SharperDingaan

With minor adjustments, the rolling 5-year CoBF average return is probably representative of where a PM would be - were he/she able to invest without restriction. ie: todays 100% gain offsets part of last years 20% loss, etc. It really just gives an idea as to just how damaging the money management industry restrictions actually are, and what ordinary people can do on their own. SD

> 100%, and a return of capital by mid 2017 PWT, ADV, PD, DB, maturing FTP debentures, and even SAN contributed this year. There were no misses. There is also a very high likelihood that absent a crash, we'll be able to do it again in 2017. SD

A very merry Christmas, and the best of the season to you all. SD

When they launched Fairfax India, my observation was that the only real advantage for FFH is the opportunity to earn some management fees. So, like Fairfax India, this fund will be $1B, meaning that the investment fees would probably range from $10-20m per year (ie, a fee of 100-200 bps). It's a nice little addition, but I can't see it really moving the needle. SJ What difference do the boots on the ground make? The expected revenue stream for FFH from managing $1B of other people's money can only be about $10-20m per year. Boots on the ground might mean that they'll do a better job of investing, but it doesn't change the revenue stream. How is it relevant that they have separately invested $300m of shareholders money in this? For the record, I think it's great that FFH is snooping around for value anywhere that it might be found, including Africa. So, they pay some of their guys to find some opportunities and they invest the $300m. The only advantage of going the next step and launching the fund is that they can use the same analysis for other people's money, and collect a modest fee. What am I missing here? Think long-term, not short-term. If a firm hopes to successfully invest in these places, 1) it has to be part of the business culture in these places, & 2) have the runway to let the investments develop. At best its a 5-10 year lottery ticket, that might well not even work - but you have to be in it to win it. It benefits the next generation, not this one. We would suggest that the fees will simply cover the 'boots on the ground' cost of operation during its first 5-10 years, resulting in a zero cost option on business activity in these places. Should these places develop as expected, a known and entrenched 3rd party investment team will be a very valuable asset, & give FFH front of line access to deal flow. The fund itself would grow as well, the same as any other fund in a slowly improving investment climate. It's a fairly standard inter-generational investment technique, & explicitly recognizes that the team is getting old. We use a 'poor mans' version, with much the same generational aim. Never forget that FFH is a family business, that outsiders are allowed to participate in. There is going to be more of this. SD

Nice to see. It's also a very smart idea to keep the whole thing private until it finds its feet, and the direct FFH commitment low enough to avoid equity accounting. No mandatory IFRS disclosures will be required. Like India, Africa moves to its own drummer, and it's methods are very different to NA expectations. There will be some culture clashes! SD

Could you explain? Another FFI, this time called FFA? India I understand and like. In Africa what is their edge? Cheers, Gio What's FFH's edge in India? Prem born there? Now that we're talking about what Prem is versus Buffett, folks may remember that Berkshire tried working with Bajaj Insurance in India for a couple of years and completely pulled out their money. Surely they saw downside risks that they don't like. Their thesis was not that Jain is Indian thus let's put a Billion there. Insurance is a game that requires the environment to be very right, including legal systems. FFH has invested in just about every emerging economy around the globe. Sounds great, which of those could turn into a turd? Cause collateral damage to the holding company? What edge does FFH have in each of these countries? Empire building doesn't have to necessarily mean wealth creation. Risk avoidance does. That's why there is only one Berkshire. Watsa is no Jain, let alone Buffett. This is very similar to the age-old mercantile approach of provisioning & sending ships to the new world. It's very much a future focused orientation. Invest a total of $X in 2-3 ships per adventure, spread the risk per ship over multiple partners, and send them to different parts of the new world; in the investment world we know this as sector diversification across a clutch of names. But in the real world - we also recognize that if it works, we will also need trading posts in the new world to fill the homebound ships. For inspiration look to the Dutch East India Company, the British East India Company, the British South Africa Company, etc. Insurance is about getting paid to take on risk, & successfully mitigating it. But one must take on the risk. SD

