Partner24

Basically, that means that if the given indexes double and everything else remains the same, we could theorically get back to zero (see next post). No, I think I got that wrong. We would lose approximately 50% of our equity (a cost of 4,8 billions). The indexes would need to triple in order to get back to zero. Also, a further comment. The Russell 2000 is specificaly an especially imperfect hedge. This is a small caps index. http://www.russell.com/indexes/data/fact_sheets/us/russell_2000_index.asp As far as I know, our equities portfolio is mostly not a small caps one. If that information is correct, this 3,3 billions $ Russell 2000 equity swap (short position) looks more like a bet on the future value of small caps than a plain vanilla hedge on our equities investment portfolio.

Ok, so based on the appreciated comments above, here it goes: - These equity indexes swaps (short positions) were at 4,8 billions $ value at a 646.5 Russell 2000 index and a 1062.5 S&P 500, wich weight 54% of total equity of Fairfax. - Basically, that means that if the given indexes double and everything else remains the same, we could theorically get back to zero (see next post). I know they have a portfolio of equities, but it's hard to say how much it is correlated to these hedges. They also have some call options, but again it is difficult to say how much it would compensate for the loss in the above catastrophic scenario...so we would probably not be to zero, but our balance sheet would be impacted in a very significant way if the portfolio of equities would not go up enough. Remember that some value investors see their stock portfolios do nearly nothing when everyone is cheerful and make some mint money when the stock markets tank. - The counterparties and Fairfax have to deposit collateral to reflect the changes in value quarterly. That point is still not very clear. Do they have to write a check quarterly to the other party to reflect the change in value of these swaps and post collateral between the quarterly set dates? Regarding counterparties, we have 3 (those are listed above in that thread), so that lower and diversify, but does not eliminate, our counterparties risk. We still don't know how we would rank in the "food chain" with these collaterals if a given counterparty liquidate or goes bankrupt. - Regarding liquidity risk if a counterparty exit the contract, people here think that these should be very liquid. Someone said that there is normally an ending date for the counterparty so it can't exit the contract at will. Basically, we can exist these contracts at will, but it might imply an additional cost. So, even if everything is still not 100% clear (these hedges are indeed not simple to understand), that's how I see it. It's an ark above the ground in case we would have a flood in the stock market. That's not a perfect ark since we have some counterparties, but it's overall a fairly solid ark. But's it's also a double hedged sword. If it does not rains and the sun shines significantly, that ark could burn and kill us too and that's NOT an insignificant risk. Even if we're not killed, it could hurt us very significantly. Any more information and/or comment by the boarmembers are welcome and think that some further details and information publicaly provided by Fairfax to all shareholders would be helpful to them. Cheers!

Thank you very much Ben for your answers and Myth for your comment! Based on your very good answers, here are some further questions opened to the members of the board: As the position moves against Fairfax, they are forced to post collateral and mark their position against them. Does that mean that Fairfax doesn't have to write a check for the quarterly loss amount to the counterparty and the opposite is true? They mark the losses against some specific assets? If it's the last case, do you know how their rank in the "food chain" with these assets if the counterparty goes bankrupt or liquidate? In normal markets, these contracts are probably somewhat more liquid than the underlying. Let's invert. If the counterparty does want to exit the contract, what happens to us? Do we have to liquidate the collaterized assets and write a check for the whole loss accumulated since the beginning of the contract? Thank you very much!!

So here is my "far-less-than-perfect" understanding of the FFH equity hedges and I would ask some helps from the boardmembers to verify and correct it. In the end of the last quarter: Fairfax had 3,3 billions notional amount of equity hedges against the Russell 2000 index at an average of 646.5 value (short position). Let's say that the index goes up 30% over a quarter (just an example), that notional amount goes up nearly 1 billion and Fairfax has to put 1 billion $ on the table to cover that change in the underlying value. Let's say that the index goes down 30%, that's the counterparty that has to give us the 1 billion $. You can apply the same principle on the 1,5 billions $ of notional amount of the S&P 500 hedge (average of 1062.52), but on a different scale since the notional amount is different. Is that correct? So, basically, unlike the credit default swaps and the CPI-linked derivative contract, there is no downside limit to Fairfax to this hedge. Correct? Some might reply that since it's an hedge of the FFH equity portfolio, if the hedge is at lost, normally the portfolio will also go up accordingly so the net will be zero or so (I say or so because it was 90.9% of the portfolio was hedged and our equity portfolio has a different composition then the hedges). That being said, since we have a focused value investing portfolio, it does not mean that our stocks will correlate with the indexes (especially the Russell 2000), so the index could go up significantly and our stocks do nearly nothing and that would mean we would have to put some significant money on the table without being able to sell some shares that have appreciated as much in value than the actual loss. Is my understanding correct? Since it's a swap, we have counterparty risk related to it. So if the company on the other side goes kaput, we will run after our money if the indexes go down in value over a given quarter (because money have to bet given on a quarterly basis). Is that right? If so, do we know who are our counterparty(ies)? Lastly, can we exit these short positions in swaps easily? I would guess yes since they have done that already in 2008, but I would just like to be sure. I understand that my questions might sound like it's actually a bad thing to have (or bashing, some might remember what we saw with some hedge funds some years ago), but that's frankly not what I mean. I just want to fully understand the risks associated to these financial instruments. Thank you very much for your help! Partner

