A_Hamilton
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Posts posted by A_Hamilton
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I’m in the process of starting a new separately managed account RIA and trying to figure out all the paperwork to get registered and I wanted to see if anyone else has gone through this process and can offer some insight. I have less than $25M (now the limit is actually $100M in most states) in AUM so will be registering with the state of Washington, not the SEC.
Most sites, such as this one from IB (http://www.interactivebrokers.com/download/HowToBecomeRIA_Web.pdf) make it sound like after you set up your LLC and get an EIN (which I’ve done) then you simply register with FINRA through the IARD system, take the Series 65 if you don’t already have the 66 and 7 (I’m registered to take the 65 in a couple weeks), fill out your Form ADV and away you go. And if I go to the IARD website (www.iard.com) it says that the only thing I need to do to access the IARD system (and therefore the form ADV filing) is to fill out the State Registrant Entitlement Packet (http://www.iard.com/pdf/stateEntitlementPacket.pdf) and send it in and then I get access to the IARD system where I can electronically file my ADV.
However, when I go to FINRA’s site (http://www.finra.org/Industry/Compliance/Registration/MemberApplicationProgram/HowtoBecomeaMember/) it notes that I need to fill out the following 4 forms to be able to even get access to the Firm Gateway (which I believe is the same thing as setting up an account on IARD) where I can then fill out my ADV: 1) Notarized Form BD, 2) Super Account Administrator Entitlement Form, 3) Member Firm Email Notification Contact Form, 4) New Member Assessment Report. It also says that once I’ve been approved for access to the Firm Gateway, I need to fill out a very lengthy Form NMA before I can have an opportunity to file my Form ADV.
The Form BD is an application to become a Broker/Dealer, which is not what I’m doing, so it doesn’t make sense that I would need to fill that out to become an RIA right?
Even though FINRA’s website says I need to fill out those four forms, can anyone confirm that since I’m registering as an RIA I simply should be filling out the State Entitlement Packet at IARD and submitting it, and following the process as laid out on the IARD website rather than the process shown on the FINRA website?
Thanks for any insights! I searched the blogs but didn’t find a clear answer to this.
You don't need to become a member of FINRA. Everything before your paragraph beginning with the word "However" is what you need to do.
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I have been looking for numbers on the average net worth of people in various parts of the country and at various ages and have been surprised at what I've found.
For example the Federal Reserve Survey of Consumer Finances in 2012 reported this:
Median family net worth
Age 45 to 54: $117,900
Age 55 to 64: $179,400
Age 65 to 74: $206,700
These numbers seem low to me. I wonder if this includes retirement accounts and home equity? For someone who works say for 30 years (age 22 to 52) to have a net worth of $118k seems low, that is the equivalent of saving less than $4k per year with 0% return. Comments?
When you have a 4% savings rate and a median household income of $51,000 it's easy for that to happen. Also, the 4% savings rate has a fat right tail full of high income/high wealth individuals, so very little saving going on until you get into the 80%+ income bracket.
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Applied quarterly I believe
The plan would take effect Jan. 1, 2015, and the levy would be assessed each quarter, applying the 0.035 percent rate to each company’s total consolidated assets after subtracting the $500 billion exemption.
It's a great plan. Let's tax JPM's $40 billion of goodwill. Define Bill of Attainder.
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Do you still believe in their accident year combined ratios? They have to use the most conservative level that their auditors/independent actuary will allow.
I did not quite understand why you would not believe the accident year CR. Could you please explain?
Thanks
Vinod
They sandbag the accident year reserve. If they think they are going to have losses of $100 on a policy they put $115 into the reserve. They say they are being conservative (which they very well may be, who knows what will happen between a reserve being established and claim identification/settlement. Courts could become more hostile to insurers, inflation could go up, an unforseen risk might not have been excluded from a policy). However, at a certain point you've reserved for the unknowns that I've bracketed and you are effectively setting up redundant reserves that you will bleed through calendar year combined ratios in future years.
