Cigarbutt

"Feels like 1994" These days, really looking at optionality in FFH bond portfolio. Mr. Bradstreet has done an amazing job over time and the return component of the bond portfolio may not have been (and may not be) fully appreciated. Speaking of 1994, FFH had a net negative move on unrealized gain on bonds of 20,8 million then with the message that bonds would fluctuate and could be held to maturity. SE was 391,9 million. In 1995, the net move was +39,2 million. In 1997, as per annual disclosure, Mr. Bradstreet was building a significant put bond position with dual maturity dates and that position continued to grow++. In 1999, long bonds went down about 20% and FFH reported 1,241 billion unrealized loss on bonds. SE was 3,116 billion and then, FFH was facing a difficult negative cash flow environment. The unrealized loss position reversed after. What's the point: -FFH (Mr. Bradstreet) has been able to find bond opportunities in many different circumstances. -They don't seem to mind huge unrealized positions as long as their long term thesis holds. -My understanding is that they mostly expected rates to go down over time. -The actual cash position now at FFH is highly unusual. I understand the investment team is (was?) morbidly fascinated by the the way Japan evolved in terms of general interest rate yields. In a way , if you're not mindful of the JGBs-type widow maker trade, a simple way to make money would be to short bonds if you expect yields to go up. No? Can't wait to see the evolving strategy on this front.

Subtitle: The Power of Courageous Leadership in Turbulent Times. Did not pick up this book expecting business/investing insights. But it's about leadership and I thought it would be relevant to do a review here. May have practical value when watching a CEO "perform" either as a leader of one of your core holdings or as a key actor in a difficult situation (ie restructuring). This book will stay with me and I highly recommend it. https://www.amazon.com/Forged-Crisis-Courageous-Leadership-Turbulent/dp/1501174444/ref=sr_1_1?ie=UTF8&qid=1516544944&sr=8-1&keywords=forged+in+crisis The author, a historian, elegantly brings five historical characters to life. 1-Ernest Shackleton, a polar explorer 2-Abraham Lincoln, the 16th President 3-Frederick Douglass, an advocate and spokesman 4-Dietrich Bonhoeffer, a young German minister 5-Rachel Carson, a scientist/author/activist The chapters on President Lincoln show a man sometimes inhabited by doubts and frailty but at the same time determined to take what he considered to be the right path. I thought that the author's description fit nicely to the depiction of tranquil strength showed by Daniel-Day Lewis in the movie Lincoln. Impressive. The chapters on Dietrich Bonhoeffer expands on the "price" to pay for your actions. Those familiar with the works of Hannah Arendt on personal responsibility may particularly appreciate the degree of moral commitment. The author's most provocative proposition is that leaders are not born but made. It must be terribly lonely at the top. I got my copy from the local library but I have included a link above.

Just thinking out loud and not taking a specific position on the role of the ECB. The 2017 report is interesting and draws a realistic picture of the present situation. Thanks for the link and the observations. Just re-read their 2006 and 2007 Economic Forecasts. Definitions Forecast: prediction based on objective facts (ideally) or experience or something else. (my bold) Foresight: vision, or a horizon of expectations, based essentially on your internal farsightedness, prudence or general mental preparedness. (my bold) I would venture to say that if macro is useful at all, it should rest (at least try to) on the latter definition. With all due respect, I find that the ECB does not discount the possibility that what "it" thinks or does may not be relevant for the Markets in certain scenarios. :)

When you look at the interest rates (ie US 10 yr bond) trajectory in the last 30 to 40 years, the trend cannot continue unless interest rates become negative. ??? It may be reasonable to expect higher interest rates going forward. But cannot offer a "base forecast". With all this talk about relative valuations between asset classes, it seems that what you describe is becoming mainstream thinking. Another example (skip the section on China, look at graph Cyclically Adjusted Earnings Yield US 10yr Bond Yields... and associated commentary): http://archive.is/6BCMF I wish I could see what's coming but it is always darkest just before the Day dawneth.

