vinod1

I am completely kidding of course. I go a long way back with Fairfax. First purchase at $106 in 2006. Very small purchase as I did not know much. Second stock I bought after Berkshire. Added and reduced several times all the way until 2011 when I exited the investment completely at $418 when it is pretty obvious that returns are going to be poor. Got back in at scale at various price points between $450 to $485 in the last couple of years. To me it meets the minimum return requirements with a high degree of certainty with possibility of higher returns. I intent to hold it for a long time as conditions have changed and it has become just as obvious now that returns are going to be very satisfactory as it was in 2011 that returns would be unsatisfactory. No need to nail down a specific price. I am not selling even if it reaches some arbitrary price point as long as my return expectations meet my minimum requirements and/or other opportunities show up. The moment we make an investment part of our rationality goes out. When we comment on it, more rationality goes out. When we start putting price estimates with dates, we all tend to start exhibiting various forms of bias. That is the only reason I did not vote and do not comment too much on this topic.

Guys answering yes, please tell me what you are inhaling! This is a large, very large part of my portfolio and dont need you guys angering the market gods!!!

I analyzed historical Fairfax investment returns and compared to what their return would have been if they invested in index funds both with CDS gains and excluding CDS gains. This is way back in 2015 and I posted this on my blog but when I moved my website to another provider, I did not move the blog and dont have it online. I was doing this because I wanted to see if I should get back in FFH after selling it off in 2011. Vinod Fairfax Expected Returns Year End 2014.pdf

I bought $1000 of EGAN and and $1000 of VIAD sometime in 1999. I had no idea what those companies did, just read an article online and bought them. The value jumped to $7000 at dot com peak and then became worthless. That started my investment journey as I was trying to figure out if I am an idiot for buying those stocks (I am) or if there is someway to actually invest systematically. The first time I picked up an investment book, it was like fish to water for me. Next two years I would not be able to sleep well on Friday nights. I was too excited about the investment books I got from library that I used to wake up by 3 or 4 AM. I must have gone through the library finance book section twice over. Did not understand a lot of it but I just kept reading. If not for these stocks, I might not have become interested in investing.

It is okay to enjoy the rally guys As value investors we might want to invest to this song But we would enjoy life more if we lived by

Really sad. One of the rarest people who if you disagree with him, it is safe to assume you are very likely wrong.

Yup! India has a history of winning hearts. Again and again. 2014 T20 WC Final: Lost 2015 WC Semis: Lost 2016 T20 WC Semis: Lost 2017 CT final: Lost 2019 WC Semis: Lost 2021 WTC final: Lost 2022 T20 WC Semis: Lost 2023 WTC final: Lost 2023 WC Final: Lost Copied this from twitter. Just thought it is funny.

Next time there is a serious recession. Expect trillions in fiscal spending. Who is afraid of double digit percentage deficits, especially if it is for short duration? That is one big lesson learned from the pandemic. Who is going to be against it? Not politicians. Not Fed. Not people. Only bears who are preparing for a recession/redemption in markets since 2008 would be against it. That is my quota of Macro for this year Vinod

You need to account for about $1 billion in other expenses (interest costs, corporate expenses) and a tax rate of 20%. Rates could and would be influenced by the Fed, we had 12-13 years of that in US. Longer in Japan. So I would not base interest rate expectations on what we think should happen. If not for Covid, we might be sitting at pretty low rates even now. But who the hell knows. Not Fairfax or Cooperman. Vinod

You might be absolutely right, but the following is what gives me pause. For the last 2000 years people always thought the next generation is going to hell. It is actually quite funny if you research the different things people worried about in the past. Books, bicycles, cars, landline phones at homes. Look up the stories behind these and we now see how the fears are beyond ridiculous. Would future generations look at what we worry about in similar way? The baseline for what is acceptable/normal/good/right is what we have experienced in our childhood. Anything before is too primitive, anything after is coddling. We long for, back in the day... The story of human progress can be summed up in one word: conquest of risks. So not sure what is going on is bad. Vinod

Absolutely, Fairfax deserves credit. They behaved exactly what I thought many others should have behaved. My point is the returns were helped by luck. Pandemic had been a huge boon. So dont just bake "normalized luck" into earnings figures into the future. Vinod

