2013 results are out

[petec]

Prem is almost always right long term

 

This is the part I agree with... ;D ;D ;D

 

Gio

 

Me too, especially having read Michael Pettis' latest book on China which is a big part of the Watsa deflation thesis.

[giofranchi]

Me too, especially having read Michael Pettis' latest book on China which is a big part of the Watsa deflation thesis.

 

I have just purchased the book. Thank you for recommending it! ;)

 

Gio

[ERICOPOLY]

FFH might find it useful to look at American Barrick & Placer Dome; how they fell in love with hedging, what it did to them, & how they eventually broke the spell to get out of it.

 

The ability of a company to precisely control its major risks is highly addictive ... but it is a investor responsibility, not managements.

Investors buy gold companies because they want those specific risks, & they choose how or whether they are going to mitigate them. Managements job is solely to run the company in the most efficient & effective manner possible. If I want P&C exposure I will buy it, & I will buy as much of it as I want.

 

The solution may be as simple as hedging the major ownership stakes through the option market. FFH takes the full P&C operational risk, & performs accordingly. Owners hedge their risk through the option market as they see fit. If FFH goes down it does not BK its owners, & we get better separation between owner & investor interests.

 

SD

 

On the other hand...

 

An FFH investor could buy index calls to hedge Fairfax's index hedges.  That way, the company is safe and so is the investor.

[Guest Dazel]

 

Packer....his name is Brian Bradstreet.

 

A little respect for the best bond manager in the world....better than Gross and Gundlach. With all due respect to Prem Watsa....it is Brian who has been the star over the last decade. In 2003, the bond portfolio was leveraged 10 to 1 (long dated treasuries) on equity in Fairfax...they have always looked at risk...this time is no different.

That 2003 trade was the trade of the century...well until the credit default  trade!

 

Thanks Brian.

 

Dazel

 

 

 

 

 

[Packer16]

You are correct it must have been late at night.  Brian has done a great job, is humble and does have a great knowledge of history also.

 

Packer

[petec]

What I find interesting is that people keep talking about how we will see if they are right in the future. It's been 5+ years. Doesn't there need to be some kind of time component to a determination of whether someone is "right" about a course of action?  Broken clocks and all that. It's like predicting that San Francisco is due for another major earthquake. If it occurs in 2024 are you right?

 

There's another aspect here, which is that debt bubbles/busts get worse the longer they go on.  In other words, the longer Watsa is wrong, the more right he may eventually be.

 

That said my personal opinion is that he was wrong to hedge in this way (rather than just buying puts) when the market was reasonably priced, which is what he did.

[txlaw]

 

Packer....his name is Brian Bradstreet.

 

A little respect for the best bond manager in the world....better than Gross and Gundlach. With all due respect to Prem Watsa....it is Brian who has been the star over the last decade. In 2003, the bond portfolio was leveraged 10 to 1 (long dated treasuries) on equity in Fairfax...they have always looked at risk...this time is no different.

That 2003 trade was the trade of the century...well until the credit default  trade!

 

Thanks Brian.

 

Dazel

 

Brian Bradstreet may also be the guy who is most responsible for FFH's hedging strategy. 

 

He spoke at a small get together the day before the FFH meeting last year, and he was very, very bearish on the macroeconomic environment -- in a way that made it seem like he might be the one driving the macroeconomic focus at FFH.  Very Austrian viewpoint on the world.

 

For those of you who are going to the meeting this year, you might want to see if you can get Bradstreet's updated thoughts on the macroeconomic environment and the hedging strategy. 

[petec]

 

The ability of a company to precisely control its major risks is highly addictive ... but it is a investor responsibility, not managements.

 

Investors buy gold companies because they want those specific risks, & they choose how or whether they are going to mitigate them. Managements job is solely to run the company in the most efficient & effective manner possible. If I want P&C exposure I will buy it, & I will buy as much of it as I want.

 

SD

 

Yes - but what *I* want to buy is Watsa's brain.  Insurance is just the lever.

[giofranchi]

Yes - but what *I* want to buy is Watsa's brain.  Insurance is just the lever.

 

And Mr. Bradstreet’s, and Mr. Barnard’s (even if insurance is “just” the lever… ;) ).

 

Gio

 

[bluedevil]

 

 

Brian Bradstreet may also be the guy who is most responsible for FFH's hedging strategy. 

 

He spoke at a small get together the day before the FFH meeting last year, and he was very, very bearish on the macroeconomic environment -- in a way that made it seem like he might be the one driving the macroeconomic focus at FFH.  Very Austrian viewpoint on the world.

