Luckyone77

The volume on the US shares has been unusually heavy. Someone is bailing out. No idea why but I'll proffer a guess that it's because they're not so pessimistic about the market anymore now that Obama is gone and won't be keeping his thumb on economic growth. Fairfaxs' main attraction to many has been the deflation hedge and the stock hedges. I know it was for me. I'm much more optimistic now that a conservative has his hands on the wheel. I think the US economy is poised to grow solidly. At the very least, I'm hoping we'll quit digging such an enormous hole.

From WhoisWarren: "They have the appearance of naive high-rollers at the casino looking for a couple of long-odds big paydays (the deflation swaps, the equity hedges). Trading out of long-dated Treasuries looks to me like they are being too clever by half. Correct me if I'm wrong, the bread and butter of Fairfax's investment track record is buying underpriced securities. Singles and doubles." My feelings exactly.

10b in cash and short term stuff? I wonder if this is macro related or if there a major purchase of some kind on their radar. Either way, they have enough to make a dent in something significant.

Other than that, how was the play Mrs. Lincoln?

You got it all wrong! Actually, though the hedging hasn't worked out, I still don't disagree with his thesis there. This whole economy doesn't add up and if you take government spending and money printing out of the equation GDP is probably about zero or a first cousin to it. That's why I kept my money with him...protection. So far it's been a mistake but one I don't regret. It's some of the investments they've made that are the real head scratchers. What's the point of protecting on the downside and then throwing a half billion or so away on a Sandridge or some of the other questionable stocks or investments. Defeats the purpose.

"Don't invest in a frog, and hope it turns magically into a princess. The answer to your question is that FFH isn't a 'princess' and likely won't ever be." And that's the conundrum.

The answer is that Fairfax has *never* been a buyer of "quality" in the Buffett terms (sure, after 2009 they kind of talked briefly about holding WFC / JNJ, but that's the only stretch I'm aware of, and they stopped that after only a couple of years). So your question is simply a misunderstanding of the business you supposedly own shares in. They have been buying beaten up, second tier equity and distressed debt forever. Shit Fairfax's origins are Prem buying a super struggling insurer... So it's not like their strategy has changed, so your question doesn't make sense. "It seems like Fairfax is buying low quality speculative, etc etc." My answer, by your definition, "yes, yes they are." If you do not like, that is fine, many don't like it and they are all very reasonable people. What isn't reasonable is for you to continue to ask the same question over and over expecting the response to be different. You can buy, sell or hold, but... your questions aren't furthering your understanding or changing anything. Don't invest in a frog, and hope it turns magically into a princess. The answer to your question is that FFH isn't a 'princess' and likely won't ever be. Hope that is clear. My frustration stems from the fact that I can't actually believe you don't get everything I said above, so I am actually curious why you post (only on Fairfax) over the last 3 years, and seem to continually forget that this has already been said before. I just suggest you sell your shares if their strategy is so distressing... a few weeks back $580 was attainable which was a very rich price. I get all that. I do. But it still doesn't explain why they persist with buying junk when quality wins the day in the long run. Tortoise vs Hare. Buffett figured it out. Judging by the declining share price, I assume some other people have taken your advice and are going elsewhere. I should have done the same as I've owned it for years. Hopefully, Watsa's instincts prove correct and I get rich while I wipe the egg off my face. It wouldn't be the first time.

And the answer to the question is what then, Ben? And it isn't a rhetorical question. Yes, I STILL don't understand how people so adept at investing could have bought SD and, yes, it sticks in my craw but it still seems the pattern that led them there persists today. Why do they continue to buy long shots instead of a more Buffet like approach of buying great companies at a fair price instead of the other way around? At what point do they stop trying to be so clever and just buy great stocks? Given their size, I would think that there would be opportunities for them that would be too small for Buffet but too big for most others. It just seems to me that they've finally gotten their act together on insurance and are building something significant but are still finding their philosophical way when it comes to investing the float. We all know how Buffett evolved his thinking after the influence by Munger of buying quality assets. Why reinvent the wheel?

Is it just me or does Fairfax always seem to be squandering the float on buying cigar butts? I too often get the impression they act like it's a craps table in Vegas. Maybe this'll work out and maybe it won't but shouldn't they be buying stuff with enduring quality and value with a more certain outcome instead of all these weird "fingers crossed" deals with hair all over it? It's like they're always swinging for the fences instead of just going for singles and doubles. SD has to be one of the worst investments I've ever seen.

