kyleholmes

http://www.bengrahaminvesting.ca/Resources/Video_Presentations/Guest_Speakers/2011/Watsa_2011.htm

Roman Bridges Sanjeev!

Sanjeev, I agree with you... just thought I would post it as I had not seen anyone mention it yet! Kyle

1992 Annual Report HWIC is an investment counselling firm that Tony Hamblin and I founded in 1984. With five partners, Tony Hamblin, Roger Lace, Brian Bradstreet, Frances Burke and me, who have worked together for 18 years, and Vito Maida, a recent addition, the firm manages approximately $1 billion in pension, corporate and individual funds. Of the $1 billion, approximately $240 million are funds that originate from Fairfax's insurance subsidiaries. From inception the firm was set up to manage a small number of portfolios with a long term value-oriented philosophy. All the clients agreed to an incentive fee, resulting in HWIC being more investment driven than marketing-oriented. The company's long term results have ranked among those of the top investment managers in Canada. How did we value the firm? Firstly, we created an independent committee of our Board, chaired by Robbert Hartog. Secondly, we consulted Sir John Templeton, the dean of the investment counselling business and also a large shareholder of ours. After arriving at a price that both Robbert and Sir John felt was fair, we obtained written approval of this transaction from all of the more than 50% of our minority shareholders that we contacted. Thus, the valuation of $14 million ($1.85 million in cash and 433,773 Fairfax shares valued at $28 per share) was considered fair and approved by our Board of Directors, the majority of our minority shareholders and all the partners at HWIC. 1994 Annual Report As far as the business of HWIC is concerned, 1994 was another record year as incentive fees were earned from most clients, including Fairfax's insurance subsidiaries. Incentive fees are paid by HWIC's clients only if their results exceed the hurdle rate on both a one year and from inception basis. For example, for clients that have a Canadian common stock portfolio managed by HWIC, the hurdle rate is the TSE 300 return plus 200 basis points, i.e., before the client pays incentive fees, the client's results, net of all fees, must exceed the TSE 300 return plus 200 basis points for both 1994 and from inception. Incentive fees payable are 10% of any return in the past year above the hurdle rate (90% remains with the client) up to a maximum of 1.75% of assets. All the non-Fairfax related clients have considered this a very fair fee and have been happy to pay incentive fees in the past two years. Fairfax's insurance subsidiaries were charged incentive fees by HWIC for the first time in 1994. Insurance subsidiaries did not qualify for incentive fees in 1993 mainly because of a block of FCA shares purchased for them by your Chairman in 1989. Some more details about investment management fees paid by Fairfax's insurance subsidiaries to HWIC: 1)Incentive fees are paid only on common stock portfolios. Results are measured against the TSE 300 return plus 200 basis points for Canadian stocks and the S&P 500 return plus 200 basis points for U.S. stocks. 2)The inception date for Canadian common stock portfolios is January 1, 1990, the date incentive fees were first instituted by HWIC for its clients. The inception date for U.S. common stock portfolios is March 31, 1994, the first quarterly date on which HWIC managed a U.S. common stock portfolio for a U.S. subsidiary of Fairfax (Ranger). The common stocks of any subsequently acquired insurance subsidiary will be included in the appropriate portfolio for measurement purposes essentially from the date of acquisition. 3)The average base fee paid by Fairfax's insurance subsidiaries to HWIC for investment management is 0.25% of assets significantly less than the average base fee paid by HWIC's pension clients. Reflecting the Continental Canada purchase and a reduction in the base fee, the average base fee in 1995 for Fairfax's insurance subsidiaries will drop to 0.17% of assets. Just to refresh your memory, when Fairfax purchased HWIC in 1992, a fair revenue sharing mechanism was instituted at HWIC. This is how it works. The revenue base for HWIC in 1992 was $3.7 million of which $2.0 million covered expenses, including salaries and overhead, and $1.7 million was pre-tax profit. In each year after the sale, HWIC retains $2.0 million of the first $3.7 million of revenue to pay expenses, while Fairfax gets the remaining $1.7 million. Any revenue above $3.7 million in any year is split 50/50 between Fairfax and HWIC Fairfax's 50% being additional profit (to the $1.7 million), while HWIC's 50% covers any incremental expenses beyond $2.0 million and thereafter constitutes a profit pool to be shared among its partners and employees. This is an excellent way to provide attractive returns for Fairfax while keeping the incentives at HWIC. In 1994 HWIC had revenue from base fees of approximately $4.6 million. Incentive fees totalled $4.9 million of which $1.6 million was from Fairfax insurance subsidiaries. Through the revenue sharing mechanism discussed earlier, Fairfax earned a 33% pre-tax return on its $14 million investment in HWIC. These returns are all cash and, of course, there is no additional capital investment needed at HWIC. As mentioned last year, while returns after goodwill amortization (of $1.4 million annually) will be less than those mentioned above, we think the returns we have shown are the best measure of HWIC's performance. This is perhaps an appropriate point to mention where my compensation comes from. I get a straight salary of $250,000 from Fairfax with no bonuses, director's fees or other payments from Fairfax or any of its subsidiaries (other than HWIC). From HWIC, like all partners there, I get a $200,000 salary and participate in the profit sharing pool (up to 30%) described earlier. Any bonus that is shown for me in the proxy circular comes from this profit participation. Because my compensation can be significant depending on investment results, I wanted to make sure you understood exactly where it comes from. Why did HWIC make sense for Fairfax? Mainly, for the following three reasons: 1) It was a very good investment for Fairfax. Under very reasonable assumptions (i.e. no incentive fees or additional funds under management), Fairfax could achieve its 20% return on investment. Also, a multiple of 3.8 times revenue and 8 times pre-tax earnings was reasonable compared to private transactions and public valuations of investment counselling firms. Furthermore, we paid for most of the purchase by issuing shares of Fairfax at a fair price of $28 per share. 2) It brought proven investment management into Fairfax. 3) It removed my perceived conflict of interest and placed all of my interests in one pot. *This is not an apples to apples comparison, but figured I would post it nonetheless out of interests sake....

