Parsad

it tends to be used by savvy capital allocators as a way to increase their grip on the company. Only if you have owners who do not subscribe. It tends to increase ownership of anyone who subscribes and also purchases the maximum they can in the over-allotment from left-over unsubscribed units...not just any single shareholder. Cheers!

Good way to raise capital. Doesn't cost much and you've incentivized your existing shareholder base to subscribe and buy. Only problem is for those shareholders that do not have the capital to buy the shares...they get diluted heavily, since the exercise price is well under book. But, usually the other shareholders will buy the unexercised warrants and you maintain your shareholder base, while raising the funds you need without the massive investment bank fees. Jon and Sardar did this back at Western Sizzlin and it was a brilliant idea. That's when I first became a shareholder...about 6-7 months before they did this. I have no clue why more companies don't do this! Cheers!

You don't say. LOL. Cheers!

+1! +1! Cheers!

Would be a catch 22 for the independents (Samsung, HTC, etc) that are using Android, thus Google's Nexus tablets would get hurt as well. It would be a net benefit to Kindle & iPad sales where there are no independent hardware manufacturers. Cheers!

Actually, the board works for the shareholders, but the management works for the company. You as a shareholder cannot go hire the management, but you can vote and set the board. At the same time, management's compensation often is decided by shareholder's when you have a vote on compensation, so in certain respects, shareholders have some control over management. I think clearly the author doesn't like Friedman. While the assets belong to the corporate entity, cumulatively with their share ownership, the shareholders can decide how the assets are utilized. That may not always be the correct path for the company, but ultimately they control what happens. Cheers!

Yes, quite surprising. Cheers!

Breaking news! He bought just the newspaper assets. Cheers!

So it's not necessarily the overvaluation of the general stock market that prompted Fairfax to hedge, but the possibility of major economic collapse? Both. They needed to protect their statutory capital levels to write business if markets tank, but I think they were also very worried about a major economic event...be it a run on U.S. currency, China real estate crash, Japan going bust, or Europe falling apart. They have no clue what will happen, but I think the odds of something happening were high based on history, and they took an incredibly conservative stance. We'll know if they were overly conservative only in hindsight. Cheers!

Two things you've gotten wrong here. If they had used less leverage, the significant issues they faced during the 7 lean years would not have been as pointed. Second, if they had used less leverage, more of the portfolio would have been in equities like Markel and Berkshire. Why do you think they've decreased leverage from historical levels? Because they've learned that lesson. I just wish they would reduce it a little more. Cheers!

What do you mean by sinking? They have obviously sunk off and on but have always come back. Buffett said that Berkshire was weeks from going under if the Fed didn't step in. That's how bad things had gotten at one point. Whether that was a bluff or not by Buffett, I don't know...but he would not make a statement about Berkshire like that if he didn't think it was possible. He reiterated the comment in his open thank you letter to Uncle Sam on November 16, 2010. Cheers! http://www.nytimes.com/2010/11/17/opinion/17buffett.html?_r=0

That stage has passed. Berkshire won't blink even if hard core guys are correct, it cares if there is permanent damage to intrinsic value of the companies it owns. You know this better, such comments of yours surprises me, may be the head is stuck in FFH bin. On macro level, I think, we should be watching if inflation crosses 2% level for the Fed to act. Could be you are buying into the Berkshire hype a bit. Investors were always told that Berkshire could not sink. Then we are told by Buffett in 2008 that Berkshire was weeks away from sinking, if the Fed had not acted to stabilize the system...although they would be the last to sink. How many people had their entire life's savings in Berkshire Hathaway? Foolish to think that corporations aren't susceptible to economic collapses...even the best of the best are susceptible when you have leverage, debt, counterparty liability, and in many cases regulatory requirements for statutory levels of capital! Cheers!

LOL! Cheers!

