omagh

Small impact to Fairfax's book value: Small writedown of book in the short-term, bigger increase in book in the mid-term:

H & H are interesting reading, but have very little impact on portfolio decisions. Portfolio decisions are all about finding undervalued securities with margins of safety, sell when estimated value is reached, and periodically remove the deadwood. Undervaluations are few at the moment, so I'd rather sit in cash and wait as new cash comes in or is raised from securities sales. In Canada, about 50% of our local stock market is tied to commodities which have had a cyclical surge based on sentiment and currency shifts with a dollop of leverage from speculators. In the local stock market, it's prudent to have dry powder for the potential mispricings when commodities inevitably revert to the mean as people rush to raise capital in falling markets. Meanwhile, securities bought at good discounts continue to grow, so that I participate in the upside with high-quality businesses, but position well for other events. This paragraph from H & H gave me some pause thinking that the banks have found a new way to increase leverage using the Fed's balance sheet: According to the outstanding monetary researcher, Rod McKnew, Ph.D. of Newedge, the Fed facilitated inflation through a more direct channel than expectations. He points out that reserve balances, which are not money, increased much more than money. In the past two years, M2 rose 6% while total reserves jumped 85%. But this does not mean that unused reserve balances had no influence on prices, and in particular on commodity prices. To quote McKnew, “In a world of advanced derivatives, high cash balances are not required to take speculative positions. All that is required is that margin requirements be satisfied.” With reserve balances at unprecedented levels, margin risk is minimized for those market participants who wish to take positions consistent with the Fed’s goal of higher inflation and have either direct or indirect access to the Fed’s mammoth reserve balances, which can satisfy margin requirements." There are always unintended consequences of Fed actions, but is this a productive use of capital? It's a siphoning of wealth from others, not wealth creation. Long-term wealth creation in commodities businesses is substandard, but obviously a necessary part of a functioning economy. -O

It looks like the initial offer, subsequent offer and the personal pressure on Fremont's CEO (i.e. you'll be fired if BH buys you) were tactics to extract value in the alternate scenario. These efforts were enough to put FMMH into play. So, Plan A didn't work out, but Plan B did. Cold and calculating efforts by Biglari. -O

Farnam, It was a stock dividend not a cash dividend. Keep good notes, make the appropriate calculations based on your knowledge of the events and pay the appropriate taxes. If you're working with a software tax package, this may be a good year to use an accountant instead. For heaven's sakes, don't overpay the taxes because it will be much harder to recover with all your personal time going to waste. http://www.cra-arc.gc.ca/E/pub/tp/it88r2/it88r2-e.txt -O

Hunt and Van Hoisington argue the opposite. They contend that QE2 has been a failure and that ending QE is paramount for recovery. Further rounds of QE will put US into recession. When corporate margins are being squeezed, FCF and other profitability measures are reduced which indicates why many of us are struggling to find adequate pricing for stocks. Personally, I've been raising cash for several months as profitability has weakened. My opinions on commodities have been stated a few times. http://www.hoisingtonmgt.com/pdf/HIM2011Q1NP.pdf -O

No, but this might re-rate MSFT. http://www.asymco.com/2011/04/14/first-quarter-pc-forecast-windows-down-2-macipad-up-250/ http://www.asymco.com/wp-content/uploads/2011/04/Screen-shot-2011-04-14-at-4-14-9.22.26-PM.png

Full report is now out: http://www.hoisingtonmgt.com/pdf/HIM2011Q1NP.pdf

Cash is priceless when others have none. -O http://pragcap.com/wp-content/uploads/2011/04/gs1.png

Inflation affects cost inputs (raw materials, inventory, labor, financing, etc). The cost of the inputs can only be passed along to customers at suboptimal rates, meaning that companies must absorb the input costs in their value chain. Companies with pricing power have the ability to pass along most if not all costs to their customers. Over time, most costs will be passed along, but margins of weaker companies will be destroyed in the process. Quality of business is a critical stock selection factor (high margin, high ROE, demand stability across business cycles, etc). -O

