Fairfax Q1 2013 Results

[giofranchi]

Personally I think opportunity costs are real.  That's okay though, we just live with them.  They don't feel as bad, which is probably what has led to the traditional of not thinking of them as real losses.  Gains don't feel as emotionally important as losses, so I think people are relatively comfortable with losing by missing out.

 

Eric,

I am not sure I have understood your comment… You really see opportunity costs today?!  ??? Well, even if there were some opportunity costs today (Hey! They are very well hidden!! ;)), FFH is trying not to incur opportunity costs that will be 4 times higher in a 1 or 2 years time!

That is obvious, so I must have missed the true meaning of your comment…

 

giofranchi

[ERICOPOLY]

Personally I think opportunity costs are real.  That's okay though, we just live with them.  They don't feel as bad, which is probably what has led to the traditional of not thinking of them as real losses.  Gains don't feel as emotionally important as losses, so I think people are relatively comfortable with losing by missing out.

 

Eric,

I am not sure I have understood your comment… You really see opportunity costs today?!  ??? Well, even if there were some opportunity costs today (Hey! They are very well hidden!! ;)), FFH is trying not to incur opportunity costs that will be 4 times higher in a 1 or 2 years time!

That is obvious, so I must have missed the true meaning of your comment…

 

giofranchi

 

The unrealized loss on the hedges is the opportunity cost of the cautious stance.  I bought more puts myself today.

 

 

 

[SharperDingaan]

Gio.

 

The .95 to 1.05 BV spread is simplification. The reality is that in most years, FFH has quite a spread between peak & trough; if you can systematically capture 1/2 of it, be happy. P&C's typically make their money in Q1 when nature is calm, lose it in Q2 and Q3 depending on how many & how severe the natural disasters, and make/break their year in Q4. We just recognize the seasonality, & invest accordingly.

 

We are retail, we trade the shares directly, and we synthetically short via the sale and repurchase of 1/2 our existing long position. If we're right we restore our position at the lower value, & take cash off the table. If we're wrong we just restore our position at the higher value; the cost is 2 commissions less the interest earned on the sale proceeds, the unrealized gain on our long 50% offsets the realized loss on our short 50%.

 

Were we institutional, we would be selling long dated calls when the mood is buoyant, & buying them back 6-9 months later when the mood is sour. We would capture the volatility delta, the time decay, & get to leverage the return. No activity in the shares themselves unless we absolutely had to. Different players in different markets.

 

Our underlying message is that there is no conflict in being strategically long, and tactically short, at the same time. The rubber duckie could also be any core holding in the portfolio that is unlikely to sink; Oil/Gas, Health Care, etc.

 

We try to play consistently within our market advantage  ;)

 

SD

[giofranchi]

Gio.

 

The .95 to 1.05 BV spread is simplification. The reality is that in most years, FFH has quite a spread between peak & trough; if you can systematically capture 1/2 of it, be happy. P&C's typically make their money in Q1 when nature is calm, lose it in Q2 and Q3 depending on how many & how severe the natural disasters, and make/break their year in Q4. We just recognize the seasonality, & invest accordingly.

 

We are retail, we trade the shares directly, and we synthetically short via the sale and repurchase of 1/2 our existing long position. If we're right we restore our position at the lower value, & take cash off the table. If we're wrong we just restore our position at the higher value; the cost is 2 commissions less the interest earned on the sale proceeds, the unrealized gain on our long 50% offsets the realized loss on our short 50%.

 

Were we institutional, we would be selling long dated calls when the mood is buoyant, & buying them back 6-9 months later when the mood is sour. We would capture the volatility delta, the time decay, & get to leverage the return. No activity in the shares themselves unless we absolutely had to. Different players in different markets.

 

Our underlying message is that there is no conflict in being strategically long, and tactically short, at the same time. The rubber duckie could also be any core holding in the portfolio that is unlikely to sink; Oil/Gas, Health Care, etc.

 

We try to play consistently within our market advantage  ;)

 

SD

 

Well, this is much more sophistication!! ;)

 

SharperDingaan,

mine is the point of view of a businessman: believe me, what has become almost second nature to you, is not automatically clear or easy to put in practice for everyone else! Again, imo, what applies to 100 extremely sophisticated and extremely successful members of the board, doesn’t automatically apply to the remaining 1300, me included!

 

Cheers! :)

 

giofranchi

 

[SharperDingaan]

Gio, we're not that dissimilar in approach. We view our investments primarily as businesses as well, & buy/sell according to how we think the individual business's are likely to perform over the next 6-9 months; & whether that expected performance is going to reduce our total risk. We essentially see each investment as a sub; sell if we don't expect to achieve our minimum WACC, & buy if we expect a significant diversification (synergy) benefit. We could also keep our cheque-book closed, buy Canada's/T-Bill's, or start something entirely new - according to our business requirements. Obviously, buying/selling shares is a lot easier than divesting/acquiring entire divisions  ;)

 

Our portfolio approach just reflects our formal investment education. Were our focus not on running businesses, we would probably be in the OPM business. As we have the knowledge, & few of the restraints, we mostly get to have our cake & eat it as well.

 

Different applications.

 

SD