petec

Reckless is too strong a word, I think. Blackberry, the equity hedges, the CPI hedges, Eurobank, and a few smaller ones all went about as badly as they could have done in the time period we are discussing. And book value was...flat (more or less). It's also worth remembering that Prem knew (even if we didn't) the value that was building at Lombard and First Capital. My view is that while Prem took big bets, they weren't reckless risks. Also a point of detail: $500m of the $1.3bn the BBRY bet was in convertible bonds to a net cash company that had a decent chance of stabilising cash burn (and did). That changes the risk profile, obviously.

SJ Agreed that we should not put Prem on a pedestal. He's made some huge errors. This will sound odd, but I don't mind them. It's part of investing his way, and what matters is the overall result, not the individual ones. I would not try to persuade others of that - anyone not comfortable with how they invest should not be a shareholder - but I am comfortable with it. I think the reason they didn't take the large cap value lying in plain sight is that they are deep value investors by instinct, and past c.2012 the US wasn't deep value - especially if you allowed for some margin mean-reversion. Anyway, I don't really care because I bought a lot of those cheap large caps myself. Fairfax was a diversifier and a hedge for me, as well as an excellent long term compounder at a reasonable price. On position sizing: I think it's fair to point out that some big bets like BKIR & TCIL worked beautifully. Also, I don't really believe in criticising investments until they are finished. Let's see where Eurobank and Blackberry get sold. Prem et al are avowedly long term value monkeys. That means they don't try to maximise compounding by jumping on the best horse each year, but by buying dirt cheap and waiting. Given current valuations on the S&P and current trends at Eurobank and Blackerry, it's quite possible that these two look like great absolute and relative investments over their full holding periods, which probably won't end for a few years yet. Who knows, but I will assess them when its over. On BBRY: Fairfax now has control over a wide range of businesses in which they have limited experience. Some (like Cara, TCIL, Quess) are huge. So, I don't find the idea of buying BBRY outright so odd, although I am glad they didn''t. Also, I think one of the key strengths of Fairfax is its ability to build businesses by attracting the right managers (a key cultural strength) and supporting them. I think (?) they were instrumental in getting John Chen to come to BBRY. They probably couldn't have done that without a board seat. Agreed that the sizing/structuring of the equity hedges was an outright mistake - although as I have said before, I think we would all be more forgiving if the longs had outperformed. That way they'd have locked in their alpha but foregone beta, which would now look like a "mistake" but a more justifiable one. But I think you're wrong about the deflation swaps. The nominal exposure hit $110bn but that's a meaningless number. What matters is that they'd have made 1% of that number for every 1% CPI dropped below strike. Since strike was some way below current CPI, you'd have had to have had several % of deflation to make a big return on the outlay. I think they sized that one more or less right and it was a decent "heads I win, tails I don't lose too much" hedge against a tail risk. What damaged them was hedging the equities as well and then not performing on the equity longs. Thanks for your comments. Even though I often see the other side of the argument, they are all valid and good for helping me keep Prem off that pedestal. As Dazel says, what matters is the future.

Viking and SJ - while everything you post is true, I take a slightly different approach with FFH. I decided a long time ago that a) I like the float-investment model; b) I trust Prem and his team and the culture they are building; and c) that they are smart people who will make more good decisions than bad over time. So I decided to hold the shares long term (unless they got to a silly valuation) and see what happened. Maybe that's naïve - many would say so. But then again all investment managers go through good patches and rough ones, and if you can't stick the rough patches you seldom compound with them. So far I am very happy with the results, although I will admit that keeping the faith was easier in 2015/6 by the fact that I agreed with the hedges! Oops! where Prem and team beat me hands down is I wouldn't have taken them off when they did. Big oops, but then that's why I let them manage some of my money! Anyway, that's why I don't really feel we have more info than a year ago. We have more precise data on the value of certain subs and investments, yes. But what creates the value is the people and the culture, which has proven itself over 30 years, and that hasn't changed in the last 12 months. I accept that the ratio between the "surfaced" value per share and the share price has changed, but that only explains why people are more bullish on the shares. It does not explain why Fairfax has gone from hero to zero, from dumb to smart. I honestly think that anyone who has changed their mind on that in the last 12 months simply didn't know the history or isn't being rational. However as RG said, the tone has changed because different people are posting so it is a moot point. I'm not trying to start a fight here, BTW, so I slightly regret my initial post.