I'm with you brother. I'm holding my nose more than I ever thought I would. I totally get the deflation bet and the hedging. It's pretty much why I bought this stock. Their stock picking, however, is too often atrocious, indefensible and bordering on amateurish... if not already there. I simply don't get their thinking or analysis.

http://www.theguardian.com/business/2016/apr/08/yen-us-dollar-deflation-bank-japan

Is his annual shareholder letter out? http://www.bloomberg.com/news/articles/2016-03-11/watsa-decries-unicorpse-collapse-as-tech-companies-lose-value?cmpid=yhoo.headline

And you haven't even mentioned Sandridge or Resolute Forest Products. Those were 10 footers'. Absolute atrocious stock picking and total head scratchers. I sound like a broken record but I cringe lately when I hear people give them accolades for their brilliant stock picking. You're absolutely right that they'd be much better off had they stuck with the "great companies at a fair price" philosophy. I'm still in and they've had a helluva run this year but I sure hope they go to school on those mistakes. Wish they could've hedged their stock picking instead of their stocks.

Not sure what this means to Fairfax. http://www.bizjournals.com/houston/news/2016/01/27/exclusive-houston-energy-private-equity-firm-eyes.html?ana=yahoo

I think this is a very smart commentary and I would add that it's not just about P&L quality but balance sheet quality. I'm sure you can do very well with value investing in a depression scenario so long as you focus on companies whose assets have value even if the company goes bust. For me the crime with something like Sandridge is that the asset value can go to zero if oil prices fall far enough, so balance sheet value gets wiped out at the same time that P&L value does. If you expect a GD scenario, you simply shouldn't go there. Great points, guys. Castles made of sand...or, in the case of Sandridge, built on overpriced land and too much debt. It should have been seen by somebody at Fairfax long before it happened. Inexplicable, really, and concerning.

This is where the back of the envelope calculation helps: math so simple all it takes is the back of the envelope to explain it, even if the figures are approximate. I remember reading an 80+ page presentation on Sandridge right after Ward spoke at the FFH AGM a few years ago. After reading it, I was farther away from a thesis using simple math that supported buying the stock than before reading their presentation. Nowhere in those 80 pages was there simple quantification showing what their edge was or how much that edge was worth. Later, a little digging revealed that Chesapeake with acreage not too far away was pumping twice as much oil per well drilled than Sandridge was. A decisive analysis didn't even require the space of the back of an envelope. That one astonishing fact was sufficient to falsify all the BS in their self serving, 80 page report. When Tom Ward spoke at that meeting, all my antennae went up, and I got that greasy feeling. I never even bothered to look into Sandridge after that. Ward made out like a bandit. I got the same feeling about the CEO of Resolute. Never bothered to look at it either. Before the flames come out, I am not saying I am any better - we have all been had a few times by a good story. As time goes on I see more and more the wisdom of the "ham sandwich" businesses principle, even if its not entirely realistic in our fast changing world. I wrote this years ago, and will reiterate it. There is a reason that Buffett went into stable cash generating businesses as he got into the multimillions. Graham style businesses aren't meant for concentration and there aren't enough good ones around to invest billions in. As always I admire the business that Prem and company built. But doesn't it seem they've lost their way when it comes to investing? Some of this stuff is garbage and has a very amateur feel to it. They've sold good dependable companies to buy long shots. The kind of stuff you do when you're learning not when you've acquired wisdom. It appears they've forgotten Rule #1: Don't lose money.

If memory serves, they went into this company because of its natural gas and not it's oil. That was the original thesis. Then they had to reinvent themselves by doing a 180 and try to get into oil since gas was a loser. They took on massive debt acquiring land at higher prices all the while building a huge building in downtown OKC and things had to go perfect for it to work. Red flags everywhere!! That's when I finally bit the bullet and took the loss. Blackberry is a similar situation. They went in thinking with better leadership that they could regain market share in the phone business. Another thesis down the toilet. Now after another new CEO, we're left hoping they can too can reinvent themselves and just be a successful software company. Possible? I guess. But shouldn't they start buying better companies at a fair price instead of so many long shots at a discount? Your losers shouldn't go to zero. SD is basically there. Spin it however you want but that was a very stupid investment that these guys should have seen coming.

And I remember the beating I took on this stock when I was selling it at about 5 and 6 bucks a share. Lost my butt but now I feel lucky that I dodged an even bigger bullet. It's all relative I guess. I know I'm beating a dead horse here but still struggling to understand the investment in this complete dog of a stock. Another stock pick by this team that had to "try" to reinvent itself because the original thesis was a turd. Do we still own this? http://finance.yahoo.com/news/sandridge-delisted-nyse-low-price-205008881.html

Motley Fool is a waste of time.

I'm in the exact same boat.

