StubbleJumper

Well, my point really was that ex-ante, we did not know that H&R was better than Abitibi. On the old board, I recall many people applauding the Abitibi purchase when it was made. Time has shown that it was a disaster. Same with Torstar and CanWest. So in retrospect, we call them "cancer generalise" and shake our heads about those investments. H&R worked out, and so in retrospect, we say that it was obvious. However, I will tell you, it was not at all obvious last fall. Nobody would lend money to H&R last fall. The credit markets were collapsing, everybody was talking about another great depression and 25% unemployment. There was speculation that commercial real estate would collapse, and vacancy rates would soar. Putting money into H&R last fall was a risky move. There was a significant risk of a permanent loss of capital. If it had not worked out, we would have called it a "cancer galopant" and people would be here posting about how obvious it was that FFH should not have been investing in commercial real estate last fall. The same is true with the credit default swaps. We have all kinds of people who are now saying how obvious it was to buy the CDS. I will say, that it was not at all obvious when the purchases were made three years ago. As with all derivatives, there was a significant risk that they would be worthless at their expiration, leaving FFH with a modest permanent loss of capital. It worked out that credit markets collapsed prior to the CDS expiry dates, and FFH made a ridiculous pile of money. But ex-ante, there was no guarantee that this would be the outcome. All this to say, FFH takes significant risks on our behalf. Some of them work out (credit default swaps, H&R) and some of them don't (Abitibi, Canwest). On the whole, we have a bunch of really smart guys working for us, trying to assess the likely outcomes. We should give them full credit for their successes, but also cut them some slack for the failures. The failures are a cost of doing business. If it was easy, everybody would be doing it. SJ

This one worked out very well. However, every once in a while, on this board we start bitching and moaning about the mistakes that FFH makes. We should remember the winners like this when we start questioning the wisdom of investments in Abitibi, Canwest, Torstar or Megablox. For all of these, the decision making process was characterized by a broad range of potential outcomes (from wonderful like H&R to atrocious like Canwest). Ex-ante, you really don't know which outcome you will get. Overall, you hope the winners more than offset the losers. Kudos to the team for this particular decision. SJ

Hmmm...so, that's like 9 bucks per share, before tax. Very nice!

I struggle with THI....I would really like to be a shareholder, but I can never seem to convince myself that it is a good idea. A couple of thoughts: 1) Domestic Growth: there is still a little room for domestic growth in Quebec and Western Canada. They can maybe increase their Canadian presence by another 25%. That's nothing compared to their historical growth. 2) US Expansion: This is the real wild-card. Will the Americans embrace Timmy's the way we have? If so, there is an absolutely enormous market available. However, history has been unkind to a great many companies who thought that they could take their success in Canada and simply apply the same formula in the US. I worry that Timmy's may get their head handed to them. 3) Product expansion: IMO, they have made a mistake by offering breakfast sandwiches. This broadening of their product line seriously juiced their sales numbers for the past two years, but it has caused their drive-through service to slow down to a crawl. Ultimately, this may end up cannibalizing their coffee and doughnut sales, as who the hell wants to wait in line for 15 minutes just to get a damned coffee and doughnut? If this occurs, they will be gaining relatively labour-intensive low margin sales, but may lose a chunk of the quick high margin coffee and doughnut sales. Don't these guys ever look to McDonalds past mistakes before making decisions? 4) Value: This thing is priced for perfection....or maybe it's priced for the potential US growth. But it sure isn't priced appropriately for their current volume of business. I'd love to buy it, but I just cannot pay such a large premium (20X EPS) based on the very uncertain prospect of US growth. SJ

I didn't actually vote, as it is not really a cut and dried question for which there is an absolute yes or no. However, I do think that some sober reflection is needed about the significance of the tail risk, and the ability to hedge it. In particular, FFH is exposed to a number of possibilities that threaten its existence (most are extremely low probability): 1) A series of uncorrelated mega-cats (ie, an 8.0 California earthquake followed by a cat-5 New York hurricane, followed by XXX, etc) 2) Financial fraud, mismanagement or embezzlement within FFH (à la Enron) 3) A ridiculous regulatory change from one or more governments (ex, retroactively applied changes in insurance coverage like in Mississippi, post-Katrina) 4) A drastic change in the credit-worthiness of the US government (ie, devaluation of treasuries) 5) Some crazy development in APH or in health risk related to food (ex, somebody discovers that high fructose corn syrup causes XXX disease and then the lawsuits hit every major food processor and beverage bottler) 6) The US government enacts some sort of legislation to inhibit or expropriate FFH's US operations (something like the Helms-Burton law). 7) Other crazy development that could bankrupt FFH??? These are all ridiculously low probability, but high impact events. They are so diverse, it would be hard to predict them, and difficult to hedge the risk. We know it's part of the package when you buy an insurer like FFH, but these are some of the risks that you really need to think about if you are putting an enormous part of your net worth into an insurer, or if you are going to borrow big-dollars to buy shares in insurers (not sure whether $50k is big dollars for everyone here, but it might be for some people). On the other hand, if you are reasonably diversified, then you probably don`t care about those risks.... SJ

