tiddman

I have never paid such close attention to the week by week workings of the Supreme Court. So it seems likely that there will be a decision sometime in the next couple of weeks, before their summer recess?

I go back and read Steinbeck's "Cannery Row" every few years, by far one of my favorite books, also entertaining, funny, and quick to read. I'm going to sound like a psychopath but one of my favorite sci-fi books is "Battlefield Earth" by L. Ron Hubbard. Even though it's around 1000 pages I've read it 4-5 times. Not an endorsement of the author as a person but it's a great book.

I have looked at Trisura on and off. When spun it didn't seem especially cheap, around 1.2-1.3x book and about 15x earnings if I remember. I am in the US and have gotten a little confused by the different securities. It trades on the TSE with a tracking stock on the US markets. They recently did a 1:10 reverse split followed by a 10:1 split, I guess to get rid of all of the shareholders that had less than 10 shares. But this seems to have created a new US security, so it's hard for me to see the trading history since the split. Do you have any idea about its current valuation?

What got my attention recently was for the first time in a long time we saw what looks like a clear catalyst to resolve what everyone agrees is an untenable situation. The tax plan forces their hand and there finally seems to be appetite to do something. At the same time we can't expect the politicians to make rational comments of any kind. Just listen to comments from Hensarling: "I continue to believe that a government guarantee in the secondary mortgage market remains a bad idea, a risky idea, and an unneeded idea," .... "I also believe the idea is not going away anytime soon and I fully expect it to be part of any successful reform effort in this Congress." "This is a terrible idea but is probably necessary" pretty much sums up the view of so many politicians, who don't grasp the financial consequences but are more worried about the political, and are more likely to obstruct than facilitate. Also, this is a situation that can resolve in many different ways and isn't going to end up tied up with a pretty bow on it which is also what makes it hard to quantify. Could be a recapitalization, could be a reinstatement of the preferred dividends, could be a combining or splitting of the companies, who knows what will happen to the "implied government backing" etc. However the current situation of a quasi-public company funneling billions in profits to the gummint based on a crisis-era fiat, perhaps the last such fog-of-war regulations that are still in place, can't continue.

I work in software engineering and my experience is exactly the same as this. On paper, overseas workers are cheaper with similar qualifications. However in practice they simply don't do the same amount of work, and often effectively do "negative work" because the amount of oversight required exceeds their work output. I was on a project 5 years ago where we replaced 50 offshore workers in India and Pakistan with 5 "onshore" workers, and we turned the project around after it had been in trouble for 3 years. On paper the 50 offshore workers were actually cheaper than the 5 US workers but simply couldn't get the job done. They could look at and address a single small task and declare it done, but nobody could look at the larger picture to see that there was duplicated work, the same issue being re-opened 10 times, etc. In this case there were also problems of corruption, the person in charge of the Pakistan office was skimming nearly 50% of the money we paid and hiring the cheapest workers out of school (i.e. he made the equivalent of 50 of his workers). On another project we hired a few people from Chennai. To mitigate the potential productivity problems we brought the lead guy to the US for 2 weeks to get to know him. He was smart, communicated well, etc. However once he returned to Chennai and we had to work with him via 12 hour time change and from his office it was just impossible to get anything done. We had to walk him through each tiny step of each problem (this was usually at 12-4am our time). They would sometimes have a misunderstanding at the end of our work day, and the beginning of theirs, and we'd show up for work the next day to learn that they lost an entire day's work. We had to assign senior people to "babysit" them, to the point that the senior person could have just done the work himself faster. While we couldn't pinpoint it, it seemed like they were almost trying to misunderstand, drag projects on, and never finish anything. I think they just wanted to stretch the work out as long as possible, knowing that during their work day, we were asleep and they could do what they wanted. I even suspect that some of them were simultaneously working for more than one company. Culturally there is a very strong incentive to "fit in" and just say "yes" to whatever you're asked, I think this is how they are raised and what they are taught in school. This leads to a lack of problem-solving, creativity, and self-motivation that are the hallmarks of a successful worker here.

