ERICOPOLY

I have a desire to preserve my spending power from a devaluation of the USD. Regarding gold, as I've mentioned before I think it already prices in a lot of inflation that hasn't yet happened. Some people don't agree with that, however... But let us take a currency like the Australian dollar where the government isn't going fiscally crazy and isn't monetizing and doesn't have huge unfunded liabilities... all the things that people claim are causing the gold to climb in USD terms. Why is gold rising so rapidly against the Australian dollar? http://finance.yahoo.com/q/bc?t=5y&s=AUDUSD%3DX&l=on&z=m&q=l&c=gld I'm not trying to stir up a debate on whether or not gold is going to crash to 10 bucks or anything, but can't it at least crash back to the AUD/USD line on that chart in the link above? Or is gold priced accurately and does the Australian dollar need to inflate to catch gold? Or do the goldbugs think that the Australian dollar is really depreciating in real terms against gold at this pace?

Buffett talks about it a lot but from what I can tell it works for him only because he avoids the more speculative range of outcomes (sticks to companies with lasting qualities).

I am personally worried because I am up 85% pre-tax this year and it came very, very quickly -- after being down beginning in early February and still down by 3% in early July. It's easy to feel manic. It seems others are feeling better about it too. Now... if they all feel better about it and spend, then it becomes better. But if they all change their minds again and feel scared, then they'll drive the bid down on stocks and we're all poor and terrified again. Trouble is, when we were all poor and terrified the forward potential gains looked extremely enticing in the stock market. But now that we all feel fantastic, the forward gains look much worse. •Men are spending more on drinks and lap dances at strip clubs. Many people simply feel a little richer after a 50% rebound in the stock market and with all the talk about a possible recovery. Citigroup strategist Tobias M. Levkovich estimates households have regained $5.4 trillion in wealth because of the market rebound. http://articles.moneycentral.msn.com/Investing/CompanyFocus/Good-news-the-splurge-is-back.aspx

I started the year fully invested and remained so all the way through the bottom of the market. I thought your strategy of being all cash was too conservative to start the year but you were right in the end. You played it perfectly. I sold WFC puts a few weeks ago as a means of making another 40% by Jan 2011, yet while maintaining my potential entry price at just $21.12 (And the meek shall inherit the Earth...), which is barely above the cost that HWIC paid. The strike is $30 so I really am not counting on any further market advance to make my money. Should the market correct again, you will do better. I'm happy though with my potential return being capped at 40%.

Australia -- few talk about it here. I would not mind being stuck with Australian currency denominated assets given that I'm a dual citizen US/Australia and the place is very nice. I nearly bought WBK (listed on NYSE) but don't understand banking well enough to analyze it.

Depends when you ask him. He said 1080 last October. Why did he then drop it a few months later?

The strange thing about inflation, in the 1970s/1980s anyway, is that it seems to have driven down the market P/E, giving cash buyers a chance to get back a fair chunk of their real earnings power after the fact. Grantham talked a little bit about this earlier this year -- people wanted higher earnings yields to compete with the high short term cash yields. So I know some are thinking about buying stock in great businesses as real assets as an inflation hedge, but the last time around that was not the best play -- it was best to wait for them to crash first. Then their P/E's reflected high earnings yields that outperformed inflation as inflation eventually subsided. Same with long term bonds as well.

It is possible that extra factories (and other PP&E items) were built to meet credit driven consumer demand. In that case, it would suggest we face a lower P/B multiple as many of those assets will sit unproductive until demand swells back to prior levels (which normally happens in a V shaped recovery, but not for a very long time in an L shaped recovery). So if it's L shaped, then lower P/B would make sense.

Hey I'm up for lunch anytime. Belatedly (never got a chance to implement it) I had an idea of going 2x long ORH in my IRA accounts and then to short FFH in my brokerage account (in an amount exactly 1/2 of the ORH position). I figured I would be building up a loss on the FFH position that would be useful for tax purposes, yet on a total net worth basis would not be suffering real losses. But I never did attempt to follow the strategy (only thought of it a month or so ago). Like the cycling through ORH, NB, FFH, this idea is now meaningless too.

I think they get most of their returns from investments, not from insurance. The 80% in equities certainly delivered the bulk of their gains this year for example, with book value up nearly 30% YTD. Let's suppose in a parallel world there is another Fairfax run by the same investors but that isn't involved with insurance underwriting, so the only way to deliver gains would be from their investments. Then you are comparing them to somebody like Leucadia. How much premium then are they worth? Remember, Leucadia's record is inferior.

Hey Eric, may I ask why you didn't do it for the Jan 2012 ones? Too long? Premium is higher but ... I don't remember the 2012 being available at the time. However, going by the prices today the delta is only about $1.80 between the 2011 and 2012 puts. That's not enough to wet my whistle. I think it's (my bias) already a given that the shares will be at $30 in 2011, so making an additional $1.80 for the following 12 months only gives me an extra 8.5%. That's just not high enough of an annualized return... 8.5% is crappy. It had to be at least 12 months to expiration because I don't want to pay 35% short-term capital gains rates... so that left me with the 2011 as my only viable option.

