ERICOPOLY

A great book is The Empire of the Summer Moon. No, it's not about ISIS, it's about the Comanche. I keep thinking about that book whenever I hear about ISIS. Don't think it's politically correct the word "Terrorists" when discussing the Comanche, but there's the term "Comanche Moon" for a reason. Their tactics were pretty extreme (for example, raping old women after staking them to the ground with their lances and slowly roasting a 6 year old girl over a spit). I don't know if it's political correctness or what, but we don't refer to them as a terror organization. However back in the day, the Texans went pretty damn crazy over it and a lot of tribes were persecuted who had nothing to do with the Comanche. So let's not go too overboard and throw every immigrant in with ISIS. Here is the very abbreviated version: http://www.dailymail.co.uk/news/article-2396760/How-Comanche-Indians-butchered-babies-roasted-enemies-alive.html

Ok, so do you see too rapid a P/B expansion right now? Cheers, Gio No, I didn't sell it this time for that reason. I said that I sold it last year for that reason. This time, I see that I've made a 12% return from where I bought it in a couple of months. I weighed the chances of whether I'd make another quick 10% return or whether it might slip back to where it was. I couldn't come up with anything convincing either way. I thought about missing out on 15% a year book value growth, but then I looked at where we are with interest rates and I think about risk to bond prices. I think about the equity hedges hedging out capital gains. Bonds could soar further, but I don't feel particularly bullish that they will. I don't know, I'm just not trembling with greed and I have a high tax basis and some capital losses to absorb from selling VRX at a loss. There is nothing really compelling me to own the stock at the moment. Crash (don't want it) Muddle through (won't miss out on much) Devaluation/Revaluation (wash) Interest rates (if rates were a lot higher the float would be super valuable, but rates aren't a lot higher) The engines that drove the legendary book value growth just seem to be powered down right now. It's great to look at the book value growth over their entire 30 year history, but let's cherry pick a few things about today's environment that make me sad 1) long term rates declined significantly over 30 year history. That gave them enormous capital gains. How many more years of this juice is left? Maybe, a few, but looking at where we are today with rates I think a lot of it is played out. They were right for a very long time -- well played, but perhaps played out. Perhaps not. 2) interest rates were high, and with their huge float leverage, this was sizzling. 3) capital gains from equity investing -- but they are all hedged away at the present. The reason why the past 5 years have sucked overall are IMO for those missing 3 ingredients that allowed them to smoke the S&P500 over the long term. I feel like the gas tank on long term interest rates engine is getting low, the low interest rates are robbing their float income away, and we're still hedged on equities so nothing spectacular is going to occur (but it could!)

The float is worth a lot more in a high rate environment, so there are worse things to worry about.

+1 Then what? 1) You are not worried about a crash at all and you are 100% invested, 2) You are worried about a crash that might come soon and you hold cash, 3) You are worried about a crash that might come some years from now and you hold FFH, 4) You are worried about a crash, but you don’t know when it might come, and you hold both cash and FFH. Which of the 4 cases? Is there a fifth? Cheers, Gio 5) I get worried when rapid P/B expansion in FFH can be followed by a reversal, crash or no crash. That rapid expansion late last year overwhelmed me with fear of a reversal. I just don't feel an overwhelming amount of greed to stick around for a potential reversal. The prior 4 or 5 years they had only compounding book value at something like 2% or 3% annually. That kind of backwards looking performance can make a momentum player bored, in which event the valuation can sag again. It looked like some sort of momentum stock how it jumped up so quickly.

The bold part sounds nice, but doesn't the italic part contradict the bold part? I.e. if you have a group "discussion" (read: argument), the fundamental premise of argumentative theory starts playing a role: your goal is to win the argument, not to reach the correct solution. The group as a whole may or may not reach the correct solution. But it seems very likely that the participants of the argument are more likely to dig in and try to persuade others of their POW rather than change it because of the discussion. (There's numerous examples of that in this forum too ;)). I wonder if responses to this post will be a meta example of the point above. The thing that I questioned about the article is that people defer their own judgements to an expert. I didn't see the article addressing this. We don't argue enough with the expert to fit the theory. A group needs to make a decision and move along and not spend it's resources quibbling forever -- that's how I'd explain the deference to expert testimony. I still found it interesting -- their theory fits within an argument between relative equals. This is likely what they meant. I think a lot of harm is done when an expert is consulted and his strong opinion is followed unquestioned -- that leaves us victim to his confirmation bias. We usually don't get enough experts together to duke it out for this theory to work -- maybe because it's too expensive from a time and resources point of view. And of course there is danger in not consulting an expert -- usually it's best to consult with them. People make their way through life with different abilities and develop different specializations -- we can't all be a master of everything, so deferring to the area expert is best perhaps.

