Hamburg Investor

"Book value per basic share at December 31, 2023 was $939.65 compared to $762.28 at December 31, 2022 (an increase of 24.7% adjusted for the $10 per common share dividend paid in the first quarter of 2023)." Book value grew $63.10 in q4 alone or 35.6% of the $177.37 bvps of 2023. That's an increase of 8.3% in q4 alone (in relation to year end 2023). Weightes shares outstanding in q4 just reduced by 1.1% / 23,076 in q4 2023 vs. 23,387 in q4 2022 (I don't have the YE numbers of 2022; still that will not move the needle)

"By miles" was meant before the catch up of FFH. My other bigger longterm holdings since the crash in October 2011 (that was my - lucky - starting point) are BRK, MKL, DHR (including the Spinoffs), Brookfield (including the Splits) and Smurfit Kappa. They all performed better and the gap widend a lot from the beginning of 2017. Of course, since 2022 Fairfax catched up a lot, still it lags the others, most by miles. But I am hopeful, that will change now.

Over all the bad years of Fairfax to me it always felt like the contrarian stock to the mainstream. The inflation hedge (to me fairfax was the insurance against a black swan event back than). Going into greece when it almost collapsed. Going into old style businesses, when the rest of the world was going into tech and growth and china. Going into africa and india felt like a useful diversification (which in a way doesn't make sens, as I view myself as a focus investor...). I wasn't aware that interest would stay so low for such a long time. If I knew I would have maybe sold some FFH stock. But I haven't known and I don't have any idea, where interest will stand in - say - 2026. Maybe there's another war, another Corona, maybe China collapses (housing), maybe the world finds its way back to peace? People in Germany weren't aware in 1920, that they would have a hyperinflation some years later. So maybe people could blame me (us?) for holding the stock so long. But I don't speculate on interest or anything; I just want a business that's robust against the downside.

@SafetyinNumbers Yes, thanks a lot, I really appreciate you're taking the time . You guys here are so much longer in the investing world and from time to time I need a little bit of assurance... We have way less people in Germany being interested in investing than you guys on the other side of the atlantic have. So I don't really have a lot of opportunities to get in touch with other people, discuss ideas etc. So I read a lot and feel Buffett, Prem & Co talking to me through the books and annual reports; so I really appreciate gett8ng into contact here (and - way less - at Seeking Alpha). And sorry for my english... @dealraker nice comment; from the investments with over 10 per cent of my portfolio, Fairfax has been my worst performer since 2011 by miles for a long time; still it always felt being on the right train. In fact it helped me to learn, that Munger and Co are right, when saying you make money by sitting around and waiting instead of trading.

Same here regarding the cost basis. But I can‘t take FFH private and consolidate it like FFH has done with GIG. Unfortunately…

Thank you. But how does this work within the buying process of a whole business? First, the asset (stock) is available for sale (afs) at the stock market. Let’s take the GiG deal as an example. Because that‘s part of what MW is referring to. If I get MW right, than they are saying something like: FFH bought the biggest part (was it 90 per cent?) of GIG at a rather low price. And than they bought the last 10 per cent at a way too high price (that’s not what I am saying… was it at a 2.4 pb?). Than FFH revalues the 90 per cent of GIG it already owns at the higher price and consolidates GIG. So buying a rather small portion of GIG defines the value of GIG in FFHs books later on. That‘s what they are actually saying, right? Is that wrong than or doesn‘t your post adress that question? I don’t think, as I’ve written here, that Prem cooked the books. I just want to understand, how a relatively high/low valuation within the books helps or hurts.

I read the report of MW. It doesn’t make me nervous being long with over 40 per cent of my portfolio being in FFH, as I think the MW report is very onesided and I don‘t see that FFHs books are cooked. My understanding is, that FFH has and had a lot of assets that were understated in book value. Like the pet insurance business. If Prem wanted to show a high book value „whatever it takes“ he wouldn‘t have to do illegal or ugly things in 2018 or whenever. Instead he could just activate that hidden value. My understanding ist, that it would cost a bit (of intrisic value); but still not so much of it. Why do illegal things, if you could easily legal things and promote yourself way better? Still I ask myself, if I know enough about how and why FFH values its businesses the way it does. How does it e. g. help to buy a business and have it in your books at a high or low valuation? Let‘s say in an example you own 95 per cent of a business and you buy the last 5 per cent: my understanding is, that paying a high price you can revalue the 95 per cent you own at that price. So does having the business booked relatively high help to get a better rating and pay less interest ? It’s obvious, that one shouldn’t push such things to the limit; still my understanding is, that there is no definite number that’s right and valuing it one dollar higher is wrong etc. There‘s a legitimate rabge I guess. Has anyone an idea, how and why Prem values some businesses relatively high (low seems more a function of time, see the example of the pet insurance business…?!)