Full report is now out: http://www.hoisingtonmgt.com/pdf/HIM2011Q1NP.pdf “The historical record on massive Federal Reserve intervention is minimal but indicates that as QE2 terminates at its scheduled end on June 30th, the inflation/risk trade will also fade. Accordingly investors should gradually move into Treasury securities and other high-grade risk adverse investments. This will release funds for the mortgage market and credit worthy state and local governments. Upward pressure on commodity prices will abate. This will begin to mitigate the downward pressure on real wage income and consumer confidence. The lower commodity prices will also serve to unwind the corporate margin squeeze that resulted from the higher commodity costs. While the economy will slow initially, the drop in inflation over time should lift real income and serve to stabilize the economy. The dollar should firm, encouraging foreign investors to place additional funds in U.S. markets. Taken together, these factors should give the economy the opportunity to stand on its own, rather than rely on massive governmental interventions whose potentially negative and unintended consequences are unknown. The evidence of the past three years seems clear in that monetary and fiscal policy have been unable to improve the average American’s standard of living. Time will be required to reestablish balance sheets to more normal levels, and in the interim disinflationary/deflationary tendencies will be ascendant. This environment is favorable for holders of long dated Treasuries. Positioning for an inflation boom will prove to be disappointing.”

- 13 public businesses spread across 7 accounts; 5 major positions - 2 private operating businesses, 3rd being planned - cash reserve, no leverage -O

Hoodlum...2 points: 1) Bayes Theorem doesn't apply here. Valuations in China are not a pre-condition for valuations in Florida. 2) Absolute valuation matters and relative valuation doesn't. Values of Florida real estate assets are best examined in the context of replacement value -- a measure of absolute value. -O

...or Japan to stop buying US debt. http://www.gurufocus.com/news.php?id=70344 -O

Al...to value insurance companies at this point in the cycle, is P/B the right measure to look at for valuation? That metric seems to percolate throughout most of the commentary here and it's a good one for looking at many points in the underwriting cycle. A case could be made for price/underwriting capacity. The estimate of intrinsic value could have an alternate scenario looking at the embedded optionality of the underwriting platform's capacity under firmer pricing conditions. A working thesis that I have is that a subset of insurance companies are greatly undervalued -- 50 cent dollars. The subset consists of experienced companies that are managing the cycle well -- excess capacity, experienced teams in waiting, few reserve releases, writing at decent pricing. It takes a pricing catalyst, which I'm prepared to wait for, to unlock the embedded value. -O

Because the market is efficient? :)

I looked at this a few weeks ago when it came up on a search. The margin of safety is not high enough as the company reverts, from a one-time sales boost due to the flu scare, back to its core operating capability. The compensation to key executives is also an issue. Pass. -O

Watsa has a decent record of calling out specific bubbles -- TMT - 2000, US real estate - 2006. Now, there is a new target: Chinese economy and its effect on commodities. 2011 and 2012 will be interesting times for those with cash and hedges. Meanwhile we have concerns over potential bubbles in emerging markets. Consider, for instance, what we learned on a recent trip to China: many house (apartment) prices in Beijing and Shanghai had gone up almost four times – in the past four to five years!; many individuals own multiple apartments as investments with the certain belief that real estate prices can only go up; and maids are taking holidays so that they can buy apartments also. “Buy two and sell one after it doubles to get one for free” goes the refrain! In his essay in Vanity Fair, “When Irish Eyes Are Crying”, Michael Lewis says, “Real estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long term investment real estate has become and flee the market, and the market will crash.” We agree!! Infrastructure and construction spending in China accounts for more than 40% of GDP – a number rarely seen in the past in any economy. In fact, this demand has resulted in commodity prices going up in a parabolic curve. Combine the increase in commodity prices, substantially from Chinese demand, with hedge funds and others again trying to allocate money to these very illiquid markets, and you can understand why some of these commodities have exploded in price, as shown in the table below. 2000 2008 2010 Oil – $/barrel 27 45 91 Copper – $/lb. 0.83 1.39 4.35 Nickel – $/lb. 3.09 5.31 11.23 Wheat – $/bushel 2.80 6.11 7.94 Corn – $/bushel 2.25 4.07 6.29 Cotton – $/lb. 0.62 0.49 1.45 Gold – $/oz. 274 870 1,405 Even onions and chilis went up 64% and 38% respectively in 2010!! We shy away from parabolic curves, so we continue to maintain our equity hedges!