Was it a mistake? We only see one version of history. The smart money bought at -50% in the Great Depression too, only to see another -80%. Fairfax (and Hussman) may have rightly played the odds and just just been beat by a lucky draw. Yes, it was 100% a mistake. I expected them to load up and they didn't. I admit my mistake. I shouldn't have made assumptions about what they would be doing, instead I should have sold it and just bought them all directly. I didn't say they made the mistake. I said that I made a mistake in remaining with FFH under the assumption that they were loading up. I effectively only had 50% of my capital in the stock market when I had imaginings of much, much more..

I agree with that. However it's not a reason for me to own the stock because based on that logic I might as well put that portion of my portfolio in cash. The reason is because they aren't compounding at a high rate while hedged, and I strongly believe FFH will go down a good deal in price in a generalized market collapse (driven by deflation or whatever). So I feel like it's picking up nickels in front of a steamroller. Rather just not stand in the road at all if the steamroller is my worry. It's not quite nickels by the way... not the best analogy. It's more like if the crash happens several years away, then FFH is better than cash quite likely. But if it happens next quarter (or in 18 months) before any significantly offsetting low-rate compounding, then I think cash is way better.

Eric, I absolutely agree with your broad point here and I do think that all multiples will compress in the next crash. I don't expect to make money in Fairfax the first 6 months of a crash. That said, I do think you're picking your dates a bit too carefully! I just (fairly randomly) chose Nov 2006-Nov 2010 to graph FFH CN, and it basically goes from bottom left to top right. The selloff starting March 08 lasted five months, took you back to where you would have been in Sept 07, and reversed rapidly. The same thing happened starting early 2009. So yes, the start of the storm felt shitty both times, and maybe that'll happen again and we'll will get a great opportunity; but all the graph really tells us is that this is a volatile stock that performed extremely well through the crisis. And we all know that what matters far more is how IV trends, and I believe FFH's IV could explode in the next crash if there is a deflationary panic. I think 2008 is not comparable to today in two ways: as soon as the next crash happens people will look to Fairfax, remembering what happened last time, which is bullish; but the starting multiple is higher, which is bearish. P People may look to Fairfax in a crash, but they will be selling none-the-less. The reason is fairly simple: the need to raise money for margin calls, and generalized panic. It absolutely will happan again. Your naive to assume otherwise. Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings. I know because I was buying FFH at the time. Its posted somewhere on this board. I believe that people will see other stocks they love down 80%, and they'll dump FFH to buy those stocks. I've said this before: once you think the bottom is in, FFH is the wrong stock to own. I think they only had like 50% of their book value in stocks in March 2009, and a lot of it was stuff that wasn't all that compressed (JNJ for example). THE BIGGEST mistake I made in early 2009 was smugly believing that FFH would be backing up the truck and loading up on bargains. HARDLY! Not a single share of AXP for example. And MKL? I think the only thing they bought through the crisis was a teensy weensy bit more KMX. So look, there won't be much buying pressure on FFH stock itself if people remember what happened last time. But that was my mistake in misreading them -- they probably were uneasy after dropping their hedges and/or couldn't add more risk being an insurance company.

But if you take the point of view of the argumentative theory, having a confirmation bias makes complete sense. When you're trying to convince someone, you don't want to find arguments for the other side, you want to find arguments for your side. And that's what the confirmation bias helps you do. The idea here is that the confirmation bias is not a flaw of reasoning, it's actually a feature. It is something that is built into reasoning; not because reasoning is flawed or because people are stupid, but because actually people are very good at reasoning — but they're very good at reasoning for arguing. Not only does the argumentative theory explain the bias, it can also give us ideas about how to escape the bad consequences of the confirmation bias. People mostly have a problem with the confirmation bias when they reason on their own, when no one is there to argue against their point of view. What has been observed is that often times, when people reason on their own, they're unable to arrive at a good solution, at a good belief, or to make a good decision because they will only confirm their initial intuition. On the other hand, when people are able to discuss their ideas with other people who disagree with them, then the confirmation biases of the different participants will balance each other out, and the group will be able to focus on the best solution. Thus, reasoning works much better in groups. When people reason on their own, it's very likely that they are going to go down a wrong path. But when they're actually able to reason together, they are much more likely to reach a correct solution.