What I tried to say - and I may be wrong, I am not an account, just an amateur investor - is, the following: - the pet insurance business was bought by FFH at a low price (seen from the point of selling; let‘s say $50mn). It was sold 15 to 20 years later for $1.4bn - and the profit was $1.2bn. - So the book value of the pet insurance business in FFHs grew from $50mn to $200mn ($1.4bn less $1.2bn). - Let’s assume $50mn was a fair price, when FFH bought it. Than for nearly two decades the busines value grew anormously to $1.4bn, but that wasn’t represented within the book value of FFH; the book vakue of the pet insurance business just grew by the amount of the reinvested money; but the business seems to not having needed lots of that and still grew stronger and stronger. In the beginning the difference between the paid price and the business value was low and over the years, that difference grew and grew. - So the real value of the pet insurance business was understated in the books of FFH. What could Prem do to make that hidden value visable? As I said, I am not an accountant, but I think he would e. g. have to sell a part of the business and mark the business to market. There may be other and more technics; but from my understanding, FFH would have to pay taxes (as they sell a part of the business) or/and they would loose the possibility to fully profit from the per business (if you sell e.g. 10 per cent, than you only own 90 per cent…). The point is: Making the value of a wholly owned business visible, you need to mark it to market; but there is no market, if you don‘t sell. But if you sell, you loose intrinsic value. Is my way of thinking correct or not?

What I tried to say - and I may be wrong, I am not an account, just an amateur investor - is, the following: - the pet insurance business was bought by FFH at a low price (seen from the point of selling; let‘s say $50mn). It was sold 15 to 20 years later for $1.4bn - and the profit was $1.2bn. - So the book value of the pet insurance business in FFHs grew from $50mn to $200mn ($1.4bn less $1.2bn). - Let’s assume $50mn was a fair price, when FFH bought it. Than for nearly two decades the busines value grew anormously to $1.4bn, but that wasn’t represented within the book value of FFH; the book vakue of the pet insurance business just grew by the amount of the reinvested money; but the business seems to not having needed lots of that and still grew stronger and stronger. In the beginning the difference between the paid price and the business value was low and over the years, that difference grew and grew. - So the real value of the pet insurance business was understated in the books of FFH. What could Prem do to make that hidden value visable? As I said, I am not an accountant, but I think he would e. g. have to sell a part of the business and mark the business to market. There may be other and more technics; but from my understanding, FFH would have to pay taxes (as they sell a part of the business) or/and they would loose the possibility to fully profit from the per business (if you sell e.g. 10 per cent, than you only own 90 per cent…). The point is: Making the value of a wholly owned business visible, you need to mark it to market; but there is no market, if you don‘t sell. But if you sell, you loose intrinsic value. Is my way of thinking correct or not?

I reay really appreciate your postings. Thank you.

again, thank you for making really good points. I really wanted to focus on this year, on 2024. So I focussed on the same time frame you took with your initial post (“the 10 points”). And of course, you’re definitely right, when you write, we can’t predict the share price for such a short time frame, for just one year. Mr. Market is, well, Mr. Market. But still I see a lot of discussion here about exactly that topic, so I felt like why don’t speculate yourself for fun (something I haven’t done a lot ubtil now). But I agree on what you said regarding Fairfax Financials special ability to profit from volatility in bond rates. Imho they are better than any other insurer I follow. You’re points regarding reflexivity and taking a more dynamic approach when looking at value creation is totally valid, although I think one year being a little bit too short in normal (whatever that is) years, to watch that in the surface. What everyone sees on the surface is earnings and growth in book value. We were a little bit lucky, that treasuries at the beginning and end of 2023 weren’t that far away from each other after some wild swings. Something that was really different the year before and could easily happen again. My best guess is, that volatility in esrnings and book value grwoth doesn’t help to win new investors for any (insurance) stock, the more Fairfax not being loved by the market at present. As I tried to point out, I tried to think about the stock price, focussing more (and maybe too much) on the question, what might help other investors, not yet being aware about this fantastic company, to find it and build trust into it and its management. To me looking at this company, I don’t understand, how anybody can’t just fall in love with it immediately. But that’s me and I can’t buy more having over 40 per cent of my portfolio in Fairfax. After all less volatility in interest rates in my eyes would support this process of trust building. But at the same time I totally agree, that a volatile and/or not too low interest rate environment would be better for Fairfax value creation. Just as it would be better for growth of intrinsic value, if Fairfax shareprice would fall, the dividend would be dropped and the “freed” ressources would be used for buybacks (I am not saying, I want that to happen; just illustrating what helps growth in intrinsic value; but that’s not everything that counts). Does anybody have an idea/guess, how the mechanism regarding the management of the bond portfolio looks like? I mean, something like, when interest rates fall below 1%, they buy bonds with 1 year to maturity, under 2% they go for 3 years. And what would they do with really higher rates like 6% or 8%? Would they go above 5 years? I started in 2011 so I haven’t watched Fairfax going through the 80ies (I was 10 years old in 1986) or 90ies…

