oec2000

Would you be opposed to credit card companies being forced to show (prominently) the amount of interest that a customer would pay if he just made minimum payments? This way, no one can accuse the banks of being evil. I tend to agree with you that people should take responsibility for their actions and we get nowhere by namecalling banks. All businesses will maximise their margins if given the opportunity; banks are no different. People tend not make the same accusations of luxury goods companies like Hermes who make more obscene margins.

No, but the US has many headwinds that Japan didn't have in 1990 - overleveraged consumer with impaired credit histories; states and municipalities in fiscal distress; commodity price inflation squeezing disposable incomes; higher taxes on the horizon. This has long been a criticism of the Japanese system. There is a huge cultural difference with the US - Japanese managements do not have the same focus on profitability as in the US which explains the low ROEs historically in Japan. Sony is a good example of a company with a premium brand in the 1990s that was not able to translate this moat into superior returns for shareholders. Interesting - the numbers don't jive with the numbers I thought FFH mentioned (in the AR?) that prices deflated by about 15% in Japan. Wonder if FFH are looking at a different indicator? Anyway, we shouldn't expect the Japanese experience to replay itself identically in the US - there are too many differences. It is more important to identify the headwinds and tailwinds that the US will have going forward. If we just compare the US now to the end of 2007, I don't believe market valuations are materially different (other than in quality large caps); yet, the economic fundamentals are decidedly weaker.

Even if the Japanese market had started at 16x PE in 1989 (i.e at 10,000 instead of 40,000), the market today would still be only about the same level as it was >20 years ago. I agree. I pointed out that the market (adjusted for valuation premium) being flat for 20 years in Japan must have been due to collapse in earnings. Unless the Nikkei market index doesn't include paid dividends, but I'm assuming it does include them. I'm not ruling it out either, but I wonder if our market with over 40% of it's revenues in international markets is as vulnerable as Japan's. Is our index better diversified by geography? I have no idea -- for some reason the guru's don't care enough to find out either (I've never heard them mention it). I've spent a lot of time on Google/Bing trying to find any mention of it, hopefully somebody else can do better. Right, you are being more fair by picking a better entry valuation (however still historically quite high), but you've cherry picked a terminal point with a historically low terminal valuation. And in the 1965 the market P/E was about 23. So between 1965 and 1980, the market premium on earnings declined by nearly 2/3 -- not quite as big as the Nikkei valuation adjustment, but impressive nonetheless. I think if you had picked 1966 and 1982 as the terminal points you might see a Nikkei sized premium adjustment. Unless I'm mistaken, neither the Nikkei nor the S&P indices include paid dividends. There are total return indices that account for dividends but the widely quoted indices do not. In any case, dividend yields in Japan have historically been very low. Although I have no idea what the figures are, I would intuitively expect foreign revenues to be quite high for Japanese companies given their highly export-oriented economy. Again, it is hard to say without looking into the hard numbers but Japanese company earnings would have been hit much harder if they had not had the benefit of the US consumer over the past couple of decades. Japan also had a few things going for them that the US currently does not have. Low inflation and interest rates (1+% 10 year bond yields), a booming global economy that was awash with liquidity, and strong current account surpluses. The US today is much more vulnerable to economic shock. Whether you think the current economic troubles will end in higher inflation and interest rates or deflation and lower rates, neither outcome seems particularly favourable for stock valuations. I don't see how the current muddle through policies of high deficits and low interest rates can sustain moderate growth with moderate inflation without an eventual day of reckoning. I accept that 1980 is a cherry-picked endpoint but is it an unfair comparison given our current situation vs. that in the seventies? I don't think it is a stretch to make the case that the economic fundamentals today are at least as bad as they were in the late seventies.

The Japanese stock market in 1989, I've read, was at a P/E of 65x, and (I'm guessing) the businesses heavily reliant on sales within Japan have suffered the most. Starting at a high P/E of 65x is hard -- it was going to fall 75% due to mean reversion alone, and that kind of decline brings the market down to a P/E of 16.25x. From there profitability likely fell apart, explaining why it's absorbed 20 years of earnings. Anyhow, to compare Japan to the US market today, we're already at that collapsed level of P/E in the teens -- the risks now would be the collapse in earnings and, can you avoid it by sticking to the multinationals? Even if the Japanese market had started at 16x PE in 1989 (i.e at 10,000 instead of 40,000), the market today would still be only about the same level as it was >20 years ago. In 2000, the US markets peaked at 30x (?) PE. It is not implausible that the market could be lower than that peak after 20 years. I'm not saying it will happen but it is a risk I would not rule out yet. Even the US market went nowhere between the mid-1960s and 1980 and I do not think the starting valuations were as high as they were in 2000. I agree that value investors can beat the markets over such periods and do well - but your original point was about markets in general. There are two plausible potential reversions to the mean that would adversely affect markets - lower corporate profit margins and higher real interest rates - so we are not talking about exceptional stuff here. (In Japan, we haven't even seen interest rates revert to the mean yet.) Given their dismal track record, I am not betting on the politicians or the Fed engineering a happy ending to our economic problems. America will eventually get it right - but chances are it will take a crisis to force the policy makers to find real long term solutions.

