Partner24

By the way, I appreciate your initiatives Sanjeev! It's good to see that you are very open to the suggestions of the board members. Sincerely, Partner

It looks like you rate the person overall rather than rate the specific post. I'm not sure I'm confortable with that. I might well like a post, but if it's from someone that I don't know enough, it would be more difficult to recommand the post (like we used to do on MSN board). It was a great tool to gather feedback and to track interesting threads. This new feature is very different from the old one. I'll probably vote against it next time you post the poll. Cheers!

Why not? :P

Well, like I said earlier, one aspect of my daily job is online marketing. Actually, I have both "Google qualified individual" and "Microsoft Ad Excellence" certifications. So I think it's fair to say that it's fairly inside my circle of competence. Let me give you some short comments. Google is, in the online search and content advertising fields, the leader. Regarding search content, they have criteria that make sense to provide relevant "organic" (not paid) results to people who use their search engine, and they do it fast. When people type keywords on Google, they hope that they'll be able to find what they are searching for fast enough. As long as Google is able to do that job better than the other search engines, they should be able to keep their search volume, because they already have the mindshare asset. Now, they bare the fruit of this asset by providing paid results (AdWords) to people. The ways they use to determine how paid results will show up in the overall results is also brillant and sensible to the end user. It's basicaly a keyword bid system, but it goes further than that. It's also people who do the search that will tell you how you rank. If they don't click on any of your ads because they are not relevant to them, even if you bid very high for they keywords, you'll probably end up at the very end of the results. It's a win (user) -win (Google) -win (advertiser) situation system. Regarding content, they have a very wide network of websites who use Google content to advertise and get paid on clicks. Google scan content of websites to provide relevant ads to visitors. When visitors clicks, the owner of website get paid, Google get paid and the advertiser get qualified leads (if he advertise properly). Since Google has a lot of advertiser, it's a good idea to do business with Google. Since Google has a lot of websites owner's as partners, it's a good idea for online advertisers to do business with Google. It goes even further than that. Google has terrific tools. Unlike traditional medias, with Google you can segment like no one I know. It's a little bit like Yellow Pages in some sense. You can choose your keywords and only show your ads when people type those keywords (let's say that you sell hot-dogs. It people in your locality type "hot-dogs restaurant" on Google, it might be a good idea to show up. If they type "south korean gymnastic", maybe your ad budget wouldn't be well spended if you would show up there. You can also segment locally. You may want to target several countries (not a good idea if you're a local hot dogs restaurants), your country, a region, a town or even some specific spots on a map. Google allow you to do that!!! Same thing with content. You can choose the keywords, the specifics websites, the geography, etc. Google has some other great tools, ads features, etc. but I'll stop here. Suffice it to say that they are the leaders in that field. It enjoy a very significant moat that bare some juicy fruits for it's owners. But that's not to say that it is necessarely a durable moat. Microsoft is very agressive in that field and they do a good job. Far from being Google, but I see them as challengers. And who really knows what this field will look like in 10 years? That's the point where I get less confortable with Google. It's not like boring insurance you know... Now, Google as an investment. For those who have red "From good to great" terrific book, Google might be a good case study of what not do to regarding focus. Google tries a lof of new ventures and I'm not so confortable with that. To me, they should invest time, energy and money on where they core competences are (I guess they do that), but leave the extra cash to the shareholders (they do not do that). I guess Peter Lynch would call that diworsification. So I'm not confortable enough to invest in Google. Cheers!

No one can say if gap between the trade value and the intrinsic value of FFH will end soon. It will happen one day, but I can't say precisely when. What always has to remain the priority is to value the business and see if the margin of safety is attractive enough to buy. I've made that calculation and bought some common shares today. To me, FFH trade something like 6-8 X normalized earnings per share (my own math) and I think that it should trade at 10-12X if it was at full intrinsic value. Add to that that it could be able to compound it's intrinsic value per share at a 12-15% CAGR over the next decade, plus a little dividend, and the total return might be higher that what I expect from my portfolio. Value price right now. Reasonable expected growth for a long period of time as a bonus. Just the way I like it to be! 8)

So do I. After all these years, Fairfax is still cheap. Nothing remains cheap forever, one day or another FFH will be trading at a fair price. Cheers!