I think it's debatable that the Chinese economy is "well managed", some would say it's manipulated. Brookfield Asset Management has begun to make sizable investments in China and had some interesting comments on the Chinese economy in their annual letter: http://brookfield.com/_Global/42/documents/relatedlinks/6190.pdf I look at the reports of Chinese "ghost cities" and can't imagine how this could possibly end well. Someone, somewhere is taking hundreds of billions of losses. Enormous resources were employed to build these cities and those people are either no longer working or building more empty cities. What's the possible end game? Perhaps the government is quietly moving in and buying up all of this surplus property or something but this is a property bubble orders of magnitude larger than what happened in the States. As commented above, the Chinese economy is huge and so can theoretically absorb larger air pockets than others, but how can you have multiple cities built for more than a million people populated by 20-50 thousand people? It's mind boggling. This is like intentionally building dozens of Detroits and assuming that people will move into them.

I agree, the "aggressive" plan I'm in is invested in VASGX, which is composed of 3 index funds including an international and bond fund neither of which I like. I would rather just be in a stock index like the S&P 500 or Russell 2000. It only takes a few percentage points of underperformance to offset the small state income tax benefit, so it might be easier to just put your own money into an index fund. Again, it's really too bad that there are so few options and so little assistance for such a major expense...

My kids are 9 and 11 so further along the path than yours, we still have some time to save but college expenses have gone from being an abstract concept to a current concern... I have Coverdell accounts for the kids but the contribution limits are not very hgih. They used to be $500/year per kid but are now $2000/year per kid. This is across all contributors, so if you and your in-laws each chip in $1000 per kid then it's maxed out. With expected college costs in the $100-250k range per kid, this seems like a laughably low limit. BTW these contributions aren't tax deductible like an IRA but the gains are tax free. This is one of the few tax breaks you'll get with college savings plans. The good news is that you have a lot of freedom how to invest this money basically any fund / brokerage / etc. The 529 plans have changed somewhat over time. It used to be that they were good only for colleges in your state, then that changed so you can use them in other states. They have expanded the investment options, it used to be only a savings accounts and now there are various stock and bond options. In Virginia where I live there is still a "prepaid" option where you can basically buy semesters of college today for presumably less than they'd cost when your kid is going to school, but the kid has to go to school in Virginia. They also have a plan where the money is invested 90%+ in stocks when the kid is little and the balance shifts to 10% stocks and 90% bonds as they get near college age. This sounds interesting on paper but with interest rates near zero I don't want any bond exposure over the long term, but that's just me. Bottom line is that you need to read up on the details. I get a break from my state (not federal) tax for 529 contributions up to $4000/kid, my Virginia income tax rate is around 4-5% so this isn't a huge break but at least it's something. I also have UTMA/UGMA accounts for the kids which I set up before I really understood them. Basically the money is in their name / SSN and there is a small tax break, basically the first $1000 or so of income/gains in the account is tax free and the next $1000 or so is taxed at the kid's rate (presumably the minimum rate of 15%). Not sure about those amounts today. However to get this tax break the kid has to file their own tax return. Depending on how you do that the costs associated with doing the tax return can largely offset the savings, for example you might pay $150 tax on $1000 but if you spend $100 to do the tax return you've only saved $50 and went through a lot of hassle. And if you think about it this tax break becomes relatively meaningless once the accounts get up to around $20k, i.e. if you have an account of $20k that has a 10% return or $2k, that is the extent of your tax break, if the account is $50k then the tax break is almost meaningless. With UTMA/UGMA you are also stuck with the issue that the money is legally the kid's, so when they turn 18, they could take it and go tour with their favorite band for a year instead of going to college (slightly tongue in cheek but there is definitely a risk here), Fairmark has a good treatment of the topic: http://fairmark.com/custacct/regret1.htm The Gerber life savings plan that you see advertised on TV is really a savings plan, the return on investment is something like 1-4%, you'd be better off just putting your own money into an index fund or something. If you will be age 59 or older when your kids go to school you might be able to withdraw from your IRA for qualified educational expenses, I haven't tracked this closely and this doesn't apply to me but is another option potentially worth considering. So in short I haven't found any really satisfactory plans. We max out the Coverdell ($2000/kid) and 529 ($4000/kid) each year and get the small tax break, I have stopped contributing to their UTMA/UGMA accounts, and besides that just figure I'll pull money out of my personal accounts when the time comes. It's a real shame that the government doesn't provide more support for what must be one of the most important expenses for parents, kids, and society as a whole, even as costs are spiraling out of control. $0.02. http://imgur.com/5GvWV

