txlaw

Hey, at least they're selling shares at fair value -- maybe even at an overvalued price?

Fair enough, rjstc. I totally understand having this position -- it's a reasonable one to me.

Over promise, under deliver VS. Under promise, over deliver. Could this be what all this boils down to?

Some thoughts I just posted on another thread: http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/prem-watsa-and-respect/msg139605/?topicseen#msg139605 I view all of this feedback as good. Hopefully, the folks at FFH are reading carefully.

As someone who is invested in BBRY not as an arbitrageur, but as a deep value investor, I will say that I have not lost respect for PW. I am certainly willing to criticize PW for mistakes made with respect to BBRY, but do I think he has acted shady? No way. Having said the above, let me make some observations regarding all the displeasure expressed with FFH over the last couple of days, which have coincided with the BBRY deal purchase not going through (a flip flop or a failure, some might say), and with earnings being bad again due to the macro-focused positioning. These are not irrational criticisms based on the notion that PW is infallible or doesn't know how to position size. Instead, I see two major criticisms being expressed with regards to the investment process at FFH. First, people seem to believe that FFH won't admit mistakes and are very inclined to "dig in their heels" and "throw good money after bad." Specifically, they see BBRY and think that PW is being irrational in the face of overwhelming evidence of being wrong or in over his head, so to speak. The same is true of the macro bet (or hedge, if you like). Second, people just don't like that FFH is not becoming more BRK- or MKL-like with regards to their investment approach. The implicit criticism here is that, over time, the best investment managers will realize that cigar butts, turnarounds, tech, macro focused hedging, etc. are best abandoned, and the modern Buffett/Munger approach (great biz at reasonable price) is the best way to go, particularly for someone like an insurer. (There is also a third criticism that has to do with FFH being overly nationalistic or biased towards local investments. I don't view this criticism as warranting any response.) With regards to the first criticism, I am skeptical that FFH is simply "digging in their heels." I once spoke to a fairly well known investor who is very, very familiar with FFH and their investment process, and one of the things he told me was to always admit your mistakes and then move on. I am willing to bet that they are cognizant of the phenomenon of digging in one's heels and that what they're doing with BBRY is trying to mitigate mistakes made in the past, realize value, and keep their reputation intact in terms of being a long term partner -- not "throwing good money after bad." (I'm sure people also think I have been digging in my heels with BBRY, perhaps in response to fairly negative posts from other board members, but I have tried to remain as rational as possible with respect to what I believe is "break up" value. I may be wrong on "break up value", but I'm trying to avoid cognitive biases associated with digging in my heels, as well as with capitulation due to negative sentiment. Again, I may be wrong, but that is how I'm approaching this. I'm sure FFH is thinking the same way.) Now, was FFH in over their head by investing in a tech company? Maybe. Maybe not. There can be a difference between being wrong and being in over one's head. Hopefully, we will get some clarity on this when everything is all said and done. With regards to macro, I believe their view is dead wrong, but I also don't think it can be said yet that they are just digging in their heels. I'm sure people said that about the CDS bet as well when it was not going their way. I believe they have even said on CCs that they might be wrong about this, but that they are trying to be very conservative (of course, I disagree that their approach is actually the right way to be conservative). Again, when it comes to admitting mistakes, PW should admit mistakes when it is clear that mistakes have been made. They admitted it with regards to TIG. They admitted that the public sale process that they put BBRY into with their bid was not good for the biz. (On the other hand, if they just couldn't get the financing, then they should probably just say that they couldn't raise financing, despite the public assurances.) And if they are wrong about value at BBRY for $9 per share or about the macro, then they should admit it when the evidence is there. But is the evidence there yet? It's debatable. To me, the second criticism holds a bit more weight, and that is the one that you see long term FFH investors really talking about. Specifically, people want FFH to change their investment process to be a bit more Buffett-like. I'd agree with this, but, hey, PW isn't WEB. Different strokes for different folks, right? Over the long run, they'll do well, but as someone else said, you don't have to partner with someone if you disagree with the way they do business. If long term holders don't like the way that FFH is conducting biz, or don't think it will be effective, it's their prerogative to sell out. And if they express that displeasure on CoBF, that's fine too. It can only be helpful for FFH in terms of getting feedback from their shareholders -- current, former, and prospective.

