beerbaron

Well, before I even look at valuations in a declining cash flow. I first look if that company is conscious that the end is inevitable and that it is ready to let it die for the profit of shareholders. That is even before looking at PV and making projections. For example ELNK has about 170M of FCF but only redistributed 47M to shareholders. Why are they stacking so much cash? It seems to me they will want to buy another business to survive. It's not my type of investment, I would much rather if the company would distribute 90% of it's FCF. Then you have a nice margin of safety as the earnings go straight to your pocket. The company must also show capable capabilities of downsizing it's operations as it's revenues go down, you don't want the cash flow to reverse just because the fixed charges cannot be reduced at the same pace as earnings, it would kill your investment. BeerBaron

Thanks, that's the missing link I was searching! BeerBaron

I'm not shooting FFH, I'm just trying to understand. I'll be more then glad to learn from some more experienced insurance investor. Here is an hypothetical insurance company scenario. Please tell me what I'm missing. Company X insures company Y against a 1000$ event happening once every 5 years in average. It sells the policy at 1000$ at Day 1, interest rate is fixed at 5% for 5 years. Event happens at end of year 5. Company had 1000$ Equity to begin with. Day 1 Year 1 Year 2 Year 3 Year 4 Year 5 Assets Cash 2000$ 2100$ 2205$ 2315$ 2430$ 1551$ Liabilities Provision 1000$ 800$ 600$ 400$ 200$ 0$ Equity 1000$ 1200$ 1605$ 1915$ 2230$ 1551$ Now lets assume that company X made a mistake in underwriting and the event ends up costing 2000$ at the end of the 5th year. Day 1 Year 1 Year 2 Year 3 Year 4 Year 5 Assets Cash 2000$ 2100$ 2205$ 2315$ 2430$ 1551$ Liabilities Provision 1000$ 800$ 600$ 400$ 200$ 0$ Equity 1000$ 1200$ 1605$ 1915$ 2230$ 551$ As you can see, from day 1 to year 4 the equity is identical, therefore, the Net Premium to surplus would have been stated identically under both scenarios. But the outcome at year 5 is totally different. We know: Rates have been declining in insurers Fairfax has 98% of Net Premium Written from 5 years ago. Their recorded policy liabilities are now 90% of what they were 5 years ago. So the reduction in the liabilities is one of the following: -FFH has now shorter tail insurance (reduces the liabilities). -FFH has under estimated it's past claims, boosting the income/equity but it could come and hunt them back. -FFH had much bigger liabilities in 2005 then today (maybe some leftover from 9/11 or Katrina???). -FFH has a great sales force capable of selling lower claim insurance at a similar price while the rest of the world is reducing their price. It would make sense to assume that it's either for reason 2 or 3. I personnally think it's likely they had some liabilities trailing from 2001, 2004 and 2005 which had the impact of boosting their claim liabilities and reducing their earnings from 2001 to 2005. BeerBaron

Onyx1, thanks for your Excel spreadsheet. I have updated it to show averages and Balance sheet reserves. Here is what caught my eye. -Combined Ratios were very low in the last 5 years at about 91.8% average for the group. These results cannot continue forever, therefore, using trailing PE for insurance stocks seems bad. -Insurers as a group performed really well in the last 5 years. Fairfax as noted before has been a poor underwriter compared with it's peers. But here is what worries me: -It's net premium written stayed flat at 98% (including ORH acquisition) -It's reserves actually decreased by 11%. Judging by those 2 facts it seems to me like FFH might have released a lot of reserve and is now under-reserved. Is there something I don't understand correctly here? BeerBaron

Guys please tell me if my logic is correct. Insurers are cutting their margin to increase policy count/revenues. Since policies are sold trough brookers then policy count/revenues growth comes from reduced margins to get new policies. (I don't think sales forces really make a difference in this market, am I right?) Therefore, get: -An insurer that did not show any organic policy count/revenues growth for the last 5 years. -Well diversified. -Well capitalized. -Well managed (good underwriting, good investing) And you will likely get a winner when the tide goes away. BeerBaron