Interestingly, the Globe and Mail had a small commentary about this topic yesterday with a reference to an article written by a hedge fund manager who used to be government economist. Is that what they mean when they say that some people are reaching for yield? https://www.theglobeandmail.com/globe-investor/investment-ideas/gi-newsletter/article37632557/ https://behavioralmacro.com/there-is-zero-correlation-between-the-fed-printing-and-the-money-supply-deal-with-it/ The gist of the article would tend to go along what rb describes in relation to the multiplier effect and velocity of circulation. The actual transmission mechanism does seem to rely on animal spirits. I like also the way Rainforesthiker describes the forces which are multi-factorial and often opposing. It must be a challenge these days to manage a bond portfolio, especially if your goal is to earn more than the benchmark. :)

@RichardGibbons I reviewed this topic. Thanks for shining a light on my (relatively weak) assumptions and for underlying other key issues. Live and learn.

One feature that I have followed and that may have implications in the opportunistic "future" of FFH is the growing presence of alternative capital, especially in the reinsurance market. Last year was unusual in terms of the size and frequency of major catastrophes. Despite the losses in several catastrophe bonds, there seems (anecdotal and some data) to be an abundance of capital (often from the same sponsors) who continue to provide "replacement" capital. This appears to be a slight positive for primary insurers as reinsurance rates are "kept" lower but some say alternative capital is looking into the territory of primary carriers as well. I find that the capital inflows provided by the insurance-linked securities market has been unusually strong in the last few years. I suspect that this may be a major enhancer of the underwriting cycle. It must be frustrating for reinsurers to have competitors who can provide capital almost out of thin air in softer environments. Even if this may prolong the softness of the markets, I submit that, in due course, it may also contribute (disappearing capital) to a harder market in a more difficult environment. From my limited perspective, I would like to see net premiums written by the reinsurance segments of FFH to remain stable or even shrink in this environment. www.artemis.bm/deal_directory/cat_bonds_ils_issued_outstanding.html What is a "SOP" valuation?

"guaranteed by our constitution" Definition of constitution: the way in which a thing is composed or made up; makeup; composition. Definition of Constitution: the system of fundamental principles according to which a nation, state, corporation, or the like, is governed. Isn't it revealing that the former explains the latter? But then, a quote from Mr Money Mustache: "A big part of the recipe for a good life is to love the place you live. Although you can compensate for almost any living conditions with a strong Stoic attitude and some training, it sure is nice to be surrounded by an environment that truly agrees with your constitution." (my bold) Another definition of constitution: the aggregate of a person's physical and psychological characteristics.

Not an easy question and there are always two sides to a coin. The Program was terminated at the federal level because: opinion that it was "cash for citizenship", many stated the Program provided little or no benefit to the host country, the tax issue that you allude to and skyrocketing home prices in certain places. All these reasons are at least partially valid. The issue obviously has political ramifications. There are two schools of thought (described in the second link). My take is that, instead of simply repealing the program, it could have been improved (selection criteria to improve the "fit", to include a form of active management (certain provinces have that), etc). http://www.immigration.ca/inc/uploads/2016/08/Fortin_Paradis-IIP_March_2010.pdf https://www.brandonu.ca/rdi/files/2014/03/2017.05.24-Slides-Canadian-Entrepreneur-Investor-Immigration.pdf Note/limitation: The first study does not cover the most recent years. Final comment: The IIP accounts for a very small portion of immigrants coming to Canada and an often overlooked variable is that, concomitant to their arrival, money "deposited" is channeled into funds lending to small domestic businesses.

Would like to contribute here. My opinion is that the Immigrant Investor Program is a good one (win/win). Canada has repealed the Program in 2014 and the province of Quebec has maintained it in parallel. Common sense and actual studies (which I can supply on demand) show that the receiving territory benefits from the arrival of immigrants who meet the criteria. Applicants must "intend" to settle in Quebec. Applicants come with a relatively large family, are often business oriented and children often get higher education. The main disadvantages are that the process is relatively long and integration assistance is suboptimal. I understand that legal assistance may be helpful. Just in case: http://www.investorimmigrationcanada.com/ I don't understand the 1,2 million quoted above. In addition, you may want to remember that tax rates in Canada/Quebec are relatively high and quite "progressive". If you are wealthy, the health insurance premiums that richer Americans pay may be a good relative deal. I hope that everyone is happy where they are but otherwise Quebec welcomes you, especially if you're rich. :)

