SharperDingaan

Leasing is primarily a sales tool. It is used to move metal, & as a sales channel it does not have to be profitable. Cost of funds & tax deferral is key; you get it by deliberately mismatching term, buying the assets in poor areas, & releasing them into richer ones where they will actually be used. There has to be no question that you can roll over your ST debt at will, & you have to be able to forecast run-off fairly well Dead simple in theory, but difficult to execute as the salesforce & administration level. You cant just give someone a laptop with your model on it, & then expect them to sell the most profitable lease for the application; the minimum is constant training & oversight by large numbers of folks who know what they are doing. Its a small pool, & most often you will have to acquire another leasing coy to get those people. Lots of very specialized niches, & it can be very profitable, especially if spread over many lessees. Eg: Brewing equipment. It is usually stainless steel, not prone to obsolescence, & very long lived. Costly to buy so there is a preference for lease vs buy, but some of the lessees are not going to make it. When the equipment comes back it is simply re-leased to a new brewer at a reduced rate as some of the Capex has already been recovered. And when the same equipment can cycle for 40+ years .... SD

Maybe one or two newsprint companies should be making him an offer. Welcome to BOOK .... SD

Its easiest to think of education as a pyramid; reading/writing, foundation knowledge, factual recall, application. World over, reading/writing is widely recognized as the basic minimum. Foundation knowledge is the high school math, sciences, arts foundation required for university/college entrance. Problem is - it has been taught the same way for 50+ years, there is a culture not to allow failure, & there is zero recognition for maturity. If you come from somewhere not first world you actually have an advantage (life is harsher), but it is handicapped by local condition (cant learn if you're hungry or supporting your family). 50 years ago was the 1960's - & the start of the various social revolutions. Bachelor degrees are still taught the same way; factual recall of theory from textbooks, & make believe attempts to mimic real world by case study. Cheating, & plagiarism, is endemic - & the universal institutional response is criminalization, versus actually hearing the message. Gaming, cheating, copying, facts lookup, etc. is simply life imposing itself - the skill is in applying what you learnt, & we teach you to game the system. Not a bad thing, but not really the intent either. When you graduate, you are magically supposed to be able to apply what you learnt. But just how, exactly, if you were never taught how to do it? But we did teach you - it was how to game the system!; a lesson the financial types of 2003 through 2008 appear to have learnt very well!! Unintended consequences. Different cultures do the application differently, & there in lies their comparative advantages. And you can change those comparative advantages by simply putting someone on a plane & sending them elsewhere for an extended period (ie: to get a university degree in a foreign country). SD

Couple of things we've learnt over the years, which may be of interest. For us it has always been about having fun owning & running a business; subject to the business having comparative advantage in our chosen market sector, & not being a public entity. We invest to raise the funds to buy into those businesses, & along the way - we learn how to control risks & get ourselves out of trouble. Money is our servant, & we never want to get to the point where the business becomes too big - & starts controlling us; if we want big, we could simply buy/sell equities. It means we are constantly reinventing, there is no time-limit to our business life, & there is enhanced anti-fragility. It also means that you are always working with partners; sometimes good, sometimes not so much, but everyday a new experience. Marry the creativity of reinvention, with mastery of finance, & good things are almost a given. Case in point: While some way from retirement I have chosen to learn the beer business by becoming a Master Brewer in my spare time. Takes 5 years to become a Master Brewer, & along the way it will be necessary to spend some time in a brew house, time learning beer sales, time doing a thesis in beer, & time investing in a brewery or two; not the most simple things to do, but not impossible either. The end result will most likely be the part-time teaching of brewing, & the business of brewing, at a brew-school; partnership interests in various local brew-pubs &/or craft breweries, & investment interests in bigger breweries via time limited Brew Master, or MD contracts. No retirement in any of it, & the fun in business pretty much assured .... Different strokes, but think outside the box. SD

It just requires a different way of thinking ... The UK used to tax its top earnings at 98% on every $ of incremental earnings. So .. everybody changed the coy car to a Porsche, & the coy flat to a nice little place in Knightsbridge. When the tax rules eventually changed; everybody bought the flats & the cars for their own account at fire sale prices as the fleet & flats were sold off. London's girls got quite a boost. SD

