if the trend for RIM's market share does not change trajectory? What you have in that case is a reprise of WordPerfect, which was also a product that was a market leader, seemed to have liquidation value and ended up bleeding market share over 5 or 6 years. In reality, there's not much that Prem can do about that. Watsa cannot help RIMM make a decent product, he cannot help them maintain a reliable messaging system, and he cannot meaningfully help them with marketing. At most he can provide advice on corporate finance, and hopefully steer them away from making value-destroying acquisitions. Let's look at this in another way. If you cannot predict the smart phone market size, RIM's market penetration or margins in 5 years, how can you arrive at a reasonable estimate of value? Unfortunately most of us end up with a wild-ass guess which could range from a Corel-type result to a Google-type result depending on which ill-informed assumptions that we use. For people like me, it falls into Mr. Buffett's "too hard" pile. Since Prem has bought a large slug of this on our behalf, we need to at least understand the worst plausible case.....and unfortunately the worst plausible case is a heavy permanent loss of capital (history of tech investments shows that a zero is unlikely over the next 5 years, but not inconceivable. A large permanent impairment in value is not unusual). FWIW, we also had these types of discussions about the CDS. Many of us also "wrote off" the investments in CDS because we didn't know how to value them. Personally, I also write off FFH's lawsuit against the shorts.... I write off the investments in Irish banks... The difference between RIMM and some of the other investments that were subject to great uncertainty is that most of those other investments were at least situated close to FFH's circle of competence, so at least investors could console themselves that Prem was an expert in the area he was investing in. SJ

Silly like Canwest Global? Or silly like Abitibi Bowater? Or silly like Torstar? Or did you mean silly like TIG? Or maybe Lindsey Morden? The point of listing all of those train wrecks on which FFH was a passenger is that some value investments do not work out. Sometimes they do not work out even if you have full control of the company. Being an outside director of a company does not mean that Prem will prevent the inevitable (if it truly is inevitable, which is an open question). But it does impose something of a moral constraint on FFH which may prevent a "cut-and-run" strategy. So, no, the potential for a permanent loss of capital is [glow=red,2,300]not silly[/glow], IMO. SJ

This doesn't really make sense. You really think RIM is worth $0? Someone the other day said that they wouldn't buy RIM even at $5. I'll tell you this -- if were RIM were trading at $5 tomorrow, I'd be buying hand over fist. Is RIMM with zero? No, that's probably not the case right now. However, you can make a strong case for a permanent loss of capital if you believe that their phones suck, that clients have zero loyalty, that switching costs are not large, and that RIMM will continue to use shareholders' capital to pursue a market which they will inevitably lose. The history of technology is littered with companies that were leaders in a particular product/service and that eventually squandered shareholders' equity. So which view of RIMM is correct? Will RIMM be another Corel which was a zero for shareholders, or will it be another Apple which came back from the dead? Time will tell. As a user of both BB and Android, I have a fairly well entrenched (but perhaps not well informed!) view of RIMM's future. But who knows, Apple came back from death's door... And, we shouldn't forget that RIMM doesn't need to be a zero for this to work out badly for shareholders... SJ

Sorry Sanj, but I don't buy it. Being a credible, legitimate board member for a major company is a big job, requiring significant amounts of reading and several meetings per year (look in a 10K to see meeting attendance). It's probably even more of a challenge for a tech company, particularly in the first few years of board membership when directors are working at getting up to speed. If a board member additionally takes on a larger role on the audit committee, or compensation committee, it can take even more time. I have no doubt that we're currently getting 60 hours per week out of Prem. No complaints there. However, it is not in my interests for him to instead spend 4 hours per week on RIMM and only 56 on FFH. As FFH gets larger with more international subs and more non-insurance subs, the leadership requirement is increasing. It's a bad thing for us when Prem dedicates his time to other endeavours. I can accept that he would dedicate his time to charitable or social initiatives (church, universities, etc), but if his mind is to be dedicated to a profit oriented business, it should be to FFH's business. SJ

