Hamburg Investor

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…

... 2000...?

This is interesting and I admit, that I don‘t know a lot about hedging, so I am wrobg and you ware right here. What I don’t get: What would a 100% deflation hedge look like? I mean, what exacy is the definiton of „100%“ if it gets to currency inflation / deflation and its risk? I mean, I live in Germany and the culture memory of the „big depression“ in 1923 is very vivid. Hyper Inflation was some billion or trillion per cent in less than a year. People were paying a wheelbarrow full of bank notes for one bread. How do you derisk such situations or longterm high deflation? There are reciprocal things happening to the whole economy, people loose their jobs, economy hoes down - so I don‘t have any idea, what 100% hedging would be? By how much exceeded Fairfax hedge the underlying risk - 110%, 200% or more like 300%…? Would be interesting to know, as this information doesn‘t really build my personal trust to managament…?!

How good is Fairfax's insurance business? Is the CR just benefiting from low interest rates (so the industry is being pushed to profitability since the bond portfolio wasn't yielding interest for a long time?). Or has Fairfax Management done an indredible job? I have picked out some figures from Fairfax's annual reports to analyze that: The combined ratio, the float differential (i.e. profitability + interest on the insurance business) etc. since the end of the 1980s (some of the figures are slightly different and are reported with a slightly different number some years later, does anyone know why? Are later payouts still partly offset against earlier years CRs, so that it changes until the last claim is paid out?) And then I calculated an arithmetic mean of the CR over 5 years and compared it: Once with Markel and once with the US CR of the PC insurers (yes, that's not perfect... and I just haven't done that over 5 years but just added the percentage point up over the years - hope it is understandable and correct...?!). The idea was to get away from individual years ("noise"). Do we see any trends? If the thesis is correct that Fairfax has only benefited from a general market trend in terms of improving CR, I would expect the gap between Fairfax and the PC insurers and Markel to have remained roughly the same over the decades or just moving around random. However, this is not the case (see xls attached): Fairfax has consistently had a 4% to 9% worse CR than Markel between 1994 and 2013 in the 5 year view. There is one exception: from 2001 to 2004, Fairfax was slightly better than Markel (5 year view); in the years 2000 and 2001, Markel had by far its worst CRs since 1990 to date (114% and 124%). I suspect a Black Swan event at Markel and Fairfax, but haven't checked. Does anyone know? If It's been a special noncomparable situation, than I would ignore it; if not it would be interesting to know, where the improvement came from an why disapperas as sudden as it has occured. In any case, Fairfax lags Markel by 8% over the prior 5-year period in 2011 - and then improves dramatically: In all 8 years since 2015, Fairfax CR was at most around 2% worse than Markel and in 3 years even slightly better than Markel. In comparison to Markel Fairfax CR has been record good in all eight 5-year periods after 2015. There is no 5-year period after 2015 with a worse CR compared to MKL than in any year before 2015 - with the exception of the years 2003 to 2005, which I suspect to be a historical exception. Since 2017 to date, there may be signs of a slow trend in the opposite direction. How does Fairfax compare with the US PC industry (I know, I know, Fairfax has very different insurance companies)? Very similar: from 2001 to 2011, Fairfax's lagging CR added up to almost 30 percentage points. From 2011 to 2022, Fairfax lost 37 percentage points again. This is already enormous: until 2011, Fairfax lagged behind the industry by around 3%, since then it has been around 3 percentage points ahead of the industry per year. The relative improvement in CR of around 6%/year before 2011 to the period after 2011 is also roughly reflected in the 5-year comparison with Markel; with a time lag, of course: while it was mostly between 4% and 9% underperforming until 2013, this changes to an average of around -1% after 2015, i.e. an average improvement of around 6%. I know that this is certainly not statistically perfect, but I just wanted to get a quick overview and tried to find some numbers, that are easy to get and seemed to make sense in a way to me. Anyway I am now surprised that such a clear trend can be identified. Let's hope that the indicated trend in the opposite direction does not become a fixed one; it can't be seen in comparison to the PC Insurers; there Fairfax outperformnce even improved a lot in the last two years. Zahlen.xlsx

