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This is pretty well described in The Snowball, but it helps to see the annuals from the time. He was paying in the $40 region initially, when he first started accumulating in 1964. They earned $2.69 that year, or about $12.5 million, so he was paying right around 15x, as someone mentioned. I believe the low was $35, which would have been a market cap of less than $160 million in 1964. But it took him a few years to put the full $13 million in. Alice writes that I took until 1966 for him to get 5% of the company. By then, Amex was earning $4 a share or about 19 million. So by the time the market cap had risen to 260 million, the price he was paying remained in the 13-15x sort of range. And as we know, Amex was growing at nearly 15% per year, with a fairly unassailable franchise. Diners Club, Citi, BofA and others had tried to attack them and Amex still had dominant share in credit cards and travelers' checks. Despite charging premium prices all along for both its checks and its card. So by 1966, it would not have been hard to argue Amex was worth something like $500 million, and Buffett had accumulated his stake at a market cap ranging from 150-250 million. The value was increasing every year. The key insight was that Amex would continue growing the value of those franchises, while paying out much of its earnings in dividends, for a long long time. And that was a correct insight. Cha-ching!

Hmm, I'm not sure I understand this. How does switching their stock positions into total return swaps relate to the cash they've been losing on the short index swaps? I apologize if I'm being thick as a post. Total return swaps are legal agreements to exchange cash flows from two items. In Fairfax's case, they are paying the return on the Russel 2000 index (and will receive the return if it's negative) and are receiving payments on the financing leg of the swap (likely to be th 1mL or the 3mL rates plus or minus a spread). I don't know the exact specifics of the swaps, but it's likely that they result in either monthly or quarterly cash outflow for Fairfax as the index appreciates. The financing that Fairfax receives on the opposite side if the swap isn't going to be anywhere near the outflow on the index side so they need regular cash flow coming in for these payments. Fairfax could regularly sell shares to cover this monthly/quarterly outflow, or they could enter into monthly/quarterly swap agreements to receive the return on the underlying stocks. This would result in cash flow coming in every quarter which will partially offset the cash outflow every quarter. So they're just matching the cash flow mechanics of the short bet- gotcha. Thanks for your help.

Hmm, I'm not sure I understand this. How does switching their stock positions into total return swaps relate to the cash they've been losing on the short index swaps? I apologize if I'm being thick as a post.

Just to follow up - do you, or does anyone know why they made that choice? And secondly, are they allowed to write insurance against that capital as those positions appreciate? One of the reasons Buffett likes to hold those big positions for a long time is to build up the deferred tax account, which becomes a sort of equity-like capital if he never sells the position. So I'm just wondering how this move affects Fairfax's ability to do the same. (I believe this was part of their stated rationale when they bought those stocks four or five years ago.)

Thanks Grenville. There's my answer.

Hi guys, I noticed Prem sold half of the JNJ position recently, as reported in the 13F. But when I compare the 13F's to Prem's own reporting in the annual letter, I get a huge disparity. In the annual letter, on page 8, he says that at Dec 31, 2012, Fairfax held 12M shares of Wells Fargo, 7.4M shares of JNJ, and 10.1M shares of US Bank. But the number of shares reported in the 12/31/12 13F filing for each of these positions, especially for the banks, is not even close. (http://www.sec.gov/Archives/edgar/data/915191/000119312513059881/d487003d13fhr.txt) Can someone explain why that is? Are the shares held in a subsidiary or group of subsidiaries that do not have to report as a part of the 13F? If so, why do those shares not need to be included? I notice that all of their Blackberry shares, for example, do show up in the 13F. What is the difference? Thanks for your help. I am sure I am missing something obvious.

Do you remember if Charlie said this in a meeting or somewhere else? I have it in an OID clip. It's from a Wesco meeting. Here's the quote: (On the idea of the 20-punch card) "But that doesn't mean anything to people. They can't believe it. Nobody does that. But Warren wasn't kidding when he said it. And I'm not kidding when I repeat it. I think it is literally true that you would do better by only making 20 investment decisions in a lifetime -- assuming that you're a smart, disciplined person -- because you would really think very hard about each one and you'd be loading up fairly heavily on the ones that you knew most about. And therefore, you would do better."

For what it's worth, Charlie Munger has said (I'm paraphrasing, but it's close.) "Warren has made this analogy about the 20-punch card to business school students, and I agree. I literally think you would be better off only making 20 investments in a lifetime."

Buffett may agree with you, for all we know: http://fundmanagernews.com/buffett-microsoft He flat out said on CNBC this morning that he thinks MSFT is attractive but won't buy any or let Ted or Todd buy any as well, because of his relationship with Billg.

Probably owned it on the TSE, wouldn't be reported in his 13F.

