SharperDingaan

The reality is that you can do very little about it. It is part of the package. The best defence is a bigger position acquired at prices well under current MV, so that you at least get a liquidity event. Example: 500,000 shares bought at an average 8c (40K), trading at a MV of 20c (100K), with an IV of 40c (200K). You could not sell this many shares without materially dropping the market price by 50-60% (11c); leaving a walkaway gain of 3c (15K) before costs. If management made an offer at 10% (low) over market (22c); your walkway gain would be 14c (70K) - 4.67x more. You might not like it, but you will be giving them a kiss. SD

Oil trunk pipeline http://www.ukrtransnafta.com/en/about_company/shema/ Gas trunk pipeline http://www.eegas.com/ukraine.htm Pipelines to Europe http://news.kievukraine.info/2006/01/european-moves-to-solve-gas-row.html Note that the Ukraine gas fields are primarily in the east, near Russia; & south, again near Russia (Sevastopol). Germany can also bypass Ukraine & access Russian supplies via Belarus. Not possible for France. In 2006; 95M cubic feet was being siphoned off a day (mob cut). It is now 8 years later, & no-one gets anything if that Russian gas flow stops. Two guys laying charges against a line is very old-fashioned. In the modern age you hack the systems & order compressor stations to over-pressure intervening pipe. The older the pipe, the more corrosion they will be, & the better your odds of explosive rupture. No fixing it for a very long time. http://www.taproot.com/content/wp-content/uploads/2010/12/Pressrel_2010_images_San_Bruno_28-foot-long_ruptured_section_of_pipeline.jpg Forget the Russians - go shopping in Germany & France; & hope for protests in Belarus. SD

This thing is probably going to go for a while, & get a lot worse. Anything Russian o/g is very vulnerable. All a radical need do is blow the gas pipeline &/or pumping stations, or blow a hole through any of the individual ship-borne nukes powering the Black Sea fleet in Sevastapol. You sow what you reap, & those Russian troops are not there for fun. Short of mass relocation (India/Pakistan, Israel/Palestine, North/South Korea, etc.) & partition, it is also hard to see any real prospect for longer term relative stability. Premiums for secure supply, higher spot rates on all tanker traffic, & something additional for the largest possible tankers that can pass through Suez or Panama. SD

Treat the whole thing as a business.... Assess your skills in a BS format. It will highlight where your competitive advantages, & weaknesses, are. Pass the CFA & your major assets will be technical expertise, youth, & just a little arrogance (OK for a time, but don't make it a habit); the weaknesses will be patience, & maturity. Mitigate the weaknesses. Stay in small caps, within your circle, & only in things with option markets &/or convertibles/warrants. Sh1te quality, speculative, build a big position cheaply - & lose it. Treat it as an apprenticeship, & expect to spend at least 3-5 years at it. You have to find out who you are, learn how to extract yourself, read a company, hedge effectively, see money as the servant, handle the emotions, & control your risk. Real world experience, not books. When you can systematically withdraw capital comfortably, you have become mature. Giving $ to other people to manage, because you recognise that you are your own biggest systemic risk. Nothing to it! SD

Gold!

Zach: Assume a 100K interest only loan @ 6%, with the loan to be repaid when the underlying asset (house) is repaid. The borrower gets into trouble & stops paying interest; under normal conditions the loan is declared NPL at 120 days, the lender repossess, sells the house for more than the o/s balance - & walks away whole. But if enough people could not pay, there would be massive social unrest, the repossessions & sales would glut the soft market, & the bank would incur large & permanent loan losses. The solution is to refinance under more generous terms, either under some kind of legislated 3-5 year moratorium (Greece, Spain), or a specific government program (US). Over the moratorium period the bank might change the interest rate to 2%/yr, & guarantee the interest payment; so that on exit the loan is now slightly over 106K+ [100K*(1.02)^3], & the borrower paid nothing during the moratorium period. The 106K exit loan is then refinanced on a P&I structure over 2-3 years to reduce the 106K balance back to 100K; thereafter it reverts back to its interest only structure. Moratorium loans are typically financed through direct central bank borrowing, at enough of a spread to generate the additional regulatory capital needed to support the loan. As these are non standard loans, they are routinely fair valued but designated Held To Maturity HTM; so that MTM variations do not hit the P&L. Cash yield is the cash interest being received (either by new loans, or reduced borrower cash payments)/MV of the loan. Because cash is being received they are 'performing' loans. SD

Oh shit .. It's Canada!