I was shopping for headphones recently and tried out the Beats By Dre, I thought they were just really bass-heavy. This probably appeals to certain listeners of certain music and overcompensates for the lack of bass in your typical earbuds. From one article I found: "Beats revenues increased fivefold between 2010 and 2012 alone, hitting the $1 billion mark.". If Apple is paying $3.2 billion and revenues are say $1.25-1.50 billion (assuming some growth since 2012) this might be a perfectly good use of cash for them, that's something like 2-3x revenues for a great brand that is complimentary to their business and profitable.

Buffett and Munger have harsh things to say about EBITDA but I think what they mean is that valuing a company based strictly on its EBITDA is a bad idea because those I, T, D, and A expenses are real expenses especially for a long term owner. They are differentiating themselves from many private equity shops that buy companies based primarily on their EBITDA multiple. Part of the reason is probably that most private equity buyers probably plan on selling the business before the chickens come home to roost, and part of it is that most PE buyers are buying with debt and EBITDA gives an idea of how much they can lever them up. However as we have been discussing here there is a lot of variance / slop in the D&A numbers and if you want to compare to businesses on an apples-for-apples basis, EBITDA is a fine metric, as long as you ultimately account for the cap ex, D&A, etc.

IMHO most D&A is in fact an expense over the long term though it is just an estimate. For instance you may depreciate some plant over 10 years and it most likely does need to be replaced or the company won't have the same earnings power. It might last 8 or 12 years instead of 10, so depreciation in one year might understate or overstate the expense, and the new plant might cost more or less, or be more or less efficient, etc. so it isn't an exact science. But companies need assets to run and they wear out. This can get distorted though, for example goodwill can be amortized over a period of years and show up as an expense when in fact it isn't something that wears out and has to be replaced. Fixed assets such as commercial real estate are depreciated over time as if they wear out when in fact they often appreciate in value, so if you hold them for a long time, the difference between carrying value and market value can increase, meanwhile you're recording an expense every year. Really what you're doing is building up a capital gains liability. There can be situations where a company can buy a business via asset sale and the assets might start at the new company at an artificially high or low price. I was recently looking at a bank CARE which was made up of the combination of about 10 banks, and all of the goodwill accumulated by acquiring all of those banks shows up as an expense, when in fact the amalgamated banks will probably earn more due to lower overhead expenses.

Their results are driven by portfolio returns, underwriting results, hedging, macro forecasting, and anything else they do with their capital such as acquisitions. It also has to do with their level of leverage and risk. Shareholders can't pick and choose. Doing poorly in any one of these areas can lead to mediocre performance. You could say that there are 5 primary factors each with a 90% chance of success, but that adds up to a 60% chance of success. Historically they've done well overall but they'd have to walk a tight rope to get 15% returns IMHO.

Well unfortunately we can't all go back and undo our worst investing mistakes of a few years ago, if we could we'd all be getting 15% CAGR returns...