What do you mean exactly? It seems to me that from Zenith to Brit they have made a series of great acquisitions in the insurance field. Their investment abilities in stocks can be very much critiqued of course. Not their abilities in buying good insurance companies at fair prices, imo. By now they have proven many times their focus has rightly shifted from poor insurance businesses for a price well below BV to good insurance businesses for a premium to BV. And Allied seems to perfectly fit this healthy change. Cheers, Gio No, I believe he's referring to the TIG and C&F acquisitions which almost destroyed the company. Correct, I'm referring to TIG and C&F. This is a big acquisition; if it turns out to be a dud - it could hurt them badly. However they've had more practice since these two, and been successful. Obviously, we hope that it continues. That's just the nature of business. SD

You might want to consider the possibility that this deal ultimately doesn't go through. This is just the opening round, FFH has to top other bidders, and the final cost could well end up a fair bit higher. We also don't know how much FFH currently controls (stock + options); if it goes to someone else there could be a significant gain. At 26%+ dilution, FFH obviously thinks it a good deal. Given the European focus that FFH would get from this, that additional share float is probably a good thing. The string of insurance acquisitions evidence that FFH is bootstrapping its insurance business. Nothing wrong in that. Last time out this didn't go so well; they had more to lose - and they almost lost the business. History tends to rhyme. All acquisitions are of course a risk, and we learn as we go. We wish them luck. SD

Our 'we' is two partnerships; one limited to very close family friends, & one limited to very close family. I am the MD of both those very private partnerships, and they are both structured as Canadian investment LLPs & regulated accordingly. Funds can be contributed, but not prematurely drawn out - except under a majority vote. It is 'forever' capital subject to a maximum cap, above which surplus capital must be returned within 6 months of year-end, on a pro-rated basis. As MD, I'm paid $C 1.00/year. The family partnership is multi-generational, & multi-national; it exists to create family opportunities, tax efficiency is a secondary consideration, and it follows the fairly standard practices of many African and Indian family businesses. The friends of family partnership functions the same way as any other limited partnership. The expectation is that everyone does their own thing, & has zero involvement in the day-to-day partnership decisions. The only exceptions are significant related party transactions, which require a majority vote. Otherwise investing for/alongside family is generally a bad idea. SD

In Canada, any interest paid on a mortgage against your principal mortgage (you live there > 6 months/yr) is not deductible. Any interest paid on a loan (margin) for investment purposes is. So ... rearrange accordingly. SD

The reality is that most of us have significant others. We can pay down mortgage - but not remortgage. The additional 35K per 100K of house is going to come from margining an existing portfolio, which is also more tax efficient. In Canada, margin interest is deductible whereas mortgage interest is not. A fully paid off house worth 600K, net of 20% reduction has a value of 480K. A 50% re-mortgage would fund a 240K investment. You decide to margin instead - subject to a self imposed portfolio margin limit (risk tolerance) of 25%. The size of the portfolio after the investment would be 960K (240K/.25). The existing bearish portfolio was worth 720K (960-240=720). Over the cycle this investment triples from 240K to 720K, and is sold out at a 480K gain - taking the portfolio to 1.2M. The existing bearish portfolio declines 144K (20%) in the rising market - reducing the portfolio to 1.056M You walk away from the casino, withdraw the 336K of net gain to restore the portfolio to 720K, & do something life changing with it. The cycle turns & the industry busts. The bearish portfolio runs up 33% to 960K, & is sold down to 720K (for a 240K gain). When you're feeling 'safe', repeat the investment in your two best 'long' picks. Per the textbook this is simply a long straddle. The more cyclical your industry - the greater your total reward will be. Per the common man - this is just an application of Talebs antifragility. Apply what you know. SD

A little expansion on the leverage ... assume that you own a house in the oil patch (Calgary/Edmonton), work in the industry, and need your employment income to pay your mortgage. If your house is worth 100K, & you have a 80K mortgage; your industry leverage is 4x - and very high [80K mortgage/(100K house value - 80K mortgage)]. To lower your leverage you need 1) a non recourse mortgage (US only), 2) house appreciation, or 3) less mortgage. A mortgage at 50% of house value produces a leverage of 1x. As the intent is risk management, most would reduce the mortgage to 40% in anticipation of a simultaneous 20% reduction in the value of the property (ie: everyone selling up at the same time, & looking for work elsewhere). Hence the first $ of any taxable savings should really be invested in accelerated mortgage repayment - until it gets to about 40% of house value. Assuming conservatism, at a mortgage of 5%, the ratio is 0.07 (5/(80-5) - indicating you would benefit from a downturn. As you anticipate a 20% decline in house value, the benefit is 50% of the lower house value - existing mortgage = .5(80)-5 = 35K. If you felt reasonably secure in your employment you would have 35K of equity, per 100K of house, to invest in your industry; when equity prices are at rock bottom. When the cycle turns, you will be well rewarded. Just keep in mind that your portfolio is now a continuous hedge against the cyclicality of the industry you work in, & that you need to periodically keep taking capital out of the portfolio as it grows (to avoid hubris). Most would diversify the capital withdrawal into either life changing opportunities, or real estate unaffected by their industries economics. It works very well. SD

