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Year-End Results


Parsad

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There is a note in the statement that book value is underreported due to investments in associates:

 

Investments in associates (fair value $1,782.4; December 31, 2011 – $1,271.8)

 

That's an extra $21 / share, I realize that due to GAAP they can't include it, but would you guys include it in your analysis?

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I see a $1B loss on the hedges in 2012 but where are you seeing that it is unrealized?  It looks to me like there is a $238M liability related to the hedges on the balance sheet.  If you look at page 13, section 7, it breaks out the assets and liabilities of the hedges.  $238M liabilities (which is what shows up on the balance sheet), $207M assets.  I think they true up every month or quarter.  I'm not an accountant though, so let me know if you read it differently.

 

 

 

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I see a $1B loss on the hedges in 2012 but where are you seeing that it is unrealized?  It looks to me like there is a $238M liability related to the hedges on the balance sheet.  If you look at page 13, section 7, it breaks out the assets and liabilities of the hedges.  $238M liabilities (which is what shows up on the balance sheet), $207M assets.  I think they true up every month or quarter.  I'm not an accountant though, so let me know if you read it differently.

The table on pg 2 of the press release has the realized/unrealized break out of the net investment gains.

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I believe it is unrealized but its still Marked-to-Market.

 

Yes, it is marked to market.  Cheers!

 

Yeah affects BV but and operating profit I believe. Luckily most of the bonds are MTM too since they are classified as short term investment so it's easy to value FFH. I find it amazing that they lost 1 billion dollars in hedges and still managed to grow BV by quite a bit. They are taking a defensive approach and I can't blame them for it.

 

BeerBaron

 

 

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They are taking a defensive approach and I can't blame them for it.

 

On the contrary! Imo, they should be praised for taking a defensive approach! Anyway, let’s put opinions aside for a moment. What really matters is they have the strength to behave like anyone should behave, except that no one else has the strength required to do so... It is anyone’s duty to assess risk, and to choose the proper course of action accordingly. When your judgment hints at a “high risk environment”, you must accept a 6.5% return, and not reach for yield, or try to outperform the market. It really doesn’t matter all that much if your judgment will be proven right or wrong. Because, most probably, sometimes it will be proven right, and sometimes it will be proven wrong. It is the discipline that matters. And we all know that, but we all experience great difficulties going from theory to practice… well, the best practitioner I know of is, without any doubt, Mr. Watsa!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

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I see a $1B loss on the hedges in 2012 but where are you seeing that it is unrealized?  It looks to me like there is a $238M liability related to the hedges on the balance sheet.  If you look at page 13, section 7, it breaks out the assets and liabilities of the hedges.  $238M liabilities (which is what shows up on the balance sheet), $207M assets.  I think they true up every month or quarter.  I'm not an accountant though, so let me know if you read it differently.

The table on pg 2 of the press release has the realized/unrealized break out of the net investment gains.

 

Page 11 shows 760 B of realized losses on hedges, and then around 297 in unrealized losses on same.

 

Now its not really realized because the contracts are still in force and it could go the other way, but they are required to settle accounts at Q ends.  However, if the markets keep rising this will become larger and larger.

 

Still makes FFh an excellent hedge against a market drop that would hammer my other holdings, and FFh will still makes money in the meantime. 

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Insurance premiums are way up....bond gains stellar as per usual! Hedges....are the story again...does anyone have cumulative loss on the hedge program since they started in 2010? $2.5 billion to $3 billion?

 

The company is killing it with out the hedge losses...all the insurance companies they bought will come to fruition....and Fairfax will be a powerhouse for years to come...what a great team.

 

 

Dazel.

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If the mkt decides to decline in a meaningful way FFH will more than outperform by not declining as much it should in fact increase in value. If the mkt can hold at these levels the 1st quarter numbers will be VERY good they have generated the most alpha since the time of the cds positions so far this year.

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These hedges are a two edged sword. It is defensive, but in no way it is fully safe to do so. If the markets go up and our investment portfolio don't, we get hurt.

 

Think about Noah ark. If it rains, we float while the others are underwater. If the sun shines, it get dry and we are thirsty.

 

I'm not complaining at all. It's just a fact that people need to remember.

 

 

 

 

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There is a note in the statement that book value is underreported due to investments in associates:

 

Investments in associates (fair value $1,782.4; December 31, 2011 – $1,271.8)

 

That's an extra $21 / share, I realize that due to GAAP they can't include it, but would you guys include it in your analysis?

 

They won't have accrued the offsetting tax on this.....so more like $14 per share uplift net of tax.  I'd include it alright, but no big deal either way, right?

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Any major changes since year end other than the $10 dividend and the stock portfolio volatility? On the portfolio: BBRY, JNJ, RFP, USB, IRE are up. LVLT, SD are down. The net gains for those holdings look to be around $5.50 +/- after tax per Fairfax share.

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These hedges are a two edged sword. It is defensive, but in no way it is fully safe to do so. If the markets go up and our investment portfolio don't, we get hurt.

 

Think about Noah ark. If it rains, we float while the others are underwater. If the sun shines, it get dry and we are thirsty.

 

I'm not complaining at all. It's just a fact that people need to remember.

 

Is the Noah - ark analogy really that suitable? 