I was referring to the ownership of the bond. By banning CDS, you are essentially denying my right to write an insurance policy against my own property (the bond.) By requiring ownership of the underlying security, you largely mitigate moral hazard. I agree. But recent history tells me that sooner or later, it will go beyond that and people with bad intentions will come in. I remember a group of obscure people who said on long articles that basicaly Fairfax was bull******* about their tax liabilities and, oh, in the end of their articles, they said something like "we own some CDS against FFH default". What a questionable behavior! If you want more examples of using some tools that are potentialy very moraly questionable, see: deepcapture.com Fairfax lawsuit posted on 26-07-2006 etc. On the liberty point: (a) Trust and the use of insurance. Insurance against an event isn't about trust. It's about recognizing that there are probabilities of huge events that are incalculable. Well, if I would get a big payout if an event that would create a damage about I shouldn't basicaly financialy care, I would get an incentive to directly or indirectly "help" for that damage to happen. I'm not talking about a 5$ bet about the issue of a football game here. I'm talking about billions and billions of dollars bets against the default of companies that have collectively hundred of thousands employees. If you insured your wife's wedding ring, I am sure it wasn't an indication that you don't trust her. Well, if it was the contrary, I would be financialy stupid or simply insane. ;) It was simply a recognition that sometimes "stuff happens" that you can never see coming. Yes, but again, to further extend my point, if I would be compensated a lot if my neighbor wedding would end up in a divorce, that would create an uncomfortable moral situation that I wouldn't want to get involved in. But, well, Wall Street like these kind of things and some of them actually "help" get some bad things to happen if they get compensated for that. You can say that you can simply ask for better price on the bond to compensate you for that risk but I'd say that CDS-type instruments are designed to protect against some risks that some people can't price accurately. If they can't price it accurately, why buy them in the first place? At least, they should ask to get directly compensated for the "unknown" risks, or otherwise just say "no" to the offer. (b) On the lobbying point, it's a very logical point but lacks enough practicality for public policy in my view. You can very well argue that we should ban, instead of regulate, CDS to prevent lobbyist manipulation but if you believe lobbyist manipulation is so strong, then how do you propose to pass that ban? I'm no expert on how to pass legislation in the U.S. I just hope that, after more than a trillion of U.S. taxpayers money on the table, the timing is right to pass this kind of things, because if it is not, when will it be? Regarding the practical point, if I do not allow them to have any active grenade in their house (but they can go ahead with G.I Joes plastic grenades filled with water), probably that they'll find another tools to have fun and lobby with. It's not like they haven't anything else to use their clients money to speculate with. Lobbyists for financial firms will allow an outright ban on CDS when Hell freezes over. They might, however, be able to accept regulation. Well, like I said before, it is not like after a trillion of taxpayers money on the table because of their lack of prudence, they are really well positioned to ask for, allow or accept something before regulators get things done. But if regulators don't act now, what will they need to do to so? Now it's the perfect timing, not in 20 years. Cheers!

What's within my circle of competence? Frankly, just enough to be happy with my investement universe of choices. First of all, I can fairly say that finding good to great investors at insurance, diversified conglomerate companies, mutual funds, etc. is within my circle of competence (100% of my personal holdings are there). Online marketing and ticketing software is also fairly within it (it's my daily job). Restaurants, retail, food and other basic industries like that are also reasonably within. There is also others that are reasonable within, but give me 5 minutes to study any company and I should be able to give you more than 9 times out of ten an answer and I keep working on shorten the time needed to do so. And you? :)

Ownership.....ownership of what? I basically call this moral hazard tool: " "Unjustified speculation about someone else credit risk where I shouldn't give a damn" This as nothing do to with real ownership. I own my car, I own my stock certificate, etc. but a CDS is a very speculative tool that has barely a thing to do with capitalism ownership. By the way, I would like to say that I own my wife, but please don't tell her because she'll give me a slap on my head ;) Regarding your bonds point, I would basicaly say yes, but: - first if you don't trust the credit of a given company, don't buy the bonds, and if you do, but don't think that the yield compensate you for the risk, ask for better terms or keep searching for something better elsewhere. - second, even if you don't think that the first point is something rational, if you allow CDS to exist just on that basis, sooner or later lobbysts will deregulate that, so you'll see very bad behaviors again with some very bad consequences broadly speaking. Liberty...liberty of what? If I sign a contract with terms that say that if my neighbor goes bankrupt within 3 years, you'll give me one million dollar for a 5000$ premium, the Civil Code of Quebec would tells me that it is probably against public order (and rightly so), so my contract will be invalid (I've never seen a foolish contract like that in a court case, but very likely a judge would conclude that). It should be exactly the same with Wall Street. Economy and capitalism don't need these kinds of foolish tools to prosper.