This would be my guess. Few know those institutions as well as Bill, if you remember his recapitalization plan back in 08/09.

Bingo.

Again, don't put words in my mouth. I never said BAC common was dead nor did I say it was a bad investment. I simply said a preferred investment is completely different than a common investment and can't just be looked at as very junior debt in a massively levered financial institution. I will repeat: In the case of a 2008/2009 scenario, common equity holders were hosed while pref holders never lost a penny. I apologize for putting words in your mouth. But all I'm trying to show is how tough it actually is to kill the common stock at $8. And if you can't kill it... Let's be cautious in comparing 2008 to now. As Buffett said this morning, the circumstances are no longer the same. I would agree with you that the preferred is not common. It's not the same. But I disagree about what that implies in Warren's thinking. (That he is too worried to take a common position, but OK with preferred.)

Not sure I understand this. If he had bought the common, what exactly would be different? You keep saying "free look" -- well, it's not a free look. He's assuming $5B worth of risk in the preferred. The preferred doesn't have risk you say? Then how does the common? What is the scenario where the preferred remains intact and the common implodes, and how much faith do you think Warren would put into it? Preferred may seem like debt, but it's very junior debt. Preferred DOES NOT EQUAL common. In 2008/2009, if you owned BAC or C preferreds, and held, you didn't lose a penny. If you owned the common, you'd be down HUGE due to the massive dilution that came. WEB knows that if we get into trouble again, before nationalization or "bankruptcy" (will never happen but whatever), they would convert the public preferreds to common just like they did last time with Citi. I can't stress enough how much safer/different a bank cumulative preferred stock is vs. the common given the history of the 08/09 crisis and how it played out. So you are worried about dilution. Read my post a few spots up, or just do the math yourself. Assuming BAC can continue to earn its current PTPP level -- I'm not giving them any credit for improvements in earnings -- how much dilution would it take for the common to be really, truly, impaired? And what is the probability that they will need to dilute that bad? Assume they balloon to 30B shares. That's $.50-$.60 of earnings power. Is BAC common dead in the water? You (and many of the bulls on this board) assume they can raise capital at $4+ a share in a bad market scenario. Who knows what could happen. I don't think its likely but if the S&P went to 800 or 900 and BAC goes to $2, the capital raise would be substantially more dilutive than you think. OK, let's do $2. In my 30B shares out scenario, that gives them another $40B in capital, in addition to the $5B they just got from Warren. Their CCB stake is probably worth way more, but let's say $10B. That's $55B in capital to cover losses, and they're earning $.50/share. Is BOA common dead?

Not sure I understand this. If he had bought the common, what exactly would be different? You keep saying "free look" -- well, it's not a free look. He's assuming $5B worth of risk in the preferred. The preferred doesn't have risk you say? Then how does the common? What is the scenario where the preferred remains intact and the common implodes, and how much faith do you think Warren would put into it? Preferred may seem like debt, but it's very junior debt. Preferred DOES NOT EQUAL common. In 2008/2009, if you owned BAC or C preferreds, and held, you didn't lose a penny. If you owned the common, you'd be down HUGE due to the massive dilution that came. WEB knows that if we get into trouble again, before nationalization or "bankruptcy" (will never happen but whatever), they would convert the public preferreds to common just like they did last time with Citi. I can't stress enough how much safer/different a bank cumulative preferred stock is vs. the common given the history of the 08/09 crisis and how it played out. So you are worried about dilution. Read my post a few spots up, or just do the math yourself. Assuming BAC can continue to earn its current PTPP level -- I'm not giving them any credit for improvements in earnings -- how much dilution would it take for the common to be really, truly, impaired? And what is the probability that they will need to dilute that bad? Assume they balloon to 30B shares. That's $.50-$.60 of earnings power. Is BAC common dead in the water?

Not sure I understand this. If he had bought the common, what exactly would be different? You keep saying "free look" -- well, it's not a free look. He's assuming $5B worth of risk in the preferred. The preferred doesn't have risk you say? Then how does the common? What is the scenario where the preferred remains intact and the common implodes, and how much faith do you think Warren would put into it? Preferred may seem like debt, but it's very junior debt.