As far as I remember, the deflation hedge from Prems point of view wasn't exactly a "bet", but more like an "black swan insurance", as he was cautious, when interest went to zero. So more a bit like: "I don't do it to get a great performance, but to get through a black swan event." Wasn't that what he wrote in the annual report back than? In hindsight it was wrong and the insurance was unnecessary; still than it wasn't made with some hubris, but with cautioness and that sheds a different light to Prem as a manager. My gut feeling is, that Prem tries to avoid big macro bets, but he may fall back into the old pattern after all; reminds me a bit of Buffett trying to avoid Airplanes, but than investing into those again and again (he ones joked, he's an "airoholic" - from memory). My impression is, he and Fairfax have been focussing on insurance (improving cr and growth, widening global footprint - bought all this little insurers around the world and on nearly every continent), bond portfolio and investments in Greece and India. It works fine - so maybe, hopefully he stays on the path. At least I just hope that, as the new Fairfax doesn't need that in my eyes. I'd be happy, if he just stays on that route of the last years. Improve quality, be a value investor. The way Markel has gone with Ventures and Buffett/ Gayner both have done with investing into more into quality has some logic, as you grow and investments have to get bigger and going in and out gets more difficult. On the other hand I sometimes ask myself if maybe low (or hidden) quality is just so much out of favor for such a long time, that Prems style might outperform. Everything comes back from time to time - look at inflation. So who's still doing "cigar butt investing"? And buying what nobody else wants in general is a very good concept. But I don't know, maybe quality investing is just better. On the other hand regarding macro bets: Has someone here analyzed the outcome of ALL macro bets of Prem altogether? Maybe if we put the bad and the good decisions together, the macro bets have been a tailwind for returns? My summary is somewhat that I hope it doesn't happen again, but also don't feel that a bad macro bet would ruin everything. Several things came together between 2010 and 2016: Growth outperformed value, Blackberry, zero interest rate. If it had just been the macro bet, book value growth would still have been bad, but not so underwhelming. Digit, Eurobank, Bangalore, TRS, better CR, growth of global insurance business, ... will work their magic.