"So, on the subject of disruption, what do people think about outfits such as Alimentation Couche Tarde or Parkland? Essentially, their business is to buy crappy gas stations that the majors want to dump and then operate them. So, is the value in those companies from their operations (selling a tank of gas and a pack of smokes) or is it in the real estate? Or will convenience stores which rely on gas station traffic go the way of the dodo bird?" Can't comment about Parkland but Couche-Tard history has been characterized by adaptive evolution. I would say that location (real estate) has value but most of the earning power comes from intelligent operations. For instance, they have recently "tested" rapid charging stations (+/- 10 minutes) in Norway and have recently put together a joint venture to expand across Europe. http://corpo.couche-tard.com/wp-content/uploads/2014/06/PR-EV-Europe-Circle-K_final-EV.pdf I understand that they plan to transform this disruptive event into an opportunity as customers may spend more time (and more $) when they "visit" the store during charging: fresh food, seating locations, TVs etc In addition, interesting to remember that they lost turnover because of cigarette sale bans and tried (recently and with no apparent success) to obtain cannabis selling rights in parts of Canada, as marijuana consumption is becoming legal within months. Disruption may come from all angles.

Just to expand on maintenance (and need to re-invest). In their last 13-F, it shows that Fairfax has a position in Northwest Pipe Company. From the company website and other sources, it appears that there is now a massive need for catch-up investments in water infrastructure. Here's a nice article wrapping up the topic and touching on the plastic/metal controversy: https://www.nytimes.com/2017/11/10/climate/water-pipes-plastic-lead.html

compounding, The transition question was mostly tongue-in-cheek. But "absolutely nothing" are strong words. I would bet that how you viscerally react to the second video linked above (seconds 13 to 22) may have a strong inverse correlation with your inclination to buy an electric vehicle. I think that there will persist a fraction of the population who will continue to identify with their cars and the scarcity argument makes sense but my opinion is that cars are likely to become more viewed as simple utility vehicles over time.

Recently had a talk with my two older ones about the declining value of cars, especially new ones. Showed them the typical curves and talked about opportunity cost. The goal, I proposed, is to look for appreciating assets. :) But came across this: https://www.cargurus.com/Cars/price-trends/Porsche-911-d404 The data is preliminary but significant nonetheless. For full effect, change the start date to March 1st, 2015 and update chart. So, contrary to conventional wisdom, if you recently bought a Porsche 911 (2018 model), the value of your car is appreciating! Not a car type but did not find a model-specific reason for this (unusual model, temporary demand/supply factors etc). Maybe, this is another area where animal spirits are in action. Or is it one of those unintended consequences that may appear during the transition to electric vehicles? For those with a more than average interest in the Porsche 911, you may appreciate the following: http://flatsixes.com/porsche-culture/resources/watercooled-911-depreciation/

Interesting post Dynamic. Have always been naturally attracted to industries being disrupted and it took 1 or 2 mistakes early on before the realization of the potential challenging impact of disrupters knocking on the barriers to entry. Good video. "We're on the cusp..." Not an expert but follow the field for several reasons including an interest in the oil and gas sector and previous investments in OEMs. You might like: http://image-src.bcg.com/Images/BCG-The-Electric-Car-Tipping-Point-Jan-2018_tcm96-180862.pdf Again, another piece of work that seems to be relatively objective but that contains also a "hype" component. Like they say, the tipping point is in sight but, at least from my limited horizon, the road won't be straight. It is hard to see a radical change within 5 years but after, it's anybody's guess. With innovation and technology, it all becomes so clear in hindsight. Your comment about depreciation made me think of Carmax (KMX), a used car reseller that I'm following and triggered an inspiration for a new post that I will make later today about "reappreciation".