Can you afford to eat the $50k if the world goes sideways from some sort of outlier event that culminates in FFH's bankruptcy? Never invest money that you cannot afford to lose...particularly in an insurance company! That consideration aside, Prem is targetting BV growth of 15% annually. Assuming that he is able to actually achieve this, FFH's BV at the end of 9 years would be roughly 3.5X current BV (ie, 250% return, assuming no change in p/BV multiple). In theory, at any reasonable rate of interest (ie, 4-8%), you would make out like a bandit on this kind of deal. Except if you get hit by a black swan....or a whole flock of black swans. SJ

Interesting article in the Globe about the impact of historically low interest rates on Canadian housing prices -- and the potential risk to both consumers and lenders: http://www.theglobeandmail.com/globe-investor/easy-credit-soaring-prices-raise-new-housing-fears/article1346308/ SJ

You are absolutely right. Trying to time the market bottom is a fool's game. Instead, when you see value (that is, when you see securities that appear to give you an adequate risk-adjusted return), you deploy cash. When you can't find value, cash is a good option. Right now, it is possible to buy any number of wonderful blue-chip companies at 15-20X eps. I tend to hold the view that most of those are fully valued at current prices. I will not expose my capital to significant risk if I only have the expectation of a mid-single-digit return. IMO, at 10-12X, some of those options would be a great deal more attractive. Do not forget Rule #1 and Rule #2! SJ

Looks like I'm in the minority, but I'm completely comfortable there. I would respectfully suggest that Byrne has proven very little by getting these guys to settle out of court. There has been no "guilty" judgement, just an attempt by Rocker to terminate an expensive legal process that likely distracts them from their business and harms their reputation. The settlement means roughly nothing, as people settle out of court on a regular basis just to keep from blowing ridiculous amounts of money on legal fees (even if you are not guilty, sometimes it can be quite rational to settle out of court to make something go away....call it "protection money"). My interpretation of a $5m settlement is that Byrne didn't think he would be able to win the big prize at the big show. Principles be damned, he rolled over. Let us hope that the FFH lawsuit is built on a stronger foundation....and that the defendants will still have some money left on judgement day. SJ

Man, I wouldn't be making those kind of assertions on here. :-) I heard Canadians hate being referred to as the 51st State. Only when the speaker is somebody who lives in the 11th province.

So Byrne rolled over. I wonder whether he spent more than $5m on legal fees or less. Good chance he lost money on this one. Wonder what Prem has spent. SJ

Why do you really care if your portfolio takes a temporary dive? As long as you think that your current securities offer good value, then the market's broader moves are only a temporary distraction. Do you need the money soon? If not, you could end up paying a fair bit to buy "insurance" when you might not really need it. For whatever reason, last winter the decline in my portfolio value did not seriously psychologically affect me. Rather, I was a busy beaver looking for securities that were obviously mis-priced...and I deployed all of my cash. And then I margined lightly. I was so preoccupied with buying stuff, that the last thing that I was worried about were the market values of my existing securities! If course, I am certain that I will not need even a penny of that stash for at least another five years, so it's easy to ignore the gyrations. From a valuation perspective, I think you are correct that there is more room for the market to go down than up. I was a great deal more comfortable at S&P500 ~ 800-900 than I am now. With limited attractive options, I am accumulating cash in a government guaranteed savings account that pays me 0.75%. It's not much of a return, but I don't want to deploy cash for the pure purpose of deploying cash.....I want to see value first. When opportunities emerge in the next period of market dislocation, I will be ready! I will again deploy my cash, and if conditions are particularly attractive, I will again margin lightly. I just need to remind myself not to do anything stupid in an effort to reach for yield. SJ