There are lots of 20-year old Japanese who can say that markets were 300% higher when they born vs. current levels. There has probably not been a period in the US in the past century when there was such a combination fiscal and monetary irresponsibility so it may not be useful to rely solely on past US experience to handicap what is likely to happen.

You're not as far off as I was - I called a bubble in Dubai a full 8 years before it burst! If it had not been for the global financial crisis, who knows how much longer the bubble would have lasted.

I am not sure what this proves other than the fact that FFH missed out on the massive bull market in gold. In any case, this may not be the consensus view at HWIC - a HWIC principal I spoke to at AGM mentioned (in passing) owning physical gold personally. While I agree that it pays to be aware what the smart investors are doing, this is no substitute for making our own decisions based on all the facts and arguments we can assemble. The strongest arguments against owning gold are its significantly lower cost of production vs price and the impossibility of determining its intrinsic value. On the other hand, gold has many smart proponents who consider it the best currency to own during periods of financial dislocation. All of us have exposure to at least one currency even though we can't compute its intrinsic value. For most people, it is almost like choosing a religion - they choose the one that they are most familiar with growing up. As for real estate, FFH's investment in Kennedy-Wilson is a bet on real estate. It may be wrong to read too much into FFH's deflation bet. It may not be that they are absolutely convinced we will see deflation; they may see it merely as a significant risk that is prudent to hedge against. They seem more convinced, however, that the indebtedness of the western countries will impose a major drag on their economies; hence, their bet on long term bonds which do not need actual deflation to do well.

It depends on how much of the debt is non-recourse. Also, are things like HELOCs non-recourse? Going forward, the strength of consumer spending depends on where personal savings rates stabilise. Current rates are still below historical norms, I think. Also, employment and personal income levels are dependent on what happens to govt stimulus spending. Interest rate levels are also a factor to consider. The burden of debt is a function of the amount of debt AND interest rates - it is no good if the former drops and the latter rises. How much of the foreclosed debt were teaser rate loans that have been replaced by lower debts but which pay higher rates? The discounting of debt securities by the markets do nothing to ease the burden of debt servicing.

They can hold to maturity while funding with low short term rates. The Fed controls short term rates simply by setting them through the Fed funds and discount rates. Traditionally, the Fed has no control over long term rates - the QEs were an attempt to bring long term rates down, so far unsuccessfully.

I still can't get to how you conclude that "neocon" Harper "believes that deficits don't matter, favours a weak currency and monetary inflation, is anti-immigration (i.e. racist), practices religious bigotry" and which country has he invaded for resources? These are not present in his election platform or past policies.

