SharperDingaan

Keep in mind that the P&C industry is not an oligopoly. There are enough new entrants underpricing to get the business & obtain the float to wreck the model. Yes the existing new entrants go out of business on the first big loss event, but the next round spring up as soon as the markets hardens. The P&C industry is very much like the airline industry; for most, a sub-standard return on equity. You are looking at only the better companies, & after survivor bias. Quasi-nationalization is also common - nuclear power stations, natural disasters (flood relief, state of emergency, etc). If we had to pay the 'true' cost for the nuke & flood plain risk, the power stations would not be built & there would be no new housing built. Hence the government offers insurance at a loss to achieve a higher standard of living, & insurers accept a lower return. SD

Keep in mind that it is not just the Toronto flooding, there will also be losses from Calgary & High River as well. And if you want to do business with these folks again - you are not going to be breaking heads. We have been saying for a very long time that you do not get paid enough to hold FFH through the high risk summer weather events, the magnitude of the risks are getting bigger, & that you need to hedge the risk. Not popular, but unfortunately it is proving to be bang on. Good luck to all. SD

NBG - just 'cause we like the whiff of tear gas - & have hedge proceeds that we need to deploy. There is still some room to run, but it is event driven - not a buy and hold. Re disclosure. We added a significant weighting at < $3.00, so today was a very good day ;) http://www.independent.ie/business/world/greece-given-68bn-lifeline-but-warned-to-push-through-controversial-reforms-29404259.html SD

Gio, it is easiest if we use a numerical example. Let’s say that for 20 years; UW performance has averaged an annual CR of 96 on a moderately growing book of business. The extremes were 2 years of CR at 108 (ie: Katrina) & 3 years of CR at 87 (ie: Hard Markets). At its simplest - over the 20 year period (ignoring DCF & the timing of UW gains & losses ), the company has made a total UW gain of 15 years of average CR gain (100-96)+3 years of extraordinary CR gain (96-87)+2 years of extraordinary CR loss (96-108); or a total UW gain of roughly 63% of the average annual premium. Business is great. But we know that weather event payouts are getting higher, more frequent, & that UW market under-pricing is occurring for longer periods ... Lets say average CR is now 97.5 (lower pricing), there are 3 years of bad CR at 110, & 2 yrs of good CR at 90. The UW gain is now 15 years of average CR gain (100-97.5)+2 years of extraordinary CR gain (97.5-90)+3 years of extraordinary CR loss (97.5-110); or a total 20 year UW gain of roughly 15% of the average annual premium. Business sucks. Same skill but suddenly you are short 48% of average annual premium, or about 2.4% of annual premium – every year. Those worsening weather events really mean that you need either more investment income, or significant realized gains - every year; just to track to historic performance. We all know that if you can continually roll short-term debt - it will act like long term debt. But the effect also applies to any other liability – & turns P&C short tail UW risk into long tail risk. And we all see the long tail Life Co’s getting crippled because of the low rate environment. It is the same thing here, but with weather as the trigger. Given that 1 bad year at 110,could wipe out 4 yrs of average performance at 97.5; you are really betting that bad weather events are going to happen no more than twice every decade –& that it will only be after that, before we truly start making money. A great 8 yr track record could get wiped out by 2 years of back-to-back UW losses, that were nothing more than poor timing (ie: noise). SD

"Given that, contrary to what happened during the last decade, I expect insurance operations to get better and better, and finally to achieve an underwriting profit, the annual return needed from their portfolio of investments might actually be only around 7%. Historically, instead, they have achieved a 9.4% annual return." Gio, you might want to rethink what this actually means.... (1)Annual weather events are getting more frequent, more certain, & more severe - therefore bigger, & realized, event losses. (2)There is a rising presence of under-priced state cat (flood) insurance - materially lengthening payback periods. Those big realized losses are lowering BV, & most would argue that on those big losses - the payback period is now longer than the time to the next big event. In practical terms; realized net BV losses are getting bigger & compounding negatively. Re-insuring cat risk against the state, is also not a sure thing; as we all found out with AIG. While states theoretically cannot go bankrupt (therefore you will eventually get paid); unless there is timely & full settlement - you WILL experience a realized BV loss equal to your GROSS exposure. As your investor I will want more yield to compensate for my additional risk. Point is that while intrinsic value may well rise over the holding period; the simultaneous rising noise level could well obliterate it - producing a NET gain of almost nothing. SD

