SharperDingaan

Chinas biggest asset is its very large number of people, and their entrepreneurialism. While the majority may have limited education (as in the US), the PRC has ensured that relatively (to the west) more of the benefits of globalization have trickled down to them. Whether that person is in Shanghai, Hong Kong, or Taipei. It is far easier to hold a territory when the populace benefits from your rule; there is less complaint when you live in a comfortable gilded cage – in a harmonious society. It’s a very old trick, dating back at least 2000 years. But history has also taught us that when things sour, the ‘toys’ get seized and the populace gets killed off. The really successful conquerors (around the world) have also shown us that it’s a cyclical process. Hence a far sighted man in the East, always keeps some assets in the West. Taiwan to China, is as Cuba was to the US. Both were belligerent countries, and regarded as territory of their bigger and nearby neighbours. When Russia did its thing in Cuba, it almost started an all-out war; hardly surprising if China takes a similar view. As in the schoolyard, might is helpful – but not always right. We allow ‘gangs’ so that no one group controls the school yard, and we let them be ruthless because it keeps the total collateral damage down (the holding territory trick). Push and shove is desirable, as is letting problems get ‘solved’ – internally. Mexico’s biggest asset is also its large number of people, and their entrepreneurialism. But to benefit; a neighbour has to either buy goods that cheap labour force makes, or hire the workforce directly. Without the illegal workforce crossing the border, a great many US businesses collapse. Going forward, ‘America First’ is no different to any other demand; that new car plant gets built in the US versus Mexico, and hires American workers. But the cost of the cars produced is so expensive that the target market can’t afford them at the price point required – resulting in the plant not being built, period. Negotiated bi-lateral solution. Long term, adding 30-50% to the price of a high-end car is actually highly desirable, but exceptionally disruptive in the short-term. I drive the Maserati, BMW, Mercedes, etc. as a statement – I can afford to not have to drive that high end ‘American’ POS, whereas you can’t, so please f*** o**. Highly offensive to an American - but it results in better/new cars rapidly getting built so that Americans can make the same statement – except it’s now that Italian &/or German POS on the road. Insults work, patriotism works, & it wakes up the sleeping giant …. It would seem that the world either compromises, moves to bi-lateral balanced trade, or wakes up the sleeping giant. It’ll be disruptive, but long term – probably not a bad thing. SD

Keep in mind that building 'a wall' serves 2 purposes; (1) defense of territory to keep others out; and (2) defense of ideology, to keep people in. The 'wall' doesn't need to be physical, or even secure - it just needs to be a barrier (trade tariff etc.). Most folks get the keeping others out. It's why we have militaries, and the projections of might - its always better to defuse tensions via proxy wars on other peoples lands, than have those bombs go off at home. Of course if you're one of those stuck in that proxy war, your viewpoint might be a little different. Defense of ideology is about using fear to manufacture 'us versus them'. A citizen living in a wealthy, gated enclave with security to keep the riff-raff out, usually feels pretty good. The enclave, or skyscraper, allows the opportunity to display a little wealth - & show you've 'arrived'. So it doesn't go down well; when one points out there's little difference between the inmates in a gulag, and the wealthy in that enclave - same fence, guns, people living inside a compound, etc. Gilding the cage changes point of view, but it doesn't change what it is. To 'tear down the wall' (Reagan), is to allow 'hybridization' to the societal benefit of all - except those in power. Hence 'set' the game by putting up 'a wall', & sell tickets to live within the compound ...... Trump Tower? SD

Never forget that China is a communist state, it is controlled by the PRC, they are very good at what they do, & not about to give it up. What the west sees of China, is primarily what the PRC wants the west to see. The use of propaganda is routine, & effective. Of course all states use propaganda, & have done so for centuries. We think it also likely there will be more trade in 4 years than there is now, but it will also look very different. In the business world we routinely negotiate agreements bi-laterally, & usually for no more than 5 year chunks with 1-2 option extensions at best; it's quicker, agile, a lot easier to achieve, and explicitly recognises that times change. However, this kind of approach is highly threatening to a great many people - so expect aggressive & nasty pushback. Leopards, & crocodiles, don't change their character; they change their masks. Rebranding the KGB to the 'newer, friendlier FSB' - didn't change what it does, how it does it, or the former head of it. He just wears a nicer suit. SD