WRT buying content, I would observe that e-readers may actually result in lower sales for book vendors (including AMZN) as it is virtually certain that people will just ignore the copyright (I personally know people who are already doing this with Kindle files). It is quite possible that the book industry will go the same way the music industry has gone after the development of mp3 files and broadband internet. I think you are right that online shopping will keep gaining market share from bricks and mortar. The implication for AMZN is that they may be able to offset lost book sales by increasing their volume on non-book products. Time will tell. SJ

Transferring accounts in-kind is a PITA. My experience with RBC was that it took about 10 weeks during which my previous broker effectively froze my accounts (which is fair) but the securities had not yet appeared in my new account. The good news is that I do not trade frequently, so the frozen assets issue was nothing more than an annoyance. WRT dividends, I had them rolling across in dribs and drabs for the 10 week period. Usually they were transferred over to my new account automatically, but there was one small divvy in my RRSP for which I had to make a phone call to wake up the admin staff. Anyway, it's not really my idea of recreation, but sometimes you need to send a message to your existing financial institution that their fees are out of line. SJ

The good news is that it seems that inherited wealth tends to get frittered away before it gets passed on for too many generations. There are probably some Bronfmans rolling in their graves when they look down (or up!) at what their heirs have done! SJ

You can only change management on a going-forward basis. But KFS has a problem with its past. IMO, there are still more skeletons in the closet. Just as a general comment, when you takeover a company, generally you try to pay less than what it's worth and when you sell a division, you generally try to charge more than what it's worth. KFS tried to sell (er, donate) Lincoln General for a price of zero. Tells me that they think it's worth less than zero. Nuff said.

All the riskiest loans are insured by CMHC, so that gets paid by Ottawa. But, there are still some loans on the banks' books which could go "up-side-down" if house prices really tank. In particular, there are probably a great many mortgages where equity is currently .60<x<0.80 that are at risk of going up-side-down in some markets. How realistic is this? Well, prices are high enough in Vancouver, Calgary, Regina and Toronto that a 20-40% correction is entirely conceivable (IMO). That is a very good sized chunk of the Canadian real-estate market. The big question revolves around the behavioural response of home owners. IMO, Canadians still have a greater tendency to stick to the old-fashioned values of repaying debts that they owe. Beyond that, non-recourse loans are not prevalent here, implying that you can't just walk away for the pure fun of sticking to the man. You pretty much need to be thinking of bankruptcy to walk away from a house that is seriously underwater. I tend to think that most of the mortgages that go underwater will still be repaid, as long as employment circumstances of borrowers remain reasonable. The other element where the banks are exposed is on consumer loans and credit card debt. If I know that I'm going bankrupt due to job loss and an up-side-down mortgage, I have a significant incentive the charge the hell out of my credit cards along the way (hey, if I'm going bankrupt anyway, might as well enjoy the last few months by charging vacations, clothes, restaurant meals, etc). Same deal with car loans; pretty much all car loans are underwater from the day the car is first driven off the lot. If I'm going bankrupt anyway (implying that I'll probably lose my car), the very last thing I'll do is make my car payment (just park it a couple of streets over to discourage the repo guys). Nope, on this one, it'll be Ottawa that will take the big hit. But the Canadian banks will still take a smaller hit. SJ

Ok. First off, it sucks to be you. You have found yourself in a complicated web of tax law, existing broker policy, willingness to change brokers, and your leveraging strategy. Obviously something's gotta give, and none of the options is exceptionally attractive. However, without wanting to seem like too much of a prick, that problem is an individual problem for which an individual must seek a solution. It is not an FFH problem, it is not FFH mismanagement, it is not FFH failing to optimize intrinsic value, it is not FFH expropriating shareholders' wealth. Ultimately, time will tell whether the de-listing is optimal for FFH (in terms of access to capital, talent, etc). However, I would not attribute this to FFH being a "bad partner." SJ I didn't explicitly refer to FFH as a "bad partner," though I can see how one might infer that. Given that this move may well benefit SOME shareholders while it clearly does not benefit me and, I would assume, many others in my position, I am having a bit of difficulty understanding how exactly this is supposed to be "fair and friendly." It was not my intention to go down this road. I was hoping for advice on what course of action to take, but I guess since I started by voicing my frustration I'll now have to settle for the value investing community wagging its finger at me and telling me I don't deserve to own FFH since I've been naughty and used leverage to do it. :-\ I don't think anyone is telling you that you don't deserve to own FFH. Rather, I think I was telling you that your problem is your problem, not FFH's problem. You have already identified potential solutions to your problem, but as it happens, you don't seem to like them. I understand this, but I have a problem when you suggest you are cheesed off with FFH. Personally, I didn't love the cash buyout of ORH, but I didn't try to solicit sympathy from board members about all the capital gains that I will have to pay (poor me!). Heavens, if paying income tax is our biggest problem in life..... SJ