That is what FFH is doing...it's also what BRK.b and WRB are notorious for.
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I am, of course, pleased to see underwriting profits for 2013. I hope this continues into the future. This is foundational for a strong FFH.
I am not happy with their hedging strategy, of course. Quite simply, they could have just parked money in cash and lived with <1% yield. Why the urge to be in the market if they see market as highly valued? Why the urge to be buying return swaps and other instruments, when they lead to a negative sum game? If they got into cash in 2010 and missed the rally since then, they would be in the exact same boat as today; i.e. nothing gained and nothing lost.
They call these equity "hedges", but they really aren't hedges at all. They were and are directional bets. They just happened to lose the bet. If the market dropped another 50% from 2011 to 2013, they would have been slightly up, but not much. But relative to everyone else, they would have looked brilliant. They could have achieved the same result with far less stress and stayed in cash since 2010.
I really hope, at least behind closed doors, Mr Watsa and his team are reflecting on what they did and how they could have done it better. I have a lot of respect for Mr Watsa and his team. I expect them to be introspective and self-critical, if not in public, then in private.
+1
It is good to see underwriting going in the right direction, but it is aided by $440 million reserve release. Accident year CR is at 100%.
Vinod
Do you still believe in their accident year combined ratios? They have to use the most conservative level that their auditors/independent actuary will allow. Here's a question for FFH management: How much inflation do you bake into your reserves and how is this level consistent with your view that deflation is likely across the western world?
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Just so we are all on the same page - $370 USD or CAD?
USD
:)
Adjust for all of the unrealized gains this Q and subtract out the dividend that was paid and you are around $370-$375 in BVPS. Under $370 would be a decent bargain.
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For those like me who have been clamoring for the underwriting to improve, we've been given a nice dose of that.
For those who want to buy below $370, you may get your chance tomorrow.
-Crip
Perhaps, though with the gains in IRE, BBRY, RFP, KW, USG, LT bonds thus far this quarter and the only real offset being a loss on OSTK, BV today is substantially higher than reported BV...so not really sure it matters what they reported for year end.
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It looks like Graham holding pension plan hold around $228mn of Berkshire stock. Buffett may swap these pension plan assets for stake in Graham holding. It might involve entire portfolio of the pension plan.
Here is excerpt from SEC filing of Graham holding.
Essentially all of the assets are actively managed by two investment companies. The goal of the investment managers is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both of these managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. The investment managers cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway or more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval by the Plan administrator. As of September 30, 2013, the managers can invest no more than 24% of the assets in international stocks at the time the investment is made, and no less than 10% of the assets could be invested in fixed-income securities. None of the assets is managed internally by the Company.
In determining the expected rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the Company may consult with and consider the input of financial and other professionals in developing appropriate return benchmarks.
The Company evaluated its defined benefit pension plan asset portfolio for the existence of significant concentrations (defined as greater than 10% of plan assets) of credit risk as of September 30, 2013. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country and individual fund. At September 30, 2013 and December 31, 2012, the pension plan held common stock in one investment that exceeded 10% of total plan assets. This investment was valued at $389.3 million and $223.1 million at September 30, 2013 and December 31, 2012, respectively, or approximately 16% and 11%, respectively, of total plan assets. Assets also included $228.6 million and $179.9 million of Berkshire Hathaway common stock at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013 and December 31, 2012, the pension plan held investments in one foreign country that exceeded 10% of total plan assets. These investments were valued at $406.4 million and $240.4 million at September 30, 2013 and December 31, 2012, respectively, or approximately 16% and 12%, respectively, of total plan assets.
Is it saying pension plan held investment which increased from $223mn to $389mn in 9 months? I wonder which one that would be. Mostly some large cap.
Also structure of this transaction will point to Buffett's valuation of Berkshire. I think it was good bargain below 109 and still not very far from it.
Valeant Pharma. Sequoia is one of the two managers of the pension plan and Valeant has been a grand slam home run for them.
That's a good guess. Matches the reported gain.