http://sportsillustrated.cnn.com/vault/article/magazine/MAG1153364/index.htm I have witnessed first hand some of the excesses that go on with some of these athletes.... mostly in professional hockey. I know many will not believe this but some of them do not know how to fill out cheques, go to the bank, etc. Many pro athletes pay a couple percent a year of their salary for people to "look" after their finances such as making sure their rent, phone bills, etc are paid! And as you could imagine many get royally fleeced... and I mean fleeced, but they have no idea even if they are being taken or if they are not. Stealing from babies in a way.... and makes a person sick listening to the stories.

http://online.wsj.com/article/SB20001424052702303912104575163891292354932.html http://files.shareholder.com/downloads/BHI/639761756x0x363026/210AEB5A-0060-4756-AE2C-78D988A49417/na_rigs_040110.pdf The EIA data showed that gas supply rose 4% in 2009, despite a 60% decline in onshore gas rigs. The conflicting numbers have perplexed analysts.

The banks aren't stupid. I am not convinced of this Sanjeev! ;D

Viking, I used to watch this show (years ago) when I lived in Toronto. I saw the spanking by Embry... yes, a classic. I loved it when Brian stated 'model price' like it actually meant something. My read on Brian was that must be good at sales because the logic behind his stock picks certainly was lacking. Nice to hear he is still going strong; gives me confidence that most on this board can continue to outperform Sit through any finance courses taught at our North American universities.... and you will have great confidence that most on this board will continue to outperform.... variance is risk, markets are efficient, beta means something, etc, etc! It is mind boggling talking to some of these guys who are teaching our "future"!

