Gamma78

had written soemthing but then realised the article was a decade old.

Looks like markets are in for a little bit of a storm - I really really hope Fairfax takes advantage of this bigly. You don't get too many chances like this.

By his logic all insurance companies are no-moat. Yet the sector has not done badly long term. And some standouts (Chubb, Fairfax, Berkshire, Markel) have done spectacularly well. The lack of curiosity as to understand why that is is the marker that defines his lack of intellect.

Looks like Fairfax has repurchased 850k shares in the first 6 months for just shy of $ 1 bln, and now has 22.2 mln shares outstanding.

Would love to see more stock repurchases. Loved it when they repurchased 10% of the outstanding a couple of years ago below book value. Even at these valuations today it should be a no-brainer. There is a lot of talk about Singleton and Teledyne - I certainly hope they go this route with the valuation where it is currently. I'm not quite seeing them move exactly that way just yet though. After all, they just made a big capital allocation decision on Country Sleep. I'm fully prepared to give them benefit of doubt given the moves they have made recently. I would be lying if I said I understood that as a better deal than buying back their own shares.

Thanks for your response @Viking your points are really improving my understanding of Fairfax and the investment I have in it - which I love! It's deepening understanding like this that makes it considerably easier to be an ultra long term shareholder, which is what I want to be. The more you understand the less short term issues freak you out, and you can let compounding work its magic. Your point of "shrinking" the organisation via share buybacks, meaning that size doesn't become the same barrier it did with berkshire is an interesting one. And compelling. Basically its like a hedge fund returning capital to investors to be able to continue its strategy. Yes, I can see that working. For a while. Though I suspect that a continuous repurchase of shares leads itself to valuation gaps closing over time, and hence the size issue coming back to the fore. For that not to happen, Fairfax would have to continuously trade at a discount such that share buybacks are a viable and value enhancing option. But the medicine of buybacks is likely to cure the malady of discount, so that arbitrage will wither away. As I said though in my previous post, we are in the early innings. There is a long way to go yet before size restricts opportunity. And yes, share buybacks extends that time.

What I mean is, you are seeing the Berkshire / Fairfax strategies as trade-offs. I see them as being on a continuum, where Berkshire is later stage and Fairfax is earlier.

Well in Stelco, to your point, management is a moat. In Fairfax's own case, culture (which is a follow-on from entrepreneurial management). I note that a lot of Fairfax deals are really about partnering with a savvy operator/entrepreneur on an opportunity. Stelco was that. I think Sleep Country is too. So is BDT, Poseidon. In many ways Fairfax India is like that too. Fairfax really seems to almost identify the entrepreneurial partner first and the opportunity second. They believe in the management as a moat piece. Your point of appreciating the differences and embracing them is fine, but I would note that Buffett was not a "buy and hold forever", moat driven investor earlier in his career. He was much more like Fairfax. I think the evolution to "buy quality and compound" comes as a reaction to size. After a certain point of size, finding the marginal transaction becomes hard. And at that point you better have compounders, otherwise buying and selling just won't get you there. Noticeably, after "compounders" he is now going for infrastructure because it is just about the only thing he can chuck money at that moves the needle for him. As Fairfax grows, I think it is an inevitability we will see similar shifts. But we are still in the early innings of Fairfax.

Distribution would be a moat (so retail footprint) and scale of deposits. Retail deposits are the lowest cost financing a bank can have (though they carry their own risk). Replicating Eurobank's retail footprint and deposit scale for a newer entrant is tougher. Brand I guess would be a third, but I think that is actually very tied to retail footprint. I think that is about the biggest moat a bank can have

"So much advantage in life comes from being willing to look foolish in the short term". Was thinking about this sentence tied to a lot of Fairfax's portfolio. Also, just a great blog: https://fs.blog/brain-food/august-14-2022/

I don't think the issue here is that people think Sleep Country is a terrible business. It isn't. It's grown reasonably well for a very consistent period of time. Mainly it's hard to immediately see it as a "great" opportunity. But I'll keep an open mind and willing to learn more as the investment unfolds. The recent spate of investments are all "in partnership" with a great founder / owner / entrepreneur. I imagine here the quality of the existing ownership played a role too.

On reflection I think at specific points in the past 10 years Prem and the team have made calls on positions keeping in mind a "political backdrop" as justification for the investment. The "animal spirits" unleashed by Trump. The Modi narrative in India. The "help Canada" position on Blackberry (and some other investments as well). We even heard it as a reason for investment in Eurobank (Greece political backdrop). I suspect some of this comes from investing in bonds, where macro conditions are taken into account by definition. I would much much prefer that on the equity component Prem and Fairfax act like Warren B. The "political backdrop" is not the main consideration (or perhaps is even irrelevant). Look at the quality of the company and the compounding it can have over time first and foremost. The problem is that in some ways we've discussed this on the board before - and the concept of "quality" can get murky. Right now to me it looks like "quality" in the eyes of the team at Fairfax is determining who their entrepreneurial partner is (Sokol, Byron Trott, etc). Though I don't always understand it, I am A-OK with that.