@Viking Thanks again! It‘s Great, that you share all this detailed information and your thoughts. That’s really really valuable. I don’t have anything to add. If we take a step back from the company itself and don’t focus on Management, but to external factors (your analysis ist just much more important and valuable, but still) two points come to my mind: 1. Inflation und Interest rates. Falling interest rates would give book value an extra push short term as the (big) bond portfolio would be valued higher. But it would be bad mid and long-term. I am not sure, if falling interest rates after all might help the stock price in this regard. The good trend of the last year would get even more visible on the surface on the one hand, even though it would be bad news for Fairfax outlook, the value stocks it holds etc., the value creation imho on the other hand. Would be interesting to watch, how Mr. Market would react. - if rates just stay around where they are the good trend in value creation would just get more visible within this year. I guess this scenario would support rising stock price - rising interest rates would be a good thing for Fairfax value creation, but one wouldn’t see it on the surface. Again would be interesting to watch. 2. The election of the new president. If I remember correctly, then when Trump became president Prem became very active... What would he do this time? Of course, there are a lot of other external factors and my best guess is, that there will happen a lot that we don’t anticipate today. It’s just, that those topics popped up in my mind, when I tried unsuccessfully to finding about a maybe number 11 to your list. The interest rate topic imho of course is important for all insurance companies; still, I think there are 3 reasons, why it’s more important to Fairfax than for any other insurer. First Prem Invests more into old style value stocks then another insurance float guy I am aware of, e.g. in comparison to Markel or Berkshire. Second the bond portfolio is just so big in comparison to book value, so the effect to book value is just reay hugh. And third Fairfax comes from being a hated and ignored and forgotten stock to maybe getting a loved one. The ones ignoring Fairfax until today maybe won’t find their way to Fairfax if interest moves into the wrong direction and they don’t find the stock in the typical lists of strong growers, etc. Do you have any opinion to these two topics?

Thank you! In a way it‘s fascinating: Prem is 73 years old and I get the feeling, everyone (including me) not thinking so much about succession. Maybe we all have a „Buffett-Munger-Bias“?! As if there‘s a rule, that Prem, Gayner and the likes will all work until the 90ies (or even longer), as this has happened at Berkshire. Anyway I don‘t have the feeling, that succession at Fairfax or Markel is easier to do than at Berkshire, if all three would step back or get hit by a bus tomorrow. Of course the odds are in favour of Fairfax and Markel, that their CEOs might stay longer. Anyway if it happend, I think it would be harder for Fairfax and Markel. Berkshire is just so big and a lot of value creation lies in the big companies it owns etc. and nobody expects that high returns for incremental earnings like at Fairfax and Markel. So the downside would be bigger for Fairfax or Markel, if it happened tomorrow, while it’s less likely to happen, at least in my eyes. And while I have a relatively clear picture for Berkhire, I don’t have that for Prem. I just wish, all to stay healthy for the very longterm…

Thank you!

Do you think, they are able to lead Fairfax into a bright future?

Prem or other important managers at Fairfax could retire/get hit by a bus, get ill out of a sudden. I guess Prem today is more important than Warren is for Berkshire. And there’s no rule that Prem or Gayner have to work as long as Buffett, stay healthy etc. Does anybody have an idea, who would lead Fairfax, if Prem would leave tomorrow?