Watsa's Ownership in Fairfax I have seen numerous different estimates of Prem's net worth and ownership in Fairfax and wanted to see if anyone else had an different estimate than mine. The confusing thing for most I believe is just how much of The Sixty Two Company does he own. When shares are beneficially listed it can provide amounts that are misleading as we all know. Not that it really matters much as Prem has more than enough money on the line in any of the various different estimates and has went above the call of duty for shareholders throughtout his whole tenure. Just out of interests sake I tried coming up with a number. Here is my estimate. On page 849 of "Fairfax Discovery" it gives an organizational chart as of September 30, 2001 of Prem's ownership directly and indirectly in Fairfax. It lists that he has: 129,735 shares through number company 810679 12,589 shares held personally and a 50.01% ownership in The Sixty Two Investment Company Limited which would result in another (1,598,620 * 50.01%) 799,470 shares which equals a total of 941,794 shares This being said though, these numbers are of September 30, 2001... which as we know from his annual reports he has added more shares since then. Looking at Sedi it looks like he has added an additional 119,246 shares directly and through his kids account. All added up it looks like, plus or minus some, that he has an ownership stake of 1,061,040 shares. Is this correct or am I missing something? Other interesting subjects if anyone else knew would be 1) What percentage of ESL Investments is Lampert's 2) What percentage of the Lion Fund is Biglari's. While I understand that it is their fund so they have an incentive to treat all of it like their own, just out of interests sake knowing actually ownership percentages would be interesting.

From the Reuters article posted by Viking: "The biggest price cuts are being taken by the largest carriers, according to the most recent survey by the Council of Insurance Agents and Brokers (CIAB) in October. Large property-casualty insurers were paid about 7.4 percent less for policies in the third quarter compared with the more modest 3.6 percent average decline recorded by smaller players." I'm speculating that the reason larger players are seeing more pricing pressure than smaller ones is due to AIG cutting rate drastically since, well, they are backstopped by Uncle Sam. Can anyone in the industry confirm or advise to the contrary? Crip, I spoke to a fellow over at Markel Corp and he was livid about AIG's pricing..... they are trying to earn there way out of there problems which can seem smart when more money is coming in, than going out.... but in reality it really is not as more guarantees and money are going out, than money coming in! It just might take awhile to play out! But from what he was saying you are correct, and he was quite enraged about it! He said they have been running there business correctly for years waiting for the stupidity to stop(ie-Reinsuring with questionable reinsurers, poor investments,etc) and the eventually hard market both with their investments and insurance.... they got the investments, but are waiting for the insurance and when they should have got one based on the storm on the left side of their competitors balance sheets... they have competitors that are writing business at unreasonable rates stopping it from turning..... He had some choice words for the competitors with back stops from Uncle Sam, which are some of the large culprits!

http://watch.bnn.ca/#clip240385 Little bit on Canadian Banks on BNN

Wesco Financial Shareholder Letters Anyone have any links to more of these letters dating back pre-1997? Thanks in advance!

Ericopoly, I know your pain. A friend of mine plays in the National Hockey League with the Columbus Blue Jackets and gets shut down for almost everything! He is not overly business savvy, so he usually calls me for advice and I can't believe some of the stuff I hear. He has a 3 year contract(one way) for over half a million dollars a year and routinely gets shut down for things like American Express, Target and other cards. He just bought a condo and had a hell of a time getting approved as well. He had to eventually get his loan from a smaller, regional bank that does almost all the lending to the Blue Jackets, as no other bank will touch the players as many are Canadians and have little to no credit in the US. The banker at the regional bank said that in all the loans they have given to the players, they have never had one missed or late payment! Common sense just isn't very common I guess! P.S- He was buying some furniture the other day, and got embarrassingly declined for a card that would have allowed him to save 10% on his purchases. Is actually quite comical at this point!!