I too sold at $62.50 and got back into FFH at $344 USD. $67.58 price for ORH is needed to match this. The other thing I did with the proceeds was to write Jan 2011 $30 WFC puts for $8.88. Today those puts are at $7, giving me a price of $68 from ORH to match it. Not sure if this will be the best way to go with WFC, but it will be a 42% 16 month return if WFC is at or above $30 when they expire -- I like that, you know, 42% is okay with me... I think it will beat the market ;D

That may have been part of the short sqeeze environment.... Probably right about that. However, about that time MKL was over 2x book, I think even like 2.2x. Even with a CR advantage of 9 points, that's only 6% after tax operating yield from underwriting which at 10x multiple is only worth 0.6x book. So 2.2x less 0.6x is 1.6x -- which is less than 1.75x book but not much.

I started the year 100% notional FFH, now I'm only 70% notional FFH but it's the same number of shares! Ultimately I think FFH will trade up to 2x book at some point -- barring that, at least 1.4x. Already traded at 1.75x US GAAP in early 2007 -- and that's before significant improvements. This is not what I think is a fair price, but rather what I think a cheery consensus will eventually pay.

And Crum gets upgraded too http://finance.yahoo.com/marketupdate/inplay#ffh 2:50PM Fairfax Financial: Moody's upgrades Fairfax Financial's snr debt to Ba1; outlook positive (FFH) 339.40 -2.07 : Moody's upgraded the senior unsecured debt rating of Fairfax Financial Holdings Limited to Ba1 from Ba2; upgraded the insurance financial strength (IFS) ratings of Fairfax's subsidiary, Crum & Forster Holdings to Baa1 from Baa2 and Crum & Forster's senior debt rating to Ba1 from Ba2. In the same action, Moody's affirmed the IFS ratings of Odyssey Re Holdings Corp.'s (ORH) main operating subsidiaries at A3 and Odyssey's senior unsecured debt rating of Baa3 and preferred stock rating of Ba2. Moody's also upgraded the preferred stock rating of TIG Capital Trust I, another Fairfax subsidiary, to Ba3 from B1. This rating action follows Fairfax's announcement that it intends to repurchase the remaining 28% stake in Odyssey Re that it does not own. The upgrades of Fairfax and TIG reflect Fairfax's strengthening financial flexibility and the steady reduction in risk stemming from its run-off operations. The positive outlook reflects the company's long-term commitment to maintaining financial leverage at its current level and substantial holding company liquidity (in the range of $750 million to $1 billion). The upgrade of Crum & Forster reflects the improved financial profile and upgrade of Fairfax as Crum & Forster's ratings had previously been lower than their stand-alone credit profile because of the risks at Fairfax. The affirmation of Odyssey Re's ratings, with a stable outlook, reflects the rating agency's view that the company's underlying financial strength will not be materially altered by the Fairfax repurchase.

Well, this is the issue, isn't it? Lots of people on this board, including me, think that FFH is not paying up for the minority interest. Most people on this board do not value ORH based solely on the portfolio holdings at any given point of time, although there is a lot of discussion about what BV is at the moment. Most people understand that ORH provides low cost (and possibly negative cost) float to FFH over time and adds diversification to FFH's lines of business. In HWIC's hands, ORH is very valuable. So are they really paying up for the minority interest? I don't think so. I also think that ORH has been trading at a major discount in the market precisely because of FFH's involvement as an 80% owner. I just sold out of all my ORH. I was leveraged through the February options, and I just feel more comfortable not chasing after a couple more dollars. I think $65 is probably the max anyone can expect FFH to up the bid. I just bailed at $62.50. Now the buyout will be raised I suppose. I'm back in FFH now.

Prem does. Otherwise you should hit him with a 2x4 for not selling.

Andy Barnard has 400,000 shares of ORH. Now, if the deal goes through at $60 I wonder if Andy would get a big pat on the back with additional cash "for his performance and leadership". They should be motivated to keep him happy. This would be very distasteful, so I think there's no way they can do it -- yet one more reason price won't be $60 in the end.

If ORH special committee told me to pay more than $60 I would walk away from the deal. It's not like FFH need to consolidate ORH into the FFH group. Yeah, just like they didn't need to pay 30% above book for NB.

Amy Calistri.

That fits my sentiment. There is nothing wrong with FFH anyhow, happy to switch back. Anyone who thinks FFH has too much debt should borrow a bunch of money and then put the cash proceeds in the bank, and then just let it sit there. Is it risky? Nope, just pay the loan off if you need to. But what if someday you really do need that money and it comes at a time when the capital markets are closed due to fear and panic in the markets? So really, the debt makes it a lower risk enterprise, not a higher one ;)

Here is one for Prem: Why not buy it for the same multiple the shares were issued at? Hey, that would be fair. Unless you think you gouged them, eh?? Or, perhaps time are different and market valuation is lower (other companies to switch the cash proceeds into are trading at lower valuations too).

