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DynamicPerception
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I'm pretty cheezed off about this whole thing at the moment.

 

I just got off the phone with TD Ameritrade, after nearly an hour and transfers between four different departments trying to divine just exactly where I stand.

 

Granted, I'm an idiot for ever allowing myself to get into using margin at all, but that I did, and unfortunately some time before the whole meltdown began last year.  Some of my holdings have recovered, but some, in particular related to energy, have not.  I still expect that they will, but not before we start to see some real movement in the real economy (read, energy consumption approaching pre-recession levels).

 

I'm not anywhere near being in danger of a margin call at the moment, but since FFH makes up over half my portfolio, when the delisting occurs it will immediately put me into a large margin call situation.  I couldn't even get the Ameritrade rep to give me assurances that I'd actually be given a chance to deal with it before they just start dumping stuff for me.

 

So now I am forced to do something now.  I either have to unload a large part of me FFH, pay the capital gains tax, and miss out on future growth in the stock, or else I have to realize significant losses in other equities for which nothing in my thesis has changed...again, missing out on any future opportunity.

 

I only see two alternatives now.  I either have to replace the long shares with deep in the money LEAPs (thus realizing gain and paying taxes now), or I have to move to Interactive Brokers - which frankly doesn't appeal to me given their policy of no margin calls.  Not to mention the fact that IB tells me it could take up to two weeks to complete a transfer of my holdings from Ameritrade, during which time I'm completely locked out from executing any transactions, with no guarantee that I won't end up being denied, resulting in basically no time to do anything.

 

Frankly, this sucks.  Either way you slice it, I'm feeling like Fairfax isn't exactly treating me like a partner in ownership of this company right now.  And in all likelihood there are a non-trivial number of others in my position who will be forced to do something along the same lines with increasing urgency between now and December 10.  >:(

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I only see two alternatives now.  I either have to replace the long shares with deep in the money LEAPs (thus realizing gain and paying taxes now), or I have to move to Interactive Brokers - which frankly doesn't appeal to me given their policy of no margin calls.  Not to mention the fact that IB tells me it could take up to two weeks to complete a transfer of my holdings from Ameritrade, during which time I'm completely locked out from executing any transactions, with no guarantee that I won't end up being denied, resulting in basically no time to do anything.

 

Frankly, this sucks.  Either way you slice it, I'm feeling like Fairfax isn't exactly treating me like a partner in ownership of this company right now.  And in all likelihood there are a non-trivial number of others in my position who will be forced to do something along the same lines with increasing urgency between now and December 10.   >:(

 

Ok.  First off, it sucks to be you.  You have found yourself in a complicated web of tax law, existing broker policy, willingness to change brokers, and your leveraging strategy.  Obviously something's gotta give, and none of the options is exceptionally attractive.

 

However, without wanting to seem like too much of a prick, that problem is an individual problem for which an individual must seek a solution.  It is not an FFH problem, it is not FFH mismanagement, it is not FFH failing to optimize intrinsic value, it is not FFH expropriating shareholders' wealth. 

 

Ultimately, time will tell whether the de-listing is optimal for FFH (in terms of access to capital, talent, etc).  However, I would not attribute this to FFH being a "bad partner."

 

SJ

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during which time I'm completely locked out from executing any transactions, with no guarantee that I won't end up being denied, resulting in basically no time to do anything.

 

 

I think a better way of handling this would have been for Fairfax to give us all more time to arrange our affairs.  Why the rush?

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Ok.  First off, it sucks to be you.  You have found yourself in a complicated web of tax law, existing broker policy, willingness to change brokers, and your leveraging strategy.  Obviously something's gotta give, and none of the options is exceptionally attractive.

 

However, without wanting to seem like too much of a prick, that problem is an individual problem for which an individual must seek a solution.  It is not an FFH problem, it is not FFH mismanagement, it is not FFH failing to optimize intrinsic value, it is not FFH expropriating shareholders' wealth. 

 

Ultimately, time will tell whether the de-listing is optimal for FFH (in terms of access to capital, talent, etc).  However, I would not attribute this to FFH being a "bad partner."

 

SJ

 

I didn't explicitly refer to FFH as a "bad partner," though I can see how one might infer that.  Given that this move may well benefit SOME shareholders while it clearly does not benefit me and, I would assume, many others in my position, I am having a bit of difficulty understanding how exactly this is supposed to be "fair and friendly."