Pay off some of mom/dads mortgage in return for equity in the family mansion. When the kid goes on to university/college, mom/dad remortgage to buy him out - then downsize to prevent the kids coming home!, the capital released pays off the new mortgage. The monthly savings from a lower family mortgage, & inflation appreciation on the house itself - will also benefit the kid far more than sterile appreciation in a trust account. SD

We routinely use a concentrated portfolio approach, & would add 3 explicit considerations. If you work in an industry (or are relying on a pension from it); and are investing in that industry that you know (equities &/or FI) - you need to realize that you are extremely concentrated. Worse still is that if you are also reliant upon employment income from that industry to pay your mortgage (most people) - you've also leveraged this industry exposure by your mortgage/house equity. Lose your job to an industry downturn, and you will lose your income at the same time your investments crater, & possibly your house as well. If you are this person & you have a big mortgage - you want a bearish portfolio (shorts or puts). When the sh1t happens you want the portfolio value to rise, AND you want to be able to sell enough to reduce your mortgage to 50% - to eliminate the industry leverage. Hence you're looking at the size of your mortgage, the cyclicality of your industry, the competitors in your industry, & trying to figure out which ones will hurt the most in the next downturn. Ideally it's not a firm you work for. If you've done well the mortgage is paid off, & a portion of your portfolio is in FI. Apply moderate margin, put it into your 2 best picks, & systematically sell on runs & falls; to gain on BOTH the up & down cycles. Looking for a 'formula' isn't going to help you. Applying what you know, will. SD

What's wrong with 407? Ontario doesn't permit an operator to put a toll booth on the road; you have to sell a transponder plate &/or rely on collection backed by photo-radar - & the honesty of the public driving the road. At the time it was built, the business model also assumed that if you didn't pay, your licence plate could not be renewed until you paid the outstanding fine. Turned out that for a province to collect on behalf of a private company in this manner - is illegal; however were the province to own the asset, it would not be a problem. Hence, it's a 'stranded' asset. The operator is permitted to raise tolls to maintain the road & 'lock-in' a reasonable profit spread on its investment; hence it remains an attractive infrastructure investment - offering a large, reliable, & long term stream of cash flow attractive to pension funds & life insurers. If you want 'out', you essentially have to keep your ownership interest & 'securitise' the cash flow. Limited appeal. SD

It's better to look at WHAT you invest in WHEN you invest. They are not the same thing. A 'widows & orphans' company cutting its dividend (ideally to zero) is a pariah to many - to us it's a prime opportunity. DB facing a 14B fine, BP facing Gulf Coast exposure, FFH facing bankrupting investments, TransCanada, Telus, Manitoba T&T, NT & PWT financial restatements, etc. ... are all similar opportunities - & the list is endless. They are generally bigger firms, they've done something stupid, & they're paying the piper - & you're betting against the professional raid baiting of the mob. Were this a street riot there would be tear-gas, police in riot gear, burning vehicles, & media images of water cannon beating back crowds. Were this riot in a popular place, social media would be pushing propaganda images to sell the 'story', & governments would be using gag orders to starve the information flow. The 'flash point' that starts it, the images, the 'back story' ... are professional raid baiting. Rioting collectively destabilizes a regime (or company), but the individual riot (div cut, well blow-out) typically does not topple it (collapse, etc.). Authorities react with suppressive actions (management change, breakups, demonstrated financial strength), & for a time - stability returns. Whether it continues ... is something of a debate. You are investing with the angels, the overall process is pretty predictable, & there are lots of demons lighting fires. SD

