oec2000

Valuecfa, Sorry to hear about your situation. But, as I've been reminded many times by Vancouverites: After the gloom and rain, the sun always shines again. Your predicament is not permanent. Vancouver is without doubt a wonderful city to live in (it also happens to have the best and cheapest sushi in the world :)) - I chose to move here almost 10 years ago and have never regretted it. But it is not a financial centre and thus not a great place to build a sell-side career imo. On the other hand, it is not a bad place for a buy-side investor as it keeps you somewhat detached from the short-term thinking of Wall St and Bay St. Real estate prices should not be a consideration in your decision-making. Rents are still relatively low and a good option. Good luck.

Actually, Prem has been quite consistent about deflation risks for some time now. Even before 2008, he was putting out charts of how Japan played out. I believe HWIC pay close attention to Hoisington who have been firmly in the "deflation risk" camp for a while now. It took great conviction for FFH to have massive exposure to US treasuries during the commodity boom in 2008 when everyone else was worried about inflation (I remember myself, foolishly as it turns out, questioning their wisdom of being so exposed to USTs then!) Prem has also consistently questioned whether govt spending alone could offset slowdown in the 70% of the economy driven by the consumer. So, I don't think his/their view of the economy have changed that much since 2007/8. That they managed to catch the bottom of the market and ride it up till recently despite this view is just evidence of their investing genius. They have explained their deflation derivative bet as protection for the insurance business. Unless I'm missing something, the insurance business should be more vulnerable to inflation than deflation given that they collect premiums upfront and pay claims out later. I suspect that the deflation bet is more of an investment bet than an insurance one. As to the point you raise about why Japan's deflation has been less severe than the US in the 1930s, my guess is that it is due to a combination of factors - less safety nets in the 1930s (social security, FDIC) and the more global nature of the 1930s depression. Japan's tradition of lifetime employment must have kept unemployment rates from rising sharply; they also kept their banks alive albeit in zombie states; and Japan benefited from the fact that the rest of the world continued to experience strong growth thus allowing them to maintain very strong current account surpluses which in turn provided them with the domestic savings to finance the govt budget deficits used to fund stimulus spending. The problem this time round is that the deleveraging is more global with the US and Europe together comprising a much larger proportion of world GDP. The rest of 2010 could turn out to be very interesting indeed!

SJ, their target is to grow BVPS at 15% p.a. (close to but not exactly the same as 15% ROE especially with share issuance). Also, given the nature of their business, it's more appropriate to evaluate their performance using comprehensive income and not just net income (which is what you appear to have based your computation on). I'm not unhappy with their performance of a slight decline in BVPS (I agree with your earlier comment that quarterly movements aren't that important) but just wanted to point out the difference - which I think is important.

Can you help me understand total return swaps? I have assumed that these were synthetic versions of what exists in the options and futures markets, but more bargain priced. How do these work, and why aren't they affected by volatility? Onyx explains it well. To make it more simple, you could think of the TRS as an over the counter futures contract. Futures prices are a function only of the relative cost of carry of the two reference asset classes (in this case, stocks vs cash). Volatility does not come into the picture at all. Only options have volatility premiums because of the one-sided nature of the contracts (limited loss vs unlimited gain, for e.g.) The premium are sort of like insurance premiums.

Even if BP were to trade back to the level before the spill (highly unlikely until there is clarity over their losses imo), the upside is only 50%. Is the risk worth taking for such limited upside? There may come a time when BP is an attractive bet but surely it is premature right now when there is still so much uncertainty over the extent of their potential liability. I would rather go bet "red" at the roulette table - at least the potential upside is 100%!

Woodstove, Given your knowledge and experience in farming, would be curious to get your thoughts on Sprott Resource's (SCP-T) investment in One Earth Farms. http://www.sprottresource.com/one_earth_farms.html Their strategy is to lease farmland from the First Nations with the goal of creating the largest and most efficient farming operation in Canada. Sounds good on paper but isn't farming just a low return commodity business at the end of the day? SCP may just be trying to time the market cyle or perhaps they really believe in the long term secular story. Thanks, oec