If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ? (assuming Picasso was still alive and expected to continue painting for many years ;) ) Cheers That's what Fairfax shareholders own. Not ORH shareholders who merely contract Picasso to paint their canvas. Picasso changed his mind and doesn't want to work under contract anymore -- this is decidedly different from the relationship that ORH has with it's IN HOUSE underwriters. I beg to disagree; Fairfax' value is to a large extend that it owns a huge chunk of ORH - effectively this is your guarantee that the contract will not be cancelled. Fairfax would loose a lot of money if they cancelled the contract with ORH. Unless, maybe, that a much higher offer was presented by a third party - in which case the $60 offer in comparison would be way to low... I am playing the Devil's Advocate here. Put yourself in Prem's shoes. Why the hell should he have to pay up for his own performance? I mean, really. ...to expect a premium from Fairfax for it's own stock picking seems unjust... I like the analogy of selling the blank canvas to Picasso at an extreme premium on the basis of speculation that it will soon be worth a mint simply because he has produced past masterpieces. Well, playing the devils advocate, then the persons constituting the HWIC could quit tomorrow and then Fairfax shareholders would also be aware that they only held a contract. That's true, and I agree. I've said many, many times that I think FFH is only worth book value plus a risk-adjusted premium for the operating income from the float. However, ORH is for sale and it doesn't make sense to raise the price of the sale in step with the investment prowess of the buyer. If a bunch of mediocre investors made offers for ORH, then the price they would be willing to pay would be based upon their own projections of ROE. Is it fair to jack the price up to the moon for Warren Buffett as a buyer, or HWIC, just because they will be good allocators? I don't think so.

The point is that HWIC do run the investments for the present holders. If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ? (assuming Picasso was still alive and expected to continue painting for many years ;) ) The decision to buy or sell @ 60 seems easy to me ::) Cheers Unlikely, but suppose Fairfax were to sell off it's majority stake? Overnight you'd learn the value of ORH without HWIC. That's really all there is to ORH... the underwriting and an average return on investments -- Fairfax owns the rest already (HWIC)... they're just offering a price for the underwriting and average return on investments, which is fair given that they own the rest already. If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ? That's what Fairfax shareholders own. Not ORH shareholders who merely contract Picasso to paint their canvas. Picasso changed his mind and doesn't want to work under contract anymore -- this is decidedly different from the relationship that ORH has with it's IN HOUSE underwriters. I beg to disagree; Fairfax' value is to a large extend that it owns a huge chunk of ORH - effectively this is your guarantee that the contract will not be cancelled. Fairfax would loose a lot of money if they cancelled the contract with ORH. Unless, maybe, that a much higher offer was presented by a third party - in which case the $60 offer in comparison would be way to low... Cheers It's unlikely that they would cancel the contract with ORH -- unless they sold their majority portion, in which case it would be almost certain that it would be cancelled. Selling the majority portion would be unlikely. Thus, ORH's ROE is at the mercy of Fairfax. I am playing the Devil's Advocate here. Put yourself in Prem's shoes. Why the hell should he have to pay up for his own performance? I mean, really. The future performance is only there if he continues to be "lucky". It's not like Wells Fargo where you have this high ROE due to customer relationships, brand, etc... That stuff is what gets a high premium to book. Instead, much of ORH's growth comes from "lucky" stock picking and "lucky" macro calls. It's certainly a different animal. I can understand why a 20% ROE at Wells Fargo is going to be fetching a different multiple than a 20% ROE at ORH if it's coming from stock picking. But that's getting off topic -- to expect a premium from Fairfax for it's own stock picking seems unjust... I like the analogy of selling the blank canvas to Picasso at an extreme premium on the basis of speculation that it will soon be worth a mint simply because he has produced past masterpieces.

ORH is only worth 20% ROE if you have HWIC managing the show. So how common is it for an insurance company to have HWIC's numbers? I think any independent buyer should be assuming average investment returns. It's only a 20% hindsight grower if HWIC runs the investments. This implies that HWIC is worth a massive chunk of that 20% ROE, but then Fairfax already owns HWIC and need not pay for it twice. So it's not in the ORH sale. ORH is just canvas on which HWIC paints. I think some of you are trying to sell blank canvas to Picasso at the price of a completed masterpiece. The point is that HWIC do run the investments for the present holders. If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ? (assuming Picasso was still alive and expected to continue painting for many years ;) ) The decision to buy or sell @ 60 seems easy to me ::) Cheers Unlikely, but suppose Fairfax were to sell off it's majority stake? Overnight you'd learn the value of ORH without HWIC. That's really all there is to ORH... the underwriting and an average return on investments -- Fairfax owns the rest already (HWIC)... they're just offering a price for the underwriting and average return on investments, which is fair given that they own the rest already. If you did own a share of all the paintings that Picasso would paint now and in the future, then why would you sell for the price of the canvas ? That's what Fairfax shareholders own. Not ORH shareholders who merely contract Picasso to paint their canvas. Picasso changed his mind and doesn't want to work under contract anymore -- this is decidedly different from the relationship that ORH has with it's IN HOUSE underwriters.