Mungerville

The ORH muni portfolio is certain and in a deflationary environment its huge - especially when guaranteed by Berkshire. I hold ORH because its a guaranteed return from the big muni position PLUS some underwriting profit here and there, and eventually they will do something else that is smart with the rest of the portfolio with all the dislocations. Its a huge head-start vs investing myself. Its the power of an insurance/investment business model in this environment PLUS the specific very rare muni bond portfolio. Its just so simple, you start off with an 8% guaranteed return taking no risk.

OK. The stock market is back to still under where it started the year at 900 and still down more than 40% from the peak. Housing is down every month. Credit is has rallied to October levels after Lehman collapsed. Job losses are mounting every week. I don't know what you should make of it. I don't start jumping up and down that's for sure.

Scorpion, Maybe its your portfolio rallying like crazy in '09! If so, congratulations!

Scorpion, Achievement? Maybe I am going senile but last time I checked the S&P 500 started the year at 900. And 873 is lower than 900 so its down so far this year. Now you might say that many small caps rallied. I would say the Russell 2000 is also down in 2009 thus far. So what's the achievement? Many stocks rallied and many sank?

Parsad, That's right. That's the likely framework for the macro environment so you got to buy cheap, you got to understand that prospects for growth in earnings are low, deflationary forces will likely overwhelm although we can not be certain. That's why I like ORH's large muni position - no brainer at below book moving to well below book as the muni bonds soar.

Klarman (and Watsa) seem to me head and shoulders above many of the value apostles. Of course Buffet being Jesus, Munger the Holy Ghost, and Ben Graham being God. When I compare Klarman's ideas in that video and in the most recent OID to, say, Berkowitz's in the recent OID, it just seems like Klarman's ideas are much better and more diverse.

Thanks Partner. That's the way I look at it when I compare MKL to say ORH. One is just much cheaper. Also investment leverage at ORH is more than underwriting revenues relative to book equity so the investment side is that much more important to a point. And I think that a lot of people on this board forget the very basic notion that when you buy up things at below book value as a strategy, you will get integration years (1 to 4 years) where the combined ratio is north of 120% and if you keep doing that to grow, your underwriting track record looks just "OK". BUT that is not the steady state situation on a go-forward basis. So you have to split the underwriting record out and determine the impact of the integration years and when you do that, the historical record starts to look a lot lot better. This is so simple but very very key. And compare this to a strategy where you buy high-quality insurance companies not needing turnaround at 2x book value - of course they have better underwriting so your integration years combined ratios will be below 100% as they were good underwriters to begin with. So, you have to adjust for that but a lot of people on this board forget this simple fact. If you ever get the urge to share your other two positions, I'll be listening.

My hunch would be that they are not and ORH is indeed most undervalued. Is that fair?

Thks. Question: With ORH trading at 85% of book, are ANY of these better deals?

Similar to slide at FFH AGM. Partner, May I ask you Which high-quality insurer do you believe to be cheapest now - one that is good on the underwriting and stays out of trouble on the investment side or is good on the investing side - other than ORH and FFH? Also of your core non-insurance holdings,which one do you think is most undervalued?

Those calling for long-term bond types for 25 years have been perma right as the long bond has outperformed the stock market for 20 years.

Even better if ORH goes to low 30s!!!

Yes, nothing is guaranteed annually. If there are major disasters, and the combined goes to 115% and the stock market drops in half as well, book value will go down. My point is that they have a 8-10% advantage or so annually in terms of book value growth coming from the investment side now that is significant, they are well capitalized and any pain like that will create a hard market. So I welcome a book value decline this year where competitors also get hit hard - that would be the best scenario for long-term value creation.

Sanjeev, You have been doing a great job here with this board for so many years. I really wanted to go to the AGM this year to hear all the interesting talk at the dinner, etc. (I was fortunate enough to be able to meet with Prem for the first time a few weeks earlier on other business so I made the mistake of convincing myself that that was good enough) but most importantly to meet all of the great board members you have assembled as well as yourself in person. Things transpired against me as I had a heavy travel agenda which is not typical for me.

Thanks, that's what I figured. We are on the cusp of a hard market - if only the stock market could go down another 30%, that would guarantee it! Bad is good.

