dartmonkey

Another trick is to hold the shares in a brokerage account with transactions that cost $9.99 (TD) instead of $1 in Interactive Brokers. This small fee is enough to influence the behaviour of someone as cheap as me, and has surely improved my returns enormously. Some broker should market this : a lockbox for core investments you know you should never sell…

The simple way I understand it is that Fairfax has invested a certain amount of money in Eurobank, say it is $500m for a third of Eurobank, for the sake of the argument. At the outset, that is both the fair value (as demonstrated by the transaction, with Eurobank presumably worth $1.5b) and also the carrying value. Now after a few years Eurobank makes $150m in net income, and pays out $30m in dividends. Since Fairfax owns a third, this means the company essentially made $50m for Fairfax, and paid Fairfax $10m of that in dividends. So Eurobank has retained $120m in earnings, and this is an additional investment that Fairfax has made in Eurobank - its $40m worth of retained earnings were reinvested in the company, so that is added to the carrying value. That may also be the increase in fair value, too, if those reinvested earnings are not producing a lot of return. But in the case of Eurobank, we also have publicly traded shares that are indicating that fair value has gone up more than the $120m in retained earnings. No matter, carrying value rules say that, on Fairfax's book, carrying value is what it paid initially, plus its share of the earnings, minus what Fairfax received in the way of dividends. Eventually, if Eurobank does well enough and pays out lots of dividends, Fairfax's carrying value for its Eurobank could go right down to zero. So there can be a major divergence between carrying value and fair value. Muddy Waters suggested that Fairfax had not written down its carrying value enough, and that its book value was overstated. Most of us feel it is the opposite, that IFRS rules have increased the excess of fair value over carrying value, with Eurobank being a good example of this, and that Fairfax's book is actually understated.

I've just been trying to figure out the logic of dropping the carrying value based on receiving dividends, and based also on Eurobank's earnings. From Fairfax's Q3 report, I see that Carrying Value went from $2099.5 at year end 2023 to $2385.2 on Sept 30, 2024, the number in your table, and they also mention that in Q3 Fairfax received dividends worth $127.9m from Eurobank (slightly different from the number in your table.) Also, Fairfax's share of Eurobank's earnings in Q1-Q3 was $343.7m. There are also exchange rate changes in USD:EUR, with the USD up about 1% over the same time period. Can anyone explain in simple terms how Fairfax might have updated the carrying value of their Eurobank stake? We non-accountants thank you in advance.

I have lost my records of exactly when I bought things before the year 2020, but I probably bought my first shares in around 2008, when they would have been at about $200 US a share, meaning my returns are not really that great, 13% per annum not counting the dividend, maybe 2-3% more with the dividend, let's say 15% or roughly FFH's target ROE. I've had much higher amounts invested in the last 5-6 years, so if I could actually calculate the total return accurately, it would likely be over 20%. I found this old email I sent to a friend of mine in 2010, who turns out to be a distant cousin of Prem's :

Good grief. There are people that have nothing better to do than to compile lists of insurers, ranking them by the number of insurance policies they have written for companies that have or haven't published 'climate goals'. Implicit, I suppose, is that Fairfax SHOULD really be refusing to insure any oil company that hasn't followed the Investors for Paris Compliance organization's standards for recognizing how terrible their industry is and appropriately apologizing for it and planning to eventually phase out fossil fuels. personally would be horrified if Fairfax ever turned down business for such a flimsy reason. If they did, it would be a major red flag.

This is odd because he isn’t the president and there are no vacancies anyway.

Meaning that Fairfax is not really a Canadian financials exposure, given that most of its operations are abroad? It's hard for me to say whether the resignation is good for Canadian business or bad. Trudeau was certainly poisonous, but the very likely prospect of elections in the Spring or Fall, with an almost certaiin Conservative victory with Trudeau leading the Liberals, is now looking a bit less certain. Carney or someone else might do a good enough job to salvage Liberals' fortunes, or reduce the Tories to a minority. I think a Tory majority victory is still the most likely outcome, but the probabillity may have gone from 95% to 75%.

When was Berkshire the same size as Fairfax with its current $31.5b valuation? It's an interesting question, as Berkshire is clearly constrained at its current size, most private and public companies being too small to move the needle. In the end of 1988, before the B-shares were introduced (in 1996), Berkshire had 1.72m shares outstanding, share price $4,700, for a market cap of $8.1b, or $21.5b in today's dollars, quite a bit smaller than Fairfax today. But the share price doubled one year after, and Berkshire closed 1989 with a share price of $8675, and a market cap of $15.0b, or $38.1b in 2024 dollars. So we can say that Fairfax is now at Berkshire's size some time in 1989. We still have some room to run.

Roughly transcribed: "So it has the utility, to us, of common equity, in terms of what we can do with it. How you value that, in terms of intrinsic value, is up to you." I agree that the 1:1 equivalence with cash would be the upper bound. On the other hand, the value of the insurance business that generates that float could be more than the value of the float, if it has negative cost (i.e. positive underwriting profit, on average.)

