ERICOPOLY

FFH and ORH have, in past couple of years, provided an opportunity to buy after the market (and their gains) have already gone up. It's like a sci-fi movie where you read the morning financial papers and you have a time machine to go back a few weeks and invest after you already know the outcome.

MKL reported a combined ratio of 99% for Q2, and 97% for the full six months. They reported book value of $239.68. So MKL is trading at 1.38x Q2 book value right now. Put this in perspective. ORH trades at about 0.86x Q2 book despite doing far better in the underwriting profit department, and far better in the investment management department. Hmm. FFH's consolidated combined ratio was better than MKL's in Q2 -- 98.4% vs 99%. For the full six months, the comparisons are 98.5% vs 96% for MKL. Seriously, a 40% premium for this?

1) You are saying that you are the writer of the put, so you can't exercise early. Only the buyer of the put may exercise it. You may close out the contract at any time to lock in your gains by just buying the put off the market. 2) You just let it expire. No action to take on behalf of the writer of the put. The put buyer only exercises it if the shares are trading below strike, but even then maybe not. Back in April/May 2009 expirations I had written ORH $40 strike puts. The shares closed within 8 cents of strike each time (second time the shares closed at $39.99), and some of the shares (but not all) were put to me. This was annoying because I WANTED to acquire the shares. Anyway, the person who could have exercised the contracts perhaps did not do so for the simple reason of transaction cost outweighing the potential benefit, or the likelihood that ORH would open higher the following trading day (which happened both times).

Well I hope somebody finally gets this point: You can invest your float for 5% per annum and hold onto it for 3 years. That's 15% collected. Then you have a combined ratio of 105% and you give back a third of your gains. You still make 10%! That's the point. Please correct me if I'm totally wrong because it's better to be corrected now than to go in in the darkness of ignorance for longer.

The interest rate environment in the 1980s was such that you could still be doing great even if losing a bit on underwriting.

Today on the conference call they stated that they plan on holding their investments over the long term, and then stated that they expect them to be generating big gains within 3 to 5 years. It sounded to me like they perhaps think of 5 years as "the long term" -- maybe not. I should think that you certainly believe 15% is likely over the next 5 years. They have a lot of cheap stocks, and they have a tailwind from the float. It's hard to tell whether they can do it for the next 20 years though.

I agree with Cardboard that a meaningful amount of Fairfax's historical growth came from issuing overvalued shares. In this regard it is hard to argue against reflexivity. The price that FFH trades at is determined by Mr Market, and if Mr Market is willing to pay an astronomical price to the Fairfax treasury it then does in fact grow intrinsic value. There are religions however that believe the future path for all of us is chosen... in this sense intrinsic value doesn't change, only our perception of it does as we live life forward and it is revealed to our eyes. In this case, only our estimates of IV change as our actions (including Prem's) were already decided by some God who know the IV all along, and that IV always included the peaks and valleys of Mr Market's mood.... thus Soros' reflexivity doesn't matter as this God took it into account already in his master plan of the universe.

Correct, it can only be explained partially by business level. However, double the volume of business in a hard market and I think the underwriting profits will fill in the underwriting losses we are now seeing. One quarter at CR of 90% in hard market with double the business will fill in a year of underwriting losses at CR of 105% at present volumes. But we don't know when it will happen. I do know however that when you buy the shares for 10% below book (even after today's spike) you have a margin of safety against three years of 105% CR. Market won't turn in three years? Possible of course.

What happens to the combined ratio when you write less business but your expenses do not go down? They could fire some underwriters, but it would send the message that if you hold on prices and write less business then you will lose your job. It would also leave them shorthanded when the market turns.

I invested in Fairfax and it has since added a zero to my portfolio. An additional comma was needed to accomodate it. Is that what people mean when they say it is a zero? I am looking forward to it being a double zero.

A week or two ago some people were expecting ORH to outperform FFH in Q2. Scoreboard for Q2: ORH book +18.5% FFH book +23.5%

What does this "fair value" of ICICI mean? A or B? A: Is it what they believe the stock would trade for in today's market given present market valuations? B: Is it like the "FAIR" value they paid of 1.3x for NB? If B, then I fear that you might as well count all of their common stocks at "FAIR" value, which probably puts BVPS well over $400. But that's kind of like putting the cart before the horse. If A, then it's perfectly fine to count it towards BV. Fair value per fas 157 - the price at which it would sell for today, in todays market. For most traded securities, fair value means current market price. If you own more than 20%, it means cost or book value, adjusted for your proportionate ownership. Its carried on their books as an equity investment for accounting purposes. This means it is not marketed to market value. Given the high growth in india, it is worth significantly more than this if they were to sell it today. That's what I was hoping for. Thanks. At today's close of $290 it's still valued at 82.8% of estimated present book per your estimate.

