omagh
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Posts posted by omagh
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Exactly... Buffett and Munger do their homework on competitors. I recall Munger, from a Wesco meeting, mentioning Cott Corporation (small carbonated soda maker in Canada) when making rhetorical points about Coca Cola's business model and potential threats to their model. If Munger knows about Cott, surely Buffett knows about Fairfax.
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When Buffett referenced Fairfax, he did say something to the effect of Fairfax being a "small" insurance company. I guess if you are Berkshire's size, pretty much EVERYONE is small!
Seriously, Buffett watches the insurance industry as closely as he watches any industry, and one cannot watch insurance and NOT know about Fairfax. And they did both participate in the USG deal...
http://archives.chicagotribune.com/2008/nov/21/business/chi-biz-usg-warren-buffett-nov21
-Crip
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The business model has been broken for Moody's; their moat was based on trust and credibility to demand outsized margins in a market where a few suppliers could be trusted enough to evaluate and grade securities traded in the aftermarket. This isn't the Salad Oil scandal -- http://en.wikipedia.org/wiki/Salad_oil_scandal. When American Express lost money in that swindle, the biz model was still intact and in 1963 the Buffett Partnership put 40% of its assets into that fat pitch.
The bet on Moody's has changed and a permanent capital loss has been incurred. Ergo, don't lose more capital and salvage what you can -- see Rule#1 in investing.
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Does anyone care to speculate where Buffett is going with this. Is he planning on selling all shares or simply getting down to a smaller number?
While Berkshire has trimmed positions in the past in order to maintain a basic level of liquidity, it seems like he's sold enough at this point that this is a pull-out.
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I have no idea how Paris made out, but that Warren Buffett fella seemed to do OK. From the same article...
Warren Buffett, a very successful money manager turned private investor, "has no idea what stock prices will do," but thinks our hypothetical investor should "buy some marketable security that represents a good business that he understands, at far below its value to a private owner." Private-owner value, he says, is where the businesses would trade between two well-informed private businessmen who are under no compulsion to deal. This varies from industry to industry, and tends to be based on multiples of likely future earnings. "There are businesses trading hands rather frequently, like banks, TV stations. . . . Business is done, and the prices in that world of private ownership are enormously different from what little pieces of paper [stock certificates] change hands for. Where it used to be that public companies were selling way above their private-owner values, now just the reverse is true."
Private-owner value gives you a benchmark of reality in the approach to securities, says Buffett, instead of trying to decide whether they're going to go up next month. "It's standard Graham-and-Dodd [the classic text], but all I can say is that if you're not in a hurry, it works."
Since I've had 3 stocks taken out this year (TSE:TUN, WEST, ORH) and a fourth about to be taken out (TSE:KOS), Buffett's opinion on private owner valuations holds even today (~35 years later).
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http://nymag.com/news/businessfinance/47178/
In a word, Mr. Paris sees ever worsening cycles that go something like this: a credit crunch that leads to a recession, which leads to reflation of the monetary supply to pump up the economy, leading to even higher inflation leading to controls, leading to a burst of superinflation when the controls are lifted, leading to an even more severe credit crunch to try to restrain the inflation, leading to an even more severe recession, leading to even more massive reflation (like a big tax cut) . . . and so on, ad disastrum. His book was written a year ago and "So far," he notes gleelessly, "things seem to be right on schedule."
As you would expect, Paris, a Chicago-based officer in the investment firm of Spencer, Trask, thinks this is the time to aim for survival rather than capital maximization. He suggests dividing your $10,000 among "cash equivalents," like Treasury bills or savings accounts (that can be quickly converted to cash); gold coins, like the South African Kruger Rand (which gold enthusiasts agree are more practical for the little investor than investing in gold itself); and stocks in gold-mining companies. Or, if you are trying to maximize capital, he suggests buying only high-quality stocks to try to catch what he expects will be the temporary updrafts in the market. "You had some great rallies in the thirties," says he.
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As with most over-builds in the economy, eventually there is a firesale below replacement cost -- http://en.wikipedia.org/wiki/Dark_fiber#Dark_fiber_overcapacity dark fiber and railways were classic over-builds. I'm sure that Ross has an elephant gun.
-O
Out of the multitude of businessmen out there, I hold Wilbur Ross quite high, and he had some very interesting comments about the U.S. commercial real estate market today. Cheers!
http://www.bloomberg.com/apps/news?pid=20601087&sid=aoRYl03Rw1_g&pos=5
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http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN3029761220091030
* Says no sign of hardening insurance market
* Says priority is to keep financial position strong
* Acquisitions, buybacks, dividend hike all options (In U.S. dollars unless noted)
TORONTO, Oct 29 (Reuters) - Fairfax Financial Holdings Ltd (FFH.TO) said on Friday the insurance market remains soft and that the company continues to put a priority on maintaining a strong financial position rather than on expending capital.