RSS feed is the way to go to get 95% of the stock update you want. Google reader does a good job with RSS feeds. You can even set Edgar to RSS feed. Very usefull to keep an eye on new filings. BeerBaron

What are you trying to hedge against? If it's a Stock Market downturn then the simplest and least costly of it all is to increase cash % of your portfolio. BeerBaron

I agree FFH is probably a good buy, added a bit to my portfolio at 365$ last week. Now if it could go down to 360$ or 355$ I could finally be 100% invested. BeerBaron

If I'm not mistaken In Canada. Banks Interests are taxed as 100% income Dividends are taxed at 50% as income Capital gains are taxed at 33% as income So the little guy who knows shit and gets Customer Deposits actually gets 0% real return if not negative. The savvy guy, buys an Medium Term Gov Bond ETF and gets taxed half the amount, giving him maybe 2% real return plus the liquidity. It really sucks, 99% of people don't optimize their taxations because they just don't know. Why not make it equal for every income types? It just does not make sense. BeerBaron

It seems to me like a long shot for insider trading. Anyway if I were to buy shares on this insider's information I would go see for myself... I'd hate to be the patsy. BeerBaron

Investment Checklist Is it a long term investment? A short term investment? What is your target for this stock? What timeline do you foresee for this stock to realise it's projected value? Investor psychology checklist Is it in your circle of competence? Are you investing now because this is a good deal or because you feel you need to dance on the music? Are you sure you are not speculating? Are you sure you are not acting on over-confidence? Are you following the 3 rules: Don't lose money, don't lose money, never forget the first two? Are you sure you are no acting on an impulse buy? Are you taking undue risk? Are you sure you are not delusioning yourself by the great numbers, therefore forgetting the great risks? Are you changing your strategy because of a series of bad performances? For the review only: Are you reinforcing yourself just to avoid the reality that you were wrong? Are you sure you are not buying just because you don't want to miss the boat? Investment metrics Are you sure you are not buying on a market that has front wind? Are you buying a great company at a good price or a good company at a great price? Do you understand correctly the financial structure of the company? Is the business understandeable? Do you know how the money is made? Does the business have a consistent operating history? Does the business have favorable long term prospect? Is it a business that even a dummy could make money in? Is the company free to adjust prices to inflation? Have you read the annual report of the main competitor? Are you buying at a PE around the growth rate or lower? Do you feel you have more then 10% margin of safety? Is the equity to leverage acceptable for you? Does the company have a strong track record from the past? Does the company has good prospect in the future? Has the management's demonstrated a high degree of intelligence? Has the management's demonstrated a high level of integrety? Has the management demonstrated a high degree of energy? Is the management rational? Is the management candid with shareholders? Has the management resisted the temptation to grow quickly by merger? Has the management the strenght not to follow institutional imperatives? Has the management been free of a major merger within this period? (Many merger failures come out of the woodwork within this period) Are stock options treated as an expense? Are the insider been buying lately? How is the company able to resist economic cycles? Could a small change in the liability wype oup an apparently huge equity? (Ex Fanny Mae) Can the company generate enough Free Cash Flow to survive if another downturn happens? Does this company have some kind of moat? Do you see an asymetric Risk/Reward? Are you sure you are not buying at the top of a cyclical company? Do you see strange informations in the report that you don't understand? Is the company earning a good return on it's investment? Is the company earning a good return on equity? Is there a plausible catalyst that can unlock this stock? Is the company having a heathy organic growth? Does this stock have good tangible equity to protect in a downturn? Has the companyhad a track record of earning growth in most years above the stock market average? Is the value of discounted earnings greater then the current market value? Have you discounted at a rate greater or equal then the 10 year bond rate? Have cash flow been based on net income+depreciation+depletion+amortization-capEx-additional working capital? Has the company been temporarily punished for a specific risk that is not long term risk? Is the company conservatively financed? Are those kind of revenues sustainable? Could the moat shrink in a short period of time? Can this investment be a zero? Does it make you overexposed into an area of the economy? Is it a bet?