We bought in a modest BB position today, & it had zero to do with IV or valuation. Frankly, BB is an investment POS. But we're confident that enough folks got burnt today, to be fairly sure there will be changes before the next quarterly earnings report. Hence, a minimum 10% appreciation between now & the next report seems pretty modest; which is a 40+% annualized compound return. Rain or shine we will be flat by the next report; & if we get to average down, so be it. Sometimes its just nothing more than plain vanilla supply & demand. SD

Keep in mind that as soon as the Sun Life dividend is cut, the common will fall like a brick ;)

Whatever Greek companies do will be vilified by the market, & it will primarily be just because its popular. But 5 years out, ... it's a very different story - Iceland, Ireland, etc.

More "shovels" PD. Horizontal wells require specialized knowledge & equipment. Gatekeepers you have to talk to. MTL. Not as good, but if you need a big move,set-up/take-down you will be talking to them. Re disclosure. We hold & long-time & concentrated position in PD.

MTG, EFN, PD, 18% leverage +1 conv pref +1 new build in progress We include the leverage as a portfolio weighting, as we use it as a negative asset to offset the impact of big (for us) holdings of very low cost shares. We periodically run the leverage up to buy in the new positions; & repay it via ongoing hedging.

It's not just O&G; Pharma, Tobacco, Booze, some of the big FI's as well Little hyped is that if you simply bought a basket of these, with an average ROE of 6.5% & div yield of 5%; your portfolio would double roughly every 11 yrs (72/6.5), and pay you 5% in cash each & every year. ie: A $1M portfolio at age 65 (retirement), would pay an inflation adjusted 50K cash/yr, AND grow to $2M by age 76 - & with minimal interference ;) ... promotion of which is very definitely not in the asset gatherers interest. Then consider that if you have been learning your craft on this board for 8-10 years (Gladwell's 10,000 hours concept) or so ... that $1M is very likely low-end, & your portfolio will quite probably have a cash yield well > 5%. The 'non-quantifiable' value of value investing .... SD

The RICO appeal doesn't have to stick, it just needs to suck more of the oxygen ($) out of the room. There may also well be an element of strategic SEC suggestion to it. Keep pushing a target off balance & it will make mistakes ....

Only if there is no experience to go with it..... In real life Apollo will actually have more experience than either of the University candidates, as they were actually working while the others were on campus. Apollo may well also be the preferred candidate simply because they are more mature, & have demonstrated that they can handle competing priorities (school + work). No wet nursing required. Just because you are newly graduated from university, does not mean that society automatically owes you a job.

Keep in mind that this is just the averaging effect. The rich person living in a poor neighborhood feels rich, but can only go down by association. The poor person living in a rich neighborhood feels poor, but can only rise by association. If ... you choose to play the game. Move to a poor neighborhood, get your rich friends to come as well, & you gentrify it. The poor get forced out, the neighborhood becomes 'trendy', the value of your (& your friends) real estate rises, & you all walk away very rich. You still need a place to live .... but changed the game. "Make your money early, then retire to do your own thing", is the time-worn game of many discarded trophy wives. The divorce settlement to set yourself up, & a kid or two to ensure an adequate cash flow while they are growing up. Disgruntling, because the independence evident in this time-worn game is a threat, but it is a threat that is tolerable as long as it is not widely advertised. "Make your money, & have the grace to die early", is the game of many an heir; & much of the financial services industry. The heirs don't know what to do with you, & don't appreciate your 'retirement' activity rubbing your wealth in their faces. And you only leave a significant estate behind .... because the financial services industry guilt trips you to. Other than paying off your taxes, & ensuring your spouse has a pension for his/her remaining life - WHY are you leaving ANYTHING? You've already paid for your kids education. Your grand-kids are your kids responsibility; not yours. The notion that you might work in retirement for fun - & live a healthy, active & very fulfilling life, is totally counter-culture. And ... really no different to the sexual revolution of the 60's; it is the same generations, all facing the same issues, at the same time ... just 40-50 years later. The "I Don't Feel Rich" dissonance being observed today is just the beginning. Disgruntling, because the independence evident in this time-worn game is a threat, but it is a threat that is tolerable as long as it is not widely advertised. Then ... given that Jagger & Richards can still play in their 70's, when they should have been dead many times over, it promises to be an interesting time! SD