Eric, I absolutely agree with your broad point here and I do think that all multiples will compress in the next crash. I don't expect to make money in Fairfax the first 6 months of a crash. That said, I do think you're picking your dates a bit too carefully! I just (fairly randomly) chose Nov 2006-Nov 2010 to graph FFH CN, and it basically goes from bottom left to top right. The selloff starting March 08 lasted five months, took you back to where you would have been in Sept 07, and reversed rapidly. The same thing happened starting early 2009. So yes, the start of the storm felt shitty both times, and maybe that'll happen again and we'll will get a great opportunity; but all the graph really tells us is that this is a volatile stock that performed extremely well through the crisis. And we all know that what matters far more is how IV trends, and I believe FFH's IV could explode in the next crash if there is a deflationary panic. I think 2008 is not comparable to today in two ways: as soon as the next crash happens people will look to Fairfax, remembering what happened last time, which is bullish; but the starting multiple is higher, which is bearish. P People may look to Fairfax in a crash, but they will be selling none-the-less. The reason is fairly simple: the need to raise money for margin calls, and generalized panic. It absolutely will happan again. Your naive to assume otherwise. Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings. I know because I was buying FFH at the time. Its posted somewhere on this board. I believe that people will see other stocks they love down 80%, and they'll dump FFH to buy those stocks. I've said this before: once you think the bottom is in, FFH is the wrong stock to own. I think they only had like 50% of their book value in stocks in March 2009, and a lot of it was stuff that wasn't all that compressed (JNJ for example). THE BIGGEST mistake I made in early 2009 was smugly believing that FFH would be backing up the truck and loading up on bargains. HARDLY! Not a single share of AXP for example. And MKL? I think the only thing they bought through the crisis was a teensy weensy bit more KMX. So look, there won't be much buying pressure on FFH stock itself if people remember what happened last time. But that was my mistake in misreading them -- they probably were uneasy after dropping their hedges and/or couldn't add more risk being an insurance company. Yes, you have said this before. I was buying the Leaps back then. FFh did some merchant banking as I recollect including H&R Reit, and Mullen Group. Most of my money in spring 2009 was going into SBux, GE, Axp, wfc, hd, and a couple of others. The others were much cheaper than FFH in March/ April 2009. Which begs the question: Why hold FFh at all? Returns now are middlng, and getting to the bogey of 15% for any further 10 year period is unlikely. Please dont take it that I hate the company at all. Its just there better investments. It really is the question to ask. Why hold it at all? If you're in it because of the hedging and the stock goes down anyway, then what's the point? Sit in cash and wait. Hmmm.

You said what I wanted to much more elegantly. Canwest baffled me at the time, as has RIM, Torstar, SD, and especially Resolute. Buffett's buys almost never leave me shaking my head. I expect some of their macro bets will do well, at some point. But the returns noted above by one poster (-6% for the last number of yrs) are not enough to make me want to hold FFh stock, even as a hedge. Just because I think I can get better returns in other places doesn't detract from the fact that I admire the wonderful company that Prem has built. I also admire Google, Tesla, and others but dont hold their stock, either. Nor do I hold Berkshire. Stated as Munger taught Buffet: "It's better to buy a great company at a fair price then fair company at a great price." Fairfax forgot that lesson and is buying crap and at a bad price. Hard to believe really.

Totally agree with you Dazel. Simply inexplicable just how bad their stock picking is. Like you said, it has to be in the bottom 5% over the last few years. I invested in them for that ability yet I truly believe a monkey could have randomly selected equities with a MUCH better chance of not going to ZERO! Both SD and Blackberry, and I'm sure there's others, are companies who's original thesis for buying was thrown out the window long ago and now they're holding on for a Hail Mary. At what point does someone get fired or does the strategy change?

Great post, TwoCities. Seth Klarman commented back in 09 or so that one of the reasons he was so skeptical on the market was because of the lack of the Depression mentality after such a market shock. Once the government stepped in and essentially put all the bad private debt onto the books on the government (instead of letting Capitalism do it's cleansing), people said..."Well, that was a bad few weeks. Carry on." Lesson not learned. I can only speak for myself but the reason that I'm sitting on so much cash is simply because I don't trust this academic economic experiment of printing gazillions of dollars all over the world. Make no mistake, I've been wrong up to this point. I'm just not smart enough to know exactly when the music stops in this game of musical chairs. Maybe it never will but this paper currency in my wallet has to mean something. Just feel like the day of reckoning has been postponed not avoided. It's been an expensive miscalculation so far. For Fairfax as well actually. Let's see how the story ends.

"It's not so much that -0.1% is significant in and of itself - it's that we're getting -0.1% despite policy makers doing everything in their power to get to 2-2.5% and we're still getting deflation in return...." That truly is the scary part of all this. What is real GDP around the world if you took the massive amount of QE by all parties out of the equation? Ray Dalio calls it beautiful deleveraging. Maybe he's right. Something, however, just feels very wrong about it all. Right or wrong, hence my investment in Fairfax. Protection.