Crip1

Odd thoughts: In reading through this, a little voice in my head said that this is starting to look like a “Machine”. Underwriting and investing fund acquisitions which beget more underwriting and investing which generate funds which beget more... Fascinated that they did show a positive realized gain for the year in equity hedges in an up market…though they were dwarfed by the unrealized losses, it seems to indicate that they were timely in closing out some hedges. Rough Q4 where both the Equity investments and equity hedges but get hit pretty good. Ouch... Never thought I’d see the day where Fairfax’ combined for a full year would be lower than Markel’s. -Crip

Two major themes of this posting Cardboard: First and foremost, I’ve been reading Cardboard’s postings for more than a decade and have found him to be brutally honest, very intelligent, knowledgeable and, when warranted, critical. He was quite vocal of FFH-bashers back in the days of the short-attacks on Fairfax. He has also shown to be critical of several aspects of the very company he was defending, Fairfax, over the years. Now he has turned traits noted herein and set his sights on himself. One cannot help but applaud that. All too often people are reticent to do that for what are likely a number of reasons. As my expertise is not in the arena of psychology, I’ll not attempt to explain this. But I will state that challenging one’s own beliefs and actions is effective in either changing for the better or reinforcing said beliefs. I have to disagree about dividends, though. As I get closer to retirement, a well-covered healthy dividend is becoming more and more attractive. Not easy to find, but quite valuable to a “set it and forget it” portfolio. Oil: My max concentration in Oil was under 3% so the sector’s rapid decline has done relatively little damage to my net worth. Being the contrarian, I am looking for two things. First, an entry point which would be at or close to maximum pessimism. And based on the comments seen in multiple articles, I do not think we’re at or close to that point (something akin to February of 2009 when our CFO told me my recent investment in Wells Fargo was dangerous). We’re not there yet. The second challenge is to determine which survivors will be best served by the inevitable increase in oil prices. At this point, I’ve no opinion on that, but that’s the work that needs to be done in the coming months, IMHO. -Crip

Biosyent, being a smaller cap, is rather volatile. Do you have a target price or intrinsic value? -Crip

Micro: I normally tend to be pretty close to the top of the bell curve, plus or minus a little in any given year, and this year is no exception. So far, the top of the bell curve is >10% and <15% and I am at 16%. At this point, 55.5% of the respondents had returns below 15% and 44.5% were at or above that mark. Altius, EXCO and BYD were my biggest losers for the year but my relatively small positions in each saw to it that, in aggregate, they reduced my overall returns by 2%, so, I would still have been in the same bucket had I avoided those “mistakes”. Macro: I enjoy this thread every year. The reason is that to clearly displays my observation from years ago that Value Investors tend to be a humble lot, willing and able to admit their errors as they are their triumphs. One will rarely, if ever, hear the CNBC-esque-“I destroyed the market because I am a total bad-a**!!!”. One will hear “I thought that this was an easy decision and it worked out for me” or “I thought this was an easy decision but I did not see this or that impacting…”. Investing is like sports in that brilliance is not quite as important as avoiding mistakes. Because of this, I tend to buy and sell less frequently than others and have not used leverage at all. This will see to it that my returns will not be at the top, or the bottom, of the range for this group. And, I’m increasingly comfortable with that because… Personal: I’m 51 and have the goal of achieving semi-retirement by 60. The definition of semi-retirement is where the decision of where to work and what to do will be driven less by income and more by other factors, primarily lack of stress, short commute, the ability to come home and NOT think about work or to go on vacation and not feel the need to work a couple of hours every day. Arithmetically, this is quite possible but as the investment portfolio has increased, losses hurt more. Back 15 years ago, if I would have a negative 5% annual return, the amount I would add to my savings would offset that and my overall net worth would remain the same. Now, if I have a negative 2% annual return, even though I am adding more to my savings in dollar terms, my overall net worth would decline. This compels one to be much more loss adverse. As part of this group, I figure that if I can achieve annual returns equal to the mean, then the “Semi-retirement at 60” goal should be achieved. Thanks to everyone for their commentary… -Crip

Now that we've had our Airing of Grievances, it's time for Feats of Strength. Perhaps we should simply assume Muscleman wins this, put away our aluminum pole for the year and start planning for New Years Eve? -Crip

