Rabbitisrich

The investments are held as available for sale. FCF, Owner's Earnings, and similar income statement derived going concern valuations are appropriate for BH because the restaurant operations comprise most of the value.

I'm not familiar with the application of portable alpha, but the concept is simply to hedge out the volatility associated with a benchmark, so that your asset or portfolio return can be attributed to your selection skill. In the case of Fairfax, they seem to be long specific stocks while hedged against broad market indices, so I don't think that they are using a portable alpha strategy. My guess is that portable alpha is more like being long Citigroup while shorting the BKX.

True, but in the case of MSFT, there was only short-term confusion during a period when the company was in strong financial shape. You might even say that the dips transfered ownership to people with more confidence in the underlying business. Steady dividends may attract a shareholder base which judges a company on the consistency and growth trend of its dividend. If we get too many owners who underestimate the earnings volatility of a healthy insurance company, we may be forced into a trade-off between intelligent dividend cuts and necessary stock sales.

Yeah, fully agree; plus I don't like the increasing regularity of the dividend, which tends to attract dumb money to the table.

SNS alone might be somewhat undervalued at current prices. Biglari surprised me with his operating skills (I sold SNS at $10), and he seems to have rationalized the upfront costs of expansion. Customer are paying less per ticket, but NRA surveys and customer traffic figures from major chains seem to show that we are approaching a bottom in the casual dining space. On the other hand, there are plenty of cheap companies in this space if you think that the macro picture is improving. Regarding Biglari's potential returns, think about all the tax drags before shareholder returns. You get the operating income tax, followed by realized taxes from investment activities, and then the dividend tax on accumulated passed through funds. Meanwhile Biglari gets his 25% cut on returns above 6% even though that 6% represents a return before management fees and dividend tax. The tax inefficiencies pretty much force Biglari to find a leveraged business like insurance to achieve required returns.

At the end of 2009, the percentage of commercial bank assets (according to FDIC call reports, which covers bank holding entities) in reserve accounts stood at 5% from 1/4% before the crisis. On the other hand, the Fed issues a quarterly survey of senior loan officers that shows flat to declining loan demand, particularly at small banks and in commercial and industrial loans. This link shows the distribution of loan officer responses from the October survey: http://www.federalreserve.gov/boarddocs/snloansurvey/201011/table1.htm

Is that specific to your location or loan size? In November, I could obtain a 15 year fixed rate from Wells at 4.3% APR on a ~$400K loan, which also covered closing costs. This is in Pasadena, CA, where home prices have been less volatile than the greater Los Angeles area. Also, you may have been hurt by the composition of your assets. If you maintain a large checking account balance for 6 months, your application is more likely to push through.

I wonder about that phenomenon of simply updating write-ups. I read an AGM transcript with a respected value fund which owned DELL, and their thesis was straight out of 2003, i.e. negative working cap., low cost advantage, etc... It also irritates me when respected managers with great long-term records say that they review their thesis when the stock price plummets. Isn't that activity more rewarding before the damn drop?

Unfortunately, FBAK shareholders don't sell stupidly. It's one of those super consistent businesses with a steady shareholder base; great once you get in, but tough to find an entry.

Thanks, Watsa, for the Ayn Rand Lexicon. I am interested in reading more of her philosophy. Can you recommend her more technical writings? I am having trouble with the ambiguous usages of "rational man", "conceptual consciousness", etc... Reading through some of the quotes, it seems that she implies the need for a mediating authority: "He has to plan his life long-range, make his own choices, and deal with other men by voluntary agreement (and he has to be able to rely on their observance of the agreements they entered)." This quote implies limitations in the ability to own the proceeds of your work: "If you exist only because society permits you to exist—you have no right to your own life. A permission can be revoked at any time. If, before undertaking some action, you must obtain the permission of society—you are not free, whether such permission is granted to you or not. Only a slave acts on permission. A permission is not a right." It's something to consider when it comes to the allocation of survival resources such as clean water medicine. For the Randians, does Rand confront the notion that societies form rules, codified and otherwise, to mitigate the endless processing that would occur if participants had to cost-benefit model all interactions?

Just poking fun at the notion of secondary market participants demanding originality.

Are you guys seriously implying that it's okay to be unoriginal when you are investing in secondary markets?

One would think that China would be glad for American inflationary policies despite the short term hit to their exporters. The inflation differential is eroding their currency advantage, in real terms, anyway so why encourage a disinflationary trend?

I used to criticize Tilson for the seeming obnoxiousness of his public appearances, but I've since become more educated about the money management business. Performance doesn't exist in a bubble; he also must keep his capital stable in the face of market volatility. Tilson's public appearances serve to manage expectations and to communicate T2's logic to current and future capital sources. I bet that the money managers on this board can appreciate the value of a Tilson type.

