petec

I just listened to the WR Berkley Q2 call and Rob Berkely stated they feel pricing is firming. Fairfax said on the Q2 call that growing the business at their operations is a priority (to take advantage of the hard market that is developing) and you can see this in the growth they are posting. Fairfax also mentioned they are required to take out minority stakes in Brit and Eurolife in 2019. They also need to take out OMERS and their minority stake at Allied World at some point and this will be a big use of cash. So i am not expecting aggressive share repurchases until we get more clarity on how much new business they can write in the hard market and timing and cost on the minority buyouts. Exactly right, in my view. Pity.

The only thing I disagree with here is the ROIC part. Some ROICs will be very high; but we might be surprised at how accessible some of these technologies and how competing ecosystems drive down returns. That's not a prediction, but it is a risk. I think I am already starting to see it in some spheres of activity. Incidentally, if you have any recommended reading on this I'd love to see it.

Not me, although I do occasionally question my sanity.

a) If I buy Stelco at the right price and trust management to allocate capital I can compound very nicely, not just pop. Just requires discipline. b) The kind of companies you're looking at can't endlessly redeploy capital at a ridiculous ROIC. The very fact that they have a ridiculous ROIC tells you they can't deploy capital in the business. That's why they end up with tons of cash and doing deals at silly valuations, both of which depress ROIC. c) App development is becoming commoditised and it's viciously competitive. Picking winners is nigh impossible so while 100x is possible, 0x is probable, and I don't have access to nearly enough opportunities to offset that risk (do you, and if so how?). d) Summary: I'd rather invest in what I know and understand than punt in what I don't. I'm happy to have my life changed slowly, but surely. Just my view :) All I just read are excuses not to adapt to the changing environment that tech is bringing to the global economies. Very much reminds me of Plato's allegory of the cave when you mention tech to a "value" investor ;) I must look up Plato's cave, but FWIW I wouldn't describe myself as a value investor. In general I'm a value-aware growth investor with a weakness (I use that term deliberately) for a few deep value stocks. More broadly, as a personal investor I own both tech and startups (but not tech startups so far as I haven't found any good ones yet) and as a professional investor I would say I spend 75% of my time thinking about what impact tech will have on a given industry/company and how to benefit from it. That thinking has driven huge shifts in my portfolios over time. So I am moderately confident that you're wrong, although there's always room for improvement. The point is, none of that stops me from investing in an old-industry business if I think it has certain characteristics - for example a high (say, 20%) sustainable free cash flow yield, a solid balance sheet, and a management team that can allocate capital. (For clarity, I am not saying Stelco has these things. I'm interested but haven't done enough work. I was using it as a hypothetical example.) So, a question: leaving aside the general impression my comments gave you, what did I say above that was actually wrong?

a) If I buy Stelco at the right price and trust management to allocate capital I can compound very nicely, not just pop. Just requires discipline. b) The kind of companies you're looking at can't endlessly redeploy capital at a ridiculous ROIC. The very fact that they have a ridiculous ROIC tells you they can't deploy capital in the business. That's why they end up with tons of cash and doing deals at silly valuations, both of which depress ROIC. c) App development is becoming commoditised and it's viciously competitive. Picking winners is nigh impossible so while 100x is possible, 0x is probable, and I don't have access to nearly enough opportunities to offset that risk (do you, and if so how?). d) Summary: I'd rather invest in what I know and understand than punt in what I don't. I'm happy to have my life changed slowly, but surely. Just my view :)

On the latter point, I spoke for about 2 hours in depth about this at my annual meeting this year in NY. I think you're exactly on point here :) How does software "destroy", for example, Stelco? Or is the thesis just that software companies have higher ROICs and can therefore grow faster, provided demand is there? Because if it's the latter, you're right, but that doesn't mean you can't make an amazing return on a Stelco if you buy at the right price. And it may be easier/lower risk to make money that way vs investing in software, because 1) everyone is looking at software and ignoring the likes of Stelco and 2) it's not always easy to predict the winner software winners before the market does. FD: Microsoft is one of my biggest positions so I have drunk the Kool-Aid - but only to a point.

None. Hence the use of the past tense. I totally agree that Prem et al have lost respect. From my POV that's a good thing, because I no longer have to pay for that intangible. In reality I suspect they have got better as investors, for two reasons: 1) I believe they are learning, although this is painful to watch and impossible to prove. 2) I think their scale/contacts etc. allow them to do deals they likely couldn't do before, such as the SSW warrants which were a gift. problem I see is that Prem and Fairfax have lost much of the respect they once had and that reflects directly on share price.

