SharperDingaan

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?

We've only been over once so far & that was in summer. Holed up in Reykjavic to do the DD & sign-offs, then a self drive tour along the South & West Coast. Rather not say who we talked to - as Iceland is a VERY small place! The plan is to return/vacation every 18 months or so, over summer & winter. We x-country ski in Southern Ontario, Algonquin NP, & Quebec. Occasional dog-sledding as well around Thunder Bay & Whitehorse.

Oddly we actually did use the central bank auction, & also hold some Marel. As at Friday the FX rate was 126 ISK to the $C (around 150 ISK using the central bank auction), & Marel was at 135 ISK - or $C 0.90. OK, so you have to hold for a minimum 5 years - but we don't see any similar quality juniors about at comparable prices - even if the market falls off the fiscal cliff. Iceland is not that far away, the people are very friendly, & x-country skiing under the northern lights is pretty special. Agreed on the Real Estate, but players who haven't failed by now are most likely not going to. We're on the property management side, & one of our partners has deep experience in the business.

http://www.bloomberg.com/quote/ICEXI:IND You need to do your own dig, as the main limitation is where the very small universe is listed; trade scale/transaction cost is an issue as well. New investment is not subject to capital control, & it is possible to do Icelandic Kroner deals at better than the official exchange rate. We hold a modest investment in fish, oil, & property management via a limited term partnership. When capital controls are eventually relaxed we will do very well. There is also an article on Iceland in this months CFA magazine."Necessary Adjustments"

Look at the Icelandic companies, & try to pay in Icelandic Kroner. Execution is difficult, but the results canl be rewarding.

Broaden the instruments in the bond category to include margin &/or mortgage. $ from the Bond allocation pay down the margin/mortgage. Reverse the process when you can earn more on the bonds than the mortgage costs. Lower leverage (risk), higher net after-tax return, & less over-exposure to equities in the bad times. The lower fee income from the reduction in Assets Under Management will put your adviser/agent in the poor house, so don't expect a recommendation. Graham generally didn't leverage, so debt (margin/mortgage) was not a 'category' or even a (negative) bond adjustment. Had he done so we would all be leveraging only in bull markets, & viewing net carry cost as importantly as Margin of Safety.

CFX: Does anyone really think the dividend will remain at 5c/quarter? Cash: If it looks like a loss for the Republicans, why would you NOT expect Tea Party members to use the 'fiscal cliff' to change the game?

Notable is the deleveraging. Student debt is a commitment & they have the cashflow to remove it.

Not visible yet, but we know it is occurring: US. 0-6 months. Lot of drama, but the fiscal cliff ultimately gets punted as part of the 'global growth agenda'. Neither party will want to wear austerity cuts. Fed is already positioning to counter the anticipated drama. • Press Reports: Operation Twist extension, QE3 on standby, etc. Eurozone. 0-6 months. Framework to transfer fiscal & political powers to new global eurozone governance institutions. You want German help ? agree to it. • Press Reports: Merkel ‘relenting’. Bail-out funds increased to 750B Euros. Louder calls for growth & sudden silence on ‘Eurobonds’. • Cdn Visitations: PM ‘Runway’ comment, Finance Minister ‘governance comments’, BOC Governor presence in senior committees. Eurozone. 6-18 months. Coordinated eurozone attack to 'grow their way out', stabilize/reduce unemployment levels, & keep politicians in power (Germany, France, Italy, Spain, Greece) (1) Sovereign debt restructuring. 40-60% of existing debt re-termed, converted into zero-coupon, & backed by gold, forex, & global SDR reserves. FX rates centrally 'managed' against global SDRs. Martial Plan 2 (MP2). (2) Extensive eurozone infrastructure rebuilding as fiscal policy, paid for with new printing. Hard assets grow at the inflation rate, bail out funds re-tasked to buying in devaluing sovereign debt & mitigating the jump in the yield curve. • Press Reports. MP2 concept recently floated in senior places. Sudden foreign interest in SDR’s Eurozone. 3-5 yrs. Bretton Woods FX reset (BW2). (3) Co-ordinated Basel IV restructuring & trust busting of the financial industry. A few heavily regulated systemically important oligarchs - & a lot of smaller & more easily controlled entities. Zombies allowed to collapse. (4) New global securities act. Direct nation state investment in the traditional hedge fund areas. Securitization, trade clearing, share lending etc. standardized, commoditized, & state supervised. Bulk central bank long/short trading (for state pension plans) disciplining markets. According to the 'chattering class' this is the 'Great Recession'. Does anyone really think the policy response can be anything else but real change - & extensive modernization of the 80 year global '1930 Investment Act' ?