The way I see it, for the first time in more than a decade, Fairfax has a path to 10% book value growth doing nothing much or anything risky. Anytime you have such a path, there would be an improvement in P/BV. So there you have a high probability of good returns. There might be some opportunities, good luck, etc. that could more than balance out any negative shocks, bad luck, etc. No need to go Cathy Woodish on Fairfax assuming everything that can go right would do so and then some. This is P&C business at heart, not a wide moat business. So competitive pressures would have an impact. When, how, etc. are hard to foresee but reasonable to assume there would be some. Vinod

1. Regarding 5% annual growth in earnings, I low balled this on purpose to show how much earnings have to be over the next decade even at such a low growth rate. If I assume 15% growth rate, they would have to generate earnings of about $3500 in the next 10 years if normalized earnings are $150 today and they can reinvest these earnings at returns comparable to what they get on current book. Looking at earnings from associates, they are carried around $5.5 billion and earnings to Fairfax right now are $1.1 billion. 20% earnings yield. I truly did not dig deep into any of these associates to form a strong view, but to me they are more likely cyclical highs. 2) I do not disagree with any of your other arguments. Yes they did good. But. I suspect almost everyone on this board would disagree with this: the role of luck. Assume covid never happened, where do you think Fairfax would have been? It would still be doing much better than in the past. Nearly half of the earnings power increase was from the side effects of Covid - the shock, monetary response, the inflationary follow up and the interest rate response. If instead, let us say Covid did not happen, we still have zero interest rates, then where would Fairfax earnings power have been? Many of the things you mentioned as brilliant would not have occurred. We would still be bitching about Prem. StubbleJumper wrote better than anything I could write, but my view is almost identical. These couple of years are the confluence of almost everything that can go right going right. I suspect that would not be a good baseline to hang our hat on for the next 10 years. This is my largest holding by far, I had to break every self imposed maximum position limits to avoid selling. I wish nothing more than for you to be right! 3) Volatility is good for Fairfax, always has been, and for us. No disagreement there. Vinod

If normalized earnings for Fairfax this year are $150 per share. Then these earnings must be growing at least at about 5% annually. That means, Fairfax should be able to easily earn $2000 per share in aggregate over the next 10 years. You cannot exclude any "one time" losses, this would be all in. That would be the definition of what normalized earnings would mean. Personally, I would be thrilled if this happens, but I think this is unlikely.

Investors are in this because they are expecting 15%+ returns. Prem himself mentioned I think they would not be investing in India if they did not think they can make 20% (OK, that is Prem being Prem ). Paying 1.5% + 20% performance over 5%, would seem perfectly reasonable for most of these investors when returns are north of 15%. Realized returns are 8.5%. Worse, these are investors who went to emerging markets seeking higher returns and they find S&P 500 had much higher returns. Now, they feel stupid for paying the performance fee. So they are going to capitalize the costs and discount it. Hence, the discount to BV. I dont think the discount would close unless 1) Fairfax India starts generating 15% annual returns, or 2) Fairfax India vastly outperforms US stocks, even if absolute performance does not reach 15%. Investors would be flocking to these non-US alternatives in that case. Vinod

You guys are seriously bitching that market is not recognizing Fairfax after a 100% run up in an year? Have patience! Give the market some time. It needs 3 dots (3 years earnings data) to then put a line to extrapolate to infinity. Then we might get BV multiple that makes us blush! In the meantime enjoy! (I am sure you guys are smiling ear to ear looking at the share price ) Vinod

Don't see how you are getting a 4% BV growth. If 2.5% of the shares are reduced each year at 0.65x BV, then you are gaining IV of about 0.35 per share of BV x 2.5% of shares. This should result in about a 0.9% gain in BV (0.35 x 2.5) for remaining shares. Vinod

Not Fairfax, but most insurers do asset liability matching. So for current book of business changes to interest rates, does not matter all that much. But for writing any new business, the cash coming in on that would be invested at higher rates. So they can afford to write at a higher CR.