I sold KMX at $29, so I am a bit biased against current shareholders, but the current price accounts for the wonderful strengths of the company. Simpson might simply be clearing out the less obviously undervalued stocks.

Shilling was an early prognosticator of doom as shown in this link: http://www.safehaven.com/article/6329/the-coming-collapse-in-housing I'm assuming that the page hasn't been adjusted retroactively. I think he also has old client letters floating around, if anyone cares to find them.

The reported value is notional. Hopefully Tilson will go into the pricing and term on the next call.

The media plays up commodity price movements, but they are unreliable indicators of inflation. If the general economies don't also adopt those inflation expectations, with the accompanying investment and consumption that seems to be the goal of QE2, then we get another 2008 experience in the commodity markets. It's true that we get real trouble if the fast growing countries decouple their growth rates from the U.S. and cost-push us to stagflation, but that doesn't seem to be a near term scenario. The Richmond Fed president gave a speech today in which he reviewed monetary actions in response to the 1960-61 recession. He noted that, rather than adhere to a rigid unemployment target, the Fed should be ready to react when the economy shows signs of moving under its own momentum. ???... If the Fed is trying to coerce the public into building vision boards with expectations based upon artificially low interest rates, then how easy will it be to distinguish between natural momentum and the monetary push? Lockhart referenced some of the issues that made monetary looseness so sticky in the 60s and the 70s, but he didn't address how exactly the current Fed would act differently.

Shorting definitely seems to require some trading skill, or an ability to catalyze price action. Tariq, have you read "Fooling Some of the People"? Einhorn's early thesis on ALD heavily focused upon misrepresentative accounting. Meanwhile, the company nurtured an equity investor group that prioritized dividends without adjusting return requirements as the source of those dividends switched from operating income to realized capital gains to debt/equity issuances. The lesson I learned is that companies have tools to combat a reputation war, which can buy them time to restore fundamentals.

Any thoughts on the NBSK volume drop? Almost 10,000 tons below '08 and '07 levels.

UCP, you are almost certainly right on your view of technological obsolescence, but you are overstating Amazon's ability and desire to become Itunes. Kindle already allows for .mobi and there are solid conversion tools for .epub. Kindle's conversion service for supported formats is free, and although somewhat clunky due to the need to email documents, it works fine. The hardware argument should dissuade people who don't want a book substitute now, but the Kindle doesn't overly constrain customer choice.

I have the Kindle and it is absolutely wonderful for linear, page by page reading. However, the lack of a scroll feature, or any smooth method of jumping back and forth in a text, makes reading annual reports difficult. Also, data sets will frequently appear in a jumbled mess and instead of page numbers, you have "locations", which is a bit annoying when trying to skip to a specific topic. As a book reader, however, the Kindle is pretty far ahead of the pack.

I think you guys are expecting a bit too much when it comes to fair value. Rates are low, the market is soft, and alot of major insurance companies are trading at below book. Who is going to pay 2x BV, would you? If I possessed CNA's balance sheet and familiarity with the management and business, then I would purchase at 2x book. The assets are fixed income heavy, despite an apparent surplus of capital, and you get paid $100M+ pre-tax to manage $500M of float. Even at a $2B price tag you could earn fair returns on a large amount of money. In any case, the point isn't relevant to the issue of a fair offer. The sale of a company is only one method of unlocking assets. SUR could institute buybacks (until the bid at less than $20), pay dividends, or adjust the portfolio composition. Unless CNA and management know something about future losses, $22 per share is a cheapo offer, and the market seems to anticipate a higher bid.

Harry, don't tell me you are happy with the bid. Unless management anticipates the effects of hidden liabilities, there is no reason for such a low price. For an insurance company with the historical results of SUR, unless there are huge, looming costs, the price should be at least 2X book value.

As most people have said, practical experience is the best teacher. But I think that the threadstarter mentioned his mixed results over a 10 year period. In that case, the CFA program is a fairly inexpensive guide through major financial topics, and it will help to highlight areas that may warrant further study. The major problem with the program is that it takes a pretty long time; at best, you will have to wait one and a half years to finish, but more likely it will take three or more. In addition, the course material covers a wide range of topics, and frequently dwells in minutae. The CFAI even began to bundle the course books with the testing fee because so many students bypassed the books in favor of Kaplan or Stalla materials. It may be a frustrating exercise if you do not have an immediate practical goal, i.e. promotions or raises, to push you through a convoluted yet non-technical explanation of the Black-Litterman model. If you can find a program that covers the basics of financial theory and economics, I would recommend those. Books such as You Can be a Stock Market Genius and Fooling Some of the People provide good examples of market analysis and corporate analysis, respectively.