3) & drop like a brick. The evidence points to zero predictabiity & that most of everything 'known' about this company may well in fact be false. You have no idea what it may be worth, & as a result - would be reluctant to pay much above the discounted liquidation value of its assets or holdings. SD

FFH might find it useful to look at American Barrick & Placer Dome; how they fell in love with hedging, what it did to them, & how they eventually broke the spell to get out of it. The ability of a company to precisely control its major risks is highly addictive ... but it is a investor responsibility, not managements. Investors buy gold companies because they want those specific risks, & they choose how or whether they are going to mitigate them. Managements job is solely to run the company in the most efficient & effective manner possible. If I want P&C exposure I will buy it, & I will buy as much of it as I want. The solution may be as simple as hedging the major ownership stakes through the option market. FFH takes the full P&C operational risk, & performs accordingly. Owners hedge their risk through the option market as they see fit. If FFH goes down it does not BK its owners, & we get better separation between owner & investor interests. SD

As already mentioned we are not long term FFH investors, but a final note, to close the subject. In practice, a P&C's long run return will consist of consistent CR < 100, consistent use of COF (float) below market rate, and alpha on its investment portfolio. You get the CR through good underwriting, float through premium expansion/contraction, and alpha by exceptional investment prowess. Most would argue that global warming should be pressuring UW, global money printing should be reducing float spread, & that to do well you are really relying on alpha. Where FFH excels at. We would suggest that their reporting is measuring alpha very well. However, they seem to have a problem with beta capture, net of the hedge overlay. The result is over hedging, and an investment return that is primarily alpha; not alpha + beta. What bothers us is that hedge overlays are usually a top-of-house responsibility, we have seen a number of questionable bets over the last few years, & there is a marked refusal to cut losses. Mistakes are OK, but they seem to be piling up. Last time something like this occurred they almost lost the company; & those shorts could not have borrowed their shares in sufficient quantity unless there was smoke. We are not suggesting we are there again, but the risks are escalating. Nothing that cannot be fixed, but it shouldn't be there. SD

They have to deliver in this timeframe, all the time, & at an amount in line with the SML expectation. You do not get to deliver some now & some later .. in the long term. SD

Bluedevil, simple example; Assume we have a long US large cap equity portfolio managed by a very good PM, and a hedge on the US Russell Small Cap Index. We can all see the basis difference, but what we don't see is that a brilliant 10% return on the large cap may be only 2% after the hedge loss on the Russell Index. Per the SML maybe we need a 6% return on this portfolio. The PM silo did brilliantly, he/she earned 10% versus the 6% required. The hedge silo did brilliantly, & covered the downside risk at minimal risk. But combined - they earned barely better than a T-Bill, at many times the risk, & did so because nobody was looking at their combined return (management reporting lapse). The solution would have been to reduce the hedge, so they come out at 6%; or NOT hedge - if they cant earn better than the required SML return. ... and this is just one of the many obvious solutions. SD

Couple of quick observations ... We have not invested in FFH, other than dividend related purchases & sales in Dec/Jan, for at least the last 3 years. FFH has to realize that they make their money by taking on net risk, & getting it right. Great investing offset with opposing hedges nullifies one of the biggest competitive advantages they have, & is akin to having a Ferrari that you never take out of first gear. If I just want to get from A to B, I'll use a beat-up VW, & at maybe 1/20th of the cost. Yes the Ferrari could very easily crash & burn ... but that's why you put it in the hands of a F1 driver (preferably not Italian!), & not a mere mortal. It is highly likely that FFH has a systemic management reporting problem; as how else can very smart folks consistently forget what their business is? The best analogy is a sales force taking market share - & positive they are doing great; then discovering that every sale was putting them further in the hole - as they were selling for less than it cost to make the product. And all because nobody realized that the weekly management report they were basing decisions on - was missing some costs. Judging from the boards year-end investor returns, over the last 3 years - most people on this board probably had better returns than FFH did. OK, it is not scientific, but suddenly everybody is investing better than HW? Either HW has been drinking a lot of cool aid, there is something very wrong in the shop, or we're all brilliant! We hope they do very well, but we just want to go from A to B with no fuss. SD

We must be on some other planet ... FFH LOST $31.15/share in the year, in spite of a very benign casualty year, and an $400M reserve release. One of the best possible outcomes and they still lose money? As Eric points out, 2-3% growth over 3 years - & even less if compounded. Apparently this is a good thing? No denying this is a well run company, & they know how to invest - but come on ... SD

You have to declare where you are resident (Canada), & spend < 180 days outside of Canada/year - or lose your Cdn health care. Some Cdn government pension benefits can be paid anywhere in the world, net of Cdn taxes; others are paid only in Canada. No restrictions on private pension payouts. Brokerage/home banking, etc. ONLY where you are resident. KISS principle. You can be clever, but be prepared to prove that you are not a money launderer - & from uncomfortable places. Cdn UI can only be collected in Canada - you are supposed to be looking for work IN Canada. Your entry/exit to the US will be detected, & funds will either not be paid - or clawed back. Flying south for winter, also doesn't mean just flying to Florida. Lot of folks will rent a place in the Canaries/Spain/Greece/Caribbean for a few months during winter, & increasing in Chile/Argentina/South Africa as well. Currency, house rental, & food is cheap (in $C terms), the weather is hot, & why bother with Florida - if you can stay in Rio over carnival, or safari in South Africa during Feb/March. Just call home over Skype every now & again. SD