I didn't vote for him, but I think he was far superior to the alternative, so I'll answer your questions. 1) It's silly, but doesn't concern me. I do hope he starts doing something that matters soon. 2) I don't really care how much he makes or what he pays in taxes. I'm not sure why politicians are expected to release such personal financial information. We learned for instance in the 90s that Bill Clinton donated underwear to charity. Did we really need to know that? I still have no idea what this guy is going to do. Politicians live in fish bowls (ie: the people have a right to know), & it's a bruisers sport (the smear the other guy to win). The 'media' view is that they are the 'gate-keeper' between government & citizenry, they 'interpret', and to sell papers; they 'spin' according to whatever is appealing to their customer base. Of course the people don't need to know everything, and also don't need an 'interpreter'; its an extremely condescending view, & the media is being called on it. The Trump 'brand' is very vulnerable here, & it is hard to see how it ends well. If he's impeached the 'name' is clearly not going to be worth what it was; and if he doesn't deliver - all 'branded' items become targets, everywhere in the world. Charming. SD

As investors we incorporate the political view only so much as it is a generator of change; direction, magnitude, etc. We view personalities as probability generators; the more predictable the personality the higher the probability that the change will occur as envisaged. With Trump it means we need a change in mind-set, & to think in terms of option strategies under high volatility. Domineering leaders are nothing new in the west. The US had FDR, Reagan, Kennedy; the UK had Churchill & Thatcher; Canada had CD Howe (Minister of Everything) & Trudeau (father). It is only shocking to us today – because we haven’t had this for quite some time. There was a time when western journalism was a respected profession, today we are simply calling it what it is - junk. News is entertainment, fake news is cheaper to produce (& sells better) than real, & the cost to producing & distributing propaganda it is far cheaper than it has ever been. Of course the solution is the profession taking a hard look at itself, calling the emperor on his lack of clothes, & continually making clear-cut examples of what the profession does, and why it is a worthwhile societal institution that should be trusted. Black swan events are inevitable, & with Trump – quite possibly more likely. The US has a long history of assassinating controversial presidents, when the changes weren’t going well. It is also quite acceptable to bet on tradeable ‘days to impeachment’ pools – as entertainment. We live in interesting times. SD

Ultimately we pay global price, adjusted for transport and processing cost. Carbon tax is just another processing cost, & we pay it because as a community - we have collectively deemed it a worthwhile thing to do; doesn't mean that everyone agrees. We make this type of energy more expensive, to promote both conservation and local alternative sources. Electric is great if you're close to hydro, not so much if you're far away from it. Nuclear is a great alternative if you're live on Canadian Shield, but a really bad idea in earthquake zones or oil fields. Windmills don't work so well in the frozen north, etc. It sucks if you're an oil worker, but its kind of hard to argue against. If the world takes a different view we can always change our collective mind, either temporarily or permanently. SD

The federal governments economic job is to ensure that resources receive market price, wherever possible; that means Cdn and US tidewater access on both the West & East coasts, & the Cdn North coast as well. It means transportation via the safest & most economic means possible, and the movement of non-tanker traffic through the North West Passage. For o/g that means pipelines, for agriculture & minerals it means rail. We have multi-layered government for 2 reasons; greater responsiveness to citizens on the ground, and ability to act in the national interest of all citizens. Petty bitching gets a fair hearing, but overridden to the benefit of all. The geologic record evidences that global warming is cyclical; human activity may accelerate/slow it, but it doesn't stop it. Carbon trading is just a human effort attempting to ensure that not everywhere is as air polluted as Bejing. Put a value on clean air, & perhaps we can make the oil sands more valuable as a lung than as a oil source. If we don't try, nobody knows. SD

