oec2000

Al, I haven't done it so I don't know the answer to your question. (Due to some quirks in my tax situation, I have not been able to use off-the-shelf tax software for my returns.) Perhaps, someone else here knows the answer?

To work out the exchange rate for every transaction would take a huge amount of time. It's not hard if you have your transactions on Excel. Daily exchange rates are available from Bank of Canada - download them to a worksheet and just use the VLOOKUP function in excel. It's a snap.

The only part that I don't bother doing is the following: "Strictly speaking, you have to compute the capital gain both assuming the FX rate stays constant during the holding period and also using the actual rates. You then use the first number as your cap gain on the trade; you use the difference between the two numbers as the FX gain on the trade." Cardboard, it seems we are in complete agreement. I don't bother to do the above either for the same reason you've given. I also agree with you about the amount of time we waste preparing our returns. ;D (I was up until 3am last Thursday trying to make sure I had not miscalculated my FX gains. I had not expected the amount to be so significant.) And the T1135 - I'm pretty sure they just make a bonfire from all the forms every year. oec

SJ, I do treat it the same way even when my USD account is in negative balance (which I did do deliberately late last year to hedge my currency risk when the C$ weakened sharply). Imo, it's consistent and it's fair. I'm quite happy to pay taxes on my gains as long as I'm allowed to claim my losses. The problem when you don't account for the gains/losses on cash is that you could end up paying taxes even when you have suffered a real loss. Of course, it could work out in your favour but I don't like rolling the dice.

You know what Mandeep, It is probably not a good idea to ask explicit advice on a message board, even one as good as this one. Each individual has their own style and abilities and thier own way of applying them. I have to disagree with you on this, Al. There can be no harm to an intelligent and open-minded investor of exposing himself to various ideas/concepts/styles of investing as long as he does not follow anyone blindly. The more he is aware of, the more likely he will find something that suits his temperament/inclinations. That's what most of us have done - your 10,000 hours of reading being a case in point. Like you, I've spent countless hours reading about investing - some useful, lots useless, others downright dangerous - and I find that I'm still learning. I have learnt lots from this board and I think it is it a great resource for anyone - beginner or experienced - who is interested in becoming a better investor. Thanks again to Sanjeev for making this possible.

Cardboard, I agree with your assessment and that is how I have historically computed my FX gains/(losses). (The tax specialist at TD who helps me with my returns has not questioned my treatment and we did discuss the issue briefly in the past.) It is the only logical way to compute your gains, imo. Using your example, ignoring the movement from 1.30 to 1.40 is hard to justify because it is clearly a gain. The bad news, from a 2008 tax year perspective, is that you will likely experience gains from these computations. In fact, for one of my accounts, the FX gains from cash was almost as much as my capital gains from stocks! (I hope to get my revenge when the USD eventually weakens.) On the point raised by others about using the average rate for the year, it is my understanding that for securities transactions, you MUST use the actual rates on the transaction dates - there is no option. (The average rate can be used for income.) Strictly speaking, you have to compute the capital gain both assuming the FX rate stays constant during the holding period and also using the actual rates. You then use the first number as your cap gain on the trade; you use the difference between the two numbers as the FX gain on the trade. Finally, you add up all your FX gains (on securities and on cash) and ignore the first $200 of gain or loss. (The first $200 of FX gain/loss is exempted/disallowed.) I cannot refer you to a CRA bulletin but I feel that if you do it consistently, you cannot be faulted by CRA. And, if you, like me, believe that the CAD will in the long run appreciate against the USD, it is to your advantage to adopt this treatment. That will be $500/hr for the opinion. ;) oec

Preferreds! I'm flogging a dead horse here but if your goal is to do 3x in 8 years, I can think of no easier "couch potato" strategy. E.g. if you are happy buying common stock of financials (e.g. USB or WFC) with the attendant dilution risks, why not buy the preferreds which are trading at about 50% discount to par and yielding approx 10% (USB) and 15% (WFC)? Assuming things go back to normal in 8 years, the preferreds should have doubled back to par value; add your 8 years of dividends with some compounding and you have 3x your money. If another opportunity arises like the last couple of weeks when preferreds were trading at 20-30% of par, you can achieve 3x money without raising a sweat. :) To be fair, I have not addressed the issue of how you get the full $133K to be fully invested to day! To the extent that you have to build up your capital over the 8 years, tripling will obviously be a tougher hurdle in the out years. So, you may need to achieve 5-6x return on your earlier investments to come up with an average of 3x over the 8 years - in which case, you may have to look into FFH LEAPs (but understand these are options and you may end up with negative 100% returns!).