 

For those of you who are going to the meeting this year, you might want to see if you can get Bradstreet's updated thoughts on the macroeconomic environment and the hedging strategy.

 

Txlaw -- anything else you can share about what Brian said?  Thanks.

[ERICOPOLY]

There's another aspect here, which is that debt bubbles/busts get worse the longer they go on.  In other words, the longer Watsa is wrong, the more right he may eventually be.

 

The positive side is that the further along we get in this deleveraging, the less of it's drag there is ahead of us.

[constructive]

The market is up 66% in the last 4 years. Let's say the market's intrinsic value is up 46% (10% annualized). By hedging out the market risk, Fairfax has permanently lost that 46%. And stocks are only 20% more expensive than they were 4 years ago, not 66%.

 

The risk/reward for shorting the market is pretty bad, except under extremely rare circumstances.

[txlaw]

 

 

Brian Bradstreet may also be the guy who is most responsible for FFH's hedging strategy. 

 

He spoke at a small get together the day before the FFH meeting last year, and he was very, very bearish on the macroeconomic environment -- in a way that made it seem like he might be the one driving the macroeconomic focus at FFH.  Very Austrian viewpoint on the world.

 

For those of you who are going to the meeting this year, you might want to see if you can get Bradstreet's updated thoughts on the macroeconomic environment and the hedging strategy.

 

Txlaw -- anything else you can share about what Brian said?  Thanks.

 

I can't really recall the specifics.  For some reason, I feel like it was quite similar to Kyle Bass' view of the world at that time.

 

My major takeaway was that HWIC had positioned the portfolio in a way that was anticipating some sort of global macroeconomic disaster -- an echo of the financial crisis due to money printing and governments taking on more and more debt.  And that because they really believed in this view of the world, they would not be taking the hedges off anytime soon.

 

Since I totally disagree with the hedging strategy, it was a very worthwhile thing to hear from someone other than PW because it solidified my decision to stay away from FFH until they actually take off the hedges.

[bluedevil]

Thanks!

[Phoenix01]

 

 

Brian Bradstreet may also be the guy who is most responsible for FFH's hedging strategy. 

 

He spoke at a small get together the day before the FFH meeting last year, and he was very, very bearish on the macroeconomic environment -- in a way that made it seem like he might be the one driving the macroeconomic focus at FFH.  Very Austrian viewpoint on the world.

 

For those of you who are going to the meeting this year, you might want to see if you can get Bradstreet's updated thoughts on the macroeconomic environment and the hedging strategy.

 

Txlaw -- anything else you can share about what Brian said?  Thanks.

 

I can't really recall the specifics.  For some reason, I feel like it was quite similar to Kyle Bass' view of the world at that time.

 

My major takeaway was that HWIC had positioned the portfolio in a way that was anticipating some sort of global macroeconomic disaster -- an echo of the financial crisis due to money printing and governments taking on more and more debt.  And that because they really believed in this view of the world, they would not be taking the hedges off anytime soon.

 

Since I totally disagree with the hedging strategy, it was a very worthwhile thing to hear from someone other than PW because it solidified my decision to stay away from FFH until they actually take off the hedges.

 

I recall that it was all about the uncharted territory and unintended consequences.  FFH spends a lot of time trying to figure it out, and they did not know what would happen next.  The risks of something bad happening (especially in Japan with Abenomics) was very real and even probable. 

 

I look forward to the AGM to see what has changed.

[Phoenix01]

Here is a link to an article by Soros that does a nice job of highlighting the major financial risk that exist today.

 

http://www.project-syndicate.org/commentary/george-soros-maps-the-terrain-of-a-global-economy-that-is-increasingly-shaped-by-china

 

There is a lot of fragility in the world.  It will not take much to trigger a crisis.

[gary17]

 

On the other hand there's a lot of opportunities for the world to work together and advance - the glass can be half full or half empty. Where there are risks there are opportunities. All I know is there's a lot more wealth today than 100 years ago and we had many crisis this last century and nothing slowed down on that scale (relative to the last 1000 years before 1900).

 

 

Here is a link to an article by Soros that does a nice job of highlighting the major financial risk that exist today.

 

http://www.project-syndicate.org/commentary/george-soros-maps-the-terrain-of-a-global-economy-that-is-increasingly-shaped-by-china

 

There is a lot of fragility in the world.  It will not take much to trigger a crisis.

