petec

APR Energy? I missed that.

Thanks, I'll read up on those. Were they just early, or wrong? I agree with your point on using leverage to fund low return bonds. The warrants and converts give more equity exposure than is obvious, as do the investments in associates, but still. Berkshire is less levered by debt and pref, but also less levered by cheap float. Overall it's significantly less levered full stop (roughly 2x assets/equity vs 4x, and even more so on tangible equity).

In order: - I think investing returns will be good going forward because I think these guys are good long term investors. Looking at their recent investors reinforces this. You might disagree. - They might stop making macro calls, they might not. They've made two historically, one of which was a great success and one of which was a great failure. Importantly, I know they might and I can live with it. Don't invest if you can't. - It's worth at least book, IMHO, because there is clear franchise value here. Valuing it at book suggests you'd make as much money by closing the business as you would by running it. I doubt that. I think they've built a platform with multiple competitive advantages and I expect it, therefore, to produce a good ROE over time. To put it another way I think the ROE will be higher than my required return, which means it's worth more than book. Depends on yyour required return. - They are so short on the curve that if rates rise it will be a huge help. - I don't think Prem has lost his touch. I do think he made and reversed a mistake. I also think he has built an incredible platform and in recent years has added a lot of value through management action on both the insurance and investment sides. I'm happy to wait and see whether I'm right. Cheers P

Agreed and for full disclosure this is my largest personal position.

a) I don't think that's true if you include holdco and interest costs b) 4.4% net isn't that easy in a business where you are constrained re: what you can invest in, when treasuries yield 2.5% gross. I've been digging through their investment portfolio and there's some great potential in there, but i) some of the Indian prices have gone from silly cheap to pricing in quite a lot, so that move may be done for now, and ii) they have 25% of the post-AW portfolio in cash earning nothing. I love this thing long term and agree there is great earnings POTENTIAL, but it's going to take some very good investments to realise that potential. Fairfax's historic investment performance had a massive tailwind from falling bond yields (as did everyone's). That won't repeat, so historic absolute returns aren't a good guide to the future.

Maybe. maybe not. They have a 50% hit rate with macro prediction derivatives (counting the hedges and deflation swaps as one bet and the CDS as the other). Who knows which lesson they have learned?!

I wouldn't say it's extremely cheap. I'd say it is priced at a level where you can compound nicely (7-10% over the long term with little risk) and you have real optionality on a higher rate of compounding if the investments do well. With bond interest plus underwriting at 95% less holdco costs and tax, Fairfax can probably do a 7% roe, meaning that if it holds its multiple it matches the market's long run return. With a tailwind from equities, or outperformance in bonds, you can get past 10% fairly easily and towards 15%, which is their target. Re: AW, a 12% roe at 1.4% book is an 8.6% return on your purchase price, effectively in perpetuity. That's not amazing, but it's not bad in a context of 7% long run returns from stocks and sweet FA on bonds today. If you can juice the ROE with some nice investments, it gets exciting. BTW while you're right that you can pick and choose what you include in ROE for any company, the difference here is that the hedges were a (bad) choice that has been changed. Most companies can't do that so easily. Ford can't suddenly decide that carmaking is a low ROE business and switch into pharma. Fairfax, effectively, can (on the investment side). So I'd argue that looking at their longer term investment and ROE record is legitimate, rather than just 5y. Again, it is not extremely cheap. But it is a very fair value for what has become a really powerful underwriting/investing/operating platform with a superb culture. It ought to compound nicely.

Yes and no. What they did was restructure their agreement with Markel, selling them F-M Acquisition Corporation in return for cash, 23% of Fairfax, and some prefs. It wasn't a buyback in the open market, bought-for-cash sense. That would be new. Also worth noting that they have the Brit and AW minorities to buy out over the next 5 years, and plan to raise cash at the holdco, so I'm not holding my breath for major buybacks. Racemize: You're right. The argument hinges on Fairfax's assertion that intrinsic value has been growing much faster than (and therefore presumably is above) book value. If that's right then buybacks make sense. I think it probably is right when I look at the platforms they've built in insurance and investing. They're doing a lot of smart things that in aggregate will be better than average and just might be brilliant.

My love has been fairly consistent, actually. Possibly too consistent.

Thanks. I have a growing impression that on the investment side Fairfax is becoming a brain trust of good executives, which allows it to build platforms that create value over time. Obvious examples are Fairfax India and Africa, but I'd add Cara (restaurants acquisition platform created by Fairfax and run by the ex-CEO of an old Fairfax investment, The Brick) and arguably TCIL and Grivalia (which is now controlled by FFH). Even Blackberry brings John Chen into the fold and Richie Boucher is now on the board at Eurobank. I am starting to think people are wrong to say that Watsa hasn't learned the lesson that Munger taught Buffett about quality. Sure there's some cigar butt stuff but the equities increasingly seem to be concentrated in good platforms containing growth companies bought cheaply and run by exceptional people, often founders. The convert+warrant deals seem to lean the same way - exceptional people involved in all of them and Fairfax is starting to look like the centre of a web of good people and deep knowledge (e.g. in ag commodity storage and distribution via AFGRI, NCM, AGT). Interesting to know a bit more about ICICI Lombard in this context. I thought they had to sell ICICI Lombard completely, rather than just down to 10%.

