steph

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!

How far can the equity positions go down, before FFH is in danger?

Yes. Adjusted for that I believe it was actually up quite a bit, although I haven’t double checked that. Thx! Momentum seems positive recently on some important positions

Thomas Cook was down 50% last week. Is that related to spin off of Guess?

No, no time frame. It will only happen if they make some pretty smart investment decisions which will bring confidence back regarding their investment skills or if interest rates start to rise again. But timing of these is difficult to predict. But I just see it as a bonus. But a bonus which will most probably eventually happen.

Management says that they aim for 15% growth of book by achieving a 95% combined ratio and 7% return on their portfolio. I assume they will do 98% combined and closer to 5% on their portfolio due to low interest rates. If they get close to 10% growth in book value I am perfectly happy. I am not sure there are that many companies out there that will achieve this. And being today at close to book value , you may even hope that at one point investors will like FFH again and price goes back to 1.5 times book. Then you get 10% growth in book plus a rerating which would give a very decent return.

Did Brian retire?

Not too bad. I was expecting worse. Insurance is good. Bonds well managed. Equities are a drag but was expected. All in all rather reassuring.

It looks like BRK has outperformed in the current selloff, even though the equities he owns haven’t. I also think that due to its larger industrial business, BRK is more economically sensitive than it used to be. I am quite surprised by the relative outperformance, quite frankly. FFH in the same time span has gotten absolutely wrecked. Ajit jain just bought 20 million $ of Brk at 296.000. That is reassuring.

They are not bullish. They still hold lots of cash. That is why they will never be able to achieve 15% with yields as low as they are today. But if they even achieve 10% priced at book value today, and hoping for a rerating at one point in time to 1,5 times book, that would still be a great investment. Investment performance has been poor on the equity (and hedging) side, but on the bond portion of the portfolio they are amazing. The fact that they sold everything just before Trump got elected when long term yields were at 1,5% is a master stroke. For an insurer the fixed income part of the portfolio is essential, and with Fairfax you have the best.

Best letter in a very long time! Prem finally admits that hedging was a mistake and that the equity selection was very poor over the last years. They will do no hedging anymore and there will be a change in the equity team. Mistakes are human, we all make them. But it is important to admit them, learn out of them and move on. It seems that Prem was finally able to do this and it is very important for the future of Fairfax.

It is not really the hedges that are a problem, it is the difference between their stock selection and the hedges that is/was the problem. If their equities had done as well as the S&p and Russel , it wouldn't have hurt that much. But I am buying now. I do believe they have taken a radical but briliant decision to sell all their bonds a week before Trump. Some positions have gone up strongly in recent months. What you get is a good insurer with lots of cash , not too far from book anymore. In these rather expensive markets I believe FFH is one of the better propositions. And if in the coming years they find good opportunities to reinvest the cash, it could be a very strong performer with book value going up and much higher p/b ratio.

Just looked on Bloomberg. Since 2000 his fund is down 31% and his other fund is up 19% since the end of 2002. These are just disastrous results during what I would call an 'entire cycle of bull and bear market'. His strategy is clearly not working. He is probably a great intellectual, but a very bad money manager.

Their hedges were a big mistake, but if they had outperformed the markets with their stock selection there wouldn't be any problem. The real problem is their disastrous stock selection of the last years. On the other hand one must say that their bond management is still one of the best. Having cut their long duration a week before the election was a huge and (up to today) brillant move. I hope they have learned a lesson and that from now on it will be back to basics again.