Hamburg Investor

+1 order to Germany. to the author: What have you learned or was the biggest news for yourself when doing the analysis?

In Germany government oftentimes steps in, if the economy gets hit badly (covid…). My gut feeling is, that in the US they are more market oriented and let things go without too much intervention; but at some point they would I guess. But I am not an expert, any thoughts from someone else?

If I get you right, than buying on the cheap site isn’t an option for you as for the risk?! So you could get into the situation to buy a security, that is priced reasonable, but if it gets cheaper over time, than you sell, even though the gap to intrinsic value widens…?! I get your point and I‘d agree, that liquidity is all important and you make a good point. Still it leaves you with less opportunities and you would have to sell at points, where I‘d see most value. Think of FFH when it was valued at 0.4 book just 3 years (or so) ago. Have you sold at that point; if not, why? Looking at Prems investment style, doesn’t he invest just totally contrary to you? Thinking about Eurobank and others.

To me, that‘s the key point. Buffett said something like - from memory - crisis is good for a good business, as the crisis wipes out the competitors. A good business WINS through crisis, as it wins market share. Not only, but especially in those times. Gayner wrote about that topic some years ago in his annual report too, saying something like, that it‘s an advantage for its subsidiaries, that Markel will always be there to e. g. buy a new machine, if it gets broke at one of it’s subsidiaries. So management is able to always think for the (very) longterm. So how will the world look like some years after a 600 bn dollar event? BRKs and FFHs market share should have grown AND the premiums within the sector as a whole should have grown too (as prices within the insurance sector would have grown). So both BRK and FFH would get a bigger piece of a growing cake, some years after such a scenario and I wouldn‘t be surprised, if CR would go down a lot. So, yes, there are tail risks, that will ultimately hit BRK and FFH; but in the long run those risks are in fact not risks but chances.

That‘s just a theoretical scenario. I like to think about the downside. Most, if not all, of us are implicit thinking the stock price of FFH should go up in the next years. I wouldn‘t bet against that. Still from time to time things happen and the world changes within a moment. Think Covid, think FFH trading at 0.4 book value. So by this scenario I try to get a rough idea about „What if I am wrong and Mr. Market is go crazy within the next years? After all you‘ll NEVER know, where rhe stock price goes to in the short term (and 3 1/2 years to me is shortterm). So why not think about that „bad“ scenario? Would it be as bad as I think? Often things turn out to be way better even (or: especially!) in a bad case scenario than one thinks in the beginning. E. g. in the other thread about the question if FFH would reach 2.000 dollar until 2027 I just bet „yes“. But I don‘t hope for that outcome. For every longterm holder (net seller or holder) of FFH it would be even better, if the share price would be way below 2.000 dollar. As shares can be bought back way cheaper. So in a nutshell: No, I don‘t think, that the share price will stay where it is. But if anything, than I would hope for such an unlikely scenario, as my share of FFHs earnings would only go up. And I like to lean to the downside. Having shares of a business with a pe ratio of 8 today, and having zero return over 8 1/2 years and than owning a business with a normalized pe ratio of 2 and a normalized roe of 15%- if that‘s the bad case scenario, than that’s a scenario I buy. (Again: ignoring buybacks, which would make the scenario even better). Thank you for the work, which I really appreciate! Gives a lot of colour.

I like the way you think. Mine is a bit similar: The rule of 72 tells us, that at 15% ROE equity doubles in around 5 years, at 18% it doubles in 4 and at 24% it needs 3 years. Of course ROE can be less or more in the upcoming 3 years (and thereafter hard to say), but I wouldn't bet on less than 15% or more than 24% for the next 3 years. My best guess is around 20%. So that's around a double in 3 1/2 years, isn't it? Than I try to find a comparison of FFH to the market. It doesn't make a lot of sense to me to compare the book value of the market (think: S&P500) against book of FFH, as most companies of the index are better understood with pe. So how to come up with a normalized pe for FFH? I just pick a normalized ROE of FFH (my best guess is 15+% over the long run, so I take 15%). If FFH earns 15% on book and I can buy it at less than 1.2 book, than that's a normalized pe ratio of 8, compared to nearly 30 for the S&P500. Wow, that's cheap and I am pretty sure the average S&P500 company won't make 15%, not even 12%. That's my definition of Quality at a cheap price and of GARP. Thinking one step further: Assuming a double of FFHs equity in 3 1/2 years and the price stays where it is, than FFH would be valued below a pe ratio of 4 (!). I would love that, as the buybacks would bring returns even higher. Assuming 15% after the next 3 1/2 years, would bring pe ratio down to 2 after 8 1/2 years.