Merkel is not going to survive another selection as a chancellor - the refuge disaster in Germany alone is enough reason for that. Inclined to agree. Euro 1.0 is a house of cards, but only worked so long as no-one called the bluff. But Brexit did exactly that though many tried to dismiss it as just an irrational act (denial). The Trump win has rubbed the underlying reasons in the face of Europe (millions of people not benefiting from progress), & proved it isn't isolated. The Italian rejection has now removed the excuse that this is just something that happened 'over there'. It is very hard to imagine that this underlying 'angst' does not exist in every country of the EU; it's just a matter of how many governments topple, & which ones. The normal state of affairs in Europe is warfare of some type, even today (ie: the baltic states). Flushing todays 'radicals' into the sterility of daylight is highly desirable; its a competitive space, and it forces change - which will happen whether we want it or not. Damming change up behind a wall just creates devastation when the dam eventually breaks. Europe has had two World Wars to prove it. To dam change you have to use fear - the change is so frightening we have to lock it up ... creating the threat. Calling the bluff (Trump) pops the bubble, & releases the water behind the dam. Interesting times SD

You are really talking about P3 Private/Public Partnerships. They have always been part of the financial picture, & are almost exclusively the preserve of pension funds & life insurance (airports, ports, hospitals, sewage/water treatment, etc. - endless list, & no shortage of available capital). Today, we just have a catalyst. It's highly BAM gains, simply because the pie gets better; 1 slice of a large pizza is a lot more area than 1 slice of a medium pizza. Cant invest in a pension fund though. But every one of those infrastructure projects required engineers to design them, & construction companies to build them - no matter who funded them. Look at the service providers, not the funders. SD

The great thing about squids is that they can also squirt a lot of ink - to hide the evil! Kind of reminds one of the Greek monks talked about in the Michael Lewis book, 'Boomerang' SD

Imagine a bank loan asset portfolio of 125M, liabilities of 100M & equity of 25M. After risk adjusted capital haircuts the 125M of assets is 100M, & there is essentially zero equity to absorb shocks (many major EU banks). The bank/regulator runs a series of different stress test scenarios; under the worst scenario the value of the assets would fall to 85M - if they could sell them, & the bank would be bankrupt. To prevent bankruptcy the regulator would demand the bank hedge to produce an offsetting gain of at least 20M (assets at 105% of liabilities), an unencumbered pool of treasuries (5%+ of liabilities) in case the assets can't sell, and risk adjusted equity at around 12% (Tier 1 Capital Ratio). As the size of the treasury pool is driven from the stress tests; multiply the size of the treasury pool by a margin of safety (2x in our example) - just in case the forecast is wrong (common engineering practice). Unfortunately the treasury pool earns squat, & barbells the asset portfolio. But if you add a bigger hedge & hold less risky assets - the maximum possible stress test loss declines, and the pool of treasuries can be smaller. The surplus treasuries can be sold and invested in infrastructure - producing both a higher return than treasuries, and much more effective ALM matching. This is the fund flow to infrastructure. When everybody starts doing this, it diverts bank capital currently supporting the riskiest loans into less risky infrastructure, AND MULTIPLIES THE EFFECT. That 20M of high risk loan, required 10M of risk adjusted capital, which can now support 30M+ of lower risk infrastructure loan. This is both the mechanism, and source of bank capital supporting the funds flow to infrastructure. The loan universe de-risks from high risk loans getting pulled. Borrowers have more cash flow to service their loans (from a stronger economy) - & pay the higher interest rates on their loans (net zero impact on borrowers). And if a bank or two fails along the way - there isn't going to be a lot of sympathy; it's evidence of change. It's very slick, & very elegant. Unfortunately it has the squids sucker marks all over it. SD

You might want to look at the concept a little more critically; then how it's applied. This is a probability weighted FORECAST. The actuals will be different - to find out how different, simply go back & compare. A 5% forecast error in Yr 1 (pretty good), compounds to 15%+ (unusable) after 3 years. It's a forecast at < 1yr, & a 'feel' at >1 yr. There's nothing wrong with 'feel' as long as it is supportable, & can withstand outside scrutiny. But it is not a guarantee that XYZ will occur. Hence you invest 'with' todays forecast for 1 yr or less, & 'against' it > 1 Yr (Talebs antifragility); it's application of the Gladwell 'fast & slow'. Alternatively, reforecast at 1 yr. Most folks are far better at 'feel', primarily because its closer to real life. I 'feel' like something wants to eat me, so I stay in the cave. But you cant sell 'feel', you can sell 'forecast' - talking heads do so daily. In NA we don't trust 'feel', in a Russia or China it keeps you alive. SD

