steph

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.

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.

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.

thank you Viking for sharing all your work with us. Much appreciated.

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.

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.

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.

Dear Viking, I just would like to thank you for all the work you do and for sharing it with us. Very much appreciated!

no...it's 10% of market cap...but closer to add 7% to book

It seems this is just a tiny peace of written premiums. Should boost book value by close to 10%.

Do you know at what price this was in the books?

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.

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).

Not bad. They sold 10% of Odyssey for 900 million and with almost the same amount they buy back 7% of the entire group.

very useful! Thank you.

I have been on and off a shareholder of FFH for more than 15v years now. They have made big mistakes. They have done things they said they would not do. I am always afraid that when they see a cigar butt they just can’t resist and buy it. Interest rates are low and are a big drag on potential earnings. So many reasons to not touch this one. But in these last 15 years I think it is the best opportunity we have had to buy FFH. An investment is always about probabilities, it is not perfect science. FFH is today in my humble opinion a very good risk/return investment. Worst case it will be average. But chances of very strong returns are high. Core business (insurance) is much better than it has ever been. Insurance market is also strong. On the bond side they have always been if not the best, one of the bests. The problem are macro calls, shorts and deep value long positions. Shorts are out. Their deep value positions were just recently at all time lows. We are witnessing strong rebounds. But what matters most are their Indian positions and Atlas. Atlas is very well managed, is in a very strong market for the next years and should do well. But the sherry on the cake is Digit. Sequoia just invested at a valuation of 3,6 billion. They don’t do this for a quick double. This thing could be valued at crazy prices. Compared to the market cap of FFH this is huge. The crazy thing is that you get it for free. My conclusion is that there are many free options with FFH. This stock (management) is completely out of favor and gets no credit at all for the good things they have done (Digit). For me one of the best risk/returns out there.

He probably was too well informed. Bill Gates scared him and he got very little time to buy at prices he really found attractive. Never forget that in 2008 he didn't buy anything meaningful in the stockmarket. He responded to very attractive offers made to him with preferreds,etc....

My hesitation is that it values cash and equities at 27 times peak-cycle cash/equity earnings of approx $14 billion. A 3.7% peak-cycle earnings yield. how does that value cash and equities at 27x p/e? I dont follow ... fine - apply a 50% discount and its still cheap. I'm just saying this is one of several interesting ways to value BRK Assume cash and equities are worth approx $382 billion. In 2019 the cash and equities had look through earnings of around $14 billion. That's a multiple of 27 and change. At year end 2019 the top 10 equity positions consisted of a credit card company, 5 banks, and an airline. Enough said. I think the value of BRK will ultimately correlate with earnings potential. Putting a multiple on earnings on the cash is a bit strange, no? Top equity position by miles at year end was Apple, which is up 21%.

The entire insurance sector is taking a beating, which is not helping BRK stock either. Chubb CEO said it is the biggest disaster the sector has ever witnessed. I was surprised how little Buffett said about it. He seemed quite relaxed about it all. The next months will be another great period to invest in insurers : BRK, FFH, Chubb, MArkel, WRBerkley,...

Did Buffett buy a lot in 2008 - 2009? I mean by that: did he buy directly in the market? From what I remember he was continuously offered deals he couldn't refuse. Lot's of preferred shares which he has always loved. But open market buys in regular shares? It just doesn't seem to be his thing even when markets go down 50%. He prefers shares with some guarantees attached or buying 100% of companies.

