giofranchi

Very very clear... and alarming!! You compel me to do some serious thoughts! But just to be clear: I didn't mention the hedges on FFH's equity investment, to implay that they would be a protection against the threat of a RIM bankruptcy. I am not that naïve… At least, I hope I am not!! :) Instead, I mentioned the equity hedges, just to say that, without them, FFH investments gains for the first 6 months of 2012 would have been much bigger: instead of those paltry $30.6 million, they would have been $463.8 million, or almost 6,4% of common shareholder equity. And that is already counting all the losses in RIM, in ABH, in LVLT, occurred during the first 6 months of 2012. If you read the numbers differently, please let me know! giofranchi

Cardboard, FFH has $23,36 billion in investments. You are right, when you say that, if we lose our entire investment in RIM, our equity will be worth circa $382 million less than what it is worth today. Vice versa, any potential gain on the rest of FFH’s Portfolio investments ($23,361.7 - $382 = $22,979.7 million) should be added to our equity. What I mean is that it would take just a moderate appreciation of FFH’s remaining Portfolio investments ($382 / $22,979.7 = 1,7%) to completely offset the hypothetical loss in RIM. I think proof is the fact that, while FFH has already lost more than half of its investment in RIM, it has declared a small investment gain ($30,6 million) for the first six months of 2012. And that, even if its equity investments are fully hedged (for the first six months of 2012 FFH lost $433.2 million in equity hedges plus $61 million in CPI-linked derivatives)! As far as I am concerned, this is consistent with the idea of “never bet the company on any project or acquisition.” You surely have been a FFH shareholder much longer than I have been. So, I would really like to know your opinion: do you think Mr. Watsa is not doing what he says, and is really betting the company on the RIM investment? If so, how do you explain his recent comment on The Globe And Mail? Thank you very much!

I have just read the article on the July 27 issue of The Globe And Mail. "Please put the additional $190-million (U.S.) we invested in July in RIM in perspective relative to the $24-billion size of our investment portfolio," said Mr. Watsa... Well, I guess that’s exactly what I was trying to say in my July 25 post, in which I wrote that FFH’s investment in RIM is over publicized and that it is getting too much attention. It is very reassuring to know Mr. Watsa is reasoning the same way!

I had WTM, MKL & MRH,... but sold them to get cheaper other values. Wow! That’s really wetting my appetite! I don’t want to be too nagging, but any hint to what those cheaper values might be? Just a comment on White Mountain: “I have heard that White Mountain would rather I stick to my knitting,” he wrote, testily, to his original backer, “though it is not clear to me that White Mountain has historically understood what my knitting really is.” No one seemed able to see what was so plain to him: These credit default swaps were all part of his global search for value. “I don’t take breaks in my search for value,” he wrote to White Mountains. “There is no golf or other hobby to distract me. Seeing value is what I do.” Michael Lewis on Michael Burry in “The Big Short” At the 2012 GLRE AM, David Einhorn said he believes we are still in the middle of two crises: 2008 and the coming sovereign debt crises. I don’t want to say that WTM got it wrong in 2008, but certainly didn’t get it as right as Mr. Watsa did! And I might be wrong, but generally, while awaiting for the second crises to hit, I prefer to stay with whom proved to be the savviest in 2008.

Thank you berkshiremystery! I am on my way to check out your recommendations! That's why I like this board so much: it offers the opportunity to meet and interact with many knowledgeable people!

