ERICOPOLY

This is a very good point, and probably does have real relevance to the comparison. I would just add a few countervailing points to the mix: (1) just as most households today are 2 income households (or were), and so have some income coming in still, most households require two incomes to stay afloat, or at least two incomes to keep spending the way they were and savings a bit for retirement. So, losing one of two incomes probably means doing away with the saving, and drags out the housing situation because they have enough income coming in to keep the house payment up for a while, but like a structural deficit, will require selling the home long-term to downsize to a lower overall monthly payment; and (2) the way unemployment is calculated has changed so much over the past 15 - 20 years that it is probably way undercalculated today from how it was in the 1980s (i.e., the government keeps moving the line whenever it suits them with respect to unemployment and inflation, for political reasons). Overall, perhaps it's a wash? Here is something that never gets mentioned when comparing employment levels: Today everyone over age 65 is getting an income -- it's called Social Security, but they're not "employed". Logically though, an income is an income. This income is also reasonably secure. If instead of "employment" levels we were to focus on percentage of adults who live in a household with an income, that would perhaps be more meaningful in terms of measuring the level of financial insecurity out there.

The question is, do real returns matter?

I suppose in some cases half of that money is being given by the taxpayers -- it's money that otherwise would have been collected in estate taxes, so the drop in revenue will need to come out of somebody's hide. So all US taxpayers can feel like they've given something with this announcement :)

I keep coming back to your comments here. Thanks for the help. #1 is worrying me. The CEO is aggressive-- acquiring another ship opportunistically and then hiking the dividend before letting us know that he has his ducks in a row on the ships he ordered in 2007 -- you know, the ones he had to cut the dividend for. Then talking about wanting another 20 or 30 ships. Maybe he's already pulled off a new financing deal and not mentioned it, but it is starting to make me question whether he is exercising enough caution.

I actually pay an accountant yet I still complain because I hate getting all these different statements and things emailed to me from all these different accounts. Just collecting the info and getting it to my accountant is a pain for me. I must be getting really lazy I suppose. Plus I want a place where I can go and peek at on any day of the year to get an idea of what my quarterly estimated taxes should be.

You're right about taxes. However, in a world without taxation the benefit is that you get the dividend paid at full intrinsic value. It doesn't matter that the share price drops -- it's supposed to drop after a dividend is paid. I will provide now an example where the dividend adds value: Let's say for example that you want to withdraw 3% annually from your investment account, but everything in your account is trading as a 50 cent dollar. You have nothing trading at intrinsic value. And we're in difficult economic times and this discount exists for years on end. Your account is fully invested. Do you sell shares for 50% below what they're worth? Or let's say instead that you own dividend payers and your yield on your portfolio is at least 3% -- you can just extract the cash from your account at full intrinsic value, without needing to sell anything. So dividends allow you to regularly extract full intrinsic value from your investments like clockwork. A value investor should enjoy that aspect of it. Isn't the whole point to purchase shares below intrinsic value and then realize full intrinsic value from your investments? That's my understanding. Selling shares for intrinsic value is very lumpy and it might never happen as for some companies the fair value at where they should trade could very welll be far below intrinsic value (prices take risk into account) -- when you need cash on a more consistent basis the dividend is the answer. How long might you have been holding onto Fairfax shares waiting for full intrinsic value? I like their dividend -- every January I get full intrinsic value on a portion of my investment.

Yeah. New normal as in the mid to late 1930's or in Japan during the last two decades. Japan's unemployment has stayed below 6% -- rising from 2.1% in the early 1990s: http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704249004575384944103200032.html There is a good chart on that page contrasting US 1930s deflation to that of Japan's more recent experience.. I find it interesting that they haven't seen the kind of spiraling collapse that people fear when they hear the word "deflation".

I don't think that's his argument at all. Berkowitz, like Buffett, cares about the future earnings power of financial institutions like AIG and C. Tangible common equity and all those other book value measures are only helpful insofar as they tell you whether the bank is undercapitalized and is at risk of being seized by the regulators. The pig is going through the python, and what matters is what remains when everything is digested. Berkowitz believes we are "in the spring of a recovery". Those are his words. Given that thesis, C is a no-brainer. However, if you think we're in for a very nasty economic surprise, then it is too early as they would need to boost reserves further.

I've been thinking about their move towards deflation hedging. They must be worried about the pullback from stimulous as countries adopt new "austerity" measures. It feels like the current level of economic activity is pumped up in a form of "false prosperity" worldwide by all the stimulous -- when it pulls back that's got to result in some form of "new normal" right?