Probably no one. His tone was pretty much what I expected going heavily short into the weekend. Furtures should be down nicely given the markets knee jerk reliance on short term narratives of late. But on a larger scale, I was disappointed. Most investors, earn our future dollar because we recognize past mistakes and adapt. Buffett to me, seemed like a bewildered old man. I know its heresy to most, but whatever. He has broken his own rules over the past decade... only to end up costing shareholders because of such lack of discipline. AAPL worked, but IBM was bad, and missing the FANG stuff is a huge opportunity cost as well. He's admitted as much but then when the time came to buy into these business he decided to stand pat with Wells Fargo and Coke...yea, so much for reputations and decency! The tune from value investors for a while has been reliance on old cliches about how "this time isn't different". The truth is that no, this time isn't different. Because it started changing a long time ago. I think its reasonable to say Berkshire is impaired. They own businesses that got taken to the mat and the referee is currently counting and at 5 or 6...Insurance may very well be a bright spot. But banks, airplanes, and all the old economy stuff is on the ropes. The best selling Coke products during the pandemic are the Dasani water...yea, if you haven't got Covid yet, go drink some liquified sugar so you develop diabetes, and die when you get the virus! I admire the man greatly. But I also think its time to call a spade a spade. He has failed to get with the times and his investments since the GFC have been largely dismal. I have tried speculating on what is the reason, but at the end of the day it doesnt matter. You dont need to be a buyer of Amazon to see e-commerce booming, nor do you need to buy Tesla to see old auto is done. But you cant sit there and acknowledge these trends and admit your mistakes while continuing to invest in airlines, traditional auto, and bricks and mortar business. Nor can you be the worlds largest owner of banks while previously ackowledging the very real possibility of continuing ZIRP. Are we predicting deflation? Because theres a way to make that bet. Same for inflation. But with Buffett, he's continually, year after year, made the excuse for doing nothing. And thats not a reality I think most have admitted is costly. I often hear people say "follow what he does, not what he says". Well, I also hear people say "the markets are where they were in 2019". Well, Buffett and BRK are were they have been for a while, much further back than 2019... nothing has changed. There is just a convenient story to tell in 2020. I believe this is too hard on Berkshire. When looking at a track record it is important to take the entire cycle of bull and bear market. I like to look at track records since 2006 or 2007, because only looking since 2010 favours the 'high quality' or 'high tech' investors'. Berkshire since 2006 or even 2007 is bang in line with the s&p 500 even though I think that Berkshire is valuated cheaper today than back then and the S&P is valuated more expensive than back then. So on an underlying basis Berkshire has probably been better. And more important, the S&P is in line with Buffett of course with dividends on which one had to pay taxes. So, Berkshire was better for shareholders ona net basis. Not bad for an old man and for such a large amount to manage. Not being more in tech is a mistake. But the amount he put in Apple makes up for all this. It is probably one of the best investments made ever. Having the guts is quite impressive.

Or they closed most of their shorts in the first part of the quarter...being just sick of losing money on them

First time I heard Prem acknowledge that he had made bad stock selections, which is very positive. Stock portfolio is now divided between different persons, which will lead to a more diversified and probably more large cap portfolio. They were very bullish about the hard market in insurance. Especially bullish about Allied World.

He didn't blow up his fund. There is no leverage. Just 3 years in a row with subpar performances. After more than 15 years of stellar results this seemed to be too hard for him mentally. He had too much stress. When you are very concentrated (which you have to be if you want to beat the markets by a high margin), you have to accept very painful periods. But it is not easy when you manage a 'public' fund.

Your question might require a bit more explanation. There are a number of potentially bad/dangerous outcomes of a collapse in equity prices: 1) Reduced underwriting capacity in the subs: if equities are held in the insurance subs, lower equity prices are marked to market and that increases the premiums:statutory capital ratio. This would fall under the category of a "bad" outcome rather than dangerous. 2) Line of credit covenants: FFH holdco and several of the subs maintain lines of credit, some of which are partially drawn. Each of those revolvers likely has a lengthy list of covenants. The holdco covenants require a maximum debt:capital ratio and a minimum shareholders equity total. My rough math suggests that FFH holdco could take about a $5b haircut on its equity before violating its covenants, but what are the other covenants that have not been disclosed? What covenants are present in the subs' revolvers? It would be highly inconvenient if the credit lines were pulled...this might be a "dangerous" outcome. 3) Bond/notes indentures: FFH and the subs have floated dozens of debt instruments, all of which have indentures. Presumable these are far less restrictive than the credit line covenants? Do falling equity prices constitute a risk? This might be a "dangerous" outcome, but from the outside it's hard to estimate the risk. 4) Management fees: one of the ways that the holdco finances its operations is through management fees related to Fairfax India, Africa, and Hamblin Watsa's management of the subs' portfolios. A smaller portfolio means smaller management fees, and perhaps a cashflow challenge for the holdco. This would probably be a "bad" outcome but not dangerous. 5) Refinancing risk: either by good management or by good luck, FFH holdco doesn't have any bullet maturities during 2020. However, holdco must continuously float new debt to replace maturing debt, with about US$300m needing to be refinanced by May 2021. A collapse in the equity portfolio would not be helpful for credit availability or terms. Similarly, if the need to issue shares arises, it is virtually certain that the price that FFH could obtain for a share issuance would be considerably lower after a collapse of the equity portfolio. This is merely "bad" rather than dangerous. At this point, I'd say that equity prices are not really a "danger" for FFH, but they do constitute yet one more trip to the woodshed for shareholders. SJ Thank you for this very complete answer. Very interesting!