You don't actually retire; the hobbies become businesses in their own right, & you end up with a number of partners working harder than you were before. Self correcting as well - as your investment in those partnerships also makes you poor again - & restores the incentive to work ;) Used to be that when you retired you were washed up - these days you are just getting started. Thank the boomers. SD

You might want to keep in mind the highly likely probability that money laundering underpins much of that unused capacity. To do money laundering you need a hot inflow, to fund an investment in country X; to borrow against, & then repatriate the inflow. You create a local bank, use it to fund construction loans to build the asset, & increase the LTV ratio to push up the collateral value of the asset. It is of course a Ponzi scheme, the last in will hold the bag, & it requires construction loans - but you don't need anyone to actually use the constructed asset. Vegas was the early version of this, & it was strictly US mob. Dubai is a more recent version, but primarily Russian mob. China is primarily local. Country X gets a lot of new assets ready to go, with zero cost after the scheme collapses. Excess capacity that eventually displaces existing business with older & less attractive assets. Dubai becomes the next Vegas, so long as the ruler allows it to happen - & everybody wins. SD

This is usually a really bad idea ... You own because it is cheaper than renting; home ownership costs don't change anything. You simply pay them to the landlord or pay them to the bank/insurer/municipality/DIY store. If I am your landlord you will also pay me a profit, & I am not going to give you back any tax rebates (US interest deductibility) or loan principal reduction. Home ownership is pushed on the young because it is largely idiot proof. Apply 25 yrs of inflation to the house asset, & mortgage liability, & the difference is equity that you will live off in retirement. In Canada you will also have no mortgage, & the benefit of 25 yrs of forced saving. The underlying cause of most boomer wealth. The exception is owning your home via a standard sale and lease back. ie: your portfolio sells its assets for cash, uses the cash to buy your house, rents it back to you, then mortgages the house to recover some of its cash, which it then reinvests. The portfolio has deductible interest costs covered by your rental payment, benefits from all future appreciation on the property, & you get cash. SD

Putin is KGB; boss of bosses - but even a boss has to periodically change players when the corruption gets out of hand. Make the takeover big enough, & you will over-ride state sovereignty. SD

You also need to question why you are in this space at all: To amass 500,000 shares would require 25 trades @ 20,000 shares/each; & another 25 to exit if there is no liquidity event. At 1 trade/day a round trip is 2.5 months, & for that entire time you are hoping the market has not noticed. Lot of execution risk, & a lot of work, for not enough return. You could have taken the 40K of equity & bought a real share on margin. Assume 4000 shares @ $20, paying a $.50 annual dividend, using 40K of margin @ 5.00%. Divs (2K) = Interest (2K) = carry cost of $0. Assume a 20% gain & a sale @ $24; total gain = 4000*(24-20) = 16K. Little execution risk, little work, better quality, more liquidity - & a higher return. Quality matters. SD

The reality is that you can do very little about it. It is part of the package. The best defence is a bigger position acquired at prices well under current MV, so that you at least get a liquidity event. Example: 500,000 shares bought at an average 8c (40K), trading at a MV of 20c (100K), with an IV of 40c (200K). You could not sell this many shares without materially dropping the market price by 50-60% (11c); leaving a walkaway gain of 3c (15K) before costs. If management made an offer at 10% (low) over market (22c); your walkway gain would be 14c (70K) - 4.67x more. You might not like it, but you will be giving them a kiss. SD

Oil trunk pipeline http://www.ukrtransnafta.com/en/about_company/shema/ Gas trunk pipeline http://www.eegas.com/ukraine.htm Pipelines to Europe http://news.kievukraine.info/2006/01/european-moves-to-solve-gas-row.html Note that the Ukraine gas fields are primarily in the east, near Russia; & south, again near Russia (Sevastopol). Germany can also bypass Ukraine & access Russian supplies via Belarus. Not possible for France. In 2006; 95M cubic feet was being siphoned off a day (mob cut). It is now 8 years later, & no-one gets anything if that Russian gas flow stops. Two guys laying charges against a line is very old-fashioned. In the modern age you hack the systems & order compressor stations to over-pressure intervening pipe. The older the pipe, the more corrosion they will be, & the better your odds of explosive rupture. No fixing it for a very long time. http://www.taproot.com/content/wp-content/uploads/2010/12/Pressrel_2010_images_San_Bruno_28-foot-long_ruptured_section_of_pipeline.jpg Forget the Russians - go shopping in Germany & France; & hope for protests in Belarus. SD

