SharperDingaan

Don’t laugh! Part-time College/University Level teaching. Diversified revenue; day job in private industry, night job in government. Minimal expense. Minimal overhead - primarily depreciation of intellectual capital & technology. Minimal CAPEX (seminar every year), minimal business risk. Long investment horizon. Sharpe ratio through the roof. Synergies everywhere. Write & sell the textbook. Referral fees if your company hires a graduating student. Gen X community involvement looks good in the day job. Wider network generating your next job in 5-10 yrs! And if you happen to teach finance/investment … you essentially get paid to research your companies. Now if you start up & run a new business for 8 years? it takes 3 years just to break even, & runs another 2 years at around break even – which route is more likely to yield the higher return? Which was the lower risk? To earn enough to justify the risk, how much does the business have to net ... & when? Not such a dumb idea!

Also keep in mind that the funds could be frozen at any time, & what escapes the trap becomes no questions asked bounty. Attracting all the best kind of friends, worldwide.

Agree on the PE assessment, but would add two outliers .... Most PE is institutional, therefore subject to the typical IPS minimums threshold. Headline events that temporarily drive the market price below a minimum threshold, typically act as tipping points. OK for about a week ... but after 2 weeks the position gets marked down ... whether there are trades or not. The PM's least risky personal option is to dump before the rush, & the first to dump will start a run. Needless to say XYZ becomes incredibly cheap, & bad mouthed everywhere in the media. Large cap or small cap .... the sell-off is almost always grossly exaggerated. A great time to offer liquidity at an extortionate price ;) A good portion of the bank owned PE is also not so private. PPP's may be the poster children - but don't ignore the proxy's doing serial accretive acquisitions, taking on bank supplied credit lines, & issuing equity along the way. Only to get taken out by said bank a few years later? Way too visible if the bank itself did it, but very different if done through a proxy ;) Obviously, if you can deduct who the outliers are - you are going to do very well.

We don't look to size, & chiefly exclude by exchange; kiss of death if you're not listed on the TSE or the dominant Int'l regional exchange. We just think there are too many scams/turds in the excluded mixes to make it worth the risk or time investment. Sure we might miss the next Microsoft at < $5.00/share. We'll just pick it up at $6/share ;) on the big board, if/when it graduates.

20 years ago you might have bought the service .... after the break-in, & only if a lot of valuables got taken. The resultant claim ended up being way more than the deductible, & you really took the service to reduce the cost of that new higher premium. It was a derivative product. Today a lot of the market buys the service to babysit the old folks .... especially if you/they live in different cities. They push a button & you get a text/'phone call. Effective, dirt cheap, & not reliant upon the neighbors. It has become the primary product. ..... one of those rare products that re-packaging & demographics really helps.

Look at the new equipment financing businesses; leasing, vendor financing, etc. The crisis forced most parent &/or shadow bankers to exit the market, hence it is very under served. Know that these businesses are inherently unstable as LT assets end up being funded with ST debt; if they can't roll their ST debt they go under - even the GE Capitals of the world. They are marketing tools, & their primary business purpose is to move metal (ie product of the underlying manufacturer), not necessarily make money in their own right. To be successful you need scale. The bigger you are the lower your Cost Of Funds, the more and earlier you see new deal flow, & the greater your ability to reject the probable duds. Over time, margins initially increase as financing is walked down the yield curve, then declines to zero as pricing is reduced to move more metal. The early years of the business model favor rapid growth, funded with recurring equity financing's priced at growth multiples. The middle years favor a sale of the various financing platforms to other entities (sovereign wealth funds, banks, manufacturers, etc). You also may want to keep in mind that the mindset in the early stage of the business is very different from that in the later stages. SD

There's a handy little 'container' company (T.PSN) in the NA oil patch that may be of interest. Welcome to the board.