Also, I don't think this has anything to do with Buffett having a love affair with any of WPO's assets at this point. Kaplan has been a stain and a strain on the Gates' and his relationship . Melinda Gates resigned from WPO's board, Buffett resigned and I think he just wants to get away from for-profit ed.
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It looks like Graham holding pension plan hold around $228mn of Berkshire stock. Buffett may swap these pension plan assets for stake in Graham holding. It might involve entire portfolio of the pension plan.
Here is excerpt from SEC filing of Graham holding.
Essentially all of the assets are actively managed by two investment companies. The goal of the investment managers is to produce moderate long-term growth in the value of these assets, while protecting them against large decreases in value. Both of these managers may invest in a combination of equity and fixed-income securities and cash. The managers are not permitted to invest in securities of the Company or in alternative investments. The investment managers cannot invest more than 20% of the assets at the time of purchase in the stock of Berkshire Hathaway or more than 10% of the assets in the securities of any other single issuer, except for obligations of the U.S. Government, without receiving prior approval by the Plan administrator. As of September 30, 2013, the managers can invest no more than 24% of the assets in international stocks at the time the investment is made, and no less than 10% of the assets could be invested in fixed-income securities. None of the assets is managed internally by the Company.
In determining the expected rate of return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the Company may consult with and consider the input of financial and other professionals in developing appropriate return benchmarks.
The Company evaluated its defined benefit pension plan asset portfolio for the existence of significant concentrations (defined as greater than 10% of plan assets) of credit risk as of September 30, 2013. Types of concentrations that were evaluated include, but are not limited to, investment concentrations in a single entity, type of industry, foreign country and individual fund. At September 30, 2013 and December 31, 2012, the pension plan held common stock in one investment that exceeded 10% of total plan assets. This investment was valued at $389.3 million and $223.1 million at September 30, 2013 and December 31, 2012, respectively, or approximately 16% and 11%, respectively, of total plan assets. Assets also included $228.6 million and $179.9 million of Berkshire Hathaway common stock at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013 and December 31, 2012, the pension plan held investments in one foreign country that exceeded 10% of total plan assets. These investments were valued at $406.4 million and $240.4 million at September 30, 2013 and December 31, 2012, respectively, or approximately 16% and 12%, respectively, of total plan assets.
Is it saying pension plan held investment which increased from $223mn to $389mn in 9 months? I wonder which one that would be. Mostly some large cap.
Also structure of this transaction will point to Buffett's valuation of Berkshire. I think it was good bargain below 109 and still not very far from it.
Valeant Pharma. Sequoia is one of the two managers of the pension plan and Valeant has been a grand slam home run for them.
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i think it's too difficult to model the hedges
if the S&P starts to drop - it doesn't need to go to 800 - the hedges should start to appreciate? so therefore FFH shares should worth more. but nobody knows if the market is factoring the hedges at 0 at the current price or not.
I don't think so. The hedges are for providing losses to temper the gains on the the stocks in their portfolio providing gains to temper the losses on the stocks in their portfolio.
Potential upside from equities begins after they've dropped the hedges -- until that point, the gains would likely be on the bonds and other things they may have (like potentially the deflation CPI thingies).
That was good. Agree about the upside being muted for now.
Still not sure how to assess this.
If their value portfolio is good, maybe a 10% drop doesn't mean a 10% loss for their stocks, but means more than a 10% gain for the hedges (the reduction in losses being more than 10%). Options tend to get ahead of the market.... no?
Why can there only be gains when the hedges are off? What if they unload them at different times? Unload when hedges seem ok but keep buying stocks if there's a down market. Is it really that complex?
Think about the holdings in the background. In a 40% loss scenario needed to bring the hedges to break even (give or take) BKIR, BB, and RFP are gojng to drop alot more than 40%. I would wager 90% on RFP and BB.
add to this: In the last major market drop FFh dropped 1/3 after reporting huge earnings.
Agree with Dazel. FFh has the best bond group going.
Why would you think RFP would drop 90% if the IWM dropped 40%?
