StevieV

Some unstructured thoughts: (1) The underwriting seems to be under control and going reasonably well. (2) I like the mea culpa on shorting. Good to acknowledge mistakes and learn from them. (3) I generally don't like exclamation points, and didn't care the sprinkling of them here. Just say what you want to say. (4) Nice dividend and interest income. (5) The 15% "target" seems more of an aspirational target than a mid-range or average result target. I'd prefer they communicate this differently. Perhaps a range of possible returns depending upon equity, fixed income and underwriting returns. They achieved neither the underwriting "target" or the investment target. (6) Sort of a swing for the fences portfolio. I own KW myself, and consider that more of a steady performer. But, a lot of the others are more volatile businesses. (7) Also not a fan of the opening - we would have done great, except we didn't. (eight) I think the dividend and interest income, plus reasonable underwriting should be a good baseline driver of returns. Equity returns will be a wild card. ---------------- Edited to write out the "eight". Not sure why, but the board was automatically changing my number 8 to an emoji. It wasn't showing up when I typed it, so I was not sure how to edit. In any event, the last point is simply another of my thoughts, and I meant no special meaning for the last point.

I have four kids, and it is the best thing I have done in my life. As is much discussed, it takes a ton of time and work. Most of the parents I know love their children very much, and do their best to be good parents. So, I generally don't like to specifically criticize other parents, even if I don't agree with everything they do. Also, of course, I make plenty of mistakes myself, and can certainly be wrong in some of my views. That being the case, here are a few quick thoughts on where things can go wrong (IMHO). Interestingly, I think some have investing parallels: (1) Goals: As a parent, I am trying to raise kids with a goal towards helping them achieve their potential and become adults I can be proud of. For me, I would like them to develop a strong faith, good character and compassion. I would also like them to be hard-working, determined, independent and resilient. Those are the types of things I think about. Sounds pretty straightforward, but I think almost nobody else thinks this way. My list is almost totally different than other parents. I believe most other parents look for: (a) good grades; (b) excel in sports or other activity (music, dancing, etc.); © friends/happy. I'd also like my kids to have these things, but as a by-product to the qualities above. The best player on one of my son's soccer teams this fall was difficult - criticized refs, teammates, was lazy at times. I'd rather a hard-working, ok player, playing his best (good thing, cause that is what I had; the coach noticed, was very complimentary and gave him some good chances; plus he had a lot of fun). (2) Short term thinking: This is a tough one. It is often tempting to give in to say whining. You're tired and want to go to bed. But, this generally leads to more whining and much more trouble in the longer term. I sometimes give in myself, but try not to set myself up for longer term problems as best I can. (3) Following the crowd: There is lots of crowd following. What are the Jonses doing? Should we be doing the same? That's just what people do now (without thinking for themselves). An incredible amount of time is spent on kids sports. That's fine. I like sports. However, if you are going to spend all of your time and money on something like club and travel sports, you should do it because you've decided it is the right thing for your kids and family. Not because everyone else is doing it. (4) Pain avoidance: We all want our kids to be happy. We all want to shield them from pain. But, challenges are a part of life. It's ok if they don't get everything they want. It won't make them less happy, and will hopefully help them build some of that resilience and independence I mention above. Also, trying to avoid all problems can drive you crazy and lead to spoiled kids. Anyway, just some quick thoughts. Off to watch the big game.

I am watching this stock too, but isn’t the relatively small premium to the current market cap ( rumored purchase price is $11B, current market cap is $9.8B) a concern. That’s just a 12% premium to the current price. This seems to be a difficult business to run and really not worth as much than thought. Sold out of Arconic today at 20.20, break-even for me. Deal set to be announced between 21-22 per WSJ. Would expect a decent spread to remain until closing. No loss but still a disappointing premium. Good call Spek. Good call. Deal fell through, and stock price retreated accordingly.

As you point out, 7% is aggressive. Difficult to get there without a change to the mix, and some higher rates. What is interesting is that Fairfax's investment style may make 7% more plausible, while at the same time making a big miss also more of a possibility. I am not sure if that is a good thing. Somewhat higher rates, somewhat more aggressive mix, better underwriting and more conservative stock investments may make 7% investment returns less likely, but it may make double-digit BVPS growth more likely.