Uccmal & Broxburnboy, Is it possible that you are allowing your ideological differences with Harper to cloud your judgement of his record and intentions? I always hesitate when I hear views expressed with absolute certainty. In her excellent book (which I strongly recommend), Being Wrong, author Kathryn Schulz describes how most people form their opinions of politicians based on quick first impressions and that their later explanations for why they like/dislike them are purely rationalizations to justify a view that was decided long ago. Confirmation bias - looking for evidence to support already formed views - aggravates this problem. The best recent example of this phenomenon is Sarah Palin. These are mistakes that most of us on this board know how to avoid in investing. We know that we should look for flaws in our views/arguments; that decisions are always probabilistic; that it is ridiculous to label stocks as either growth or value. Yet, it seems that people make exactly these mistakes in choosing our politicians - applying labels to them, and using the labels that we have subjectively slapped on them to make judgements with absolute certainty. In investing, we get indisputable feedback from our mistakes but in politics, our mistakes are cannot be so clearly or painfully identified so we continue to make them. Let me try to point out alternative interpretations of some of the points you made. Al, Harper's opposition to daycare/childcare benefits - this seems consistent with conservatives' general aversion to entitlement spending. Is it not possible that he prefers a markets-based solution to the problem? While it is certainly possible that your wife is right and his policy is driven by a hatred of women, there are many other plausible explanations. Maybe he feels that those who want the benefit of an extra income to bear the extra costs that are associated with it? (To give a somewhat ridiculous analogy, if I want a higher paying job that requires me to wear expensive suits, would you like to pay for my suits?) Without other evidence, it seems too much of a leap to conclude that this policy results from an anti-women view. This is no different from concluding that someone who is ideologically opposed to social safety nets is a people hater. (As an aside, this approach may not cripple economies contrary to what Myth suggests; the most successful Asian economies do not provide the social supports he favours; this is Asian common sense at work! The fact of the matter is that in Asia, many younger women do work and they cope by arranging childcare privately.) Women ministers - if he really hates women, why appoint so many female ministers in the first place? (I don't seem to remember Chretien having as many women in his cabinets). It would have saved him a lot of trouble and criticism firing them later. Whether we agree with his reasons is another issue, but most of the firings of the women ministers did appear to have some basis. Vision - imo is overrated. If we look back at the history of US and Canada, how many leaders stand out as being great visionaries? They are a minority and yet this did not prevent our nations from becoming great. Neither should we ignore the visionaries who were misguided (Trudeau, if you consider him one, or LBJ?) and caused more harm than good. In any case, in this election the choice wasn't between Harper and a visionary - maybe your vision is better than mine but I could certainly see no other visionary. Brox, Ruinous wars in the Middle East. It was the Liberals who got us into Afghanistan. Chretien was also ready to follow the US into Iraq if there had been a UN resolution. The evidence simply does not support your assertion that there has been a 180 degree turn in policy. Is the Libyan operation a ground invasion as you put it or a peacekeeping one? Most people would not paint it as black and white as you do. Balanced budgets - Harper/Flaherty maintained surpluses until the financial crisis (when the opposition, including the Liberals, complained they were not spending enough) and have committed to bringing the budget back to surplus, now likely ahead of their original timetable. Based on their track record, there is no reason to doubt their commitment. You may disagree with how they plan to do this but surely you cannot question their intention to do so. Don't forget their decision on income trusts which was certainly not corporation-friendly - a decision for which they took a lot of flak; it was a tough but right decision that the Liberals were too fearful to take after going 90% of the way. Neocons - it is easy to slap a neocon label on Harper and then lump all their worst traits on him. But, is this really an objective way to assess a person? Harper may share some of the neocon views but I don't think he comes even close to meeting your own definition of a neocon (deficits don't matter, monetary inflation, weak currency, invading countries for resources, racism and religious bigotry, etc). Do I live in a different Cnada from you? Is there a country called South Canada that you live in that we all haven't heard of? Why, oh why do people not spend as much time objectively researching our election decisions as we do our refrigerator (and in the case of this board, our stock) buying decisions? As far as I can make out, the Conservatives and the Liberals are very close in ideology and I suspect that if we could perform blind tests on their decisions and pronouncements, many Canadians would be hard pressed to identify who made it. Yet, people seem to view the parties as though they were divided by a huge chasm.

As a Conservative/Harper supporter, I have difficulty understanding the visceral dislike some people have of Harper and wonder whether this is evidence based or simply ideological and personal. Uccmal, you say Harper has no vision and is a bully. Wasn't Chretien the same? Yet, most people would say the Chretien Liberals were decent stewards. (Sure, had ethical issues - for which they were rightly brought down - and they also "crippled" our healthcare budgets.) Visionaries and nice guys do not necessarily make good leaders (Hitler and Jimmy Carter come to mind respectively) and bullies can be great (think Lee Kuan Yew). I use these examples not to disparage visionaries or justify bullies - merely to make the point that we should judge our politicians by their intellect, policies and actions than by their personalities (or worse still, by their appearance.) "He hates women." ??? Surely, this is a bit strong? What exactly has he done to women or women's rights? Broxburnboy, aren't you are engaging in fearmongering of your own with your talk of anti-abortion, gun nuts, the muslim peril and personal liberties? There is no denying that part of the Conservative base has kooks with these views but do they really reflect the views of Harper and the mainstream Conservatives? Maybe I do not follow politics closely enough but I have not heard/seen any signs that point to Harper seriously heading down this road. Anyway, we will soon know now that he has been given the mandate to do what he wants. I am no apologist for the Harper Conservatives and I do not think they are without fault. However, the reality is that in truly democratic societies, it is impossible for a highly ethical and honest person to be a successful politician - how would Buffett fare in politics, I wonder? So, I believe we are left with the option of choosing the least bad leader. And, we simply can't do that if we choose to look at the potential candidates through idealistic ideological filters - no one can pass the test. Despite not having a majority mandate so far, Harper has done a commendable job of balancing the conflicting demands put on the govt and economy responsibly and prudently; he has generally managed to chart a steady and consistent course (avoiding the knee-jerk type of policies so commonly employed down south to deal with burning popular issues of the day); and imo he has genuinely tried to do the right thing most of the time (e.g. income trusts and Afghanistan) rather than succumbing to the temptation of doing the popular thing. Imo, this is what differentiates them from the Liberals who have become the "opinion poll" party whose policies are driven by polls rather than by what they believe to be right (resulting in their constant flip-flopping on issues). I am truly curious to know what you guys see that the Harper's govt has actually done badly (major consequential stuff) that make you think so negatively about him. I am not a dyed in the wool conservative and honestly want to see what I am missing, if anything.