10% in combo of long FFH Calls, short FFH puts & FFH/ORH Common (mostly FFH Calls; effective notional long exposure 40%). 20% preferreds (80:20 US: CDN) 10% Asian stocks 5% in basket of energy and gold stocks. 5% in basket of small caps. Balance in cash. Waiting for opportunity to increase exposure to energy sector to 20% and good quality large caps (Buffett type stocks). If/when companies underlying the preferred holdings stabilise, will borrow up to total cost of preferreds to buy more of the other positions. The high yields (on cost) of the preferreds will self liquidate the borrowings relatively quickly.

Why is the spread this wide? because people can't get a borrow in C to set the arbitrage up and there is a finite amount of buyers in the pref market. We think the swap could take anywhere from 6 weeks to 3 months to complete. For guys who already own C common when they took a flier on it down near $1.00 you can sell your common here and buy the pref and essentially get back in the stock at 60c discount and lock in the gain on the flier you took. This trade is for those more bullish on C long term that (1) have to own because it’s part of the index and (2) think that C survives and is worth $5. For those who missed it the first time round and are still interested, the spread is even better today! Pfds still at $1.80 equiv and C at $3.10. That's a 70+% return on the pfds! Too bad my broker won't let me short C. >:( There is a solution, though. You can create a synthetic short by simultaneously selling the calls and buying the puts - costs a bit and ties up some margin but well worth it still, imo.

Stop buying back common shares, I meant.

Now, having said this, they may just want to raise capital now, keep the preferred shares, and build the capital base to really expand in a hardening market. The amount needed to buy back the As is so small as to be insignificant in the bigger scheme. If they really wanted to build up capital, they could simply stop buying back shares.

I believe the intention is to use the trust vehicle to raise new debt for ORH in the form of junior subordinated debt. As discussed elsewhere, the proceeds from this debt raising could be used to buyback the existing pfds. Sub debt costing 8% would be much cheaper than the ORH.PR.A 8% (paid from after tax income). Question is whether sub debt can be issued at 8% in the current environment. They could just be preparing to take advantage when market conditions become more favourable.

WRT the preferred buybacks, I'm not too sure that open market purchases will be that relevant in Q1 or Q2 2009 as the ORH common shares have been trading at $35-38. At those prices, I expect that we will see ORH actively gobbing up as many common shares as they can -- just as they've done over the past 18 months or so. At current prices, it would cost only about $60m to buy back the preferreds. If the intention were to redeem the preferreds in 2010 anyway, it would make more sense for ORH to do as much buying back now as it can and get the "free" $40m. At the very least, it makes sense to spend $34m to buy back the A pfd. I'm not so sure they will redeem the Bs in 2010 - unless LIBOR is significantly higher then. 1) I am already borrowing hundreds of millions with my left hand at 8% rates. 2) Is it a screaming deal to loan it to my right hand at at 0-2% net interest margin, even though I own 70.5% of the person paying me the interest? FFH's current investment decisions should not be based on their cost of borrowing which is a "sunk cost." It should be based on what they are earning on their lowest yielding investible asset currently which must be either cash or T-bills. There is nothing illogical with FFH giving a loan to ORH at 8-10% if that is considered a fair arm's length rate. Having said this, I agree with your later post that FFH should probably just buy the pfds directly.

