djokovic1

Yeah the higher yields go, the equity book has to do less and less for Fairfax to be a great investment from an already comfortable starting point. Additionally two of the biggest equity investments, Eurobank and TRS are positively geared to higher rates.

I agree with most here (strongly so) that the beauty of investing in Fairfax today is that you don't need to rely on above average equity returns for realising great ROE and compounding given that other income streams are locked in and the inherent investment leverage in the business model. For me that point is moot. I still find it a useful and interesting exercise to separate out the source of the returns as the data is there. At a high level, figuring out fixed income returns vs everything else. The everything else comprises of equity returns including TRS (positive), CDS (positive), hedging (big negative) + realised gains on assets held on book value which are worth more. The below analysis obviously doesn't incorporate the potential future returns from assets for example Poseidon and BIAL held at Book value which will show up sometime in the future when realised at market value. @Marco Van Basten Dude ...if you like to be called that I have to thank you for your push back because you are right, I was being approximate in my calculations for efficiency and you pushed me to be more specific. I still think you are very wrong in assuming Fairfax's non fixed income investments have underperformed the S&P over the long term, hopefully the below will help. I was able to go back to 1996 using CapIQ and Claude, so 30 years to calculate specific FI returns by year to 2025. I also have the total investment returns from 1996 to 2025. Using those pieces in the puzzle you can approximate the returns from everything that can't be attributed to fixed income for the 30 year period. Here are the results: 1996-2025 (30 year period) geometric annualised returns Total investment return: 7.0% Fixed income return: 3.9% Average 5 year fixed income US treasury yield: 3.2% Equity return + everything else (TRS, hedging, CDS): 16.6% S&P Return including dividends: 10.3% Note: this is assuming 75% / 25% fixed income equity split which I think is accurate. If you want to be conservative and use a 70%/30% split, the equity + other bucket return goes to 14.4%, still well well above the S&P return. The fixed income returns are higher than the average 5 year fixed income yields for reasons pointed out by Marco ie higher yielding FI, but not by much and the overall conclusion remains the same as my initial intuition with rougher assumptions. For anyone who says Fairfax is mediocre investor, these long term results should provide further evidence over and above the stock price performance that they know what they are doing (clearly a lot of people still don't get it! as they judge Fairfax based on the lost decade and don't realise the handbrake of hedging is gone). Additionally these stellar returns are after the impact of the lost decade and hedging in there. I too find investments like UA and KW questionable today. But in a similar vein there is also zero probability I would have invested in Eurobank 10+ years ago or Poseidon or Orla Mining and missed big gains. The best non biased evaluation of an investor is their long term track record. The above is further evidence for trusting in their process for value creation and compounding.

And I 100% agree with this. I am lucky to have spent some 1-1 time with him and discussed investments with his team. will also be seeing /meeting him at a conference tomorrow. Excited! His book is my investment bible and assessing capital allocation is the most important aspect in my investment decision making.

I agree it’s hard to be precise but I find it an interesting endeavor. Personally, I would include the CDS, hedging, TRS all of it and not exclude them. They were decisions taken by management at the time to maximize risk reward of the model. So I would first calculate the all-in number and then if you wanted to strip out specific items you can. I don’t think it would be impossible to approximate a rough FI returns using historic financials (though it will take time and I may make an attempt), and if you have that number you will also have a directionally correct equity return. It would be nice if management did the hard work for us as I’m sure they have the numbers ~15% CAGR of equity compounding for 40 years is mind blowing and so is 19% of bvps and share price compounding for 40 years.

Do you have a more accurate number? Where does the 6% come from precisely? Even if 5 year bond yields average 4.5% over the last 40 years, Fairfax has always run much shorter duration than that. How do you factor that in to your analysis? Btw, even with your 6% assumption the equity returns are 12%+ which beats the S&P over 40 years.....can't argue with that? Why didn't Buffett do this?

I agree I am a big fan of buybacks too given where the share price is. The good news is assuming a 10% forward equity return you can estimate a ~15% forward ROE, assuming a 15% forward equity return you can estimate a ~19% forward ROE. And this is before any additional unlock of latent value eg. Bangalore airport and situations like Poseidon where book value << market value.

Btw @Maverick47 I just had Claude estimate the Geometric return based on the AGM chart, and historical annual reports and given the low volatility in returns (due to high FI %), it calculated the Geometric return is 7.5%, not far off from the average.

Yes I agree @Maverick47 good point, I had thought about that and yes its only a rough approximation. For example, on the other hand, their fixed income return in the calculation is likely overstated as i) the realised fixed income yield would be less than the approximated 5 years Fixed income yield given short duration cash held will reduce the overall yield. ii) There have been times when they have been significantly short duration relative to their liabilities (i.e assuming the 5 year yield is overstated for those periods). That would imply an equity return higher than I calculated above. In aggregate, their equity returns may be somewhere 15-20% annually over 40 years but I am quite confident to say they have trounced the S&P500 over that period.

Average total return of their portfolio (FI and equities) over the last 40 years is 7.7%. We don't have a direct number for the equity return but can approximate it. Last 40 year average 5 year fixed income yield is 4.2%. Lets assume Fairfax earned that yield. Split between fixed income and equity book has changed over time but I think 75% vs 25% is a good approximation for historical average. So, 75% * Fixed income return + 25% * Equity return = 7.7%. Lets assume FI return = 4.2% so equity return over 40 years = 18.2% Note that calculation is rough but S&P return over 40 years is 11.5% with dividends re-invested. So unless you meaningfully disagree with my rough calculation, over 40 years Fairfax equity returns have trounced the S&P 500.

Once again thanks @Viking, so much useful information in there. I am going to pitch Fairfax at an investment conference (if all goes well) and your compendium will be a big resource that helps build that.

That's true but I also think there is truth to the fact that the CDS success made them think there is alpha while reducing downside risk in taking big macro positioning bets (I think @Viking's great post about the lost decade alludes to that too). You can find great single stock investments even when the market is overvalued as a whole, as they have done recently. You don't need to short to reduce risk, just focus on finding undervalued securities. The painful costly lesson of shorting seems to have made Prem and team come to the right conclusion i.e don't short. It's just a very hard game to play and the odds are against you.

This is the crux of it. Shorting equities as a long term strategy can be fatal. And I’m pretty sure it won’t happen again at Fairfax.

Love the pace of buybacks. Think June will be an aggressive month too (if share price stays here). Would expect to get close to 8-9% for the full year if share price remains depressed. Or the share price will go up. Win either way!

I think quite high. The simple logic being 15%+ compounding should trade at 2x+ book. As I have said before, I think it's relatively unknown or under researched outside of Canada based on my experience talking to investors about it. No reason that should be the case. Just a matter of time. Of course, a big cat year or bad equity performance (both possible in an individual year) can delay that multiple re-rating.

Thanks, if I had to guess I feel we may not have to wait more than 1-2 years of continued compounding. You never know when the inflection happens but when it happens it happens all of a sudden and everybody is then rushing to buy the momentum. Good news is, we don't need it to happen for great returns as that's on top of the 15%+ compounding.