Luckyone77
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Posts posted by Luckyone77
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Great job, Parsad! I feel like I just went to India.
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I find this whole Global Warming/Climate Change belief to be a fraud and a scam of epic proportions. Groupthink at it's absolute worst. Science gone bad and few adults around to call BS on the herd. Education today is politically correct garbage. Universities today are more concerned about gender identification than good science. So disheartening. Glad I was raised when I was because this lunacy is getting out of hand.
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Might be worth changing the title given there is already a Fairfax 2017 thread.
On a 2018 topic, worth highlighting BBRY is worth $1.3bn to Fairfax at yesterday's closing price, assuming conversion of the bonds. Fairfax has much greater upside exposure than it has downside risk given the convert.
How much did they pay for it?
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To me, the negative opinions on Fairfax are far too extreme because, based on the outcome of a single event, people seem to have concluded that Fairfax can't do macro. But suppose that, at the time the last macro bet were made, there was a 50% chance that the bet was right.
If that were the case, Fairfax was betting on a coin flip, where, if it came up tails, they'd lose $X, and if it came up heads, they'd make, say, $6X. Well, it turns out the coin came up tails, so they lost $X.
But now to claim because of that single bet that Fairfax's are likely to be low in the future--particularly when that single bet may have been a good bet to take--simply because the bet had a bad outcome seems illogical. It kind of smells like outcome-oriented thinking unless you believed strongly seven years ago that the bet was a bad one. And to my (faulty) memory, I don't remember many people making strong claims back then that the macro bets were a bad idea.
(In fact, if it were the case that the odds were like the coin-flip described above, I'd be delighted if Prem et al make those macro bets again and again. The more the better.)
It wasn't just the bet on deflation that soured my opinion of Fairfax. I agreed with that play and, IMO, your take on it is exactly correct. Who knows, it still may play out. It was the poor quality of equity purchases that was the nail in the coffin for me and, frankly, inexplicable at this level. Too many Hail Mary's for my taste.
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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.
The assumption here is that "they find good opportunities to reinvest the cash". Their terrible recent track record on that is why the stock price is so low and why it's hard to believe they will. It's one thing to just miss. It's another thing to be 180 degrees wrong. If they do regain their sanity, it's a steal at this price. If they maintain the same philosophy and gamble their money on a bad thesis and declining company then watch out below. It's tempting at this price.
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Sanjeev:
I've never attended though it has crossed my mind in the past. However, I've basically liquidated my position and no longer hold them in the same high regard. As I've stated before, it wasn't the hedges, shorting etc. but just the horrendous stock picking. I could no longer justify or trust having them manage my money. They lost their way.
Though I feel terrible for you as you clearly put so much effort into this website and event, I'm afraid the lack of interest lies squarely on Fairfax. Hopefully, they'll rebound and right the ship again soon.
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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.
Agreed 100%!
Last year again they lost money with their equity investments. It’s hard to believe…
I still like the business model of course, and I still like management (they have done a great job on the operating side of the business in recent years).
But insurance without good investment capabilities is clearly unsatisfactory: they should prove they can be good stock pickers again.
Cheers,
Gio
So, they've become an excellent insurance company but a horrible capital allocator. And I mean REALLY horrible. I've dumped the bulk of my Fairfax stock at this point. Hard to justify the results but, nevertheless, I don't blame them for the hedges. I shared their beliefs and it was a safe bet that simply didn't pan out. It happens. But no way you can justify some of these horrendous stock purchases. A 10 year old should have known several of them were losers with little potential and bad fundamentals.
Of course, now that I've sold my shares it's probably a good time for the rest of you to buy. The stock will probably take off!
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"Fairfax is one of the best capital allocators in North America and we look forward to working with them."
On what basis? Sandridge, Blackberry, Dell?
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Here are a couple of interesting quotes from Prem regarding the rational for the purchase:
“The recent election . . . has a strong potential to make the business climate for growth great again,” he said. “We believe the US may see significant growth in GDP and our business in the US will benefit from any such positive development.”
Mr Watsa suggested that there could be more US deals in the future: “When the biggest economy in the world is on the way up we think the downside is significantly reduced and it becomes a value-oriented, stockpickers’ market. In the last few years we’ve played defence. We expect to play offence.”
He sounds like a cartain manic depressive fellow I want to sell some shares to... really strange.
Yea - This is getting bizarre. I don't have any issues with the acquisition in and of itself, but the 180 degree turn on the U.S. markets as the result of the election with no commentary on rising rates, falling liquidity, strengthening dollar, declining corproate profits, levered corporations, and valuations that appear excessive certainly seems strange.