Does anyone have Prem's letters in a single, searchable PDF? Thanks in advance! Pete

To what extent did Fairfax help build Lombard?

He's hinted strongly at buybacks recently. Whether now is the time, I can't comment. And much of his cash pile, being float, can't really be used for buybacks. Cash flows could.

Does BIAL trade?

It's not just "who held on", it's "who lived long enough to take advantage". Even if the Nifty 50 outperformed from 1972 to today, give or take half the people who were alive in 1972 are dead today and haven't been able to spend the windfall. Long term investing has its limits.

Totally agree. The only thing I am fairly certain of, having followed solar for a decade, is that some sort of disruption is likely!

My family has two cars. Uber has already rendered one of them obsolete (it sits forlornly outside the house and I really ought to sell it). A driverless (=cheaper) service, with more flexible usage models (e.g. the ability to book ahead, or the ability to book a car for the weekend), and wider geographic coverage (so that we could get back from the weekend away we have just taken), would render the second one obsolete too. In fact my family would adopt it in an instant and my wife and I have already decided never to buy another car due to concerns that residual values will collapse. (We will lease until we no longer need a car.) Travelling with strangers will be an issue for some people but that's very culture-dependant. I'm from the UK, where everyone uses public transport as a matter of course, so the idea of ridesharing for e.g. commutes doesn't seem so odd. In fact I currently commute packed like a sardine on the London Underground, so the idea of sharing a car with 4-10 people running a more or less point-to-point route (as opposed to regular stops) sounds like a dream. I accept the article is overoptimistic on adoption in urban areas, but that depends entirely on population and fleet density. Much of Europe will be coverable, for example. The critical point about the article, I think, is the speed of adoption. Here I think it is directionally plausible: 1. Big corporations with tons of cash will aim to saturate markets rapidly - this transition will not be driven by individuals deciding to switch AEVs for ICEs. The corporations will be willing to accept up-front losses to dominate markets. 2. Costs will collapse. Utilisation will rise many-fold, cutting cost per mile. This immediately makes EV's the only option, as it minimises their disadvantage (higher up front costs get spread across more miles) and maximises their advantage (lower fuel and maintenance costs per mile). Optimising the supply chain for fleet AEVs will take out yet more costs (EV production becomes commoditised and modularised; designs are optimised for mileage rather than their performance, look, or penis-extending qualities; parts are no longer designed with planned obsolescence). 3. Once the markets are saturated, the convenience and low cost will attract a lot of demand. Slowly thereafter, many people will abandon their cars as they will simply not use them enough. Box 5 on p20/21 jumped out at me - some of the cost claims are starting to be proven out, and if Teslas can really do 1.5m miles then we are in a new world. P

Yes. Presumably the trick is to delay converting until as late as possible, so as to collect all the coupons on the bond and still have the equity? Depends on the exact terms I guess.

Pity it's a convertible. I rather like the prefs + warrants deals where you (as I understand it) get to keep the pref when the warrant springs into life!

No, the trend suggests they are regaining them slowly!

Yes, it created wealth *at the top end* but it also meant a big chunk of the population were disincentivised and unproductive. If it was such a good system for creating wealth, there's a decent chance the south would have been wealthy enough to beat the north. In fact, the north's economy dramatically outperformed the south's and was a major factor in winning the war. Similarly if slavery was an effective economic system great wealth would have been created in feudal Europe; in fact, wealth creation exploded as we moved away from the feudal system. Slavery is a great system for moving wealth from the poor to the rich; it is not a great system for creating wealth, not compared to free trade. Ha! Fair. Although everything is relative: what I meant was that America didn't start with a feudal system and have to waste centuries persuading the lords to give up their serfs.

Slavery is not a factor - if anything the slave states were poorer and had less flexible economies (partly why they lost the war). Slavery is great for the slaveowners but it does not create broad wealth. What might be more of a factor is the lack of an historical economic structure. No lords and serfs - everyone arrived equal and got on with it. Perfect environment for free trade, hard work, and innovation.

A separate board? ;)

It's not *that* hard, now that the long bonds and hedges (and vol associated with them) have gone, to get a sense of how the following add up: - return assumption * portfolio ($40bn after AW) - underwriting assumption * premiums - holdco costs and debt - tax Divide the above by the book value and you get a rough stab at the compounding rate, and you don't need heroic assumptions to get over 10% for very little risk. That will do me fine and if they get to 15% that's free money at this price IMHO.

What was the answer? FWIW my view is if you want the high qualify equities own BRK, and if you want someone grubbing around in the dirt for the undervalued cigar butts own FFH. Both are proven long term investment strategies. (FFH also do a lot of high quality investing - mainly when they buy permanent holdings in insurance subs, but also in FIH and some equities.)