Fairfax, which deals in property and casualty insurance and reinsurance, said it would consider all options when it comes time to deploy capital -- including share buybacks, a dividend increase or acquisitions -- but for now it is guarding its financial position.
Has anyone seen anything on results anywhere? Sad for the rest of the world who do not know the
story.
Dazel
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Mo's back doing his thang.
Ex-A.I.G. Chief Is Back, Luring Talent From Rescued Firm
http://www.nytimes.com/2009/10/27/business/27aig.html?_r=1&em
While America generally loves stories of entrepreneurs making a comeback, Mr. Greenberg’s success may be at the expense of taxpayers. People who work in the industry say that if he is already luring A.I.G.’s people, he may soon be siphoning off its business and, therefore, its means to repay its debt to the government. “To me, it’s just going to be a matter of time before the valuation of what he’s building is greater than the valuation of A.I.G.,” said Andrew J. Barile, an insurance consultant in Rancho Santa Fe, Calif.
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The full hi-quality 1-hour episode can be found here:
http://thebox.bz/details.php?id=96807
The World's Greatest Money Maker: Evan Davis meets Warren Buffett
Monday 26 October, 9:00pm - 10:00pm, BBC2
The working title for this engaging profile of super-investor Warren Buffett was How to Be Rich. That had a double meaning: Davis's film is as much about Buffett's ability to treat his wealth sensibly and lead a rich life as it is about the way he got there. He is the second richest person on the planet, worth tens of billions of pounds, yet he lives in the same modest house in Omaha he bought 30 years ago, buys cut-price cars (when his daughter persuades him it's time to get a new one) and works from a very ordinary office with minimal support staff. As Davis puts it, "It's easier to see what's ordinary about Buffett than what's extraordinary." Buffett's most valuable insight is one he quotes from a 1940s investment book: "The market is there to serve you and not to instruct you." Overall, he comes across as genial and funny in a slightly geeky way, and you can't help wishing Davis had had more time with him.
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This story reminded me of an old thread about Detroit real estate...
Despite a minimum bid of $500, less than a fifth of the land was sold after four days
$100-125 per square foot? Good Lord! I'm thinking of moving to Detroit next week! ;D In Vancouver suburbs, you would be lucky to find something for $350-400 per square foot. Right in the city, you would be fortunate to find something for $550-600 per square foot! It takes almost 65% of the average family's disposable income to support housing costs in Vancouver...crazy!
I don't expect things to get much better as the winter Olympics draw closer. A buddy of mine has been offered $15,000 for two weeks to rent his 500 square foot studio in downtown Vancouver during the Olympics. Some homeowners have already booked their homes for upwards of $40K for two weeks. Nuts! Cheers!
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It will take time for the toxic assets to be wrung out of the financial system. It's good to see this happening with another 12-18 months before we come out the other end. Clarity brings certainty in pricing and we'll start to have a resumption in lending as banks get a better picture of their capital requirements. Most of the money delivered by the Fed has gone into reserves without impact to the wider economy. Once banks start lending, we will see a noticeable pickup in the pace of recovery.
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Bank charge-offs of uncollectible loans are at 2.9%, which is higher than in 1932. Annualized rates are at 3.4%, which is on par with 1934. Cheers!
http://www.cnbc.com/id/33481862
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http://plus.cnbc.com/rssvideosearch/action/player/id/1308196114/code/cnbcplayershare
Sokol interviewed on CNBC. Best part is around 07:20 in this clip.
Sokol: "...History will show that the last 18 months have been Warren Buffett's greatest. ..."
Since Berkshire reports shortly, we will see some of the product of the last 18 months.
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This link works better... http://www.ft.com/cms/s/0/6e2dfb82-c018-11de-aed2-00144feab49a.html
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http://www.ft.com/cms/s/0/6e2dfb82-c018-11de-aed2-00144feab49a.html?nclick_check=1
This is a must read if you're interested in macro issues, particularly with respect to long term currency movement.
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In spite of the recession, there are steady growth markets. I'll bet that you drive your car more often than you shave and Gillette has a pretty good business in razor parts. Cars are on the road longer and have a longer lifespan than in the past. Have a look at the bargains in auto parts wholesale and retail such as 9.5% earnings yields, 13-20% RoCE annually. In spite of my insurance company investments, I prefer a steady 13-20% to a lumpy 15% and get even more excited when the market misprices the steady growers. My shotgun is reloading now after firing earlier this year for a 37.5% gain.
People still drive and their cars are an essential consumer item because of how North America has structured its living spaces -- few people can walk to all of their daily necessities -- work, groceries, school, recreation, entertainment, etc. It's even counter-cyclical since fewer people are buying new cars, except for that silly Cash for Clunkers blip -- mortgaging your new car with your grandchildren's earning power.