I wonder if it is appropriate to compare Blackberry and The Brick. Not an expert in the Blackberry businesses (old or new) but the turnaround relied on huge shifts including strategic, products, markets etc So, I submit the jury is still out on this one. I can say a few relevant words about The Brick as I followed closely and held units, warrants and debentures during the down and up phase. I suggest that Fairfax involvement made more sense then as there were very specific issues that had to be dealt with (liquidity squeeze, inventory shortages, lack of staff (sale) and slashed publicity spending) that led to a downward spiral that could be stopped by a cash infusion which Fairfax could provide. Obviously, credit has to be given to the new management including Mr. Gregson, but the key event was the financing done by FFH and the founder (Mr. Comrie). In the future, I hope that they make more deals templated on liquidity issues and not on fundamental or existential issues.

Historically, looking at the evolution of high yield spreads, there have been times when the default definition or the contract terms didn't need to be interpreted. Funny, at a time when I find it may be useful to insure against credit risk (premiums appear low), I find that some suggest that high yield bonds were a good investment 10 years ago (fact) and may still be a good idea now (hypothesis) as spreads and volatility are reaching historical lows. With long term thinking and with risk-free interest rates where they are, junk bonds look relatively cheap! Fascinating. https://www.lordabbett.com/en/perspectives/marketview/us-high-yield-news-spreads-ten-years-later.html

Dazel, Agree with most of what you put on your list. For point 3, I'm not sure. The way the hedges were set up has been discussed. If what you say is true, I just wish they would have come out with the real reasons behind the change in strategy (hedges too large, too early, no longer sustainable with the release of "animal spirits" etc). For point 6, from what I read, price increases are lower and not widespread. Despite record losses, 2017 events barely met the definition of capital events and "alternative" capital continues to be plentiful. I agree that it will be interesting to see how and when they deploy their huge liquid capital position. The financial outcome also has a lot to do with their ability to participate in the hard market which will happen eventually.

Thanks for the link valueorama. The CDS market has been declining. Is it because it is no longer a useful tool? because of the legal uncertainties tied to the default definition which is really a misnomer, or because there is simply less emphasis on credit risk? The specific issue mentioned in the article is similar to previous interpretation issues raised before between the risk "shedder" and the risk "taker". It seems that the ISDA modified the master agreement (specific section on definition of default) along the way since the introduction of the product in the 90's. Perhaps just noise?

Wise words. Sir John Templeton had some words to say also about optimism and avoidance of excessive and unwarranted pessimism. OK. Analytical tools first came to me from a scientific background. I find too that there are similar principles to investment analysis but submit that the framework is vastly different. At times, pure quantitative work can provide perhaps a sense a security that may not be always warranted. In business analysis, much of the input has to be interpreted using subjective judgement, a degree of intuition and a fair bit of common sense. The challenge is to try to understand human nature and that has to remain work in progress. I understand that this Board is inhabited by out-performers and that's good but I continue to note that most investors (in the world in general) underperform. This is a conundrum that science has not solved yet. Quote from an article, Scientific Investment Analysis: Science or Fiction? Financial Analysts Journal, W. Scott Bauman, pp 93-97, 1967. Last sentence of the conclusion: "Evidence strongly suggests that the intelligent use of sophisticated quantitative techniques together with the use of discrete judgement offers fascinating rewards to the investors". Will ponder about the issues mentioned above as I'm about to go on my long solo cross-country ski ride. That's when I do my best quantitative work, far from my financial calculator.

james22, Your expectations or the market's? :) FWIW, I think LC's point about paying for quality is a good one (anytime through the cycle). With all due respect, it's just that the underlying reasons justifying the conclusion were not exactly convincing. For those interested, here's a link showing a follow-up of Mr. Siegel's work published in 1998. He showns that an investor buying/holding Philip Morris, Pfizer, Bristol-Myers, Gillette and Coca-Cola in 1972 would have done very well over time and that meant buying/holding securities with relatively high PEs (Coke at 46,4!). We know now that 1987-9 was a better time to buy KO but it was already a good target in the early 1970's. The table also shows that Lubrizol was not an ideal candidate then. In retrospect, for these 5 specific top nifty companies, even in a different interest rate environment, the stocks were "cheap"... Even JNJ with a PE of 57,1 and Disney at 71,2, were fair deals. https://www.aaii.com/journal/article/valuing-growth-stocks-revisiting-the-nifty-fifty