As soon as you compared your house to an alternative investment, you made it an investment; your direct comparison is the Palm Springs real estate broker, you are doing it because your business is buying/selling listings, & if you aren't doing similar things to that real estate broker you aren't very good at it. Nothing wrong in that, but houses just happen to be the investment vehicle. As soon as you see your house as a place to live, it is no longer an investment. You simply shrank your BS to permanently remove risk, you are not trying to buy/sell/rent, you enjoy the property for what it is (not as a bank account balance), & you earn your return in piece of mind. You could also buy a new Porsche for piece of mind, but you probably paid more for it than you did for the house. And ... the guy who owns the house may well also get your Porsche as well - in a yard sale, after you blow up :D. Compare apples to apples, & if the comparison is not flattering - fix it. SD

But what if the house is also an investment …. that $5M mansion in Palm Springs with 10% down. Then treat it as an investment … - Maximum optionality … non-recourse, minimum DP, revolving heloc loans. - Cost minimization … real estate licence, move between houses; live in whatever you cannot rent. - Revenue maximization … short term rentals, & many of them. - Sell & move to equities when the sector over-values …. reverse, rinse & repeat. - Multiple geographies …. domestic & global Or use a proxy …. - Fully paid of mansion in Palm Springs …. - And margined investment in global developers/house builders or mortgage insurers. Unless you are a real-estate agent, & your business is buying/selling listings … there is little reason to NOT have your mortgage paid off. And if you need proof … look at the millions around you (or your parents) who lost their houses because they speculated poorly. Nothing wrong with greed; just make sure you use it intelligently. SD

A few things being missed …. You may be the greatest, & luckiest, stock picker in the world – but if you are not periodically taking cash off the table, you are just upping your ante; & eventually you will be wrong. Removing cash & putting it into a bond or blue-chip is also not really removing it; you simply moved to another table in the house with lower stakes. For normal people; if that cash just pays off the mortgage &/or student loans – whatever happens, you cannot lose the roof over your head. Net worth did not change (portfolio + house + mortgage + student loans), you have truly removed risk, & you get a significant non-taxable benefit to boot. SD

We all have experience with rapidly expanding companies; seeking funds to push their first mover advantage. All very sexy .... but apparently nobody has ever actually understood what a cost accounting text - is actually telling you. If you use absorption costing (IFRS methodology), an inventory increase will reduce operating expenses by capitalizing some of it as inventory cost. The result is artificial higher earnings per share, discounted at a rate that includes future growth; & the faster the rollout - the more the benefit ;) All perfectly legal. So next time you get the fast mover doing a stripper dance, & everyone is hot & bothered; you should be too - selling the hell out of it! Something your broker is definitely not going to tell you. SD

Auditors do not give absolute assurance, & are not there to catch fraud. And they are not saying there are no miss-statements ... only that the net miss-statement is within a defined acceptable limit. SD

Talk to your friends in low places.... for a modest order specification fee, & new paint job, & a 5th person pick-up at some industrial site ;) SD

Stab the tires of all my competitors, & add $2 onto my delivery charge! ...... now do I have the job, & where do I need to send my people. SD

You might what to take a powder. You were told "we don't want you". Maybe because we want another guy, & need you gone to free up head-count. You were told "you are our insurance policy". The biz is underperforming, there will be cuts, & they will go by bonus level. You are being driven to walk, & so far - are performing right on plan ... So ... Obviously you hedge your bets - & discreetly look elsewhere; your employer will know, but will not act against you. Stay & network the other desks. It costs to exit a bad trade, & your desk is either going to pay it to your new desk, or you directly; via a payout. To your new desk you're just a trade, they get maximum gain if you have just turned down a very recent outside offer - & you have demonstrated that you know the game. Then accept the next offer, remove the liability, & take your new rabbi for a beer. The rabbi will not hold it against you - & will probably thank you for the head count room; which he can now justify filling with his choice, at your new salary & bonus level! Don't take it personal, it's just business. SD

Not popular but we prefer the use of margin for exactly this reason; when proceeds pay down margin, it really puts a brake on activity ;) SD

Sad to say, but it is usually best to pass, say nothing .... or point to a name brand financial planner. Yes they will be pissed because you didn't help them, but if it blows up you will keep a friend. One of the hardest things to do is learning to pass, & how to firmly say no. SD