I had some information this morning. Thanks. I think they should better explain the more complicated financial instruments. My first reaction was to read the files available instead of posting here or call Fairfax. They provide with reasonable facts, but I would provide more details about some financial instruments, because they are far from being simple to understand prima facie My second reaction was to ask the question here, but I said to myself that it was not your responsibility to inform me and did not want to take your time for it. I had some information, but I'll post on a new topic to see if I understood them well for those who are kind enough to help. So here are my personal general recommandations: - First of all, it would be best explain furthemore the things that are complex to understand and financially significant in the filings. Example: a 4,8 billions $ notional amount short position in equity related indexes I would suggest to better explain the nature of these financial instruments (what are they, limited cost or not (unlike credit default swaps) can they get out of them easily if they want to, etc.) and provide with some financial scenarios (example: a 30% upside , a 30% downside in the related indexes) to explain the impact it would have on the financial results. - I'm confident that there is a way to answer the private questions effectively, legally and fairly if these questions are related to actual information provided (not the coming EPS estimate, reasons for the 4% decline today, some changes in the equity portfolio since the last filing, etc.). Expeditors have their way with 8-K, Markel answer the questions directly in a friendly way, some answers the questions via emails (and they provide with good answers with reference to the filings if needed) Thanks for all your comments guys. Cheers!

Me and a lot of my family members have been shareholders of FFH since 2003. In most of the cases, you would say "So what?", but given what happened with FFH since then, I think that it's fair to conclude that we're far from being "day traders"... But I think it's fair to say that when you call Fairfax to ask a fair question, you can expect to have a nearly mediocre service and sincerely this is annoying. Fairfax is a public company! I understand that they can get annoyed with people who are asking "Why did the stock price did % up or down today", "I think that you'll get x,xx earnings per share for the next quarter, am I right?" or questions like that, but I've called to ask a fair question about their equity swaps (short positions), wich is not a simple thing to understand, and both times I got a "they are actually in a "meeting" and they'll call you back" answers... Guess what happened with the phone? "When the phone doesn't ring, you'll know it's me". Yes, I know it's them and frankly it su***. Come on, I'm not Peter Eavis who try to publish an article about the coming Fairfax cash crunch...(!) A very good businessman who've known them for years (more years than me) did suggested me, before I went to the AGM, to tell Prem that their "marketing" to investors was poor. I didn't tell that, but frankly when you call a public company with fair, honest and long term oriented questions in mind, the least they should do is to try to prick up the phone and try to answer them. That's even not marketing, that's just fairness. I'm sorry if I don't own 10% of Fairfax, but that's my family money, we did put a significant part of it in Fairfax for years and I deeply care about them so I try to have my fair question answered and they should take 2 or 3 minutes of their life to answer them. Sorry for the ranting, I do not rant about Fairfax often, but frankly I think it's a fair one. I'm very disapointed. Cheers!

have no problem with dividends in general. but dont like in a year when you are issuing common and preferred to raise money. thanks Agree, but that's the Fairfax way and we can debate about that with 45 posts if you want to, it will not change anything.

I would guess Sokol, but you never know... Anyway, a lot of things can happen over the years. New leaders might emerge from Berkshire. We'll know when it will happens. Cheers!