SD, Just curious if you have a fund that allows you to buy real estate or was done outside a fund with partners? Thanks, AtlCDore This was done with purely family funds; real estate was just another asset class, no different to stocks or bonds. Our IPS allows us to hold pretty much anything, but departures from core mix require a family vote & at least one independent outside review. They are blunt discussions, we need a 2/3 majority, & over time it's the number of younger members deciding outcome. Real estate for us, generally means the fund buying an equity interest in a family property, instead of the family taking on mortgage. The family can buy out the fund whenever it chooses, but the intent is to get away from 'house rich & cash poor' when kids are young, going to university, or just starting out. As one of our family is a Quantity Surveyor we can do this fairly equitably. Iceland: I had the chance to visit Iceland when the madness was occurring, a 2nd time shortly after the crash, & a 3rd time 2 years ago. I also knew one of the bankers who had lent them money, & wasn't popular for supporting the Icelandic viewpoint. They were very smart, it was a very hard thing to do, & it probably couldn't have been anywhere done else but Iceland. It would seem that it repeatedly comes down to calling Casandra's 'bluff; today it's a very different place, & a great place to stop over to/from Europe. SD

A tank isn't much different to a D9 cat. The Hercules also has be to no more than 1-2m above the ground when the chute deploys ... and you need a pilot who doubles as a magician. SD

http://www.cbc.ca/history/EPISCONTENTSE1EP17CH3PA1LE.html 1982: The Calgary Heralds classified section bulged with homes for sale, sometimes including the contents and cars. The city had 2.3 million square metres of vacant office space, and its real estate speculators and oil investors had reverted to their former careers as teachers, dentists, and taxi drivers. A little context … this is normal. Iceland following the banking collapse, large parts of the US following the sub-prime collapse; & these are just the better known ones of the last 10-15 years. The recent oil crash is often compared to what it was like in 1982, fear. But like all crashes it passes, and there is a recovery; in 1988 Calgary hosted the Winter Olympics. Sink or swim is brutal – but it produces results; & it is what you do with that experience that counts. Change is inevitable; so grab it by the throat, & squeeze the cohunes’ on the sucker. It‘s not going to be boring! SD

Fixed income (bonds & preferred shares) moves inversely to market interest rate. If you think interest rates are likely to rise, it’s a bad idea. To invest, is to make a call on how much rates change – and over what period. Most recognize that existing rates are historically low, it’s artificial, & it’s been this way for some time. Firms have generally used the opportunity to refinance at lower cost and extended term, raising profitability, and building equity. But there has been little/no NET new investment in plant/investment. As old plant has become obsolete, or worn out – replacement new plant has been built, often in different global locations. To date this has been allowed to occur unfettered, but in the real world; old plant either gets state subsidized to keep the jobs, or tariffs are imposed on competing product to make them more expensive. But make a manufacturer replace obsolete equipment with state-of-the-art, & the state can reduce/eliminate subsidies/tariffs over time as labour transitions. Trump land infrastructure spending? Most firms would borrow to invest, raising the demand for money, & the interest rate ‘cost’ of it (all good). However, the ‘cost’ of money was artificially lowered to promote this kind of activity; once infrastructure borrowing takes off, the central bank action can be eased. 2 big & independent sources driving up the cost of money – lowering the value of FI instruments. Your call as to how large that combined change is interest rates might be. Your call as to how long it might take to occur. SD