I own TSO. I actually do like the producers that have become more oily (e.g., CHK). I guess I should have said E&Ps with unrecognized nat gas potential. It's going to be great to see nat gas get exported as oil starts to stabilize at a lower price (hopefully).

For me, all the usual contenders are still there -- nat gas heavy E&P companies, finance cos, telcos, auto companies, and certain RE companies. The newest sectors I've been looking at are refiners and steel producers. I own companies in both sectors.

Wise words. I find it hard to believe that Ben Graham "invented" value investing. Buy low, sell high is what merchants, investors, and bankers have been trying to do for aeons. Graham just created a nice intellectual framework for capital markets investing.

Another thing about SBUX is that they embrace diversity of taste. You can get their traditional roast, which tastes over-roasted, or you can get Pike's Place roast. You can get brewed pot coffee, or you can get french press coffee. They have Clover machines. You can order Barista made espresso-based drinks. You can get frappucino's. Or tea. Or flavored sodas. Basically, you can take a look at the Malcolm Gladwell video on spaghetti sauce and see that SBUX cares about being able to satisfy everyone (or most people) with their products. Why oh why didn't I hold onto my SBUX?

In addition to the arguments about SBUX consistency, which I agree with, SBUX also offers up a "third place" experience, which helps keep their mass market brand more premium and leisure-oriented. When you go into SBUX or any coffee shop, you're not just paying for a cup of coffee. You're also paying for rent, music, the "vibe," etc. If you park yourself at SBUX for a couple of hours, drinking one cup of coffee (or some espresso drink), reading the WSJ for free, using their bathroom and air conditioning, and working, that's really what you're paying for in addition to the cost of preparing the coffee. As for those who pop in for a daily dosage of coffee, I wouldn't underestimate the convenience factor and the "communal daily ritual" aspect of it. I remember going to SBUX in DC (and Peet's in SF) when I was working in those cities, and I did it despite knowing that I could wake up a bit earlier, make a french press, and have better coffee. It was a ritual stop before getting into the office that I enjoyed. Howard Schulz and Co are very good at what they do, even if their coffee is only sub-par.

http://www.railwayage.com/index.php/freight/class-i/a-stronger-network-with-more-capacity.html?channel=50

Interesting thread. Pre-fundamentals oriented investing mistakes: Buying a bank and an electronics retailer based solely on "value metrics" like P/B and P/E. And then seeing those go to $0 during the financial crisis. Errors of omission/trading: Buying WFMI and SBUX near the financial crisis bottom and selling for a quick profit. And then never getting back in because of my macro worries and their continued march upwards. I'd be substantially wealthier now if I had just paid attention to fundamentals, not looked at the volatility of the market, and avoided my "trading instincts." BBRY: While I still believe in the sum of the parts being higher than my cost basis in my latest tranche of BBRY shares (I think my assessment of BBRY's assets is sound), I made several errors when investing in BBRY over the last two years. I didn't bake enough of a discount into what value I could realize as an OPMI based on a distress situation and possible fire sale. I didn't pay enough attention to the risk of OPMIs not necessarily getting even liquidation/run-off/break-up IV due to control investor involvement and management financial incentives (the FBK lesson?). I overestimated the reconstituted board's (and Prem Watsa's) ability to prevent poor decision making by management and to make necessary cultural changes to preserve and maximize value. I assumed that awareness of the necessity of preserving resource value (for "highest and best use" resource conversion) would trump the inertia of strategic plans already put in place. And probably more mistakes as well. I will definitely be doing a post-mortem on my BBRY investment after everything is said and done and maybe even sharing with the board.

This is a really interesting paper: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1603484 Abstract: We document sizeable and surprising differences in investment behavior between stock market listed and privately held firms in the U.S. using a rich new data source on private firms. Listed firms invest substantially less and are less responsive to changes in investment opportunities compared to matched private firms, even during the recent financial crisis. These differences do not reflect observable economic differences between public and private firms (such as lifecycle differences) and instead appear to be driven by a propensity for public firms to suffer greater agency costs. Evidence showing that investment behavior diverges most strongly in industries in which stock prices are particularly sensitive to current earnings suggests public firms may suffer from managerial myopia. Very appropriate I think, given all of the discussions about tech stocks and whether or not they're destroying value through their investments.