Many 1st year college kids should not be there. Most are there as an alternative to boarding school, or 'gap' year travel; because mommy/daddy will not cut the apron strings, and going to college is viewed as an acceptable interim 'parking lot'. Most kids will be living at home, mom will do all the cleaning/cooking/etc, & dad will happily pay the bill to keep mom happy. In many cultures the real reason for sending their kids is to attract a husband while the daughters are as physically attractive as possible. It is a family effort, and the economic utility of the education is largely secondary. Having the degree is important, not what it is. Unrealistic expectations abound. Decide what you want to do with yourself by your early twenties?, get educated up over the next decade (bachelors, masters, professional designation)?, & then do very little other than 'maintenance' over the next 30-40 years? Where you went, & who you know, being all important ? Crock of Sh1te. A sheepskin is just a technical certification. 5-7 years on it is how you have applied your training; the training itself may be largely obsolete, as the technology has changed or become commonplace (you can now simply read how to do it on the internet). You do Harvard because the 'contacts' are valuable, long after the technical material you learnt became obsolete; and Harvard charges accordingly. You have no idea how employable you will be 20 years out, or even if you will be employable. The function may be routinely off-shored (accounting, IT), contracted for versus made-in-house, not pay enough for your needs, or you might even dislike it intensely. It may well also be that you will actually need to go back to school in your 40's/50's to retrain for something else, and that it will be commonplace. In the modern age, you either get your degree on-line, or via a co-op program. You work in your field a couple of years, & then go back to a specialized college/university in the area you love. You are mature, experienced, & your employer will usually pick up a good chunk of the freight. The stigma to it is purely counter-culture .... a) This is cutting the apron strings. Mom has no purpose until there are grand-kids, & not happy. b) Daughters can no longer be married off just on looks. Now they need brains too. c) Independent kids are harder to control. Pressure is less effective if they don't need your $. d) Envy. Mom/dad did not have the strength to buck the system, & you successfully have. e) Low cost, effective, competition is definitely not in the Harvard business plan. What matters is what you the student decide. You either cut the apron strings and live your own life, or forever suffer indecision. Scars, dents and bruises are just part of life ;). SD

The reality is that most folks will be looking at 10-15 years maximum. They will be looking at Big Pharma, Big Oil, Big Consumer, Big Financials (Canada-Sched A's, LifeCo's, etc.), & Utilities. Each of these businesses is unlikely to entirely disappear within 15 years, & at an average 6.67% (100/15) cash yield, you will have your original investment back by the end of year 15. A 6.67% cash yield is nothing special. You locked in a low cost price 15 years ago, buying on a dip, & dividends have successively increased since then. The cash yield was < 6.67% when you started, & > 6.67% when you finished. Any business 10-15 years out is very different from what it was. 10-15 years out, most folks will also be increasing their asset allocation to prefs & bonds (assumes an older person), & looking to trim common equity; either by direct sale or derivative hedging. And as most of financial services is transaction driven ... this is the last thing the industry wants everyone doing. SD

"You have to be in the top 10% of investors to apply a strategy that selects the top 10% of stocks" No. You just have to be able to pick a good business; hence the DD requirement. Most folk will not do it though because they don't have the patience, or temperament. "This is assuming that you're investing for income in the first place" No. Dividends during the holding period are to ensure that you get your original investment back as soon as possible; risk reduction.