That's where my concern comes in. Except for my first purchase of FFH eons ago, I had always purchased Fairfax at below BV assuming the following: * FFH would, over time, earn an average of 15% ROE...lumpy though it may be. * At any given time, FFH would be able to be sold at BV. This meant that annualized returns would be 15% taking into account the price "catching up" to BV which is growing at the previously referenced 15% clip. Operating under those two assumptions, I did not need to know intrinsic value or fair price. Granted this is very simplistic, but I considered this a reasonably easy "hurdle" to jump over (Warren Buffett: "I don’t try to jump over 7-foot hurdles: I look for 1-foot hurdles that I can step over.") Now, the issue being faced by me now is that Fairfax is priced will above BV so, in order to maintain the 15% annualized return, either FFH needs to continue to trade at 1.3x BV as it currently trades or FFH needs to achieve better than a 15% ROE. So, with apologies for being a bit long-winded in response to your question, I don't have a firm figure/multiple. -Crip

P24, Well, that's an interesting point to ponder. I want to say that it was roughly 2007 that Markel was selling for 2X book and, at that time, I contemplated selling a good-sized chunk of my holdings. I think they also got pretty close to 2x BV in 1999 as well. Ultimately I never did and it cost me dearly as I could have, a couple of years later, purchased some MKL for dramatically less. I promised myself that, even though I think MKL is a great company to own (and I know you do as well), that I'd sell half or so of my holdings if it was selling at 2x BV. I think that it is a reasonable conclusion that 2X book for MKL is a result of price getting ahead of value. As we are currently sitting at about 1.3x BV, we've got a ways to go. The same concept would seemingly apply to FFH but the specifics are not as clear to me. I cannot argue with your assertion that 1.7x BV being a selling point, but I cannot endorse it either. Do you have any specific calculation that says 1/7x BV is overvalued? Not trying to challenge you on this, just looking to understand. -Crip

Full disclosure, I was offered a job about a thousand miles away from all of our family and friends about 9 years ago which we ended up accepting. In fact, it was exactly 9 years ago today that we closed on our home here in North Texas. Let me offer a couple of thoughts on the subject. · Relocating does interesting things for a marriage. When you move from family and friends, you and your spouse lose a large amount of “support” that you unknowingly get from family and friends. The result is that, in the new location, you both really need to support each other. When this works, the move actually strengthens a relationship. When it doesn’t, the consequences may be acceptable, or may not. In my circumstance and in the circumstance of one of my best friends, the move really helped our respective marriages. Not that there were problems pre-move, but post-move, my wife and I both learned to depend on each other, and that both of us would be there for the other one. · There is an element of paralysis by analysis in that people tend to inject “What about this, what about that?” into their decision-making process. Ultimately, there is no way to accurately forecast what would be best outcome…no way at all. After thinking and pondering and talking it out, you’re ultimately playing a guessing game. · There are too many variables, some of which are impossible to foresee, to consider. You could make an elaborate score card but such a score-card has its limits in terms of effectiveness. I would think of it this way…is life good now? Do you thin life will be good after taking the move? Likely, the answer to both questions is “yes” so while it is difficult to make the “right” decision, there is not really a “wrong” decision as you are good if you go, and good if you stay. FWIW, we are glad we made the move, though we do miss family, friends to be sure. There is something liberating and empowering about moving away from “home”. Without a doubt, it would be great to see things like how our kids’ friends from years ago have grown up, but we’ve met some great friends here as well. We miss family but also find it nice to be away from family drama every now and again. Just remember, either way you decide, you’ll end up being the prime determiner of how things go…if you have a positive attitude, work hard, treat others well, etc, then you are likely to be quite content and happy irrespective of what you decide. -Crip

Stick with beef and chicken to avoid sugar. Spiced rubs work great with those two meats. I love pork BBQ but always favored the sweeter sauces with pork...no can do on a sans-sugar pork BBQ. And, speaking for the Leucadia shareholders on the board, you'll want to make sure to purchase the Certified Angus Beef... -Crip