If you read what he's said carefully, he hasn't done a 180 on the US markets but on the US economy.
The hedges were not mainly explained in valuation (e.g. CAPE, Tobin's Q) terms. They were explained in terms of protecting the company from another 1929-33 type selloff, which would have destroyed the company in the absence of the hedges.
They now feel that that kind of catastrophe has reduced in probability, because we have a quantum shift from a world in which politicians over-regulate and rely on central bankers to promote growth via leverage, to one in which (maybe) government gets out of the way and productivity drives gdp.
So the hedges have gone. Doesn't mean they think the market goes up. All they've said on that front is that it will become a stockpicker's market again. Value starts to win again.
I have a problem with this idea that productivity is suddenly going to go up and all ills are cured because of the election. This implies something along the following lines: As a business owner I have a project that I can execute that would that would improve productivity of my labor force and I can make me more money. Interest rates are low so I have cheap capital available. But I don't execute the project because I don't like the guy in the White House?
In addition economies are large and complex mechanisms. They don't turn on a dime. You don't go from deflation risk and possibility of a great depression just because you had an election. The risk of a stock market crash definitely doesn't go down after you've had a 100% or so rally in stock prices.
Others here have said things along the lines of just go with it and don't ask any questions or Prem has a master plan that shouldn't be disclosed, trade secrets etc. Please! Managements are accountable to shareholders. Strategies reflect management thinking and should be disclosed. More disclosure is required when those strategies go bad and when they are dramatically changed. Take Berkshire for example. Their strategy is well defined and well communicated. They say what they will do and do what they said and it works. The fact that the strategy is public doesn't prevent them from implementing it. If Berkshire did something radically different like go and drop 50 billion on airlines or buy Twitter you can bet we'd get a way more detailed and reasoned explanation then "Trump won the election - problem solved".
So in 2010/2011 the strategy was buy quality companies at attractive prices (remember the big 3?), hedge the long portfolio and hedge against deflation (a macro call since the hedges were outsized relative to FFH risk). This was based on a view the the economy will stagnate and would be at risk of recession. Ok this is quite reasonable for an insurance company in the 2010 environment. Then they go ahead and ditch the quality companies and buy duds. Ok maybe they've made investment mistakes we're all allowed one or two of those. But one should acknowledge the mistakes, learn and correct.
Then we get back to the hedges. The economy in 2014/2015 was different that the one in 2010. They look at the facts and decide that the hedges are still appropriate. They don't take even a reduction. Now you get the election and it's 180 change? I'm sorry but "Trump won the election - problem solved" is just not good enough.
Actually, an economy can turn around very quickly when the animal spirits are unleashed and the correct policies are enacted. Thomas Sowell describes that in an older interview with Peter Robinson in Uncommon Knowledge that you can download or watch on Youtube. I believe it was Harding, though my memory fails, that basically did it and the economy turned on a dime with a year. And he states it's been done before.
And to your point about a business owner not doing something because you don't like the guy in the White House, that's a bit simplistic. It's not the person but the policies and philosophy and it's ramifications that would gives them reason to pucker up and freeze. It happened to millions of us who were extremely wary of risking capital with such an anti-capitalist/socialist in charge.
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Oh my,
Prem is still making these macro forecasts? No lesson learned from these huge losses? He's bearish when the market is low and bullish when the market is high?
For the first time in 13 years, I will seriously consider reducing or eliminating my position in FFH. I can handle a lot, but this is difficult.
Partner24,
Since 2011 these are the results:
EQUITY (cumulative): $628 million
HEDGES (cumulative): -$3112 million
BONDS (cumulative): $2950 million
CPI (cumulative): -$570 million
UNDERWRITING (cumulative): $1333 million
It seems to me that, if we are to blame Watsa for something, it is because FFH has been a very poor stock picker in the last 6 years: the idea of a 100% hedged stock portfolio should be that your stocks go 1%-2% higher than the stocks you have shorted. Of course you would expect to make a very meager profit overall, but still a profit... not a loss of -3112 + 628 = -$2484 million.
In other words, if FFH had been a good investor in stocks, and equity gains equaled losses from hedges, in the 6 years from 2011 to today FFH would have earned 2950 + 1333 - 570 = $3713 million. Starting in 2011 with an equity of $7.4 billion. Not bad!
