The One Good Reason Why David Sokol Is Clean (NYSE: BRK; LZ)

Even if it is widely discussed that the former Berkshire Hathaway (NYSE BRK.A, BRK.B) executive David Sokol acted in an unethical manner in the Lubrizol Corporation (NYSE: LZ) deal, people seem to forget one important matter.

A lot of the buzz is generated by the fact that Sokol took his position after that meeting with investment bankers at Citigroup on December 13th 2010. those who are in such a ruch to throw accusations at Sokol seemed to miss that there were 18 companies proposed to David Sokol on that day.

Even if he acknowledged that Lubrizol was the most interesting company out of that list. There is no way he could have known in advance which of those 18 companies Berkshire Hathaway's Chairman Warren Buffet would come to chose in the end. It is also interesting to note that Buffet was pretty cold about buying Lubrizol until near the end of January 2011.

A way to know that Sokol acted in a way to profit from an acquisition by Berkshire Hathaway would have been for him to buy all of the 18 companies. One must remember that before the acquisition, as he said in an interview on CNBC, David Sokol purchased those Lubrizol stocks for his own account because he thought that the company had a good long term potential. He also mentioned that he trades pretty rarely. That is also the same reason why he was pressing for a deal between Berkshire Hathaway and Lubrizol. He was just acting in the interest of Berkshire Hathaway shareholders according to his duties. 

This all just seems to be a matter of bad timing and probably bad judgement about the perception of those moves from David Sokol if we take into account that his portfolio turnover is dismal on a yearly basis.

On the right is a timeline of the deal between Berkshire Hathaway and Lubrizol from an article provided by the Wall Street Journal.

Fairfax Financial (TSE: FFH) is a Buy Once Again

For people who have ha the opportunity to follow my posts: my first report on the company, when I commented on the company taking it's subsidiaries private or on a recent acquisition over the past two years, know how much we are fond of Fairfax Financial Holdings limited. This Canadian based insurer has provided great returns for it's shareholders through astute acquisitions and massive gains on credit default swaps derivative contracts in 2008. I am very pleased with it's performance for the past two years I have held at the company's stock.

The company announced on January 18th 2011 that the 99% of the shareholders of First Mercury Financial Corporation that cast their vote had visibly almost unanimously voted in favor of the friendly takeover bid proposed by Fairfax Financial. This acquisition is very typical of the way the company's CEO, the great investor Vivan Prem Watsa manages these operations. For those who are not accustomed to the company, it's name stands for Fair and Frieldly Acquisitions and should not be mistaken with Fairfax county in Virginia. The company will generally come with a bid for a company that is usually higher than the target's current price and win the approval of shareholders.

It is interesting to note that acquisitions and major investments are managed at the holding company level by  Vivam Prem Watsa and his small team. As of the last quarterly earnings release, the company stated that it had $32.5 billion of assets and close to $8.9 billion of shareholder's equity or 416$ per share and this is certainly the first reason to buy the stock. We also know from the 2010 annual meeting slide presentation that when current management took over in 1985, the company's book value was 1.52$ per share. They have to be doing something right in the tough insurance business.

Many other factors have to be taken into account, but I have noticed that when the company is trading under book value per share, it tends to rally back to this value. At the current price of 383$ per share, that implies at least an 8.3% return if book value doesn't change by the next quarterly filing on February 17th 2011.

10 year target price: 910$

Disclosure: The author is long FFH.TO

FairFax Financial Spots a Deal

Fairfax spots a deal - The Globe and Mail

After months of issuing preferred shares and debentures, the insurance giant Fairfax Financial Holdings Limited is initiating one of the largest share buybacks of it's history. At yesterday's closing price, it would be valued at over $600 million. Over the next 12 months, the company will buy close to 1.6 million shares, almost 10% of the current float. This means that the average daily volume of the company will be greatly influenced by the actions of the company.

The company's Chairman and CEO, Vivan Prem Watsa, has developed a reputation of value investor over the past 20 years. Having the company dedicate more than half a billion dollars to buying it's own shares instead of increase it's current investments is a clear sign that the FFH is currently trading under or close to it's book value. This is an hypothesis that will be confirmed on the next quarterly filing of the holding company. Note also that this move will greatly increase the seize of the CEO's control stake in the company, which is already pretty close to 50%.

However, before buying the stock, one should consider taking this news with care, as the final amount of the operation is not yet known. Some companies will issue such statements to stimulate a downbeat stock price. Fairfax is up a mere 2% for the year, this is therefore another possibility. If the transaction is completely filled, the remaining shareholders will be greatly rewarded as the company will showcase higher EPS.

This might not be a good time to buy the company's stock, but for those who already own it, it is definitely a great idea to hold on to it.