What companies do you see on a worldwode scale that do mimic Buffetts approach? I see BRK, MKL, FFH and Protektor Forsikring, a small Norwegian company There are other good companies, but as far as I can see they miss one of the points: - e.g. RLI is a very good underwriter; but they fail the value / active / stock / whole company approach. - Some do invest a tiny bit into stocks, but its so less, that it doesn’t move the needle. Anyone with further suggestions?

So just for my understanding: As Fairfax isn't an American business Markel doesn't have to show them in their 13F, right? It wouldn't have been a bad timing to exit Fairfax in 2015, if I remember correctly. What do you think, why they could have voted for not showing Fairfax any more? I mean, 1st they did, than maybe not any more - so, why...?!

Okay - Markel held Fairfax from 2006 and 2015, and it was between 3% and 8% of the portfolio. https://dataroma.com/m/hist/hist.php?f=MKL&s=FRFHF#google_vignette

I am pretty sure that Markel owned Fairfax stock. But that’s mabe more than a decade ago, maybe before the financial crisis. If I remember correctly, then it wasn’t one of the biggest top4 positions of Markel, but at the same time not one of the smallest.

couldn‘t agree more! Just posted something similar @ seekingalpha a few minutes ago. cheers!

This is really really interesting, thank you again, @Viking! I shared a similar analysis here a few months ago, I think it was overseen (I just posted an xls file probably no-one opened; so this time with a picture). Essentially, I wanted to understand how Fairfax compares to Markel and to the US PC industry as a whole. I basically compared the following things after researching the annual combined ratios: Made the average combined ratios from 5 years (without weighting the premiums). This gives you smoothed figures Then I calculated the difference between FFH and MKL. You can see: Until 2011 - with exceptions - Markel was usually well ahead of Fairfax, mostly between 4 and 9 percentage points. In the following years, Fairfax caught up massively and for the last 10 years has been in a narrow range, with Markel usually only just ahead or even Fairfax in the lead. If you want, you can either see a slight trend in the opposite direction since 2017 (so Markel improving against Fairfax again) or a levelling off in very slightly negative territory from Fairfax view since 2014. In any case, Fairfax combined ratio has been catching up in large steps since 2011 and 2012 against Markel, probably above 5 percentage points on average. In comparison with the PC sector as a whole, I have created a difference on an annual basis. Years in which Fairfax cr was 3% worse (red) or 3% better (green) are marked accordingly. In this way, we can see where particularly large deviations occurred. You can see that 2011 was the last red year, with a total of 5 red and one green year up to 2011. Since 2013 there has been no more red year, but 6 (!) green ones. Of course, this is still episodic, but an initial picture emerges. To gain a better picture of the entire period I added up the yearly differences between Fairfax and the PC sector over the years. So if Fairfax lagged 5% in year 1 and 2% in year b, I summed that up to (7%). The result: you can clearly see that from 2000 to 2011 the crs add up to (30%). Unweighted, this results in an average of (3%). Fairfax was therefore around 3% worse than the average PC company. After that until today (2011 to 2022), (30%) has become 8%. In other words: On average, Fairfax has beaten the PC market by about 3% / year. Comparing the periods before 2011 and after 2011, there is a difference of about 5% to 6% / year by which Fairfax cr has improved to the market. Fairfax has also outperformed Markel by roughly the same difference if you look at the 5-year differences; this means that Markel would have moved roughly in line with the market, while Fairfax would have made up considerable ground on both the market and Markel (and Traveller's, as I learn here and now). Comparing what I found - Fairfax relatively improving by 5 percentage points against a. Markel and b. the American PC industry as a whole, I find it astonishing, that the comparison against Travellers seems to tell nearly exactly the same story: In 2014 Fairfax cr was 5% behind Travellers; and in 2022 they are head to head. As if nothing changed between Travellers, Markel and the market; they all moved parallel into the same direction. Only Fairfax improved by about 5 percentage points against all three.. Please note my figures: In Germany we write "-5%" where in America you would write (5%), if I got it right. The cr figures are manually researched from the annual reports. It may be that errors have occurred there. Premium growth is not included. The mathematically correct way to calculate an average would have been "per dollar of premium over 5 years". Corresponding criticism is also appropriate when adding up against the PC industry etc. This is not perfect science, I check, only roughly ideas and theses. Is Fairfax a (purely American) PC insurer? Definitely not. This comparison is very flawed. I am not an insurance expert and have taken, what I could find easily and found relatively plausible ("Ok, let's do it and see if we could see an uptrend"). You could certainly take it further and compare each insurance line of Fairfax individually with suitable industry indices. That would also be desirable, but I don't have the time and it was enough for me for these purposes. Assuming that profitability trends in industries often occur worldwide, such a comparison can at least help to find general theses on trends - and that's all I was interested in here. In combination with the Markel comparison (and the Travellers comparison), an overall picture emerges, albeit a rough one. I have no idea how to get that fancy graphs, like the traveller one here, out of an excel. Has anybody a hint for me? That would certainly be easier to understand than my table.