Buffett, AR 2018: "Beyond using debt and equity, Berkshire has benefitted in a major way from two less-common sources of corporate funding. The larger is the float I have described. So far, those funds, though they are recorded as a huge net liability on our balance sheet, have been of more utility to us than an equivalent amount of equity. That’s because they have usually been accompanied by underwriting earnings. In effect, we have been paid in most years for holding and using other people’s money." So the float is more valuable than equity if it produces underwriting gains, which of course is typical both of Berkshire and Fairfax.

Minor quibble: float that is not going to disappear may be worth almost as much as its equivalent in cash, but surely never more. If you are FFH and you have $35.1b in float (end of 2023 number) and can invest that float for a good return, it may be worth close to $35.1b in cash, which you might add to its book value, $21.6b, to get $56.7b, divided by 22,891,108 shares outstanding, to get $2477 per share. Updated to Q3, if we still had $35.1b in float (I don't think they report the updated value every quarter), and $22.7b in equity, divided by 21,990,603 shares outstanding, we would get $2628 per share, close to your figure, and even closer if you model in the probable increase in float over 3 quarters which you may have done here. But if Fairfax could magically just keep that $35.1b in funds in perpetuity, with all the concomitant obligations to insured parties waived, that would be even better, right? In other words, a $1m 0% interest loan that is due in 40 years is great, and it's probably worth almost $1m, but certainly not more than $1m. I imagine you might say that it is worth more than $1m if the loan amount keeps increasing over time, but if Fairfax's float is increasing, it is because Fairfax is investing some of its earnings in buying new insurance businesses, or putting new capital into existing businesses, so there would be some double counting there. The other thing that makes float worth a little less than its equivalent in cash, is that, being insurance float, there are some restrictions placed on what that cash can be invested in, meaning it has to be mostly invested in safe bonds. Anyways, by that method #3 metric, it would mean that (22.7+35.1)/22.7= 2.55 would be a P:B ratio that would make FFH fully valued. High enough that we don't have to worry too much about the details, and from today's 1.42 we have lots of room to grow before we get there. And if we get to 2.5, we could alwaysswitch to Method #1

Why would a rational seller accept totally overpriced shares for their company? Only a fool or a BS artist would, and I am not sure that's the type of company FFH would want to buy. It doesn't have to be shares for shares. FFH could perfectly well issue shares and use the cash for an acquisition. If the timing makes it awkward to issue shares, they could even sell swaps, or sell the ones they already have. The point is that they would have access to more liquidity.

I didn't know this. How would we know, has Watsa ever mentioned that? Watsa would certainly seem to have a big advantage on Buffett, when it comes to feeling comfortable with an insurance business in India and its management.

In the hopes of preventing a nasty scuffle breaking out, let me just say that I appreciate both sides of this argument. If FFH were to go to 4x book, I would be selling most of my shares, just because there would be no margin of safety and a high risk of a drawdown. But I would probably still keep some, because I would be quite confident that Fairfax would be able to use those high prices to increase value for ongoing shareholders, by ALSO selling shares but using that cash to invest in assets with a reasonable return. I think having a high P:B ratio would be unarguably good for Fairfax, because of this latter opportunity. It would also be very good for my portfolio, and I would be happy to sell 3/4 of my holdings and lock in that return. The only 2 downsides I can see, is that it would obviously not be good for Fairfax repurchasing shares and keeping the company small - no one should want it to go to $1 trillion like Berkshire. And if Fairfax were to go on to make great returns over the subsequent 10 years, at very high prices, being at 4x would have dumped me out of most of my position, so I wouldn't get all that upside. But if I can get $4000 US per share today, a bird in hand would have compensated me very well for having missed out on x birds in the bush.

I think both views expressed above can be reconciled by differentiating between the short term and the long term. In the short term, the market is a voting machine, and that vote is expressed by supply and demand, with a new demand (like indexers buying 4% of outstanding shares) likely to push the price up. This could be an important consideration for someone who wants to buy new shares or trade around a position. In the long term, the market is a weighing machine, and what counts is primarily sustainable earnings, and secondarily, asset values anchoring the value. If Fairfax continues earning 15% on equity for another 10 years, its price will be about 4 times today's price, and whether or not FFH is in the TSX 60 will be completely irrelevant to that. The focus of long term investors should be on earnings, on new investments and how likely they are to produce future earnings. For a long-term investor, inclusion in the TSX 60 and a subsequent share price increase also has 2 furthert small advantages, IMO: (i) it makes liquidity less of an issue, since FFH adds the option of issuing shares, for instance if they wanted to buy a big Indian bank or reaquire assets from OMERS; (ii) it reinforces Fairfax's visibility and credibility, in Canada and overseas, when it wants to do a big transaction. Admittedly, the lack of inclusion does not seem to be hampering Fairfax at the moment, but index inclusion would just be one more sign that the dark ages of the tech shorts, the Blackberry position, the macro bet on deflation, etc. are behind us and that the new Fairfax is concentrated on insurance and solid investments of the insurance float in sensible businesses.