Watsa has always said he was worried about a 1 in 70-80 years event that could shock the markets... Sincerely, were you sure that event was never to come? I know I was not, and I don't blame him for protecting FFH. Instead, what I would surely like to know are the reasons why they have chosen equities that performed so poorly...
Furthermore, those $3 billion of earnings in bonds imo were very much related to their macro views: FFH held onto long term US bonds for at least three years after Buffett started calling them the worst investment. And the reason was they thought yields could continue decreasing because of disinflation in the US and deflation in Europe. Finally, they have picked almost the best time possible to sell those bonds, just before Trump got elected. Another macro call that turned out to be right.
This is how I view the recent past. But, as I have said, I would prefer to talk about what lies ahead.
Cheers,
Gio
"what I would surely like to know are the reasons why they have chosen equities that performed so poorly.."
That's the billion dollar question that is highly concerning and indefensible to me, Gio. The macro bets, I get. The bonds, I get. The stock picking, "Huh? You bought what? And then you doubled down and bought more of that turd when the original thesis for purchasing was no longer there". It's just the incongruence that keeps giving me pause.
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I have been appreciating everyone's thoughts and have two questions probably due to my lack of experience:
1) Isn't increasing the amount of insurnace that can be written in the future at ratio~0.9 a substantial tailwind to the potential for investments moving forward? If equities are well priced right now and interest rates are rising, more insurance is a good place to be putting one's cash, right? It sounds like many respected insurers like Markel were interested in this company recently but at a cheaper price. Even Gayner will say that if you want to continue working with a company and have their respect, you cant beat the snot out of them on a low ball price everytime.
2) I also have trouble digesting Prem's public reasoning for this drastic change at FFH and it is a concern that he may be buying high right now by removing the hedges... I hope he will say something in the annual letter about this ... But, doesnt Prem have good reason to hold his cards close to him and not publicly state what his team thinks and what they are planning on doing right now? After re-thinking about my own question, maybe I am just trying to justify his lack of willingness to admit to his own mistakes and should re-think my position..
I am interested what you guys think regarding these questions as all of these developments are new and of great interest to me.
1) It depends. If the combined ratio is kept below 100%, everything works fine. In a rising interest rate environment they can invest in bonds that pay more, but we have to consider after tax returns on these bonds and inflation. We have not had a significant rising interest rate environment since the 1970s, early 80s. If policy payouts rise more rapidly than interest rates then the combined ratio will turn negative.
There is also the effect of rising interest rates on competition. Prem himself had a chart where he showed that combined ratios in the industry improved when interest rates where low. Now, your guess is as good as mine as to what the actual level of rates needs to be at which competition heats up, and combined ratios drop.
And then there is the aspect of a major claims event, which seem to come in waves, and are generally unpredictable. Granted FFH has worldwide diversity which they didn't have when Katrina and the Twin towers hit. Buffett has had periods with his insurers when he would rather have not heard the numbers, for years at a stretch.
2) Prem has never admitted his mistakes. He is an incredibly good salesman. Had I invested according to FFHs doctrine of the last 6 years I would have had an investment return of zero, or less. I simply dont believe that we are going to get all the tail winds everyone expects, without a major hitch along the way. We dont know what the achilles heel is yet but its somewhere.
Markets, and popular sentiment indicate that everyone is 'happy' right now. The wall of worry is suddenly gone. There is a con man who will be running the US shortly. We dont really know how this is going to play out. I dont get why everyone is suddenly so optimistic right now. And I have never been a perma bear, in fact, more the other way around.
Oh, please. A con man will be running the US? He's infinitely better than the talented phony that's been running us into the ground for the last 8 years and he enters the Presidency certainly more qualified than Obama was, and is, even to this day. Thank God amateur hour is over and the adults can assume control. There's so much low hanging fruit out there that stoking this economy won't be that hard now that Capitalist are running the show.
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It appears that Ray Dalio has the same opinion as PW about future US economic prospects. I share their sentiment that things have changed 180 degrees. Doesn't mean there won't be bumps on the road but, FWIW, I haven't seen this many people this hopeful and optimistic in a very long time.
More detailed comments:
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I didn't look it up but I don't recall seeing this many Fairfax US shares trade hands before. Volume was 47,000 shares today when 2500 or so has been the norm. Off the charts compared to what's been normal. Makes me wonder if someone is still unloading a ton of shares but maybe Fairfax decided to step up and start buying them. Very interesting.
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Berkshire or Markel are very easy to understand. They have a clear strategy and have held on to this over different cycles. When buying these shares you know why you buy them and what you get.
Fairfax is a different story. Even if the shares are cheap you don't really know what their strategy is anymore. What are they doing, where are they going?