Most of you are missing the entire thrust of Buy and Hold: If you buy an equity today, that consistently pays a growing dividend over time, three things will happen. (1) The cash yield (Dividend/Purchase Price) will grow over time (2) Inflation will maintain your purchasing power by increasing the share price, & your dividend (3) The longer you keep the equity, the more reliable (1) and (2). Essentially, no think risk management. If you buy a dividend paying XYZ at age 20. It is highly likely that by age 60 (40 year holding period) your cash yield on XYZ will be so high that it repays the investment every 1-2 years, you will have a cash flow that you can live off, and an investment worth many times what you paid for it - if you ever need to sell. Zero need for a financial adviser, & you would essentially eliminate most of today's services provided by the wealth management industry. Moat, management, etc is just the DD necessary to assure yourself that XYZ is probably still going to be around, and paying a growing dividend, over the planned holding period. SD

The biggest innovation is 'application', and it is not just Moore's Law. Materials science did not exist 70 years ago. The great innovation of the time was plastic, and the application was how we could use it. 70 years ago, today's plastics applications are so inconceivable they could not even have been imagined. Today we can bond ceramics to pretty much any material (including teeth!), we can bend cold glass like paper, & we routinely use carbon fiber instead of steel or plastic in many applications. 'Technology' is just a tool; it wears out & we replace it with another one. 'Application' is the process, & limited only by imagination. The internet is just an enabler; & the product is 'connectivity'. The result broader and more rapid global cross-fertilization, & a explosion of hybrid new applications solving old problems, world wide. What used to be done by physical 'letter' correspondence over a lengthy time period, & actually travelling to far-away places to observe/compare notes, is now a matter of minutes. SD

Reading between the lines, you were being asked for a bribe. 15 minutes of inspector time on site?, sudden appearance of a new 'code' book?, very uncomfortable with your taking notes?, town where you need friends? The smart thing is to walk, & never do business in this town again. Somebody will have been hurt because you wouldn't play, & they may well have a long memory.

Not to quibble... But what does it mean 120% probabilistically speaking in real life sense? .... absolute certainty that it is a coin-toss!

Lottery tickets do not have to be long positions in depressed companies; call or put options qualify as well. And given that the only consistent `winner`in a lottery is the sponsor; that should tell you something! Writing out-of-the-money calls would be a lot more reliable ;) Sell the lottery tickets, don`t buy them.

Keep in mind that probability is just a % estimate of the specified event occurring, at a future point in time, +/- an allowance for uncertainty. P(ground breaking event, t=1): 85%, +/- 5% means there is an estimated 80-90% chance of the 'ground breaking event' occurring within 1 year. High enough to warrant a potential investment in the ground breaking event actually occurring. The longer the time period the more uncertain the estimate, & the less powerful the prediction. P(ground breaking event, t=7): 85%, +/- 35% means there is an estimated 50-120% chance of the 'ground breaking event' occurring within 7 years. Essentially a coin toss. Low enough to warrant changing the strategy to shorting, or selling calls on, the company to capture the misplaced enthusiasm. Probability is also a 'relative' measure, that assumes all else 'constant'. i.e the company business plan will remain as profitable as it currently is throughout the whole 7 years, there will be no interim financing to support development, etc. All unrealistic. Most folks restrict their use of probability to short horizons, & the limitations are recognized intuitively. Actuaries & underwriters excluded.

Take a page from portfolio management; 90% of your return will come from asset and sector allocation (correctly timing the cycle), with only 10% from the name itself. Focusing on Coy X, versus Coy Y, is not really productive. Quality matters. Coy Z may cost more; but they are going to be doing the consolidating if the sector is really as undervalued as you think it is, and they know their business a lot better than you do. Do you want to be with the experts, or do you feel really lucky. Time and high cap costs are your friends. Once your costs are fixed, every inflation uptick makes new plant less likely, & small tech improvements can easily bump throughput up 50%+; & dramatically lower BE. Not very sexy, but way more reliable.

Re GNW. Be sure you know which risks you want, & have a plan for if they split the business. Today it is 2/3 mortgage insurance, 1/3 extended health insurance (by Q1 P&L); & they are reducing their mortgage LOB. If you want mortgage insurance exposure this may not be the place. We hold a concentrated position in MTG, bought around Xmas. While MTG has more risk, the risk is rolling off a lot quicker than most give it credit for.