Yes I think as he got bigger he found that he can't turn over 100% of the portfolio into sports cars. He winds up with an increasing mix of station wagons. If a portfolio of station wagons generate 10% FCF yields, he can still grow at 20% if he can put that 10% into 50 cent dollars. But he can't get ahold of the full 10% FCF if he is holding merely shares if the managers running the company plow the incoming FCF into buying back shares at merely fair value (or even if undervalued, likely not as good a deal as what Buffett could dig up elsewhere), or use it to acquire new subsidiaries at mediocre prices. That's probably a major reason why he began to like wholly owned businesses so much. So, accepting his fate of owning more station wagons as Berkshire grew in size, he opted for the kind that gives him full access to the FCF -- that would be the wholly owned variety. Plus he also saves on taxes by not having to sell publicly traded shares to raise cash for reinvestment -- a benefit of buy and hold forever with the wholly owed business is you can get ample cash for reinvestment without triggering capital gains taxes.

That wouldn't be a bad idea as long as you were issuing shares at good to great prices and were able to find investment opportunities at stupid cheap prices. You would then be improving your blended prospects. I think Berkshire issued shares for acquisitions. If the company is a Berkshire or Fairfax I believe the shareholders are there for the investment fund aspect of it -- they effectively want HWIC or Buffett/Munger to manage their money for them. So my attitude towards those companies is that they should be doing just that -- always making the better purchase if a better looking woman walks across the room. However, if the company is not an investment vehicle... like if we're talking about MSFT for example, I don't want them to invest in anything that isn't strategic to their business. I don't want them for example investing in shipping stocks, or purchasing shares in JNJ, etc... It's just different to me -- I want to invest in MSFT if I'm buying MSFT. If MSFT is going to bring YHOO into it's fold, then so be it -- that's part of their strategy. But investing in JNJ has nothing to do with their strategy. So I don't think MSFT should be buying the best looking lady in the room -- I think they should just buy their own stock, make a strategic investment, or return the cash. Preferable just return the cash. I can just sell my MSFT shares if they buy the stock (nice to have a buyer) and if I believe there are better places to invest it would be a good idea to sell. But with FFH I own the stock because I want THEM to invest the money -- I want a small dividend so that I can eat and such, but I want them to always choose the prettier lady before their own wife. Just like if I put my money in a hedge fund -- why would I want the hedge fund manager to always reinvest their dividends in their current positions when they could instead start buying up new more interesting positions? Well, FFH is kind of like a big leveraged hedge fund -- does it make sense to just keep adding to existing positions even if they know there are better opportunities out there? I mean, that's crazy. And so what if the existing positions are trading at 15% FCF yield -- guess what, that FCF simply comes from investments that aren't in-and-of-themselves FFH. FFH is just a whole bunch of investments put together, and then levered with float. And why not diversify that stream of income that the 15% depends on when the new investment is better than anything in the existing portfolio -- on a blended basis it makes the portfolio stronger. Fairfax and Berkshire are special because the float (combined with dividends) provides a huge amount of new cash to invest. Let's say you get 10% yield of new cash to invest -- well, if they sink that cash into just two new investments each year, and each investment is a genuine 50 cent dollar, then you have a 20% growth rate I believe. I mean, if it were a $100 stock and it threw off $10 that were reinvested in half-price dollars, that's effectively the same thing as it throwing off $20. Even if you never trade the existing investments but rather hold them forever, you still grow at a surprising rate. The only problem is that you wind up like Berkshire today where that 10% yield becomes so large that there are no 50 cent dollars available anymore due to size.

In both examples, the following is the case: 1) one method keeps buying shares at ever lower market cap (thus getting a better value every year) 2) the other method keeps buying shares at a constant market cap (thus getting the same value every year) The only conclusion these examples show is that it's a better value to purchase the exact same company at a lower market cap than at a higher market cap. It leads to no valid conclusion as to which of the two methods is better for returning value to shareholders.

I haven't looked yet, but was it due to currency translation to USD?

I could start a thread titled "Returning value through dividends rather than repurchases". I would then start that thread using an example where a company buys back roughly 10% of market cap every year. The stock moves up each year such that the market cap remains a constant. The company keeps buying shares back at market price and in doing so, the stock keeps moving up and up. Then I would compare it to another company initially trading at $10 that paid a 10% dividend (a $1 dividend), where the stock price kept dropping by $1 annually but where the absolute amount of dividend paid remained a constant at $1. Thus, each year the dividend yield keeps heading higher and higher, as the market cap keeps getting lower and lower. I reinvest the dividend each quarter in the ever-cheaper shares. Pretty soon I'm in the position of owning the entire company in the dividend example, whereas I'm nowhere close to doing so in the share buyback scenario. Therefore, I've shown that dividends increase value better than buybacks. Okay, truce alright? I've created an equally BS scenario as yours -- neither is correct.

