petec

For two reasons: 1) Something did change: they stopped shorting. This is clear and has been communicated clearly. 2) Their investments are in a much better position because the cycle changed. But what we are seeing now is the fruits of going bargain hunting at the bottom of the cycle. It has taken years, but the fruits are here. We are not seeing the results of a sudden change in management philosophy. If we were, I think they would have told us so.

Every single one of these has to do with a change in the relationship between the price and the intrinsic value of the security concerned (or, in the case of the KW private credit investment, the alternatives). Not one of these has to do with a change in strategy or approach. Fairfax goes where they see value. They did not buy back shares in FIH when it traded at or above book. They started to when it traded at two-thirds of book. This was not because they decided to invest internally.

Out of interest, why do you think 1+1=2.5 in this case? I don't see that the economics of any of the underlying assets changed as a result of the merger - Grivalia's properties did not rise in value, Eurobanks NPE's did not suddenly spring back to life, and there were no significant cost reductions. What did happen is that Eurobank's capital increased, because it issued equity. But that would have happened if it had issued equity for cash, rather than for Grivalia shares. Am I wrong?

And by the way, the merger with Grivalia did not fix Eurobank. The massive issue of equity (to buy Grivalia) did.

I’m not denying that Fairfax’s investments have worked better recently than they did before. But if you think that’s because Fairfax has dramatically changed how it invests you’re not looking at the evidence right in my view. What changed was the cyclical environment for these companies. Eurobank is a great example. Its initial failure had EVERYTHING to do with monetary policy as dictated by the EU and ECB. Greece experienced a depression - one of the closest corollaries of the Great Depression that I know of. Monetary policy could have changed it in a heartbeat (at a cost). Tight monetary policy is why it took Eurobank ten years to work through its NPLs. Loose monetary policy (during covid) is part of why the Greek economy has started reflating. Fairfax owned the company in both periods. Their investment policy did not change - circumstances did.

My point is that every decade or two the level of monetary manipulation or the lack of it is extraordinary, and investors seldom fully understand the distortions at the time. Nations going back onto the gold standard after WW1 and then failing to adjust the amount of money in the system after the crash had a huge impact in the 1930s. Rebuilding the global monetary system (Bretton Woods) had a huge impact postwar. Taking the dollar off the gold standard had a huge impact from 1971 onwards. Volker had a huge impact in the early 1980s. No-one had experienced those things before, either. Everything changes and everything stays the same.

Personally I think it is too early to say. I know that sounds ridiculous but it has sometimes taken FFH years to get acquired insurance subsidiaries right, but when they get there, they can be super-valuable.

I think this take is largely wrong. First, the reasons the shorts didn't work and Fairfax's type of value investing didn't work has a lot to do with monetary policy, so I think Parsad's point stands. Second, a lot of the equity holdings that you're so excited about are the same ones, or the same type of ones, that didn't work for so long. What has changed is the cycle. Stelco had exceptional pricing. RFP had exceptional pricing. Atlas had a once in a generation opportunity to deploy capital after issuing a lot of shares to fix its balance sheet. Eurobank has finally worked through its NPL issues and Greece has finally got a pro-market government. Exco is still there and may well bounce back on higher oil & gas pricing. So the fundamentals, and the extent to which the market cares about value stocks, have changed. Fairfax's style of investing has not changed. I think they have got better at it - I think Stelco's management and balance sheet when Fairfax bought in were better than Resolute's were, for example, although even that is a false comparison because Fairfax initially bought Resolute debt - but you're not seeing Fairfax dump its value investments in favour of putting $2bn in Google. Even Digit is not indicative of new thinking on Fairfax's part - what they are doing in building Digit from scratch is exactly the same as what they did building ICICI Lombard from scratch. What has changed is the cycle. EDIT: for evidence, go back and look at comments on here when Fairfax bought Seaspan and Stelco. It was all "oh, God, more of the same, I really wish Prem would stop buying cyclical crap and buy high quality compounders". This has changed (somewhat) because the fortunes of the cyclical businesses have changed (for now).

