steph
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Posts posted by steph
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The longer it lasts the more ridiculous he becomes.
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....and 15 times earnings. FFh could double and still be cheaper than WRB.
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What if you manage a fund?
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I used to agree with this, but much less nowadays. Reason being that with BRK you also pay 1,4 times the value of Apple and other huge listed portfolio + huge cash pile. You don’t pay the real value of the unlisted companies, but you pay a big premium on cash and listed portfolio that has become a very big part of BRK.
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57 minutes ago, Parsad said:
Again that comes back to Fairfax's reporting requirements as a Canadian reporter and Berkshire's reporting requirements as a U.S. reporter. Under IFRS, you are required to mark assets at fair value or comparable value. Berkshire hasn't adjusted See's Candies cost since acquiring it I believe.
It's why Buffett says that Berkshire's intrinsic value is far higher than book value. That analogy cannot be used with Markel or Fairfax, where there isn't massive amounts of undervalued assets on the book. While both companies should trade higher than book...1-2 times, Berkshire probably should be trading between 2-3 times book. Cheers!
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Thx Haryana!
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Somebody on the board knows if there are any other interesting meetings/presentations the day(s) before the annual meeting? Thx
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@Vikingthe only thing that will certainly happen in the coming years, but we don't know when, is a high catastrophe year with very bad combined ratios. Business as usual, but it will impact your 25% compound.
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Not so sure that FFH book value is more inflated than competitors. At Markel the difference between book and tangible book is also quite big. And with Berkshire you have a lot of hidden value, many companies that are worth much more than what book says, but on the other hand you have today, more than ever, 200 billion in Apple, 150 billion in cash plus all other equity holdings for which you pay 1.35 times book.
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You don't only pay a higher P/B multiple because of high expeced return on book. You pay a higher multiple because of the notion of quality. Quality company, quality management,... . Fairfax got a low P/B because of distrust towards management and the idea that FFH was lower quality. With what they have just done I sincerely do believe that the market will reward them again with a P/B more in line with quality competitors. 1.3 to 1.5 times would be reasonable. So if after 2026 rates are lower and ROE will be somewhat lower I am convinced the P/B could be higher as long as they continue doing sensible things.
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Very interesting discussion. Thx!
Whatever the outcome in 5 or 10 years, Fairfax is today a quite unique risk/return investment. Investing is about probabilities. With Fairfax today you have a bond portfolio consisting of mostly AAA paper and some other quite secure income that will give you 10% for at least the next 3 to 4 years and probably longer. You can buy this at book and all the rest is optionality : good combined ratios/Eurobank/Digit/buying back minorities/ even higher interest rates/ good reinvestments of all this cash coming in/ rerating to a higher price to book….and many more possible surprises.
In my eyes, for the next 5 years a certain 10%, a high probability 15% and why not even a good chance of even higher returns (if the market falls in love again with Prem
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I have been a shareholder for 18 years and have made it a very large position two years ago because the risk/return compared to other opportunities was just unique. A bit like Berkshire at one point around book value when the overall market was expensive.
I have always been amazed by Brian Bradstreet and I am surprised he is not better known. He is a true legend. I suppose Bill Gross had a good track record in bond investing, but nobody comes even close to Brian’s track record. And in the end, fixed income is the most important part of the portfolio of any insurance company.
Even though the stock is up nicely, I still believe Fairfax is one of the best risk/rewards today. Never have they been in the luxury position of having close to 10% of market cap coming in annually, for at least the next three years, from interest on AAA treasuries. Imagine what they will be able to do with that….
My reasoning is the following: Book at +/- 900 at the end of this year. You add 100 every year, for the next three years. End of 2026 book is at 1200. By then people will finally realize that FFH is worth at least the same multiple as most other insurance companies. Let’s take 1,25 times book (still reasonable). Target stock at 1500 in three years. Return of more or less 20% annually.
In the meantime we will probably have to go through bad news regarding Blackberry (which will make a lot of noise). There will certainly be one bad insurance year. But I am convinced that there will also be some very nice surprises that will more than make up. So adding 100 a year to book value is very reasonable in my opinion and 20% a year a high probability outcome.