Sanjeev, I am not quite as bearish as Martin, but I think things will get tougher for a lot longer before they get better. We may not see the lows of the recent past, but we will most certainly tread deep waters over the next couple of years. Not speaking specially about the Fairfax posting here but this is why I am of the belief that the importance of managements abilities over the next 3-5 years has been magnified many fold. If a person is wrong about the "new normal" you will still do quite well, and if they are right they are still in a great position to build value over the very tough economic times that result from the "new normal"! Example: Berkshire Hathaway 1974- $38/share 1980- $400/share *Alot of value can be built in very different economic times! It goes without saying though that these "abilities" are only part of the valuation process and must be purchased at attractive long term values! I am a majority in Sanjeev's camp as everyday there seems to be less value around..... with this said though, I have been finding enough!

Uses of Idle Cash! There are alot of different options out there for idle cash to sit until the 60 miles an hour fast ball comes across the plate and I was curious where other board members park there cash, when they have any? Any favourite places? Canadian and US Funds? This is something that I have yet to see talked about on the board, so quite interested in hearing the responses! Thanks in advance!

I was wondering if anyone had any information or comments on Rai Sahi and Clublink Enterprises or Morguard Corp. Haven't done much research on him, but looks to have made quite a bit of money for himself(Not sure if done the right way or not yet!). Interested in learning more about him, just haven't yet had the time and figured maybe someone on the board already was up to speed on his history and track record. Any comments would be great. Thanks!

http://aaronandmoses.blogspot.com/2008/10/remember-rocker-partners.html Was unaware of this and had not seen it posted yet. Life has a funny way of taking care of people!!

http://garyweiss.blogspot.com/2009/06/bernie-madoffs-hedge-fund.html Look at this article.... unbelievable! This guy is an idiot... would be nice to see them go down, which life has a funny way of doing that to people like this sooner or later. A year or two ago I would not have believed things like this happen, but got my eyes opened up. I thought that the junior mineral ponzi scheme/related parties/stock manipulators/option, kickbacks and expense card whores were bad. I could go on and on about these people, who steal in my eyes from good honest people that invest with them... Saskatchewan is absolutely terrible for it.Well they got nothing on these people. Excited to see how this story ends on the 'big fish criminals'. The people at Deep Capture are heros in my books!

Hello Boardmembers, This is not my speciality so figured would as if anyone had any good ideas for me. My 75yr old grandmother is looking for monthly income with of course safety of principal. I have a few ideas, but are there any good, stable(she can't handle volitility!) Canadian(Wants to keep in Canadian currency) Income Funds, investment funds, etc. that would give her a decent monthly income without 'reaching for yield' unintelligently that anyone knows of? Any ideas would be appreciated! Thanks, Kyle

Is anyone familar with George's track record before Clarke Inc. It is difficult to find anything out about this and was curious if any board members know of any information either positive or negative. Seems to have had some success, but again difficult to gauge how and why! Thanks in advance, Kyle

A very important part of the university experience in my opinion is the relationships that are gained. The gaining of many friendships and life long business contacts in school is extremely important and something that can't be had with distance learning(I do agree however that the content and learning experience is largely equal with inhouse and distance learning) Being around motivated, like minded people is very beneficial and something that is missed out by not 'having the experience'!

Happy Birthday Sanjeev. Also appreciate the good work on the board! I just like ubuy2wron love this board, and couldn't imagine not having it! You will have to let us know what the sentiment and activity was like in Vegas Sanjeev... good/bad!?

