RockNation

During the “old” days, the knights that protected the economic moat of the castle via capital allocation could lead to unpredictable outcomes, to say the least. You can bet that any company with unpredictable operating income - the market has a hard job to value it. Especially when sometimes the management takes part in some interesting capital allocation choices. Markets like and crave certainty. It was difficult during that time for Fairfax to be valued in the market as a GARP style stock. The market more so tagged it as a “value trap”. As capital allocation throughout the business and culture is ultimately what will drive long term returns. Especially in P/C, of course. With confidence not able to be built during that time, any outside investor would most certainly be at a disadvantage in trying to build enough confidence to put a large amount of their net worth in Fairfax. Culture inside the moat after all does have the potential to narrow it instead of widen it. I remember reading in one of the more recent annual letters, Prem wrote: “mistakes that will never happen again”. You could begin to put together the honest reflection and outlook to allocating capital for a future when the current knights were no longer around to widen and protect the moat. You can tell Fairfax has a culture that understands its economic moat and what it needs to do. It continues to prove this to market and its shareholders. Decisions being made now are certainly with a steady hand, paired with what they did build over those years.

@Viking Thank you. Excellent reference to Peter Lynch that is exactly what my thought process involved even though I failed to mention it. Strongly agreed. Management has been on point. Hitting the ball out of field on every inning since Covid. “New” Fairfax as you have called it. Strongly agreed. This is still not reflected in the valuation. Fairfax still trades like it has an issue or that its earnings will be highly inconsistent/volatile.. or that management will drop the ball. The market is not yet used to being able to value the company off an operating earnings stream. This is changing - without recognition to this by the market for managements recent actions, or for recognition of the future cash that Fairfax will be able to produce, and future decisions of management to drive more balls out of the field. It is still valued with hesitancy regarding its future. How so ? The current multiples are one thing. The future multiples are another, getting those right is where the fun begins. The current multiple reflects very low assumed future growth in its cash flow. Even almost a “stagnant” valuation. It doesn’t trade like a “quality” company, yet. I have seen portfolio managers discuss Fairfax as a “stock they missed”. When asked about it now as a buy the rhetoric is “we’ll se what happens”. Many who consider themselves to be “professional analysts” (and decorated as such) also still write about much “caution” again on having “missed Fairfax”. They have been saying this for years. Fairfax is slowly slapping them to a new reality. But… are they not supposed to be experts on valuation ? Whats happening ? 1) to much rear view mirror driving looking at earning streams. 2) not being “business analysts” (as Buffett would teach us one needs to be) number two is where completely missing managements home runs, the business model, and failure to understand the managements ability to take advantage of dislocations and opportunities in the future. As they have proven very well to be able to do. Instead the answer “we’ll see what happens” is a lazy way to ignore all these strengths in the thesis. Time is ticking though, like the ticker has been ticking. For those institutions, ignoring this reality, what are they going to say in 2-3 years ? 7 years ? Are they waiting for ZIRP, an unprofitable soft insurance market, a massive capital allocation mistake all at once? It’s awfully dire. Imo the valuation of Fairfax is only beginning to show hope for more sunshine down the line, this means your downside is still well covered even if the world does not play out even close to perfect from here. The cash produced by this company is likely to be much more years down the road. The margin of safety at current valuations is still very much in tact. Unlike much of the markets “quality” comparables or companies in general. “New” Fairfax, is quality unfolding over time.

Aside from the continuous and amazing break downs and analysis in Fairfax. One of Vikings most important points to not overlook is the change in investment style of Fairfax from “turn around” to “value” to “quality”, and how investors who identify as pure value really need to pay attention. This is something I have been breaking out of over the years. We have all had investments that have transitioned through the various investment styles over time,. right before your eyes you watch multiples expand and you can’t imagine buying more shares at this new re-rated market quotation. This is what has been happening with Fairfax as Mr. Market gains confidence in the consistency of earnings, begins to have more “proper” historical earnings to go off with each passing successful quarter - and realizes that Fairfax is trading to “cheap”. Fairfax has low institutional ownership compared to companies of its size trading on the market, wether it gets added to the TSX 60 or not (the 60 add another long term tailwind) the consistency, growth and quality in the operating earnings stream will/should continue to generate the type of numbers that will have institutional investors who control many billions look at its previous say 5 year track record, look at its weight in the index, realize they are very underweight this stock, and the “demand” for shares are very likely to increase. These institutions will have to buy from someone to get the exposure. We are in the midst of creating the new “historical” track record institutions will use and build into models, imo. Of course, many people have been hesitant, skeptic, nervous and even extremely pessimistic about Fairfax, and some peoples negative hopes and dreams are finally thrash now as the company continues to execute well and shut the haters out. Without a spotty track record, shares would have spiked much faster. So the net acquires over the years and more so recent years should be thankful really. As the thesis proved correct and you have been able to buy at a still cheap valuation. To me even at this date to establish an “exit price” or “exit multiple” is too simplistic and.. even early. The thing is, we all know once the market gets something into its teeth the re rating of shares can be extremely large. If the market decides to re rate this a bit faster then you’ll never catch the share price… (then you might get the chance to come here and say “okay now its frothy”). It’s been hard enough to keep pace the past couple of years however. With important earnings stream locked in, the near term results and investment thesis is of course an extremely good bet going into 2025/26. No guarantees of course, as everyone has heard - but good enough odds for me. It is not only value that is important - but value/growth/quality all in one package, and it’s a rare combination.

I stumbled across this board during the MW fiasco. Since then it has been a pleasure to see like minded individuals engage and react to the continuing market recognition and the unfolding of the business affairs at Fairfax. I browse Seeking Alpha (where I go by SnowOwl) but you need to be super careful about who you engage with or what you read there. CoBF has a higher contributor quality (or views I am more aligned with?) I purchased my first shares of Fairfax in 2016 but only began to invest heavily over time as the thesis got better. Congrats to the many Fairfax longs here and I am thankful to discover this board. It is a great resource and the conversations that take place here can contribute positively to any rational investors mental and thesis framework.