 

It was not my intention to go down this road.  I was hoping for advice on what course of action to take, but I guess since I started by voicing my frustration I'll now have to settle for the value investing community wagging its finger at me and telling me I don't deserve to own FFH since I've been naughty and used leverage to do it. :-\

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during which time I'm completely locked out from executing any transactions, with no guarantee that I won't end up being denied, resulting in basically no time to do anything.

 

 

I think a better way of handling this would have been for Fairfax to give us all more time to arrange our affairs.  Why the rush?

 

I couldn't agree more.  Talk about the Law of Unintended Consequences.  I can't imagine they meant for these types of situations to arise, but how could they not have anticipated that they might?  Surely these guys understand more about this stuff than 99% of retail investors - that's why I entrusted them to invest for me in the first place.

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or I have to move to Interactive Brokers - which frankly doesn't appeal to me given their policy of no margin calls.  

 

 

Here is my advice:

 

1)  Move to Interactive Brokers

2)  Buy FFH puts to raise your margin borrowing capacity to a safer level (when they expire worthless you at least have a tax loss)

 

Other ideas to further reduce your margin risk at Interactive Brokers:

Sell your energy holdings (assuming no taxable gain):

A)  replace them with deep-in-the-money LEAPS on those same energy names (if available).

OR

B)  replace them by writing deep-in-the-money puts on those same energy names (the money you get from writing the puts helps count towards your total margin equity, thus increasing margin borrowing capacity and thereby reducing margin risk).  You also benefit by not actually borrowing any money, so no margin interest expenses, but you miss out on a dividend which will be partially if not completely (and then some) offset by the volatility premium in the put contract you write.

 

Downside is that soon you won't be able to buy puts anymore on FFH, and if you write deep-in-the-money puts the volatility premium tends to virtually disappear as they go further into the money (increasing the chance of somebody putting the shares to you at the very time you least want them to -- when the shares are crashing... and that's why it's annoying that Interactive Brokers won't grant you a stay of execution and allow you to handle the margin call yourself).

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While we all consider ourselves investors in FFH, many of us - myself included - own or have owned FFH through LEAPS instead of owning the stock. There has also been a lot of talk of short-term trading of the stock on this board. I have done this stuff as much as anyone, so I am certainly not criticizing anyone here . ..  but I think its possible that this move by FFH has just as much to do with the actions of us on the board as the actions of the NYSE or short sellers.

 

FFH wants long-term investors, and while many of us have admired and owned this company for years, trading in-and-out and using options doesn't really make us long-term investors in the company.  Owning through margin is also frowned upon at least by Buffett - who is one of the intellectual father's of FFH.

 

I would certainly prefer if they stayed on the big board and that there would still be LEAPS on this company going forward, but I don't forget that it is the work that Prem and everyone else at FFH have done that have made me money . . . my buying LEAPS certainly doesn't help them out at all.

 

There has been a lot of talk on this board lately about FFH being shareholder unfriendly and I think it is both misguided and unfounded. This company has gotten where it is because of the leadership it has. I am glad there is a dual share structure to prevent more short-term-thinking shareholders from controlling the fate of FFH. I don't think a share split will help anyone in the long-term, not the shareholders or the company. It is to our benefit to have the other shareholders be long-term (I would say "also be long-term", but I have already disqualified myself) - this is why they could raise capital when they needed to a few years ago and could do it again on good terms this year.

 

Someone complained that the other shareholders got a sweetheard deal with they injected equity a few years ago. They deserved to! They were helping Fairfax . ..  I certainly have never helped FFH in any meaningful way, and certainly couldn't give them a couple hundred million if they needed it.

 

I don't mean this as a rant or an attack on anyone (myself included), only as a request that everyone take a step back and get some prespective. This is probably the most shareholder friendly company I know of outside of Berkshire. It is also one of the best investments I know of, and most of us have already made a lot of money investing in this company (or derivatives of such).

 

If Prem wants me to (and I don't presume to know why he and the board made this decision) be a true long-term shareholder, and even if he wants to prevent me from using margin (not that I think this will ultimately be a problem for many people or that it was a part of the motivation for this action at all) I am fine with that. I am lucky to be able to invest in FFH and have benefited by it, not the other way around.

 

If the only way to invest in FFH going forward is to buy $360 subordinated voting shares in Canada, I am just fine with that. It worked out pretty well for those who bought BRK in the 80s. 15% annual appreciation is pretty darn good, and one day the multiple will reflect that.

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or I have to move to Interactive Brokers - which frankly doesn't appeal to me given their policy of no margin calls.  