ORH, C&F and US runoff will all still be operating mainly in $US. Given their dominance in the company, that would be an argument in favour of continuing to report results in $US. It also might suggest that for FX management purposes, FFH might still wish to pay the divvy in $US (ie, if you earn $1B and want to pay $200m in divvies, then probably best to try to match currencies as much as possible so that you are not put in position of having a gyrating annual divvy). SJ

Ok. First off, it sucks to be you. You have found yourself in a complicated web of tax law, existing broker policy, willingness to change brokers, and your leveraging strategy. Obviously something's gotta give, and none of the options is exceptionally attractive. However, without wanting to seem like too much of a prick, that problem is an individual problem for which an individual must seek a solution. It is not an FFH problem, it is not FFH mismanagement, it is not FFH failing to optimize intrinsic value, it is not FFH expropriating shareholders' wealth. Ultimately, time will tell whether the de-listing is optimal for FFH (in terms of access to capital, talent, etc). However, I would not attribute this to FFH being a "bad partner." SJ

IMO, it's because too few people know that they are getting royally screwed on exchange rates and there is no pressure on the banks to change. It would cost the banks a chunk of money to add US$ RRSP capability as it would be a significant information systems challenge, and then the banks would also lose the margin that the get from converting every little dividend back to CDN$ and from dinging clients a couple percent on each trade. Canadian clients focus far too much on the visible trading commissions (ie, we get totally pissed if broker X offers $9.95 commissions and broker Y has the audacity to charge $14.95). For the few dozen trades that I make per year, the difference in trading commissions amounts to bugger-all. Getting screwed once per year on a decent sized currency conversion totally overwhelms any differences in stock trading commissions amongst the big-5. The worst is that the banks' disclosure on their FX spreads is generally pretty poor, so it is really tough to figure out who screws you the least, and who screws you the most (probably IB is the best). SJ

Ya, and while you're at it, can you add the canadian stocks, as well as the convertibles and warrants??? Haha, only kidding. But seriously, I do really appreciate the feature, and I even went back and read some of your previous posts and l've been on the look-out for your posts ever since. . . although you've been quiet lately. Anyways, sincerely, thank you Nick Actually, adding the Canadian stocks is pretty easy, just use a Canadian symbol (ie, ca:ffh). But if anybody knows how to get Google prices for options please let me know, as I'd love to have that technology! SJ

The cost savings are significant. I seem to recall that many of us were whining about administrative costs ballooning a few years ago, which Prem attributed partially to Sarbanes Oxley requirements. So buy back ORH, de-list FFH, and you're golden (er, what about ORH-A and ORH-B?). Maybe it'll save us $1/sh per year at the FFH level? De-listing from the TSX probably would not save nearly as much money, as it is really SOX that made US costs silly. I view this as Prem returning to his principles (he had been forced to stray on a few of them). Years ago, he had a tendency to say that his job was to run FFH with a view for long-term profitability. With that objective, he disdained media attention, did not care about silly analysts who know bugger-all, and scoffed at all the silly buggers who waste their management team's time on quarterly teleconferences. He had to adopt the quarterly calls, and he had to make himself available for media over the past few years. Maybe now he is using FFH's financial strength to consolidate the demands on his time and attention, allowing him to focus on generating wealth (as opposed to granting interviews). It is also possible that Prem had originally imagined doing a traditional offering to US investors through a consortium of investment banks and brokers (ie, IPo/SPO type offering). In that case, the US listing could be quite useful to tap into a greater pool of individual investors. However, if you are using private placement instead to sell $1b of common shares at a time, well who needs the NYSE? SJ

The only problem is that Prem must already be a billionaire.....how much would you have to pay somebody who is already a billionaire? Thank god that Brian Bradstreet is not already a billionaire, because we could not afford to be without him! SJ

FFH may also end up with whole ownership of The Brick......