Care to explain the mechanics and reasoning behind doing that ? This was the first oil boom and Calgary had little experience with the boom and bust cycle. Jobs were plentiful, adventure was everywhere, pay was good, and as in booms everywhere; people bought ‘toys’ and expensive houses – sure it would never end. Dome Petroleum was the ‘darling’; and I was a 2nd year petroleum engineer flying up and down the McKenzie Valley pipeline, teaching Cariboo to walk under elevated pipeline, & doing engineering tests on cold weather metal fatigue and heavy drop parachutes (D9 cats yanked out of a Hercules in flight, & dropped softly onto a 50m target, when the plane is going at 200km+ an hour). Then the bust struck. Petroleum Engineers with 30yrs experience couldn’t get a job, & went from king to bum in under 6 months. It lasted a long time, folks couldn’t pay their bills, and mortgage foreclosures went through the roof (often every 2nd or 3rd house on a street). Alberta’s depression era laws were still on the books, & they had the effect of making recourse loans ‘non-recourse’ under certain conditions. If you had title, you could essentially ‘quit stake’, sell your property in a public auction, and just give the banker the proceeds; if it wasn’t enough to pay off the mortgage – the banker had to take the loss. Block party auctions were common, underwater homeowners would put their property on the block, and ‘enforcers’ would ensure that nobody offered more than $1 - or competed against the selected ‘winning’ family (cant bid if you’ve been rabbit punched, & are on the ground with a boot across your throat). It was community action, and it saved a great many people from poverty. I went to university with many of the sons & daughters of these people, and many of their dads owed their companies to a successful win at poker – when it was common for roughnecks to ante up their partial well interests, so that the winner would have a better chance at building something. They were being wiped out, and there were more than a few suicides. I found it utterly amazing, & extremely odious, that Canada’s banks didn’t know their sh1t; and that this level of misery had been allowed to happen. I changed majors to finance, researched what had made it so bad, left Calgary, & swore it would never happen to me. I learnt these things are recurring, what you can do to avoid getting burnt, and how to exploit them. It turned me into a counterculture value investor, & I have been forever grateful for it. Not much different to the experiences of many of the ‘greats’. SD

My strengths are strategy and risk management, my partners are common sense. Together it means that most of the time we have a block of cash to invest when the sh1t hits the fan. 2008/9 we got the opportunity to buy a flat in Knightsbridge (London, UK). It was a punch card investment, a lot of money, the $C/Sterling FX rate was unusually favourable, we were being offered an historically low price, and it was an 'invitation only' location; but it meant materially stressing the portfolio, for an unknown period - and none of us would be using this flat. Ultimately, we ponied up, and it has served us very well. Points are that you 1) need cash/security, and 2) the courage/support to step up. There are lots of ways to ensure that you have the cash when you need it; the courage you have to earn. I had the experience of living in Calgary at the time of the first oil crash, and saw first hand people selling each other their houses for $1 to avoid bankruptcy. I have never forgotten it, & have repeatedly benefitted from the experience. SD

If there were feasible every small private dentist, veterinarian, accounting firm, etc. in the country would be part of a 'franchise'; practioners would build up their businesses over their working lives, sell to the 'franchise' on retirement, work 1-2 years to transition their client over, then leave. Yet it doesn't happen - implying that personal brand businesses are just not suited to this kind of structure. SD I was specifically curious about businesses with significant tangible assets (real estate or other). You still have the same issue. To get the sale you will have to pay a premium, and tolerate goodwill = to what you paid - what the tangible asset could be sold at. That goodwill is supported by the value the management adds to the business; as measured by a previous X years of quantifiable net income - projected forwards X years and discounted at Y%. Were the business in Canada the projection would be re-performed every year, and the difference in valuation charged off as goodwill expense for the year (IFRS treatment). The reality is that If you cant resell (likely); you make squat until the value of the tangible asset + net income after tax, made since acquisition is > than what you paid. Lots of uncertainty, & it could take a very long time, while your tangible asset is both ageing & wearing out. If interest rates were high, & forecast to decline - it might make sense; but otherwise? The alternative, is to just buy a call or a LEAP on somebody's REIT. SD

If there were feasible every small private dentist, veterinarian, accounting firm, etc. in the country would be part of a 'franchise'; practioners would build up their businesses over their working lives, sell to the 'franchise' on retirement, work 1-2 years to transition their client over, then leave. Yet it doesn't happen - implying that personal brand businesses are just not suited to this kind of structure. SD

We don't want to hear it - but if you're simply coat-tailing someone, you are being lazy. It is the idea that if the famous lemmings are jumping off the cliff, you should to - because obviously they know something that you don't, & wouldn't be doing it if they thought it wasn't going to work out. Despite the evidence of repeated cases, after the fact, indicating that the famous lemmings were as clueless as everyone else. When it sours, it isn't a happy experience. You have to do your own research/analysis, and trust in your own judgement; it's that simple. If you're not able to do that, you're just another lemming - praying there are a whole lot of other lemmings between the cliff edge and yourself. Not a pleasant thought. There's no blind following. SD