Humm, did you get into any troubles with the CRA. It seems like a grey area that could apply to Lancashire... BeerBaron

Thanks guys... that sucks that the OTC does not count in accepted investments. No Lancashire for me :) BeerBaron

Anybody knows what exactly are the rules of what we can buy in our RRSP and TFSA? I'm interested in looking into the Pink sheets but it seems I can't hold those stocks in registered accounts? Any workarounds? BeerBaron

Well, I don't predict anything it can go up or down, a lot of people way more clever then me were proven wrong trying to forecast so why should I believe I'm right. Like most value investors I get all excited about awesome deals. I love dips because they bring correlations between asset classes. My money is in "low downside/high upside" stocks until it looks like I should switch assets. I just hope I'm not repeating' Fisher's mistake of 1929 (see Common Stocks and Uncommon Profits), thinking the market will go down but believing your stocks can resist the earth trembling more then others. BeerBaron

I don't understand, why did they invest in the vineyards. -It takes 20 years to make a brand with pricing power. -If you have pricing power, a bad year will hurt your franchise. -Really segmented market, with no opportunities on consolidating. -Passionate owner competition willing to work for 2$ an hour... in America. -Little possibilities to be a low cost producer. Compared with Beer: -Strong brand recognition -Consolidation is possible -Immune to weather conditions -Can be a low cost producer. Compared with Vodka and other Specialty liquors: -Incredible brand recognition -Drug dealer type of margins -Cost of production has no link with cost of sale Can someone explain? BeerBaron

-Because it's nice politically to say you want people to own their own home. -Because this extra credit doesn't show up as new taxes. -Because it's well implemented in most people's head that it's better to be an owner then a renter. -Because home ownership encourages the velocity of money, therefore increasing government's revenues. -Because politicians have an outlook of maximum 4 years... -Because most people have an outlook of maximum 1 year... -Because most politicians loose focus of the social impact and concentrate on the popularity. Keep your cash on the side... it's going to be great to buy all those apartments at a PE of 5. I can wait longer then failing homeowners can. BeerBaron

Every week I download the weekly summary because that is the only list that I find understandeable. I once called to get the whole 2008 summary and they wanted charge me 10K :-\ . BeerBaron

I hate how the bond market is setup, there is such a lack of transparency. It's hard to get quotes, the comission fees are hidden, everything seems just not accessible in that market. Personnally I'm not even looking for bonds, if I had to buy fixed income I would buy insurers. Right now, you can get profitable insurers with a 100% fixed income portfolio for 75% BV. You get free leverage+free float, it can't get much better then that. BeerBaron

Found the bill.... It's referred as the Neil Bill by the Bermuda Re's. Judging's from Bermuda:Re magazine the players don't seem to alarmed by it. H.R. 1755, Reinsurance Tax Equity Act Still worth investigating if you have a stake in insurers. BeerBaron

Lately I have been focusing on finding a good Bermuda Reinsurer that would meet the following attributes: -Good underwriting discipline -Low dividend distributions (I want the tax free compounding to do it's magic) -Well capitalized -More then 5 years of existence While researching if there is any changes in the US laws that might affect the Bermuda Re I found out that there is a law proposed under Obama's administration that would tax any Reinsurance above 50%. This could potentially be a big issue for any investor with a stake in the Re business, especially if Obama makes the 50% drop over time. I don't see any market discount due to this uncertity. It seems to me the Bermuda Re would take a major blow to it's business if the tax would come into effect. Does anybody have a good and complete article that explains the situation? What do you guys think of the situation? BeerBaron

What's to note with this, why post an 1985 letter out of the blue? BeerBaron

Don't forget Ridley... they seem to have increase their margins in the last quarter and the stock price has taken about 15%. Still trades well below BV. BeerBaron

It won't freeze until people really forget about what just happened. I'd say we won't see the same type of crisis before another 10 years. Right now everybody is looking for: "The next bubble (China, Canada's Real Estate)" "The next big failure(Greece, Portugal, US...)" "The next derivative problems" Because that's just what we got... it's funny how people tend to discard the years 1780-2006 when looking for troubles! Thunder never hits twice at the same place. BeerBaron

Maybe there is some Real Estate China companies listed on the Nasdaq or Amex (there is none in the NYSE... I checked). BeerBaron