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My reasoning is quite simple. Market Cap is 21 billion. Total portfolio is 55 billion (equity and float). If float is for free (combined ratio = 100) and they average 6% on the portfolio for the coming years…that is 3,3 billion before interest expense on debt and corporate costs. But let’s assume we roughly arrive at 12-14% return on actual market cap. If you then assume a combined of 98 for the coming years instead of 100, you can add a 2-3% return a year.
So from here (with the higher interest rates) I expect they will ‘easily’ achieve the 15% return on book. Therefore at book I estimate it is much too cheap. 1,3 to 1,5 times book would be a very decent price. Margin of safety when buying today is very interesting.
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I also do agree that expecting 94 combined ratios long term is not realistic. 97-98 would be nice. On the other hand I hope to see some nice surprises on the equity side in the coming years: Digit, Eurobank, Atlas,....whatever....and not much credit is given to this possibility.
In the meantime FFH still trades at what is a historical very low valuation compared to book even though it has never been as solid: great insurance activities (used to be very average) and a AAA bond portfolio. A 1.5 times book seems acceptable today. This would be more in line valuation compared to the past and compared to competitors. And FFH is today better, stronger and more interesting growth profile than ever before.
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thank you Viking for sharing all your work with us. Much appreciated.
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I am not sure we have to see this as a +5 billion loss. If they couldn't take the hedges and shorts they would have sold their entire equity positions because they were so bearish at the time. In my eyes the real loss is the difference between the performance of their equity positions and the shorts & hedges. And as such one could argue that it is the huge underperformance of their equities relative to the market that cost a lot of money.
I take the opportunity to thank you Viking for all the amazing work you to here.
16 hours ago, Viking said:“Those who cannot remember the past are condemned to repeat it." (George Santayana)
Given it has come up in discussion on this thread, I thought this would be useful to review what has to be Fairfax’s biggest ever investment mistake: the equity hedges.
Why are they Fairfax's biggest investment mistake? The ‘equity hedges’ were in place from 2010 to 2016… and they caused investment losses of $4.4 billion; an average loss of $628 million per year for 7 straight years.
Shareholders equity in 2010 was $7.7 billion. So losing $628 million in ONE YEAR was a big deal. And, as a reminder, this happened, on average, for 7 straight years. Book value per share was $376 in 2010 and in 2016 it has fallen to $367. Yes, Fairfax did pay a $10/share dividend every year so shareholders did earn a positive return over these years.
Why did Fairfax put on the equity hedge trade? They were afraid “the North American economy may experience a time period like the U.S. in the 1930s and Japan since 1990.”
From Prem’s letter 2010AR: “2010 was a disappointing year for HWIC’s investment results because of the two factors mentioned earlier. Hedging our common stock investment portfolio cost us $936.6 million or $45.61 per share in 2010. Our hedging program masked the excellent common stock returns we earned in 2010, of which a significant amount was realized ($522.1 million). We began 2010 with about 30% of our common stock hedged. In May and June we decided to increase our hedge to approximately 100%. Our view was twofold: our capital had benefitted greatly from our common stock portfolio and we wanted to protect our gains, and we worried about the unintended consequences of too much debt in the system – worldwide! If the 2008/2009 recession was like any other recession that the U.S. has experienced in the past 50 years, we would not be hedging today. However, we worry, as we have mentioned to you many times in the past, that the North American economy may experience a time period like the U.S. in the 1930s and Japan since 1990, during which nominal GNP remains flat for 10 to 20 years with many bouts of deflation.“
Why did Fairfax exit the equity hedge trade? The US presidential election on November 8, 2016.
From Prem’s letter 2016AR: “Unfortunately, the presidential election on November 8, 2016 changed the world for us, so we reacted quickly by removing all our index hedges and some of our individual short positions and reducing the duration of our fixed income portfolios to approximately one year – all of which resulted in a $1.2 billion net loss on our investments in 2016 which, in turn, resulted in a loss in 2016 of $512 million or $24.18 per share.”
But our sad story does not end here because even though Fairfax exited all of their equity hedge positions late in 2016 they continued with some short positions. From 2017-2019, Fairfax lost another $514 million on short positions.
From Prem’s letter 2019AR: “In the past, to protect our equity exposures in uncertain times, we shorted indices (mainly the S&P500 and Russell 2000) and a few common stocks. After much thought and discussion, it became clear to me that shorting is dangerous, very short term in nature and anathema to long term value investing. As I mentioned to you in last year’s annual report, shorting has cost us, cumulatively, net of our gains on common stock, approximately $2 billion! This will not be repeated! In the future, we may use options with a potential finite loss to hedge our equity exposure, but we will never again indulge anew in shorting with uncapped exposure. Your Chairman continues to learn–slowly!!”