I agree (or rationalize, given my current holdings?) that FFH appears to be rock solid. And one of the nice things about this board is that few threads revolve around where each stock closed each day. But price is fundamental to discussion of value (the highest quality company is not a good investment at every price). I am interested in the opinions of others on whether the current price of FFH is high or low ... but mostly when accompanied by the reasoning. Long FFH. My judgement is based on the answer to these two questions: 1) Do I think PW and his team can meet or exceed their goal of growing BVPS by 15% p.a. over the long run (5-10 years)? 2) If they can, would I pay the current 5-10% premium over BVPS of around USD$360-370? To (1), I believe they can; and to (2) I would if I did not hold any today but because I already have a significant position, I would buy more only if it gets cheaper.

I retired when my kids were just under 10 (late teens now). No doubt the opportunity to spend more time with them is priceless. However, there has been a negative impact on their drive imo. This did not not become apparent until they became much older so I would caution you from forming a conclusion at this point. It's tough to know for sure whether this is a result of having non-working parents, poor parenting skills or some other factor but it was definitely not due to the lack of discussion of the importance of hard work and responsibility. My best guess is that as they get older they realise that the family is "privileged" and they conclude that you can get there without having to work really hard. They are not "bums" by any means and they have a sense of responsibility but it's hard to get them to "walk the extra mile" when necessary. This is a just a sample size of one, though! These are questions you should ask: 1) How much do your enjoy your day job? Would you continue to do it for no pay? 2) How confident are you in your investing skills to provide a sustainable income through good and bad cycles? 3) Is the opportunity cost of not managing your investments full time more than the income you earn from your fulltime job? 4) Do you have enough interests/hobbies to keep you occupied and sustain your social needs? 5) Is your ego tied to the status you enjoy in your job? I've seen people who were financially comfortable in retirement but were unhappy because of their loss of status/power they used to enjoy at work. The question you should not ask: 1) What others will think of your decision?

Actually, Buffett did "sell" large cap stocks like Coke, Amex, and others in 1998 by acquiring Gen Re for all stock transaction when Berkshire shares were trading at a significant premium to book. In other words, he sold ownership in Coke to Gen Re shareholders while receiving their bond portfolio in exchange in a tax free manner. Pure genius! It is the opposite of idiotic Kraft transaction with the Pizza business sale. An unintended consequence however of the Genre transaction is that Berkshire also inherited Genre underwriting problems which were eventually fixed. Regarding the Fairfax conference call, I thought Watsa punted a very good question from Jaideep. It is very disappointing. Can you imagine Buffett ever not answering such a question when the whole purpose of the call is to answer shareholder questions? The conference call is intended to be a review of the reported quarter and to fill in any blanks on topics that weren't covered in the report. Questions of strategy and such distract from that purpose. Doesn't FFH also have a policy of not discussing of individual investments they make?

Isn't this only true if: 1) you can use the dividends to buy stock at the same price that the company potentially could, and 2) buyback amounts are smoothed out like dividends are? 1) Management can opportunistically time buybacks when stock is cheap (which could be at anytime throughout the year) but the dividend receiver has no such luxury (unless he borrows to buy in anticipation of paying back when dividends are paid). Management also has the not so small advantage of being the ultimate insider which should place it at some advantage in its buyback activity. 2) Dividends tend to be smoothed out so in periods like 2008-9 when stocks became ridiculously cheap, a buyback strategy may give management a much freer hand to substantially increase its "payout" without having to worry about maintaining that payout in the future. So, assuming, management is rational and sensible, I would much rather they do the buybacks than me (through dividends). In addition to the tax advantage, the benefit over the long run could be significant. Conclusion: Two quarters are not always equal to 50 cents - e.g. when the quarters are Canadian and the 50 cents HK.

