StubbleJumper

I'd love to get another chance to buy at 0.8x BV or perhaps 0.9x BV. It's been bouncing around pretty much at book, which is a good deal....but I'm already so ridiculously overweight that I'd need a table-pounding deal to accumulate more! SJ

The way the deal is financed is actually pretty cool (if I have actually understood it correctly! :o ). So, they're effectively putting a down payment on the acquisition of the assets, with the remainder financed at ~6% using a zero-coupon note. PLUS, they have effectively purchased $100m of finite re-insurance against adverse development (remember, for the TIG and C&F acquisitions, they bought the $1B cover separately from SwissRE). Of course, this time it's not called re-insurance, but it works out to provide the same type of downside protection without getting everybody's panties in a twist..... Very creative. SJ

Hmmmm.... I'm guessing that Warren wouldn't have needed his elephant gun for that acquisition.....

returnonmycapital: I didn't really understand your intention of a consumer-oriented rent vs buy thread....instead I understood it as a buy a rental vs buy a stock or bond thread. Rent vs buy is actually a more interesting situation. Since you are effectively your own landlord, if you intend to live in your house forever, your investment is effectively risk-free (ie, you do not face deadbeat tenants who skip out on the rent or trash your unit...and you face no market price risk because you're planning to stay there forever). Given the fact that a huge element of the risk is eliminated, you can accept a much lower cap rate. Further, since your investment return on an owner-occupied home is effectively imputed rent (ie, the rent that you would otherwise pay to a landlord), you pay no income tax on your investment return. So, returning to your Toronto example (ignoring leverage), a cap rate of 4-5% after tax is actually equivalent to 5%/(1-tax rate) on a before tax basis.....meaning it could be as high as 8% before tax, and it's low risk (almost risk free?) because you are the tenant in your own house. Personally, that would meet my hurdle rate. SJ P.S. Those *are* outstanding numbers in Houston. It would probably work out to a 10-12% cap rate (after municipal tax and insurance). That offers a reasonable risk-adjusted return.

Actually, IMO, that's a disaster. If you're getting $15k on a $250k dwelling, once you pay municipal tax and insurance, your cap rate is probably going to be lower than 5%....if there's any management or condo fees, it could be a poor as 4%. The only reason why this appears to be of any interest to you is that you are levering the investment 3:1 (ie, 25% down payment). If you have good credit, you can probably do the same by purchasing a basket of perpetual preferred shares. There are any number of issues that have dividend yields of 5-6%, which you could use leverage to get similar returns to your real estate example at a lower risk. Personally, I would not even consider real estate unless I had a 8-10% cap rate....heavens, today I can buy Walmart shares at a 7% cap rate by just making a phone call to my broker, and I know that I'll never have a 3 am phone call from Bentonville complaining of a blocked-up toilet! SJ

Stable cash flow or not, what happens when interest rates increase by 300bp (note that I say when, not if!)? Even having to refinance $10b at a higher rate would eat into FCF. Good point on the depreciation vs maintenance capex. I usually assume that they roughly offset, but it it's true that the maintenance capex requirements are far lower, then that would be a serious contributor to value. I'm really having trouble with big piles of real estate and big piles of debt. I guess that means I need more than a superficial glance at the annual so that I can better understand their portfolio! SJ

Have I understood this correctly? BAM has $33b of debt and $0.5b of income? Seems like a hell of a lot of debt to earn $500m!

Get it through your head, another poster has been short NFLX since $110. NFLX closed today at $162.21. If you care at all about these guys, risk control is not an incoherent rambling, it is necessary to have a written risk control plan when shorting, which is followed rigorously, for investment survival. When people disagree with you, clearly they must be fools. That is a very sad way to see the world. I truly feel sorry for you if that's your reaction to principled, sincere, and honest disagreement. Minds are like parachutes, they only function correctly when they are open--J.T. T-Bone and Stove, let this be a lesson to you. Wouldn't you have rather learned from me, rather than losing money? As Benjamin Franklin said, only a fool needs to learn from experience. Risk control. I tried to help, but y'all didn't want to listen. I hate to say it, but I told you so. The pain of loss should sear the lesson onto your memory. As Sir John said, "Minds are like parachutes. They only function correctly when they are open." You should all be men and post apologies to me on this thread for abusing me when I tried to help you. http://finance.yahoo.com/q?s=nflx Harry, put it back in your pants. Until your most recent post, everybody in this thread had conducted themselves with politeness and dignity. Sometimes we're right, sometimes we're wrong, but there's no need for an apology when the discussion is polite. SJ

Why would we want to do that? An idea is only of value on a prospective basis, not on a retrospective basis. Having a chart that shows ex post outcomes does not help me make any money. We have a tendency to remember and celebrate the truly successful ideas anyway (like the FFH options!).

