dartmonkey

It is amazing to me that they don't mention, in this outlook summary, what jumps out at me in their numbers, which is the fiscal deficit. Combining federal and state deficits, this was 9.2% of GDP in 2023 and is expected to come down slightly to 8.9% in 2024 and 7.9% this year. In the USA, federal deficit was 6.3% of GDP in 2023, or $1.7T, with another $1.2T from state and local governements, so the number is comparable. Both are unsustainable, and it would seem worth mentioning that this stimulus can not go on forever. In India's case, there is some consolation from the fact that accumulated debt is not as high as the levels typical in Europe and North America. For the USA, this is 121% at the federal, with another 14% from state and local governments, for a total of 135%. In India, fortunately, debt levels are lower, 61% at the federal level and 30% at the state level, for a total of 91%. In addition, the 9% or so combined deficit is not far from the real GDP growth rate of about 8%, compared to the USA's growth rate of less than 2%, so India's real indebtedness as a percentage of GDP may at least remain at about the same level as a proportion of GDP.

Does anyone know what this ‘Argentina transaction‘ is?

gfp: The profits have been cash settled periodically the entire holding period. There is no lump sum gain at the "end." What we don't know is if these gains are taxable at all. In the United States, "profits" in an issuers own stock are not taxed. There are differences between the TRS position and a share repurchase, like taxes (FFH may pay taxes every year on the gains from the TRS, unless they get an exemption; on the other hand, there’s only a small repurchase tax up front for a share repurchase) and timing of the cash outflows. The latter is probably their reason for putting on the position and holding on to it now. But if they had the cash, I suspect they’d pay less taxes overall by doing the repurchase sooner rather than later, and using the proceeds from share price appreciation to buy back shares at much higher prices. I say it’s a wash because the higher the price goes, the more they gain from the TRS but the more they will have to pay to repurchase the shares. For instance, they put on the trade at $373/share for the equivalent of 1.96m shares . A share repurchase of 1.96m shares would have cost $732.5m. If shares hit $1372, they would have made $1.96b, yippee, but at that new share price, they would have to pay 1.96*1372=$2.69b, which is, not coincidentally, $1.96b more than the repurchase would have cost when shares were at $373. It’s like Alice running in Through the Looking Glass: as fast as the TRSs run, they can never gain ground on the share repurchase that they could have done. It’s a great trade either way, but whatever happens, it’s 1.96m shares they can retire with the returns, minus whatever tax applies.

Yes, it’s pretty unlikely they found counterparties that wanted 2 million shares’ worth of short exposure, when the shares were trading at US$373, so this explanation makes sense. In other words, FFH is long 2m shares and the banks are neutral. It’s basically just a dressed up share repurchase. Which also suggests that counting it as a long position and tracking its returns is a bit odd, since you wouldn’t do that with repurchased shares, if they had structured the transaction that way.

I see your point about raising money - if shares were at 2x BV they could issue shares rather than selling bonds at 8% or selling preferred shares to OMERS and paying them 8%. But I don’t see how the company’s share price has much to do with ROE (except marginally, by decreasing interest cost.) Say the share price rose to $2000, or 2x book, how will that help them increase book more quickly? I guess the ideal would be to get the best of both worlds: low share price for a while to repurchase shares cheaply, then a high price to issue shares profitably. I’m just stating the obvious, buy cheap and sell dear, but it would be good to get a little bit of the "sell dear" part for a while.

It's an investment fund, of course the risk is with investors, not the fund managers. If you think they will do a good job getting you a good return, then you invest and pay the fees. What seems to bother you is that the fees are not determined based on the share price, but based on the book value. It is true that this is not the norm in the investment industry, and I wonder how they justified this choice. To me, it seems more fair, since it is a value that can not be influenced by short term movements of the share price. On the other hand, it is something the manager has some control over (Muddy Waters would have something to say about that), and if the share price trails book value at the end of a given calculation period, I can see how it would seem neither fair nor friendly. I haven't been able to find any discussion about this fee structure (that is, the fact that it is based on book value), from 2014 when the structure was set up.