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Any guesses on where book value would stand for the year? Prem had mentioned that they would slowly unwind hedges on CPI . Any ideas on what data would let Fairfax start unwinding their hedges? It appears that the fed is hellbent on creating inflation ..I would love to buy more Fairfax like last year when they got delisted from MSCI..
I don't track FFH very closely, but when Watsa say that he was unwinding the hedges?
He didn't. The hedges have very little value left between the writedowns/passage of time/continued increases in CPI. Don't know if I want that to reverse or not..
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Separately, on UBTI,
I don't know how other countries operate, but in the U.S. a non-profit or pension can't directly control a company. So, for instance, Harvard can't buy 100% of Kraft and operate it as a for profit entity but not pay tax because Harvard is a non-profit. If Kraft were owned by Harvard it could charge substantially less for products than other consumer food companies because they don't have to pay taxes and can still earn a decent return on capital.
To me, since these entities are effectively in the business of writing insurance our laws should force non-profits to pay taxes on their cat bond returns as any other taxable player would.
Ok I see what you mean. What you suggest is very reasonable. I don't have a good sense of how substantial these tax-exempt entities are, but I'm guessing they are a smaller part of this overall phenomenon?
Thanks for explaining.
I'd actually think they are a very big part of the cat bond market. These are high yield instruments that tend to have low correlation to junk bonds and equities. These are an ideal pitch to every pension fund and endowment.
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I'd add to this, what is the cost of capital for an endowment or pension plan? 5-8% depnding on the situation. These cat bonds are problematic in my opinion because if it were any other industry they would be treated like UBTI (after all they are effectively in the business of writing insurance), how can there be taxable competitors with this disadvantage?
Hi A_Hamilton, can you explain this some more? Thanks
First, on 5-8% cost of capital. Think about a pension plan with an 8% return on plan assets assumption. If they can acheive that by owning cat bonds they'll allocate capital there. FFH has a much higher required return assumption which is one reason why so much capital will flow from pensions ane endowments into these structures.
Separately, on UBTI,
I don't know how other countries operate, but in the U.S. a non-profit or pension can't directly control a company. So, for instance, Harvard can't buy 100% of Kraft and operate it as a for profit entity but not pay tax because Harvard is a non-profit. If Kraft were owned by Harvard it could charge substantially less for products than other consumer food companies because they don't have to pay taxes and can still earn a decent return on capital.
To me, since these entities are effectively in the business of writing insurance our laws should force non-profits to pay taxes on their cat bond returns as any other taxable player would.
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Tons of capital chasing small returns in unfamiliar markets with potential for large losses. Hmm... ???
I agree, that's the way it looks. But then why would someone with the industry stature and experience of Richard Brindle think that this capital is to be taken seriously??
These vehicles aren't been run by complete novices either. As gio already pointed out, the 'permanent capital' guys such as TPRE and GLRE, typically hire-in teams with lots of experience. And with the sidecars, the sponsors typically put up 10-15% of the capital at risk, so interests are at least somewhat aligned. At what point the benefit of the fees outweigh the sponsor capital at risk, I'm not sure, but I don't think we're there yet.
I'm also interested to know whether anyone has an opinion as to how alternative capital may impact the direct insurance market down the line. I believe that to date alternative capital has probably been a net positive for direct insurers, lowering their reinsurance costs. In the future, perhaps alternative capital may find routes to market and reduce returns there too??
I'd add to this, what is the cost of capital for an endowment or pension plan? 5-8% depnding on the situation. These cat bonds are problematic in my opinion because if it were any other industry they would be treated like UBTI (after all they are effectively in the business of writing insurance), how can there be taxable competitors with this disadvantage?
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Does any one have comments from Buffett on the % of daily volume he maxes out at when building positions/exiting a name?
I'd be interested to read any intelligent thoughts about this from others as well. Assume you plan to hold the name for years and aren't day trading.
Thank you.
A_Hamilton
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Today BB has 3B in cash & 1B in convertible debt. For simplicity sake let's assume the rest nets out to 0, for a tangible value of $2B.
