ERICOPOLY

They currently have about 50% of book value in equities. A 40% market drop (if their portfolio fell by the same amount) would hit their book value to the tune of 14% before considering the impacts of income and potential capital gains from the bond portfolio. Not really that bad is it? It sort of feels to me like they are emphasizing smooth returns over lumpy returns.

The other way to look at things is the index has recorded more than $300 in earnings since they went to 100% hedged. It has burned off, through earnings, more than 25% of the market valuation (the fat) since they hedged. So does that make $900 the new $1,200? Or is this the wrong way to think about it? They went completely unhedged at $800, and when it came back up to $900 they didn't use that opportunity to go fully hedged. Not until $1,200. But there is a lot of earnings under the belt now -- so how do they view those accumulated earnings in relation to where they would un-hedge?

There will be a time when consumer deleveraging will end. That's been a headwind this entire time. States have also been raising taxes and the Feds have done the same. Did they really "pull out all the stops"? I find that pretty hard to believe. In California a wealthy investor pays a 52% tax rate on mortgage bond income, and a 0% tax rate on municipal bond income. Can you guess which stop wasn't pulled out?

Three years from now that initial 1,200 S&P500 number will be 1,608 (growing it at 5% a year). 1,420 would be the equivalent mark where they can return to a 25% hedge position (dropping 75% of the hedges). Of course, that's if the market bounces around for another 3 years instead of plunging sooner than that. In summary, following their initial plan to hedge 25% at 1060, we can expect them to drop 75% of the hedges if the market is at 1,420 in 3 years (and not sooner). EDIT: And in 3 years time, the equivalent level for the 2009 low of 666 will be 1,069. I'm using 7% a year growth in that 666 number to account for the market trading at a higher earnings yield at the bottom in 2009.

Regarding turning Japanese, This guy says that in 2011 the Shiller PE was 37 for the Nikkei. I wonder if anyone reading this knows where to find the underlying earnings data for the Nikkei -- I am interested in looking them, but my web searches are just getting nowhere. http://www.rwroge.com/2011/06/world-equity-valuations-by-the-shiller-pe-ratio/

Thank you Ben! 1200 is much more consistent with the math that leads me to think a 30% decline in the market should be required to recoup all the losses from the equity hedges (1700 x 0.7 = 1190). Maybe Al is right and my math is wrong, but I still don’t understand where my error lies… Other very good points as well. :) giofranchi I think Ben is right as well -- it looks like it was only 25% hedged at 1060. However I don't follow Giofranchi's reasoning. Recouping all of the losses means losing a largely offsetting amount on equities -- what does that get you? Why is that exciting? The opportunity cost is baked in today. Call it the real cost of float.

Question: How much did the earnings of the Nikkei decline from 1990 to the present? Not the prices of the stocks, but the level of the underlying earnings.

I highly doubt it. They claimed specifically that it was the runup in stock prices, and gave no other reason other than continued "economic uncertainly in US and Europe". There was plenty of that uncertainty at S&P 800 in 2008 as well. I checked both the Q3 2009 transcript and the Q2 2010 transcript (can't find the ones in between those two). Given their reasons, they would not have hedged if the market had stayed at 800.

Let me put it to you differently... They dropped all hedges at 800 because: A) They thought the market would continue to fall B) Margin of safety at 800 and time to make some big money I'm worried if you answer "A". ;)

Again .. they are not terrified of a 20% drop but of a massive 90% swing .. where they will effectively get wiped out. Again... they dropped all hedges at 800 -- that's a 20% drop.

They were worried about it going much much lower than 800. No they were completely unhedged at 800. I forget where, but it was somewhere in the 800 range that they dropped ALL of their equity hedges. And yes, they made all those "1in100 year storm" comments, and "very few survived the great depression" comments a long time beforehand. Then the market rallies 25% and they go completely hedged again? It's not like 20% is a terrifying amount of market swing. That kind of decline can happen in any market. And then if it happens, it's only a 7% loss to them due to their 50% exposure and the tax thing. I mean, come on, I eat 7% losses for breakfast! (happens at least a couple of times a year).

I would like to qualify my statements by saying that HWIC are much better investors than me, and I make more mistakes than they do. However they're out there in the public and I'm not, so they get the analysis :D

Forgot to mention the role of taxes. The hit to book value would have been only 7% at 30% tax rate. Imagine... All this fuss over 7%. Giofranci estimates of growth put that at just under 6 months of earnings.

So if you consider that they dropped their hedges at 800 in 2008, and then put them back on at 1060, were they merely stressing out over a 20% drop back down to 800? That's only a 10% hit to their book value. In saving themselves from that 10% hit, they've suffered an even large hit looking at where they would be today verses where they actually are today.

I find that not making 25% gain due to fear is numerically identical to losing 25% due to crash. With Fairfax at 50% of book value equities weighting, this 25% loss is one arising from 50% decline in the markets. Going back to 1060 on the S&P500 when they first put on the full hedge, you're talking about 530 on the S&P500. Way lower than where they dropped their hedges in 2008, and quite a bit lower than the 2009 absolute bottom of 666. You find yourself in the present with a given degree of capital that came from the past years of compounding. Did you make mistakes that you are unaware of (errors of omission), that cost you 50% of your capital? Or are you only counting losses that you are aware of, where it is obvious (errors of commission).