While I agree, the change of tone (on the board, not from specific members) amuses me. A year ago Fairfax were investment morons and could do no right. And then 2017 happened... Same people, same philosophy, different years. Next the market will crash and they'll be stupid for having sold the hedges ;)

I'm not sure that's Buffett's style. I think he'd rather pick a successor who he trusted to make capital management decisions in the future, depending on the opportunities then. I agree with him. It's not rational to let the potential death of the CEO affect your capital allocation decisions at a time when there are few opportunities, if someone can take over who is competent and who will have better options in the future. I think that holds no matter how smart the outgoing management are.

:) ha! Nice to see that the earnings power of a 2y treasury has doubled in the last year, which basically gives us an extra $250m in potential income off a $25bn cash and bond portfolio without taking meaningful duration risk. Lovely to be at the short end when yields rise! Very impressive switch by Bradstreet considering how long he was at the long end for. (Some idiot will whinge that he was 5 months too early but good luck timing it better.)

I think you could achieve that via an etf or a basket of them but by and large they hold options, rather than the physical underlying, and you'd need to be comfortable with that. Google throws up a number of lists e.g. this one: http://etfdb.com/type/commodity/all/ Alternatively/additionally you could own equity etfs with commodity exposure. I have a small position in copx, for example, and there are lots of oil/gold/silver equity etfs. You might be interested in the work these guys do and especially in the chart at the top of this piece: http://www.gorozen.com/static/assets/pdf/ql/GRAQuarterlyLetter2Q2017.pdf Jeremy Grantham has strong views that EM is the only remaining cheap asset class (second half of this piece: https://www.gmo.com/docs/default-source/public-commentary/gmo-quarterly-letter.pdf?sfvrsn=50). Since EM is correlated to commodities to some extent, an EM index might give you two ways to win. E.g. Latin America is a big commodity exporter so a) there are commodity stocks in the Latam index and b) Latam economic growth and especially its currencies tend to be correlated to commodity prices.

I don't have a plan for altering my strategy as the cycle progresses, but I am accidentally doing it anyway. A lot of the high-quality US names that I bought on dumb multiples between 2008 and 2011 now look fully priced. I feel like it might now be easier to make asset allocation calls along the lines of what Jeremy Grantham recommends in GMO's Q3 newsletter - in other words, avoid the US and move to EAFE and particularly EM. I can't stockpick these markets but I can use ETFs. The relative valuations suggest that EM and EAFE should outperform the US from here whether we get a bull market (in which case I win) or a bear market (in which case I get to protect more of my capital for the next value spree). This is not a recommendation, just what I have found myself doing.

Thanks. They might have sold some then because I think they have 46.7m now. And then, when they convert the bond they get 50m at $10 so their average all-in will be in the $12's, I would think.

How much did they pay for it? Good question. from memory (which may well be wrong) they averaged $16-something for the equity. But, above $10, over half their equity now comes from the convert and I don't think that's included in the $16 number. So they are probably around breakeven on a ?5? year position. I'm not saying it has been a great investment. I'm highlighting a) its size now, b) the recent rise, which will be partly hidden in BV because of the convert, and c) the skewed risk in the position because of the convert.

Might be worth changing the title given there is already a Fairfax 2017 thread. On a 2018 topic, worth highlighting BBRY is worth $1.3bn to Fairfax at yesterday's closing price, assuming conversion of the bonds. Fairfax has much greater upside exposure than it has downside risk given the convert.

This is THE David Sokol btw I love these deals - the deb+warrant structure seems much nicer to me than a convertible bond. A $250m debenture plus warrants to buy $250m of shares at $6.50...with the share price at $7.05 today that is an instant gain of $21m, which you could think of as an additional 8.5% in interest on the debenture, compensating you for the fact it's a relatively low grade bond at a below market rate. Downside largely protected unless Seaspan gets into real trouble, plus a fat equity kicker. In the last letter, Prem mentioned investing in the craft spirit brands company Davos Brands "in partnership with our good friend David Sokol".

Please don't start the dividend discussion again! ;) The CPI bets are not losing any appreciable amount of money. They are already on the books for almost nothing and can't be worth less than zero. That wasn't the case for the equity total return swaps. The CPI hedges are much better structured. There is no point selling them now - they are a true "heads I win, tails I don't lose much" proposition.

