SharperDingaan

Thanks for the tip. I suspect the major reason we got the mortgage was because of the times, the program, & that UK resident nephews are the prime beneficiaries. The sublease is with a major PLC, the prefs are shares of their own bank, & dividends + lease payments more than cover the interest. To help the decision we also ensured that to formally question the structure, was to question the solvency of your own bank - a career ending event. The current thinking is that we will probably exit once the sub-lease expires. By that time we should have captured most of the gain, & the ongoing risks will no longer warrant it. SD

Interesting. Many buyers are cautious about buying properties on a short lease. How much certainty over renewal costs do you have and how will you fund them? I guess you could now remortgage? The remaining term of our lease is 57 years, & we are subleasing in 5-10 year chunks. At the end of 57 years the value of the lease will be zero, so at each sublease expiry we will formally reappraise. Sell the lease & buy another - do nothing or roll up/down or out/in via a sale and repurchase. We do not intend to hold the property forever. In market parlance we have prepaid 57 years of premium on an at-the-money call on a specific property in a desirable location, with the years option decay (all else equal) equal to the years premium. We do not know what the premiums will be (the greeks are constantly changing), and we cannot determine what the current years premium was until the year has expired (ending - beginning value). We can exit the option at any time, by simply reselling the property into the liquid market. Short subleases allow us to arbitrage the option decay. Our sublease is to a PLC & we are prepaid the annual rent at the start of the year. Realized CF against unrealized decay loss on our underlying lease. The primary greek is volatility, not interest rate; our increase in MV is primarily because of volatility reset. We think it will reset again before interest rate starts to move in any significant way. We don't need a mortgage; we took one out primarily to exploit the current incentives, & give us a higher paying option on our surplus cash - than a straight gilt would do. The proceeds are in high quality prefs with dividend flow applied against interest. We could pay out the mortgage at any time. The UK is unique to this type of ownership, & its part of the culture. We would have preferred a simpler arrangement. If you understand options (Eric) this is no big deal, but if not - its a bad place to be. Oddly, the optionality produces a result not that different to what you might see around a junior mining coy. Part of the reason why our stakes in ALS & ADV do not particularly bother us. SD

We bought a London, UK property & went through something broadly similar. Options. Congratulations, your growing wealth is giving you options. You have the ability ….. but not the obligation to purchase a property. Rational. Nice place, pretty locale, but if you want to visit … why would you not just rent a room or apartment during your stay. If you plan to buy & rent, then visit when the place is empty – the place must be furnished; was that part of the plan. If you are a successful renter or lessor, the place it is not going to be empty & you are not going to be visiting; was that part of the plan. Trophy. If you get a huge bonus, most would use it to buy a nice house to live in, or a nice car - to mark it. This is much bigger; if you don’t intend to be a landlord & hold many apartments or houses as a business, it is really a trophy – to which there are many other options with much lower price tags; from paintings through to mistresses. Diversification. This is really a reserve asset that diversifies earnings; if your life goes to hell tomorrow, this is the nest egg to get you back on your feet. The local property market needs to be reasonably liquid, even in the bad times. We chose London, because of its liquid property market, and the place is unfurnished. We bought because the price was exceptionally low. We treat the property as a trophy asset, & kept the equity investment to less than 20% of total net assets. The mortgage is used to absorb any surplus operating cash that we may have, as the before tax return is well above what we might earn on a gilt. The property has 8 years to go on a 10 year lease, and has appreciated 65% over the short period that we have held it. SD

FTP. We avoided the equity as we thought the odds on worsening prospects outweighed the positives. Today we hold the distressed debs, as we think the odds on a successful restructuring are favorable. Lot of anti-fragile elements, & it gets more anti-fragile every time a cash interest payment is received. Drillers. We hold PD as a core holding, have done for a very long time, & have a very low cost base. Again; anti-fragile, plus dividend cash flow to reduce exposure. We also hold a small and growing exposure to PWE, which we think is overdone. ADV, ALS. Our position is well known. With all of these you have to be comfortable with volatility as your friend, comfortable with not put putting reliance on the traditional valuation metrics, and have some idea of the kickers that come out of IFRS (all are Cdn coys). Buy and hold, and routine hedging, are not mutually exclusive. The names are also strongly asymmetric , both up and down. And with asymmetry - you don't have to be right very often, especially if you can reduce losses to BE, or slightly above ... SD