I missed this the first time you posted. You should be calling this "Security I Like Best" Fantastic job! Thank you for posting. Vinod

The amount of money that is forgone to avoid that 10-20% drawdown is just insane. I think most investors would be better served if they put 100% of their capital into an index fund. And then when they find an investment that is offering better returns, just sell some index and put that money in that investment. So instead of using cash as the default, use market index.

10 Myths about the DCF Model https://pages.stern.nyu.edu/~adamodar/pdfiles/country/DCFmythsTemasek.pdf

You say it so much better that I do!

There seems to be 3 main points of contention 1. One cannot know FCF that are going to be generated in future 2. One does not know what discount rate to use 3. If you use a conservative FCF and discount rate, you find many stocks expensive Points 1 & 2 1 & 2 are closely related and general argument by some is that they are too uncertain. As one person put it, discount rate is like using the Hubble telescope, a small change and you are in a different galaxy. All true. But every single valuation method other than relative valuation suffers from the same thing. All the shortcut valuation methods you use have the same problem. Let us take the example of using 10x earnings for valuation. Here you are making assumptions about FCF and discount rate (a) all of earnings are FCF (b) a discount rate of 10% and since no reinvestment, you are assuming 0% growth. This is DCF model in disguise, but here you have implicitly assumed things which you are deathly afraid of explicitly putting into the model. When I use to play basketball with my daughter when she was 5 or 6 years old, she used to close her eyes whenever is ball looked like hitting her. To her it seemed just the fact of closing her eyes, seemed to sweep away the risk of the ball hitting her. Saying, you are not using DCF is the same exact thing. You are sweeping away the assumptions. Future is uncertain. Cash flows are uncertain. World is unpredictable. DCF valuation reflects that uncertainty. Embrace it. Point 3 It is like saying, I dont want to risk any money in stock market but want 15% returns. There is no point in valuing something conservatively and saying it looks expensive. Value what you think cash flows are going to be. Project it out several years. It is not DCF that is stopping you from buying. 50x earnings does not make something expensive. It looks expensive. You already know that so I would not belabor that point. To you point about Damodaran, DCF calculation is not really the tough part. He is a good teacher. The mechanics are very simple. The tough part is understanding the business enough to know as he puts it "the story" or as Buffett says the moat and how sustainable that is. Vinod

Like I said, he does not need to put FCF for year 1 this much, FCF for year 2 this much and so on to build out a DCF model. But DCF is essentially the only only way to actually calculate IV. The model laid out by Alice is based off DCF with assumptions plugged in. He does not do DCF is something both Alice and Munger mention, but it does not mean what you think it means. If you look at How Inflation Swindles the Equity Investor, he lays out exactly the behavior of how the inputs to DCF behave and how it impacts IV. That is the essence of using DCF. I know a lot of value investors take pride in saying "I dont do DCF". Once you do understand how earnings, FCF, reinvestment are working, you dont have to actually lay out FCF1, FCF2.... FCF in perpetuity to actually calculate value. Then you take a short cut to DCF valuation, but underlying it is essentially DCF. The mistake I made when starting out and for several years, is look down upon DCF and missed a lot of the insight it provides. I spend several months reading up Damodaran's Investment Valuation and it really opened my eyes. Assuming you are at the same level as Buffett and hence does not need to do some of the things just because he does not do it, is not wise. Vinod

Reminds me of this joke. There are these two young fish swimming along, and they happen to meet an older fish swimming the other way, who nods at them and says, “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes, “What the hell is water?” You are using DCF if you are valuing a company with any method other than comparative valuation. What you really mean is that you dont actually lay out the FCF and actually discount it back. You might be using a short cut like 15x Earnings. But underneath that you are making assumptions about required return, expected growth, etc. Only you are doing it implicitly. All valuation ends up being some form of DCF. Buffett does DCF, he is just able to do the basic math in his head. His short cut method is pretty well covered by his biographer. For most investors, until they become very good at it and understand the impacts, actually laying out a DCF is an extremely useful way to pick up nuances in valuation that are easy to miss. As another old dude is fond to say not learning this, "you go through a long life like a one-legged man in an ass-kicking contest. You're giving a huge advantage to everybody else." Vinod