What concentration really means - in plain language You do not have to be very big before you begin to notice …… that the cost of your ‘average’ concentrated equity bet is typically getting to be around 1 x annual salary, or more. And if you need to double down - that cost can easily become a material chunk of the value of your house. At an average cost of 1 x annual salary per investment, most folks would want to know exactly what they have bought - & how they expect it to perform. For the amount of financial (& spousal) risk/stress taken on, a compound 14%/yr (double every 5 years) also just does not cut it. It needs to be a compound 24%/yr (double every 3 years) or better - or go home. Do well & your risk will fall as the number of bets rises to 3-4. Diversification reduces the non-systemic risk, & reduces the leverage multiple if you need to double up. But …… for most people, that decline in financial risk will come at the expense of rising egotism - & your total investment will now be about the value of your house. Do nothing, & the cost of your average investment will tend to rise to about the cost of a condo - & if you need to double up – it is a condo in Manhattan, versus the Bronx. At an average cost of 1x house per investment, most folks would see you as sick, & most spouse would be looking for somebody else. There is a sweet spot, & you will not blow up if you continuously withdraw any capital accumulation past that sweet spot. Remember the adage: Money is the servant, not the Master. Not for everybody ….. but perhaps something to aspire to as you grow in maturity, & wisdom. SD

We very seldom stray beyond 3-4 equities, & have done so for many years. That said, we can offer some observations... If you don't do this full time, most of us cannot realistically expect to 'know' more than 3-4 securities at any one time. To get the bulk of the diversification benefit they also need to be in different industries. You have to be comfortable with volatility; portfolio swings of 25%-40% are not uncommon. You have to be looking for at least a double every 3 yrs; or a minimum 24%/yr compound return for the risk & management involved. You have to be willing to materially overweight at inception, & spend the rest of your time reducing your risk. The unit price at inception is usually at/near its lowest, & in most cases you will be progressively selling down as the share price rises to recover your initial investment. You should have a preference for equities that are either liquid, have an option market, or are likely to become marginable at some point in the future. You don't need to sell XYZ to recover your initial investment, if you can borrow it instead. You cannot expect to manage the portfolio passively. You must be willing to think for yourself, & be comfortable with holding contrary opinions. It will also help you to master the art of hedging. SD

+3%. Lower than normal as we took significant year over year losses on FBK, & pulled 1/2 our capital out following the buyout. We also put 75% of the remaining capital into cash from mid November onward. All told, a very good result. We reinvested in 3 exceptional buys mid month, & fully expect that 2013-2016 are more than likely to make up for this years result.

When I first started out a very wise women reminded me that the B or C in the group has typically had to deal with failure, & come to terms with it; the A in the group usually hasn't. What she meant was that the B's & C's you saw were net of survival bias, & the A's were the risk. Today's youth from Spain, Greece, or Ireland that actually got on a plane (all lands 50%+ youth unemployment) & left, are great examples of the B & C. The poster child is that Spanish 23-28 year old, with 3-5 years experience, physically interviewing in NA. It took balls to leave, & discipline to continue applying - when they could just have coasted as a waiter/waitress. Long term it's a great time to be a European youth, IF you're the half net of survival bias.

Always speak your mind - but be able to back it with fact, tact, & know how to be polite. No BS has value, & the higher up the chain the more value it has. At the shop floor level, keep the conversation clear & simple; drawing in the more advanced topics as the conversation builds. Everyone appreciates a good joke, wherever possible include women & minorities, & it doesn't hurt if you can have the conversation over a beer or two. Beer is good, but you better have a thick skin! CA's/CFA's right after graduation are notorious pr***s. My sheepskin says I'm good, I know it, I've spent my time in the salt mine, I'm king - & now you lowlifes will do what I tell you, because I told you to; unfortunately, most of the time the gaming works for them. It either passes slowly with maturity, or they meet a evil bastard & get 'matured' in 5 minutes or less. Game enough, & you will meet a Black Swan!

