vinod1

Yes. I use several index funds - US Total Stock market, International Index, US Value Index (Vanguard) and US Small Value Index (Avantis). I keep track of their valuation levels and buy ones that I find cheapest. Although I have been pretty wrong on which of them is cheapest for a while. But that is not a whole lot of value add or value destructive either way. Not very scientific either but I like to keep a little bit in International and US Small value. Most of index portion in US Total and US Value. Vinod

Yes and no because it varies based on opportunity set. Sometimes I am able to find enough to fill out my whole portfolio with stocks I like. So my approach is this. I assume I have no ideas and there is not much value I can add unless I can make compelling case otherwise. So I start with a 100% index portfolio. If I find a really compelling investment, I would invest upto my position sizing limit for that specific investment risk that I tolerate. I would sell that much of index fund to fund this investment. The more stocks I find, the less I have in index funds. Starting with 100% cash instead of 100% in index funds has many disadvantages. - It puts pressure on you to find ideas. Many many ideas and really really quick. Not a recipe for patience and acting only when you have overwhelming evidence in your favor. - If you do not have many ideas, you do not end up making crappy investments. No "I like this, seems pretty good, let me take a 1% stab at this". - You do not have cash drag - You are not tempted to market time or reduce allocation because "markets seems rich" and I cannot find anything in my competence. This is actually the bane of many value investment managers. Vinod

If you believe in addition, subtraction, multiplication and division, indexing is going to beat the vast majority of the investors over long periods of time. Using elementary math you can deduce that. Assume companies make $2 trillion of profits per year. These are at the end of the day what investors return would be in the long term. Index investors get their proportion of profits without any costs. But there are about $300 billion to $400 billion in costs incurred by active investors and their share of the profits would be after this and would in aggregate would always be less than index investors. Do this math over 20 years and it is no surprise index beats 95-99% of investors. Markets can be utterly inefficient and still the above holds true.

Read "Four Pillars of Investing" by William Bernstein. I spent ungodly amount of time from 2001 to 2006 reading up on indexing, including the vast majority of the academic finance papers and every single book published on indexing upto that point in time. This is by far the best book you would find that appeals to the common man and provides the right level of information. Vinod

This is exactly what I do. Buffett talked about this several times as well but very few people seem to have paid attention to it. In addition, I have a 10 year expected earnings number as well. While I look at current earnings as my salary, I try to put together a portfolio that gives me the highest 10 year salary possible. If I had only current normalized earnings, there is a psychological pressure to juice it via a tendency to buy cheap stocks with high earnings yield like GM or banks. This forces me 1) to avoid melting ice cubes 2) focus on business quality 3) reduces impact of stock price fluctuations - I worry less about why isnt it going up? As long as earnings keep growing up I am happy. Vinod

I would think the natural tendency of market would be slightly overvalued. People who are bearish would avoid stocks most of the time anyway. So we have a market which ordinarily would be dominated by optimists (bulls, else they would not be investing) and that should lead to higher than what a totally unemotional investor would pay. So market and many stocks would be perpetually be slightly higher than what we as valuation sensitive investors would be willing to pay. If this causes us to keep a lower allocation to stocks it would undo any stock picking skills we might accidentally exhibit This is just a wild thought that I have been thinking for a while and I might be entirely mistaken.

Historical comparisons are not valid for a lots of reasons. Valuation levels need to reflect that. A few of the most important changes 1. In the past say 1880 or 1900 or 1920 or 1940... no one can put together a diversified portfolio of stocks at a cost less than 2% per year in expenses. That is direct expenses. Then you have insufficient information, risk with paper stock certificates, fraud, etc in buying stocks. Even if you ignore these indirect expenses, at a minimum you are paying 2% fees annually (brokerage costs, bid ask spreads, over the typical holding period) and unit trusts had loads and annual fees that averaged these as well. So if stocks returned 6.5% real, you still ended up with 4.5% returns and at best not in a very diversified way. Now an investor can buy total stock market fund at 3 bps. To get the same returns as in the past in a much more convenient way, investors can pay a lot more due to lower costs. 2. As much as many look down at economists and central bankers, they did learn a lot. The great depression - the bogeyman for many stock investors, is not going to happen again. We had a good practice run in COVID. Should something really bad happen short of a worldwide annihilation event (when your portfolio would be of little value/use anyway) you can predict what Fed would do. No points for guessing. You should be able to guess what politicians would do (Trump to Biden and everyone in between) - spend and spend some more. And they wont be wrong. This takes away the greatest risk to stock markets - that aggregate spending would fall i.e. consumers would not be able to spend money. Thus companies revenues are protected. This is a dramatic change from the past. If risk is lower, it is only natural to expect higher valuations and lower returns in future. 3. People also have wised up. They are not stupid. They do have 150 years of data that shows, every single time the stocks crashed, it was a buying opportunity. Short of a revolution (Russia, Germany, Japan...) when it does not matter what you hold (ok gold to some extent) everything is going to be worthless. Short of that, it is clear to anyone and their dog, that buying when stocks are down is a no-brainer. 4. In the past people worked until they dropped dead. Now people spend several years in retirement. For that they save (not everyone, but anyone who has wealth) and invest in the stock market. 401k, ira, etc. Everyone paycheck vast sums get deposited into these and they are automatically invested in markets. To expect stocks to get to a PE of 7 or 10 is stupid. Not going to happen except for very very brief amount of time - a few days at most. So valuations are going to average much higher in future. Vinod

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.