I don't think, you'll find a lot of people here, who are looking for 18% or 26% returns when investing in Fairfax. As I have already explained here, I don't do that. You describe the challenge very well: it is much easier to achieve extraordinary returns when you are smaller. Together with Markel, Berkshire is my second largest investment. As happy as I am about Apple's performance, even that is only a small part of Berkshire as a whole. Berkshire would be worse off without Apple, but it wouldn't be in a completely different league. However, my general thesis is that the investment decisions at Berkshire, Markel and Fairfax will never be so bad in the long run that they use up the advantage of the float. Whereby the float advantage is greater at Fairfax than at Markel and Berkshire (which also uses other levers, such as tax deferral) due to the greater leverage. In any case, Prem can make even more stupid investments than Gayner and still Fairfax will do better. I think there are insurance companies that have the secret sauce. Geico is one of them, RLI too, Markel was also doing very well for many years; unlike Fairfax. But since 2011, Fairfax's combined ratio has regularly improved massively compared to Markel and the PC market as a whole. So I do believe that Fairfax has found a bit of the special sauce. The interesting thing is that Fairfax achieved the CAGR of 26% at a time when the combined ratios were not particularly good compared to the market. Now the insurance business is structurally better (since Andy Barnard has been there; he started as COO in 2011). So while Fairfax grows and that surely depresses the outlook, the improved insurance gives tailwind. I think you have to differentiate between two things: The structural change that Fairfax has gone through: The Fairfax insurance portfolio is much better today than it was in 2011, but not as good as, say, RLI. Also, the many new smaller insurance companies scattered around the world will improve the learning curve and provide opportunistic opportunities. And on the other hand, we have had and continue to have exceptionally good times in recent years (hard market). But I think that with interest rates above 4%, insurance companies in general will benefit, and the good insurers even a bit more of course. And if interest rates go down again? Then things will be worse. And if they rise to 8%? Then insurance companies will fare much better than the market. And where are interest rates going now? Well, nobody knows. But just because they were so low now doesn't mean they have to go there again. That would be the first time they went back to a point just because they were already there, wouldn't it? In the end, the question is whether or not one interprets the combination of 1. favourable float (which Fairfax did not have in the past, but now has in my opinion), 2. the willingness to invest one's own equity in shares and companies and 3. having a value investor from Graham and Doddsville as CEO is a corporate advantage. If this is a clear advantage, then outperformance against an average company should be possible. If 10% roe is the average, then Berkshire, Markel and Fairfax should outperform. If Fairfax doubles twice times from here, then I am also sceptical as to whether 15% will be achievable in the long term. But until then I think it is absolutely possible. You can already see that Fairfax is focussing more on quality than Berkshire. Fairfax should therefore be able to follow the path outlined in the "Buffett Alpha" study, i.e. investing in large quality companies.