There have always been a great number of very strong minded women in the world. Most just chose to act publicly through a male screen, as it wasn't worth the effort to change the culture. US culture is also not reflective of everywhere else. Madeline Albright was enormously respected in the ME - largely because she was short and dumpy. She just let the US military do the talking for her, bluntly spoke her mind - whether the audience liked it or not, & went for comfort over beauty; the Emir's then heard it again from their spouses (who recognized what she was doing), behind closed doors. Didn't take long for the wise to realize they couldn't win. SD

Don't focus on the calculators; focus on what you are going to do once you retire. Most people re-invent themselves and will pursue a 2nd or 3rd career for a good 15-20yrs+, after 'retirement'. When Jagger can still play, & swivel the money-maker at 70, the whole idea of 'early' retirement becomes pretty ridiculous. Do something completely different if you can - especially if you don't really need the money. Carny barker had a certain appeal, but the misses wouldn't go for it ;) SD

I'm not sure I understand this. In the case of Zenith for example, I suspect PW could sell it for more than he paid so the intangibles have value to me under all scenarios and holding periods. IFRS defines goodwill (intangible) as whatever was paid above market for the asset, less all FMV adjustments to the assets & liabilities of that asset at date of acquisition. That goodwill is then amortized forward by means testing every year, & the difference in values is amortization. For you to benefit as an investor, Zenith had to be on the books as an asset available for sale, with quarterly FMV. If it is not available for sale, the best you will see is time of purchase goodwill at FMV (means test of identified CF). An estimate, of no real value, unless Zenith is actually sold. SD

Gio, keep in mind that business buyers have different time horizons than investors. IV assumes a plan to hold forever; therefore intangibles are valid inclusions. If you have a shorter horizon, the carrying value of the intangibles as at the date you sell - has zero value as you no longer hold the coy (identical to what would occur if the coy was actually liquidated, & is no longer a going concern). Therefore, book value to the investor is total book value less intangibles. Divide current price by this adjusted book value, & you get a better picture as to the magnitude of the premium. Whether it goes higher or not is a judgement call. SD

"You are comparing how someone would value a mutual fund v/s a company. Isnt that a really dumb way of viewing it? " Not at all. FFH has consistently valued at a BV multiple < peers, for a very long time, because it actually is a HF - whether we like to admit it or not. FFH is just an unusual variety of HF as it chooses to invest via the direct ownership of P&C's - which make the actual investments. Very smart way of doing things (float, liability protection, etc.), but they take the risk of being so clever (insurance vs simpler direct investment approach), that nobody else can follow what they are doing. So .... they suffer a handicap for the uncertainty. The tallest poppy in the room gets cut down - to make the rest of the room look better. Obviously, the FFH model does work ... but with no direct comparable using a very similar model, how do you know if FFH is returning more, or less, than they should be? The nearest comparable is conventional P&C, plus a handicap for model difference & the uncertainty of the HF model itself. SD

No one buys a stock & sits on it forever; not even a BRK - as sh1te happens routinely. If WEB, or HW, had a heart attack tomorrow, the smart thing would be an immediate hedge. FFH is not going to receive a high BV valuation, until it gets the HW black box, & its big investments, out of its structure. The HW black box is opaque, inherently more complex ('finite' risk coverage), hard to explain, & exposes them to short attack (why the FFH raid a few years back had legs). Their hedging & the investments also make them perform like a hedge fund - not an insurance firm (& why despite a sizeable favorable reserve release, & a historically benign payout a year or two back - they lost money - when they should have been making it hand over foot). Even if you hold $1000 of shares trading daily in your subs portfolios, an equity investor will haircut 5-7.5% off that value - simply to recognize the potential costs of liquidation & wind-up if they need to get their money back; take an additional 5-7.5% off the valuation if there is a possibility of mystery wind-up obligations arising from the black box. FFH traded at 85-90% of BV, not that long ago - for a reason. To get a premium, your insurance ops have to be easily comparable to peers - & win the comparison. Comparable CR, & history of being able to successfully acquire & integrate various books - a routine part of industry business. Not great at either, but at least getting better. The HW team does add value, but they need to add 10-15% just to get past the structural drag. Good - but not good enough. At current pricing at 115% of book, it implies they are currently adding around 25-30%. SD

A few observations ... Moving from DCF to the simple (ie: magic formula) is emotional maturity. The investor has stopped trying to substitute the vagaries of DCF, for actual experience & thinking like a business. A handful of variables, & some critical thinking, will suffice for most situations. Eventually, most folks realize that all valuations are just estimates - not guarantees. The most precise estimate in the world, does not magically assure that the projection is actually going to happen - exactly as forecast. Very few realize that value investment is actually about using optionality, & that the G&D formulas were just simple applications. We don't need to understand asymmetry to use the formulas; but when you do - you get the remainder of the ice-berg. Most of the world routinely applies value investing principles every day, they just do it in different applications. Every market vendor, small businessman, etc. either makes a profit every week or very quickly goes out of business. What they call business sense is just optionality by a different name. Nothing particularly complicated, but its not a formula. Get over it. SD

