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We made a deal with Iran. Whoopee fucking ding dong.

Let’s assume we stay between 1.2-1.4x BV for the remainder of the year. How much do you think they spend on the buyback? My working assumption is half of the dividend capacity of the insurance subsidiaries ~$2B, proceeds from Poseidon held at the holdco $400m, and potentially another $600m from the proceeds of Eurolife. I think the constraints are investments:equity leverage and debt to equity.

Regarding buybacks, my guess is the persistency of current low stock price has likely caught Fairfax a little by surprise (like the rest of us). Beginning in Q4 of last year Fairfax has been very aggressive with share buybacks. And it seems to be having little impact on the share price (this has surprised me). Fairfax also been very busy on the capital allocation front in recent months (lots going on in addition to buybacks). If the share price stays at current levels, I think there is a good chance that Fairfax will get more aggressive with buybacks. They are very opportunistic. And also very good at sizing their bets.

PBR.A back below $12 and I will reload.

Especially when the MOU (which is an agreement to negotiate an agreement) isn't going to be signed for another 5 days.

The use of minority parters to fund their acquisition spree from 2014 to 2017 was brilliant. An important outcome is the size of Fairfax’s insurance business is overstated (net premiums, float, underwriting profit). And that is because of the minority interest in Allied World and Odyssey. At least that is how I think about it conceptually. When Fairfax takes out minority shareholders, the earnings (driven by NPW, float and UP) that accrues to common shareholders will increase. It is the same as buying another company. Of course, Fairfax also locked in a low purchase price - when they put each of the original deals together. That is icing on the cake. This given an elegant way to continue to grow in a soft insurance market. (Not that anyone cares.)

Draft and 500k soldiers to Iran. You guys are crushing it. How about we sending a MAGA volunteer Army? Sign up at a recruitment center and show these non believers what your are made off.

Based on the track record of previous announcements by Trump I think it would be optimistic to even apply Churchill’s WWII comments to the situation: ”Now this is not the end. It is not even the beginning of the end. But it is perhaps the end of the beginning.”

@SafetyinNumbers , the Fairfax story is full of nuances. The “lost decade” moniker I like to use is catchy but it does oversimplify the reality of what was actually happening under the hood. Fairfax’s insurance business was slowly getting transformed for the better - and it doubled in size from 2014 to 2018 (acquisitions). Basically the insurance spring was getting coiled tighter and tighter from 2010 to 2020 (in terms of earning power) - and then it doubled in size again from 2020 to 2025 (hard market). There are many stories like this… where the earnings power had increased significantly but it was being masked by losses from equity hedges/shorts/poorly performing equities. There are so many interesting angles to the Fairfax story.

Oils still 20% higher than pre war and ...."oil hasn't gone up"...

https://www.wsj.com/world/middle-east/iran-threatens-to-pull-out-of-talks-after-israel-strikes-beiruts-outskirts-d0390e22

in 10 or 20 years

When are we going to close the gap from $65-80 from May?

Now we are patiently wait for the details of the deal to see how much Iran won by!

They also used their more fairly valued stock to buy Allied World which reduced the impact of the hedging strategy by issuing equity and dramatically increased the float ahead of what they expected to be an increase in interest rates. That ultimately took a lot longer to happen. They were already in talks with AW in September of that year but they did bump in December to help get the AW BOD on board. Another example of how Fairfax often expresses the same bet in a multitude of ways.

Great analysis as always @Viking. What’s interesting to me is that most professional active managers are using the “lost decade” as a basis for avoiding the stock. It’s the right strategy for most cyclical businesses as margins are more likely to mean revert to the last cycle lows. For Fairfax it means assuming interest rates go back to decade lows i.e. below the mean which is closer to where we are now and the equity portfolio which is filled with entirely different businesses has the same poor performance. Another wrinkle, that these managers miss is that along with the hedges, in 2012, Fairfax started adding more equity positions where they owned more than 20% which impacted the accounting returns negatively. Now that this strategy has matured, I believe it means structurally higher equity returns as investments that are sold book large gains and investments that are not contribute to ROE above 15%. Another headwind that has turned into a tailwind. I have a lot of confidence in predicting a floor for BVPS growth over the next 5 years. I have less confidence in predicting the P/B multiple but I suspect it will be difficult for it to go and stay below 1.2x for over a year. I also don’t think the multiple can get much above 1.4-1.5x unless we have another hard market. The good news is this will mean a lot of buybacks and strong contribution from the TRS as there will be no need to retire them.