Staying concentrated is what has created most of the richest in the world.... so see no reason not to be, without being stupidly concentrated. Some on the board have said that if it was your own business they would be comfortable putting 100% in.. do they not trust Prem (Chief Risk Officer) is thinking long and hard for them out of his own self interest? (Prem is probably better to make the decisions too!) To avoid gambler's ruin I argue against 100% but don't argue against a concentrated portfolio. Prem and Warren aren't concentrated for charity, but because they think that it's the best allocation of there own money... which doesn't just mean the highest return available, because we know Buffett makes higher returns in his personal portfolio. Got to get paid for when you are right! Example-100 stocks and one doubles, you now have $101! We run a pretty concentrated fund...anywhere from 5-12 ideas. At the moment, we have about 65% of the capital in five ideas. So, I agree that a fund should be relatively concentrated. In regards to the putting all your capital into one stock: Why didn't Prem put all his money into Berkshire? Prem puts nearly all of his wealth in Fairfax, because Prem is more comfortable with Prem's decisions. Buffett puts nearly all of his wealth in Berkshire, because Buffett is more comfortable with Buffett. Sanjeev puts nearly all of his wealth into Corner Market Capital and the MPIC Funds, because Sanjeev is more comfortable with Sanjeev, than he is with Prem or Buffett. That's just the way it is...you can go ask Sardar the same thing, and he'll tell you the same. That doesn't mean any of us aren't willing to make a bet on each other at given times, but that it is unlikely that we would hold onto that bet for the duration of the game. I've had my entire net worth in Berkshire and Fairfax at various times...but I just wouldn't leave it there forever...primarily due to size. Even Fairfax's growth will slow over the next decade. I agree with everything said here! A friend of mine over the last couple years has been asking if he should change the way he has played the 'game' over the years, as he has more than enough money to live for many generations.... and he has concluded that by trying to avoid losing, you end up losing... just like in sports so he has decided to keep doing what he is doing!! What has got him to where he is (investing for the long term, concentrated holdings, focusing on downside) will protect his wealth and make it grow, and he has decided that he will continue to invest this way instead of changing and 'blowing it'! What has worked for Prem and Warren is what they should continue to do. Everything else is irrelevant for most people... except when you are quite old and of more limited means. Go with what works! Both Boston and San Jose pretty much played the same game in the playoffs that they played in the regular season, yet they did not dominate the playoffs. I humbly beg to differ that they actually didn't adapt their game to the playoffs, and kept doing the same things that got them into trouble. Bill Miller didn't do anything different in 2007 and 2008, that he didn't do in past years. Neither did Mohnish or a myriad of other investors. I think that was the problem. They did exactly what they were taught. They stuck to the playbook and listened to the coach. Yet here we have Prem who changed his game...he went and bought something that has nothing to do with Ben Graham investing...credit default swaps. He bought insurance! I believe it was Sam Mitchell at our dinner, who said something to the effect that Buffett went and did something completely different than what he was saying for the millionth time, and everyone started chuckling. Buffett preaches what he has to, so that he has a group of shareholders that buy into the cult. It helps him long-term, and the end result is that it ends up helping those shareholders. Yet, Buffett often does things that are contradictions to what he preaches. As for Boston and San Jose… they ran into good teams and just were not the better team. But over a lot of different sports games, not just a couple series’, it is quite common to ‘pucker’ up and change what you have done to get the lead… causing you to end up losing. Munger didn’t believe in 73-74’ that he needed to change his strategy because it hadn’t worked lately, and neither should investors who had trouble lately if there strategy is still valid. A good coach will play the same way when he is down just as he will when he’s up, because over the long term if his strategy is sound, it will work out for him. Think the problem with these investors was that they didn’t use Peter Lindmark’s 10-20% of the time macro matters idea… and I can say that I never either.. felt things were in excess but macro never mattered, and built a dingy instead of an ark! Prem I would argue has not really changed his game as he has done things like this in the past, not using CDS but the same type of idea (it rhymed) when he bought in late 80’s puts on the Nikkei, and in the late 90’s puts on the internet bubble. Value can be found many different ways and this is one way that Prem has found it in the past… very Templeton like! You are right that Buffett does things that contradict what he preaches, but it really doesn’t contradict his style of investing at all… Derivatives are weapons of mass destruction as he said, but that doesn’t mean that they can’t be used if a mis-priced bet is found, but this leads everyone to think that he is contradicting himself. 3) Munger says to be a good value investor you need a f-you attitude to a degree. I understand that you need to temper the market volatility for some of your shareholders, but maybe that is telling a person that they have the wrong shareholder's? If I remember correctly it is Munger who gets very upset when he is asked the question about how you would act different if it was just your own money you were investing versus running a public company or a partnership of sorts. I think you need a f-you attitude in relation to the investment process..what you are buying and what you are selling. I don't agree with that sentiment when it comes to empathizing with your partners. It's their capital and they are your partners. Buffett wrote to his partners as if they were all his aunt...in a simple to understand, straight forward manner. He laid out the ground rules of how the funds would operate, but he never showed any sort of take-it-or-leave-it mentality. I guess it comes down to personal choice. I can say for a fact that it never hurt his results, and it certainly hasn't hurt ours in any manner. You could probably get away with that more in a public corporation than you can in a partnership. We want our partners to be able to redeem their capital whenever they want...we don't lock it up, and we won't ever close the fund down so that they can't redeem. Having an f-you attitude to your partners is not a good plan your right, but you definitely have to be stern in your ways as they are paying