OK. Found this too: www.valuewalk.com/wp-content/uploads/2015/07/Roller-Coaster-Investing.pdf "If you end up owning a fantastic business, then plan to hold it for a long time. And prepare yourself for a roller coster ride. If you have chosen the right business to own, the ride will be worth it." But I'm still confused: http://www.thewealthwisher.com/2017/05/28/pe-ratio-nifty-valuation/ Recent Quote from Professor Bakshi (2017?): "Recent research done by my firm shows just how dangerous it is to remain invested in an expensive market. Since NSE started, every time when Nifty’s Price/Earnings ratio exceeded 22, the average return from Indian equities over the subsequent three years became negative.” Thanks for the reference as the gentleman is interesting. He often refers to Mr. Buffett. Of course, we know how Mr. Buffett handled the early 70's. I'm really trying to understand the interest rate law of gravity. Not there yet.

"I am continuously reminded of a study where someone analyzed blue-chips in the 50s/60s/70s, and calculated their earnings yield at the time, vs. using a DCF over the next 20 years and calculating what their earnings yield "should have" been. PG for example was trading at something like 25-30x earnings (aka traditionally "expensive") but really should have been trading at like 55-60x earnings because it was a good business that kept growing." LC, The last part of this statement got me thinking. I had to find notes that I took in the late 1990's. I have followed PG for a long time. From my notes (from Mr. Siegel's book Stocks for the Long Run, 1994), the yearly total return for PG from 1/1/72 to 31/5/93 was 12,6% versus the S&P at 12,0%. Didn't check exactly but I assume that buying PG or the S&P in January 1973 (peak) would yield similar relative results. BTW (1), for all nifty fifty stocks, according to Mr. Siegel, a similar picture emerge (although, if bought in January 1973, the basket of nifty fifty stocks slightly underperformed the S&P from 01/1973 to 05/1993. BTW (2), the nifty fifty group is not so well defined (in terms on how to tabulate results over time as firms merged, disappeared etc) and other authors using other methods and criteria have come up with results that are not as good for the nifty fifty stocks relative to the S&P. For fun, I am adding that for MMM (a previous holding of yours, I understand) the total annual return over the 1972-93 period was 10,0% Could you share the study that you refer to? I understand that we should pay up for quality because, in the long run, time is our friend. My questions: Do you consider that it was worth it to pay up for PG (quality) in 1972-3 vs the index? Do you think that most investors held the nifty fifty stocks in 1973-4 when they cratered more than the market? Do you think that the average investor holding period is more than 20 years?

So, to "adjust" or not? Thought process: Where are you in the spectrum? 1-ability/"ease" to find opportunities within universe (circle of competence): no vs yes 2-holding period: "short" term vs "long" term 3-attitude about the future (margin of safety): something to "protect" against vs expectations/"potential" 4-relevance of mean reversion: high vs low If you can find opportunities that you want to hold for a long time and that offers reasonable prospects of satisfactory returns whatever economic conditions, I would submit that you don't need to "adjust". Apologies as this post probably provides more questions than answers. I wonder where prudent optimism fits in that spectrum.

For those interested, a few more data points: https://www.bloomberg.com/news/articles/2017-11-28/how-opioids-started-killing-americans https://www.vox.com/science-and-health/2017/8/3/16079772/opioid-epidemic-drug-overdoses Tough issue with moral overtones. Is opioid addiction a medical condition or a case of moral failure? Your answer may be influenced by the personal proximity to a real world example. Controversies aside, the ingredients for the tide to start receding are there and the changing landscape in healthcare (data, network, AI?) may contribute. For instance, in the workers compensation insurance programs, simple measures (patient and MD "education", organized follow-ups in a network and suggestions for alternatives) produce results. In these cases, there is an incentive to reduce opiates use to reduce cost. It always helps when noble incentives are encouraged by cash savings. :)