there are lots of insurance companies with good underwriting records that are cheap right now and some with great underwriting and investment records like BRK which are reasonably priced right now. I don’t look only to good underwriting results. I need much more, to invest my firm’s capital in a business that I do not control. I look for: 1) good underwriting results, 2) a good investment record, 3) I need to know why they have had so far good underwriting results and a good investment record: I require that they employ a “value philosophy” to both underwriting and investments, I want to be sure they behave opportunistically, 4) most of all, I require to know who I am partnering with: they have to write extensively about their business practice, about their values, and about their goals; I surely read 10-qs and 10-ks, but, as far as I am concerned, they are not enough, they don’t tell me enough about the people I would like to partner with, 5) I want to be sure their capital has not grown too big yet: the bigger the capital you work with, the less the chances you will have to behave opportunistically, 6) I want them to be still young enough, to go on compounding for the next 10-15 years. Well, I guess this shrinks a lot the universe of insurance companies I am comfortable to invest in…! Of course, I know of Berkshire (but, even though I most surely may be wrong, it doesn’t seem to me that Berkshire satisfies point number 5 and point number 6 anymore), I know of Markel (but today Markel is more expensive than Fairfax), I know of Greenlight Re (and I invested my firm’s capital in GLRE), I know of Loews (and I invested my firm’s capital in L). I am also invested in Oaktree Capital, in Leucadia, in Brookfield, in Biglari Holdings, in Third Point Offshore, but they are not insurance companies. “The curse of the insurance business, as well as one of the benefits of it, is that people hand you a lot of money for writing out a little piece of paper” Buffet said. “What you put on that paper is enormously important. The money that’s coming in, which seems so easy, can tempt you into doing very, very foolish things.” Buffett described how GEICO took in $70.000 for a few policies and lost $93 million paying claims. Such mistakes can wipe out a lifetime of earnings – a few cents gained when you’re right and a fortune lost when you’re wrong, Buffett said. - The Confidence Game And that was GEICO! Probably the insurance company that can boast the best underwriting history of them all!! We all know that Ben Graham, at the end of his career, admitted he had gained more money through the GEICO investment, than through all his other investments combined… But that didn’t prevent GEICO's stock to crater almost 90% just a few years later! I really doubt that a good underwriting history is enough. My thought on Fairfax today: at book value FFH not only offers a 15% CAGR for the next 15 years, but it also offers the SAFEST 15% CAGR I can find. And the reason is FFH satisfies points number 1 to 6 better than any other insurance company I know of. Of course, if anyone knows of an insurance company that satisfies points number 1 to 6 as well as FFH does, but today is cheaper than FFH, please let me know!!!

Fairfaxnut, I couldn’t agree with you more! Well, I guess the problem is not with the strategy, but with the stock price behaviour of Fairfax’s long positions. Fairfax realized gains of almost $100 million during the first 6 months of 2012 in equity and equity-related investments, but suffered unrealized losses of almost $280 million. All in all, Fairfax’s long positions behaved significantly worse than the markets Mr. Watsa is selling short through total return swaps (S&P500 Index and Russell2000 Index), to hedge the Company’s equity investments. Historically, though, this has not been the case. Rather, the opposite has been true! Mr. Watsa stocks selection has always and meaningful outperformed the market. If we get back to the historical trend, and I am a firm believer in regression to the mean!, Mr. Watsa’s strategy will prove to be very successful.

roundball100, you are right! I started talking (writing) about companies other than Fairfax in the wrong place...

My firm's capital right now is allocated this way: 22% Fairfax, which is fully hedged 5% Gold (who knows? just in case!) 36,5% other long positions 36,5% short positions Of course, my hope is that in a rally the long positions outperform the shorts; and, if the markets plunge, the opposite should happen! I know... it never works that way!! But David Rosenbreg has recently said in a WealthTrack interview that he expects volatility to continue in the markets. He said that the tug-of-war between the secular forces of the 3D (deleveraging, deflation, and demographics) and the actions of all the central banks around the world, which try to reflate the economy, will keep the markets very volatile. It might be “heresy” to long-term oriented value investors, but it seems to me that a continual rebalancing between the amount of capital in long positions and the amount of capital in short positions is an effective and, most importantly, safe way to take advantage of this extreme volatility. Ok, now I know I will be banned from the The Berkshire and Fairfax Message Board… the right punishment I deserve!!

