SharperDingaan

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.

They cannot leave the game, & they only get to keep it so long as the party, or a new rival, finds it convenient. Russia is not the only one with Oligarchs.

Keep in mind what 'Goodwill' is, how it shows up under various accounting standards, & that the logic also shows up under a different name in other BS lines. Impairment testing is a IFRS accounting requirement. Other accounting standards do not necessarily impose the same rigor. Capitalization of start-up & marketing costs is a very close cousin. Does that market research really have a measurable revenue stream stemming directly from it? If the whole of that deferred sales capitalization is valid ... why are so certain a portion of the underlying business will not simply walk away?

Just a reminder that you make money in FFH by trading the P/BV ratio, NOT by taking a buy and hold approach. Most would look for next weeks East Coast weather to generate some very big claims, & a forcing of FFH's P/BV done further because of the re-insurance exposure. Add in market uncertainty over the ability of the US election winner to quickly punt the fiscal cliff ... & it's not pretty. Six month's out it's getting into AGM time, a nice market hardening to pay for next weeks probable losses, & some likely significant gains from the short hedges. A sale & repurchase, or a delayed purchase & sale, could well be very rewarding - & even spin off some cashflow from FFH's annual dividend.

Sorry. Story is sealed under legal agreement. It was mentioned because the market is unregulated, & you are totally relying on the integrity of your agents. If you like to walk the wild side, you have to question whether the return is enough for the risk involved. In today's age, if you cant buy it directly on the listed exchange, why are you even looking at it?

5 big names, lots of stores - but he cant exit. No-one is going to buy him out until restaurant ownership becomes fashionable again, & if he gets into trouble, the options are very limited. 1) Sell 1-2 of the names in a sad market & at a deep loss, 2) asset strip 2) close franchises, 3) take on more debt, 4) issue equity. Reduce sales 10-15% for 9-12 months & he is in deep dung. All it needs is for somebody to serve a finger, a rat discovery in the kitchen, or a derogatory viral marketing attack. Suddenly all the names will be short cash, & suffering a stressed BS. Most banks will lend no more than 50% of collateral, & in fair weather. When its raining it falls to 35%, & the full 15% immediately comes off what is left on the lending lines. And if the bank isn't comfortable - it will not hesitate to sell debt at a discount, in return for the buyer converting it into equity. Suddenly Biglari has 'new' partners, & he didn't choose them. Biglari got favorable financing from the capital markets, but it's clear he has poisoned at least some of the wells. This time if he has to came back, there may have to be partners & the terms may not be so friendly. To date Biglari has been the guy in control & it's worked well. Same confidence if he's not fully in control, & being pushed? Give the man some rope.

Long ago we had the misfortune of a 'pink sheet' investment. We eventually got our money back, & then some, but we had to beat the thieves at their own game - & manipulate the system. Our counter-party broker was livid, but settled because their reputation was worth more than the payout - & their sales heads were guaranteed termination. It wasn't a pleasant experience. One of the thieves eventually washed up on a beach in the Yellow Sea. No eyes, and tounge cut out.

Distinguish between continuous improvement & 'changing style' - a leopard does not change its spots. Most folks progress in their investing. Pay someone else to do it for you, to do it yourself. Passive indexing to stock picking. Movement up the quality & leverage curves, etc.

The approach is what it is. He puts his chips down on red, each bet has to be bigger than the last, & he absorbs more of the cool aid with every win. The wheel WILL come up black at some point. The approach is inherently risky, the rewards bias the short side, & the more times executed the better the odds on a win. Give the man some rope.

In the Arabian Gulf if you get caught stealing you lose a hand. In most gangs if you steal from the gang you lose your life. There is only room for one guy stealing, he can only steal as long as his rivals allow him to, and then he has to prevent those rivals from stealing what he has stolen. Yes, there is a cost to society, but the 'winner takes all' approach inherently limits the amount. The market solution applied to thievery. If you are not a very good thief you get caught. If you are good thief you & don't get to keep that much, & not for that long.