Yes is FIH is receiving the fees that would be interesting. Can't argue the point in math. Personally I still think too cute. FIH receives fees from LPs and then pays management fees to FFH.

tbh the structure can work. But would FIH be the GP or would it be FFH? And that question would merely be the tip of the iceberg. My point is there would be too many "cute" arrangements that would be potentially distortive or look really weird. The 2 / 20 structure is already enough (to my mind). It's not that it can't create value as a structure (it can) but the sidecar would lend itself to too many things I don't like. Devil of course is very much in the detail.

someone (I think on this board) raised the prospect of potentially creating a sidecar fund where FIH is effectively the GP and attracts funds from LPs. But man, that would be a further complication on an already complicated structure between FFH and FIH. I hope they don't do that. Which however does leave us with the limited options of equity issuance, IPO of BIAL / sale of assets

@rajpgokul wow thanks so much for those comments on IDBI - that was a learning experience for me. This statement has my mind in a whirl: "IDBI bank has an overall cost of funds of 4.3% (almost 280 bps below Indian GSec) for its 34 billion USD of liabilities. This itself would allow it to earn ROA's of 1.5% without taking any credit risk on their balance sheet." Wild! Just wondering - you mention that private sector banks will continue to take market share from public sector and grow 16-20% compounded. Who do you see being the biggest winner? HDFC again as in the last 30 years? ............asking for a friend

"not sure we can just assume that all repurchases will be done at prices or multiples available today" They better hurry up then!

Yes all your assets above a $2 million threshold are deemed to have been sold, hence you pay capital gains as an exit tax. Which is crazy. I haven't seen any other country do that (though the UK is trying to do that now with inheritance tax liability for people who decide to leave the UK).

Ok noted so there are about $4bln over 2 years of unallocated cash earnings which should allow faster compounding if invested (even if invested in boring old bonds), net of any one time investment gains. Yes this is likely to be conservative, so book growth should beat the 15% mark. Depending on externalities, perhaps even handily.

@Viking this may be a silly question - but apart from the repurchase of shares in your model (which I think is about $700 million or so at today's prices) the residual earnings from the forecasted years are accumulating cash on balance sheet? Or what else? I mean, if all invested in bonds wouldn't that itself throw off a couple of hundred million per year incremental in interest & dividends? Am I missing something?

Wow that is a really great way to capture the change. The thing I take away really is that while some believe there is a risk of results reverting to the previous time period's averages, the reality is that in that world of 0% interest rates float was worthless and interest/dividends were unrewarding. So even in a softer insurance market results should still on average be better than the past. Let alone the stellar results we are seeing now in a hard market. Someday that will be reflected fully in the price. Someday.

I completely agree. Which is why the results of this election are in no way a barrier to development and perhaps increase resilience over time of the growth story. India's growth is fascinating and very significant. But then again it must be - because it has a huge population of young people that need jobs. So growth is literally the only way forwards. @Viking - India doesn't really need to "choose" capitalism. It did that ages ago. Every capitalist society has its restrictions in terms of how open the economy is - the US has them (ask Chinese companies....). Europe certainly does (and gets a lot of shit for them). China has them in spades. So does Japan, Taiwan, etc etc. There are very few completely laissez faire capitalist economies - if any. India is on its own path. "India needs to become capitalist" is old hat. That happened around 30 years ago. GDP growth since 2000's has consistently been pretty stellar - only drowned out by China's even more stellar growth in the early 2000's. FDI has been steadily increasing (across every government type, you name it). Restrictions have been steadily and continuously lifted. Perhaps not at the pace that some investors would have liked (particularly Indian billionaires, who frankly love having close friend they can fawn over in the government - again no matter what stripe that govt is). But continuously nonetheless. We will still see very significant growth in India for a generation. And all of Prem's remarks will still hold true (for example regarding expected growth of the banking sector). People tend to confuse their own personal return (I want an airport IPO this year or to buy a public sector bank tomorrow) with the overall issues of the country. Maybe things slow down, maybe they don't. But the Indian equity story is still strong as hell. Don't sell now, for crying out loud. This party is still just getting started.

"Need a strong leader to get stuff done" is as alluring as it is dangerous. Once the dust settles people will see this for what it is - a relatively minor setback in the grand scheme of things. Firstly because power hasn't exactly shifted. It's the same coalition in power, with a different dynamic. Who knows, maybe even better longer term. Markets always overreact to short term news. if they didn't we wouldn't be here selecting individual equities, we would merely buy indices. Economic development in India will continue, perhaps not on a vertical trajectory. But onwards and upwards as it has done, with fits and starts - compounding and increasing since 1990. I for one did not start investing in India only in 2014. And frankly I did very well after that. But I did very well before that too. Buffett says that America has a secret sauce and that of course politics over time swings in roundabouts - but the ultimate trajectory is upwards. It's why he says never bet against America. The Indian story of opening to the world and truly creating significant and participatory wealth started very small in 1991. Since then it has continuously compounded. It will continue to. This is still going to be the Indian century. If your thesis relied only on one man, it was a very very shallow thesis. This is really no great shakes.

There is a narrative that for privatization India needs Modi. While he has been a good accelerator to many development issues (and infrastructure in particular) make no mistake: India is a strongly growing country in of itself, no matter which party is in charge. And it has been a high growth country pretty much since 1990 with alternating governments of different types and stripes. That is the real testament to the strength of growth. Zoom out and you see that this result works just fine over time.

15-30% is something I would actually characterise often as de-facto control, in particular if vested in one person or family. In particular frequently rights on the shares are slightly distinct from quantity. I hear your argument, and I would say that family control is not unlike leverage. Cuts both ways. In the right hands it explodes value. In the wrong hands it decimates it. I am comfortable with Prem, the Google-guys, Buffett, the Agnelli family and Arnault because they have control and a long history of rational decision making. To me control in their hands is a competitive advantage.