What does this "fair value" of ICICI mean? A or B? A: Is it what they believe the stock would trade for in today's market given present market valuations? B: Is it like the "FAIR" value they paid of 1.3x for NB? If B, then I fear that you might as well count all of their common stocks at "FAIR" value, which probably puts BVPS well over $400. But that's kind of like putting the cart before the horse. If A, then it's perfectly fine to count it towards BV.

This is very welcome news. Book value is up 17% YTD (from a base of $270 after paying the $8 dividend). Let YTD = June 30th.

FFH is the only stock I've found where the price of volatility in the LEAPs today is largely the same as back in March (slightly lower but it could be explained by time decay). In March, FFH's volatility premium was the same as that of JNJ or KO. It was 20% strike for at-the-money then, and would probably be so today were it not for time decay (it's 18.6% today).

Yes, but it depends on when it moves up to the "break even" point. Let's say that I paid $50 for the Jan 2011 $250 strike FFH call 3 weeks ago, and yes, if the stock is only at $300 in 2011 at expiration then the option holder makes no money. However, yesterday the option holder could have written the 2011 $300 strike call for $50. In that situation, the gain is 100% in 2011 if the stock is still at $300. No tax is paid until 2011, and you have a return of capital of $50 which can be reinvested today to boost that return beyond 100%. Anyways, that's if you are concerned about taxation. I have to keep a lid on my gains this year because I'm doing another Roth IRA conversion. So I have a different perspective.

Tis the season for price firming I guess. Last week I got a phone call that my family health insurance premiums have been raised by $70 per month. The upside is that the amount I spend on insurance is dwarfed by what can be achieved through my ownership in Fairfax.

You don't necessarily lose when competing with "free" software: http://www.geekpedia.com/news193_Linux-server-market-share-plummeting.html

FFH traded 11,000 shares on Friday and 7,500 shares today. No idea why, but it is out of the ordinary.

I wonder how this conversation about ORH buyout would be different if nobody here owned ORH, and instead only held FFH. I hold some of both, but mostly FFH. My heart is where my treasure lies, and it isn't screaming for paying above book (via ORH) for the same assets that can be bought below book (via FFH).

Oh, so you are talking about buying the convertible preferred are you? Berkshire's WFC position is more than 70x larger than their GE position.

Berkshire did not purchase any GE shares in Q1. That is a huge red flag for me. Berkshire has a miniscule position in GE and it's clearly a large enough stock where Buffett can really sink his teeth into it. I think it is likely a Lou Simpson holding given Warren's propensity for concentration when he really likes something. Instead he bought more BNI and JNJ. Buffett has a small pool of stocks to choose from (combination of Berkshire's size and his strategy that relies on predictable outcomes over long time horizons). GE didn't make the cut, not even at $5.73. I bought back the GE puts that I had written -- wrote more WFC puts instead at prices where Buffett would be comfortable to put 100% of his net worth into it.

It's interesting that you can see what HWIC can't. Myself, I own no GE and can't analyze it. I posted the quote by Watsa to bring some balance to this thread. You are focusing on their present difficulties, and I am sure HWIC bought GE for it's long term potential. I don't think you can explain it away by suggesting they were naive about how bad the economy would get -- I mean, you are talking about the man with the "100 yr storm" vision after all.

Some facts: S&P cut GE's rating on March 12th. Fairfax still owned 10 million shares of GE on 3/31/09, after trimming the holdings of GE by 15% to buy other names like USB (by comparison, JNJ, KFT, PFE, DELL were all trimmed by 9%-10%). At the end of March, was the worst of the crisis starting? Maybe he still just hadn't heard the bad news yet on the economy, the part about GE capital, and the jet engine and locomotive business hurting?

Somebody at the AGM (summarized here on this board) explained that taking the rest of NB was done to improve holdco cash flow. Same could be said about ORH I suppose, but not clear to me if the new NB cashflow is enough to make them comfortable. I simply want ORH to at the very least buy another 9.5% (roughly) of it's shares so that FFH owns 80% -- just in case we need the tax sharing again one day. That could be nearly completed by now except for the fact that they haven't repurchased a single ORH share (that we know of) since Q3 2008 I believe.