I think this is just nit picky. Sure the $1200 Christmas bonus is a bit silly but totally meaningless to almost everyone involved. I'd be more concerned about CEO's getting tens of millions of compensation while underperforming. Tom Brown hasn't aged a day in 10 years which I find surprising. I bet he lost his shirt and then some in the meltdown. He was super bullish on all parts of the financial sector right up until the point that they became a smoking hole.

If there were a mutual fund that had returned 15% per year for the past 10 years and was currently trading at a NAV of 100, would you be willing to buy it for 125? Also, AZ had a good table in the article that started this thread showing that this 15% number is more wishful thinking than reality: http://3.bp.blogspot.com/-0VVAtecz12M/U0XnlAVQ-RI/AAAAAAAAAwk/M4eJ1fewwSk/s1600/Fairfax+BV+CAGR.JPG

There is a table printed in every Fairfax annual report with one of the columns titled, "INTRINSIC VALUE % Change in US$ Book Value per Share", the context is comparing Fairfax's intrinsic value (in other words, book value) to its stock price. First of all this clearly draws a parallel between book value and intrinsic value. Second, the end result in these two columns is very similar (19% CAGR vs. 21% CAGR as of 2013). Third, Fairfax stock has on average traded at 1.06 book value over the past 13 years. This all strongly suggests that Fairfax's intrinsic value is equal to book value. Berkshire's intrinsic value is higher because it derives most of its earnings from operating companies that generate steady earnings every year and are valued based on earnings rather than book value. But Fairfax doesn't have any such businesses. In 2013, Fairfax's book value went down by 10% while the stock went up by 18%, a difference of 28%. Today it trades at around 1.25x book value. The highest multiple it has ever traded is 1.44x (according to GuruFocus). I think that Fairfax stock is significantly overvalued, which is both a good time for them to issue shares and a good time for Fairfax shareholders to be cautious.

This sounds a little bit like, heads I win, tails I sell all of my long term investments at a loss? I think the situation that Watsa isn't adequately considering is that the stock market remains flat to slightly higher over say the next 5 years. The hedges will continue to require cash, he'll continue to sell his equity positions, and book value will continue to decline. This would be a pretty big disaster from an investment return and opportunity cost perspective. Then, what are the chances that one of the next 5 years are going to be a really bad year in insurance? I would say definitely greater than zero and history has shown that Fairfax hasn't done much better than others in bad years. What if the market goes up for 2 more years and then there's a terrible year in insurance where they write a 115% combined ratio? I think that is a pretty scary prospect.

They did, though, they issued 1 million shares in November 2013 at Cdn$431/sh. I had totally missed this until AZ pointed it out. This dilutes shareholders and raises cash, but actually increases book value since the stock issuance was done at a significant premium to book. I have mixed feelings about this, on one hand if they really are cash strapped because their "hedges" are moving against them I think they need to be be a little more clear on what risks these hedges pose to shareholders. On the other hand quite frankly I am surprised that Fairfax stock is continuing to trade so high, it's at around 1.3x book now. When was the last time you remember it trading at such a premium? From that perspective Watsa may as well issue as many shares as he can since he's raising cash with overvalued stock and increasing book value.

Thank you, this is a good article and it reflects / restates many of the questions I have had about Fairfax's "hedges". The idea that Fairfax is being forced to sell its core long term equity holdings in order to satisfy cash calls for its hedges does ring true, and would be very worrisome if accurate. Even more worrisome would be if Watsa is not highlighting this since it has a significant effect on their investment returns and performance.

My $0.02. Your degree and school matter most for your first position out of school, and after that mean less and less. You'll be hired for your 2nd and subsequent jobs based on recent experience, not your degree or school. Make career decisions that you expect to live with for 1-3 years. Nobody can foresee their future any further than that. In your head think of career decisions as "kinda temporary", try not to get too attached to a job and be willing to change course quickly. People get stuck in jobs because they're afraid to change and instead of getting 10 years of experience, they get the same year of experience 10 times. Always be on the job market and talk to people about what they do and if they like it. It is kind of like dating, you need to leave yourself open to it but don't need to be in a hurry, and good opportunities will come along. You are trying to make a decision now without a whole lot of information. After a few months on your first job you'll know 10,000% more than you do now and will be better able to make good decisions. After you change jobs a couple of times you'll be in even better shape. That could be 3 years from now or 20 years, but obviously making it 3 years gives you more options. Good luck. Accounting is a great field for getting involved in business and can lead to virtually anything.