I saw a chart on this just a few days ago. I'll link it if I find it again, but GDP to S&P correlation has historically been very, very low. Regarding this thread generally, I have no strong opinion on whether the economy or the S&P 500 will turn over. Doesn't seem like the economy is on the verge of major problems, but who knows. I've got even less of an idea regarding the S&P 500. I tend to think a pause or correction in the market coupled with continued growth in the economy would be fine.

7-15% is a pretty large range. I would expect Fairfax to return a compound return in that range over the next 10 years starting from today. I am not sure what you mean by "any" 10 year period in the future. If the stock rises 50% in the next year, without a corresponding change in IV, I would be less optimistic on the 10-year return from then.

I'm not sure if I'd sign up for the shares being "cheap." I'm more comfortable saying "not expensive". FWIW, I think there will be better opportunities for purchasing shares in the future.

This "talking your book" criticism seems prevalent, but is silly. As oddball notes, when an author owns a position in the stock they are discussing, they are accused of talking their book. When they don't own a position, they are criticized for not having skin in the game. It's silly either way. Better to just read and consider the strength of the analysis. ------------ I also wanted to say that I think this is a very appropriate venue to discuss, recommend and criticize investment blogs. I don't see why any criticism should be limited to the comment section of a particular blog.

Hi Eric, I listen to your podcast. I the DT has some excellent ideas. I've got some general suggestions for your podcast, even though they may not be suggested episodes. I am not sure what your goals are for the podcast, so some of these may not apply. (1) It would put out the podcast on a regular schedule. As a listener, I like that. Also, most of the successful podcasts I am aware of do so. If you are lacking a guest, you could try to do the podcast without a guest every once in a while. I imagine it is tougher, but a simple: This is one of my most recent investments; or this is my portfolio podcast could be interesting. (2) I like hearing guests who aren't on other podcasts, and that's one of the things I like about your podcast. I am not sure this is the path to podcast success. Just a personal preference. (3) I am interested in individual or perhaps small shop investors who have had success over a reasonable period of time. Someone like Packer would fit the bill. I am just interested in hearing the person's record, how they achieved it, how they've adapted, and what they are doing today. (4) I've always thought that concentration versus diversification is an interesting topic. How many stocks should you own? Is it possible to outperform with 30+ significant position? Should you cap a single position at 20%? Higher, lower? Has your weighting changed over time (more or less concentrated)? Why? (5) You put out a general call for guests here. If there is a poster here that you would like to interview on your podcast, I suggest you send them a message and invite them specifically. I think you'll have a much better chance of getting folks from the board if you specifically ask particular members. Enjoy the shows. Keep up the good work.

Styles of investing, including, and perhaps especially, value, don't work all the time. That is fine. But, Einhorn has dug himself quite the hole over the last few years versus the market. It isn't easy to make up that type of under-performance. Perhaps particularly so when long-short. Einhorn H1 2018 - (18%) 2017 - 1.5% 2016 - (0.1%) S&P H1 2018 - 2.7% 2017 - 22% 2016 - 12%

I think so too, but there hasn't been much profit in it yet. In my opinion, the risk/reward for some names has gotten much better as the oil storage situation has improved, the spot pricing of oil has improved, the potential for better pipelines (Line 3 and Transmountain) has improved, and stock prices have remained stagnant. At $30-$40 WTI, you had to be willing to anticipate improved oil prices. At today's approximately $75 WTI, you are only betting on sustained pricing (or course, there will be substantial swings).

Anything in-particular from this year's presentation? The stock seems a bit expensive to me here.

"Across all accounts up about 7.5% YTD, one account up 14% YTD. I'm at about 40% cash overall. So these are decent numbers." I believe you are saying that your accounts are up 7.5%, including the cash. If so, I would call that much better than decent.

Well, that is true. There is a price at which I would buy BH. But, as a practical matter, I think it is almost a certainty that I won't buy the stock. The discount at which BH would be attractive to me is so large, that I can't imagine the stock price would get there. In my mind, it is too hard for investors to succeed when management has their interests in mind, to invest in a one where they don't.

It seems to me as though true value should perform over a time period as long as 10 years. If I buy an undervalued stock, it may remain out of favor for a while. However, eventually, the growth of the company, dividends, buybacks, etc., should eventually lead the stock to outperform. That may not happen over 1 year, 2 years or perhaps even longer. It should happen over a 10-year time period. If they don't outperform over 10 years, the problem may be that Mr. Chou (or whoever) is not actually buying "value" stocks, at least as I would define the term. Someone above mentioned Sears and Valeant. I am not sure if Mr. Chou was invested in those stocks, but those certainly were not values (i.e., worth more than what investors paid for them). Rather the dreaded value trap.