I really, really appreciate Vikings in depth analysis with all the details. On the other hand it may be an idea to just step back and try to understand the bigger picture. We can look at the numbers and make an educated guess about the next 3 years or so and it’s eye-opening, what Viking and everybody is doing here, it’s incredible. But as a longterm investor I personally like to find the businesses that might compound at above average market rates over decades; and clearly there‘s no use of interpolating the detailed numbers of Viking over 10 or 20 years; there‘s just too much variables. Looking back we just find so many things happening all the time, that all were hard to anticipate 5 years before (some even days or weeks before) happening. E. g. Interest rates have been so low for so long and nobody anticipated that in - say - 2007. But if you wouldn’t have anticipated that back than, you were totally wrong with the numbers. The world has seen so many things within the last 15 years. One of the worst bear markets within the last 100 years, a worldwide lockdown for a virus, wars, fraud, political instabilities, financial crisis with nearly melting the financial system, new technologies changing whole sectors… To me that seems just too much to get the numbers only even „approximately right“ with that concept (this is not saying Viking or anybody thought this would be possible; just saying). Trying to pinpoint the exact compounding rate until 2038 I personally would definetely end in being precisely wrong. Okay, so how do we get it „approximately right“? I don‘t know of any other concept than looking for an endurable moat in any company. If you find that endurable moat it‘s hard to get a really bad outcome over 15 years. Even if you pay a bit too much. Here and elsewhere have been some discussions, if Fairfax has a moat or not. „Is it again the old Fairfax?“ is a question that arises here again and again and my reading is, that this in larts refers to the moat wuestion too. Getting that answer wrong one looses a lot of money, either by investing too much or too less or by selling too early etc. If Fairfax had an endurable moat and looking at the valuation, than - from my perspective - this is one of the five or ten best investment opportunities in a lifetime. So I thought it might be an idea to discuss that point here more broadly and to begin with here‘s a list of points why I think Fairfax has a moat. I‘d really appreciate others sharing why they (don‘t) feel there‘s a moat, as it helps increasing (at least my) learning curve: longterm outperformance - 19% per year over 37 years in book value growth. That‘s a bold indicator. The outperformance is just too big and lasts too long for being just luck. Prem is from Graham and Doddsville - Buffett laid out, that value investors outperform the market. Prem is clearly a value investor. He‘s more old style than others including Gayner and Buffett. Integrity of management. Prem has a lot of „skin in the game“. He‘s clearly not a phony. He has his own ideas and goes his way, even if nobody applauses him. As far as I know, he likes what he does more than living an easy life. I trust him. The business itself: Fairfax clearly is in the footsteps of Berkshire. Yes, Prem has a different style. But still Fairfax is build on the idea of compounding through float investing in combination with equity invested in businesses (stock market, wholly owned, …). This general concept as a basis to me seems totally reasonable to lead to outperformance. Buy an etf with your equity on the s&p500 and invest the float in bonds… Have a combined ratio below 100… and there you have the outperformance. Okay, Prem has been really different with combined ratios of 115 in the early years, and the macro bets… Okay, okay. Still: The general concept was being a value investor (in comparison to growth, momentum or other styles) and invest a bigger portion of the equity in equity and not into bonds. (And btw: What does it tell us about Prems future performance, when he just outperformed the market that much in the early years, even though the float was so expensive and has gotten so much better / higher quality since then?) Fairfax has changed to the better and has gotten even more Buffettesque: „No more shorts“ Combined Ratio: in the first 20 years, Prem outperformed the market the most, allthewhile the CR was bad (and sometimes really bad!). Now Fairfaxs insurance businesses are profitable and most of the time really good and better than the sector, for over 15 years. The Fairfax insurance business has widened its footprint to other continents and will widen even more. US, Western and Eastern Europe, India, Asia, Africa, South America, … So even though the insurance abroad is really small, there’s a worldwide diversification of risk at the horizon. Even though really small, they are growing stronger than the North American and wordide insurers alltogether and he‘s buying more (like GIG) Okay, let‘s play the advocati diavoli: „Prem has lost it. Look at the last 10+ years. No outperformance to speak of.“ The answer is easy: Interest rates were low. That hit Fairfax in two ways: First, no income to speak of from bonds. And indirect the low interest beared the hefty outperformance of growth versus value; that was clearly a bigger headwind for Prem as for Buffett or Gayner (both more on the GARP and/or quality investing site), as Prem is clearly more like a classic value investor (buying the ugly - in greece when everybody was fleeing, Blackberry… so low pb and pe ratios, not exactly cigar but investing, but „buying cheap“ is more important to Prem than to Warren or Tom m). So some may find it being just an excuse, but in my analysis I think Prem has been in the worst environment ever for over a decade. You might say, talking about „the circumstances“ is a typical excuse of someone underperforming. „It‘s always the circumstances.“ I know I know. Still to me it seems reasonable in this case. Look at insurance as a sector, look at Buffett or Gayner. They all left the S&P 500 in the dust in the (70ies), (half of) the 80ies, 90ies and to a lesser degree until 2007/2009. And since than, they are all about the same, a bit below the S&P500 or a bit above. But none of the three compounded with a cagr of - say - 5%, 10% or even more above the market over 10 years. Looking at the insurance business and it‘s logic what else should one expect within a timeframe of interest rates at 0%? I wasn‘t aware 0% would be coming and staying for so long. But in my eyes to everybody understanding the Berkshire concept it should be clear that higher interest rates are better than lower and well, cheap money helps growth investors, not value investors. What else? Okay, let‘s put that alltogether. In my eyes Fairfax has a moat. I think, Prem will be able to beat the market with his equity investments (so no change to history). I find it reasonable, that the CR will be better than the average insurance company. Below 100 if interest will be way above 4% for longer… ? Maybe, maybe not. Still I’d bet Fairfaxs float being cheaper than risk free treasuries. I have no idea where interest rates are standing in three years or five, 10, … Still I‘d say: Let‘s assume Prem just does as good as the S&P500 and compounds equity (stocks, dividends, wholly owned businesses) itself with a cagr of 10% over 10, 20, 30 years. That‘s below the historical average of 11.8% of the S&P500. And than let‘s say, he reaches a CR of 100 and earns 3% on bonds. Than Fairfax would compound at a rate of around 15%/year. To me that sounds like a reasonable, conservative base case. If the S&P500 will be flat over the next 20 years, than Fairfax probably won‘t reach that 15%, but I guess would have a good chance of outperforming the market. Or if Growth again outperforms Value by such a margin over such a long or even longer time. Or if the CR goes way more up or if the new normal for interest rates is near zero. So if you believe, interest will be lower again for a decade, you clearly will come to other conclusions and worse outcome. Still to me a base case should build on historical averagesand than you put in a margin of safety. Anyway: If Fairfax should have an enduring moat and if it would compound equity with a cagr of 15%, than you could buy Fairfax at a PE ratio of 7 today. I wouldn‘t mind buying a business, that doubles its equity every 5 years, for a PE Ratio of 14 or even maybe 21. In fact the market is way higher (like PE of 24 for the S&P500) and the average company won‘t reach an roe of 15%. 20 years from now, equity 16-folds at a 15% cagr. If Fairfaxs price tag would go up by 150 per cent tomorrow and I should bet who compounds stronger over the next two decades, I won’t bet on the S&P500.