What does this achieve that you could not do - a whole lot easier? Simply invest in a moderately distressed portfolio of pfds/debs, margin them, and use your capital contribution as the equity contribution. You will earn a net cash spread, and hopefully a net capital gain as everything mean reverts over time. Simple, liquid, & no hassle. SD

Agreed that after Allied World, the stock its pretty much done as a currency. Maybe 10-15% up at best, and 40-50% down at worst - over the next 1-2 years as things develop; not a bad thing overall. This is a family business. To an owner; being able to expand the business by paying with stock - and buying it back later at a lower price, is highly desirable. All else equal over time you get higher earnings from more business, gains on share repurchase, and a higher EPS as the outstanding share position declines. To an investor, the wide potential change in value offers a lot of opportunity. SD

I was reminded many years ago, & by quite a few people, to always keep a few knuckle-draggers around you. If they also smelt bad, and wouldn't think twice to sh1tting all over your rugs - they should be high on your list. Of course I might have been the object of some of that advice! You need to hear the messages bluntly, the tone, and the judgement. Its direct conversation, they will match your punches, and there will be zero political correctness. Most folks aren't up to it. The good news is that its often the common sense 'street view', and it gets updated every day. SD

A more technical way of looking at this …. Think of CAGR as how long to double your money. It is a compound return, so plug PV=1, FV=2, and N=holding period into the financial function of a calculator - and i will be the CAGR. For the 1-5 year holding periods the CAGR’s are 100%, 41%, 26%, 19%, and 15%. For years 6 through 10 its 12%, 10%, 9%, 8%, and 7%. Just starting out, we are all no different to any other start-up. Losses in our early years while we learn, and the vast majority unable to stick it out until they at least break even. In the real world we call that bankruptcy, in the investment world we call it tuition. If we survive, & it’s ‘truly’ our thing; our returns are more likely to look like years 6-10 - and comprise a string of losses with one or two big wins at the end. Most of us would be in our mid 30’s. We EVENTUALLY learn, and now choose to invest in any given sector over a 4-5 year time horizon; our own preference is the cyclical industries that we know – buying in the troughs and selling near the peaks. A 4 year holding period is a 19% CAGR, a 5 year period is a 15% CAGR; pretty much what we see on this board. Assuming kids along the way - most of us will also be in our late 40’s, early 50’s; & a lot ‘wiser’ than we used to be. CAGR is a deceptive measure, it says nothing about the volatility along the way. When we’re retired we have less risk tolerance for the downside, and CAGR’s start to resemble years 6-10 again; primarily because we’re extending the hold period through greater use of FI over equity instruments. Still very good, but ½ what they were. Age & stage of life matters - hence the philosophy. Experience matters – lower downside volatility shortens the hold, raising CAGR. Counterculture matters – set the game, don’t drink the cool aid. Notable is that pretty much all the folks who do this well (WEB, Morgan, Rockefeller, Rowlands, Gates, Jobs, etc.) are NOT establishment; the establishment BECOMES THEM. Rebels get assimilated. SD

You may want to keep in mind that the person you were 10 years ago is not the same as the person you are today. Stage of life, ability to take on risk, and the markets themselves - all change significantly over the intervening period. Most investments will also go for 2-3 years first, before they start generating (think start-ups, real estate, etc.). Hence a 10 year record is not necessarily going to reflect the same type of investments, or their stage of development. SD

He's using the stock as currency. Nothing wrong in that but it implies that he's planning to buy some of it back at some future date - at a much lower price. All 3 investments carry significant inherent operational risk; it's almost a given that they are going to periodically generate negative news events as they move forward. When they do the share price will drop, creating the opportunity; it's a way of safely shorting your own stock. The inference is that to make $ with FFH, an investor really needs to treat it as a trading vehicle. SD