I'm no expert on pfds but I have been reading lots of prospectuses recently. As far as I can tell, banks do need approval to buy back their pfds (a capital adequacy thing, I believe). I have not found anything in ORH's prospectus that precludes them from buying back the pfds and the recent purchases would seem to confirm this. Given where bank pfds and bonds are trading, it has struck me that the banks could materially repair their balance sheets if they had the ability to buy back and cancel their debt and pfds for pennies (ok, maybe quarters) on the dollar. These buybacks would also have the impact of stabilising the debt markets. I wonder why the Treasury has not considered this route of aiding the banks. Everyone seems to be focused on the asset side, not the liability side of the balance sheet. In fact, this is how I think the deleveraging of the US economy could be achieved not just for the banks but for all the other corporations - bondholders will have to take haircuts. Especially on the private equity side, irrationally exuberant lenders will eventually be forced to take losses or accept debt-to-equity swaps. Sorry if I digress! :D

Look for the silver lining. We will know the bottom has been reached when Moody's and S&P also downgrade BRK. ;D

I doubt that shorting reduces speculative bubbles. I think the shorts stand out of the way of the bubbles, and then jump in once the weakness begins. The problem is that 99% of investors have a long bias - we have been conditioned to think that way. That's why shorts are not able to stop stock market bubbles - because there are too few of them. My proposition was that if there was a more even balance between the numbers of longs and shorts, there would be less extreme market swings. It is wishful thinking on my part, no doubt, as nothing is going change anytime soon. To get a better gauge of the impact of shorts, we should look to the currency markets which have no natural long or short bias (every long position is also a short position). Apart from times when govts distort the markets by creating artificial pegs (Asian currencies in the 90s) or intervening to defend fundamentally unsustainable levels, I think the experience is better than in stock markets. Despite much larger volumes of 24 hour trading centred on just a few currencies, the volatility of these markets are much lower than stock markets. Would be interesting to see what academic studies there are on this. Btw, my recollection is not clear now but I thought that several studies recently concluded that the short selling ban last Sep actually aggravated the problem. My point? Benign shorts (i.e. shorts like FFH who have no malevolent intent) do no harm and we should try to find solutions to tackle the problem of the "evil" shorts without banning shorting completely. There are too many unintended consequences of a full ban, one of which would be the effect on options markets. If the "evil" guys just migrate to the options pits, do we ban options also? How are we going to buy our cheap FFH LEAPs then? ;)

Thanks, dcollon and cman! I've not bothered about reading the tax provisions on US pfds in the past because I'm resident in Canada and don't qualify for the preferential treatment unfortunately. But, it is interesting that they could be highly tax-efficient for BRK and FFH. More after tax income for them and an indirect way for Canadians to benefit!

Cman, nice catch on USB L! I missed it myself - too many preferreds to monitor! ??? I have a question for you on taxation of pfds. Is 20% the highest tax rate on eligible pfd dividends for individuals? What rate do corporations have to pay, if any on these dividends? (Trying to figure out whether pfds would be a great tax advantaged investment for FFH/ORH.)

Some of the companies whose stock FFH purchased are beginning to look like the walking dead...The situation at CGS is critical, SFK and Abitibi Bowater may be soon under water. The hedges against the failure of some of these positions have been unwound and gains realized, in the near term we should expect that the losses against which these hedges were placed will also be realized. Most of these positions have already been marked down as at 31 Dec 2008. They took a huge OTTI charge Q4. Whether these losses are realised or not will have little impact on book value. Like Buffett, Hamblin Watsa will make some investment mistakes from time to time. What matters is that their successes outweigh their mistakes - so far, this has been the case by a big margin. This is good enough for me.

I know why FFH has been falling. There have been more sellers than buyers. ;D This forum is named the Corner of Berkshire and Fairfax for a reason. Aren't we members supposed to be value investors in the Graham, Buffett, Watsa mould? All this obsessing over why FFH is up or down is truly counterproductive. How is this different from listening to the talking heads on CNBC telling us why the market went up or down 100 points? Do we really learn anything? Do they really know what they are saying? All we should care about is that FFH's book continues to grow and that it's price continues to fall so that we can buy more. Sorry for ranting but I hate to see unproductive discussion crowd out useful commentary.