Yes - perhaps I phrased the question badly - what I meant was, are any further reassessments outstanding (e.g. for other tax years) or is it one-and-done?

One added thought. FFH have made some shocking mistakes. But it's also fair to say their style is out of style. This is a value board yet the mantra of most has become "buy quality growth". Of course we are all experienced investors impervious to bias, cough cough, so that has nothing to do with the fact that quality growth has performed like a banshee for the last decade. But quality growth ain't cheap no more, and one day the pendulum will reverse. That said, I do worry that in buying value, FFH have also bought cyclical at the top of the cycle. Stelco, Seaspan, Eurobank, etc. I think the value here outweighs the risks (I own Seaspan and am considering Stelco) but it is a risk.

This... ...and this. I love the fact that even on this board, which is named after FFH, literally everything the company does is questioned and there's no trust any more. That is necessary, but not sufficient, for FFH to be a good value investment starting from here. What may make it sufficient is that FFH doesn't need to shoot for the moon, and it owns a LOT of cheap stocks. I've never been more tempted to replicate the FFH portfolio PA. I take that as a good sign, although it may not be! FD: I have held FFH continuously since 2008. I've had an OK time of it because I've generally bought well, and in some ways it did what I wanted (I partly held it for the hedges, because I don't hedge but wanted downside protection), but in other ways it obviously did not (BVPS growth has been dire).

I agree - that was the underlying point (perhaps not clear) of my post. That said: 1) It's only fair to point out what they got right, like Quess and Seaspan. 2) I disagree that they should necessarily sell an investment simply because buying it was a mistake. For example FFH will never recoup their investment in RFP, but if consensus is right it will generate half of its market cap and a quarter of its enterprise value in free cash flow over the next two years. As an aside, I think the Stelco investment will work out fine. To win when investing in bad/low ROIC businesses you need 3 things: underappreciated value; good capital allocation; and low debts (or contracted cash flows that match the debt maturities). Stelco has all three (as does Seaspan although the value is becoming more appreciated by the day).

Does anyone known whether the tax reassessment announced last week closes the matter, or could there be further news?

Funnily enough several of these look really interesting to me at the moment. I have developed a new rule for following Fairfax: buy what they buy, just do it several years later.

Would you mind explaining? A while back the view here seemed to be that TauRx was a dud, the drug didn't work, etc etc. Do you have a different view?

The problem with that is, it's not possible if the market isn't doing the same. There's a trade-off between driving the CR down to compensate for low returns on investments, and shrinking your book to the point where you effectively liquidate your franchise. Up to a point, underwriting discipline drives better ROEs; beyond that point, if the market is happy to accept lower ROEs then FFH has to as well.

Shouldn't be. The two are unrelated apart from the use of the name. In fact the original TC going bankrupt might give TCIL the chance to buy the rights to use the name in India in perppetuity, which would be good.

Is anyone following Thomas Cook? I can't find a recent thread on it but it has halved over the last couple of months and was down 20% yesterday. Seems odd, even with the weakness in Quess.

I see you can now get negative rate mortgages in Denmark. Scary times.

Ha - IPO prospectuses have been nicknamed red herrings for a long time but I have never seen it used as an official term. Very funny! https://en.wikipedia.org/wiki/Red_herring

On the other hand if you get in a new CEO and he says: the best way to realise value is to reinvest heavily in this asset (UBN) while swapping these ones for a stake in one of Africa's best banks (EGH), should you argue? More importantly, Fairfax have a long history of being highly active in the investments they own. Sometimes it works, sometimes it doesn't, but changing strategy is definitely not new to them. If sticking to the initial strategy is what you require, look elsewhere! ATMA keeps weakening and on the face of it there is real value there. Company is in the market buying back shares every day.

The call is also very bullish for the common. Delonex is going the right way, Parq is improving, buying the prefs is super accretive for BV, Android is growing and likely carried below BV, they have a shot at selling TauRx (which I’d assumed was a zero). I think the risk/reward is swinging in favour of the common.

Good. Nice to see some evidence (if that’s what this is) of the portfolio review that seems to be going in, and some limited evidence that they’re willing to look failure in the eye and cut losers.

Standout for me is the extent to which the market is hardening. Anyone know why? We haven’t had systematic capital destruction via cats, and rates haven’t gone up enough to deny capital to the industry, so why are we entering a hard market?

Good for them. It’s cheap.

Off topic, but why was that surprising?