 

How about thinking about the investment portfolio as a (proper) long-short fund.  Fairfax has shown an ability to add "alpha" in the past; I'm happy to bet they'll deliver similar results in the future.  Perhaps this will 'only' be a couple of percent (or maybe less), but that's ok by me.  Meanwhile, their hedge gives them optionality (in the same way that cash does) to take advantage of a fall in the equity market.  The value of this optionality of course won't be captured in an accounting sense, but conceptually it could be added to whatever 'alpha' is generated to calculate the total return on the investment portfolio.

 

 

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In my simple mind, I am counting on Fairfax to hedge me against apocalypse (since I am not a goldbugs so I only plan against apocalypse lite).  But just out of curiosity for the experts in the forum, is there a better way (i.e. cheaper way) to hedge this.  As far as I can tell, fairfax looks to be a pretty cheap hedge (given you still have one of the best investor working for you on the long side).  So the way I think of it as a couple of percent goes to the hedge as a form of cheap insurance.  Is there another way I should be thinking about this?

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In my simple mind, I am counting on Fairfax to hedge me against apocalypse (since I am not a goldbugs so I only plan against apocalypse lite).  But just out of curiosity for the experts in the forum, is there a better way (i.e. cheaper way) to hedge this.  As far as I can tell, fairfax looks to be a pretty cheap hedge (given you still have one of the best investor working for you on the long side).  So the way I think of it as a couple of percent goes to the hedge as a form of cheap insurance.  Is there another way I should be thinking about this?

 

In “Margin of Safety”, where he discusses hedging, Mr. Klarman has written:

 

In the best of all worlds, an investment that has valuable hedging properties may also be an attractive investment on its own merits.

 

So, FFH really is “the best of both worlds”!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

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In my simple mind, I am counting on Fairfax to hedge me against apocalypse (since I am not a goldbugs so I only plan against apocalypse lite).  But just out of curiosity for the experts in the forum, is there a better way (i.e. cheaper way) to hedge this.  As far as I can tell, fairfax looks to be a pretty cheap hedge (given you still have one of the best investor working for you on the long side).  So the way I think of it as a couple of percent goes to the hedge as a form of cheap insurance.  Is there another way I should be thinking about this?

 

Not an expert by any means but I have tried buying puts (spy) a few times.  It has never worked very well.  The problem is that it inovolves many facets of market timing and there is no way to get to an estimate ofmintrinsic value.  It is much easier and cheaper to let FFH do it with their own hedges, or BRk do it via incoming cash. 

 

The FFh hedge has allowed me to buy vast amounts of US financials, and not have to be overly worried about them in a catastrophe situation.  If things went totally in the dumper FFH may make hundreds of dollars per share, and have money to invest at the best time.  In the meatime we eat a $50 per share non-cash loss but FFh still makes money.

 

 

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In my simple mind, I am counting on Fairfax to hedge me against apocalypse (since I am not a goldbugs so I only plan against apocalypse lite).  But just out of curiosity for the experts in the forum, is there a better way (i.e. cheaper way) to hedge this.  As far as I can tell, fairfax looks to be a pretty cheap hedge (given you still have one of the best investor working for you on the long side).  So the way I think of it as a couple of percent goes to the hedge as a form of cheap insurance.  Is there another way I should be thinking about this?

 

Not an expert by any means but I have tried buying puts (spy) a few times.  It has never worked very well.  The problem is that it inovolves many facets of market timing and there is no way to get to an estimate ofmintrinsic value.  It is much easier and cheaper to let FFH do it with their own hedges, or BRk do it via incoming cash. 

 

The FFh hedge has allowed me to buy vast amounts of US financials, and not have to be overly worried about them in a catastrophe situation.  If things went totally in the dumper FFH may make hundreds of dollars per share, and have money to invest at the best time.  In the meatime we eat a $50 per share non-cash loss but FFh still makes money.

 

Al, what's your FFH:financials ratio?

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They are taking a defensive approach and I can't blame them for it.

 

On the contrary! Imo, they should be praised for taking a defensive approach! Anyway, let’s put opinions aside for a moment. What really matters is they have the strength to behave like anyone should behave, except that no one else has the strength required to do so... It is anyone’s duty to assess risk, and to choose the proper course of action accordingly. When your judgment hints at a “high risk environment”, you must accept a 6.5% return, and not reach for yield, or try to outperform the market. It really doesn’t matter all that much if your judgment will be proven right or wrong. Because, most probably, sometimes it will be proven right, and sometimes it will be proven wrong. It is the discipline that matters. And we all know that, but we all experience great difficulties going from theory to practice… well, the best practitioner I know of is, without any doubt, Mr. Watsa!  :)

 

giofranchi

 

 

Well said Gio.  Prem is intelligent and rational while others only wish they were.

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These hedges are a two edged sword. It is defensive, but in no way it is fully safe to do so. If the markets go up and our investment portfolio don't, we get hurt.

 

Think about Noah ark. If it rains, we float while the others are underwater. If the sun shines, it get dry and we are thirsty.

 

I'm not complaining at all. It's just a fact that people need to remember.

 

Partner24 The only trouble with this type of analogy is it doesn't take into consideration the dynamics surrounding FFH's position.

There is a crew of guys monitoring things daily who are ready act/react quite quickly.

I know you know this but I always like to think about these guys and some of the interesting meetings they must have.

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