Im not saying you are wrong Mungerville, just curious on what area you find gives you cause for the optimism in this particular year? I also hold ORH. What gives me optimism is really pretty simple. The underwriting is under control so a combined of 100% is achievable and has been achieved in recent years in an average market for reinsurance which I think is what we have in 2009 - not hard, but not as soft as 2008 at least in reinsurance. This isn't the reason, I'm just getting that out of the way. So, with that out of the way, imagine this is a mutual fund you are invested in. 1. Now imagine this mutual fund having a guaranteed minimum return of 8% after-tax buying at $40 per share just to start off with zero risk using none of the assets; 2. Then add some of the best investment managers in the business to that mutual fund to take the assets of say $1 dollar which you can buy for 90 cents (i.e. book value is $45 and price of stock is $40) and invest where they see fit - say undervalued stocks, MBS, junk bonds and you get the full return from that in a market that is semi-disfunctional; So that's pretty damn good so far - an 8% head start after-tax, and assets for 90 cents on the dollar on top of that. 3. Now on top of this, let's say they get a little over-enthusiastic about the economic situation and misread a bit and buy stocks and other risk assets a little early and then the bear market resumes. So you lose some of your assets, but because the wreaks havoc on the entire industry's already somewhat depleted capital base, a hard market for reinsurance occurs. So you lost some assets, but now with a combined ratio of 90-95%, buying at $40 per share, you get an extra yield of 3-6% after tax added to that initial guaranteed yield of 8%. So you are at 11-14% yield in this "dire" scenario. On top of that you still have the assets invested in now very undervalued securities with the opportunity to buy more. ------------------- My first point is the big kicker because that is one hell of a head-start. ORH's equity capital or book value is $2.7 billion but... it owns $2.3 billion in muni bonds the great majority of which are guaranteed by Berkshire Hathaway which are pretty rare securities as Berkshire only guaranteed $15.6 billion of these in total - see p. 13 of Berkshire's 2008 annual report, 6th paragraph. So, in my view there is zero credit risk there. Furthermore, for those who care about mark-to-market volatility, they still owned $1.8B notional in CDS at year-end 2008 at Odysee so that will more than take care of any m-to-m volatility/credit risk or perceived credit risk in those munis as well as the 0.3 billion in convertible bonds ORH held at year end. On top of that, they have 1.2 billion in US government bonds. So they have a rock solid bond portfolio of 4 billion on book value of 2.7 billion which you can buy for 90 cents or $2.4 billion. The $4 billion yields $280M pre-tax or $200M after-tax on your purchase price of $2.4 billion for the whole company. That is a risk free 8% after-tax head start using float that costs them nothing. So its like a mutual fund with a guaranteed 8% return, with no risk, tax sheltered because you already paid tax, and where you still have not started investing the net assets of yet. The second point speaks to buying the net assets at 90 cents with great management investing the assets. The third point is really important because if the markets turn down from here, and ORH loses book value because of its equity investments, we should almost be guaranteed a hard-market and expanding market share going forward as the competition will be on its knees and moreover the equity values will be wound up like springs being so low. So we have a counterbalancing effect that is very significant. And part of point #1 and point #3 talk to the two very important advantages of a well run P&C business: i) no cost no maturity investment leverage - who the hell can get that these days other than institutions supported by the government?, and ii) the countercyclical aspect built into the business - when investment returns get crushed, underwriting profit typically increases thereafter and for those that are ready, they can really expand their market share on top of that to get more float. Take all that together and add a talented investment team and your worst-case scenario has to be an annual return of well north of 10% even in the worst economic and/or market environment. 8% is locked and loaded to start after all. So that's the downside and that's how I like to think and that's pretty damn good for the downside. So if that's the downside, what is the highly likely return?

For anyone that was at the AGM, on slide 35, what was the reason for the red bar labeled "GAAP" - did they explain that as the US P&C surplus which would have been eroded had a change in GAAP not occurred and therefore you need this additional portion to make it comparable to the three other periods where erosion of surplus occured? Or some other explanation?

Munger says you just need 3 good stocks and I agree with him. In 2008, I had essentially one good stock (ORH) I was 100% or sometimes more long using in the money call options such that even if it went to zero I could only lose 20 percent of my principle. I was 100% short the Russell and long the US dollar more or less all the way through the year. Bought Berkshire and GE on the dips and sold promptly. Bought KO and JNJ and held on as they should perform reasonably well in any economic scenario. ORH is down a lot in 2009 but book is going up almost guaranteed this year and it is selling below book. And if book does not go up because of further declines in stocks and bonds, then the competitors will be wiped out and its hard market time. What more could you ask for?

I agree with Sanjeev, I don't think more diversification will help Monish. His problem seemed to be some bets on financials combined with not seeing the reset that was coming in the stock market, economy, bond market and housing and all of those interacting. So what I would do instead is to first understand what has happened at the macro level and what that implies for the economy/asset values going forward and whether the implication is something different relative to a normal business cycle/asset cycle. That was probably the deficient area so that area needs to be studied for its implications going forward. Once that is done, and he seems like a smart guy so its probably already done, then I agree, based on that and based on standard Buffet/value investing principles find ideas that will work well given the macro but also using value principles and then concentrate, don't diversify.

If you did not see the potential for a "reset" in the economy coming or if you did not see the potential for a "reset" in the stock market back to a reasonable long-term average from the bubble level of S&P 1500, and if you did not see the housing bubble, then you missed a big important piece. Both were fueled by leverage and credit. So if you understood that, you looked for a trigger. The trigger was the US housing decline which started in 2006 impacting structured credit in mid-2007. After that, the stock market continued to hold up. There was time to protect capital but you had to realize early on that we had bubbles in the economy, stocks, housing, credit, and structured credit, then you had to realize that the initial decline in housing and break down of structured credit were the initial triggers and take out insurance on risk assets. Soros came out of retirement in September 2007 to protect his capital as the stock market continued to hold up but structured credit was imploding in August 2007. I mean the stock market did not see what the bond market saw for months and months and months. There was lots of time, but you had to understand the risk was there and the triggers had been triggered.

Ucc, thanks for the summary. Others, please, give us more than this guys!!! Let's go, all the gory details... :P

Good video clip of Watsa this morning by BNN at the shareholders meeting. http://www.theglobeandmail.com/servlet/story/RTGAM.20090415.wvpremwatsa0415/VideoStory/VideoLineup/News

I really wanted to go this year. Wanted to meet many of the board members face to face and get Fairfax's take on where things are headed. I'll be waiting for the updates eagerly.

I am impressed by Grantham and Klarman but not by the rest of them: the others' stock ideas look good rather than great. I did not see a better idea that ORH where I have 50% of my money.

Good God. By the way Jack River, if you have two reasons BNI is such a great deal and you have bought all your damn shares that you are going to buy, and you are not sure about one reason then why the hell don't you spill the beans on the other one at least. And on the one you are not sure of, just say you are not sure. But that would be too simple wouldn't it? You like to play little games instead. Is that it? Do you get off on keeping little secrets?: I know something really really important but I'm not telling you people. I stopped doing that in 1st grade personally. Nothing personal, other than that it sounds like you are intelligent and have a lot to bring to this board.