Full disclosure: Long FFH.TO

Institutional Investors and Stock Prices

In their quest to generate impressive returns to their clients, institutional investors shape the financial world. An average investor will tend to get heavily influenced by their investment choices.


Institutions generally tend to be banks, insurance companies, pension funds, mutual funds, investment trusts, unit trusts or hedge funds. They are very meaningful invertors because of the sheer size of assets that they manage.


Any individual wandering in the financial arena should consider getting more acquainted with those entities. If you are playing in the small capitalization and mid capitalization field, you should know that some of those investors shun companies that expose their stock prices to levels that they deem too low. In fact, some if those institutional investors establish minimum buying prices; in order to avoid the frequent price manipulation that incurs from companies have a too low stock price.


For most of those investors the minimum price will be set at 5$. This will explain why some companies experience huge gain in their stock price as soon as it hits that minimum price. A good example is DryShips over the past two years. However, some funds will go as low as 1$ per share.


Mass market movements are often the consequence of actions by those investors. If we take that market plunge of September 2008, one of the conclusions implies a chain reaction in the financial market.


Like any companiy, institutional investors have balance sheets and obligations towards their lenders and must maintain some capitalization levels in order to stay solvent. When news about a financial crisis were gaining grounds, many individual investors, who had their money managed by mutual funds, pension funds or companies, began redeeming their investment, thus causing a lot of stress on the cash position of those companies. Those institutional investors were forced to sell promising positions to fulfill their cash balances that were dwindling because of redemptions from clients or investors.


The investing world is a challenging one for value investors. Even if you get the right assumptions about the value of a company, institutional investors can dramatically affect your results because of their specific needs.

Fairfax Financial Holdings (FFH) to Acquire another Subsidiary

A couple months ago, I wrote an article about one of Canada’s main reinsurance companies. Namely Fairfax Financial Holdings Limited, I also elaborated on how the company had been incredibly positioned to benefit from the financial meltdown of 2008. Through the sale of its large credit default swaps portfolio and a recent $1 billion public offering, the company has built an impressive cash position that it has used to invest in numerous ways, mainly by investing in the stock market but more importantly by acquiring the minority interest of two of its jewel subsidiaries.

At the beginning of December 2009, Fairfax Financial made an offer to the minority shareholders of it’s Canadian subsidiary Northbridge Financial Corporation. The details of that transaction were quite simple and very attractive to any single one of the company’s shareholders at the time.

It was an offer to acquire all of the outstanding common shares of Northbridge, other than those shares already held by Fairfax, for $39.00 in cash per common share, representing total cash consideration of approximately $686 million. At the time, $39.00 per Northbridge common share represented a premium of approximately 28.9% over the $30.25 closing price of Northbridge common shares on the Toronto Stock Exchange on November 13th, 2008, the day Fairfax approached Northbridge’s board of directors to consider the proposed transaction.

As Fairfax’s press release underlined it, the proposed transaction also represents a 31.8% premium over the 30-trading day volume-weighted average closing price for the period ended November 28, 2008 of $29.59 and a 160.0% premium over the May 21, 2003 initial Northbridge public offering price of $15.00 per common share, it was pretty rewarding for long term as well as trading shareholders of Northbridge Financial. At the time, Fairfax owned 30,111,306 common shares or approximately 63.1% of Northbridge’s outstanding common shares.

It seems that Vivan Prem Watsa is striking again; this time with Northbridge’s American sibling, Odyssey Re Holdings Corporation. According to the September 18th press release, the price of $65 per share in cash represents a 29.8% premium over the closing price on September 4, 2009 (the date on which Fairfax publicly announced that it was proposing to acquire all outstanding shares of common stock of Odyssey Re that Fairfax does not currently own for $60 per share) and a 33.4% premium over the 30-day average closing price for the period ending on September 4, 2009. The complete transaction would amount to about $1.8 Billion. Based on Odyssey Re’s initial public offering price of $18.00 per share in June 2001, the purchase price represents a compounded annual return of 17.3% through the date of the merger agreement.

The acquisition of those two reinsurance powerhouses and the investing incredible investment ability of Fairfax’s CEO Prem Watsa reinforce my conviction in the future growth of the company. I remain convinced that even at a price of 398$ per share at market close on September 18, 2009, this company is clearly undervalued by the market.

10-year target selling price: 651$

Disclosure: The author is long FFH.TO

A Small Year for iStar Financial

A couple of weeks ago, I wrote an article about a REIT I am currently invested in that goes by the name of iStar financial (NYSE: SFI). The position of a long term investor gives the advantage of having quick access to financial statements as soon as they are issued. This year, I have been very disappointed by the performance of the management of, this REIT, which was, before 2008, the soundest of such companies in my opinion.