You might want to consider that a deal was deliberately not offered - to raise the ante on the remainder. With this kind of organization it is far easier, & more reliable, for some people to meet with a permanent accident. SD

Long ago, it was drummed into us by a master - that you only need to know 2-3 names in each of your circles of competence really well. The rest is just waiting for the opportunities to present themselves, & patience; as some on this thread have already alluded to. SD

The PV generation process (because of the Gallium) drastically loses efficiency when ambient temperatures get hot, so to offset it - you concentrate the sun, & always keep the PV at 90 degrees to the sun (hence movable panels). You also try to put the things in the prairie where there's often snow on the ground in winter, & temps at <OC. The same panel, with the same amount of sun, now suddenly generates 2-3x the amount of power - simply because its being more efficient. Similar thing with windmills; today's next generation, but similar sized windmill in the same location, will typically generate 6MW vs 1MW - & doesn't cost 6x as much. SD

Coal is always going to be competing with gas, & be at a disadvantage - simply because it is the dirtier fuel (even after improving the actual combustion), & because it takes longer to spool up the plant. Gas is the cheapest fuel by which to manage erratic demand volatility, & it doesn't have to come from shale or conventional drilling. The world is full of easily accessible offshore methyl hydrate at depths that are not a problem; to get it out is a simple as raising the temperature at the end of a pipe in contact with the hydrate. The heat vaporizes the hydrate, & the change in pressure drives it to the surface. SD

All you really need is a battery that you charge at night (cheap rates) & draw on during the day (expensive rates). Capture the rate difference & suffer far less efficiency loss (solar doesn't work well when its hot outside). The 'battery' could simply be a flywheel (buried in an underground vault), or even an air-bag at the bottom of a lake (water pressure squeezing it). Cheap, simple, & little technological magic required. SD

Agreed, but we take a multi-tier long term view. Lux markets are the most resilient, recover first, & rise furthest. Owners can & will change, but Knightsbridge property is highly likely to remain a trophy bauble for the newly rich - & the more gauche the owner, the higher the price for 'acceptance'. Lux markets can & do periodically go down, but its usually very temporary. Pretty sure much of the anticipated price rise will be purely because of QE inflation, accumulating first, in the hands of the 1%. Basic economics dictate that one purchase hard assets, pay with funny money wherever possible, & acquire as early as possible. We don't see QE vanishing any time soon. We've heard the drumming for domestic ownership, have structured accordingly, & have the place leased out for 10yrs. Ultimately we don't expect much real change in these lux neighbourhoods; very different story for other neighbourhoods. For us it is a straight forward value investment, bought cheap, using an inflated CAD/GBP FX rate. We think upside materially exceeds downside, we have no carry cost, got the appreciation option for almost nothing, & view the whole thing as being pretty anti-fragile. We could have bought a UK bank (IRE), but simply chose bricks & mortar instead. SD

Its Knightsbridge (London, UK). Lux neighbourhood, lot of mistresses, convenient location, favoured foreign investment area. We bought it artificially cheap, & at the time - depression was clearly visible in the faces of most of those who work in the city. The only thing that will drop prices is either a material increase in domestic interest rates (extremely unlikely for a very long time), or a very sharp appreciation in the pound (again unlikely). We're also very aware that traumatic growth almost always follows traumatic collapse (Great Recession II) When it eventually occurs, central London RE should rocket. With our cost base, a 4 bagger (15% compound return) 10 years out - is not out of the question. SD

As disclosed in early 2010 we took our proceeds from SFK, & invested it in a London property. In our 3+years of holding, the price of similar properties in the area has risen 65%+, & in many cases - because of the shared ownership scheme. With deals this good, it is beyond stupid to not take advantage. https://www.gov.uk/affordable-home-ownership-schemes/shared-ownership-schemes It is a basic wealth management tenet to start retirement with fully paid off shelter. Renting comes with eviction risk, most landlords will routinely discriminate in favour of younger renters (more flexible when elevators are down), & most elderly do not suffer abrupt change too well. Doesn't mean you have to have a fully paid off shelter, but either have the ability to buy it outright - or accept that you are reacting to a failure; & have severely reduced options, at a time when you have materially less ability to tolerate risk. Press ranting that retiring boomers will secularly depress markets by continuous disinvestment (stocks, houses, etc.) is bull. As old folks don't buy anything, most corporates will elect to raise EPS by buying back stock versus investing in new net production. Mac Mansions just get sold to middle-agers (who need the space) & new immigrants seeking safety. No real decline in value - so long as your country/neighbourhood remains a viable & desirable place to live. There is also nothing to prevent the use of a reverse mortgage against the property (via government program: CHIP, or otherwise) near the end of life. Families are not automatically entitled to large estates upon inheritance. SD