Glider, Not sure whether it is too late for you but I just got a good deal through priceline.com using their "Name Your Price" function. Booked 3 nights at the Delta Chelsea -2 nights at US$80 each and 1 night for $69 (+20% for taxes and fees). (Showing $140+ taxes on GTAhotels.com. Sutton Place is quoted at about $120+taxes - it is a nicer hotel but it is a few more blocks away and not as convenient for the Airport Express). It's a notch below the hotels Sanjeev mentioned and not as close to the FFH meetings as the others but it is just a short train or cab ride away (or a pleasant 20-25 min walk). I've stayed there many times before and it's OK although the room quality can vary quite considerably. It can also get a bit busy sometimes. But, it's conveniently located (the Airport Express stops there) and I get free internet and room upgrades as a Delta Privilege Gold member. (If you sign up as a basic Privilege member (it's free), you can ask for early check-in and late check-out and I believe you also get free internet and local calls). If you are interested, use "Name Your Price" selecting Toronto Downtown North and 3.5 stars. You might want to start bidding a little bit lower than I did. (Long story how I got 2 different rates - won't bore you with details unless you are interested.) Should caution you there's no guarantee that you will get same hotel but I think chances are high if you do not wait too long. Also, my experience with priceline's star ratings are that they are quite reliable. (Friends of mine last year got a room at a nice hotel for $100 in downtown Omaha during the BRK AGM! That's really cheap.) (I'm still kicking myself for not picking up priceline stock when it sold off during the crisis.) Btw, the Airport Express is much cheaper than a cab if you are travelling alone and you get an extra 10% off if you book online. Hope this helps!

Damn! I missed the earlier portion of the discussion because CNBC in its wisdom decided to show Obama giving the same old Washington-speak. First time I've seen WEB on the other side of questions and he sure makes a good interviewer. CNBC should get him to do interviews occasionally. With him asking questions, interviewees would feel pressured to provide more accurate answers knowing that the interviewer is not the usual "clueless (relatively speaking)" anchor.

Thanks, Myth, for the presentation and tips. Like you, I prefer to look at reserves (as opposed to P/CF for e.g.). The problem is figuring out extraction costs and timing of extraction and also the reliability of reserve estimates across companies. Another factor which is difficult to quantify is how mgmt well mgmt allocates capital to replace reserves. I suppose the complications are no different from those involved in analyzing insurance companies and we should just rely on the "margin of safety" principle - the right investment is the one that looks so compellingly cheap that it just screams out at you.

Sorry, don't have an answer to your question but would like to ask a related question. I have been struggling with how to value O&G companies and have not been able to arrive at a satisfactory solution. Was wondering whether anyone has suggestions as to books or websites that deal with valuation of resource companies. Advice would be much appreciated. Thx.

Sanjeev, are you clairvoyant? For all our sakes, I hope you haven't jinxed the situation. ;) http://www.google.com/hostednews/afp/article/ALeqM5iPUypYzbtPSRw0bDSVW5LqS0qdHw I agree with you and the other posters about Acker. What galls me is his arrogance. It says it all about most of the fund managers out there - they're just very good marketing organisations.

This guy "sang" only after he was caught. It appears like he provided info not voluntarily but under pressure from authorities. I wouldn't class him a whistle-blower, whom I would define as one who comes forward with information to highlight wrongful acts, often at some risk to himself. They do it not out of self-interest but in the interest of the common good. This guy's actions are more like that the Galleon insider-trading crew who are cooperating with authorities in the hope that they will get lighter sentences.

Thanks, Lennie, for the links. In my experience, the House Price/Income Ratio has the drawback of not taking into account interest rates and structural changes in the mortgage financing market. For example, it makes cross-country comparisons misleading when countries have historically had very different interest rate regimes. Thus, the HP/I ratio have historically tended to be lower in "high interest rate" economies such as Australia and the UK and higher in low interest rate economies like Japan and Singapore. So, where a ratio of 5 would be historically expensive in the UK, it has historically been cheap in Singapore. Whereas in recent times global interest rates have converged, interest rates were quite diverse among countries in the 1980's and 1990's. This explains, to some extent, the upward trend in HP/I ratio in countries like Australia where there has been a structural shift downwards in interest rates. The other question I have with the Demographia numbers is whether they use the actual median income for the cities measured. I have tried to find median income numbers for some cities before and they do not appear to be generally available. Imo, the mortgage payment/income ratio is a much better indicator of affordability. If anyone has come across affordability studies that use this or a similar measure, it would be instructive to compare these with the Demographia study.