This thing is probably going to go for a while, & get a lot worse. Anything Russian o/g is very vulnerable. All a radical need do is blow the gas pipeline &/or pumping stations, or blow a hole through any of the individual ship-borne nukes powering the Black Sea fleet in Sevastapol. You sow what you reap, & those Russian troops are not there for fun. Short of mass relocation (India/Pakistan, Israel/Palestine, North/South Korea, etc.) & partition, it is also hard to see any real prospect for longer term relative stability. Premiums for secure supply, higher spot rates on all tanker traffic, & something additional for the largest possible tankers that can pass through Suez or Panama. SD

Treat the whole thing as a business.... Assess your skills in a BS format. It will highlight where your competitive advantages, & weaknesses, are. Pass the CFA & your major assets will be technical expertise, youth, & just a little arrogance (OK for a time, but don't make it a habit); the weaknesses will be patience, & maturity. Mitigate the weaknesses. Stay in small caps, within your circle, & only in things with option markets &/or convertibles/warrants. Sh1te quality, speculative, build a big position cheaply - & lose it. Treat it as an apprenticeship, & expect to spend at least 3-5 years at it. You have to find out who you are, learn how to extract yourself, read a company, hedge effectively, see money as the servant, handle the emotions, & control your risk. Real world experience, not books. When you can systematically withdraw capital comfortably, you have become mature. Giving $ to other people to manage, because you recognise that you are your own biggest systemic risk. Nothing to it! SD

Gold!

Zach: Assume a 100K interest only loan @ 6%, with the loan to be repaid when the underlying asset (house) is repaid. The borrower gets into trouble & stops paying interest; under normal conditions the loan is declared NPL at 120 days, the lender repossess, sells the house for more than the o/s balance - & walks away whole. But if enough people could not pay, there would be massive social unrest, the repossessions & sales would glut the soft market, & the bank would incur large & permanent loan losses. The solution is to refinance under more generous terms, either under some kind of legislated 3-5 year moratorium (Greece, Spain), or a specific government program (US). Over the moratorium period the bank might change the interest rate to 2%/yr, & guarantee the interest payment; so that on exit the loan is now slightly over 106K+ [100K*(1.02)^3], & the borrower paid nothing during the moratorium period. The 106K exit loan is then refinanced on a P&I structure over 2-3 years to reduce the 106K balance back to 100K; thereafter it reverts back to its interest only structure. Moratorium loans are typically financed through direct central bank borrowing, at enough of a spread to generate the additional regulatory capital needed to support the loan. As these are non standard loans, they are routinely fair valued but designated Held To Maturity HTM; so that MTM variations do not hit the P&L. Cash yield is the cash interest being received (either by new loans, or reduced borrower cash payments)/MV of the loan. Because cash is being received they are 'performing' loans. SD

Oh shit .. It's Canada!

3) & drop like a brick. The evidence points to zero predictabiity & that most of everything 'known' about this company may well in fact be false. You have no idea what it may be worth, & as a result - would be reluctant to pay much above the discounted liquidation value of its assets or holdings. SD

FFH might find it useful to look at American Barrick & Placer Dome; how they fell in love with hedging, what it did to them, & how they eventually broke the spell to get out of it. The ability of a company to precisely control its major risks is highly addictive ... but it is a investor responsibility, not managements. Investors buy gold companies because they want those specific risks, & they choose how or whether they are going to mitigate them. Managements job is solely to run the company in the most efficient & effective manner possible. If I want P&C exposure I will buy it, & I will buy as much of it as I want. The solution may be as simple as hedging the major ownership stakes through the option market. FFH takes the full P&C operational risk, & performs accordingly. Owners hedge their risk through the option market as they see fit. If FFH goes down it does not BK its owners, & we get better separation between owner & investor interests. SD