I agree with your point but not your wording. Monetary policy has dominated 5-10 year returns over the last 20 years but then if you look back 200 years, I think it always does, and in that sense it is not a distortion but a fundamental part of investing. One could equally stand at the bottom in 1933 and say, well, the reason I lost 90% of my money was distortions in monetary policy. It took me a long time to come to this view, and I'm not criticising anyone here, or saying it's easy.

I agree with all of this, but "it's hard to be right" doesn't change the fact that Prem has been wrong to call a bubble in high quality big tech names over the last 5-6 years. I am not criticising him for not owning the stocks. But the point is he said repeatedly and loudly that they were overvalued, and I am not sure history has or will prove him right on that. He also called out a bubble in lower quality Covid-beneficiary smaller cap tech names in 2021, and was right to do so. Props to him there. All I am saying is that if he conflates these two and declares overall victory, he's being a bit naughty in my view.

so familiar!

Oh, don’t I know it.

I'm expecting Prem to switch his Eurobank into Sberbank here

Yes, quite right.

Yes re both! Fairfax has this "problem" with a number of holdings buying back shares - FIH, Stelco, RFP. The difference is I'd quite like to see them own KW outright as a platform for originating investments for their float. I was hoping Westaim and Arena might go that way too but it doesn't seem to be scaling.

I think it is a bit too much to say Prem has been proven dead right. He spent much of the last few years saying things like Google and Amazon were overvalued. I don't think he was right and that's not the bubble that is bursting. The real bubble was in all the crap that was valued on P/S because there was no E, and that bubble formed and burst over the last 18 months. If Prem points to that as evidence that he is a sage, he will be being a little disingenuous.

Yes, I think this is the key part of this announcement. I'm not sure the duration is *all* that much longer - probably 3-4 years, so it's not like they're buying 30 year treasuries. I think the bigger tradeoff is lower liquidity for a higher return. This is what is driving investors who don't need liquidity into the private credit markets. The big challenge for owners of long duration liabilities today is sourcing appropriate assets to back them at sufficient returns. Fairfax have basically failed to do this in private credit so they have to pay KW a fee to do it for them (rather as others pay FFH a fee to source investments in India for FIH). Still, it's a move in the right direction. It would not entirely surprise me to see KW merge into FFH one day. FFH would then own the platform and command the fee.

I think this issue is that his circle of confidence and his circle of competence don't entirely overlap

Surely you should multiply CR by Premiums written, not float? Sorry if I’m being thick.

Ha ha - oh God, don't get them started again

Where are you getting that from? It is a larger number than I remember. FIH's entire balance sheet is carried at 3.5bn so 3bn would be a huge excess of fair over carrying, especially if that is just FFH's portion...

I don't think they have taken it yet. They've booked it, but it doesn't actually pay out until Dec 2023 (and is subject to adjustment between now and then). And yes from memory the fee is paid in shares unless p/bv is over 2x, in which case FFH have the option of taking cash. I won't have remembered that exactly right but it is something like that. The last performance fee was paid in shares.

Including unrealised gains. Speaking of which, nice to see Eurobank breaking out to what must be decade highs.

I'm not entirely sure this is true. I think it's about assessing whether you are being paid to take duration risk. In other words it is about analysing the spread between short term and long term debt, and deciding whether that spread adequately compensates you for the risk of capital loss if rates rise. You can forecast interest rates to do this, but you don't have to, because you can just do it by looking at how much you'd lose if the bet went wrong vs. how much you'd make if it went right, and deciding whether you like the payoff. Not sure I am making sense here but to put it another way: if 2y rates = 30y rates it might be very stupid of Markel to duration-match a 30-year liability. They'd be taking a totally un-necessary risk.

If it does IPO, Prem will be able to claim another “monetisation”.