You're right, of course. My error. I got confused with the preferential tax treatment of dividends paid by US companies. Since FFH is a Cdn company, this preferential treatment doesn't apply to you. The point I wanted to make was that a US taxpayer with a high marginal tax rate gets penalised by a high dividend payout. Lower dividends = higher book = higher share price = long term capital gains which are taxed preferentially and only when the stock is sold. Like you, I'm retired so can understand your preference for income. However, I deal with the situation differently. I have a HELOC that is enough to cover living expenses for 5 years. Combined with income from dividend paying investments, this can keep me going for well past a market cycle before having to worry about selling stocks. I'm thus able to invest without having to give undue consideration to dividend-paying stocks only.

If mgmt wanted more torque, they would have done that by issuing less shares for ORH. I suspect that PW wants to have enough slack in the balance sheet to capitalise on opportunities. (He has spoken about having the ability to ramp up premiums significantly in case the market should harden, for e.g.) It's irrational (and I would even say unfair to existing shareholders) to issue shares at a discount to intrinsic value and then almost immediately use some of those proceeds to pay higher dividends. My point exactly - that if the dividend were not so high, we would not be "forced" into exercising the LEAPs early. Perhaps I'm reading too much into it but I have wondered whether the rush to delist from NYSE and the "high" dividend are part of FFH's plan to wind down options activity - to close down another avenue for short attacks in the future.

Agree completely with you on the compensation bit. As for "raising the dividend to the moon", there is no reason why ROE should rise on what's retained except to the extent that leverage has increased because of the higher payout. The same ROE effect could be achieved much more efficiently through share buybacks at discount to book. Moreover, as a US tax resident, you should not be happy about the unfavourable tax treatment of Cdn dividends. Also, I wonder whether you have considered, as a LEAP holder, that you are adversely affected by a high dividend (although this should clearly not factor into mgmt considerations).

Many do not like his style (must be because of his bow tie :)) but Jim Rogers' commodities call should rank right up there too and it may not be over yet. His bullish China call and the short FNM/FRE/US financials call were not too bad either.

Well, that might be good in theory but in practice dividend paying stocks tend to outperform non-dividend paying stocks. Not sure whether there is a specific study you are referring to but wouldn't there an inherent negative bias in the "non-dividend paying stocks" sample (because most non-dividend paying stocks are unprofitable or have financial issues) that would make any study misleading? To me, it boils down to the return that retained funds can earn. Shareholders of a company that can generate a high marginal ROI would, imo, be better off if no dividends were paid out because earnings would compound at a much higher rate than otherwise and in the long run, stocks tend to be valued off earnings. As a long term investor in FFH, I would much rather see them keep their dividend payout low and use the surplus funds opportunistically in share buybacks, buyouts or acquisitions especially in cash-constrained times like these. I would have preferred them not to have paid any dividends in 2009, for e.g., and then issue fewer dilutive shares for the ORH buyout. Unfortunately, this is not the way markets or shareholders like it even though it makes perfect rational sense. To be Machiavellian about it, the best thing to happen for long term shareholders would be for FFH not to declare dividends for 2010, let the share price fall in response and use the surplus funds to buy back stock cheap. Of course, this is not going to happen because it is not the "friendly" FFH way of doing things. I'm just saying that long term shareholders should rejoice, not whine, if dividends are kept low.

A belated Merry Christmas and Happy New Year to all. (Was away enjoying the "Canadian winter' weather conditions in London and Paris (thank you PW, HWIC and FFH :)) and have not been reading the posts.) Jack, I remember sitting across the table from you urging you on. If I remember correctly, we ended up toasting FFH at $1,000! ;D Not quite there yet but I am confident we will eventually get there in the not too distant future. Off topic but since vrbo.com was discussed previously on this board, I thought I would mention that I had another great experience with a Paris apartment rental booked through them.

The answer should depend on how you plan to repay the loan, i.e. what are your sources of repayment? Take two extremes: If, for e.g., you are going to repay the loan with your employment income and you have a secure job with the Federal govt, then borrowing makes good sense. On the other hand, if you are relying completely on FFH dividends and the sale of FFH stock at the end of 9 nine years, then you will have to consider the risk of black swans and how comfortable with those risks.