you, to run the ship the best way you think possible… which could at times mean showing tough love to your partners. Buffett is a good communicator which has helped him get to where he is. Barack Obama would never have gotten to be president if he was not good at conveying his messages, just like Prem would not have got to where he is if he was not a good communicator with his partners. I agree to talk to them like they are your ‘aunt’ but to make sure that they are not changing the way you are running money, to accommodate for them. Buffett never showed any take-it-or-leave-it type mentality and I am not saying that a person should, but they have to run it the way they want too, and get shareholders that understand what they are trying to accomplish so they can help you accomplish these goals. Buffett did when he was younger kick people out of his partnership when they were causing him to run things differently than he wanted!! So I would argue to treat them as you would want to be treated if roles were reversed, but to steer the ship the way you want to and if they don’t like it, it’s not a good relationship for either of you. Sanjeev, you would have a lot of knowledge with this, more than I would, and would have had to deal with a lot of difficult circumstances due to other's temperaments in the last while, so I am in no position to argue this point but know that any coach I have ever seen in hockey that coaches to keep other's happy, ends up sinking the ship... and he feels terrible about it, because he wasn't even doing what he actually wanted to do! Bobby Knight has won three NCAA championships, but how many of you want to be Bobby Knight? I certainly don't. I think a coach's entire job is to find a way to motivate his team, and help them form a cohesive bond that allows them to reach their maximum potential, regardless of the circumstances. I bet there are many different personalities within Fairfax's executive teams...just take a look at Sam Mitchell, Greg Taylor and Dennis Gibbs. I think anyone who has met the three, would say that for the most part, they have very different personalities, even though they operate very successfully as a team. Now how do you manage the egos of three very different, very successful people, with three significantly different areas of expertise? Well, a good coach takes more of the blame and less of the credit first of all. Prem does that all the time. In the years I've known him, I've never ever heard Prem take any credit for himself...ever! It's always someone, or "we at Fairfax", or something to that effect. Second, he knows how to make everyone feel useful...give them a very specific purpose and goal. Why are the best penalty-killers in the league, guys that don't do a whole heck of alot other than that? Third, you get everyone to buy in to the philosophy. I agree I don’t want to be Bobby Knight either!!… I believe that people who run a business, family, sports team or whatever that way are doomed to not have success… surprisingly some do, but that style is not for me. I agree with all the points you made above and that is one of the reasons they have so much success! We mitigate risk to a certain degree for two reasons: preservation of capital, and because regardless of how good the culture is at a company, you will always find investors that cannot handle the volatility as well. It doesn't mean they aren't good long-term partners, but I think a 50% drop would scare off at least 30-40% of partners in a fund. So unless you can meet redemptions for all those people, or lock up your fund, you are going to have to shut down. Take a look at Legg Mason. You had a manager who was a God, and beat the markets for 16 years in a row. One hit and he loses more than half his assets. Miller runs a mutual fund, so he wouldn't have to close but what about all those hedge fund managers out there who did. Even in Mohnish's case, he's fortunate that his redemptions are just once a year, and the bulk of the losses came in the last two quarters. He didn't get much in redemptions. But if his investors were allowed to redeem into the 1st Q of this year, it would have been a much different story. His fund will recover alot of ground over the extra year he has now, and he'll end up keeping most of his partners, but if redemptions were allowed into the 1st quarter, he may have had a difficult time meeting redemptions. In Seller's case, he closed his fund! Cheers! If a person goes back and reads all Buffett’s letters from the start it is very hard not to notice how much he preps his shareholders for bad times, prepares them for events that have not yet happened, and teaches them about what he is doing. This helped him when he had the significant drops, as he had already talked about it happening and his shareholders expected it. You are right Sanjeev, that no matter how much you prepare your shareholders for when Mr.Market acts up, some will still be scared off. “I feel this has a high probability of occurring one year in the next ten—no one knows which on” Warren Buffett- Talking about the market being down 35-40% in a year. Marty Whitman tells the story of when he was buying Kmart’s debt and how he was talking to others in the investment business. They said that they knew it was a good deal, but they couldn’t buy them as there was to much ‘market risk’ and they could not stomach a 20-40% decline that could possibly happen. Whitman said that was hogwash and he didn’t care what happened to the price, because he felt that at the current price he was going to make a lot of money. The other investors missed out on a great opportunity because they were worried about the volatility for there shareholders….. which is why most underperform an index fund and become closet indexers. I guess this is why the best in the world were looking for investor’s not shoppers when they started there investment funds. “It is most important to me that you fully understand my reasoning in this regard and agree with me not only in your cerebral regions, but also down in the pit of your stomach”- Warren Buffett I am in no way saying this about your fund or the way you invest Sanjeev, as I know full well that you don’t act that way. I know that your not scared to back up the truck when you see opportunity, even if it could potentially be tough for your partners in the short-term but thought it was relevant to the debate. Personally, I agree virtually everything you say and on a value investor’s bell curve I am pretty close to where you are in the ‘style box’ so it is quite out of character of me to be of a differing opinion even if it's a small one. Debate on these answers would be great as it is a good learning experience to test your beliefs in front of others.. and maybe kill your best loved ideas! I know I don’t even know close to everything but these are my humble answers! *Sorry for the length boardmembers... will make it shorter next time! *Sanjeev, you are right on penalty killers too, there is definately specialization of labor in that game!