Gold has no fundamental use beyond a few minor industrial applications such as electronics. The entire "demand" for gold is thus predicated on a continuing role in pecuniary expression and in speculation. If the former should ever cease to be, it's virtually worthless. Now some have questioned whether its role in pecuniary expression will ever subside, but I would observe that our culture has changed significantly over the past few hundred years, and could continue to do so. I have no difficulty with the notion that gold could ultimately become as fashionable as eagle feathers.... For my part, I'll take productive assets. And if I were worried about the collapse of my country, there are any number of safe havens where I can buy productive assets to hedge my risk. Perhaps an apartment in Rome, a villa in Spain, a ranch in Texas and a plantation in the Dominican....but they'll all have a productive use! SJ

I don't have a complete list of all the parameters available, but in my watch list, I have columns for ticker-symbol, "price", "high52", "low52", "eps", and "pe". It's not an in depth analytical approach, but those five parameters enable me to keep an eye on the large caps to see whether a security might be heading in a direction where value could be present. SJ

I do this all the time in GoogleDocs. In the spreadsheet, just add the following function: =GoogleFinance(D9, "price") In cell D9 you put in whichever ticker symbol you like. There are also a bunch of parameters other than "price" that you can query, which is convenient. I just open up my spreadsheet at the morning bell, and it happily updates itself all day long. ;D SJ

Nope, energy prices were not really a tail-wind in the 1990s....the big improvements in crude prices occurred in the 2000s. There were, however, a number of circumstances in Canada that might not be available in the US or other countries: 1) We were coming out of the recession of 1992/93. This was important because employment insurance indemnities decreased and income tax receipts increased as people returned to the work-force. 2) Interest rates were coming down. This allowed governments to refinance the existing debt at lower interest rates as the bonds came to maturity. This was of enormous help. 3) The federal government chopped transfer payments to the provincial governments which was also a big help (but not for the provinces!). For the US and most European economies, my sense is that #1 is still a couple of years away, #2 is virtually impossible since interest rates are already near zero, and #3 is only available in federations where fiscal transfers are large. In the absence of #1-3, there may need to be a more aggressive reduction in program spending or in the size of the core public service. SJ

Presumably Lombard bought reinsurance to manage some of the outlier risk associated with this? As noted by others in this thread, the main risk is that a single plane could crash over the course of the contract and this would not come anywhere close to $9B. But there is always some possibility of a series of uncorrelated events taking out 10 or 15 planes....

Shorting anything is always a risky venture....but a precious metal might be among the riskiest. I have some comfort with the notion of attempting to evaluate the intrinsic value of Company XX and then shorting the hell out of it if the current stock price far exceeds the intrinsic value. You might be wrong about the exact intrinsic value, but if you have a decent margin of safety, your valuation work will leave you at least directionally correct. However, as we saw with tech stocks, that kind of over-valuation can persist for quite some time, and it can even become a great deal more pronounced before markets come to their senses. I have a great deal less comfort with the idea of shorting a precious metal because I have no idea what these things should be worth. Why does gold carry any value at all? Sure, there are few industrial uses, but the majority of the demand is for jewelry and for hoarding. I accept that it has always had economic value, but I really become puzzled when I try to assign some intrinsic value to it. All of that to say that I would really be uncomfortable shorting something that I cannot value and that has demonstrated a past tendency to run hard and fast. SJ

Sell because the market pops 2% in one day? No, not really....

Given that the hurricane season has been so mild, they'll likely have a super low CR this year, and smoking hot returns.