In the upper stated previous article, I elaborated on the attractiveness of iStar, which unfolded to be a yield trap, meaning by that a dividend so attractive that it cannot be sustained forever. At the time of my first analysis of iStar, their average quarterly dividend for the last five years hovered around 70 cents per share. This amounts to roughly $2.80 per year. With an average cost per share of 3.98$ such a dividend would provide a staggering dividend yield of 70%! Such a yield is mouth-watering for a value investor and many dividend investors have probably noticed the same phenomenon. The only problem is that the board of directors decided to suspend the company dividend during the last half of 2008, at the same time making the company’s stock less attractive relatively to the initial reasons that made iStar Financial so appealing.

The annual letter by chairman of the board and chief executive officer Jay Sugarman was more of a desperate call for shareholders not to leave the company’s beaten down stock than a real explanation of what happened. Plus one of the matters that had to be voted in the annual shareholder’s meeting was the board of directors proposed vote in favour of the 2009 Long-Term Incentive Plan and Performance-Based Retention Award to the chairman and Chief Executive Officer. The plan allows Jay Sugarman to get compensated in stock about every three years relative to the performance of the company. They justify the plan by with the fact the company purchased about 32.6 million shares between July 1st 2008 and March 31st 2009. The only reason I disagree with the plan is that in three years, iStar’s performance will be significantly better than in 2008. Jay Sugarman will be automatically awarded for the good performance of the company. I just hope the stock price will be significantly up enough to ensure little dilution of shareholders’ wealth. This is another good example of the institutional imperative.

My only solace is that the company proceeded to a huge share buyback program, thus bringing the common stock count from 133 million shares to 105 million as of December 31st 2009. This is great news since it will allow the company to spend proportionally about 21% less cash when they reinstate their dividend. At the time of making the investment in iStar, or in any dividend paying company for the long term, a yield of 10% is enough to justify a 10 year commitment from my capital. Taking this into assumption, iStar needs to have a quarterly dividend of at least 10 cents per share to make a long-term investment worthwhile.

Disclosure: The author is long on SFI

The Great Housing Bubble

At the end of the 90’s, investing in the bull market was kind of a walk in the park for all the people hunting for a quick profit. The internet was promising to revolutionize how people buy what they need and many companies ending with .com flood the market with  IPOs. Thousands of speculators rush on them, certain to bet on the next IBM. Their illusions are quickly scattered when they notice that most of those companies burn more cash than they can get on the open market. Between 2000 and 2001, investors pull out of the market and many speculators follow them swiftly, causing one of the worst panics to hit the stock market since the Oil crisis. However, those events remained silent for most people because they were eclipsed by the horror of 9/11. 

Governments were quick to react, in most industrialised countries; they asked their central banks to reduce interest rates at levels so low to make credit inevitable. That spurred a takeoff in consumer spending, mostly financed by credit and avoided a recession in some countries. It also generated an explosion in the housing market and the mortgage market at the same time. That was a close call. Banks were able to offer really affordable mortgages to almost anybody who wanted to buy a house.

For those same banks, making money on those mortgages wasn’t enough, they had to make more; mostly on the lower quality mortgages that could easily default. Some investment banks, like Lehman Brothers (OTC: LEHMQ), started recycling those mortgages in investments vehicles of smaller size called collateralized debt obligations. They also got rating agencies to give those financial instruments a rating ranging from AAA to B depending of the seniority of those vehicles. To make sure they would be able to repay in case of default, they bought bond insurance, to companies like AIG (NYSE: AIG) on those CDOs to ensure payment on the holders, hence the AAA ratings, no matter the safety of the underlying investments. That system could have worked forever based on the assumption that home prices ALWAYS go up; since people could have refinanced their mortgages.

Closer to us, in 2007, the first wave of mortgage try to get some refinancing. But there is a big problem; since 2002, interest rates have almost doubled, affecting mortgage rates and at the same time doubling mortgage payments. Millions of homeowners in the US could not afford their new payment and since home prices were not going up; in some cases, they were going down! This led to an increase in the number of bankruptcies, forcing many financial institutions to write-down many of those mortgages, which in turn caused most of the sophisticated investors who had acquired CDOs to write-down their assets. What we have here a good example of systemic risk.

This is the chain of events that caused the current recession. It has been many years in the making and many rational investors saw it coming. The good thing with the current financial environment is that it will force most companies to deleverage, making them safer and reducing their systemic impact in the process. Those events also showed the need to regulate the market of derivative contracts that are still selling over the counter because their current value is now a staggering 600 trillion dollars.