But even after the mea culpa above in 2019 shareholders learned in 2020 that there was still one last mystery short position on the books. Only after another $529 billion in losses in 2020, did Fairfax finally come to the conclusion that shorting was a tricky business. Margin and unlimited losses can be a bitch, especially in a decade long bull market (S&P500 was 1,133 on Jan 1, 2010 and 3,756 on Dec 31, 2020).
And there we have it: Fairfax’s lost decade for shareholders from 2010-2020. Fairfax lost a total of $5.4 billion over 11 years. An average loss of $494 million per year.
From Prem’s letter 2020AR: “I said in our 2019 annual report that we would not short stock market indices (like the S&P500) or common stocks of individual companies ever again, and our last remaining short position was closed out in 2020 (not soon enough, as it cost us $529 million in 2020).”
So as they began 2021, Fairfax shareholders were finally able to close the book on the whole ‘equity hedge/short’ trades.
What was the cost to Fairfax?
1.) Investment losses of $5.4 billion from 2010-2020, or $494 million per year on average.
2.) Additional significant opportunity cost - easily in the billions.
3.) The massive size of the losses each year likely warped capital allocation decisions, especially 2010-2016 when the losses were larger.
4.) Long lasting harm to Fairfax’s reputation in the investment community.
5.) Exit of many long-term shareholders.
What went wrong? The size and duration of the position. The losses were massive. And they were allowed to go on (pretty much) for 11 straight years.
What explains the mistake? No idea. But my guess is hubris.
Hubris Comes From Ancient Greece: “English picked up both the concept of hubris and the term for that particular brand of cockiness from the ancient Greeks, who considered hubris a dangerous character flaw capable of provoking the wrath of the gods. In classical Greek tragedy, hubris was often a fatal shortcoming that brought about the fall of the tragic hero. Typically, overconfidence led the hero to attempt to overstep the boundaries of human limitations and assume a godlike status, and the gods inevitably humbled the offender with a sharp reminder of their mortality.” Merriam-Webster
Will Fairfax make the same mistake again? Well this is where things get interesting. Fairfax has stated publicly numerous times that they won’t make that exact same mistake again. To the best of my knowledge, they have never discussed publicly the failures with their internal processes that allowed such flawed investment to be made (in such a large size and for such a long duration). Did they identify the internal failures? Have they made the internal changes necessary to ensure it (a terrible investment decisions that results in another lost decade for shareholders) does not happen again? I’m not sure… I do think something changed at Hamblin Watsa around 2018 - and for the better. Their capital allocation decisions for the past +5 years have been stellar. And that will be the subject of a future long-form post, so stay tuned.
Summary:
As shareholders, I think it is important that we discuss/remember not only Fairfax’s successes but also their failures. I call it 'eyes wide open'. The equity hedges were an unmitigated disaster for Fairfax and its shareholders. There is no way to put lipstick on this pig.
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Fairfax's 2016AR:
Prem’s Letter: "Unfortunately, the presidential election on November 8, 2016 changed the world for us, so we reacted quickly by removing all our index hedges and some of our individual short positions and reducing the duration of our fixed income portfolios to approximately one year – all of which resulted in a $1.2 billion net loss on our investments in 2016 which, in turn, resulted in a loss in 2016 of $512 million or $24.18 per share."
"When we removed our hedges near the end of 2016, we realized a loss of $2.6 billion in 2016, but that included $1.6 billion which had gone through our statements in prior years. As discussed earlier, since 2010 we have had $4.4 billion of cumulative net hedging losses and $0.5 billion of unrealized losses on deflation swaps (which we still hold), offset entirely by net gains on stocks of $2.7 billion and net gains on bonds of $2.2 billion. The volatility of our earnings caused by our hedges and long bond portfolios is over – and as I said earlier, we are focused on once again producing excellent investment returns."
Equity contracts
Throughout 2015 and most of 2016, the company had economically hedged its equity and equity-related holdings (comprised of common stocks, convertible preferred stocks, convertible bonds, non-insurance investments in associates and equity-related derivatives) against a potential significant decline in equity markets by way of short positions effected through equity and equity index total return swaps (including short positions in certain equity indexes and individual equities) and equity index put options (S&P 500) as set out in the table below. The company’s equity hedges were structured to provide a return that was inverse to changes in the fair values of the indexes and certain individual equities.