Good morning rranjan! Yesterday I was in a hurry and I could not articulate my thesis on Biglari Holdings. I wrote that I like the fast food business. Bill Ackman ended his presentation of Justice Holdings (Burger King) with the following judgement: “The most valuable businesses in the world are brand royalty businesses that can grow without capital investment”. I also wrote that I like the way Sardar Biglari allocates capital. In his 2011 letter to shareholders, he writes: “BH resembles a capital allocating vehicle, one that will continue to hold most of its assets in controlled companies. I have full responsibility over capital deployment with no constraints in structure or in preconceived strategy. Further, we have inherent advantages over other forms such as partnerships because the capital under our control is captive, unlike a hedge fund, in which capital can be withdrawn by its partners. BH possesses structural advantages — a combination of permanent capital along with controlled businesses generating cash to BH for reallocation. Such a framework allows for the opportunistic deployment of cash regardless of the state of the economy or of the stock market. Most investment funds run the risk of redemption, usually during a severe market decline, plainly the very moment capital is essential to take advantage of lower prices. In contrast, we welcome market volatility — the more extreme, the better — for in times of market dislocations myriad opportunities surface. When allocating capital, a prepared mind and a prepared financial posture are absolutes for taking advantage of a rewarding opportunity when it presents itself. Thus, we can be aggressive when others are mired in apprehension.” Than he goes on: “Phil Cooley, Vice Chairman of BH, and I believe we have designed an ideal concept that maximizes our potential for aggrandized returns. While we do not have a fixed plan, we do have economic principles. One of them is our long-term economic credo: to maximize per-share intrinsic value. We do so by pursuing the production of cash flows and judiciously reallocating capital to earn high returns. The combination of cash generated by operating subsidiaries along with my capital allocation work will stoke our corporate performance, which according to our criterion must outdo our benchmark, the S&P 500 Index. I think we would comfortably surpass the market if over the next decade we grow per-share intrinsic value at 15% per annum. Exceeding the S&P should be far easier than achieving 15%. Of course, there is no guarantee that we can achieve either, but we will aim for both.” And finally he adds: “Our primary business, our preference, is to acquire businesses in their entirety; however, the stock market frequently offers better value but in noncontrolled interests. Because we take a businessperson’s perspective when investing in equities, we view stocks as ownership in a business. Out of thousands of publicly traded equities, our objective is to find a few underpriced securities, which result in extreme portfolio concentration. We constantly cast about for stocks of businesses trading at a discount from our assessment of their worth. We will make money on a stock if we appraise its business correctly, if we purchase it at a discount, and if its price/value (p/v) converges. Investors who take the same value approach usually depend on management to attain the peak value of the business for the benefit of its owners. But if they do not like the actions of management, their best choice is to sell the stock! We, however, are control investors when we own a sizable block of stock engendering influence, which creates optionality and uncommon value. Control investors benefit from two additional possibilities: either to change leadership’s views or to change leadership. Correspondingly, buying stocks at “knockoff” prices — and waiting passively for them to wend their way to their worth — compose a good strategy, one we often employ. The alternative strategy is the application of control investing. When management fails to create value and the board does not hold management accountable, we may perform the work that others have left undone. Correcting underperformance is often highly lucrative once we identify an undervalued target, purchase a large stake, assume leadership positions, and then implement winning ideas.” That’s exactly what I am trying to do with my own firm! Except that I do not have enough capital to be a “control investor”… If I can implement that strategy partnering with Sardar Biglari, so be it! I also wrote that I like the fact he is young and could go on compounding for a very long time. He is just two years older than I am: if he proves to be a reliable partner, I surely can stay invested with him for many years. Finally, I like the fact he is trying to purchase an insurance company: it shows that he understand the power and importance of float, and that he is following in the footsteps of Mr. Buffett and Mr. Watsa. What I do not like is valuation: At April 2012 BH showed on its Balance Sheet a Shareholders’ Equity worth almost $310 millions. With 1.337.446 shares outstanding, that leads to a book value per share of almost $232. Yesterday BH closed at almost $365, so it is trading at 1,57 x book value. On April 2011 BH Shareholders’ Equity was worth almost $259 millions: in the last 12 months Biglari was able to increase Shareholders’ Equity by 20%. If Biglari is as good as Buffett, Watsa, Einhorn, Loeb, Ackman, (I know, that is a BIG IF!), and will go on compounding at 20% per annum for the next ten years, buying at 1,57 x book value means locking in a 14,65% CAGR. Not bad, but neither great! That’s why my firm’s investment in BH is much much much smaller than the investment in Fairfax: I wanted to leave a lot of room to average down. I think a big plus for Sardar Biglari is that he works with enough capital to be a control investor, but not yet with too much capital that will dampen growth. Besides the compensation “changing the rule in the middle of the game” problem, do you see any other warning signs in BH? I really would like to know your thoughtful opinion. Thank you very much!

You are right!! I like the fast food business, I like the way Sardar Biglari allocates capital and I like the fact that he is young and could go on compounding for a very long time. Anyway, his track record of changing the rule in middle of the game is undoubtedly worrisome! My firm has a big position in Fairfax, a smaller position in Greenlight Re, and a much much much smaller position in Biglari Holdings.

Sorry, no! I don't have any particular insight in Exor. But I don't like the business climate in Italy right now... I really think the safest place to be is North America. If you haven't already read it, I strongly recomend to check out Hugh Hendry's Eclectica April 2012 Market Commentary: "It has long seemed to us to be the case that this economic crisis would start in the US and make its way to Europe. That has happened. However, we also think that it will end in Asia. ... We are more bullish on US groth than most. The momentous nature of recent advances in shale oil and gas extraction and America's acceptance of the unpleasantness of debt and labour price restructuring looks to us as if it is creating yet another historic turning point. ... On the plus side we also believe that we are much closer than before to the beginning of a bull market of perhaps 1982, if not 1932, proportions. We just need the last shoe to drop." And waiting for that last shoe to drop, I would stay in North America!