I think we need to differentiate between cyclical and secular macro trends. Cyclical macro trends are tough to play and this is where the argument for a bottom up approach makes sense. However, there are also longer term secular macro trends that are perhaps easier (but not necessarily easy) to spot because they usually start from extremes in economic circumstances. Examples include the tech bubble, the housing and debt bubble, the Japanese bubble in the 1980s, the interest rate bubble in the early 1980s. Buffett has clearly made a number of such macro calls in the past - winding up his partnership in the late 60s, identifying the cheapness of equities in the early 80s, the tech bubble, and the USD short. Of course, FFH has made quite a few outstanding macro calls too. Buffett may not have quite called the 2008 crisis but he did go into it with a boatload of cash which allowed him to profit during the crisis. Was his build up of cash in the pre-crisis years a macro call of sorts? The point I want to make is that there can be times when the odds are so strongly weighted in favour of a particular macro position that we would be foolish to ignore them. Buffett ha said it is dumb to differentiate between growth and value stocks. It could be similarly argued that we shouldn't just ignore macro for macro sakes. There are times that when the situation is so obvious that it would be dumb not to let the macro risks or opportunities guide our stock picks. It should boil down to our handicapping of the odds - if we can play the macro game with odds strongly in our favour, why shouldn't we?

So I bet you there are two reasons why they play this way: 1) easier to hedge against an index than to get into and out of big positions 2) potentially a big tax savings Agreed and I would add the following: 1) You can't be a fan of FFH or BRK unless you believe they are great investors who can outperform the broad market indices. Otherwise, you would would be complaining about why they are trying to pick individual stocks instead of buying the indices. If you believe that FFH can outperform the markets, then you would expect them to add value while reducing volatility by hedging this way. This is classic hedge fund stuff - without the 2+20! 2) Would shareholders have been better off if they had not hedged their equity portfolios in 2008? Where is the evidence to support the criticisms of their equity hedging strategy? Has anyone even tried to quantify how much they made or lost from the hedging mismatch? For all we know, they may have made a spread from the hedging. Sure, they have foregone the opportunity cost of more equity gains but surely we would be worse off if they had sold the underlying equity positions and taken the tax hit instead?

Ditto. Congratulations and thank you, Sanjeev!

Partner, I thought that the explanation of their short swap positions including exposure, cash settlement procedures, and collateral and counterparty risks in the notes to the financials were pretty clear and detailed. The information is there for us to perform the scenario analyses ourselves. Beyond that, it seems unreasonable to expect management to lay out all the possibilities for us. I don't have the data to investigate the historical record but I would think that the risk of the broad indices going up sharply (100-200%) while FFH's broadly diversified portfolio of equities went nowhere or down would be extremely low unless you think that the guys at HWIC have suddenly become the worst stockpickers in the world. So far, the evidence supports the more reasonable assumption that the loss on the hedges are offset by gains in their long portfolio. A more significant risk to worry about is a sudden sharp rise in interest rates. As the Q4 results show, FFH is not hedged and would be much more vulnerable to this.

Omagh, I have spoken to Brian before and I agree absolutely with your assessment - he not only knows what he is doing, he is honest about what he does not know and, most of all, he is very generous with his time and advice. I agree also with your assessment of BB's and FFH's skills in bond investing. Compared to them, Bill Gross is overrated (it will be interesting to see how FFH's deflation bet plays out because PIMCO has apparently made the opposite bet). However, FFH will intially be hurt (in mark to market BV terms) if there is a sharp rise in interest rates. If you check the notes to the Q4 financials, you will see that they materially lengthened their bond duration in Q4 2010. They are certainly not positioned for inflation right now. Everything they have done and said (Prem's mention of a commodity bubble) last year points to a deflationary view. This does not worry me because I think they will be right. I'm just saying that we should not be complacent about how inflation could adversely impact FFH. oec

Would you mind clarifying how you see the portfolio positioned for inflation if the equity positions are substantially hedged?

To put things in perspective, FFH's purchase price effectively placed a value of $500m (approx 150m Dinar) on Gulf Insurance, i.e. about 20x reported net earnings.

But that's exactly my point. You only reduce the risk on the individual position. At the portfolio level, it is not clear whether you have reduced risk. If you take the $100K and invest in another stock that is more risky than XYZ, you have increased your portfolio risk. To reduce risk in a portfolio, you have to switch from a more risky stock to a less risky one based on your analysis at any one time; switching it based on a mechanical % limit is not the risk reducer it appears to be.

The question is whether illiquidity can lead to insolvency. What if, because of a failure of Citi, people worried about the safety of their deposits with JPM and withdrew them? Who could JPM have sold their illiquid assets to then and at what price even if they could find a buyer? These are imponderables - we simply have no way of knowing how things would have played out. I would bet, however, that if the govt had done nothing we would eventually have had runs on the banks which would have brought the system down. The banking system lives or dies with confidence just as fiat money systems do but let's not start another discussion on gold. :)