Surprisingly, it hasn't hurt us and has worked great. But I'm a notoriously pessimistic person, whereas most investment managers are optimists! ;D I would say over the last 7.5 years (since we started), the markets have been incredibly diverse...from bull market induced by loose credit, to a complete financial collapse comparable to only a handful of historical periods, to another bull market again induced by low interest rates. We were pretty consistent through the entire stretch...greatly outperforming when markets were dismal in 2008, and hanging in there trying to keep up when the S&P500 averaged about 14.5% annualized in the years 2006-2007 and 2009-2013...we averaged 16% annualized in those years. That was with an average of 35% cash! So if managers tell you it can't be done, that's BS. Cheers!

I like that. Was it me you quoted! ;D Actually, without a doubt it's because of the quality of people we have here, and pretty much no subject is taboo. You can have broad expansive analysis of an idea, or someone just talking about a movie and the film industry. People here have become lifelong friends...not just posters on a message board. Cheers!

Good post, but I will ask the question I've asked before. What does it matter? Unless you are investing in the market what does it matter if its overvalued or not? Either an individual security is undervalued or it isn't. Perhaps there are less opportunities and that's fine, but I am trying to understand your point. For me the general market level figures in at the margins. I am more conservative in terms of valuations and that affects both buy and sell decisions. But it never stops me from buying something undervalued and there is still plenty of that. If you are buying for your own personal portfolio, then as long as you are comfortable with the volatility it won't matter, as long as you are buying cheaper things all the way down. You give up the optionality of cash, for probably a very modest upside from here...not a great bet. But for anyone who ran a fund in 2008/2009, and was susceptible to redemptions, did it matter? You bet your ass. If Mohnish's redemption date was a little bit later, would he have been able to save his fund? I would say 25:75 that he would be around today. If he had no lockup? Kaput! How close was Bruce Berkowitz to the end and that was without the calamity of 2008/2009? The downside always matters when you are managing a fund! Buffett has the luxury of permanent capital today...he shut his funds down before the 70's correction. Munger survived it, but not without the type of wounds Mohnish received...thus Mohnish's affinity for Munger...they've been through the war just decades apart. How would Fairfax survive a 40% correction if they were invested in equities like Markel, but had the same leverage? It matters. Cheers!

We have more cash today than ever before in our funds. Either I'm very wrong, or some on here are going to be. I was fully invested in 2008/2009, selling stuff at 7 times earnings to buy stuff at 3-4 times earnings...and I rode that up over the last four years, slowly building cash in the funds. People were telling me I was crazy buying WFC at $9, BAC at $5 and BRKB at $68...because the financial world was ending and we were going to see Great Depression 2, even though the S&P's P/E was about at 8. Guess what? They were wrong. Now I'm being told that we are in the midst of a prolonged bull market, where people are willing to pay S&P's P/E of 22, because we are in a low-interest rate environment, and that federal governments know what they are doing even though they have precariously increased their debt levels to ridiculous levels over the last four years. Somehow corporate earnings, which are at historic levels, are going to continue to go up, even though governments have this massive discrepancy between revenues and expenses, especially debt servicing. Where is the margin of safety in this? The fantasy is that an energy-independent United States, along with a recovering economy, will be enough. I don't think so. You guys don't get our annual reports, since it only goes to our partners, but on the inside cover we've always had this quote which is from Berkshire's 2006 Annual Report: Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe out a long string of successes. We therefore need someone genetically programmed to recognize and avoid serious risks, including those never before encountered. Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions. Temperament is also important. Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I’ve seen a lot of very smart people who have lacked these virtues. I think it's probably the greatest quote I've ever seen when referencing how investment manager's have to have a completely unique way of understanding risk and to be able to think independently. I think this quote is as important today, as it was in 2006. Cheers!

You're talking about a very small portion of Fairfax's portfolio...about 10%. While the withdrawal is a highly anticipated event, the outlier effects are completely unknown when considering the enormity of the intervention. I'm not sure either Buffett or Prem can accurately anticipate the fallout or success. No one can! Cheers!