Please take a closer look at the example cited. Receiving a dividend of $0.10 per year would enable the holder of one share to buy .90 additional shares after nine years. The 1.9 shares owned after nine years would then be entitled to $0.19 earnings per year, quite a bit less than the $1.00 in earnings that would be available to the holder of one share in the buyback example. :) Yes of course that works out as you say -- it's not because I'm wrong though, rather it's because the example is BS. You are saying that in the buyback world the market cap would shrink every year, and further you are comparing it to the dividend world where you assume the market cap would remain constant.

In your example, you wind up with each share earning more money on a per share basis. In the dividend example, the shareholder simply winds up with more shares (if they keep buying more shares with the dividend). There is no extra value added in the buyback scenario -- it's just that the reinvestment of the earnings is automated and it feels cool psychologically to see the EPS growing at a faster rate. Then again, you might enjoy watching the number of shares held grow. It's entertaining either way. Taxation on the dividend is the bugaboo -- without taxes you could just have a DRIP take care of it and then the dividend would do the same thing as a stock buyback plan. There is an important point I haven't mentioned yet: Should I ever own shares in a company that is buying back stock and if I am caught complaining that the price is too high for buybacks, then I should ask myself a question: Why do I still own it if I don't like the price? Take the money and run.

How about some voice analysis software that determines when an executive on a conference call is lying?

I would like a "cloud" application that has my login/pwd and account information for all of my accounts and my wife's accounts. We have three retirement RothIRA accounts across two financial institutions, then we have two individual brokerage accounts across two institutions. The cloud app should suck up all of my trading data and determine my capital gains/losses etc... Presently the information we get from the Fidelity tax statement is meaningess because they don't know what's going on at the other institution, and they don't look at what I'm doing in my Roth account even at Fidelity. For example, if I sell Fairfax at a loss in my individual trading account and then buy it in my Roth account I'm not allowed to report that loss -- but the Fidelity tax software doesn't catch this. And they certainly don't catch it if I'm doing it in an account at another institution. So it's a pain in the rear. All this stuff can be automated -- that's what software exists for. Maybe the service already exists and I just don't know about it.

It does nothing that you can't accomplish via instead paying a dividend and letting the individual shareholder buy more shares with the dividend. Mathematically what I'm saying is an easily proven fact. The only gotcha is the potential tax liability the shareholder may incur. Anyhow, I'm sure you already know this given that I'm the amateur hobbyist and you're the experienced writer. You probably misunderstood somebody on this thread -- I don't think anyone is advocating any such thing. The fact that you had to say this suggests that you think we don't understand it though. As you suggest they could shrink by 50% by choosing not to renew certain business due to price. However if you then reward the underwriters by firing them after they've held the line on price, that will go over like a lead balloon. Because if you don't fire them, you'll have a rising expense ratio -- you couldn't for example keep continually halving your business as you hold the line on price and expect to make an underwriting profit. At some point people will need to be fired. It's quite a nasty culture we're starting here -- asking people to dig their graves. My point is that I don't think you can do this quite as easily as you suggest without causing blowback -- if you behave disloyally I don't know what will happen. But you won't get the combined ratio you want unless you fire them. Heck, right now they could fire people but they're not doing it -- they have a climbing expense ratio at this very moment for this reason (holding the line on price). They're probably not doing it because it is unwise -- Buffett himself has addressed this topic. Plus, those people will come in handy again when favorable business prices return. Yeah, I don't think that fits into the Berkshire culture. Buffett doesn't trade his wholly owned businesses, and he likes to hold onto shares for tax reasons. If he keeps dry powder waiting around on the balance sheet, he can pounce when a good deal comes along. Suppose he instead bought a meaningful amount of shares back (is there any other amount worth buying?) with that money. Okay, it's time to play Gin Rummy, a game he doesn't like. Does he now sell a wholly owned subsidiary in order to raise cash for the purchase, wrecking his culture. Or does he sell some common stock, paying capital gains taxes? Then he likes to also be forever diversifying his income stream. I believe he has at least once referred to Berkshire's income as comparable to the Amazon with it's many tributaries. Buying more of the same income stream (buying back shares) doesn't accomplish this. Anytime Berkshire's stock has been cheap there has probably been a very good deal that came along near the same time that he pounced on. Then that deal grew a lot of capital, which then allowed him to buy another insurance company and lever it and on and on. Yes, that does make the balance sheet grow and over time the compounding rate goes down. Such is the problem with getting rich. The trouble with Berkshire and Fairfax shareholders is that as we get rich we might not be looking to leave the boat... so if you think you can shrink the boat by 1/2 then where are the abandoned sailors going to go? Where would Warren put 1/2 of his money if Berkshire gets too small and illiquid for him? Somebody would have to be selling and giving up those shares -- at Berkshire if 1/2 of the people sold that would leave nearly all the remaining ownership to Warren. That's unrealistic that they would sell at low prices -- and that must mean that Warren himself would have to sell out. But then he's going to be competing with Berkshire as he picks stocks -- and he has in fact cited that very reason for not returning capital to shareholders. He thought it through and decided it's just a policy he doesn't care to pursue. It made more sense to him to just let Berkshire get bigger and bigger. Going forward though he has created a contradiction. He had a no-dividend policy because he didn't want to be competing with the other Berkshire shareholders. But now he wants to give his wealth away. So he can give it away instead of reinvesting it. Maybe this means he can pay a dividend now if Berkshire runs out of things he wants to buy.

