ERICOPOLY

I don't see why they should buy ORH at the 1.2x (minimum) multiple you likely expect when they can instead purchase FFH shares for way less than that.

Prem Watsa says (Nov 2008): "General Electric has never been valued this cheaply in 50 years. GE at $15-16, represents seven times earnings, over 8% yield -- which takes you right back to the 50s. This is a AAA-rated company. It has a tremendous record and today you can buy it at these very low prices."

I remember hearing that Brian is at the more bearish end of the spectrum. For him to buy now (with such a huge equities weighting as percentage of book at last report) suggests to me that they've put some hedges back in place, or taken some gains off of the table. Purely speculation of course.

Going forward, I am curious to see whether the volatility will be reduced with the much smaller aggregate short position.

I never mentioned liquidation. The way you phrased it though, it sounds like you aren't addressing Cardboard because you didn't mention him by name until the next paragraph. I'm the one who thinks capital gains are much better when they are bigger :-) Nothing at all about liquidation.

I'm not valuing the company with book value. Gains do flow to book value though, and when people were expecting a higher book value, it's another way of saying they expected more gains. If you are ignoring gains in valuing the company, you are doing it wrong.

During Q4 the 30 yr treasury yield was at roughly 2.5% for a while. Nobody knew how much was going from Treasuries to Munis during October... some thought there would be huge bond gains in Q4, but as it turns out the selling of treasuries happened between 3.5% and 3%. Gains yes, but not as much as some hoped. Some were expecting book value to be better than it was -- once earnings came out, the stock started dropping.

If an amount of money was at period 1 was being spent and invested, but now in period 2 is being held in cash, then that's severely deflationary. You could borrow that money and distribute it, for free, and even finance it by printing currency, and it still wouldn't be very inflationary, as it is just taking domestic product to a level previously achieved. This makes sense, you have a balancing scale where on one side you have deflationary forces and on the other side inflationary forces. It is said that there has been a permanent "reset" in spending, that prior levels were sustained by debt and that people aren't going to (and can't) return to those habits anytime soon. In that sense, a certain degree of money printing is safe because their spending isn't coming back to prior levels.

I do remember Mungerville buying at something like $80k in 2005 and selling very near the top around $150k. Now, class B shares back at $83k equivalent again.

While that is true, a gain of 50% in the S&P500 (merely recovering the ground lost last year) would leave Berkshire's shareholder equity behind. Too much of Berkshire is privately held and not marked to a bid for these kinds of 12 month comparisons to be terribly meaningful.

I don't have a job and I need cash to fund the cost of living. In a position such as mine, once the portfolio generates enough income to fund all of my expenses, I can then truly say that I care not what Mr. Market does. A dividend is a way of incrementally tapping my portfolio's intrinsic value at 100%, and Mr Market can't get in the way. A no-dividend policy simply means that I can only tap the intrinsic value of my investments at the 100% level only when Mr. Market says so. And that might never happen. Another thing to consider is that if size is the anchor of performance, why get bigger? Paying a dividend might, in theory, improve the returns of the capital left behind. Then there are the people with jobs that don't want extra income -- they perhaps care not about the dividend. Or the people with so much money that they don't need more income -- they might like a no-dividend policy as a way of tax reduction. There is no best answer. Different strokes for different folks.

This year I sold puts for a reason other than income. In Feb/March I was selling far out of the money naked puts for 20% of notional (GE, AXP, MSFT, SHLD, WFC, etc...) to fund at-the-money FFH calls for 20% of notional. Throughout this entire year I have been 100+% notional long FFH via calls. By the time FFH dropped to $250, I was tired of being scared so I switched from a deep-in-the-money FFH long call strategy to an at-the-money FFH long call strategy. The puts I wrote expire in 2010 while the calls I bought expire in 2011. FFH is still down YTD by about 20%, but I'm now only down 3%. This is because the premium in the puts I wrote are basically worthless now while the premium in the calls I bought have barely decayed at all. Otherwise I'd be down 20%. So anyway, yes, I wrote the puts to generate income but really I was running a strategy that would benefit from the 2010 expiry I sold vs the 2011 expiry I bought, coupled with a deep hedge against further decline (I sold puts at very low strikes). Unfortunately, I didn't just buy the shares of the companies I wrote puts on -- but to do so would have exposed me to market risk I wasn't in the mood for. So for whatever it's worth, I'm lucky that I'm not down 20% as I was the day I started to implement the strategy. Just pointing out that not everyone sells puts only for income. Another reason somebody might write naked puts is for meeting a margin call. You might have a concentrated position in FFH and your broker could flip out and raise the maintenance margin requirement on you. Should that happen, write puts on something with a lower maintenance margin requirement and use the premium to buy puts on your FFH position. That should meet your margin call. In this situation, if you had a large capital gain on your FFH position you wouldn't want to sell it to buy calls as that would trigger a taxable event -- so the puts is the only answer I think.