I never bought WFC, even if I was really tempted at near 8$, because it is OUTSIDE my circle of competence.

Absolutely. I agree with his 100% elimination opinion. It's like having a life insurance policy on your neighbor's life. I creates a moral hazard that is not acceptable. You should argue that it should be allowed for collateral of corporate bonds (it's like a insurance policy against a company's default in wich you hold bonds), but it wouldn't take long to lobbysts to put pressure on policy makers to deregulate that, so history would sooner or later repeat itself. So 100% elimination is a good idea.

Very straightforward, fluent and comprehensive review of where they are and what they do expect for the next 3-5 years. I don't remember to have found a particular piece of new information that would be worth sharing.

Mungerville, I think that a lot of value investors in 2008 learned the hard way that your margin of safety doesn't rely only on the price to ACTUAL intrinsic value. A solid ark and a full of hole's boat are two very different beasts to consider. Congragulations if you paid 30 cents on the dollar, but if your dollar is truly worth 20 cents now, what the heck? You should wish to have time on your side. In Drummondville, Quebec, where I live, 100 years ago, some people used to take ice on the St-François River in the end of winter and sell it all summer long. I've seen an old picture of an ice merchant not too long ago. But then came freezers...

Mark to market....bla bla bla... Can we agree that, as long term investors, we do not care about mark to market too much, but rather focus on intrinsic value gains and losses? Abitibi have so far been an overall intrinsic value mess (IMO). Not even a cigar butt. It might be a rude comment, but I've always tried to be as fair as possible in my comments. While munis bonds like the ones who are garanteed by BRK are high quality ones, who have been bought on the cheap, it's fair to be hopeful that it's a great investment decision? Price is what you pay. Value is what you get. There is pros and cons in this quarter, and we need to be sober about them. Cheers!

And since the reserves-to-equity ratio is more lower at Alleghany than a lot of their peers, probably that you cannot consider all the Burlington Northern investment as part of their float. Furthermore if Burlington was going to zero, it would not be the end of the world for Alleghany (Burlington 31/12 position at actual value weigh for more or less 10% of their equity and, by the way, Alleghany had NO corporate debt at the end of 2008).

Regarding Y american stock holdings, you can also check at: http://holdings.nasdaq.com/asp/OwnerPortfolio.asp?FormType=OwnerPortfolio&CIK=0000775368&HolderName=ALLEGHANY+CORP+%2FDE

If you ever get the urge to share your other two positions, I'll be listening. Well, I would not want to share all my holdings openly, but you can check your emails. Cheers!

Very interesting charts. Thanks Viking!