Same problem with Biglari Holdings, right? And yet, my firm is also a Biglari Holdings shareholder! Let's just say that I don't mind paying for performance. On page 7 of the presentation in attachment you can see that Greenlight Re increased book value per share at 11,7% CAGR from the beginning of 2005 to the end of 2011. During one of the most difficult period of the last 50 years! And I am exited to see what they can do during more normal times! Greenlight_Re_2012_Investor_Meeting.pdf

On the contrary! It is the best board I know of!! I really like all the criticism and the doubts that long-term Fairfax shareholders are free to express on this board! Because they are extremely useful! They help me to think hard about the Company and its future. And I reckon the very existence of this board a good reason to invest in Fairfax: it clearly shows the high quality of its shareholder base. I am positive that, if and when Fairfax really must face a serious issue, someone on this board will sound a big warning! And that is great protection! I can not think of any other company with a Message Board as good as this one (well, just with the exception of Berkshire... :)) I only beg you to be patient: 1) You all have been Fairfax shareholders for much longer then I have been, and what I write is probably old news to you! 2) My poor English...

Thank you, twacowfca! It's a pleasure! First, I would like to add just a thought on what I wrote in my first post. Howard Marks, one more manager I really like to partner with, has written: Investment success doesn't come from "buying good things", but rather from "buying things well". I believe that is true for almost any investments, but, when it comes to the insurance business, I am not so sure... Right now I am reading "Confidence Game - How a Hedge Fund Manager Called Wall Street's Bluff", which I highly recommend, about the story of Bill Ackman and his short position in MBIA Inc.: clearly, insurance, if properly managed, can be a cash flow machine (Berkshire, Fairfax), but management can also do crazy things and, when it happens, true disasters follow (MBIA Inc.)! I have come to believe that, if you want to invest safely in an insurance company, you must know what the management is doing, why and how. Second, I would like to comment on the RIM investment. Sincerely, I think it is over publicized and it is getting too much attention. And that recently might have been a drag on Fairfax stock performance. As far as I know, at the end of 2012 Q1 Fairfax had buoght 26.848.500 shares in RIM, at an average cost of $26,07/share. Last week Mr. Watsa doubled down, buying 25.000.000 shares more, at an average cost of $7,00/share. That leaves Fairfax with 51,8 millions shares of RIM, or almost 10% of the company, for a total cost of $875 millions. In the Balance Sheet of 2012 Q1 Interim Report, Fairfax showed Portfolio investments worth $23,260.4 millions. $875 / $23,260.4 = 3,76%. Guiding Principles for Fairfax Financial Holdings Limited: Values: 7) We will never bet the company on any project or acquisition. 3,76% doesn't look like betting the company on RIM! Am I wrong? Mr. Watsa and his team will make mistakes. Actually, I would be much more worried, if they were always perfect! Only Bernie Madoff got it always right... until he didn't!!! But I am confortable with a manager who thinks and speaks and writes soundly about investing, who shares his thoughts with his shareholders, and ultimately and consistently do what he says. Even if the investment in RIM might turn out a loser. Bye and take care!

Good morning! I am from Milan, Italy, I have just subscribed and this is my first post. It seems to me that there is a lot of bearishness on Fairfax right now... I had 30% of my firm's capital invested in Fairfax and I have recently sold some shares: now 22% of my firm's capital is in Fairfax. I have sold some shares, just because a 30% position was too big! But I am definitely bullish on Fairfax! Fairfax at book value looks like a bargain to me! We all know Ben Graham's advice to "buy a share as if you were buying a piece of a business". Well, in a secular bear market I think that is at least as important as the other, even better known, Ben Graham's motto: "margin of safety". I manage a business every day and there is not a single doubt in my mind of the importance of partnering with people you like, admire, and trust. I understand that AIG at half book value might have a greater margin of safety than Fairfax at book value... But who is running AIG? What are his goals? Which process does he follow? Is he consistent with the past, or has he changed philosophy? Why should he be succesful in the future? What I know is that Fairfax at book value offers a substantial margin of safety (given its past results, Fairfax should be trading at 1,4 / 1,5 per book value), and I also know that there are very few people I would be as glad to partner with, as with Mr. Watsa. He has integrity, he has good sense of humour, he knows a bargain when he sees one, he is opportunistic, he has a will made of steel and never follows the crowd, he is, in short, one of the best value investor I can think of! I really think Prem Watsa is the person you want to partner with in a secular bear market! As an aside, I didn't invest the proceeds from the sale of Fairfax shares in AIG. Instead, I made an investment in Greenlight Re. The opportunity to partner with David Einhorn at book value is as appealing to me, as the opportunity to partner with Prem Watsa at book value. And, at least in a secular bear market, I prefer both to AIG at half book value. In a secular bull market I might think differently, but we are still in a secular bear, right? First: do no harm!