Yes, Norm is a member/participant on this board. I met him 5 or so years ago at a CoBF dinner in Toronto. I think it is very interesting that Norm, as shown on his page, is a PhD and CFA...clearly he's learned and articulate. At the dinner, though, he listened a heckuva lot more than he talked. Seems like he subscribes to the notion of "God gave you two ears and one mouth, so it's twice as important to listen than to talk". -Crip

Resuscitating this from the dead...the post above discusses, among other topics, Joe Kernan. Well, this little clip from earlier today demonstrates the level with which he is ill-equipped to be on television. Really sorry stuff. https://www.youtube.com/watch?v=qWmLjBEyFMg -Crip

The markets are strange. Unless I missed something, it was not until the third day after a very good quarterly financial report that the market reacted with a 4% bump in price. It's almost like some screens changed reflecting the improved P/E or P/B and several folks said "Hey...look at this" and jumped on. Volume is high, but not out of this world high. Makes no sense to me... -Crip

A decade or so ago there were volumes of articles expounding on the tectonic shift of jobs and entire industries being outsourced to emerging economies such as India, China, etc. Many of the changes indicated therein have come to pass, but the magnitude and impact of the “shift” has been more muted than was spoken of back then. Should the cost of solar power, as indicated in this article, achieve price parity with conventional electricity (and, subsequently, become more cost effective than conventional electricity) then the ramifications would look to be immensely more far reaching than the outsourcing trends noted a decade-plus ago. Major industries will shrink and others will grow. The influence on the world geo-political stage will be massive…a true game-changer. -Crip

Net earnings (loss) per diluted share in the first 9 months of 2013: $ 72.53. I bought more than 1/3rd of my FFH holdings at below $100 and got some for $79. Kind of hard to fathom. -Crip

Eric, I am also in the Mortgage Lending industry and would like to weigh in on your concerns. · * The Purchase Agreement needs to be reviewed by the appraiser to basically make any adjustments to your transaction compared to the others. Example, if the seller is offering to pay the buyer’s closing costs, that may be worth roughly $2,500 or whatever is common for the area. So, when comparing your transaction against others in the area, this $2,500 credit you are receiving must be factored in to the comparable transactions. Same for repair concessions, etc. Stated differently, if a comparable sale is considered where a home sold for $250K but the seller paid $5K in costs to the seller, the total consideration paid is $245K. Any concessions need to be factored in to the equation. · * I’d be naïve to think that there is not an element of “hitting the number” at play, but the fact that they want to see it does NOT necessarily mean that is the ultimate goal. FWIW, I would bet that we see 5-10% of appraisals that do not hit the number. (Ironically, this tends to really make the borrower mad when, in reality, it should make them happy. A low appraisal gives the buyer ammunition to go back to the seller and say “Sorry dude, but this expert says that you house is only worth $x, and I can only get financed for 80% of $X, so we need to bring down the purchase price to $x”, most of the time, buyers do not think this way) · * I cannot comment on all lenders, but we do not employ appraisers or hire appraisers, we hire Appraisal Management Companies (AMCs) to manage this process. We do not know who is appraising the home until we receive the appraisal. Yes, we have asked for appraisers to no longer be considered for our orders in our history (at a rate of less than once out of every 500 or so appraisals) but we do that not based on “hitting the number”, but based on professionalism. If an appraisal is done poorly (inconsistent adjustments, blatant errors, etc.) then we will ask that the appraiser not be used in the future. We do not penalize appraisers for not “hitting value” but, again, I am sure that element exists. I’d also bet that this practice is not pervasive, not nearly as pervasive as was the case 10 years ago. * I am surprised that you were able to talk to the appraiser as that is an inherent conflict of interest. You could use undue influence, potentially, if you talk to the appraiser. Same with your agent…they should not be talking to the appraiser. It is acceptable to provide recommendations on comparable properties, but the appraiser has two options in that event…use those comparable properties or explain why he/she did not. The mortgage industry has devolved into a formulatic process rather than using common sense. That is starting to change a bit, thank goodness, but common sense is still lacking much of the time. I could tell stories… -Crip

This is thoroughly unscientific and is not really educational or enlightening...just meant to be fun. As both companies are selling for north of US$500, the next milestone for each is US$1,000. Markel is clearly in the lead but Fairfax has been rising at a faster rate for 2014. So, who will it be? -Crip P. S. Feel free to weigh in on your rationale, or to simply say that this is a stupid poll.