As already mentioned we are not long term FFH investors, but a final note, to close the subject. In practice, a P&C's long run return will consist of consistent CR < 100, consistent use of COF (float) below market rate, and alpha on its investment portfolio. You get the CR through good underwriting, float through premium expansion/contraction, and alpha by exceptional investment prowess. Most would argue that global warming should be pressuring UW, global money printing should be reducing float spread, & that to do well you are really relying on alpha. Where FFH excels at. We would suggest that their reporting is measuring alpha very well. However, they seem to have a problem with beta capture, net of the hedge overlay. The result is over hedging, and an investment return that is primarily alpha; not alpha + beta. What bothers us is that hedge overlays are usually a top-of-house responsibility, we have seen a number of questionable bets over the last few years, & there is a marked refusal to cut losses. Mistakes are OK, but they seem to be piling up. Last time something like this occurred they almost lost the company; & those shorts could not have borrowed their shares in sufficient quantity unless there was smoke. We are not suggesting we are there again, but the risks are escalating. Nothing that cannot be fixed, but it shouldn't be there. SD

They have to deliver in this timeframe, all the time, & at an amount in line with the SML expectation. You do not get to deliver some now & some later .. in the long term. SD

Bluedevil, simple example; Assume we have a long US large cap equity portfolio managed by a very good PM, and a hedge on the US Russell Small Cap Index. We can all see the basis difference, but what we don't see is that a brilliant 10% return on the large cap may be only 2% after the hedge loss on the Russell Index. Per the SML maybe we need a 6% return on this portfolio. The PM silo did brilliantly, he/she earned 10% versus the 6% required. The hedge silo did brilliantly, & covered the downside risk at minimal risk. But combined - they earned barely better than a T-Bill, at many times the risk, & did so because nobody was looking at their combined return (management reporting lapse). The solution would have been to reduce the hedge, so they come out at 6%; or NOT hedge - if they cant earn better than the required SML return. ... and this is just one of the many obvious solutions. SD

Couple of quick observations ... We have not invested in FFH, other than dividend related purchases & sales in Dec/Jan, for at least the last 3 years. FFH has to realize that they make their money by taking on net risk, & getting it right. Great investing offset with opposing hedges nullifies one of the biggest competitive advantages they have, & is akin to having a Ferrari that you never take out of first gear. If I just want to get from A to B, I'll use a beat-up VW, & at maybe 1/20th of the cost. Yes the Ferrari could very easily crash & burn ... but that's why you put it in the hands of a F1 driver (preferably not Italian!), & not a mere mortal. It is highly likely that FFH has a systemic management reporting problem; as how else can very smart folks consistently forget what their business is? The best analogy is a sales force taking market share - & positive they are doing great; then discovering that every sale was putting them further in the hole - as they were selling for less than it cost to make the product. And all because nobody realized that the weekly management report they were basing decisions on - was missing some costs. Judging from the boards year-end investor returns, over the last 3 years - most people on this board probably had better returns than FFH did. OK, it is not scientific, but suddenly everybody is investing better than HW? Either HW has been drinking a lot of cool aid, there is something very wrong in the shop, or we're all brilliant! We hope they do very well, but we just want to go from A to B with no fuss. SD

We must be on some other planet ... FFH LOST $31.15/share in the year, in spite of a very benign casualty year, and an $400M reserve release. One of the best possible outcomes and they still lose money? As Eric points out, 2-3% growth over 3 years - & even less if compounded. Apparently this is a good thing? No denying this is a well run company, & they know how to invest - but come on ... SD

You have to declare where you are resident (Canada), & spend < 180 days outside of Canada/year - or lose your Cdn health care. Some Cdn government pension benefits can be paid anywhere in the world, net of Cdn taxes; others are paid only in Canada. No restrictions on private pension payouts. Brokerage/home banking, etc. ONLY where you are resident. KISS principle. You can be clever, but be prepared to prove that you are not a money launderer - & from uncomfortable places. Cdn UI can only be collected in Canada - you are supposed to be looking for work IN Canada. Your entry/exit to the US will be detected, & funds will either not be paid - or clawed back. Flying south for winter, also doesn't mean just flying to Florida. Lot of folks will rent a place in the Canaries/Spain/Greece/Caribbean for a few months during winter, & increasing in Chile/Argentina/South Africa as well. Currency, house rental, & food is cheap (in $C terms), the weather is hot, & why bother with Florida - if you can stay in Rio over carnival, or safari in South Africa during Feb/March. Just call home over Skype every now & again. SD