Throwing good money after bad. First FFH made a significant investment in a tech company that is out of touch with consumers, and had its market share being eaten away by competitors (BTW, this will get worse IMO as MS puts out increasingly credible products and as people become increasingly comfortable with Android). Now Prem is going to burn a whole bunch of his time on the RIMM board instead of doing what he should be doing, which is running an insurance group. And trust me, RIMM will be a sewer for time over the next few years as they try to stave off something that strikes me a inevitable. One of the few things that gives FFH any value is Prem and his investment prowess (they sure as hell can't underwrite). And now it looks like we have less of him. Nice. SJ

I've hated several iterations of MS products, but they seem to always come pre-loaded on the computers I buy, whether I like them or not. So to me, the real question that still remains is whether people and businesses will continue their periodic upgrades. If people keep buying new hardware, then even a crappy OS with a crappy UI will have significant sales.

Hey, don't worry about broad market valuation in a historical context. It's different this time. ;D ;D ;D SJ

What I would like to see is a freezing (or reduction) of the share count. FFH would better serve me by chopping the dividend back to their nominal $2/sh, and retain an additional $8/sh or $160m/year which it could then use for the various acquisitions that might otherwise result in the issuing of new shares (eg, Zenith). SJ

Maybe they were wrong about 2012 being the end of the world....maybe they really meant that it would just be the end of the EU? :P

Doh! I thought this would be a thread about tax-loss selling! :-[

Why? The balance of a mortgage with a 25 year amortization declines by about 3% in the first year of the mortgage and a higher percentage in subsequent years as the principal progressively declines. If the market value of housing declines by roughly the same percentage over the course of a year (ie, 3%), is it reasonable to believe that bank reserves would be any more or less adequate at the end of the year? Or am I missing something obvious (wouldn't be the first time ::))? SJ

I'd say you are correct that valuations in 1929 and 2011 are not comparable, which is why I'm running about 5% cash. However, the point was simply to illustrate how asset allocation can be used to hedge against a depression scenario (if you believe that such a scenario is plausible). An investor that even had a 70:30 allocation in 1929 would have been very happy that he had the 30 in treasuries! Somebody with a 50:50 allocation who rebalanced annually would have been largely intact by 1936. Of course, if you believe that such an event will occur again, the cash/fixed income element needs to be virtually risk-free (ie, maybe Canadian or US bonds, but perhaps not European ::)) Cheers, SJ

what do you mean ? can you explain in more detail ? or link or guide me to a better description ? What I mean is that a hypothetical reprise of the Great Depression would be very bad for those who maintain 100% asset allocation to stocks. Here are the S&P index numbers that I've quickly stolen from Shiller's website: 1929 24.86 1930 21.71 1931 15.98 1932 8.3 1933 7.09 1934 10.54 1935 9.26 1936 13.76 1937 17.59 1938 11.31 1939 12.5 1940 12.3 1941 10.55 1942 8.93 1943 10.09 1944 11.85 1945 13.49 1946 18.02 1947 15.21 1948 14.83 1949 15.36 1950 16.88 Ignoring dividends, somebody who was 100% equities in 1929 would have been underwater for more than 20 years. If you go to the trouble of taking dividends into account, the picture is much better, but you'd still be underwater substantially for around a decade if you started in 1929 with 100% equities. On the other hand, if you had a 50:50 asset allocation and periodically rebalanced as equity markets crashed to maintain your 50:50 allocation, you would have been selling your treasuries in 1931, 1932 and 1933 and buying equities at rock-bottom prices. When markets eventually did partially recover, your portfolio would be largely intact (particularly after accounting for disinflation during the period). The big question is how much cash/treasuries should one optimally hold to hedge against a repeat of the Great Depression? I'm currently at about 5% cash, so obviously I'm not putting on much of a hedge. SJ