There are as many examples of rich ‘kids’ doing well as there are of them doing badly. As with most things, the ‘flame-outs’ get the press. For many rich, the fear is the possibility of ever becoming poor again. There is a lot to lose, & kids typically circulate within their own set to minimize the risk & preserve the wealth. Left unchecked, the resultant inbreeding tends to go to seed. Life & maturity broaden experience, & dilute ‘claustrophobia’. Trophy wives have made their fortune & moved onto the 2nd husband. Husbands have established their positions & had one/two affairs. Outside friends, &/or acquaintances have injected a different thinking. The 60yr old is not the 40yr old they once were - or the 20yr old ‘a*** h***’ they were many years ago. The magic kingdom has always been accessible. Fashion model to mistress to wife; flattery to scandal to husband, title for wealth. Drugs & paparazzi just make the process quicker, & more reliable. Offsetting which; the targets have hardened, & gotten smarter. Why buy if you can lease? Why not spin scandal as an asset versus liability? As the expression goes: The scum will always float to the top!

The long kept sales force secret is that most traditional business models, disproportionately benefit the sales force over the actual business owners. To increase sales requires additional investment (fresher product, aggressive pricing, new/improved distribution, promotion); all of which the firm pays for. The sales force is typically paid on the additional sales they produce (as a result of the investment) + a commission bonus on their total sales year-to-date. The higher the total sales the higher the commission rate; & the higher you are in the sales force food chain, the more the benefit. If the investment works a (5%) increase in sales will produce additional margin, but there will be no benefit to the business owner until the business has paid off the additional investment. The sales force benefits immediately. If the investment fails, sales are unlikely to fall to what they would have otherwise been; & the sales force still benefits. Asymmetric sales force payoffs The on-line model doesn't just pay no/less sales commission, it also removes most of the asymmetric sales force payoffs, & a large chunk of the agency bias (the 'slow the process, & lets milk this thing'), to the benefit of the business owners actually taking the risk. Quicker & fact based decisions, faster pivots, .... improved nimbleness. Needless to say the sales-force will disagree, & advocate for status-quo ....

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton Keep in mind that most often - this type of investment is not ‘passive’. The main risk is that the target bankrupts, so the focus is short-term. Is it worth more broken up, ‘green-mailed’, or privatized via a creeping takeover &/or as a debt for equity swap with a later IPO? Is it worth the effort to correct? (ie: RIM) - the names change, but the game remains the same. The medium-term risk is the business model. Is it good enough to tweak/save? or better to just keep the brand & distribute differently? - the IPO buyer is buying the model & the earning power. You get the most if the ‘refreshed’ business model is sexy, & ‘with the times’. A Facebook. ING proved you do not need Bricks & Mortar to have a bank – you need brand, & technology. Amazon proved you need brand – and distribution. Apple/RIM/Samsung proved you need brand - & rapid product development. Sell less product at higher margins, do it directly, on-line, more nimbly, & with better risk control. Applied: Is a far smaller - but entirely virtual - lean, mean, AIG machine worth more than the current version? Is it worth the effort to get there?

If you accept that banking is cyclical, look closer at the Canadian Sched-A Banks. If you accept that over the long-term, bank dividends should grow by (inflation + GDP)x leverage x payout ratio; it gets even better. Accept that the Canadian regulator largely assures they will seldom be leading edge, & that the $C is actually a petro-currency - & it gets better still. Worst kept secret in Canada ;)

You might want to re-think how you apply it. 'Return to normal' implies the future will resemble the past - the business model is still valid, & the environment hasn't changed that much. Back in the day that may have been reasonable; today - not so much. Do you really think that when Europe finally recovers, Europe will still be doing business the same way it was done before the 'crisis'. Banking & investment regulation did not change? 'Too big to fail' remained only a banking concept, & did not spread to other industries? The 'Too big' would not become nationalized entities?