Smart by itself is not particularly useful – our smart guy/gal has to be able to talk to people, show some humbleness, & think laterally. Our smart guy/gal has to be able to cover the earthy through to the highbrow, & talk in terms their audience can understand. He/she also has to be mature enough to handle ‘smartness’. And depending on industry ... our guy/gal also needs a natural every-day ability to automatically link the cost curves of economics, to cost accounting principles - inclusive of futures markets & the forward volume pricing typical of the high-tech industry. Attributes that are much more common than one might expect. You do not get fired if you hire from ‘name’ brand schools – but you might well get fired if you take the rough diamond. Diamonds are inherently high risk/high return, hence they collect in industry where the practical side of risk/return is well understood. (oil/gas, mining, forestry, etc.). For every 5 hired, 3 might well fail, but Lenny .... for the 2 that work out! Most college/university entrants should not be there. They are not mature enough, & the experience was essentially used as a baby sitting exercise between graduating high school & early adulthood. In most parts of the world our guy/gal would get drafted at 18 for upwards of 2 yrs, & released back into college/university at around 20.The resultant ‘enforced’ maturity provides a grub stake on de-mob, & often results in far better decisions.

The nice thing about the patch is the no BS. Leadership, smarts, & chutzpa rise very quickly - provided that you can give just as cheerfully as you get! If you have it, you're going to be apprenticed in the best schools on the company's dime, & your 'friends' aren't going to be shy about kicking your ass. It's not just the money.

Just a consideration .... buy out the elder, & get gifted enough each year to cover the interest cost.

FFH is an institutional investor, & most of us - are not. The 4.9% double down to 9.9%, re-doubling to 20.0%, & further capitalization to 25%+ of the total share-count; is actually creeping control disguised as multiple mistakes. No premium was paid for the control, & FFH’s presence (at that level) actually destroys alternative value generation (as evidenced by the spiking of BOTH the FBK and the Mercer take over options). Value does eventually get generated, but it is on FFH’s terms & most of it accrues directly to FFH - not all shareholders. FFH is good at their game – IF they are allowed to play it. We all know that a concentrated portfolio can boast a great compound return, but it comes with significant year-on-year volatility. We also know that P&C profitability is seasonal, & that FFH typically magnifies that risk by funding long term investment with short term float. No big deal as long as UW float does not decline rapidly (unlikely in normal circumstances), the investments are reasonably liquid (deep pocketed & friendly potential buyers), & FFH itself is well capitalized (big friends). But cast a big enough pall over reserving ...... & the business model hits a truck. If you wish to apprentice - by all means invest alongside them. For most folks it will in all likelihood be a worth-while, & modestly profitable experience. Just keep in mind that it is FFH first, & that it may well be more profitable to trade FFH itself – versus the companies it invests in. Everyone eventually drinks the cool-aid when enough angels sing in your ear - for long enough.

Not sure AIG is the actual source, but pretty sure their presence is influencing pricing. AIG is a fed controlled entity and Basel III insurance proposals are influencing the capital requirements of Insurance Companies. Selling coverage cheap, & taking on tail risk, is effectively the insurance version of ‘Operation Twist’. Now if you are doing this - what are the odds that you are ALSO doing a version of finite insurance?

You might want to consider why folks are hedging their UW income so aggressively - as it does have a cost. AIG's market presence has made it dirt cheap? & weather related hits are getting LARGER and more FREQUENT?

Because you cant build an algorithm that predicts outcome with a R2 > 75%? You can't back-test? or because it is too revealing when the variables are stress tested to determine sensitivity? - and produce a range of possibilities, versus the ONE answer! Narrow your hypothesis enough & your R2 can only rise - if only because there are fewer possible permutations. ie: to get better, boil it down to real short words and a clear idea. You don't have to be right every time. It is enough to simply apply Kelly criteria on the few times when you have greater certainty. Not really any different than the concept underlying the concentrated portfolio.