“However, amounts above 60% would be transferred gradually into a redemption fund”. Put another way: All EZ sovereign debt (including Germany) gets a 40% haircut, & you get a zero-coupon long term CDO backed by grossly inflated assets. All CDO’s are constructed from low grade debt, salted with some kind of favorable covenant, & resold at a higher price. In this case – default debt, backed by central bank gold & forex reserves, & a ‘Solidarity Surcharge’. On origination, the reserves are pledged into the thing at historic highs, & the quality of the remaining debt improves because its debt coverage rises (higher prices). But …. The gold & forex reserves already back ALL EZ sovereign debt. Re-assigning it to the CDO tower, removed the liquid collateral from the remaining debt; & turned it into debentures backed with nothing more than a ‘promise to repay’. Except that every financial hiccup following origination now goes directly against that ‘promise to repay’ – effectively making it ‘never’. The gold & forex wasn’t sold into the market – because it could not be. So how exactly do you exchange this paper for say 10 tons worth of the pledged gold & forex collateral? & how do you ensure that the collective EZ sovereigns will actually give it to you? The fact is that you cannot – it is just another collective sovereign ‘promise to pay’. Central banks hold gold & forex reserves for diversification & ‘emergency’. So when they are pledging those reserves, en-masse, it must be some monumental emergency; yet supposedly the central bank ‘promise to repay’ did not get any riskier ? Debt prices should go down, & aggressively – once it is realized. Where is the collateral margin maintenance, & what does it get paid in? If the collateral goes from 1600/oz to 400/oz is the difference paid in fiat toilet paper - or more gold & forex? Odds are it will be toilet paper. The reserves are pledged, not sold; if the collateral goes to 2000/oz, the central banks pocket the gain. Now if I was a central banker why would I NOT print Euros to inflate my way to growth? I could devalue my ‘promise to repay’ paper, buy it back cheap (& book a cancellation gain), & use the gain in gold prices to issue still more reserve backed paper. If the collective EZ sovereigns can only pay $6 of debt service + Solidarity Surcharge, instead of the original $10; how exactly is the Solidarity Surcharge NOT going to end up as being zero when it comes time to actually pay it (ie: the collective EZ sovereigns determine it, write the enabling laws, collect it, etc.). And if the charge is not zero, isn’t it really a Ponzi scheme payment - because the central bank wants to issue more of these bonds? Remove the wrapper. This is really a Ponzi coupon bond backed by toilet paper, & exists primarily to avoid/mitigate CDS payouts. At best you get to collect coupons & sell it on – but only if inflation bites & gold rises. At worst you get your money back years from now, in a currency nobody wants. Looks like a junk bond.

The Eurozone & the US are not islands. US sub-prime brought down the Eurozone, & that distress is washing across the US. Lehman-2 is a guess. Nobody knows what the mechanics might be, if, when, why, or how deep the fallout may go. You take your best guess on probability, & loss magnitude, & ensure you have the capital to cover it; hedge, sell down, new cash - your choice. You survive. Lehman was also a black swan, and results were worsened because nobody had experience in anything remotely like it. We have no idea what would happen in today’s markets if multiple sovereigns were to hit the debt wall in short order. We live in an imperfect world. We know downside risk is consistently underestimated, & there is resistance to holding capital against remote 'tail' events. If you're right you get a bigger return (& bonus), if you're wrong you blow up. bmichaud. The last article referred to the idea of issuing jointly guaranteed long-term 'redemption' bonds, following a redraft & tightening of fiscal responsibilities within the Eurozone. In the old days when you went to war & lost - you paid the winner war reparations to compensate them for the cost of going to war with you. To get the money you had to build new plant, borrow from the winners, & give sweetheart industrial deals, on extortionate terms. Put bluntly, you issued long term, high coupon, participating bonds - & had minimal say in the terms. The new name for these would appear to be 'Redemption' bond. Of course it doesn’t mean that the defeated issuer will actually repay. Lenin didn’t repay Czarist debt, & Hitler didn’t repay WW1 debt. A ‘Redemption’ junk bond doesn’t sell ;)

Had the post Lehman outcome been as widely known before it actually happened, do you not think the market would have been far lower heading into that fateful weekend? Most would have refused to take the paper losses, or front the cost of the hedges, for fear of appearing 'weak' or 'unamerican'. The market would have been lower - but not low enough; as few would believe that it might ever actually be allowed to happen. The 'old' name for "Redemption Fund" is "Reparation Fund". Reparations are payments intended to cover damage or injury during a war. Generally, the term war reparations refers to money or goods changing hands, rather than such property transfers as the annexation of land. http://en.wikipedia.org/wiki/War_reparations