At the time I don't remember any of them offering that type deals then. Now it has become more common like GE, Goldman. He does have the option to convert into common of BAC though. Will he keep it long term after he converts? I doubt it because he is so into WFC. The point is would he have made this investment if he thought there was a huge downside so he couldn't get his money back or convert eventually? I don't think he would have no matter how sweet a deal he was getting. Option to convert? Huh? The warrants and the preferred are two separate investments. And the warrants are 10 years in length! He won't make any exercising decisions till 2021. I'm gonna guess it will be a pretty easy decision by then to see if they are well in the money or not. Re: Wouldn't make the investment if he thought there was huge downside, agree. The risk of impairment to preferred shareholders is almost 0. But all of you that are common equity holders, it's much, much different. How different is it really? If Warren was truly worried about a series of events leading the BAC's common being worthless (i.e., a bankruptcy or gov't takeover a la FRE/FNM), do you honestly think he'd have made a preferred deal? Would he want to be exposed to the company in any part of the capital structure? It makes little sense to me to say that Buffett's investment in the preferred is somehow less meaningful than an equivalent common stock purchase. He got a better deal than buying common outright, but that doesn't mean that he lacks confidence. If he did, he'd not have called Brian Moynihan and asked to invest in his company. What is the scenario where the preferred is a nice purchase but the common implodes? Are we worried about dilution? Even if BAC ends up with 20B shares outstanding and only earning the current $33B PTPP, that's probably still $18B or so of net income, or $0.90/share on the current $8 share price. Not too bad.

I'm not sure I understand this. I mean, I get why the CDS spread and the interest rates for the underlying credits would move in the same direction. But why is it the case that the corporate bond market actually prevents CDS spreads from getting out of whack on a temporary basis? Is it because there is some sort of rapid arbitrage going on? Does anyone who has actually traded a CDS want to chime in? Yes, you can arb it. But I'll let someone who actually trades CDS corroborate this. You can arb it with a basis trade. One basic example is, if the CDS protection is selling "too cheap," you buy the underlying bond and buy the CDS protection, lever it to high heaven, and collect the difference no matter what happens. (Because whether they default or not, you're made whole.) This is the "negative basis" trade - the CDS spread minus the bond spread is a negative number (you can do a positive basis trade but it's harder because you're shorting the bond). The trade is complicated even without leverage: technicalities of a "default" w/r/t the CDS paying off, interest rate exposure still exists, counterparty risk, etc...but you can do it. So there is active arbitrage that usually keeps the spreads on the bonds and on the CDS protection tight. But both the price of the bond and the CDS are still set by market forces, which means anything can happen in the short run if you have forced buying or selling. For example, during the crisis, the basis blew out for junk bonds, which means if you had a leveraged position in the basis trade, you were in trouble. Here's a good chart: http://www.acredittrader.com/wp-content/uploads/2009/03/basis1.jpg So yes, you can arb it, but there's no free lunch, and there are circumstances where the spreads do not move in lockstep.

Ericopoly, what do you think AIG is worth? More than its book value of $50 bucks a share? I bought a very small position today. I haven't had the time to study the company because of work (hence the little position), but I thought if Berkowitz is willing to pay in the 40s, what the heck. Most of AIG's stated book value is not tangible. Barrons explained it last week: "The $58 billion of AIG shareholder equity includes more than $42 billion in preferred stock issued under the Troubled Asset Relief Program (TARP). That preferred, owned by Uncle Sam, is senior to AIG common. Take it out, and AIG's common equity falls to about $15 billion, or $21.80 a share. The $21.80 figure is buried in a footnote in the second-quarter financial supplement as "book value per share assuming adjustment to AIG's shareholders' equity for U.S. Treasury equity investments." Then there are some intangible assets, including $6.4 billion of goodwill and about $14 billion of a "prepaid commitment asset" linked to the government financial backstop for AIG. This will be written down by $5 billion in the current quarter as AIG reduces its $44.8 billion of Fed borrowings by giving the Fed equity stakes worth $25 billion in its two big international life-insurance operations. Strip out these two items and AIG would have had negative tangible common shareholder equity of $7 per share at the end of the second quarter." Careful. The article you referenced is from September 2009 and its points no longer apply. Here is a link: http://www.smartmoney.com/invest/stocks/aig-still-no-port-in-this-storm/

...He doesn't like convoluted financial statements. Even when Enron was soaring, Mr. Lampert said, he was not interested. ''Complex financials don't necessarily mean there is something wrong,'' he said. ''But if you don't have a clue, why invest?'' -NYT 2002 "Big Returns, Minus the Pleasantries"