Hmmm. I seem to recall that the accounting definition of an asset is, "something that you own, control and that provides future economic benefits." By this definition, a house is most definitely an asset to the extent that your tenure there constitutes an economic benefit (ie, imputed rent and future resale). SJ

I'd be a little surprised if the motive was to pay off existing debt. The preferreds yield 5% after-tax. The before tax equivalent would be roughly 5%/(1-taxrate), or roughly 7.5%. That's more or less the same as the stated interest on most of FFH's existing debt. In addition to that, some of that debt would likely have to be bought back at a premium, so that would be a net income hit in the current year. IMO, the only debt that might be bought back would be ORH debt to permanently eliminate the need to do ORH financials.....however, I seem to recall that FFH has already found a work-around for that. I'm guessing that Prem sees that the price of dry powder is stupidly-low, and the potential returns to being ready (liquid, with lots of equity) for an opportunity may be high, so might as well issue preferreds. That opportunity might be another Zenith type of acquisition, or perhaps it'll be a buyback if the price of FFH shares should tumble for any reason. I remember a time when FFH had little room to maneuver. This is kind of nice to see the potential avenues that can now be taken! SJ

I tend to agree with Al. The price of the preferreds is attractive to FFH, and Prem is just applying the old rule from the Canadian Football League -- if you run a play and it works, keep running the same play until the defense learns how to stop it. I've seen teams run a sweep 5-6 times in the first quarter because it works for medium, easy gains. Issuing these preferreds in small amounts of $200m at a time strikes me as a very similar strategy....if it should no longer work, Prem will flip to a different page in the play book. Keep it simple! SJ

Only anecdotal evidence here. IMO, BRK.UN is a lending company that masquerades as a furniture retailer. Their modus operandi is to target the low end of the furniture market with nice looking, but fundamentally crappy furniture that you will probably be forced to chuck after 7-8 years of use. They make essentially no money off the furniture sales, but rather scoop the majority of their earnings through financing furniture sales to suckers and by flogging extended warrantees on ignorant consumers. The implication of this is that you can get inexpensive furniture there, and they are charging the right price....but you get what you pay for. I'm not surprised to hear of quality problems, given their target market (ie, people poor enough to need to finance the purchase of a bed or chesterfield, and ignorant enough to buy extended warranties). It's a good business! SJ

Has it been 25 years already? What a ride! So, let's see. The stock price at the beginning in 1985 was $3.25 and it closed today at $411. By my calculation, that rate of gain would put us at a shade more than $50,000 per share in 2035! Truly remarkable! Congratulations on an absolutely stunning quarter century! SJ

And the share count still increased over the past year! Let's hope that there are net buy-backs this year. SJ

SJ, would you care to help me understand how you avoid their 1.5% spread? BeerBaron It's no longer a relevant strategy for RBC because they now have $US RRSP accounts, but it was relevant in the past (and maybe it's still relevant for other brokers). Suppose I had US$20k of JNJ in my RRSP and I suddenly decided that I hated the company and want to sell. As discussed above, if I just filled out a sell order, they'd hit me for a commission of US$10 and then currency exchange of ~1.5% or about $300, implying a total transaction cost of ~$310 on a $20k trade. Instead, I could look in my taxable accounts for cash or securities that I could use to execute a swap for the JNJ in my RRSP. The easiest would be if I had ~CDN$21k in my CDN$ cash account, in which case I could simply swap the CDN$21k out of my CDN cash account and into the RRSP, and then shift the JNJ out of the RRSP into my US$ cash account. At that point, I could simply sell the JNJ for US dollars which I would hold in my $US cash account. The cost of this shenanigan used to be $35 for the swap, plus $10 for the sell order, or about $45 total. That's a hell of a lot better than ~$310. I also used to swap securities other than cash (eg: swap some KO shares in my taxable account for JNJ in my RRSP), but you need to remain cognizant of potential capital gains that you are triggering by "disposing" of the shares from your cash account. At times I would end up moving 200 shares of XYZ from my $CDN account, along with 300 shares of ABC and 500 shares of CDF from my $US account plus some cash in exchange for a couple different US securities in my RRSP. It was a PITA, but it resulted in significant cost savings. To make matters more interesting, if you attain a certain assets threshold (ie Royal Circle), RBC gives you 3 or 4 free swaps per year, which further reduces your costs of this type of strategy (ie, it becomes $10 instead of $45, which is waaaaay better than $310!) SJ

FFH hypes its stock? That's the first time I've heard that one! Usually the word that gets used in reference to Prem Watsa is "reclusive." SJ