The company is still generating 1B of free cashflow annually despite all of the crap it has been through. If you believe in Chen & his team, then this is a bargain.
I am with Prem on this one. He has often said that you can't over pay for a an excellent leader. I'm hoping to meet with Chen during the Shareholder meeting to confirm my suspicions that he is the right person to turn BB around.
wrong. the company is incinerating cash. it burned almost half a billion in the last 39 weeks and cash burn accelerated in the most recent quarter. your fcf number is astonishingly wrong. Chen's stated objective is to "arrest" cash burn.
Thank you Wellmont.
I was seating here since yesterday waiting for someone to point out that barely two months after the $1B cash infusion (after the failed go private attempt) Blackberry is going back to Fairfax for $250M more in cash. And no one is asking why, or even considering it to be worrisome.
Remember the days when part of the RIM bull case was how they had all this cash on their balance sheet with no debt etc... but now two months can't go by without the need for an additional cash infusion. Come on guys... COME ON!!
BBRY didn't go back to FFH. FFH was given an option to invest and they exercised it. The question is did FFH exercise it without partners because i.) they believe strongly in the story, ii.) the converts are worth more than the original tranche as the common has rallied since the first $1 billion piece was announced, or iii.) cash burn is terrible and/or FFH couldn't find anyone else willing to put a penny into this thing.
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To be fair to Prem, I have noticed his inconsistencies more than anyone else, because I have followed FFh so closely for so long.
Al,
of course he has his inconsistencies! Yet, he is the one who created an $8 billion company from scratch. Not me, neither you, nor anyone on the board (at least that I know of!).
Therefore, the real question is: has he lost his mind? From a first class entrepreneur, has he suddenly become third tier?
Gio
He has not adapted to having large amounts of cash available. It is all back to the argument you had on the other thread. If they are gojng to be in the insurance business they need to invest for cash flow, not lumpiness. If they are going to be a PE shop then this is fine. The high debt, and poor cash flow of this style is damaging the insurance operation.
Again, I repeat: 1.4 billion could have generated a lot of cash flow directly to Fairfax. 150 to 250 million per year. instead it was thrown away on a speculation. Think about that while you defend them Gio.
Where are you finding these businesses with sustainable cash flow yields of 11-18% in this environment? I want in on that action.
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What's their cost base in BOI?
$350 million.
I agree there is an outstanding risk control question of how big of a position they will take in a given company as a % of FFH's equity and it isn't reassuring that Prem gives a poor seat of the pants answer. With that said, however, there is a large difference between another $500 million in BBRY equity and another $500 million in BBRY debt.
Thanks for the cost base in BOI.
I agree there is a huge difference between debt and equity. Risk is much less. It's the position size that bothers me.
I would say my biggest issue with BBRY is that they took a huge equity position (when they had the Total Return Swaps on BBRY as well) relative to FFH's equity. That made absolutely no sense.
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What's their cost base in BOI?
$350 million.
I agree there is an outstanding risk control question of how big of a position they will take in a given company as a % of FFH's equity and it isn't reassuring that Prem gives a poor seat of the pants answer. With that said, however, there is a large difference between another $500 million in BBRY equity and another $500 million in BBRY debt.
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Thank you for posting this as it fully answers A_Hamilton on why i am getting annoyed and scared of this investment. Imagine the universe of high quality businesses we could have taken private in the $1.3bB range.
Tks,
S
I've decided to sell down my stake in Fairfax and I wanted to share with the board members. I've owned Fairfax since 2008 and attended the AGM since 2010. I've also read all the AR's since inception and have a lot of respect for what Prem has built both in terms of companies and people.
My issue has been with position sizing with respect to shareholder's equity. I've asked questions related to this at the 2010 AGM and this year at the dinner. Below are my questions and the responses I got from Prem. I went back to my notes to post here.
2010 AGM:
"How does FFH decide its max position size for an investment in the common stock portfolio? Is there a general rule based on % of equity? For example when WFC continued to decrease in value to $10, no additional shares were bought.