I like how he made it sound like a big confessional, but then didn't actually admit his worst mistakes, and compared himself to Warren Buffett in the process. Hubris exceeds humility.

You said earlier that nobody knows how much the HFT'ers are making, yet here you refute that they're making $500 on this trade... Say you place a limit order to buy something at $17 and it's currently available in the market at $16.95, and instead of getting filled at $16.95, someone else buys it at $16.95 and sells it to you at $17. Would that bother you? How about $16.99? Maybe it wouldn't and you're just willing to give away a few basis points on every trade to someone? If so, would you be willing to pay $500 per trade instead of $10? Maybe the assumption that people disagree on is whether or not a quoted price should be available to everyone at the same time equally, like if a stock is for sale for $20, a fair market suggests that any investor of any size can get that price. How about if certain traders can get it at $20, large institutional investors can get it at $20.02, smaller institutions at $20.04, and retail investors at $20.10. Would that be fair?

Well there are numbers out there, for example, "[in 2012], according to estimates from Rosenblatt Securities, the entire speed-trading industry made about $1 billion, down from its peak of around $5 billion in 2009." I dunno in my book $1 billion a year is enough that it warrants attention to see if it's actually legal or not. My own opinion is that it is probably a lot higher, and the firms involved in this have figured out ways to make even more money from this strategy that is not disclosed, but that is just conjecture. How do we know this to be true? It's not like there is a marginal cost of labour with a running computer program. What's stopping them from attacking every single spread and every single order they can get information on? Why is TD Ameritrade's order flow the most profitable? Well my point is that if you are a typical retail investor and buy $50k of a stock and lose $500 of that (0.1%) to the HFT's then you probably won't know or care very much. If you don't trade much then this is just rounding error for you. This I think is why it has gone on so long, it's an annoyance but not a deal breaker for anyone.

Well I guess the reason that it's debatable is that your typical investor is not affected much by this. Certain investors such as the guy featured in Lewis' book is more affected, not only from worse prices but by more difficulty in closing trades. So in that sense I guess most people can look the other way (and have been). However the HFT people are clearly 1) not providing a service that anyone needs, 2) front-running which is illegal, and 3) are making way too much money for ostensibly providing some kind of trade fulfillment service to the markets. Front running is when, for example, you ask a broker to buy IBM at $190, and he buys it for his own account at $189 and then sells it to you for $190. This is illegal and any broker/dealer or advisor would get in big trouble for this. You could debate the fairness or severity of this offense but this has been illegal for a long time. I don't really see what the HFT guys are doing that is different than this, they're just doing it with computers, a lot faster, and in much higher volume.

An analogy would be that you go to make an infrequent, significant purchase such as a lawnmower, and instead of costing $200 it costs $202. This 1% difference doesn't really mean anything to you and so you could say you don't care, after all if you had bought the mower a week earlier or later or a different model or brand you might have paid $2 more or more anyway. But someone is out there collecting 1% of the price of every lawnmower sold in the country and is becoming very wealthy, they claim that they are making it easier to buy lawnmowers but really they're just skimming some money off of every purchase. So while this doesn't impact you economically it isn't fair that someone earns a lot of money for doing nothing of any value. Whether or not this breach of "fairness" bothers you might depend on your perspective. "Front running" is illegal for brokers and advisors, but the kind of front running done by the high-frequency traders is not technically illegal but is certainly the same type of offense and arguably should be just as illegal.