FFH's hedging does look off in hindsight, but honestly, if you would have asked me in 2010 if by 2013 the market would be trading for 20x+ GAAP earnings on a 10% profit margin, a Shiller PE of 24, and 2.3x book value with a sub 2% yield I probably would have laughed at you. If you would have told me that the valuation of EAFE stocks was going to be 30-40% lower I also wouldn't have believed it. I think a lot of the hard core Graham students, (HW, Klarman, Grantham, etc) underestimated exactly how active (correctly or incorrectly) the Fed and other governments would be. Buffett knew that there was really no limit and thus the "peddle to the floor" quote. Yet with anemic revenue growth, and limited net buyback of shares, the S&P / Wilshire trade up to fairly elevated levels while other countries shares (at least in many situations) trade much cheaper. Whether or not FFH has made all the right or wrong moves, the magnitude of how bad they "look" and how many folks on this board are questioning them is probably more important than the FFH specific discussion. The US markets are priced right now as if low rates are here to stay "forever" *and* that those same low rates of capital won't lead to companies lowering their required rates of returns when competing and thus driving margins down dramatically for everyone. To me, this is strange. Or maybe investors are now truly willing to accept much lower returns on equities going forward and are ok with that. Well exactly, and this leads to the question of what sort of mess has all of that activity by policy makers created? I think the Graham students, in particular HW, expected things to peter sideways for a considerable period of time...thus the hedges back in place in 2010. But that did not happen! So, exactly what is the situation like now with all of that government easing and stimulus? Well, HW is hedged 100%+! So either governments can pull off an equally stellar coordinated withdrawal of capital, as they did when injecting it...or the shit hits the fan. Will be interesting to see how Berkshire handles the situation if the hard core guys are the ones who are correct. Cheers!

I personally would have reduced operational leverage of FFH so that they can be more like other insurance companies and don't need to live in fear of getting wiped out. On the other hand, FFH wouldnt have the returns they did without the kind of leverage they built up. Not true. I think if they had used the same sort of leverage as MKL, they would have had as good, if not better returns, than they have had since inception. They are very good equity investors, and Brian is probably one of the best bond investors over the last 25 years. Combine that with the likelihood they would not have suffered as badly over the "7 lean years", and they would be ahead of the game right now. As well, they would not have had to hedge so completely and would have enjoyed investment returns as good, if not better, than anyone else. I'm not a proponent of significant amounts of leverage...be it as an investment manager, or within Berkshire or Fairfax. Cheers!

They were worried about it going much much lower than 800. Prem has often mentioned the famous Ben Graham's saying about only 1 in 100 investors surviving 1929 if they weren't bearish in 1925. The Dow Jones went from 400 to 200 ... a 50% crash in the 1929 ... and if you weren't bearish u would seen the 200 level as a great opportunity to come right back in. The Dow reached 300 .. but what would have killed you is the the second leg of the crash which was a 90% drop !! It is precisely this severe second leg they are worried about. On a side note ... I have noted many think of FFH as someone who looks to profit from active macro bets. In my opinion this is completely false. Prem and his team are good in picking stocks and protecting their downside. The macro bets are there to protect their downside so that they can create value to do what they do best - pick great stocks. The cds bet was to protect them from recoverable from reinsurers, while the equity hedge is to protect against a massive drop in equity markets so that they can live to see another day. The former was an asymmetric bet, while the latter is a bet on their skills to deliver value well and beyond the market will do over the long term. Correct. But they have to do this because of the leverage. The 1 in 100 investor's not surviving "The Crash" is somewhat of a fallacy. That number would be 1 in 100 if the investor used leverage or were on margin. An investor who owned their stocks outright, or had the equivalent of a cash account, would have survived perfectly well as long as the underlying brokerage didn't go under because of fraudulent use of the investor's assets. The same would have been true in 2008/2009. Even when Buffett said that everything would have gone under, including Berkshire, but they would have been the last to fall, is because of the use of debt, leverage and especially counterparty risk. An investor who owned Coca-Cola outright would have no problem surviving a 1929 style crash. Leverage is great when things work, but it can kill you when things go wrong. Cheers!