Mungerville, You ask a great question. When I study P/C insurance businesses, I basicaly like to find two things: - A good and conservative underwriter - A good investor ...and frankly to find both of these his hard!!! So, FFH/ORH are on that list, but mostly on the investing side of the business. I give an "ok" to FFH on the insurance side of the business. MKL is on that list too. But granted they are not the cheapest. I estimate that they have a price of approximately 10X normalized earnings yield actually and I estimate their intrinsic value per share of 500$ that can grow by 12-15% CAGR over the next decade. I follow Alleghany too. They got more involved in insurance in recent years and seem to have produced decent returns. To me, they are good investors, but not great. They had some subprime stuff in their assets and their portfolio holdings are ok. Their biggest investment by far is Burlington Northern. Alleghany was involved in railroads a lot some decades ago. I never bought shares because I always preferred FFH and MKL. Regarding WRB, it's a very good specialized underwriter. But not a very good value investor. I like the idea of a company that can grow it's float profitably AND invest the float in a astute way. So even if I follow them because of their underwriting expertise and insight, that's not the case with their investing. So I prefer FFH and MKL. There is WTM. I'm not a big fan of them since Jack Byrne is gone. I still follow them from time to time, but to me they are not in the FFH/MKL category. There is also Flagstone Re (managed by the Mark Byrne) but it's history is short and I'm not so sure about their investing style. So, there is some very interesting underwriters that I've seen so far, but the list of very good investors is very short. How many saw the storm coming like FFH and were as much protected? I don't know a lot. How many sold some of their treasury bonds, hedges, etc. and bought stock on the very cheap and very decent yielding munis garanteed by Berkshire? To me, that was brillant. I keep searching for interesting insurance businesses to invest for the long run, but in the end, I compare them to FFH and MKL and to me the bar is quite high! You'll see other insurance businesses that are better underwriters than FFH and are quite conservative, but great investors too? Not necessarely. MKL has a terrific corporate culture, I trust their managers a lot, and Berkshire is a very strong inspiration to them. Their portfolio management basic policy makes a lot of sense. They invest policy holders money in mostly high quality bonds and match the duration of it with the time they expect to be able to keep the float before paying claims and they keep a margin of safety by investing more than their claims expected in bonds. Then, a significant part of what they call "shareholder's money" is invested in mostly high quality equities (big % is in BRK, FFH, Carmax, Diageo, BAM, GE and WMT) that has a very low turnover rate (they are long term investors). Furthermore, both management have been there since a long time, are honest, owners friendly, have skin in the game, think for the long term, have decent salaries and no stock options. Sooo...my list is quite short. Wich one is the cheapest between the two IMO? FFH. I have to say that since their balance sheet have improved significantly since a few years, the gap between their respective solidity is narrowing. That being said, Markel is very conservative with their reserves, so the MKL's book value is probably understated. I'm still studying insurance companies that I've never studied before, so I might find better candidates for the long term, but so far I have not. Finally, I have just 4 names in my personal portfolio. As you have guessed, FFH and MKL are in it (and by far take the most % of it). The 2 other names are diversified conglomerates. One is a name that you've heard about several times on this board, the other one sometimes, but not very often and have a terrific track record. Cheers!

Interesting. W.R. Berkley is a great underwriter and their conference calls comments are often interesting. Cheers!

At this stage, advising people to not walk in swamps is largely rhetorical and those advancing those arguments are either misguided or crooked or both. Please, anybody trying to make points on what banks should and shouldn't be involved in is just wasting peoples time and energy in the midst of a crisis. No. Human minds can think about different things at once. There is not only once section in your daily newspaper. You have a patient that has a lung cancer at your surgery table. You want to have skilled surgeons to remove the cancer, but it doesn't mean that some other people cannot think about solutions to avoid the repeat of this problem in the future. And no, this is not a waste of time and energy and no, this is not rethorical. To not do that would be a huge waste of money and energy spended. "Hey, we'll pay a lot of money to remove your cancer, but we tough we didn't have time to think about prevention, so keep smoking your huge cigars several times per day, the surgeon table will be ready for you next time".

Hi Sreen, Welcome to this board! :) Regarding your concerns: 1. Your insurance business is a lemon if it's cost of float is higher than the government cost of funds. The long term average cost of float of Fairfax is lower than government by few percentages points, wich is good, but granted not great. 2. I would rather check the reserves to equity to have a better insight about their potential damage that underestimating insurance risk could have on our equity. The lower this ratio is, the lower the "oops" risk is. So here are those numbers for the companies that have P&C insurance subsidiaries that I follow: Markel, 2,5 x Berkshire 0,5 X W.R. Berkley 2,95 X Fairfax 3 X White Mountains 2,55 Alleghany 0,97 X All corrections and specifications are very welcomed. 3. Yes, I think they have falled in some value traps recently and it has cost us a decent amount of money recently. That being said, when you take a look at the big picture, so far their long term track record is terrific AND most of their actual stock portfolio is not in Abitibi kind of businesses. Cheers!

Less than 2%?! Seriously?

I deserve no credits for that. :) Thanks to David for informing me that the AGM presentation was available via email. Cheers!

Question number 1 makes sense. It's a fair and business oriented question to ask.