Relief from the Banks Stress Tests Results

After several months of waiting to see what would be the capital needs of 19 of the biggest banks in the US, the department of treasury provided a lot of information and if seems to me that they are a lot better than what has been expected by most investors and traders.

Since March, there has been a massive rally in stocks that has been triggered by internal memos at JPMorgan Chase (NYSE: JPM) and Citigroup (NYSE: C) that they had been profitable for the first two months of 2008. Those announcements revealed to be a source a major relief among many traders, even with the possibility of nationalization that was looming over most of them.

The goos news now is that those banks will not need more capital injection from the US government, but a couple of them will have to issue common shares to fulfill their needs for more Tier 1 capital. Those needs have been calculated by the treasury department assuming jobless rates rises above 10% and that home prices continue to tumble. The Washington Post came out with a very interesting article explaining the results of those stress tests that can be accessed here.

One thing is for sure, investors will probably feel more confident since banks like Bank of America Corporation (NYSE: BAC), Citigroup Inc. (NYSE: C) and JPMorgan Chase and Co. (NYSE: JPM) have seen major gains in their stock prices in afterhours trading on May 7th. What is left to see is how that market will react to those announcements on May 8th, even if some of the results have been leaked at the beginning of the week.

Full Disclosure: The author does not have a position in BAC, C or JPM.

You Broker and Transactions fees

A lot of people want to invest in the stock market, but I’m seldom sure that they know how they can do that. The first thing they need to know is that you need a broker to start investing in the market. The second thing is that they have to do a lot of research.

So how does one get started with trading? Many important financial institutions offer brokerage services to their regular clients and some independent brokers offer the same service. The first step is to open an account and then fund it. Pretty quick isn’t it? As soon as that is done, a trader can start investing.

Now there is a lot of choice available to investors, retail brokerage houses offer services ranging from 20$ to 30$ a trade. If you have been following the Q1 results of most banks in North America, you surely have heard that they showed the biggest increase in revenues compared their first quarter last year. A big chunk of those revenues actually came from their brokerage business, more precisely, from all the trades on all the trading of stocks and government bonds. Their profit margins must be appreciable since many independent brokerage houses offer the same services for a fraction of the price.

Right about now, many must wonder where it is possible to have a brokerage service that asks less than 20$ without having the usual minimum 100000$ or 150 trades per quarter? Being a value investor, it is pretty clear that the number of trades that I make around one per month or less. Doing business with a broker that allows a low volume of trades with a minimal fee is the option that makes perfect sense for me.

When i started looking for a broker, my first thought fell on E*TRADE, but their fee structure and, in my humble opinion, their poor service to help me get started with an account made me think that they were not the best choice for me. Fortunately, I fell, with enough luck, on a internet ad about an independent Canadian broker that goes by the name of Questrade.


What amazed me was their very flexible fee structure. It thinks as much about long term investors as much as about frequent day traders. They charge 1 cent per share on each trade, for a minimum of 4.95$ to a maximum of 9.99$, with no minimum required balance.

I have been a client since September 2008 and I have been incredibly satisfied with the swiftness of execution of my trades and their useful live costumer service. For those unsatisfied with their current broker, you can find more information on their website : www.questrade.com.

FairFax Financial: The most interesting company to date

Fairfax Financial Holdings Limited (TSE: FFH. NYSE: FFH) is a financial services holding company. It also is the biggest Canadian reinsurance company. A close look at their financial statements allowed me to conclude that the company had had an excellent return on equity since it went public in 1985: a consistent 20% every year. Talking about the business, the company’s stock is selling under book value and intrinsic value, which is one of the main reasons I decided to get involved with that company. The only reason why people might have missed on that company is that their stock is also selling at a psychologically high level for a trader. Most people would be intimidated by a company with a stock price in the hundreds of dollars, but the intelligent investor looks further than just the price tag. In fact, the price of a stock will be the last element we will take into account in our analysis before making an acquisition.

The ultimate reason I have a very important part of our portfolio in Fairfax is the chairman and CEO: Vivan Prem Wasta. His letters to the shareholders of the company are a masterpiece of financial knowledge and literacy of the insurance industry in Canada. I was far from surprised since he is a proud member and advocate of the value investing philosophy. He adheres to making much reflected acquisitions and keeping the company in a strong financial position; that focus is reflected in their very healthy balance sheet. Since he is a big individual shareholder of Fairfax, his attitude is very much reflected in how he leads the company. He is exactly the king of managers I look for.

Fairfax is probably one of my most promising positions and it has proved its performance by showing record profits in a year gloomed by a bear market. Acquiring parts of that company at such a low price is the closest thing to a robbery and I am pretty sure that I will be even more surprised when the company gets to be fairly valued by the market.

More on their website at: http://www.fairfax.ca/

Full disclosure: Long FFH.TO

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