Totally agree as I wrote, that in the end adding 5 dollars to the dividend is no big deal, when earnings are (way above) 150 dollar. It’s just a really small portion. And it‘s okay and there is a reason for doing it and taxes are in my view no big deal. Even though I don‘t like speculating where and why the stock price goes into which direction over short time frames (there are just too much variables we don‘t know in the future, which starts tomorrow), I agree, that growing dividends give pressure into the direction of a rising share price. But like Buffet said (from memory), being a longterm shareholder of a good company buying back its stock, a low shareprice is beneficial. It helps buybacks being more efficient. Intrinsic value grows stronger, when Fairfax can buy back a. more shares at b. lower prices. Lower prices give higher returns. So at todays price, if Fairfax would cut the dividend to zero, Fairfax could buy back nearly 5% extra of outstanding shares with that dividend money over three years. Or nearly 10% over 6 years. Without a dividend the stock price would potentially be lower for the here named reasons than with a rising dividend. So it would get easier to not only buy back more shares at cheaper prices with the cash from quitted dividends, but also with the cash, that will be invested into buybacks within the next years anyway. Even another TRS investment (my guess is not at the same level) gets more likely. Rising dividends push the share price, which make buybacks less attractive. So in a way dividends are not the friend of buybacks. It has been said here, that the return of the incremental capital is crucial and I agree. My best guess is that the roe of Fairfax will be at least 15% (so I agree with Prem) and maybe even 20% over the next decade. So the intrinsic value of Fairfax should be way above its current price. So at todays price the returns for the the incremental capital used for buybacks of Fairfax would be even some points above those numbers of 15% or 20%. On the other hand rising dividends and stock prices help Fairfax reputation (which e. g. helps to refinance debt) and the share price and 8.5% get back directly (very good point!). And even longterm shareholders have to sell one time and should get a fair price (like I am hoping to get a fair price, when I am retiring). So my personal bottom line: It‘s okay to raise dividends, even if it might not be the most efficient use of capital. And after all the use of 5 dollar/share of incremental capital is just not all important for Fairfax future.

Agree with everything. With structural earnings around 150 dollar, we are now at a payout ratio of 10% and an earnings yield of 1.6%. At these price levels personally I‘d be more happy with putting those 15 dollars/year extra into buybacks. But if they still want to be recognized as a dividend player, well than they‘d had to adjust it some day.

I voted yes, assuming I had to bet 1 dollar and getting an extra dollar being right or loosing the dollar being wrong (3rd option: not betting at all = dollar gone). Base case would be a cagr a little bit above 15 per cent, so bv/share around 1500 dollar (dividends subtracted). Could be 20 per cent (around 1700 dollar). Would a pb ratio of 1.33 be thinkable for Fairfax Financial with a cagr of 15% in the rearview mirror over a timeframe of 7 years than (not knowing the outlook than, which will be more important, but still) as an intraday touch at the end of 2027? Maybe. What about Mr. Market felling in love at one point in the upcoming 4 years with the insurance sector once again? It seems a long time ago, but before 2007 (that is before interest rates dropped) pb ratios above 1.5 where nothing special for a lot of insurance stocks (e. g. here’s a graph with BRK, MKL and Fairfax: https://tidefall.substack.com/p/2022-fairfax-letter-highlights). I am not predicting that, but within the framing of this bet it gives some extra per cent for a yes. Maybe this happens in 2025, in 2030 or 2070 - who knows. Still it gives a little bit of an extra opportunity. If the cagr of book is above 15 per cent (odds are good in my view) than an intraday pb ratio of 1.2 or so seems more likely. Adding up all those a “touch” for me seems to have better opportunities than a “no touch”. Would I bet on a price tag of 2000 dollar or above on December 31st 2027? Probably not. Am I predicting a touch of 2000 dollar until end of 2027? No. I just answered the question and to me a touch just feels more likely than a “no touch”. IMHO the odds are above 50 per cent. P.S: Buybacks should give an extra push to the bvps.

ThNk tou for tour answer. What do you mean with „That table is intended to convey the financing differential for the insurance companies.“? Sorry for not getting that point. And isn‘t the formular more like portfolio return x portfolio assets + profit (loss) ratio of insurance x premiums to surplus ratio etc.? The Portfolio returns are on all assets (so e. g. including equity and float), while the combined ratio is only linked to the premiums. Or am I wrong here?

I know the discussion and the theoretical frameset. I like that persoective. But how do you get those numbers together? - 1986 to 1990: cagr of 57.7%, a combined ratio of 106.7 and an average total return on the investment portfolio of 10.4%. - From 2001 to 2005 the investment returns were 8.6%, the cr was 105.4%, but the cagr was minus 0.9 per cent. So both the insurance businesses as well as the investment returns are relatively similar in both timeframes; but the cagr couldn’t differ more. 58 per cent plus to minus 1 per cent. So the relationship between the numbers shown doesn‘t get visible. Or look at the timeframe 1996 to 2000. Investment returns were equal, but the cr was way more bad. Still the cagr was 31 per cent better then in the years with the worse cr. At least we’d need to know how big the investment portfolio was and the premiums and the equity. But he hasn’t added that. Why not? Without that context and other contexts (like the macro bet) that are important in some of the timeframes, I can‘t read the relationship out of the numbers. That would be a great framework and one would understand a lot. What does the chart alone show to you intuitively? As he hasn’t added those numbers, I wonder why? How does the chart help without that? The numbers shown alone to me seem totally random, one (at least me) isn’t able to get to any conclusion by looking at the numbers shown about any relationship between those. There’s just nothing to understand intuitively by looking at the chart for me - so I guess, there’s something I miss. (There are other tables and charts like e. g. the table with the insurance companies results or the table with the tech stocks, that are easy to understand).