 

 

Here is my advice:

 

1)  Move to Interactive Brokers

2)  Buy FFH puts to raise your margin borrowing capacity to a safer level (when they expire worthless you at least have a tax loss)

 

Other ideas to further reduce your margin risk at Interactive Brokers:

Sell your energy holdings (assuming no taxable gain):

A)  replace them with deep-in-the-money LEAPS on those same energy names (if available).

OR

B)  replace them by writing deep-in-the-money puts on those same energy names (the money you get from writing the puts helps count towards your total margin equity, thus increasing margin borrowing capacity and thereby reducing margin risk).  You also benefit by not actually borrowing any money, so no margin interest expenses, but you miss out on a dividend which will be partially if not completely (and then some) offset by the volatility premium in the put contract you write.

 

I appreciate the advice.

 

I have trouble with most of it though.

 

First off, I called Interactive Brokers and was left unconvinced I can even do the transfer.  It was a difficult conversation where I don't believe I ever got the rep to fully understand the nature of the move from NYSE, and couldn't get a clear statement as to whether I'd be eligible for margin there or not.  More importantly, she said it could take up to two weeks to complete the transfer during which I'd be completely disconnected from my portfolio, leaving almost no time to do anything should there be a problem.  Waaay too risky for my blood. 

 

That leaves the options strategies.  Buying LEAPs means I pay gains tax now, I'm not really an owner, and I forego the dividend.  Not to mention that if I don't go to IB, I can't roll over if I'm unable to exercise (no margin, remember?).  So there's a drop dead date there.  I guess at least if I buy the LEAPs now it won't matter so much if it takes a few weeks to work out the kinks at IB, and I would be buying something near enough to at the money that it would get me out of margin altogether, at least until it comes time to exercise or roll over, but still too much uncertainty.

 

Your advice on the energy stocks probably makes the most sense, and it's something I've been trying to figure out how to do anyway....but I should have been more specific that they are all alternative energy stocks, namely solars, microturbines, and smart grid tech.  Small and mid-caps, lots of volume, fairly volatile, but the options in them aren't very attractive, at least to my feeble and inexperienced mind.  There's almost no money to be made selling any options that I'd want to sell and the premiums for the ones I'd want to own seem too high. 

 

I'd love to quit my day job and spend the next two weeks figuring this out but I don't really have that luxury.  There's gonna be a lot of late nights this week...

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While we all consider ourselves investors in FFH, many of us - myself included - own or have owned FFH through LEAPS instead of owning the stock. There has also been a lot of talk of short-term trading of the stock on this board. I have done this stuff as much as anyone, so I am certainly not criticizing anyone here . ..  but I think its possible that this move by FFH has just as much to do with the actions of us on the board as the actions of the NYSE or short sellers.

 

FFH wants long-term investors, and while many of us have admired and owned this company for years, trading in-and-out and using options doesn't really make us long-term investors in the company.  Owning through margin is also frowned upon at least by Buffett - who is one of the intellectual father's of FFH.

 

I have done very little trading with my FFH shares, just a little tweaking here and there when necessary.  While your point is well taken, my complaint today is that by taking this action, FFH is ironically forcing me OUT of being an owner and limiting me to options if I want to participate at all.

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I think a better way of handling this would have been for Fairfax to give us all more time to arrange our affairs.  Why the rush?

 

I agree. Although, I'm not affected. I wonder if they will ever explain why.

 

I have a work related problem with one of our largest suppliers websites. Trying to get in contact with the person that is responsible(and can help me) for the particular flash application is tough. It can be a hard these days.

 

I truly hope that you are able to exchange your ffh.nyse for ffh.u.tsx or someone will point you to the FFH expert at TD Ameritrade.

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Ok.  First off, it sucks to be you.  You have found yourself in a complicated web of tax law, existing broker policy, willingness to change brokers, and your leveraging strategy.  Obviously something's gotta give, and none of the options is exceptionally attractive.

 

However, without wanting to seem like too much of a prick, that problem is an individual problem for which an individual must seek a solution.  It is not an FFH problem, it is not FFH mismanagement, it is not FFH failing to optimize intrinsic value, it is not FFH expropriating shareholders' wealth. 

 

Ultimately, time will tell whether the de-listing is optimal for FFH (in terms of access to capital, talent, etc).  However, I would not attribute this to FFH being a "bad partner."

 

SJ

 

I didn't explicitly refer to FFH as a "bad partner," though I can see how one might infer that.  Given that this move may well benefit SOME shareholders while it clearly does not benefit me and, I would assume, many others in my position, I am having a bit of difficulty understanding how exactly this is supposed to be "fair and friendly."