Keep in mind ... Minimum DP's have been increased, & maximum LTV's increased via legislation. With all borrowers now either meeting these thresholds, or having their bank repossess & force a sale - weaker hands have been forced out & bigger cushions against loss put in place; for everybody. Sure, if you're the one repossessed you aren't happy - too bad. If you don't have the DP or income required, you cant afford it - get over it. Find a cheaper house, earn more income, or get someone else to front more DP for you - you are not entitled. Unlike the US, you are also being deliberately shut out, for the protection of everybody. Lot less risk .... SD

Most argue that RE bubbles are actually a plus. New houses get built, old areas get repurposed, infrastructure gets upgraded (water, sewage, transit, etc.), higher paying jobs from related construction, additional RE commissions, etc. But like anything, abuse it - & you will get burnt. Canada has long had HELOCs & some of the US instruments. Unlike the US, the market levers are much more tightly controlled - & OSFI/BOC/CMHC routinely tighten to cool down markets. Folks will be angry no matter what; whether a bubble was allowed - or they were prevented from borrowing under tighter rules. House ownership is not an entitlement, & neither is a short commute to work. CMHC outlived its main purpose of enabling returning servicemen (WWII) to buy a house (stability) & start families, many years ago. SD

For the most part you either have this (dull Type B's), or you don't (impatient Type A's). It can't really be learnt either, as learning typically evaporates under pressure ... so know yourself, & play only to your strengths. The good news is that the Type B's usually win over the long haul, simply because the Type A's will make errors. SD

Get yourself a trade to do in your spare time, & hire yourself out under your own shingle, or to someone else, on a casual basis. Work an average 15 hours/month on weekends as a baker, plumber, auto mechanic, etc. - & you will do quite well. Depending on skill set, look at start-ups & contribute 'guidance' for equity. You only need to find the next Apple, once. SD

Re Abu Dhabi/Dubai. Much of the building was built on money laundered funds. $ in to create a bank -> new build real estate financed by that new bank -> new real estate built at higher prices to bubble it -> loan against the appreciation to repatriate the $ in. Bank is collapsed (crises), the kingdom takes over the shiny new buildings, & offers cheap rent in Grade A buildings to anyone who would like to start-up/open a business catering to the ME. Very smart. The same process built Vegas, & Havana; just different players. The Paris of the ME was already taken (Beirut), so we got Disney Land instead - just keep in mind that Beirut, Abu Dhabi, & Dubai were all long established trading ports before the West found them; & hot money has been around for a very long time. On any given day the status of Hong Kong could be revoked, making it just like the rest of China - & it would wipe out the wealth of anyone in Hong Kong that is not in gold. So to insure survival ... periodically sell down/borrow against HK assets, invest the cash in Vancouver RE .. & you will never be poor. Vancouver RE gets a steady ongoing inflow of new cash - but the value of the condo to a HK buyer is primarily safety, not shelter. If it goes down 35% next week, it is largely irrelevant. It could never happen here is fallacy - ask anyone from Beirut. SD

There is always a bad guy; in London it was the Arabs following the oil boom, then it was the Russians, now it is the Chinese. The reality is that many of these properties are actually rented out (to friends) at below market rates - & it is often flight money, bribe money, or money laundered funds making the purchase. Players change, but the asset itself stays; realty fees & higher property taxes are just the cost of doing business. Locals bitch because they couldn't match the bid, are not the friends getting below market rates, & cant make their case for deferred taxes because of difficulty paying bills (as those rich guys ARE paying, & ON TIME). The fact that locals benefit from the modernized services financed by those property taxes, & higher borrow capacity resulting from rising property values - is conveniently ignored. You don't need people actually using the place - as Abu Dhabi, & much of Dubai proves. But you have the place, & debt free, because it is an emergency asset that you can use - should you have to flee home with nothing but the shirt on your back. Exiles are routinely created every day. Taxing is also not the answer (UK). You simply flip the place into a locals name, retain a call option at the purchase price, & agree the annual fee on the option for the next 99 years. SD