Yes, I think that's fine, because in the long run, it makes no difference, especially if Fairfax starts taking its performance fee in cash. It is probably true that they didn't anticipate every possible combination of book value, intrinsic value and share price, and now that book value has done well but the share price has not, taking performance fees on the basis of book value makes it seem that Fairfax has taken advantage of FIH investors, but in the long run, the weighing scale aspect of the stock market will prevail, and the share price will track book value as it did in the beginning, and the fees paid on the basis of book value will end up being about the same as if they were paid on the basis of share price. Of course, it's not much fun if you want to sell your shares before that convergence happens, but as an investor, knowing that fees were based on book value, you took that risk.

Yes, you have a point - although I myself am unlikely to add to my hugely oversized Fairfax position, the company is still repurchasing shares so I suppose we should rejoice in these misconceptions. And along the same line of thinking, there is no reason for us to wish for Fairfax to be included in the TSX 30, either. We get more shares repurchased for the same number of dollars, the longer the share price languishes.

Blackberry 46.725m shares, trading at $2.74, so it's a $128m position Micron 3.912m shares, trading at $111.85, so it's a $438m position Fairfax got all it's money back on its $500m in convertible shares, plus $200m in interest, roughly a 4% annual return in an era of low interest rates, so that is not so bad. But the huge loss on the common ($802m now worth $128m) has to be Watsa's worst ever investment, with a $674m loss. At least this quick $220m gain on the Micron position takes some of the sting out of the BB losses. Still, I would love to see that Blackberry line gone from the Dataroma list, especially since many investors think that these $1.5b in US and Canadian public company holdings accurately represents their $6.9b in total mark to market public equity or their $16.5b in total public equity, or their $92b in total assets. The unfortunate $128m Blackberry position stills looks like a big deal given that it is almost 10% of that $1.5b, but looking at it as context of the $92b in assets, it is only 0.14%, and is fading out of relevance. But the easiest way for that appearance to be corrected would be to just sell the stake and be done with it. Hopefully, now that the convertibles have been sold, Chen is gone and Watsa has left the board, that is something they may do soon.

The mark to market portion of the equity portfolio was $8.7b on Dec 31st, according to the annual report, and on March 8th, Viking estimated (posted here) that it might be worth $9.0b. The other 2 portions, associates and consolidated, were worth $7.1 and $2.8b, respectively, for a total equity portfolio of $18.9, but the earnings from these other 2 portions are already included in the estimate.

There has been some talk about Fairfax (FFH) 'doing the right thing' here by not diluting shareholders of Fairfax India (FIH) by 'taking advantage' of the fact that FIH shares are trading so far below book value, given FFH's 'fair and friendly' motto. As a shareholder of both firms, and given the fact that I own a much higher percentage of FIH than I do of FFH, I have every reason to be happy about this decision, but petec's point has not been addressed, I feel, and that, does FFH not have a fiduciary duty towards FFH shareholders to maximize what goes into FFH shareholders' pockets? I suppose legally they have some wiggle room here, and could plausibly say that it is in the best interests of FFH to preserve FIH shareholders' trust in FFH, and to maintain FIH as a viable investment vehicle for its Indian operations. After all, FFH owns half of FIH, and get a hefty fee (1.5% of book value plus 20% of annual book value gains above 5%.) Feeding the golden goose well is in the interest of making sure they keep getting all these golden eggs.

Ok, so 60.72% of INR 90438 crore would be $10.91b means this would be $6.6b if acquired with no premium. Seems like a very big fish for a minnow like Fairfax India (mkt cap $2b) to swallow, with or without the support of OMERS which would not be wanting to take on a lot of equity risk.