Do your due diligence since they're not all equal. Some are more heavily weighted to heavy transport than consumer auto, some are mis-capitalized, some have poor relations with their retailers, and there are gems. A basket is good, but you can do better if you dig.
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I'm having a hard time finding any great companies cheap enough to buy right now. Anyone on here buy anything lately, or what companies are on your close radar?
To answer your question, yes. I'm buying everyday. Consider that Warren Buffet as far back as October 2008 was willing to shift from treasuries to stocks when the S&P was at the exact same spot as today. He said if stocks stay at these levels much longer I will be buying. Well, I think 1 year is at these levels for a while now. It is unbelievable (to me anyway) that people are saying there are no bargains to find when stocks are very likely to outperform cash and bonds over the next decade at least. What difference does it make if you buy now or on some 20% pull back which may or may not come? The question becomes when to pull the trigger, it seems now is as good a time as any.
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For all the Hunt and Hoisington fans out there... ;) This seems to be an advance copy of their report...and it's not pretty.
Quarterly Review and Outlook - Third Quarter 2009
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Are you comfortable with the long-tail risk in an inflationary scenario? Not just CPI inflation, but other factors can cause payouts to increase. Earnings in insurance companies are opinions and you'll notice that the P&C industry that Buffett and Watsa use to generate float to finance their investments are all relatively short-term risks. You'll notice that they both avoid this insurance segment...
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I have now had a proper look at ELF and I suggest it has distinct advantages over other insurance businesses, including FFH, at present.
A brief synopsis:
Assets, float, investments, and shareholders equity at ELF have grown at 9-10% per annum since 1998, without issuing shares. Over the last 5 years, those same line items have grown closer to 12% per year, again without share issuance.
P&C insurance combined ratio (what they define as general insurance) has been 102.6% since 1998 and has been 98.1% over the last 5 years. So, recently, float and its growth has been cost-free. ELF also has a life insurance business which distorts the company-wide underwriting ratios (all life insurers seem to operate with some cost to their float).
Operating income margins (excluding capital gains) are very high, at close to 9% since 1998 and even higher over the last 5 years. Those are BRK-type operating margins.
The valuation is cheap, at 0.67X estimated Sept 30/09 book value of $735, not to mention that it is 0.23X its investments per share (growing at 10%/yr).
The one weakness is their past equity investment management. But, with Jarisklowsky, Fraser taking more responsibility and their addressing underperforming managers, they look to be turning the boat around. They recently hired ValueInvest for some of their equities and they have a very good long-term record. If they can get equities right and if we are heading into a brighter overall equity market trend, book value should out-grow assets, investments, and float handsomely.
The company is operated by shareholders for shareholders and is growing responsibly faster than I had thought. There is a lot of margin for error in its price. I cannot see why this company's market value is not at least equal to its book value. This looks like an obvious idea to me.
If anyone wants a copy of my analysis, let me know.
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Great article -- always a good reminder for us when reading financial statements from EDGAR or SEDAR.
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An FYI from Barrons on key words to watch out for onpotential Financial Shenanigans:
Now that most regulatory filings are easily searchable on the Internet, investors can troll through the documents for key phrases suggesting something could be amiss -- let's call them dirty words.
Cheers
JEast
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Attached is a summary of US mutual fund investor new cash flows.
http://www.nytimes.com/2009/10/05/business/economy/05credit.html?partner=rss&emc=rss
The surge back into bonds this year, from sterling triple-A securities to riskier junk notes, has amazed even longtime analysts and fund managers.
Investors who ran for the relative safety of money-market funds during last year’s credit crisis have been shoveling their cash into bond funds. Some $265 billion has flowed into bond funds since the beginning of the year, according to figures from the Investment Company Institute, 15 times the money that has entered equity funds.
“The easy trade is something you want to be wary of, and the easy trade right now is into the high-quality fixed income market,” said Lawrence Glazer, a managing partner at Mayflower Advisors. “Look at the flows: people are falling over themselves. That should be a caution flag for investors.”
A wide gauge of the market for junk bonds is up nearly 50 percent for the year, compared with a 13.5 percent yearly return for the Standard & Poor’s 500-stock index. The risk premium on junk bonds over Treasuries — called the spread — narrowed to 7.5 percentage points last week from more than 16 percentage points at the start of the year, according to Standard & Poor’s figures.