On the insurance front things are clear and going smoothly. On the fixed income side of the portfolio it is also consistent with what they have always done. Even on the equity side I see a historical pattern: very contrarian bets. But where they have confused all long term shareholders is with the huge macro bets.
I am a long term shareholder and would love to buy more at these levels, but what will be their next billion $ macro bet? Even if they get it right and make a billion $ next time, I will still have many questions/doubts. Am I a shareholder of a company that has a competitive advantage or is this just one big macro hedge fund?
Fairfax is a wonderful asset, but it is time they explain what they stand for, where they want to be in 10 years and how they want to get there. Just a clear and consistent story. It is only then that solid long term shareholders will return and that a higher multiple of book will become the norm again. (just as is the case with Markel)
Well stated and spot on. Thought about buying more myself but I'm just not sure what I'm buying anymore. Their equity decisions are too often perplexing and stubborn. They seem to be trying to be clever instead of just intelligent and sound. I truly don't know whether I should sell it or buy more.
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This reminds me of the joke about the guy on death row down in Alabama who was about to be lethally injected. Staring at the guy as he was strapped in the gurney awaiting his final moments, the Warden asked him if he had any last words.
The prisoner thought about it for a minute and in his slow southern drawl finally said..."You know, Warden, I do. I just want you to know that I'm gonna learn a lot from this."
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The irony here is that I bought and held Fairfax mainly as protection against a market correction. Turns out that the only thing that corrected was Fairfax while the market soared. I don't fault them for their macro bet, as I shared their belief, but it clearly has been dead wrong. I do, however, fault them for their horrible stock picking. That's on them.
Judging by the volume on the US Stock Exchange which is about 10x the normal trading, somebody is bailing out big time. Unless I'm missing something here, I guess Fairfax still must not think their stock is worth it at these prices as they haven't used any of their 10b to buy their own stock back. I have my fingers crossed that they're smarter than their stock performance and return would have you believe.
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Question for you guys who are more in the know than I am, is there a consensus opinion as to what the current book value is at this time?
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Theyve already said that dod frank will not be revoked.
From Zero Hedge:
..."dismantling and replacing of the Dodd-Frank Act financial-sector law with pro-growth policies. This means that banks will be allowed to not only engage in prop trading again, but to invest directly in hedge funds. “The Dodd-Frank economy does not work for working people. Bureaucratic red tape and Washington mandates are not the answer,” says statement on Trump’s official transition website."
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Any chance they may use some of their 10b and buy back some of their own stock at this price?
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History suggests that if they lower taxes, cut spending and do away with all these stifling regulations, business will boom and could do so very quickly. Harding did it about 90 years ago. Repealing Dodd-Frank alone will do wonders for unleashing business in the US and I understand that will be gone and replaced.
But they are not planning to cut spending as I understand it. So you've got a hell of a deficit denting confidence, and potentially offsetting the benefits. I agree with you on balance, but that's the fly in the soup. To put it another way this policy mix is inflationary and that has unintended consequences.
No doubt and I share that concern.
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Repealing Dodd-Frank alone will do wonders
Ah yes, 10 years haven't passed from Great Recession, European banks are still on the brink of collapse, US banks are fortresses due to Dodd-Frank, so let's repeal it and see if we can get another speculative bubble and burst. Great idea.
Even Barney Frank said it went way beyond it's intent. Talk to the bankers and you'll quickly see how stifling it is. Repeal it and make it more practical and less deleterious. There's a much better solution than that overreaction.
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History suggests that if they lower taxes, cut spending and do away with all these stifling regulations, business will boom and could do so very quickly. Harding did it about 90 years ago. Repealing Dodd-Frank alone will do wonders for unleashing business in the US and I understand that will be gone and replaced.
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Why is this in Fairfax section? :)
For obvious reasons. Because the politics greatly affects economic growth and subsequently stock strategies. It's not about politics, per se, but the effects of the election.
Fairfax2019
in Fairfax Financial
Posted
Well, boys, after 10 years of owning this stock I decided to sell my remaining shares today. I'm out. Greatly disappointed in their ability to judge stocks and, in particular, their ability to judge the management of these companies. I simply can't justify their continued underachievement. A dart board would have had greater success of stock picking. I hope my exit proves to be the turning point for the stock, as it so often seems to be (lol), and that you all are greatly rewarded for having hung in there. Hopefully, India will be the salvation.
Nevertheless, I do appreciate the keen insight of many of the posts on this site. Its been informative.