Ok, I see this is true for the book value gains for Odyssey and Allied stakes sold to OMERS in 2021 to raise money for buybacks (what a spectacular trade, by the way!) I'm not sure wh OMERS would really care what price they paid, if they have a side deal that Fairfax is going to repurchase the shares at the same multiple. I'm not saying this is what motivated Fairfax to do the deal; clearly, it was great to get a billion and a half of cash and repurchase Fairfax shares, at a third of today's price. But if you are Muddy Waters and you set out to see the negative side of every trade, the OMERS sales were not really sales, they were loans (an idea that has been discussed here frequently), the price makes no difference if they are just loans, and the impact of the price on Fairfax's book value is sure to be seen as book value manipulation, even if it is only icing on the cake for Fairfax. And for Gulf Insurance in 2023, the book value gain was because the purchase price for the remaining shares was applied to the existing shares: In December, Fairfax Continues its Gonzo Mode by Buying out the Portion of Gulf Insurance it Did Not Already Own at a Very Rich Multiple of ~2.4x Book Value, Taking a ~$300 Million Gain on Existing Shares https://www.muddywatersresearch.com/wp-content/uploads/2024/02/Fairfax-Financial_FFH_MW_20240208.pdf This seems to be confirmed by Fairfax's 2023 AR: Gain on sale and consolidation of insurance subsidiaries of $549.8 in 2023 principally related to the consolidation of Gulf Insurance, which required the company’s previously held equity accounted investment in Gulf Insurance to be remeasured to fair value resulting in a pre-tax gain of $279.9 https://www.fairfax.ca/wp-content/uploads/FFH_Fairfax-Financial-2023-Annual-Report.pdf

I'm not saying that anyone who sold FFH was necessarily an example of weak hands. I am saying it sounded like weak hands when one particular instance of a seller said this: With such nice gains in a very short period, and no idea of the impact of the short report, I sold. That could be an error to react quickly, because it looks like it is a good quality company. Anyway, with the proceeds I added to existing ones. I am not an expert on insurance, but it’s clear that the book value is aggressively noted, with some assets benefiting from an epic bubble in Indian equities and overvalued US real estate, as well as temporary high interest rates. It does seem that earnings are above the normal trend. The writer acknowledges that he knew little about the company, and proved this when he said that earnings seem to be above the normal trend. You, on the other hand, if your strategy involves taking up shares when they are not in demand, were probably a buyer, not a seller, when the short report came out. If so, you have done well, and it might make perfect sense to have sold back those shares with a quick gain when the share price recovered. But for me, hoping for 100-200% gains from this investment over the next 5-10 years, I would not sell because of a 10% move up or down. It is a lot easier for an investor to hang on if she knew a bit more about Fairfax, and was thus not scared off by the Muddy Waters allegations or fears about their impact.

Because of Digit? By my count, US$26.2 market cap Fairfax owns the following, in India (see p.18 of the annual letter): Fairfax India: $841m (57.6m shares) T. Cook India: $540m (300.3m shares) Quess: $309m (34.5% of the company) Other: $295m (Dec 31st 2023 fair value) Digit: $2265m (ditto) Total: $4173m (my calculation; annual letter says $4247 for Dec 31st) Fairfax has a market cap of $26b, so these Indian holdings represent about 16% of the company, assuming the same degree of undervaluation from book value for Digit that applies to other Fairfax holdings. So to prefer FFH over FIH, to get a stake in India, one would have to really love Digit, Thomas Cook and Quess as investments, as opposed to the Bangalore airport (44% of FIH's fair value holdings as of Dec 31st) and the other medium sized FIH holdings (primarily IIFL Finance, CSBBank and Sanmar Chemicals, which account for another 31%.) And even so, Fairfax Financial only gets you about a 16% exposure to these. I would gladly reduce my somewhat oversized Fairfax India exposure and buy more Fairfax Financial shares (or reestablish my Berkshire position), but for the moment, I think Fairfax India is even more undervalued than Fairfax Financial and gives me a lot more exposure to India's exciting potential. Of course with FIH you get a not insignificant slippage, 1.5% plus 20% of the annual book value growth above 5%. But unless that is a deal breaker, if you really want India, I think FIH fits the bill better.