I'd like to add a few things...just some points on things that have been said and so forth. Let me say up front I don't mean to offend anyone, everyone has opinions, and the facts have definitely not been settled on when it comes to nutrition and health. 1. Anecdotes have no place in good discussion here. I know, I know, your Uncle John lost weight eating nothing but etc. etc. But the most important factor in how much body fat you will store, how insulin resistant you are, etc., is individual variation in genes. We all know people who eat horribly and stay thin and people who eat wonderfully and can't lose weight. Looking at what works in large numbers of people is far more important. By all means, I am very proud of anyone who manages to get healthy, and please tell us your stories. But be careful mixing anecdotes with empiricism. 2. As someone mentioned above, one of Taubes' great points was to ask if maybe we get fat not because we eat too much, but eating too much is a symptom of getting fat. If your body has a process that is causing it to store excess fat in cells, the rest of your body is likely being deprived of the energy it needs to function. Thus, you eat more to compensate. To the onlooker, it looks like being a pig is causing you to get fat. In the Taubesian view of the world, our resistance to insulin (usually caused by diet, occasionally genetic) is this "x-factor". We're just blowing the causation. 3. I'm not dumb enough to argue that one can't lose weight temporarily by becoming a marathon runner or eating 500 calories a day. Of course. But these are not workable diet solutions to keep people thin over time. Over and over weight-loss studies (and meta-studies) prove that starvation diets don't have any long term effect on their participants...and yet we keep doing them. Again, viewing overeating as a symptom rather than a problem of willpower is the mental trick needed to get over this hump. We all know the central role hormones play in fat storage and distribution (women and men store fat very differently for example, due to hormones) and yet when it comes to fat loss, we decide it's not important...willpower is! 4. Regarding vitamins and minerals. There seems to be considerable evidence that we'd get all the vitamins we need in the meat we eat, but it is this insulin-caused Syndrome that keeps us from absorbing or using most of it. The Western solution has been to add more vitamins (the multi-vitamin supplement is born), when the real solution may be dropping most of the carbs. 5. I will concede that there is still argument about different types of carbohydrate maybe being far worse than others. High levels of fructose may be the root evil here (present in HFCS, sugar, etc.), but it's not decided yet. I lean towards believing wheat based products are also bad, given their recent development in human evolution and a lot of other dietary evidence. Taubes presents some interesting case studies about indigenous popluations going from thin to not-so-thin immediately after introducing wheat flour into the population. 6. On exercise. I love to exercise and I would recommend that everyone does so in whatever form the enjoy most. It's a healthy habit. But I do not think it is the road to weight loss, contrary to popular belief. We all accept the notion that we "work up an appetite" when we work hard, no? So why does it make sense to work ourselves into a state of hunger while we're trying to lose weight? Again, the body will do its darnedest to replace that lost energy...you'll either eat more or be hungrier, neither of which are conducive to losing weight the traditional way (cutting calories.) In the end, what we need to be most concerned with is what works in the real world. Not what should work or what we believe works, but what does work. I don't believe starving ourselves thin works...it's not sustainable. If we're going to talk about good diet needing to be a lifestyle...I don't see how starvation is a viable lifestyle option, and it seems the 99% of people who are failing on starvation diets agree. And one doesn't necessarily need to cut the carbs to zero to make it work. It will probably accelerate the process of reducing your insulin resistance, but even cutting out the most glycemic ones at first is a good idea - the sugars, juices, chips, pretzels, etc. Doing that and really moderating the rest of your carb intake (in favor of fat and protein) will probably do most people a favor.

This is good advice. I hope people start to understand how wrong the "eat less, move more" idea is...a very destructive piece of common wisdom. Your body works like any other homeostatic system - if you starve it, it will try to replace those calories. Expending more energy on the same level of calories or cutting calories on the same level of energy expenditure are both forms of starvation. Doing both...it's no wonder why they're called "yo-yo" diets...the body can only be starved for so long before it gives up. On the other hand, if you stop poisoning your body with insulin (released to process the carbohydrates you eat), it will be much happier and stop storing all that body fat! Someone asked how to get their triglycerides down....it's all in the carbs. Our body is not adapted to the type of carb-heavy diet we eat today. One of my favorite points by Taubes are the populations on the earth that literally eat all fat and protein -- lots of saturated fat, very little to no veggies -- and are perfectly healthy (i.e. the Inuit). Tell that to your average nutritionist and they'd be the ones having a heart attack. If you have to choose between the two, read Taubes' newer book. It's more to the point. The funny thing is people realize that sugar is not good for them, and highly processed food is also not good for them. And yet we seem to think whole wheat bread and pasta are "healthy" food, and eggs and steak get villified. What's that Charlie has to say about raisins and turds? That's how I feel about modern diet advice.

Fairholme's investment operation is two people - Bruce and Charlie. $25B and counting!

I would disagree here. If there is such a thing as "information edge" in this day and age, you could argue that Bruce finds it. I say this from having followed him for a number of years and kept track of all of his interviews and articles and so forth. He is a dogged information-gatherer. Of course, he couples that with extremely good judgment. But I wouldn't rule out his informational edge either.

I would agree with Sanjeev. I don't think he would put Ajit as the CEO of the non-insurance businesses...Buffett is well known for his preference to let .400 hitters keep batting in their usual spot in the lineup.