This is going to take years and also only works for crude not the other goods that go through the SOH both ways. Also the pipeline and storage facilities are still vulnerable to attack. Just look at what happens in Russia. Mitigations can be developed but can only partly solve the problem.

Actually, you are not. That's how they got rid of the screwworm in the 1960's. It was essentially eradicated for the last 60 years. It infects open wounds in cattle, as well as humans. It could drive the cost of beef up significantly and has made its way up from South America over the last few years. It finally arrived in the U.S. about two weeks ago. It is a legitimate scourge and problem! Cheers!

Thanks as always, @Viking, for these fascinating posts. I am relatively new to FFH, but do remember being impressed at the time when Prem took off the hedges in 2016 after Trump got elected. I think we can all think of fund managers who became bearish, not unreasonably, but who have struggled to concede they were wrong, and have just stayed stuck with their convictions, underperforming. So while it was a painful decade, it is a great credit to them that they managed to recognise their mistake, and how things had changed, and reposition themselves. Cheers

Thanks for posting the interview

Whose troops are we talking about? Can’t be US since total service members across all branches amount to 1.35 million and latest estimates are that only 10 to 20% of that total actually serve in combat roles. Taking the high end of the estimate puts the current number of US combat soldiers worldwide at 270,000, far short of 1 million. And this includes combat members in all branches including the navy and the Air Force, meaning the available number of ground troops has got to be less than that. We could always reinstitute the draft and build up the combat force to a million, but that would take years and trillions of dollars to quadruple the current force and then send them all over to the Iran Iraq border. There’s a reason we only have 50,000 troops in the area. We can’t afford to send many more without denuding force levels elsewhere in the world. If the air and naval war doesn’t do the trick, I don’t think we have any good options to put significant numbers of boots on the ground in a country of 90 million.

@Maverick47, here is where the story gets even more interesting… 1. You lose $500 million for 11 straight years. 2. Lots of the equities purchased from 2014 to 2017 underperformed. 3. Interest rates are also very low for much of the time. And you still deliver a compound return of 4% over the 11 years. How did they do it? Fairfax has an exceptionally powerful business model. Just imagine what it is capable of if the company was firing on all cylinders?

Put 1 million troops on the Iraq - Iranborder and then ask for the enriched Uranium, see if they still like playing stupid games. I don’t even know if you need to go in, I think their own people might chase them off.

Excellent summary and overview of the “lost decade” for Fairfax @Viking! The discussion of trust between a company and its shareholders was apt as well. I think it was Richard Feynmann who said that the first principle of scientific analysis is “not to fool yourself”, and that one must also keep in mind that “you are the easiest person to fool”. It’s too easy as human beings and investors to remember evidence of our own superiority and outperformance and to ignore evidence of mediocrity and failure in assessing our own capabilities. I really enjoyed the juxtaposition of the two posts, first cheering the CDS episode with over a $2 billion positive return, followed by the decade long foray into shorting equity indexes and buying protection against the possibility of global deflation which resulted in a loss of more than twice the CDS gain, even before considering the opportunity cost connected with having to sell equities earlier than would have otherwise been the case. Had the $5 billion loss over a decade not occurred, and if the company had not been forced to leave over a billion of additional equity gains on the table by selling shares early, then we might consider that the purchases of companies such as Allied World and Brit could potentially have been funded by the lost profits and potential positive investment returns on those lost funds instead of requiring the issuance of about 7 million of common shares. We have all been happy that the repurchase of shares has essentially returned us to the same share count as before the Allied World acquisition, but imagine if those shares hadn’t needed to have been issued in the first place…. But if no mistakes had ever been made, the opinion of Mr. Market on the relative valuation of Fairfax shares would likely have been sky high…at nosebleed level prices for the entire period up until this very day, leaving me and others on this board with precious little opportunity to purchase shares again and again over the last 5 years or so at quite attractive prices. So as painful as the lost decade was, it sowed the seeds of a solid investment for me personally in the years since. I don’t have to bemoan the fact that I wasn’t around to buy Fairfax in 1986. Instead, I can be happy that I was able to buy it at reasonable prices for the most recent 5 years or so….

Well, I think the key point for a successor is that they now know that USA can't actually win a war against Iran without putting boots on the ground. Knowing it's all or nothing ought to impact their decision-making.