Yes, sorry for the sarcasm. I don't really believe that Fairfax is primarily motivated by the need to artificially boost its reported book value. On the other hand, when you sell at a high price with a guarantee that you can buy it back at the same high price, with an annual fee, it's not really a sale, it's a loan. But since it is structured as a sale, you can (or perhaps, must) revalue the book value of the shares you still own, which does boost the book value and maybe has some advantages for Fairfax vis-à-vis regulators. Unfortunately, it also opens you up to criticism that you did the deal JUST to boost your book value.

A special kind of pawnshop, that gives you money for your mother's jewelry that you really don't want them to sell, because you want to come back and get it in a couple of years when your finances are better. So you pay them an annual 10% fee to keep the jewelry in a special safe. They can also sell to someone else it if you don't come back to repurchase it within a few years. Muddy Waters would add that there is another side benefit of this deal: you can 'sell' this jewelry to the pawn shop for an inflated price, because it allows you to claim that the rest of the jewelry you own is worth the same amount, reassuring other creditors. So it is a disguised loan, with a 10% interest rate, which can double as a book value adjustment, if needed. Of course, I don't believe this...

Can anyone explain this in plain English? It sounds like FFH has calls allowing them to buy out the minority interests in 2026, 2027 and 2029, but then the minority interests can dump their stakes back to FFH in a variety of was once those call options have expired. Is that right? And I presume there is some formula that says what price FFH has to pay, do we know anything about that?

You are being generous - I expressed myself poorly in referring to the notion that these $125 per share in after tax operating earnings could just be called 'net income' and put Fairfax at 9x earnings. Fairfax is actually a lot cheaper than that: net incoome is a lot higher than just after tax operating earnings. Operating earnings include a guess at underwriting income and interest income, but they don't account for retained earnings from mark to market stock holdings or realized and unrealized capital gains when the share price of some of those stock holdings starts reflecting their increased intrinsic value (I'm thinking particularly of Eurobank and Fairfax India.) Here's the quote from the annual letter (p.7): We can see sustaining our adjusted operating income for the next four years at $4.0 billion (no guarantees), consisting of: underwriting profit of $1.25 billion or more; interest and dividend income of at least $2.0 billion; and income from associates of $750 million, or about $125 per share after taxes, interest expense, corporate overhead and other costs. These figures are all, of course, before fluctuations in realized and unrealized gains in stocks and bonds! But what I was trying to express, awkwardly as it was, is that I think Watsa is just telegraphing that there are $4b per year in pre-tax operating earnings that already seem quite likely for the next 4 years, based on the earnings potential of present assets. Apart from gains from the stock portfolio, there are also a lot of assets piling up on the asset sheet for the next 4 years, and these will generate their own earnings. In other words, we presently have equity of $21.5b, and expect $4b annual operating in each of the next 4 years from those assets. But in just 3 years, we should have $29b in equity; those extra $7.5b in equity will produce its own return in year 4, apart from the $4b that we expect from current equity. I still don't think I've expressed this perfectly clearly, but the idea is that given the high returns on equity, 4 years of compounding should produce a lot more operating earnings than what we would get if all those earnings were being distributed...

Sort of the archetype of weak hands. It looks like a good company, but who knows whether Muddy Waters is right or not? Might as well sell, even after the 10% drop, since I’m still above my September buy price. I doubt many of us felt very threatened by the MW allegations, but if you don’t know better, how can you be sure enough to hang on and recoup your 10%?