If you take it as a given that the 80% is going down in a hopeless spiral, then no the 20% will not overcome the 80%. Prem does not take it as a given. Here is a quote from him: "The ultimate test is will the 80% start spending and we will not know that for some time." http://www.financialpost.com/story.html?id=1307083

Buffett has stated that we won't have a real estate situation like Japan's because our population is growing and therefore housing demand is growing. That's pretty much what we said on this board a couple of years ago. It makes too much sense. US is growing and Japan is not (to me it is very clear). Prem stated that the US reacts quickly, as opposed to Japan. It's unclear to me exactly what he means by that, however it sounds like he is not ready to compare the US to Japan. But look at this answer of Prem's. Does it sound like he intends to unload at $900 and sit in cash? It doesn't to me. It sounds to me like he would rather just buy and hold for the long term. His actions (not selling at the end of 2008) very obviously point this out. Otherwise why didn't he sell, and for what reason would he sell now if he didn't then? Q How long will it take for fear to disappear? A "The U.S. reacts quickly, as opposed to Japan. But it's a question of pessimism, which means it's not a bad time to buy for the long term. We could have four or five years of difficult times. We really don't know." http://www.financialpost.com/story.html?id=1307083

"Obama has come with a very significant stimulus plan. The Treasury Secretary has a very thoughtful way of handling the banks and yet no one believes it's the bottom. "Today we've some of the biggest actions by the U.S. government in terms of stimulus, interest rates at zero and nobody believes it'll have any impact." - Prem Watsa, Feb 2009

As for the market topping out... the market is roughly where it was when the year started -- Fairfax was heavily invested in equities at the time, presumably expecting markets to go higher, not lower.

El Nino is said to be responsible for the light year in 2006. There were Atlantic hurricanes, they just didn't make landfall (wind shear weakening them before landfall, or blowing them off course).

I think that you get roughly $1 of equities for every $1 invested in FFH at today's price. It seems like a 12% return on their equity portfolio over the next 10 years will get you 17% return on the stock if you assume: 1) a modest expansion of B/V multiple (say 1.2x) to offset taxes paid/due on the equity gains 2) 5% per annum boost from the float (pretty easy this year with the tax-free muni bonds) So is a 12% return possible?

Canadian government carries out aerial bombing raids on schools of porpoises blamed for predation on cod.

I think I read that Fairfax looks at it's insurance exposures and keeps them positioned such that a major catastrophe won't hurt them by more than a single year's investment income. A total wipeout of WFC to $0 (however improbable) would cost FFH about 6% of book value. The position is also only marginally larger than their JNJ position. For whatever it's worth it seems to me like the WFC exposure is not really that large.

Aha, here it is from Viking's post: 7.6 million WFC shares at $18.41 (46% of total new FFH purchases) I know WFC has had this tremendous run from it's bottom, but it's not all that spectacular of a run from where they bought most of their WFC shares. Of course they still might lighten up like you say, but I don't think they will because of the breadth of options they had before them at the time they were buying. They would likely have discussed this problem of needing to lighten up after a 30% pop at the time they initially had built their big position. Then perhaps somebody in the room would have said "Look, if we're going to settle for a 50% gain on the incremental invested dollar, why not put the money into something else, given that everything else in the market is getting slaughtered too? That way we can avoid paying out the tax on the realized gain." They did a year or two ago state in the annual letter that they had realized belatedly that they'd like to hold higher quality investments long term for tax benefits. You are probably right, but I guess I will be disappointed a little bit if so.

Their initial 3.5 million share stake in WFC cost them $21.93 per share (that's the price listed in the 2008 annual report). I believe their average cost is in the high teens. From my understanding they were fully bought in before it traded under book value. Average cost is probably in the $17-$18 range. Somebody posted the ORH holdings from the NAIC filing the other day and it looked like there were WFC buys in the $17.50 range. I believe (maybe it was Al) somebody mentioned that (at the annual meeting) the officers claimed to have bought the stock down to $15 but then no more. (stock then fell nearly 50% more)

They held $100m in WFC at $30 at Dec 31st. I hope they have not sold any of it. Buffett's opinion on WFC's earnings power makes it a cheap stock even at 1.5x book.

A 2% chance of blowing up is a 98% chance of survival. The chance of that single company surviving 50 consecutive years is .98^50 = .364. 36.4% isn't great, but it's not quite as fatalistic as you made it sound.

Page 10 of the Crum&Forster 10-k states that, for the past 3 years, earthquake coverage has represented between 5.2% and 6.6% of the total property gross premiums written. http://www.cfins.com/assets/downloads/financial/CFHC-10K-02272009.pdf