Now it should be the time to sell some FFH. 1.3 times book. Correct me if I’m wrong, but with the $15 increase, Fairfax is selling at 37% above BV, a valuation not seen since before the turn of the century. Granted that Fairfax’ bond portfolio is seeing some significant gains since 31 March but, still, this is pretty “frothy” for Fairfax, which brings about a dilemma. Being that the Fairfax shares are in a retirement account and there will be no tax impact on selling these shares, I’m tempted to sell 25-50% of my FFH (Fairfax is my top holding, comprising close to 25% of my total) in order to replenish some dry powder for future opportunities, which may, in fact, be Fairfax should the price drop enough. So, is anyone else looking at this run-up as a selling opportunity? -Crip

Research has shown that a disproportionately high percentage of millionaires were in long-term stable marriages. The book did not speculate on the cause and effect of this (i.e. whether professional success begat a stable home life or whether the same dedication to a successful marriage begat a successful professional life....or...whether the lack of a divorce complete with blood-sucking lawyers for both combatants allowed sufficient compounding), but the correlation is unmistakable. From my perspective, I have to say that what limited professional success I've been able to attain would have been far more difficult had I not had a wonderful, supportive, demanding wife. I can laugh at the Charlie Chaplin story, but know full well that reality suggests that a solid marriage does wonders for professional success and personal satisfaction with life. -Steve

The simulator thing, in and of itself, does not overly concern me, based on a couple of observations. 1) My next door neighbor is a commercial pilot. He has a number of books about airplanes, photo books like "Chicago from the air", and, in the eight years I've known him, looks up at every airplane that comes overhead...every single time. 2) I bartended at a hotel years ago. We had a number of Rail Road employees (Soo Line for those who are interested) who would stay there. It was remarkable....after an 8 hour day they would come to the bar and, for 6 hours, drink beer (not excessively, mind you) and talk about trains, the entire time, day after day. Many of these guys have elaborate model trains in their homes. Bottom line, I am not ready to call him innocent, but the flight simulator would be totally unusual in and of itself. -Crip

Yes, when they are parked at the airport it shows all over the air traffic controller's screeen, fillin up their screen of unecessary planes and confusion. BeerBaron I wondered about the reason a transponder could be turned off manually. Now that I've heard it, I cannot believe that there is not a way that the transponder is "automatically" on when the plane is above a certain altitude (like 3 feet) or when it is going above a certain speed, etc. Understood in full that I'm being a Monday Morning Quarterback and there has got to be something that I don't know but, seriously, how can the industry NOT have a way to make sure someone knows where every plane is at all times? I do not understand. -Crip

I totally forgot about this being on, else I would have taken the morning off of work on Friday. Besides Buffett's insights, I do find it interesting watching Becky Quick and Joe Kernen. Becky is acutely aware that the guests (Buffett and Gilbert) are the stars of the show. She asks interesting, probing questions and let's the guys talk. Kernen wants to be the "star" and will add his two cents (the literal and figurative value of his comments) which do not add to the content of the discussion but seem to me to serve as "I'm smart, too". Yes, this is an entertainment business and CNBC wants to be entertaining, but sometimes Kernen needs to step back completely and let the business people talk business. -Crip