Exactly...so, why not start a business or three? Bumming around bores me to tears, so I have 2 businesses with a 3rd in the offing. -O In Canada, we have a tax free account (TFSA). Put in money (annual cap limit), invest as you wish, pay no taxes at withdrawal (except implicit annual corporate taxation on earned profits). The little guy can take advantage from age 18. -O

Eric...you're comparing apples and oranges. The HoldCo (BRK) owns 100% of the OpCo's (BNSF, See's, etc). They are legally separated for divestment purposes, but effectively, HoldCo and OpCo's are 1 legal entity for taxation. Transfers of dividends between HoldCo and OpCo are essentially internal transfers of funds post-taxation. If BSNF had been rolled into the BRK entity, you wouldn't even see the funds transfer as dividends, just an internal reshuffling of accounts. In the case where BRK holds a minority position (e.g. WFC, KO, PG, etc), there is a double taxation just as for individuals -- we're now apples to apples. Buffett made a strategic change several years ago to have more wholly owned subsidiaries to remove the double taxation. In so doing, it permits capital to flow to the highest returns internally at BRK. Why don't you start a business or three in some underserved markets? There must be some better societal benefits to your wealth than passive investments that are doubly taxed. -O

oec...your question is good, but it reflects a certain framing. FFH is an insurance company with a substantial bond portfolio and a much smaller equity portfolio. If you look back over inflationary periods, insurance companies with short durations in their bond portfolios have the ability to roll their bonds over into higher yielding securities. It's a type of asset conversion that Marty Whitman has written about. In the event of inflation, insurance companies typically revalue towards a "going concern" model. If you get the chance to go to the Fairfax shareholders dinner, talk to the quiet guy named Brian who runs the bond portfolio -- guaranteed to be worth your time. FFH has made far more money off bonds than equities in its lifetime, but people mostly like to talk about equities here. -O

3.5% loss on a $22.7B portfolio in a quarter where bonds rose is expected. The portfolio is positioned for both inflation and deflation while meeting obligations, so it doesn't much matter in the long run. -O

Klarman has an excellent chapter 13 in Margin of Safety on managing a portfolio. Here's a teaser... Second, the periodic liquidation of parts of a portfolio has a cathartic effect. For the many investors who prefer to remain fully invested at all times, it is easy to become complacent, sink- ing or swimming with current holdings. "Dead wood" can accumulate and be neglected while losses build. By contrast, when the securities in a portfolio frequently tum into cash, the investor is constantly challenged to put that cash to work, seek- ing out the best values available. ... Selling: The Hardest Decision of All Many investors are able to spot a bargain but have a harder time knowing when to sell. One reason is the difficulty of knowing precisely what an investment is worth. An investor buys with a range of value in mind at a price that provides a considerable margin of safety. As the market price appreciates, however, that safety margin decreases; the potential return diminishes and the downside risk increases. Not knowing the exact value of the investment, it is understandable that an investor cannot be as confident in the sell decision as he or she was in the purchase decision.

I've never understood nibbling. Why not just have a watch list and make the investment decision separately? Peter Lynch was the ultimate nibbler with ~1400 stocks in his portfolios. -O

I think that they should introduce an aggressor jeopardy rule. When a player is injured due to in-game violence, the aggressor is penalized an equivalent number of games as the injured player is out. If a guy loses his career, the aggressor is suspended indefinitely (e.g. Bertuzzi). Of course, there should be oversight/review to determine intentionality and to prevent injured players from sitting out indefinitely. The league should man up and take some responsibility for the athletes whose careers are at risk from the goons. The governance of the league is weak and caters to the lowest common denominator. Lemieux's point is directionally correct, but suffers from glass houses syndrome. -O

I doubt that transition from military control will be an issue since it's unlikely to happen. In a country with no democratic tradition, it's not a given that democratic rule is the next step. http://feeds.tvo.org/~r/tvo/TxZN/~3/PxxxVVmViB0/1903508_480x270_512k.mp4 -O