As a result of fundamental changes in the U.S. that may bolster economic growth and business development in the future, the company discontinued its economic equity hedging strategy during the fourth quarter of 2016. Accordingly, the company closed out $6,350.6 notional amount of short positions effected through equity index total return swaps (comprised of Russell 2000, S&P 500 and S&P/TSX 60 short equity index total return swaps). The short equity index total return swaps closed out in 2016 produced a realized loss of $2,665.4 (of which $1,710.2 had been recorded as unrealized losses in prior years). The company continues to maintain short equity and equity index total return swaps for investment purposes, and no longer considers them to be hedges of the company’s equity and equity-related holdings. During 2016 the company paid net cash of $915.8 (2015 – received net cash of $303.3) in connection with the closures and reset provisions of its short equity and equity index total return swaps (excluding the impact of collateral requirements).
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23 minutes ago, Parsad said:
Update on shipping industry. Atlas was one of the few shipping companies to sign 3-5 year contracts when spot prices were high. They should come out near the top of the pile over the next 2-3 years. Cheers!
https://finance.yahoo.com/news/shipping-line-zim-gets-hammered-193702984.html
Hi Parsad, Atlas is a container shipping leasing company. Just like Aercap is for aerplanes. They will (normally) always lease for a number of years. ZIM is a container shipping company, with long contracts and spot contracts with their clients. ZIM is I believe the biggest client of Atlas. ZIM is known to be a very aggressive and not so high quality player in the industry. Luckily they made a lot of money recently. But the risk is that if the downmarket is long they will have a hard time paying Atlas.
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I have been a shareholder for 18 years and bought a lot more when Prem went ‘all in’. On two metrics they have done a wonderful job: insurance side and the fixed income side. Dan Bradstreet is just the best there is. What he has achieved over the last 30 years must be the best track record in fixed income ever.
My target is 1000$ end of 2024. So I am bullish. BUT there is one last hurdle that will hurt sentiment on this one and that is Blackberry. I don’t know the company but it seems to go to 0$ (when looking at financials). In my head I subtract this from book value. There are other positive surprises that will make up for this, but it will get a lot of buzz if and when this will happen.
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Dear Viking, I just would like to thank you for all the work you do and for sharing it with us. Very much appreciated!
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no...it's 10% of market cap...but closer to add 7% to book
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It seems this is just a tiny peace of written premiums. Should boost book value by close to 10%.
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Do you know at what price this was in the books?
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My belief is that when there is this rare opportunity of being able to buy an outstanding risk/reward investment that you know well, you have to go big and then let it run and don’t look at it too closely anymore.
Big returns are made if you let this high conviction do its job. I have been a shareholder of FFH for more than 15 years but went in ‘big’ (20% of portfolio) around 400 USD. I believe correct price is around 750-800 USD TODAY…this will be growing. With still many optionalities to the upside and low downside risk.
…and just imagine what could happen if one day investor sentiment gets positive again about Prem and the Fairfax team?
Unless there is really bad news I will not sell probably before we reach 1000 USD in 3-4 years I hope.
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14 minutes ago, Thrifty3000 said:
Would be nice to know what kind of annual interest payment is attached to that Odyssey deal.
if there’s no interest then this increases look through earnings per remaining FFH share by $4 or so dollars. (A very good outcome. Spending $40 per share to pick up a growing $4 per share.)
If the interest rate is in the 10% range then look through only increases by maybe $1 per share. (A good outcome if non-Odyssey earnings grow a lot faster than Odyssey’s earning.)
Earnings are quite volatile and not always very useful for a company such as FFH. What I like is that they sell Odyssey at 2 times book and buy back FFH at 0,8 times book (Digit and others at actual price).
Fairfax 2024
in Fairfax Financial
Posted
India is a nice diversification and I believe they have good connections there, which is important. However, I prefer that the bulk of investments is in ‘hard currency’ countries such as the US, Canada and Europe. The Indian Rupee has halved over the last 15 years. It is often the case that growth is interesting but in the end the currency eats a lot of the performance. I hope they will invest most of their capital like Buffett does: in legislations that are kind to investors and stable and in solid currencies. Mostly just close to home.