So it was the lost of the uptick rule and not the over leverage and bad loans? In general, I would agree with you that the shorts cannot "attack" something that is not in a weakened state. However, a case can be made that unscrupulous shorts can create sell-fulfilling vicious cycles. Soros's Theory of Reflexivity postulates that trading can sometimes change the fundamentals - I believe he used it to good effect when shorting the Pound in 1993 and later the Asian currencies in 1997/8. Capitalism would survive without the shorts, but not without the longs. So I could care less what happens to the shorts. Be careful what you wish for. As beneficiaries of FFH's shorting activity, we should be less quick to condemn short selling. One could equally argue that capitalism can survive shorting. The UK did, just as the Asian economies did. Or, I could argue that capitalism would survive without stock markets - so do you want to go back to a world without stock markets? Shorting has a legitimate role in free markets in that it can be a mechanism for imposing market discipline; it also facilitates hedging. In fact, if there was a more even balance between shorts and longs amongst market players, it is likely that we would have less speculative bubbles and excesses. We don't outlaw dynamite just because some people use it to cause harm. In the same way, doing away with short selling just because of a few bad apples doesn't make sense. Just to punish a few, you want to take away the benefits from people who use it for good? This is a sledgehammer approach. The uptick rule is a good compromise and we should try it first before we resort to more drastic measures, imo.

The most ridiculous thing was WFC preferreds selling for 17%+ yields. BTW, FFH has been buying these too (its says so in ORH's NAIC filing). That could explain why WFC was a smaller position than Kraft/JNJ yet still listed with them as his favorites, he not only holds the common but also preferreds. 20%+ actually! Does the filing identify which WFC preferred? Does anyone know how US corporations are taxed on preferred dividend income? Would FFH pay a reduced tax rate?

Shah, Thanks for your insights - most helpful. Look forward to your comments on FFH. oec

I won't be attending this year, I was planning on attending the FFH meeting, however my father planned a family trip that I had very little control of, we are coming back on the 16th of April. Hopefully someone can ask a couple of questions I have regarding the insurance operation. I may do the SHLD meeting. Thanks, Shah. I will be attending the FFH AGM. Will be quite happy to ask the questions on your behalf if can email them to me at [email protected]. Re BRK, how does one find out about the other events you mentioned? Suggestions on where to stay, etc?

Well OEC, that is exactly what I have done. I have not been out of FFH for 12 years and my position is now as high as it has ever been. Unfortunately the recent 35% drop in the FFH share price didn't help my portfolio value in these tough times. Al, maybe you might find this useful. It's a strategy I use to try and dampen the impact of FFH price volatility on my portfolio since it is also my largest position (although my % exposure is nowhere near as high as yours, as you've indicated in other posts). 1) I try to take advantage of sharp swings in FFH trading to sell options to reduce the cost of calls that I've bought. So, I might sell shorter dated calls against the longer dated calls that I am holding. For e.g., I did this after the short squeeze in Sep/Oct and more recently before the Q4 results. Yes, I do run the risk of limiting my upside if FFH has a major run-up - but I manage this risk by i) selling no more than half the number of calls that I'm long, ii) selling these calls in stages as the price keeps on going up, iii) doing the Derek Foster thing if the calls go into the money. If/when the price goes the other way, as in recently, I look for opportunities to sell puts with matching maturities to the calls I've sold. If I'm able to do this, my breakeven levels get better since I can only get exercised on one side - but I've collected premiums on both sides. 2) I also look for opportunities to swap between holding common and LEAPs. As long as the LEAPs are not deep in the money, they do not move on a 1:1 correspondence with the common (basically, the delta). So, if the common rises sharply, I switch out of the common into moderately in-the-money LEAPs - if the market corrects, the LEAPs should fall in value less than the common thus offering some downside protection. If the common falls sharply, I look for opportunity to switch back into the common - to get the full benefit of a rebound. (I have not done it this round because the calls are so cheap and I want to take advantage to build up a much bigger position with limited risk.) I know it's complicated and it's high maintenance but I don't like volatility and I am driven by a desire to squeeze out risk wherever possible. For a significant holding in extremely volatile markets, I feel this extra effort is worthwhile. Ericopoly, as the resident options guru, any thoughts on what I'm doing?