„Has Fairfax really Changed“ - I Think Yes. But let’s notdig deeper into this topic. I think even if not: What a lot of people don’t get is just what Float + equity investing does for compounding: Fairfax has compounded Book Value at a CAGR of 19 per cent over 38 years - even after the recent lost years. Berkshire, Fairfax, Markel all have Compounded really high over decades. High enough, that this can‘t be luck. Berkshire Hathaway itself was a really really bad investment, being a textile business. Warren is an airoholic. IBM, Solomon all were bad decisions. Nonethess most people look at Buffett being an oracle. Yes, Prem hasn‘t been brilliant 100 per cent of his decisions. We should discuss this points, of course. Still there have been a lot of brilliant decisions. He bought the pet insurance business somwhere in the 2000s at around 40mn and sold it for 1.3bn dollar 15 or 20 years later. That‘s a factor of 30. (I might be wrobg with the exact numbers, but I am sure about the direction). Just luck? The TRS - just luck? The handling of the bond portfio in recent years - just luck? Digit - just luck? Bagalore - just luck? All I want to say is: In my eyes you don‘t get the overall picture by ONLY focussing on the bad decisions. And the second point is: It‘s not random, that Berkshire, Markel and Fairfax have compounded so strong over 35 to over 50 years. And it‘s not random, that all three haven‘t left the S&P500 in the dust in the years with no interest rate. I am pretty sure you won‘t find another decade, where all three have compounded their book value that bad in comparison to the S&P500 chart. Maybe Berkshire 1999. Fairfax stock chart eas more up and down, but I refer to the book value growth.

Very exciting discussion between @Viking and @Munger_Disciple. Thank you! Maybe some thoughts on this: In the end, Munger's approach reminds me a bit of the early Buffett of Cigar Butt Investments. Of course not really, because Munger is also interested in the PE ratios and not the liquidation value; but Munger just insists on a very cautious assessment of the earnings, also sees no moat, and thus consequently focuses very strongly on the "margin of safety"; and especially this point reminds me of Cigar Butt. Viking, on the other hand, I often understand to mean that with the many in-depth analyses of the individual parts and the many changes in perspective, he ends up - in my perception - shedding much more light on management and its capabilities, and thus, in my view, the overall picture evolves of a value-oriented company that has become increasingly well-managed over the years and that uses "float" as leverage. Whereas decades ago, CRs were regularly extremely poor relative to the market, Fairfax has averaged a few percentage points better than the market over the past decade. Thus, Prem is following much more closely in the footsteps of a Buffett or Gayner at this point. Fairfax has had by far the strongest premium growth of the top 25 insurers over the past three years. Many investments in India, Greece and the U.S. have paid off or are performing well right now. And so on. And then Viking also builds in a Margin of Safety (one that I personally think is sufficient and reasonable!), but just less conservative than Munger. So the picture that emerges is one of many positive individual decisions that form an overall picture of how Fairfax has changed after 2016. Viking's number analyses are important, but a second layer (management, moat) is forming, and I personally read a strong case for management and the presence of a moat above all else from the mosaic of many individual analyses. And at the end Viking also builds in a Margin of Safety, but to show a possible, conservatively realistic compounding perspective it is lower than Munger's. Both seem perfectly legitimate and consistent to me. They are just completely different methods. Gayner explained in a podcast some time ago ("the evolution of a value investor") that he now pays much more attention to the development of a company than to its current state. In a sense, he said he is much more interested in the corporate movie that is being created over time than a still image (or something like that). If you have a company with a moat, the best way to recognize it is in a movie, that is, in an analysis over a longer period of time in the past, than by looking at just one point in time. I was very attracted to the idea. It is probably rare that a company can already be considered cheaply valued without a moat and it (possibly; tbd) also has a moat on top. Otherwise, there would probably not have been this exchange here. Either way, there is a lot to be said for either a good investment or even one along the lines of "Once in a Lifetime" . We will see.

Spot on. And it's not only better positioned; it's valued way cheaper.

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.