100 times profits? So I should be paid back in 2111. Where do I sign? Just kidding ;)

I don't know, I would guess 10$, but that guess...is a guess! I would not bet anything on it. By the way, we've been having this dividend vs. stock buyback vs. keeping the cash discussion for years. The dividend wins. Cheers!

with a cordial beating of the Montreal losers as a little extra bonus Bronco, you punk ;) Scorecard baby, scorecard... Les Canadiens de Montréal: The Canadiens have won more Stanley Cups than any other franchise. They have won 24 championships, 22 of which being since the cup became solely competed for within the NHL in 1927.[5] On a percentage basis, as of 2010, the franchise has won 25% of all Stanley Cup championships contested after the Challenge Cup era, making it one of the most successful professional sports teams of the traditional four major sports of Canada and the United States.[6] The Flyers' all-time winning percentage of .576 (as of the end of the 2009–10 season) is the second best in the NHL, behind only the Montreal Canadiens' .591 winning percentage.[1] Source: Wikipedia.org So, who are the losers now? :P Cordialy, Partner

That part of Markel is growing. They first bought a business in bakery equipment and bought shares in a privately owned local financial services company few years ago. Then, for some time, they were quite quiet, waiting for better prices. But since a year or so, you see some news like that from time to time. Block after block, Markel is diversifying it's streams of cash flows. Cheers!

Interesting and a thing to remember for all the permanent pessimistic people.

Fairfax press release regarding that positive change has been written 4 years ago... Just kidding ;)

Thank you. Useful information.

He talks about the pension funds that invest in commodities. I find it frankly disapointing and sad that often, you'll see pension funds being some of the last at the parties. They'll buy things when they become more socially desirable (i.e. popular and expensive) and sell them when they become socially inacceptable (i.e. inexpensive). Who will ultimately pay the note for this bad behavior? Ask the quebecers about the Caisse de dépôt et placement du Québec...

In my book, it's a kind "let put some pink glasses" valuation metric. Banker: hey, you didn't paid your interest on your debt this month. Boss: Oh, but the consultant told me to not pay attention to interest when I valued the businesses. So, I do not have to pay you, right? Government: hey, pay your corporate taxes or your business is bankrupt. Boss: so, businesses have to pay taxes too?! Are you kidding me? Employee: Boss, our equipment is scrap. If you don't buy new one soon, we'll not have anything to sell. Boss: Oh, I tought it wasn't needed to replace it eventually.... Employee:... Boss:... Employee: Did the consultant told you that our salary wasn't a real expense neither?

You know you are a hard-core Berkshire shareholder, when you notice that Elizabeth Banks is reading the 2006 edition of "Of Permanent Value", instead of looking at her legs! Well, I've watched both! ;-) Cheers!

If that's true, I guess we should be better informed about it. What about counterparty risk? And what kind of cash reserves do we have to better protect ourselves against a decline of those equities? These financial instruments do not seem plain vanilla stuff actually.

Crip, as far as I know, it's been cheaper than that just a few years ago, and in the beginnings of the 90's. That being said, their historical average multiple has been far higher than that. Are you still a shareholder? Cheers!

I can't value all insurers, but some of them are quite cheap. That being said, while it trade at historical low valuations (price/book), some overstate their book because a lot suspect that their reserves are actually too low (some troubles ahead).

Uccmal, I know I am going to get flamed for this but so be it. You're right I'll flame you arrrgghh ;) You bring some valid point. From memory (could be wrong), his father Jack said to him when he talked about that idea something like "Why not bring a pile of money and burn in the middle of the street instead?". That being said, while it's a tough business, Overstock.com has some competitive advantages like mindshare, high customer satisfaction, etc. In the online world, overall people are getting smarter, and it becomes more expensive to generate qualified trafic to sell your products. When you have mindshare, people can just type your name on Google and get to your website or better yet type your URL and go directly to your website, wich is far less expensive than bid on keywords or try to have a better ranking in organical results on Google, Bing, etc. I'm sure there is some other stuff that I could talk about, but in the end you have to generate profits and I agree with you that it is very difficult to do so in that business. But, Patrick is a fighter, and I would prefer by far to be on his side than on the other side. I admire him a lot for what he has done both in the business and against the naked short sellers. That being said, I don't have any OSTK shares, but I will certainly not short any! Cheers!

‘I am a better investor because I am a businessman and a better businessman because I am an investor.’ Warren E. Buffett Some Wall Street guys should learn to become "better investors"...and take a cup of humility. Ballmer is not 100% critics-proof, but to call for his resignation is far stretched. Cheers!

These Wall Street guys are a collective mess. They just care about the next quarter and they don't give a damn about the long term. They should taste their own medicine and fire themselves because they underperform.

It's because Peter Eavis plan to write on FFH again :D We all held or bought through the drop from $200 to $57 back in 2003, so I think she can handle the swings. Indeed! I mean, some of long term shareholders wonder what happens when the stock drop 10% or so. Remember the last few years of the seven lean years? I remember someone who told it was like a mining stock in terms of volatility, we were the darling of naked short sellers and and Peter Eavis was calling for a cash crunch. FFH: Finally Fameless and Hundrum ;D Cheers!