[Phoenix01]

It all comes down to margin of safety.  Are you reaching for yield or shooting fish in a barrel?

 

In an overpriced and fragile economy, what sort of returns are you going to demand?  Are those returns available today?

 

My perception is that there is a lot of of reaching for yields, so I am stocking up on dry powder and waiting patiently.

[Packer16]

Let me ask when was there not alot of fragility in the world?  I only see where it is fragile shifting around.  As Kraven's quote says: "If you see cheap stuff buy it and something good may happen".

 

Packer

[petec]

There's another aspect here, which is that debt bubbles/busts get worse the longer they go on.  In other words, the longer Watsa is wrong, the more right he may eventually be.

 

The positive side is that the further along we get in this deleveraging, the less of it's drag there is ahead of us.

 

What deleveraging?  The US is, a little (total debt down from ~390% of GDP to 340%).  But the world overall has added 30% to its debt load since 2007.

[Kraven]

Let me ask when was there not alot of fragility in the world?  I only see where it is fragile shifting around.  As Kraven's quote says: "If you see cheap stuff buy it and something good may happen".

 

Packer

 

Exactly.  The myth of certainty and stability is the siren song of the investor.  So what to do?  Buy cheap.  There is always tension between cheap stocks in a fairly priced or overpriced market.  Timing is difficult though.  One simply has to realize that even cheap stocks will suffer (hopefully) temporary declines if the market hits a speed bump. 

 

One thing I don't understand though is when people say they haven't bought anything in a year or there is nothing to look at.  There are always things to look at.  Always ideas.  It comes down to the same discussion of whether one views investing as putting art on the wall to be admired or whether it's inventory for a store to be thrown in a warehouse ready to be sold.  If the former, then sure, great art doesn't come around very often.  If the latter, one can always pick up some more gum or diet coke or something.

[petec]

The market is up 66% in the last 4 years. Let's say the market's intrinsic value is up 46% (10% annualized). By hedging out the market risk, Fairfax has permanently lost that 46%. And stocks are only 20% more expensive than they were 4 years ago, not 66%.

 

The risk/reward for shorting the market is pretty bad, except under extremely rare circumstances.

 

That 10% is a massive assumption!  What have corporations been doing in that time?  Not investing and adding to productive capacity.  Buying back shares and paying dividends perhaps but that doesn't add to IV.  Growing profits, yes, but by expanding margins in ways that may or may not be sustainable (given the mean-reverting nature of this series).  I find it very hard to get at how much value has genuinely been added in a world where the cost of capital is seriously distorted.  I would not be surprised if IV has barely grown.  10% seems to me to be very aggressive, especially given that my understanding is that total returns from the market in the very long run (which presumably is roughly in line with IV added) have been about 7%, the biggest part of which is dividends which clearly don't add to IV once they are paid.

 

 

[ERICOPOLY]

There's another aspect here, which is that debt bubbles/busts get worse the longer they go on.  In other words, the longer Watsa is wrong, the more right he may eventually be.

 

The positive side is that the further along we get in this deleveraging, the less of it's drag there is ahead of us.

 

What deleveraging?  The US is, a little (total debt down from ~390% of GDP to 340%).  But the world overall has added 30% to its debt load since 2007.

 

Private sector debt carries higher financing costs than public sector debt.  So you may scoff at 390% vs 340%, but I think the difference is more significant than that.

 

Let's say you take a private citizen that was paying 6% interest on his personal debt, and you tell him instead that he only has to pay 3% interest if it is moved to the public sector.

[giofranchi]

If the former, then sure, great art doesn't come around very often.  If the latter, one can always pick up some more gum or diet coke or something.

 

Either art or diet coke, first and foremost I need to KNOW what I am investing in. And in my experience to know a business well is quite difficult; on the contrary, to suffer the illusion of knowing a business well is quite easy.

Not to fall prey of the illusion of knowing a business well, I let my circle of competence grow very slowly over time. Even so doing, I believe there are inside my circle of competence some businesses I don’t know as well as I think.

Among the few businesses I think I know well, none are cheap right now (with the possible exception of the ones I already own a lot of).

 

Gio

 

[giofranchi]

Let's say you take a private citizen that was paying 6% interest on his personal debt, and you tell him instead that he only has to pay 3% interest if it is moved to the public sector.

 

Ah! Eric, that’s exactly why rates won’t go nowhere for yet some time! If there is one thing the US should want to manipulate, even more than the stock market, is the interest they pay on their staggering debt! ;)

 

Gio