And sorry, I do recognize that it grows tiresome when I say "it didn't work in 2008". Full credit to viewpoints that it could be otherwise next time. Sometimes I feel though that there are all these people in it waiting for the payout when it comes. And I was like that last time... Until I realized that being down 30% sometime around late August 2008 REALLY FELT SHITTY!!! Especially since I was supposed to be so clever as to be in this stock that was so well hedged you just couldn't lose. So maybe I'm tainted by a negative one-time experience.

I agree with that. However you could make the exact same statement that you just made back in late 2007. Then 2008 came and the best thing that you could have done in late 2007, given Fairfax's thesis of overvalued markets, is to hold no equity whatsoever... including that of Fairfax. But you were relatively better off in FFH if the gun was put to your head to be in the equity markets.

Also, I don't mean to imply that today's underwriting results at FFH are entirely due to low interest rates. It must be at least part of it though is my thinking. Anyway, if you piece together the after-tax underwriting profit and investment income, the two tend to be intertwined. The industry would care somewhat less about the pricing of the insurance if they could make 4% on short-term money. But they can't make 4% on short term money so it must be having somewhat of an effect on their pricing strategy.

Higher interest rates will lead to softer industry underwriting pricing.

I know it seems funny to call better underwriting a "macro" in my edit, but I think the underwriting environment swings along with interest rates. So I'm lumping those two as paired realities, although I think Prem has articulated the view that industry underwriting does not yet gel with his low interest rate thesis (believe he thinks rates will be low for a longer time than people expect and they haven't yet come to accept it in their industry's underwriting pricing)

Although I said it does not really matter what I do, I sold my FFH today after reviewing the logic I applied last year. negative macro: Low interest rates (mitigated by better underwriting) positive macro: better underwriting (but low interest rates) capital gains (my negative view is that the hedges cut both ways -- they also hedge out gains) So upwards revaluation in the face of low compounding looks to be the bull thesis (actually, not "the" bull thesis but rather my own), but given what we've already seen as potential and actual lows in valuation this year and last, I feel like it's equal weighted perhaps at best either way. Just as much to lose from negative sentiment as to gain for richer valuation. I also have some VRX losses to soak up -- no tax due on the gain.

I have no reason to disagree with your logic. Full disclosure, I am a long-term FFH holder. The quote above is isolated because I am not in agreement that the same thing will happen again should FFH's hedges work out down the road. The reason is that things have changed from then until now. In 2008/2009, FFH was a one-trick pony in that they could invest. Their insurance results were sub-par. Now, their insurance are substantively better, very profitable. If the insurance operations continue, then I would opine that multiple expansion overall would take place and that any contraction as a result of a macro bet would be muted compared to 2008-2009. Stated differently, a company with mediocre operations but that kicked-butt on a macro bet is less valuable than a company with solid ongoing operations that kicked-butt on a macro bet. -Crip P. S. I hated for years the usage of "bet" when discussing Fairfax...I thought it misrepresented the hedging aspect. The tune has changed to an extent. It's true that underwriting results didn't look anywhere near as good back then. However... 1) the market put a multiple on the stock while also taking those sketchier underwriting results into consideration. 2) the market crashed and the price to book compressed along with it Correlation is not causation though. MKL's price to book also compressed. Berkshire's also compressed. Coca Cola's valuation compressed. It just looks to me like: 1) pre-crash, every company has a given multiple 2) during the crash, every company sees multiple compression Why would FFH be an exception this time when all other high quality stocks see compression in crashes? Well, you could argue because the hedges would be soaring, but yet that didn't prevent it from happening the last time around... Anyway... I'm not right, it's just how I view it.

