Hi, this is my first post here, as I just joined, but have been following here for a long time. I am a Fairfax Shareholder since 2013. It's always been one of my Top5 holdings. Over the last year I bought more and more and it's my biggest stock holding today. I am German and live in Hamburg (sorry for my english...).
Totally agree, @Thrifty. I replied to Viking at Seeking Alpha regarding the assets topic here; unfortunately they kicked Vikings and my postings (don't know why...?) and as Viking asked me to join I just did and now I just thought to write that down again, why I think Assets should grow way stronger and more in a range of $4bn to $9bn per year over the next couple of years:
At the core my question was, if asset growth isn't a function of earnings and growth (... decline. ..) of float. So maybe something like: Add 1. Earnings (Dividends, interest, Earnings from profitability in insurance) to 2. return of stock portfolio (e. g. assuming 10% growth but subtracting dividends again, so not double counting) to 3. the swap (so assuming a price increase of Fairfax of e. g. 10%/year for being conservative and do the math, how the Swap as an asset develops from year to year...) to 4. growth of float (GIG to come...). Subtract taxes, overhead costs, runoff dividends, buybacks (although the last too add to growth of intrinsic value, but not to asset growth; but buybacks help accelerating the "per share" assets. One could assume reinvesting the dividends, for getting the IRR...). I am pretty sure I missed something and might be wrong with this or that, but maybe the direction of thinking is ok? Anyway, if one does that, you'll get way more assets growth from year to year. As Thrifty shows here, the asset base has grown around $3bn per year since 2 years, and then there have been headwinds to asset growth like the massive devaluation of bonds. So why should assets growth go back to $1bn?
Another perspective regarding asset growth could be to just look at Prems outspoken goal to grow Fairfax intrinsic value with a rate of return of 15% on average over the very longterm. If you think he'd manages that, then the assets (minus dividend, minus buybacks) should roughly grow at the same pace. So maybe 15% growth minus 1.5% (div) minus 3.5% (buybacks) for 10% asset growth/year (and around 13.5% assets per share growth). If you'd invest the divs back to Fairfax and leave away taxes and assume a buying price of 1.0 book, then the investors personal growth in Fairfax assets would again roughly equal that 15%.
And then I think, Prem wouldn't tell us shareholders 15% as a goal, if he would assume, reaching 15% being a "hard to do" thing. My best guess is that he'd communicate with a margin of safety. He'd tell us 15%, if he'd think that's safe and 16% or even 18% being a "maybe", but not the other way around. In fact he has reached some percentage points over that 15% CAGR over 37 years and this with just over a decade of zero rate interest in the rearview mirror (so just leaving a pretty hard time for insureres behind us, not to mention the soft market, growth beating value, the deflation insurance, that I wouldn't call a bet...). Look at Prems CAGR before interest went down.
And then there's another question: When, if not now, should Prem make over 15% to get to that average of 15%? When if not in a hard market, in times where value outperforms growth, when the companies CR is well below the first 20 years of Fairfax and below the 37y average? And then there's GIG, Digit, Eurobank, the Swap, Fairfax India at depressed valuation, all those wholly owned little insurance companies over the world really growing strong on average... Long story short: I think, Fairfax might grow intrinsic value (and asset base + divs + buybacks) well over 15% and should grow not below 15%. Therefore personally I think 15% for the next few years being conservative, so with a margin of safety included (of course it still could come worse as always, but I think this being a nice margin of safety, others may disagree, which is fine).
One note regarding relative valuation: The S&P500 is valued a bit above a PE of 25. Fairfax is valued at a PE of 6 (or 5). At the same time Fairfax roe (15%) might be above that of the S&P500 (return has been around 11.8% on average, so roe should be around that percentage too...). So Mr. Market seems a little bit weird again wanting 4 (or 5) times as much from me for each share of the markets "okay" earnings then for Fairfax "good earnings". If Fairfax would triple tomorrow and I had to choose either taking the S&P500 or Fairfax as a holding for 10 years, I personally wouldn't bet on the S&P500 being the better investamnt over the next 10 years.