Just be mindful that there are two types of blockchain network; non-permissioned (Bitcoin), and permissioned (most bank syndicates). The non-permissioned networks are too slow (10 minute mining) for high volume purposes, the miners are consolidating into cartels (independence issue), & it is not really scalable. Permissioned networks have none of these limitations, but are wholly private - and operate under a very different understanding of what 'trust' means (counterparties, software code, etc.); the major downside is a much less robust fault tolerance (excluding mixer and check node workarounds). Most Bitcoin wallet holders are not spending their coin, they are hoarding it. The argument is that there are a fixed total number of bitcoin, & over time less & less new coin is created; convince a small number of people that bitcoin is a safe store of value (ie: raise demand) and the price of that very limited quantity of it must increase - convince a lot of people, & you get another tulip mania. The kicker is that the existing design total of bitcoin could be changed at any time, simply by mutual consent; collapsing the bubble. You may also want to look up the 3rd party oracle providers, before you go too far down the programing route. Much of the basics needed to operate and run a blockchain application are already available via cloud providers. It's very basic, but enough for 'proof of concept' - and everyone has to start somewhere. SD

All our positions (except DB) were put on in 2015 or earlier. FTP Debs were bought in the 45-60 range when institutional IPS's were forcing them to dump. ADV blocks were added at roughly 1 per month depending on the market. PD is a very old core position added at < $C 4.00, similar thing with SAN. We started adding PWT < $C 2.00. Our 2015 loss was primarily portfolio MTM adjustment. We're OK at identifying the troughs; not so much at the timing, or how long we're going to be in them. The expectation is that we're either going to have to average down into a high weighting & sit on it (PWT, PD), or build quietly in thin markets (ADV) & sit on it. Over time we will opportunistically hedge (physical sale, T-Bill, & repurchase) until we've recovered our initial investment, then let the residual position rise & fall with the tide (hence the MTM adjustments). Not that different to what FFH does. We're above average at recognizing & capitalizing on panic (DB, FTP, FFH); & had also selected Rio Tinto & Glencore when they were experiencing their issues - but ultimately were unable to execute. It's a unique skill set attributable to our structure and collective backgrounds. It creates volatile returns (2015) but we're OK with that. SD

Happy New Year! Nothing like a little macro to kick the year off. None of us has any idea as to what Trump will, or will not do. What we know is that the man plays a disruptive game, he is very smart, and he has surrounded himself with very smart industry knuckle-draggers. There is going to be a muscular trade ‘adjustment’; it doesn’t mean ‘no trade’, it just means trade on different terms; and a very ‘impolite’ two-fingered take it, or leave it. In a closed economy; business collectively hires workers and then pays them enough to be able to buy the goods the business produces. Make those workers productive and their excess production grows the closed economy to the benefit of all. No leveraging, just plain old fashioned work. Economics 101. In the open economy; you hire the other guy’s cheaper workers, pay them little, & discover that they in turn buy the goods of someone else - because yours are too expensive. In the short term, to compensate, you fire your remaining domestic workers, hire more of the other guys, & borrow to pay the bills. In the long term, you go out of business. In the meantime you get your goods at the lowest possible price, but it’s not sustainable. The US today? You can’t make the other guys workers buy your goods. You can fire them instead, replace with your own workers, & pay them enough so that they can now afford to buy your expensive goods. To make your goods appear ‘cheaper’ you put up tariffs, & replace machinery to raise productivity enough to pay the additional wage cost. Goods cost more, but people are working again, making enough to afford the higher cost, & you get re-elected - repeatedly. The masses share in the benefit. A China gets severely hurt, as the exports don’t sell & it means material unemployment. To stay in power it’s also suppression at home, do whatever you can to promote domestic consumption, & watch many of your best flood out of the country - to escape persecution. It’s also hard to sell counterfeits against a tariff wall & ‘buy America’ campaigns. Many a NA entrepreneurial worker without job prospects, is forced to set up their own business as a means to raising an income. To ensure there is an income, it often means hiring illegals under the table & abusing them in some fashion (through long hours, low pay, no benefits, etc.). The other name for this is ‘institutionalized slavery’, & in the US it is often Hispanic speakers & the very poor who pay the price – Trump supporters. Give the entrepreneurial worker job prospects, & much of the need for this disappears. It adds up to significant, material, and disruptive change. We live in interesting times. SD