It's useful to look at the structure of the BIS rules around bank & insurance capital. - Invest in whatever you want but 'haircut' it for capital purposes - the more risky the bigger the haircut - Risk manage however you want - but you hold a pool of hedges & unencumbered treasuries to cover the black swans - Bi-annual stress testing. Ongoing regulatory examination - Leverage, contained within regulated limit The black swans are covered by stress testing to determine magnitude, then hedged against the 'financial system' to spread the risk. System wide the aggregate treasury pool, reduces the overall risk within the 'financial system'. For any individual institution; if the size of your pool of treasuries is roughly 2x (margin if safety) the size of your maximum loss (per the stress tests), you don't need to hedge any more. You are using your pool of treasuries to self insure, and saving the annual 'insurance cost of hedging'. Exactly what FFH is doing. It would also appear that FFH has recognized that as long as they could invest the pool of treasuries margin of safety, at more than the cost of hedging; they could make quite a 'macro' spread. If the surplus pool of treasuries investment were part of a global shift into 'infrastructure assets' (Trump), it would also reduce the cost of hedging as the 'financial system' overall 'de-risks.' Hence, what appears to be a game change in strategy. More significant, it that it gives an idea of where the $ for infrastructure rebuilding; 1) would come from, 2) the mechanism, & 3) the magnitude Very elegant, & as we would expect. SD

We've all heard about Canadian 'snowbirds' living in Florida during the winter, for 6 months less 1 day every year - to preserve their health care benefits. But few realize that many are now going to either the southern hemisphere - where its much cheaper and summer, or the Caribbean. There are many ways of doing it, but most would either fly down or travel by cruise ship, and rent an apartment + car - split over a few people. Every winter a different location. A very modest $C monthly retirement income, permits you to live like a king in either Cape Town or Durban (South Africa) - and perhaps enjoy a safari while you're there too. The number of retirement $ does not equal quality of life. SD

Think of a portfolio of 4 assets (A, B, C, D), each worth $10, each marginable, each a 25% weighting. Total investment of $40. For example purposes, only the value of Asset A changes. Asset A is 1 share of XYZ coy, bought at $10 - The price drops 1/3 to $6.67, you double down. Another $10 for 1.5 shares at $6.67, bought on margin. - The price drops another 1/3 to $4.45, you double down again. Another $10 for 2.25 shares at $4.45, bought on margin. - Asset A is now 4.75 shares at $4.45 worth $21.14, Assets B through D are worth $30, total portfolio is $51.14. Asset A is 41% of the portfolio, and the portfolio is 39% margined (20/51.14) x 100%. A very dangerous & unhealthy place to be. A double for Asset A is only $8.90 – not $20; a 25% (1.19 shares) sale of the position at $8.90 will reduce margin by $10.57. Your expectation is that Asset A is worth > $10, if it just reaches $10 you still have 3.56 shares of Asset A worth $26.17 (35.60- 9.43 of remaining margin). A very good place to be. If nothing further happened during the 12 months; 2.25 shares of Asset A would be sold to repay the margin, leaving 2.50 shares. As the expectation is still that Asset A is worth >$10, it remains a very good place to be. Obviously if one of Asset B though D is a cash equivalent, margin is reduced. If you thought Asset A is no longer what it was, you would sell it completely. When you think Asset A is getting overvalued, simply sell enough to recover your capital, & let the rest ride – it is house money. Sure you have to wait, there is risk, & nothing is guaranteed. That is just life in general. SD

Agreed the hedge is a cost. But think of a hedge as simply a sell (to protect against a price decline) & a later repurchase of the same number of shares. On entry, the cost of the hedge is unknown - it is the potential loss on repurchase + 2 commissions. However, if the hedge event occurs; the cost becomes negative - it is the gain on repurchase - 2 commissions. A successful hedge is a profitable hedge. The purpose of process is to produce result, result matters. The question is what is the right metric, & right timeframe, by which to measure. Most would agree with time weighted return, but 1 trip around the sun is pretty meaningless. SD