Well, GreenlightRe, with Mr. Einhorn managing a value long, short investment program, had a positive investment return in Q2 2013, while practically every bonds portfolio suffered losses due to increased rates. giofranchi Are there any quarters where Mr. Einhorn's strategy underperforms bonds? I'm sure it's not such a slam dunk that one quarter of data suggests.

"If Watsa is right and equity markets begin to unwind, these big unrealized losses will quickly turn into big-time gains. " The thing missing is that the equity portfolio will have losses to match those "big-time gains". There won't be any "big-time gains" until the markets rebound after they've dropped the hedges. I know,... it's technically only a wash, but they protect their company equity base in a sever market crash, while other insurers will be less fortunate. From another perspective,... shareholders are not receiving the returns on the equity portfolio, but are effectively receiving the delta between HWIC's returns and the overall market which can be of course very volatile over the short term. As of June 30, 2013, they have a cushion of over 29% or $7.5 billion in cash and short-term investments to take advantage of market opportunities. I thought you still own some FFH, that you bought some months ago with your portfolio margin. I sold FFH when I bought MBI. I haven't bought it back yet. I feel like they could buy bonds instead of investing in equities via delta hedging. Maybe it has to do with the difficulty of getting into and out of their positions.

"If Watsa is right and equity markets begin to unwind, these big unrealized losses will quickly turn into big-time gains. " The thing missing is that the equity portfolio will have losses to match those "big-time gains". There won't be any "big-time gains" until the markets rebound after they've dropped the hedges.

LOL! Should have picked "NOEMISHN" or "0TO60N4". I'm sure the boardmembers will have other suggestions. Cheers! WATTBOY was another that I figured somebody would get riled up over. Same with TSLMIST.

The plate "WATTSA" is available in California. I am presently mulling over a list of plates on the California DMV website. I decided WATTPWR might get me murdered and thrown into a ditch, so nixed that idea. Purchased "NOFILLR" a moment ago. There we go, that's not going to offend anyone. Reference to "All Killer, No Filler". Very fitting plate for such a bad a** car.

I take it this means you had it delivered? Was it everything you hoped? Any negatives? Driving down the 101, one female driver pulled alongside us to say "that is a very sexy car" (we were moving at 5 MPH in accident-induced traffic just north of Salinas). I've never in my life had that happen before. So off to a good start! It is very quick. Glad I bought all of the options. Great sound package.

I took these guys for a ride in my new car. Snapped this photo as they were walking away from the vehicle: http://rotq.files.wordpress.com/2010/09/spies-like-us-movie-image-1.jpg Say no more.

I'm a 3/4 mile walk to the Pacific Ocean. Quite a bit more expensive than solar panels, but very effective.

We use a variable speed on our pool. For proper circulation to run salt chlorine generator, skimmers etc. It consumes 400-450 watts and runs 24-7. (regular pool pump uses 1,000 -1,500 watts) The math shows a payback of 2.75 seasons (that s a 5 month season in Ontario) of use. Then the pump is free amd the savings are profit. The free options you get with these is pump will last a lot longer at lower operating speeds, savings/profits increase as rates increase and they have some good built in safety features. They re a no brainer. Currently I have a single speed pump that draws 1,400 watts. It has been running 8 hours a day over the past year and we have crystal clear water. I recently (last week) cut it to 4 hours a day, just to see what would happen. Thus far, the water is still clear and this is the peak season for pool temperature. The only catch is that we need to circulate water through the solar heating system or else it just sits there idle and doesn't heat the pool. It's not a no brainer for us because of the following math: 12am-6am: 9 cents per kWh 10am-6pm: 47 cents per kWh all other times: 27 cents per kWh So... a quarter of the time the energy is 9 cents cost. Then for a third of the day, the cost quintuples! And the rest of the time it triples. So a variable speed pump that runs 24/7 at reduced power might not be as cheap as you would otherwise believe. Except for us it might still make sense due to the solar hot water system.

Thanks for the idea. The problem with my idea of running the pool pump only at night is that I have a solar heating system for the pool. It sits on the roof of the guest house. So we still need to run the pool pump during the sunshine hours to take advantage of this otherwise free heating system. Unfortunately that's when the energy costs 47 cents per kWh. I think a pool pump capable of circulating that water shouldn't need to draw more than a few hundred watts (it only needs to run at low speed). My Roadtrek RV van has a 700 watt Tripp Lite inverter/charger that detects when AC "shore power" is present (when you plug it into the grid). At that time it switches from battery to grid power automatically, and it charges the batteries as well. Then when you unplug the van from the grid, it automatically switches back to battery power. So I figure all I need is one of those inverter/chargers from Tripp Lite, and a bank of deep-cycle batteries just large enough to run the needs of a low-power pool pump. Then I plug the pool pump directly into the inverter. So this doesn't need to be a huge bank of batteries -- just enough to run a low speed pump that will circulate the water through the solar hot water pool heating system. And then I plug the inverter/charger into the grid -- then at the plug I put something in between that acts as a switch to disconnect the power between 6am and 12am. Thus, it only gets grid power between 12am and 6am. Those timer switches are inexpensive -- I think we have something like that for automating Christmas lights. This should be pretty cheap and easy to do.