Keep in mind that you have to be right on MANY things, for XYZ investment to pan out. Get most of it right & you’re doing pretty well, even if it didn’t work out – this time. 1) Did you get the industry or company direction right - was the tide coming in or going out? 2) Did you get the timing right - the catalyst you hoped for actually occurred when you expected it. 3) Did you get the asset values reasonably right - that 50c $ was not actually 10c, & you didn’t miss the 60c in unreported pension. 4) Did you get the management assessment right – the CEO did not turn out to be Madoff’s cousin. We find it useful to benchmark our rolling 5yr result against the return on a rolling 5yr Canada, over time. We should be making a lot more, & the difference should reflect the risk we took. Improving spread should reflect the successive successful maturing of investment ideas. A string of worsening or negative spreads is the sign to exit – it’s just not our kind of market. You pay a PM for their value add - the what to apply, why, where, how and when. We call it experience; it takes courage, & years to develop. And you pay, because you can’t do it anywhere near as well. It took us years to master hedging, but today - in any given year, it typically will contribute well over 1/3 our total return.

Macro is maligned because it forces an investor to recognize that profit is not the only dimension that human nature maximizes. We all know that politics typically trumps economics, & that corruption trumps politics – but how many actually apply that? The US has begun to turn. Most would expect reform to accelerate with the improving economic ability to tolerate shock. The banking lobby group went ‘all in’ on the wrong horse, and it is now in the political interest to expose some of the corruption – set, & get paid on record fines. Revoking a major money center banks US banking license, to redress today’s ‘moral hazard’ – would also play very well amongst the winners voters. If you weren’t already in a US bank, why would you rush to invest? The saving that you might make by waiting, could well be the easiest gain that you make all year. Investment Bankers don’t get paid unless you transact - & you definitely do not transact when the macro line is all ‘doom and gloom’. But if you can belittle ‘macro’ - you can change the channel …. & get a trade. Fail to change the channel, & you join the ranks of the 10,000 from UBS.

Agreed re Ontarible ... Now the only Province in Canada where you can get a 'premium' yield on $C denominated debt!

When it is a lot of small cities, villages, etc in the same state - it is easier to just let them degenerate. They either reinvent themselves with new industry, or become ghost towns. Elliot Lake, Ontario a prime example. When the city is 'too big to fail' degeneration is just slower - & the ghetto expands to take in the entire city. The major income source is aid payments, people stay because that is all they can afford, & there is multi-generational dependency. Still 'rich' pockets within the city, but it is siege living. ie: New Orleans. Not much different when a state fails - the remaining states just prop it up so to some minimum standard of living. Newfoundland, & Nunavat, Canada are examples. There is nothing to prevent a comeback, but it is those who are dependent that pay the price. Often entire generations of people.

The RWA adjustment implies that the average asset is high quality. To most people that means a barbell of sh1te loan book plus a big portfolio of Irish Government debt, financed with bail out funds. The spread on the Irish debt will be used to write off the loan book as they need to, & is being paid by the Irish population as a whole. It does not mean the bank is less risky, it just means the risk is being ring fenced within Ireland - & achieved by granting artificially low risk ratings to Irish government debt held by Irish financial institutions. A German bank holding the same Irish government debt would have to pony up > 50% of additional capital reserve. A 40% write-off will take their Tier 1 capital to around 8.2%. They need a minimum Basel III 7.5% for Q1 2013, & 8.5% for Q1 2014. Starting 2014 Tier 1 capital will also take a hit of 20% of whatever they have in deferred tax assets, & any IFRS transitioning. Without the favorable capital rating they would have insufficient capital, & would have to either call-in loans or sell the loan book at fire sale prices. They need the Irish Government to either buy a piece of their loan book, or issue additional Tier 1 capital over the next 12-18 months. If you already own it, there is a very good possibility you will see a warrant issue, but you would prefer the government to do a QE & prevent dilution.

Keep in mind there is the actual direct loss, the more 'grey' water/sewer backup damage, & then the opportunistic. In many places insurance is seen as a scam, and the carriers are seen as ATM's. This is New York, rich folk got their houses wrecked, the average opportunist is much more ambitious, and the flooding occurred right before an election. It is in everyone's interest to reject as few claims as possible, & for carriers to evidence the maximum loss possible - to support a federal 'aid' request. ie: Burn through ALL the regular coverage, and ALL the reinsurance coverage, with the fed picking up the rest. NY receives a multi-billion stimulus injection, the new fed pays very little for it, & every Springsteen/BonJovi aid concert makes it harder to reject.