I don‘t think, that 1.5 times book value is a high valuation. Of course it‘s not at a roe of 15% (so at 1.5 pb ratio, at a pe ratio of 10 than); but I even don’t find a lot of companies with a roe of 13% at a pe ratio below 11 or 12 these days (than again you come to 1.5 pb ratio). Do you? Okay, at 10% roe, a pe ratio of 15 - that‘s not interesting. But how likely is that? FFH realized a cagr of book value of 18% over 38 years. That 18% is the average after the worst decade in its history; before that bad years kicked in, the cagr was of course higher. That was a cagr of 26% from 1985 to 2009. 26% over a quarter century. Being in the top 1% (0.1%?) over a quarter century - was that luck or skill? If you think (like me), 26% over 24 years (and 18% over 38 years) has to be skill - how likely is it, that a value investor after that totally looses his skills? Those following bad years in my view had at least something to do with the low bond yields; you could say the reason for the bad decade was only one factor (Prem doing bad). Than it would just be a coincidence, that a lot of other insurers did bad (although not that bad) in those years too, like MKL or BRK. But than: What’s your reasoning about those managers, as they at least haven’t outperformed the S&P500 over that decade too: Have Buffett and Gayner lost it too? Anyway its reasonable to assume the roe was around that 18% over that 38 years too, and 26% over the forst 24 years, or? Looking at the change within Fairfax beginning in 2017 and assuming at least another 3 or 4 years being safe to go with 15+ % roe (so that’s 6 years in a row with a roe of 15+%), my question would be: What’s your scenario for a hefty and longlasting downturn at FFHs roe after - looking from the standpoint in 3 or 4 years - 41 years with a cagr of around 18% roe? What makes you think, that the roe would go down to - say - 10% after 41 years with 18% on average? Low bond yields over the next 20 years? If that happens - okay, I go with you. It should get lower a bit, as FFH grows and gets bigger. Okay. But apart from external and from size factors, what should happen? Prem getting irrational? Loosing his skills after 41 years (again, if you’d see the last decade as a result of only one factor - Prem - and you think, that he‘s not anymore able of learning from mistakes - than that makes sense somehow; bit is that likely?!)? How reasonable is that - a value investor, who understood the power of float and having Bernard on his site - loosing all his skills after 4 decades of outperformance? I know, I know: Nothing is for sure. But that’s true for all stocks, so we should dig for reasonable risks, but I don’t see longterm risks other than Prem and Bernard getting hit by a bus, bonds going back to zero for 1 or 2 decades (but nobody knows… could go up to 8% with the same risk), a once in a century insurance risk materializing, galopping hyperinflation or deflation etc.; but most of that risks are just normal risks you have with any investment.

Totally agree with your conclusion about what 0-2% interest rates mean for insurance. Just some remarks: - Haven‘t you forgotten premium growth as an important part for how to reach 15% roe? (I don‘t mean acquisitions but internal growth). Another point: The equity returns are not taxed every year; so the overall tax is lower than 26%. And you forget the earnings through a profitable insurance business (cr of e. g. 95) - You claim 4% roe Bonds / 16% roe stocks. Shouldn’t the bond portfolio yield way higher? Treasuries are higher (and logged in for nearly 4 years) and the corporate bonds even yield higher (like 10%). - That logic (which I don‘t share) - needing 16% returns on the inherent stock/business part for getting an overall 15% return for the holding company - seems structurally absurd to me. The whole idea of FFH (and the other insurers investing part of their equity in businesses/stocks) is it to get overall higher returns than the inherent businesses (stocks, wholly owned businesses) returns. So you have two parts (insurance + businesses), both yielding less than the whole. Possible through the magic of float leverage. If one part alone would yield better than the whole - why than not sell the lower yielding one, as that would only be a drag to returns? In other words: If Prem in his own plan would need 16% in the equity part for getting 15% for the holding: Why shouldn‘t he sell the insurance part than and invest the outcome into stocks/wholly owned businesses alone? After doing that he would have a holding with a roe of 16%, before he would have one with a roe of 15%.