Based on your list, I'd also suggest looking at Houston or DC. Being in Dallas, you might pooh pooh the idea of Houston, but I actually like Houston better than Dallas. There are some fantastic areas inside the loop, and I'm sure you guys know all about how big healthcare is there. I'm sure there are a lot of finance jobs there too, although maybe they are more focused on the energy sector. Housing is cheap, and the food is amazing. It's very diverse as well. Traffic and the weather sucks, though. The DC area is one of my favorite places in the country. It's got everything, and it skews towards the younger end, I believe. And it's a very livable city compared to most of the other big cities. It might be just enough city for my taste. And you could live in either Maryland or Northern Virginia, though I think NV is more likely to have finance jobs.

Let me echo what Kraven has said. I've actually gotten PMs asking about the guarantor/non-guarantor subs, and I have respectfully declined to offer any input whatsoever (I tend to be overly cautious about providing anything resembling legal advice). However, what I have said in response is that the guarantor/non-guarantor breakdown is most useful for determining what the asset-lite biz could potentially be worth. And I think that's what Parsad's friend was really getting at as well. So, it's probably not worth spinning your wheels on this issue.

Cardboard, very interesting observation. We're already seeing a number of analysts coming out and saying that nobody wants to buy BBRY. In fact, I just watched a Macquarie analyst say that there could be a take under! If their is an outright sale of the company, I think it would likely be to a strategic buyer vs. private equity. IMO, this announcement has likely come after there have been discussions with strategics, perhaps to accelerate discussions on sales or JVs. I'm going to post more in the RIM thread.

Thanks for posting. Man, I wish they had asked Flatt about what he thinks of Ackman.

At bottom, this is why I've been a bit concerned about FFH (I don't own any at the moment, btw). It's almost like they're going for an "absolute return" strategy vs. a "total return" strategy, where they always make positive mark to market returns despite aggregate market movement. On the other hand, they may believe that the best thing to do for "total return" is to preserve the ability to underwrite as much business as possible because they believe a very hard market will ensue at some point. If that is the case, they should be more clear about this, rather than saying, we're trying to "protect" ourselves. This is why I continue to be puzzled about the notional value of the equity hedge. Why 100%? When they first put the hedge on at 1060, with 25% notional value, it only protected about 1.75% of book value if the market were to drop back down to 800 level (where they had dumped all of their hedges). Now think about that... 1.75%! Really??? Honestly why is that "protection" from anything? Yeah, that is strange.

What are your thoughts on the notional value of the hedge? The 100% versus some lesser percentage question. Mr. Watsa said: So, and to summarize, Tom, we just said we've always been always long-term -- our long-term results are excellent. In any single year, in any single quarter, we can't tell you what we'll make. Our investment results have been lumpy. They're not smooth. We're not looking at providing 5%, 10%, 15% growth every quarter. We don't know how to do it -- we'd love to do it if we could but what we have focused our company from inception, 27 years ago, is on the long term. And that continues to be the case. So this is really the issue. Are they really trying to maximize "total return" over the long run, or are they straying towards an "absolute return" strategy? As I just posted on another thread, it's possible that FFH believes that the best thing to do for "total return" is to preserve the ability to underwrite as much business as possible because they believe a very hard market will ensue in the near future. That would make a lot of sense to me. Instead, we tend to get these lines about "protection" and being "conservative." It's sort of similar to the way Kyle Bass always "hedges" by saying, well, I may be wrong, but I have a fiduciary responsibility to construct my portfolio this way (putting money into gold, making asymmetric bets against Japan, etc.). And anyone else who behaves differently is being reckless. So here's the question I think a lot of us would like definitively answered: Would HWIC be acting differently if they were not managing an insurance portfolio?

At bottom, this is why I've been a bit concerned about FFH (I don't own any at the moment, btw). It's almost like they're going for an "absolute return" strategy vs. a "total return" strategy, where they always make positive mark to market returns despite aggregate market movement. On the other hand, they may believe that the best thing to do for "total return" is to preserve the ability to underwrite as much business as possible because they believe a very hard market will ensue at some point. If that is the case, they should be more clear about this, rather than saying, we're trying to "protect" ourselves. This is why I continue to be puzzled about the notional value of the equity hedge. Why 100%?