Could you pls clarify your basis of concluding PWF is 50% cheaper? If you are using P/B, I'd like to hear your thoughts on using price to tangible book. The problem with using reported book is that it is distorted by goodwill which is not comparable among companies. I'm warming to MFC at these prices even though it is probably the most vulnerable of the lifecos to a market correction. Prior to their hedging "misstep," MFC mgmt seemed to me to be the most highly regarded among the Canadian lifecos. I'm wondering whether their "not hedging" should be compared to Buffett's sale of index puts and that the market has unduly penalised them. The long term nature of these equity guarantees are similar to BRK's puts and in all likelihood they wil be profitable eventually. I'm only beginning to look at MFC now so could be wrong. For e.g., it is quite possible, though unlikely, that they were selling these guarantees indiscriminately as AIG did with their CDS's. This is what I am trying to get my head around - whether mgmt understood and managed the risk or whether they were just lucky that the market decline stopped where it did before MFC became insolvent. What I like is that Don Gauloein(?) (can't spell nor pronounce his name!) seems to be long term thinking and not too worried about the stock price (at least in the short term).

Hi Scott, Assuming the 75% cash is not money you need for expenses, you already have too high a proportion of assets in cash. You say 75% cash allows you to sleep at night so I am not sure you have considered the downsides of cash. If you have seen very long term charts (30 years and more) that compare the returns of asset classes such as equities, bonds and cash, you will appreciate the unattractiveness of cash as an investment asset. The results are even worse when you factor in after tax returns because of the preferential tax treatment of dividends and capital gains. If you are in a high tax bracket, cash probably gives you a negative return after tax and inflation. For someone with a long term investment horizon, cash is without doubt the worst asset class to hold. In the current environment where governments around the world are all aggressively trying to reflate their economies, the danger that cash will be eroded by inflation is extremely high even if this may not happen immediately. For a true long term investor, cash should only be considered as a default investment that you hold only when you cannot find better alternatives. With cash yielding nothing right now, you should be looking for opportunities to deploy the cash rather than increasing it. You might find it useful to go through an exercise comparing cash to ORH.PR.A or WFC.PR.L (both of which pay >8% in tax advantaged dividends) under various economic scenarios. It will give you a better perspective on whether cash makes sense. Hope this helps.

Options and futures have different economic return characteristics and saying option premiums are a waste of money is like saying insurance premiums are a waste of money. Perhaps you are saying to those who want to hedge their long positions that they can do it more cheaply by using futures. However, it sounds to me like these posters want downside protection without completely giving up the upside - in this case, buying options can make sense. One also needs to consider the negatives of using futures. Unless tax is a consideration, true hedges (e.g. hedging a long WFC position with a short WFC futures position) serve no purpose - you're better off just selling the long position. If you use a dirty hedge (e.g. hedging a long WFC position with short S&P futures), then you expose yourself to a double whammy (both positions could go wrong for you). You also give yourself more margin positions to look after and monitor. Sure, options appear to cost more but you are getting something extra for it. Whether this is worth the cost is the real question that should be asked.

I thought about buying a second home a year ago; fortunately I looked harder at VRBO.COM and that talked me out of it. Just rent a place for 3 months. I've used VRBO several times in the past couple of years and recommended it to friends who have used it also. We have not had a bad experience yet so I recommend it. Nevertheless, I still hesitate and wonder whether I am going to get ripped off whenever I make the downpayment. Much cheaper and definitely more comfortable than staying in a hotel room esp if you are stayiong more than a week.

I'm in agreement about the dangers of passing over too much money to children. Yet, there are also examples where the children have done good in spite of having wealth handed over to them. (Buffett friend Katharine Graham, for one.) So, I wonder whether there is any real correlation between inherited wealth and bums or that the proportion of bums in rich families are the same as in the general population but it's just that if the rich bums get more press. Would be interesting to know if anyone has seen any studies done on this. Rather than criticising others, I thought it would be more interesting to take a more practical approach and ask what we, the intelligent and thoughtful members of this board :), would do if we had more than our "drop dead" money? For argument's sake, say you had $10m (I'm much less ambitious than Sanjeev!) and two kids. (Given the investing talents of our board members, it is very likely that quite a few of us may have to deal such a question in the future.) How would you deal with your estate? Would you leave them nothing on the grounds that they would become bums? If you would leave them something, how much? One possible solution: Set up a trust fund to provide a $1 for $1 matching income, subject to an inflation indexed minimum per child of $50K p.a. and a maximum of $250K. Rationale is to provide a safety net for the child who might, for whatever reason, be unable to earn an income, and also provide an incentive for them to earn more (to get a higher matching income). If the kid is capable of earning more than $250K, he really doesn't need much more help. Residual goes to charity. The problem with this income approach is that it does not allow for a smart and enterprising child to get a lump sum to snowball into billions.