I totally agree. And I asked myself this question again, and again. Maybe it’s because: Prems results were always bumpy. Not like Berkshire or Markel or most of the other insurance companies. Maybe it’s harder for people to trust management with bumpy results, even if there is a clear pattern over 37 years? A pattern with absolute returns that are way better than the smooth results of the competitors fishing in the same lake? Don’t get me wrong. Berkshire and Markel are opposition two and three in my investment portfolio. But Fairfax is on position one. @Viking As you are discussing this historical chart, I look at again and again. But I don’t get the point of that chart. All I can read is that the returns of the investment portfolio more or less define the end results in conpounding. But even there are exceptions. And I can’t read anything out of the combined ratio. There’s just no relationship getting visable with regards to the compounding. Of course there is a relationship, I know. But this historical chart doesn’t help to understand that. and normally you show chart because you want the reader to understand an inner structure. So is the cr just included to point out to shareholders that Prem is aware that the combined ratio is important? Sometimes I ask myself if Prem thinks that in the future, the relationship will be getting more and more visible and I would agree on that point. What is he trying to show to us? What do you read in it?

To me that seems a reasonable way to think about Fairfax. Heads you win a lot, tails it‘s ok. Again and again the discussion here touches interest rates. Where will they be in one year? In two year or three years? I don’t know. And I’m pretty sure the answer is: Nobody knows. Nobody has ever known. But the point is: it’s not important to know where interest will be in such a short timeframe, if you have lots of time to invest. And what if we would think more about the question, if there is a “new normal” that is 0% or 2%? I think that is way more easy to answer for most of us. If you think there is a new normal, then Fairfax Financial (as well as every other insurance company, but Fairfax in particular) won’t prosper. If interest rates go back to zero and stay there for two decades, then there will be better buys than insurance companies. But I don’t think so. If anything history shows, that there has never been such a thing like “a normal interest rate.” There have been peaks and lows… but interest rates have never been staying at any level for long. Of course, others might disagree. There is always the possibility that “this time is different”. But I think there are a lot of cases in history, that show, that betting on “this time is different” normally isn’t a brilliant move. In fact going that way is really risky. So my thinking is more like: “If interest rates on average are at 2% or higher over longer timeframes then Fairfax has to do a lot of more dumb things then good things for not beating the S&P 500 buy a whole lot. And history. Again. How likely is it, that a company that has compounded within the top 1% (0.1%?) of stocks over 37 years is going to do so many more dumb things then good things? In fact you don’t find a lot of management teams, that have been working for one company for 37 years and being that good in the end. Buffett? Hasn’t reached 19% CAGR since 1986. Tom Gayner? I don’t think so, but I haven’t checked Of course, people are free to believe that - again - “this time is different” with regards to the Fairfax management team. Maybe Prem and his team have lost all their skills in 2011 and 2021 to 2023/2025 is just a very short upswing episode in that downswing. Maybe. But normally people that have done a very very good job over 25 years on average (1986 to 2011) don’t lose their skills overnight. A value investor having a CAGR of 19% of 37 years in his books at the end of a lost decade, which happened parallel to a zero interest rate episode, where growth has been beating value like never before, tells me another story. The question is which perspective is right and which is wrong?

Even after 2016 on the surface Fairfax wasn‘t a big winner over some years. Looking back 15 years from 2016 growth might have been more spectacular against the market than looking back 15 years today. (I haven’t looked, just anticipating the brilliant hedge against the housing market around 2007/2009 and the longtime underperformance of Fairfax in the no-interest-growth-wins-time we look back today). We can project earnings over the next couple of years and Vikings numbers are as good as they could be, but looking back Fairfax growth over 10 years hasn‘t shot the lights out. And always remember: Mr. Market is doing the price. And he‘s not exactly famous for being rational.

Thanks. I just realize, that being an investor into Markel, Berkshire and Fairfax starting in 2007 and 2009 makes me a greenhorn here…