I was just thinking about the economics of John Carter and Lone Ranger. While I admit that I am definitely out of my depth when discussing the movie business, I think that these aren't as a huge of a mistake as people think because of the huge amount of upward optionality in these movies. The companies are not trying to launch just one movie, but a franchise. So if they were successful, we could easily see two or three sequels, which should be very profitable as well if history serves as a guide. I could not give an educated guess of the probability between bomb and successful franchise for these movies so maybe even so they were a terrible decision. If anyone has a good grasp of the movie making industry, I'd love to hear your thoughts. That's the idea...but then I think many studio executives who have the power to give the green light to such a project, probably give their own abilities too much credit. I think you could equate the film business to the asset management business. You have huge mutual fund companies that provide mediocre to poor results, but somehow they continue to operate. Then you have the small independent studios that make very profitable movies on a net margin basis, but don't have the ability to gather the assets...think small hedge fund managers with great results but low assets...yes, I'm speaking about myself! ;D In another life, I would have liked to make low-budget documentaries or independent films. I'm still not ruling it out at some point...at least from the production side! Incidentally, did anyone see Spike Lee go off on Bloomberg on Friday? It was very funny! Cheers! http://www.bloomberg.com/video/spike-lee-i-was-kick-starting-before-kickstarter-mgC7h7nyQgG0sppmFYZgSA.html

We simply cannot know yet. As Mr. Watsa has said during the conference call, it took 5 years for deflation to set in in Japan... Likewise the New Deal policies worked for 5 years in the '30s, before they worked no more... So, probably we still must wait 2 more years, before knowing for sure. What I am positive about is that, even if there were only a small chance to repeat the '30s experience, seriuos and reliable people should have looked for ways to protect themselves and their companies against such an outcome... Of course, you might argue that FFH's protections have been too extreme and not really justifiable... We will see! giofranchi I think the close calls a decade ago and the leverage forced them to make that decision. If leverage was lower and they had not gone through a near-death experience, they would have been able to avoid some of the hedges. Berkshire and Markel operate with less leverage, thus they were able to take advantage of markets, rather than worry about portfolio risk. At the same time, IF Prem is correct on the hedges and the risks (which I think he is, but not quite the extreme they've taken) then they will make it up on the back-end like they did with the CDS investment. It ain't over till the fat lady sings! Cheers!

Exactly. Something needs to disrupt the cost structure of producing a movie. Actors are not an asset but a just a commodity. I lived in Hollywood for nine months and everyone has a struggling actor EVERYONE. Too much supply not enough demand. No more correct than saying every executive is a commodity. Certain people CAN make a difference. Daniel Craig made a difference with the Bond franchise. Matt Damon made a difference with Bourne. Johnny Depp made a difference with Captain Jack Sparrow. We can't say that all actors are simply a commodity, because that isn't true. Can every actress perform like Meryl Streep or Cate Blanchett? Nope. But I do agree that the incentives are wrong. Why are big-name actors earning their salaries on revenue and not profit? It's the studio executives that are making decisions like that and misaligning incentives. When Johnny Depp wants to make a movie like the Lone Ranger, why not say for every $100M we put in, you put in $10M, but then you get 10% of the net profit after distribution and advertising. You think a dud like the Lone Ranger gets made? What's wrong with that? Isn't the purpose of a business to put forth its most profitable ventures? If you were only making profitable movies based on net profits relative to cost, all we would be watching are movies by Tyler Perry, Adam Sandler and cheap horror movies! ;D Cheers!

Just have to listen to Munger's lessons on cognitive biases. In this case, incentive bias. Clooney doesn't star in the "safe" movies (ex: the mediocre action movies guaranteed to draw an audience) easy money makers. Loeb wants Sony to make more of those movies and take less risk, which would reduce opportunities for Clooney. Not very surprising that Clooney is against it, even though he is typically a lot smarter than that. The model is changing, and Loeb has no clue what he is talking about either. Safe movies like John Carter, RIPD or Lone Ranger? Huge bombs! Studios are going to put themselves in a more precarious position by taking huge chances on massive concentrated bets as Spielberg alluded to. How did the Weinstein's build Miramax on independents if that doesn't work as Loeb is trying to say? Take a look at the numbers for the last five years. Sony is having a tougher 2013, but was leading the market in 2012, and was up there in previous years. Loeb's job is to point out short-term deficiencies to make his case...as most activists do. http://www.boxofficemojo.com/studio/?view=company&view2=yearly&yr=2013&p=.htm Cheers!