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It's great to have the detail available on the deal. Well played by FFH. ORH was evaluated for price as Project Diamond. This graphic shows ORH's growth in book value against peers. ORH was definitely worth more than an industry average price/book multiple. FFH knew what they were getting for a bargain price.
http://www.sec.gov/Archives/edgar/data/1137048/000095012309047403/y79475y79475z0092.gif
http://www.sec.gov/Archives/edgar/data/1137048/000095012309047403/y79475y79475z0092.gif
Following graphic shows industry trading at ~0.9 price/book multiple based on 30 June 2009 date. The close date would be strategically chosen to avoid later data points for the valuation in a rising market.
http://www.sec.gov/Archives/edgar/data/1137048/000095012309047403/y79475y79475z0093.gif
http://www.sec.gov/Archives/edgar/data/1137048/000095012309047403/y79475y79475z0093.gif
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very interesting, thanks for posting
I find it fascinating how the analysis relies on market prices so much (comps, % changes compared to market prices in different points in time, etc). considering how FFH thinks about Mr. Market, that is how they were able (and willing) to pull this of at this juncture. Fairness opinions are too mechanical, ideal for the Prem's of the world to take advantage in "friendly and Fair" way.
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Daphne,
By<< BRK muni>> do you mean the muni's that BRK has underwritten? that BRK holds?
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Does anyone know if BRK muni vs. triple A muni spreads have narrowed over the past 3 months?
Thanks
Daphne ???
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With the various financing deals (Megabloks, Brick, CanWest, Abitibi, etc) that have been negotiated and/or consumated, it could be part of a merchant banking thrust. At $5M, it just strikes me as below their radar given the $18.6B portfolio and would demand some management/legal time to complete vs buying an undervalued after-market security. It could be a favour/referral based on someone's relationship at FFH...a lot of business gets done based on relationships. Obviously it was considered a low risk and I agree with Crip that we haven't seen the terms which could include conversion rights. There may be a whole slew of well-managed small-caps out there with customers but no capital. Definitely something to watch.
For fun, $5M on $18.6B is 0.027% portfolio weight.
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Maybe Prem is looking at getting into merchant banking? Higher yield loans to smaller companies with an equity kicker?
cheers
Zorro
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The $5 million investment will enable PAKIT to expand its production capacity to meet equipment orders in the pipeline.
One wonders why FFH bothers with a $5M investment? There are small outfits such as Accord Financial (TSX:ACD) and larger ones such as GE Capital or EDC (government crown corporation) that finance these kinds of deals. This doesn't move the needle so why bother?
-O
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Hi Arb,
It's here...
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anybody got that article that grant wrote about V shape.
seems a bit out of character considering he did a pretty good job at signalling some of the housing stress in 2007.
i'd have to see his justificaitons and reasoning.
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Here's the full 30-minute video.
http://www.gurufocus.com/news.php?id=70344
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Smart head Julian Robertson (ex-Tiger Fund, one of the original hedge funds) has some comments about US debt and inflation. Buffett bought the Xtra trailer leasing company from him a few years back when Robertson wound up the Tiger Fund.
http://www.cnbc.com/id/33004753
-O
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Smart head Julian Robertson (ex-Tiger Fund, one of the original hedge funds) has some comments about US debt and inflation. Buffett bought the Xtra trailer leasing company from him a few years back when Robertson wound up the Tiger Fund.
http://www.cnbc.com/id/33004753
.../snip/...
“If the Chinese and Japanese stop buying our bonds, we could easily see [inflation] go to 15 to 20 percent,” he said. “It's not a question of the economy. It's a question of who will lend us the money if they don't. Imagine us getting ourselves in a situation where we're totally dependent on those two countries. It's crazy.”
Robertson said while he doesn’t think the Chinese will stop buying US bonds, the Japanese may eventually be forced to sell some of their long-term bonds.
“That's much worse than not buying,” he said. “The other thing is, they're buying almost exclusively short-term debt. And that's what we are offering, because we can't sell the long-term debt. And you know, the history has been that people who borrow short term really get burned.”
.../snip/...
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Zorro...you're spot on. This is an awesome chart on mortgage equity withdrawal:
http://www.calculatedriskblog.com/2009/09/q2-2009-mortgage-equity-extraction.html
http://2.bp.blogspot.com/_pMscxxELHEg/SrkH4FzycqI/AAAAAAAAGYs/89aAjwjqJ-Y/s1600-h/MEWQ22009.jpg
I have started reducing my US$ exposure back to C$ as cash. Francis Chou suggests that US$/C$ is a wash in the long run, but now offers currency hedging in his funds. Who knows what Flaherty and Carney do in response to a rising C$/US$ forex ratio? We may well see them turn on the printing press here as well.
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Omagh,
You are most persuasive but (you knew there had to be one) I think that the amount of leverage/debt out there means a much slower recovery than most anticipate. We still need the US consumer to deleverage significantly before global growth can resume. I don't disagree that there are bargins out there, but I do feel that this is a time for caution!
Cheers
Zorro
Fairfax Stock this week Part II
in Fairfax Financial
Posted
Partner,
Too funny. I mentioned an industry even more boring than insurance a few weeks ago on this board and had zero replies. The funny part is that this stock has outperformed Fairfax since I bought it 13 years ago. Even this board has selective hearing. Oreilles de c..!
-O