Why can't there be some middling scenario? A lot of people say that the injection of capital has juiced the capital markets, but economic growth remains tepid. Okay, well, if capital is withdrawn in a less than stellar, non-coordinated manner, isn't it possible that the capital markets tank, but that economic growth continues at its tepid pace? And if economic growth continues at the same pace, then won't real businesses (in aggregate) continue to generate wealth at the same rate they have been? If that is the case, then doesn't it still make sense to own good businesses if you are valuing them based on economic fundamentals?

Taking into account that FFH is a leveraged investor, and assuming that FFH is more likely than not correct about the disconnect between financial markets and economic fundamentals, I'm still a little unclear on why a 100% equity hedge is necessary for "protection." What exactly are they protecting themselves from? From going under? From not being able to earn a certain amount of premiums? Or solely from having their book value marked down in a manner correlated with the market? Let's say that FFH (treating FFH as one big insurer) simply wants to be able to maintain their net premiums earned at a Net Earned Premiums/Equity ratio of no more than 1:1. FFH's shareholder equity is currently at $8.5 billion, and net earned premiums on an annualized basis is $5.8 billion. The common plus preferred portfolio is at $5.3 billion. Why couldn't they just hedge 50% of their common + preferred portfolio to meet their protection goals? Why 100%? At the annual meeting, I believe management -- I think it may have been Paul Rivett -- indicated that FFH was hedged so that they could write a substantial amount of insurance if/when the markets declined. For those of you who went (Grenville?), am I right about that? Or am I misremembering that? I guess the theory is that after the market declines: (1) FFH would have a hard insurance market to underwrite in; (2) FFH's surplus would be at roughly the same place as it is now (or even greater); and, therefore, (3) FFH would be able to drastically increase net premiums earned while simultaneously having undervalued markets to invest in. This implies they are hoping to make a substantially more leveraged bet on equities after an anticipated market decline. Which would really juice their returns if they are correct. But this seems a bit more of a directional bet than protection, per se.

We simply cannot know yet. As Mr. Watsa has said during the conference call, it took 5 years for deflation to set in in Japan... Likewise the New Deal policies worked for 5 years in the '30s, before they worked no more... So, probably we still must wait 2 more years, before knowing for sure. What I am positive about is that, even if there were only a small chance to repeat the '30s experience, seriuos and reliable people should have looked for ways to protect themselves and their companies against such an outcome... Of course, you might argue that FFH's protections have been too extreme and not really justifiable... We will see! giofranchi What we cannot know yet is whether or not FFH will be right on their macro call. However, what I am criticizing FFH for is rejecting the idea that if you focus on valuation (taking into account possible adverse economic scenarios), you can essentially ignore macro forecasts. I adhere to the "don't spend too much time on macro when it comes to investing" school -- Munger style. So even if there is a risk of another deflationary period in the US, the only "risk" is the market pricing your companies at low valuations. At which time you buy more of them! Especially if you have cash coming in a la BRK and MKL. (Incidentally, I don't agree that today is like the 30s -- I believe we learned from that period, and our policy makers have acted differently today to prevent such an occurrence.)

It will be interesting to see MKL results this coming week. In my mind, BRK and MKL have had the right strategy, and FFH has not. FFH has been far too macro-focused. WRB continues to roll along as well.

Okay, one other thing for me to add. I do run a very concentrated portfolio, but turnover is not necessarily low for me. If I own a boatload of Level 3 at $1, which is ridiculously cheap, and it goes to $1.7, near IV, I will sell a substantial amount of it, and maybe all of it, only to buy at a later date if Mr. Market gives me the opportunity. I may do this for portfolio reasons -- I don't want Level 3 to constitute the majority of my portfolio. Or I may do this because of the opportunity cost of holding a biz that is close to IV, when I can buy another biz at 50 cents on the dollar. And I even do this for tax purposes as well (harvesting tax losses and putting the proceeds into just as undervalued ideas). I do tend to engage in some trading. So I probably would not fit your definition of a long term holder. But my main argument is that the "buy and hold" investor doesn't necessarily understand a biz better than the "buy below IV and sell at (or close to) IV" investor.