-->Answer from Prem (from my notes): 5 to 10% range at the high end in relation to book value.
2013 Dinner:
"At a past AGM you mentioned the max position size for an investment was 5 to 10% at the high end. The position in Blackberry at cost using YE SE was 11.5%. What changed to allow such a large common stock position relative to past guidance?"
--> Answer from Prem - Referred to Paul Rivett to confirm position size and then answered that they were just averaging down into the investment.
Recent comments re Blackberry $9 offer
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To Reuters: “We wouldn’t put our name to such a high-profile deal if we didn’t feel confident that at the end of the day that our diligence would be fine and we’d be able to finance it … Short term these things fluctuate, there is speculation one way, there’s speculation the other way. We never pay too much attention to the marketplace.”
Mr. Watsa said Fairfax won’t put in anything more to the offer than the 10 per cent of BlackBerry it now owns.
“The 10 per cent is like $500-million,” he said.
“It’s a significant amount of money. We’re going to bring equity partners and we think the company will be very well capitalized.”
The fact that Prem & Fairfax are investing an additional $250mln after already investing 880mln after all their comments at the meetings and in the press related to this deal were too much for me. I understand that 1.13bln is not much in relation to assets, but it's huge related to shareholder's equity. The position size was huge related to equity before this additional investment and now it's bigger. Some may say that this additional investment is in the form of debt so it's safer, but to me it's an additional investment.
I would much prefer Prem & Fairfax putting this kind of money into better businesses, but I understand it's not their specialty. I just think if you're going to go after turn arounds you need to be disciplined on how much money you put in, especially when that's what your telling your partners.
I just don't get it. They have now invested 1.38bln! Think about the opportunity cost of that money in todays market.
Opportunity cost? Where else are they getting seven year notes at 6% that are effectively first lien notes with an equity kicker? As a total aside, maybe not relevant to this discussion maybe it is, FFH now has over $1 billion invested in Bank of Ireland.
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1.) You are correct. They are unlikely to redeem. Also, I think they think low rates are here to stay, so the option to convert the prefs isn't worth much.
2.) I contend that these prefs are an inexpensive way for them to 1.) get capital and 2.) short the Canadian dollar.
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Why? They went from being a 10% equity holder to being a holder of $500 million in what are effectively first lien notes and 10% equity holders. This thing goes belly up the whole EV only needs to be $1.25 billion for them to be whole on the notes.
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if duration is what you seek, any reason not to buy the same amount of duration in long bonds? instead of a X% in 10 yr's why not 0.3X% in 30 year zero's or long bonds?
since this is likely to be a low return/money loser part of your portfolio (the base case calls for inflation above 0%), I would suggest packing more duration into a smaller % of the portfolio
Perhaps smaller position sizing is the way to go w longer duration. I'm a chicken for the long bond duration trades! 10 year CD w/ a coupon 60 bps over treasuries is scary enough!
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I'm looking at buying some ten year US government guaranteed instruments as a hedge against deflation.
I can get:
10 year zero: 2.82% (10 year duration)
10 year treasury: 2.69% (8.8 year duration)
10 year FDIC backed CD: 3.307% (CIT or GE; 8.6 year duration; fully saleable on the secondary market)
I'm shocked by the huge spread CD's trade to treasuries. I like the CD option but am afraid that this spread to treasury's won't close (or could rise) if deflation hits and I won't get the same price appreciation on the CD as I might on a treasury if 10 year treasury yield decline say 100 bps. Any thoughts here? Thank you.
AHamilton
FFH price not enjoying the 25% bump in BBY
in Fairfax Financial
Posted
Zach,
I agree that BBRY's impact isn't so large as to cause a major impact on FFH's valuation.
However, I think your valuation of the converts may need some refinement. The call option embedded in the convert went from $2 out of the money to in the money during the quarter. This is surely worth more than 12 million on a $500 million par value convert with a 6% coupon and $10 conversion price.