You are correct in my opinion Sanjeev when you say that diversification is dependent on the investor's abilities and emotional constitution, thus that it isn't a one shoe fits all type of question. However, I have some thoughts on some of the other points. Figured I would play devils advocate here, and maybe I will proven to be wrong and end up switching my thinking! Good discussions never hurt! Also is many ways to invest ....some like concentration, net/net's/ jockey picks, etc. so both sides can be right... just look at the difference between let's say Whitman and Berkowitz... and both are still good. 1) Throughout some of Fairfax's history, Prem's 5-10% outside would have been some money, but not a significant amount. So, should he have moved money out of Fairfax into something else to 'diversify'? If he could have found 10, or 100 other places that were just as good, I would argue absolutely... but I am sure that he tried and could not. Ditto for Warren in the early stages of Berkshire. Staying concentrated is what has created most of the richest in the world.... so see no reason not to be, without being stupidly concentrated. Some on the board have said that if it was your own business they would be comfortable putting 100% in.. do they not trust Prem (Chief Risk Officer) is thinking long and hard for them out of his own self interest? (Prem is probably better to make the decisions too!) To avoid gambler's ruin I argue against 100% but don't argue against a concentrated portfolio. Prem and Warren aren't concentrated for charity, but because they think that it's the best allocation of there own money... which doesn't just mean the highest return available, because we know Buffett makes higher returns in his personal portfolio. Got to get paid for when you are right! Example-100 stocks and one doubles, you now have $101! 2) People wonder why in hockey or any other sport for that matter, a team gets a lead and ends up blowing it? This is common and is largely because they quit doing what got them the lead in the first place! Yes, there are certain things that you change(ie- Play the trap, etc.) but the best sports teams I have ever seen seem to just keep playing the way that got them the lead in the first place. A friend of mine over the last couple years has been asking if he should change the way he has played the 'game' over the years, as he has more than enough money to live for many generations.... and he has concluded that by trying to avoid losing, you end up losing... just like in sports so he has decided to keep doing what he is doing!! What has got him to where he is (investing for the long term, concentrated holdings, focusing on downside) will protect his wealth and make it grow, and he has decided that he will continue to invest this way instead of changing and 'blowing it'! What has worked for Prem and Warren is what they should continue to do. Everything else is irrelevant for most people... except when you are quite old and of more limited means. Go with what works! 3) Munger says to be a good value investor you need a f-you attitude to a degree. I understand that you need to temper the market volatility for some of your shareholders, but maybe that is telling a person that they have the wrong shareholder's? If I remember correctly it is Munger who gets very upset when he is asked the question about how you would act different if it was just your own money you were investing versus running a public company or a partnership of sorts. Sanjeev, you would have a lot of knowledge with this, more than I would, and would have had to deal with a lot of difficult circumstances due to other's temperaments in the last while, so I am in no position to argue this point but know that any coach I have ever seen in hockey that coaches to keep other's happy, ends up sinking the ship... and he feels terrible about it, because he wasn't even doing what he actually wanted to do! Please let me know what board-members think about these points! Kyle * Small businesses that get the 1000% a year, usually are forgetting about the implicit cost of not working else were(opportunity cost) that would definately lower your 'actual' returns on your investment. If they are already factoring that in, those are quite the returns!