Mr. Market is necessary for realizing the intrinsic value of shares that don't pay dividends -- you depend on him and NEED him. Yesterday's 25% increase in SSW's payout made me happy. I can live off of my dividends -- so literally I can ignore Mr. Market. It impacts my psychology. Were they to have instead cut the dividend to zero, it would have given me a diminishing sense of control. I would be in psychological handcuffs, begging Mr. Market to be merciful. Oh please, please give me a fair price... I want to pay the mortgage and if you keep offering me 50% of fair value my money will run out twice as fast.

A psychologist could probably entertain himself for a good long while by studying the effects of market crashes on wealthy investors of stocks that pay out a high percentage of earnings as dividends vs shares that pay little to no dividends. I would suspect that those who get the dividends worry less about the crashes. Hey, as long as the checks keep showing up where's the reason to sell? This then truly feels like a real business rather than a piece of paper -- you can actually get your hands on the cash and understand that you own something that does more than just wiggle around on a chart. It become to feel like the brick and mortar store down on Main Street that your neighbor owns 100% of.

Yes well I theorize that buybacks are probably statistically more likely at companies where the big boys in charge have a very large amount of money invested. A small shareholder who owns the shares in a tax-advantaged retirement account is like "just give me the fu**** money you ****hole", but the big CEO is trying to selfishly manage his own tax load. Just a theory!

If the dividend tax rate were zero we wouldn't have all this excitement over buybacks. One could then either buy the shares if they wish, diversify it to other investments, or just spend it :) This is solely a nice tax issue. Buybacks and dividends are both a means of returning capital to shareholders. There is a hard market coming at some point. Rather than return too much capital to me now, I'd rather they find investments today to try to grow their capital. Then when the market hardens, they can leverage that capital by writing more insurance at highly favorable prices. I think that will generate higher returns than buying back shares. The reasoning is clear -- when you buy back shares, you increase your ownership of their current book of float where the underwriting profits are not good. But when you retain the capital in the business for future underwriting in a hard market, you will then have a higher mix of highly-profitable underwriting. Thus, more intrinsic value per share should be realized by NOT buying back shares when the underwriting book is sorry -- give it time... wait for the hard market and grab as much juicy business as possible.

I was just about to say the same thing. Their team must be talented enough to find cheaper stocks than FFH. They've raised capital by selling shares enough times by now to realize that being short on capital is not a good idea. Therefore, buying shares in other cheap companies rather than their own shares gives them the OPTION of just selling those shares into the market to raise cash should they ever need cash in the future. I see buying their own shares as a service to shareholders who wish to sell -- gives them a buyer. But not a service to the long term shareholders unless it's the best investment they can find.

I believe they were only 6.5% hedged after you take into account the fact that the hedge did nothing for them above 10,600 on the S&P500 and the market started the quarter at 11,700. Last I heard, the strike on the hedges was 10,600 on the S&P500. Below that level, 30% of the portfolio is hedged. But above that level nothing is hedged -- unless they added more hedges, be we don't know about that yet. I weighted it, and as it turns out (benefit of hindsight) being 30% hedged below 10,600 was just as effective as being hedged 6.5% at 11,700.