SharperDingaan

"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

Travel west from Toronto to Mississauga; & the cost of a very similar house, drops by roughly 70K - just because it is no longer Metro TO. One GoTrain stop, maybe 5 minutes of additional commute, train goes every 30 minutes until 1AM in the morning. Keep going west from Mississauga, & the same thing happens again as you pass through Oakville & Burlington. A similar thing happens if you go north or east of Metro Toronto. Go really west to Hamilton; same GoTrain line (no drive, no parking), but maybe a 90 minute commute to bank land. A many roomed century, & very modernized, mansion may set you back 650-750K; the similar mansion in a Toronto Parkdale (cruddy area) would cost you 1-1.25M, & a 30-40 minute subway commute to bank land. Buy that mansion in Rosedale (Toronto tony area), with maybe 5 minutes less commute, & its 1.75-2.25M. As property tax in Hamilton is less than 35% of what it would be in Toronto (lower value + lower mill rate), the cost of a monthly GoTrain pass is essentially free. Choice of lifestyle cost. Toronto is no different to New York, London, Paris, SFO, etc. Vancouver is just joining the club. SD

Those 800K-1.5M condos are debt free & often bought by active & retired boomers. Lux, new, one-floor, & in the centre of the action; no different to someone buying a 1/4 floor in New York - just cheaper. They will live there a good 10yrs+, & eventually use a reverse mortgage against the place to finance their dotage. Long-term money. Nobody forced that medium income to buy a house at 10x income. Thousands of people move further out of the city & commute; 60-90 minutes each way is pretty normal for a London, New York, Toronto, etc. If you don't want to commute, you made a lifestyle choice - so pay the freight & stop whining. Nothing says you have to buy in Vancouver either, you could have rented. If you sold your West Van house nothing prevents you from buying lux condos in other cities, renting them out, & using some of that CF to pay your rent in Vancouver. Again, if you want to live in Vancouver you have made a lifestyle choice - so pay the freight. Nothing prevents anyone from either downsizing to a smaller place, or teaming up with other generations to jointly buy & live in a larger place that has been re-modelled. Common practice in both Indian & Arabic communities, & it often comes with built-in baby sitting. If you are that concerned about cost - either change your lifestyle, or pay the freight your choice generates. Life is full of hard choices. SD

A large part of Vancouver RE is Asian owned investment property, & is mortgage free; get over it. If condo prices fell in any major way, those investors would simply club with their friends & buy the 2nd condo cheap - in anticipation of a later sale 1-3 yrs later. If they needed cash in the interim, they would simply mortgage the condo, & rent it out cheap to pay the P&I. If the Vancouver condo market were a slum, we would call this process gentrification, & have no trouble pushing out the poor living there - making them homeless. If you want to live in a nice place, either outbid everyone else in the world who would like to live there, or accept the fact that you cannot afford to live there anymore. You would not listen to that poor persons angst, so why would you expect anyone to listen to yours. No different to parts of London, Paris, Geneva, Toronto, etc. SD

Re Value. Every reader of XYZ financial statements will have a different opinion as to what the RE or PPE of XYZ is worth. But most don't realize that XYZ has the assets because to XYZ they are worth than MV; if XYZ thought otherwise they would sell the asset & lease/rent the space back. RE is usually also linked to war-chests; the sale & leaseback is not executed until you need the money, & the lease is back end loaded to minimize early rents & boost the P&L as much as possible. SD

Deprecation results because the asset has a finite life; typically 40 years for IFRS purposes. Evidence that the estimated life of the asset is infinite, & depreciation falls to zero - the common practice for hydro dams. Maintenance costs are expensed as the admin cost of setting up & maintaining amortization schedules, exceeds the benefit. A REIT might consider capitalizing if their costs are significant, but its rare. If you did capitalize, & maintenance cost exceeded depreciation, historical cost would rise very slowly over time. In most cases, changing highest & best use of the land will render the building obsolete before it physically breaks down. The perfectly good silo on a farmers land, now surrounded by a town, is actually worth nothing - as economics dictate that the land be sold & houses erected instead. Put a mall up in a new development, & 40yrs later you should be knocking it down & re-using the space for offices or houses; therefore economics dictate use of poor quality materials during construction, & not maintaining the mall - to strengthen your case for re-zoning 40yrs out. SD

You might want to remind yourself that a public coy does not have to sell equity to raise capital- it can also swap debt for equity. Buying OTM calls & distressed debt at cents, tripping a covenant, & forcing extreme dilution through a debt/equity swap; is a time-honored technique, & almost always immediately followed by a privatization (hedged via the OTM calls). A real underlying business, suddenly relieved of the bulk of an excessive interest burden, is a very valuable thing - & most are not about to share, or report to the world about it. The additional advantage is ability to preplan tax ahead of an IPO exit strategy, & increase your final payout into the 7-8 zero range within 5-10 yrs of initiation. Always get paid, & paid well; for whatever you do. SD

Long ago we reminded our nephews of the negative effect when a well above average, very successful man moves into a richer neighbourhood (Taleb). As the poor guy - you (or your spouse) is made to feel a failure, & you will become one ... if you play the game set up for you. But change the game, & Lenny - you are the fox in the hen house! After that, there were never any further issues. SD

Some things to be mindful of: You are applying a technique that takes you from poor (youth) to wealthy (grandpa) over a lifetime. Keys to the entire thing; are (1) ability to recognize your place in the time/process - as it is occurring, & (2) recognition that wealth is multi-dimensional - not just the size of your portfolio. Its not hard to recognize those who are good at it. The advantage of youth is nothing to lose, & everything to gain (same as when you started investing). They need to be aggressive, in your face, thrown into the world without safety nets, roughed up, & allowed to fail. Most are going to get beat-up at first, find equilibrium, & then come back attacking. Your job is to let it happen, then quietly direct. The very good will attract followers (natural leaders), be very aggressive, & almost certainly business orientated - your job is to show it is far more profitable to be on the right side of the law. Success, or failure, your investment is probably going to go far - & along the way there will be lessons from both. Any team with the next Bill Gates as its CEO, an Al Capone as CFO, & Machiavelli as consigliere is bound to do well. Periodically remind yourself as to what wealth actually is - by giving a randomly chosen homeless person 1-2K in cash, & quietly watching what they do with it. You would be surprised at how many either give the cash away to others as food, drink, etc. - or simply burn it. SD