I don't have any MKL. I went with FFH because it looked to be down near the low end of where it usually trades, and I sold it because it was up by the high end. Rapid revaluation -- it happened very fast and i didn't think something like that would happen... when it did I was just shaken up by it. I didn't feel like book value was going to compound at a high rate anytime soon because of the hedges, and if the hedges were going to be sold and working in our favor, it would come at a time of a big market dislocation. As I keep pointing out a thousand times, FFH's valuation (price to book) got compressed the last time the hedges worked out in a major way (2008/2009). So I thought there was no reason to hang around with a lofty valuation for a market crash which would make them drop the hedges, which I feared would lead to price compression anyhow (suppressing a good deal of net book value growth gains from the hedges). But I didn't really fear the market crash -- it was just as much the case that if a market crash never happened, then book value growth would still suck anyhow because of the hedges. And I have no idea if I was right, or lucky, or neither. Plus I felt nervous after making "hot money" so quickly that I reacted with the above logic, whether right or wrong.

I did buy FFH maybe a year ago, then I sold it into it's rally. Then I bought a smaller amount at $570.932 CDN (according to my IB cost basis which carries it out to 3 decimal points) over the past few months -- still holding. But I didn't mention that buy previously because it really doesn't matter what I do or don't do. In fact, it's probably mostly rewarding to not listen to my noise at all because except for like 3 or 4 times in 10 years that's pretty much the truth. Even then, I'm just amplifying what a group of other board members have already pieced together (I get it from them).

Anyways, it's not like we can't just buy MKL if we want a good underwriter that buys high quality businesses to hold for the long term. At least FFH offers variety.

It has been asked "at what point does the strategy change". Well, it changed several years ago when they bought JNJ, WFC, KFT, and I think USB -- I forget. At that time they said they were switching to a strategy of buying high quality businesses for the long term. Said that they've finally learned it makes sense and mentioned taxes as well. Since then they've invested in Blackberry among other things and I think they've sold every one of those aforementioned high quality "hold for the long term" investments. Sorry to be talking like such a bitch, but it's something I've noticed.

Dont think its fair to compare hedge funds with mutual funds. The more I think about mutual funds, the more I hate them as an investment vehicle. Almost impossible to generate outsized returns. Agreed. But Avenue Capital and Oaktree do offer mutual funds. The fact that some of these guys manage mutual funds probably saved their ass in 2008/2009. I presume they wanted to get more focused and concentrated in their "best ideas" but the mutual fund restrictions saved them from themselves.

Khloe Kardashian appears to have closed her short on her marriage with Lamar Odom. She's going for the whole bag is my guess -- he might not recover from that night in a Nevada brothel. She's going for absolute returns.

You should compare it against what a short position in the S&P500 would have done in the same period. Why? Last I checked, Einhorn reported his results based on absolute returns...an 8% return is an 8% return. Cheers! Probably not worth over-analyzing (after all, I don't want to take anyone's attention away from the VRX thread), but I think this sort of high single digit positive return like this on a short position is better than just the equivalent in a long position in some ways, because he was essentially paid that rate to borrow the money. It's pretty easy to get "paid" to borrow money in a long position... You just write a put. You now effectively have a long position by shorting a synthetic hedged short position.

Yes, that would be interesting. Might fit the large "value cycles" Rich Pzenea – a value investor who, by the way, has out-performed most of the value indexes for the past 5 years – has talked about for years. I will always associate Richard Pzena with his comment in November 2007: http://seekingalpha.com/article/55846-vic-rich-pzena-freddie-macs-the-cheapest-stock-ive-ever-seen "Freddie Mac is the cheapest stock I've ever seen" -- or something like that. This is a great insight: Fears in the market don’t necessarily impact FRE’s business but are impacting its stock

Before the crisis he was way ahead of the S&P500. Over the prior decade he had made something like 12% annualized vs 7% for the S&P500. Perhaps he did very well by buying up the discounted shares of various companies every time some little worry came along (the reason for their discounts to NAV were those worries). Each time the crisis never came, and he made a lot of money as the shares recovered. That works great until the "worries" du jour escalate into a full-blown crisis. Perhaps a study could be done of how value investors as a group do over periods of time where no true crisis ever fully develops (the group outperforms) versus periods when a true crisis comes along (they get crushed by buying a concentrated mix of the "cheap" stuff before the party really gets going!).