========= Yeah I had to read that same sentence a few times. He needed an editor there. Now that we're down to 22.891m shares as of March 7th, using 20m shares outstanding in rough calculation is not too far off, and the annual operating income expected for the next 4 years, $4.0b, would be about $200 per share (ok, it would be $175/share usiing the exact number.) So it is $50 less from the combined effects of taxes, interest expense and corporate overhead. And yes, it would have been much clearer if he had given the 2 numbers, and a name for the thing you get when you subtract taxes, interest and corporate overhead: "$4.0b ... or $175 per share, which is $125 in net earnings per share after taxes, interest expense, corporate overhead and other costs.“ Two other things that I would have liked to see there: (1) He might as well have mentioned that this means the shares, currently trading at USD$1088, are at less than 9 times the anticipated earnings in each of the next 4 years; and (2) I think Watsa is really saying that he expects $4.0b in operating income for the next 4 years based on income from current holdings. Maybe he is just putting the bar very low, but when you are expecting to earn almost $3b for 4 years, while paying out $373m in dividends (at the current $15/share rate), and you are a company that has a book value of $21.5b at the beginning, I think it is reasonable to expect that you are have at least $29b in book value after 3 years. Is Watsa really saying he expects to still be making $4.0b in operating income in the 4th year, despite starting that year with a book value that is substantially higher? I don't think so, and I think the fact that he still says he thinks he can hit the 15% return on book target means that earnings in the 4th year would be 15% of 29b, or operating income of $6b, not $4b. I believe that $4b is the income he can already see coming, but there will be other income coming from things acquired with the $7.5b or so of retained earnings in the next 3 years (without even considering compounding...) What do you guys think?

Blackberry is now a $130 million position = 0.0021% of Fairfax’s $60 billion investment portfolio. Thank you so much for this summary, much appreciated. Minor quibble about a decimal place: Blackberry seems to be on the way to being 0.0021%, but it's not there yet. 130/60,000 is 0.0021 but that means it's still 0.21%. One other quibble - I would add one word to this sentence: This is another good example of Fairfax FINALLY exiting from a poorly performing legacy investment (financially and also in terms of involvement from the management team). Capital at Fairfax continues to shift to better opportunities.

Looking at the respective compositions of the S&P/TSX Composite (currently 225 Canadian companies) and the S&P/TSX 60 (the large cap subset of 60 big companies), it is clear that the sector balancing of the subset is pretty good, usually within one percentage point of the Composite, except for financials, which are already over-represented in the subset (34.5%,, instead of 31.1%), this being easily the largest discrepancy. Also, minimum turnover is preferred, and companies are not generally excluded unless they are acquired, go bankrupt, are restructured, etc., size not being one of the issues. It may well be that the 20 bps minimum has been a historical minimum, but if you delete a smalll non-financial, and include a big financial, you make the composition imbalance much worse. So my bet would be that Fairfax will not be added unless another financial is acquired or goes bankrupt, even if there are a number of much smaller non-financials in there. It might be a long wait.

Is there any compelling reason to believe he didn't cover almost the entire thing the day of the campaign, as he often does? Do we know for sure that they tend to cover quickly, or is this just a suspicion? As for Fairfax, before the conference call, on Feb 15 to be exact, they said they remained short, for what that's worth.

How do you get a comparable AY number for recent years without the benefit of knowing what the future reserve developments will be? You seem to be assuming that adjustments will follow historical trends, for instance taking this years CR as reported from 93.2 to an AY CR of 89.0 over time, is that right? And with average AY CR's from 2017-2023 almost 10 percentage points better than published CR numbers, as opposed to 3 points lower from 2007 to 2016, we should conclude that either they are have gotten much better at underwriting, or their standards for reserving have gotten much worse recently. Hopefully the former. But might it be fair to say that part of the pessimism about how much this company is worth is based on the suspicion that their reserving standards may have slipped and that the CRs (and AY CRs) will not be as good as they look? Along with skepticism that interest rates will not hold up and that the company might return to buying Blackberries?