I believe the cash from First Capital will be moved to the Holdco (I think I read that somewhere). Since the holdco already has more than the desired $1B (it was at $1.5B at last look), it is basically surplus. To my knowledge, surplus cash at the holdco has never been invested in Bonds. Heck, they already have $15B in bonds and another $10B in short term investments in their portfolio's at the operating companies. All their major bond moves have been done with the cash that are in the reserves at the operating insurance companies. They have debt at the holdco at 4.5+% or so, so I doubt they will invest in bonds when they are paying interest on them as well. They will likely buy marketable investments or entire companies (like Allied World, AIG Chile, etc.) or do unique lending that has an equity kicker attached to it (ie. lend at 8% to a distressed company and then have equity warrants of some type). I would think they will be targeting something above a 10% rate of return, certainly not 5%. That may be true of holdco cash but the bulk of the cash is at the insurecos and must stay there against future claims - they are quite restricted on how they can invest this and I suspect a lot has to stay in bonds. But, the bond+equity kicker route can be used there and they seem to like it. I also read that they were increasing the holdco cash requirement to $2bn given the size of the company, and they've said AW was the last big deal at least for now. Overall I doubt the bulk of the cash gets put to use any time soon. Which is fine by me.

Yeah, Vehicle-to-grid (V2G) tech will be interesting to watch over time. You can combine with variable pricing mechanisms to, for example, tell your car to charge more when rates are lower. This helps flatten the demand curve and reduce the need for peakers, as well as help absorb extra renewable energy when it's available. The reverse of this is also true: When rates spike up, you can have your car delay a charge, or not charge fully (based on some pre-defined rules, like "make sure to be charged by the morning on weekdays" or things like that) to help reduce load when supply's tightest (ie. you might plug in right after work, but the car might wait until after the evening demand peak is over to start charging once it's over a minimum charge in case you need to go out again, etc). Then the next step is to have the EV owners get paid by grid operators to use part of their batteries. So you might say "the grid can use 10% of my battery capacity when rates are higher than X" and now you can draw on millions of batteries to help find extra supply when you need it most. Quite - and as we add tech to the grid we can have more flexible or minute-by-minute pricing, so that (for example) I can load my washing machine in the morning and it will turn on when it secures a cheap price for the next 90 minutes. Lots of investment before we get there though.

I think that chart might be comparing BRK in USD against FFH in CAD? I only say this because I get a different relative outcome when I draw them both in USD.

Interesting discussion. It strikes me that while the current system is symbiotic (in the sense someone used earlier, i.e. lots of different technologies and subsidies have come together to support one source of energy) with fossil fuels, it's easy to imagine one that is symbiotic with solar and wind. If automated vehicles allows fleet cars to be used 40-50% of the time then electric vehicles become the fleet vehicle of choice due to lower operating costs and the ability to spread higher capital costs over more miles. And if EVs are the vehicle of choice, then we have a lot of batteries driving around, which can constantly compute whether giving a ride or plugging in to charge/discharge is the best use of time. That is, in effect, free storage from the point of view of the LCOE of solar and wind. In other words we seem to have several technologies - automated driving, EVs, fleet apps, and solar/wind - that are potentially far more powerful together than any of them is alone, and which have the ability to help each other get adopted faster.

Bloomberg suggests FFH compounded at 6% over the last 10 years and BRK at 7% - but then FFH also yielded around 2% on average over that time (and more like 3% on the Dec 2007 share price) so FFH has outperformed BRK on a total return basis. It's also performed bang in line with the SP500 on a total return basis which is pretty incredible when you consider the hedges, how well the SP500 has done, and how incredibly stupid some people think FFH are ;)

I'd be really interested in your thoughts on this one if you have time to start a thread (I can't find one). It has levered up like crazy in the last 18 months!

Thanks both of you. I knew the basics but had not found the annual report.

Do you have any supporting maths for this claim? ;)

Well, it's impossible to know. But it would be a major dereliction of duty to make an acquisition that big without digging deep. And IIRC the CEO goes a long way back with Andy Barnard so there's a deep personal connection, which is a common thread with a lot of what Fairfax does. I think a major part of their business model is to partner with people they think are great (rather than focussing on great businesses). The key metric of an insureco, I think, is how they did vs. peers rather than in absolute terms. That helps you remove the impact of soft and hard markets. AWH have created a lot of value in 13 years. My guess - strengthened by bsilly's point about their 1-in-100 estimate - is that this one quarter doesn't suddenly disprove their talent. But I may be wrong.

How do we know any insurer (or investor for that matter) has skill not luck? We don't. What we can say is that results are (or are not) more or less as expected given the strategy. Everyone knows an insurer of this sort will suffer major losses occasionally. That's not cause to question skill. If those losses persist, it will be.

Yeah, without knowing the answer to (1) I don't think you can assume they've blown through their cover. It may only kick in above the current level of losses. And we don't know whether the cover was concentrated in any particular subsids. For example, they may not have bought cover at AWH given they've only had it a few weeks. They may also have "kitchen sinked" AWH this q given it is their first q with control over the reserving. Too many unknowns to draw conclusions sadly.

Given what's happened since, thank God they did sell those hedges. And NB they didn't go "in", they sat in cash.