I couldn't disagree more. When I look at people I know with financial difficulties ( whether they be friends, acquaintances, family members, or extended family members), what I see is one stupid financial decision after the next over a period of years then decades without ever a thought to saving a penny. When advice is given (even after they bring up the subject with their complaints) it is met with hostility and is certainly not welcome. I hate to think that I'm becoming a curmudgeon, but the older I get the more I believe that most people are just stupid and irresponsible. They make bad decisions and don't want to be called on them, don't want to admit to them, and don't want to be held accountable for them. This explains in a nutshell why democracy can't work. I see that with the middle class people, but not so much with poor people with limited education and prospects. Anyway all I am saying is that the education system for poor people needs a lot of improvement because a lot of poor kids are coming out of high school miles behind the wealthier kids. I understand letting adults fend for themselves but I think kids should get more help to level the playing field. rhbabang – You are correct in many instances. My profession is mortgage. It’s fascinating to me to see folks who make good money spending 44% of their pre-tax income on debt (housing, cars, credit cards) and who have minimal reserves (i.e. net worth). Makes me want to say “Really, your family of 4 could not have been happy in a 3,000 s/f house so you had to buy a $4,000 s/f house?” I think it’s a matter of people who hear what they want to hear. If someone really wants that nice house, or that nice car, and are told 9 times by 9 different people that it’s beyond their means, but they then hear from the 10th source that “Yes, you can afford that”, they are making a conscience decision to ignore the masses and do what they want. It is irresponsible to be sure…definitely a matter of a fool and their money soon parting. That said, I believe matjone has a very compelling point. Public schools in the US teach a lot of facts, but many of those facts are simply not useful in the adult world. Knowing the cosine of a 40 degree angle is nice, but it’s not going to be useful information to the general populace to the extent as creating a budget, balancing a checkbook, understanding the power of compound interest or other things that would be part of “Financial Literacy 101”. My oldest son took a personal finance class in High School and, while I would not call it the be-all, end-all, of education, it did expose him to ideas and concepts that he may not have understood without this class. And, for those who say it is a parent’s job to do this, you are 100% right (although, those of us with teenagers all know that teens have a habit of disregarding everything their parents say, just like we all did at that age). BUT, our education system also has an obligation (less so than parents, but an obligation nonetheless)to prepare students to be responsible citizens, and personal finance is a step in that direction. Granted that this will not make EVERY student more financially literate or more responsible, but increasing the knowledge base amongst our youth will have substantial benefit overall…for those who are rich or poor. -Crip

no_thanks: It depends to some extent on what state you are in but, yes, you can definitely do this provided that you have income/credit/etc to satisfy underwriting guidelines. Getting a loan these days is a pain, but it is doable to be sure. When I refinanced our house a couple of years back at 2.875% I thought about taking an additional $50K - $100K out and putting it into JNJ which, at that time, was yielding over 3%. The issue into which I ran was that once I went to a higher Loan to Value, my rate went up which mitigated the yield difference. So, the concept to me makes a helluva lot of sense. No comment on AT&T but there may be other companies out there whose yield is smaller but are more likely to increase it, or you may want to split your monies into 2-3 different companies. I'll leave that selection to you. When you do this, check on a few different loan amounts (50%, 60%, 70% and 80%) as well as different terms (30 year, 20 year, 15 year, etc) to see where you can get the best rate. -Crip P. S. - OK, I have to do it. I work for a mortgage lender so this is a shameless bit of marketing, but, depending on what state you live in, we may be able to help you. I am not a loan officer, but I have a great group of folks who can run some scenarios for you to see what may work best. Send a private message if interested. P. P. S. - I feel like I am soiling the sanctity of the board by shamelessly soliciting business...I figured that capitalism outranked the sanctity.

Well, it should go without saying that I've been surprised by FFH earnings and market reactions to them before. However, I don't think we're going to see a drawdown of that magnitude tomorrow. My point is not that the value of the company has declined, it is that I can easily see the market overreact to the big loss. Examples are numerous including that one could have purchased Markel below $440 14 months ago IF one was able to ignore the noise and focus on the company. My crystal ball is a bit cloudy, but it would not surprise me to see a 10% decline here and there over the next few days. To those who were looking for an entry point, it is advisable to have your finger on the proverbial trigger. Regarding the results, certainly no one can be happy to see the massive losses on equity hedges. That said, for me to criticize Prem and Co.'s investing moves is like a reporter questioning Michael Jordan's performance on a given night. Hindsight is 20/20 and while it would be wonderful to have that $2B back ON the balance sheet, I do not see that this has changed the FFH story. The FFH story is that Prem and Co will invest well over time. This "mistake" notwithstanding, that has not changed. What MAY have changed is the underwriting. Granted that this year was rather benign in regards to CAT activity, but those results are really, really good. Time will tell whether or not this is a fluke but, historically, underwriting was a weakness of this company. If that does become a neutral, much less a strength, then the story changes for the better, dramatically so. Not selling, may be buying more on any overraction. -Crip

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