Viking, Prem himself has 95% of his net worth in Fairfax, and most, if not all on this board, would say that he is smarter than I or anyone else on the board! As Yogi Berra has said "You can observe a lot just by watching"! Buffett has 99%, and Munger 90%... these guys are what the board is named after so we must think they are pretty smart!!! Prem has built a fortune by owning for 20+ years the same company and having a large percentage of his wealth tied to this company. If you look at the Forbes 400 list or any other wealth list, it has been done by most the same way.. owning a concentrated portfolio of good businesses over the long term.... seems to be a huge disconnect between how the richest in the world got there, and how most people with anything to do with investing think, speak and act. Is it better to get 100 Wayne Gretzkys versus 1? Well, yes of course but that is difficult.. I do not recommend owning one company (even though again, some of the Forbes list has done this!) but do recommend owning a concentrated portfolio of the best companies that you can find. Very difficult to find more than 10-20 Wayne Gretzky type investment opportunities in my view. Up for debate on these points though... I will answer one answer before hand though... When Markel execs were asked the question what they would do different if they were running money privately they answered that the answer to that question should be "NOTHING".... so I understand that volitility can suck if running anopen ended fund, but let's forget about that debate point as it really has no merit for value investors... as they should not be worrying about the institutional imperative I am interested to see what others think, so please let me know. Got to avoid gamblers ruin, but still have to be concentrated enough to actually move the needle when right. Fact that thought would be of interest to most: If a person had invested in six 'jockey' companies(without even caring about if they were cheap or not) 10 years ago they would have had over a 12% return versus the S&P which was negative! Would have been in the top of the fund managers!! (Fairfax was trading at like 4-5x book then as well!) This is in hindsight, but would not surprise if next 10 years were no different. (LUK, MKL, FFH, BRK, BAM, L bought in May 1999 to May 2009)