 

It was not my intention to go down this road.  I was hoping for advice on what course of action to take, but I guess since I started by voicing my frustration I'll now have to settle for the value investing community wagging its finger at me and telling me I don't deserve to own FFH since I've been naughty and used leverage to do it. :-\

 

I don't think anyone is telling you that you don't deserve to own FFH.  Rather, I think I was telling you that your problem is your problem, not FFH's problem.  You have already identified potential solutions to your problem, but as it happens, you don't seem to like them.  I understand this, but I have a problem when you suggest you are cheesed off with FFH.

 

Personally, I didn't love the cash buyout of ORH, but I didn't try to solicit sympathy from board members about all the capital gains that I will have to pay (poor me!).  Heavens, if paying income tax is our biggest problem in life.....

 

SJ

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i do feel like FFH is not treating every equally as equal partners, sure he doesnt have to but... would WEB have done it this way? I highly doubt it.

 

the recent Burlington acquisition is good example, buffett is willing to split stock 50 to 1 just so that the small investor will have the same options.

 

exactly why the rush...?

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Hi smw397...  You asked for advice, so here goes ... as with all advice it suffers from not knowing enough about your situation ... this is more of a possible solution to a puzzle you've posed, than actual actionable advice. My apology for being blunt in the following.

 

First ... you have to play defense, not offense - this is a time to preserve your capital, not try to accumulate more by turning the change to advantage. If you were not overextended at present, you could consider some offensive move, but now it's defensive play time.

 

Hence... don't change brokers at present time.  You need to keep control of situation and timing of transactions.  There is tight time window to act. Afterwards, you can explore brokerage alternatives.

 

I'll suppose you have 50 pct FFH and 50 pct microcaps (low trading volumes, large bid-ask spreads, would lose big if had to sell them rapidly).  And that FFH margin is 30 pct of portfolio - ie, you actually own 70 pct of the total shareholdings in your portfolio.  Henceforth will refer to that as 50 FFH plus 50 Microcap, ie unit of measure is percentage of original portfolio.  Also assume you have unrealized capital gain with FFH but unrealized loss with at least some Microcaps.

 

Immediate action - get rid of the margin - sell the FFH which is liquid.  That means reducing to 20 FFH + 50 Microcap, but you own it free and clear.  And you are back in control of your investing, not at risk of broker errors.

 

Secondary action - sell 15 units of Microcap, the ones which see a strong bid, and/or you feel least comfortable with.  Repurchase 15 units of FFH. Now you have half-and-half portfolio, but no margin risk.  And you have realized some capital losses to balance the tax effect of FFH gains.

 

Then ... wait for mid-December, or later, and see what transpires.  No more urgency on a personal basis, I think.  Something will probably be worked out for the FFH holding.  If not, then sell it in new year, and offset the gains by taking losses on other holdings.  If insufficient losses to balance the capital gains, then be happy you have made money overall.

 

Longer term ... in an interview posted today, Prem Watsa spoke of preparing for a combination of markets down 50 pct plus a Richter 7-8 quake, ie a major draw upon FFH assets just when it would not be pleasant to have to sell the equities held.  You might consider that model for your own financial planning.  It is good to have some diversification outside the stock market.

 

Right now the market has gone up a lot, which means there is latent selling pressure whenever some segment of the crowd panics.  Sure there are good businesses selling at 70 pct of what they "should" sell for, but another panic could reduce those prices to 50 pct of "should" or less. You cannot assume the ability to sell to other value investors at more than 70 pct of "should".  So, besides general aversion to margin, there is a case against having margin in the present market context.

 

Best wishes.

 

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As far as the delisting is concerned, this is what I got, so far, from Ameritrade:

 

"Thank you for your inquiry regarding the security FAIRFAX FINANCIAL (FFH) which plans to delist its shares from the NYSE on approximately 12/10/2009. This security will still be able to be traded through TD AMERITRADE because we are able to facilitate trading on the Toronto Stock Exchange (TSX). However, if the security only trades on the TSX, it will be necessary to contact a TD AMERITRADE broker to facilitate the trade as the order would need to be routed to Canada. You may call a broker at 1-800-669-3900 and broker assisted trades have a $44.99 per trade commission.

 

Often, when a foreign security delists from an exchange, it may change symbols to a 5-letter symbol ending in 'F' and continue to trade in the United States on the over-the-counter market. If this occurs, the shares would be able to be traded through the TD AMERITRADE website. It is too early to determine which of these two alternatives will actually occur as the delisting is not yet effective. Please feel free to follow up when the delisting has become effective".

 

 

 

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