I put WELL and KIM on my watchlist a month or two ago, near when this thread started. I am not convinced that REITs are SO cheap. At the end of the day, I think a simple yield + growth in yield formula gives you a reasonable idea of potential returns. I think retail real estate is going to be challenged for obvious reasons. Overbuild of retail, failing brick-and-mortar stores and, of course, interest rates. WELL I see as in a good industry. It still has to be sufficiently cheap to be attractive. I am having trouble quickly pulling up dividend history and growth rates because of the ticker change. However, they are yielding 6.7% now. To be attractive, I think they need to be growing the yield at least 4%. More than that to be "cheap." They are cheaper than when I first put them on my watchlist. Maybe they are getting into the attractive range, but I think not a screaming buy. KIM is more in the teeth of potential problems.

The earnings transcripts are still available and don’t disappear behind the paywall. That is the main thing that attracted me to the website in the place. I thought that they were starting to put old transcripts behind the paywall. Only the latest quarter available for free. I am also having different experiences on different platforms. If you can only access the latest articles, that greatly reduces the value of the site to the free user. As you mention, many articles are far from great. However, when you can go back a couple years and see all of the articles about a particular company, plus the transcripts, that adds up to some value. Think about the value of the threads here if you could only go back a week or month. Hope they reverse the decision. Not tempted to pay for a subscription at current pricing and quality.

Thanks petec and Cigarbutt. Those are very helpful thoughts about the insurance float. I would also expect changes to the investment leverage to be gradual (though perhaps lumpy). Meaning, Fairfax isn't going to go from 2x leverage to 1.5 or 3x leverage overnight. That would play out over a number of years. On the lumpiness side, it could go into a decline until a harder market, and then reverse.

They are using float. The holdco cash is probably going to be used to buy the OMERS stakes in Brit and Eurolife when those agreements come due. But I wouldn't necessarily differentiate between float and holdco cash. The point is that float levers your equity - you get to keep the investment returns on a far greater amount of money that what you invested in the business. Here's how I understand it: The leverage is derived from the fact that when you sell an insurance contract, the buyer effectively lends you money (premiums come in now, claims go out later, and you get to sit on the money in the meantime). The cost of the leverage is derived from the CR. The amount of the leverage is derived from the value of the premiums you write and the duration of the contracts. So for example, if you write $1bn in premiums every year on contracts that expire after a year (e.g. a typical house insurance contract) you'll have about $1bn in float, because you get to sit on one year's worth of premiums before the claims go out the door. If your CR is 100, then that leverage is cost free. Bit if you write $1bn in premiums every year on contracts that expire after 10 years, then (once the business is mature) you'll have about $10bn in float, because you get to sit on 10 years' worth of premiums. If the CR is 98%, then you're being paid to borrow that money. Of course, long tail is riskier than short tail - you can't predict the exposures so well and something you didn't foresee, like asbestos causing cancer, can come back to bite you - so you have to be very careful with underwriting. So, let's say you have $1bn in equity and you write $1bn in premiums every year on 3 year contracts. You'd have $4bn in investable assets ($1bn equity and $3bn float). If you can underwrite at 102% you're going to lose 2% of premiums a year in underwriting profit: $20m. If you can invest $4bn in a 7-year Seaspan debenture at 5.5% you're going to earn $220m in interest for a total of $200m in annual income, before holdco costs and tax. If you've also got warrants exercising at $6.50, and the Seaspan share price goes to $13, then towards the end of the debenture you're going to exercise the warrants for $8bn(!!), paying by forgiving the debenture. Not a bad return on your $1bn of equity. That's the impact of levering equity upside using float. A few points to note: - I have oversimplified the relationship between contract duration and float, but I think the basic principle holds. - Fairfax currently lever their equity about 2:1 using float, not 3:1. But they could probably double premiums in a hard insurance market. If you double premiums across the board it would take time for float to double, but logically you'd get there if the hard market lasted long enough. Unfortunately I suspect the regulator or the ratings agencies would panic long before they got to 4:1 levered, but there's scope for some growth. - underwriting profit in any given year is calculated off the $ of premiums, not float. That said, you can look at the float and know, if the average CR over all those contracts is 98%, that you're getting paid 2% to borrow. - float gives you huge investing leverage whether or not the CR is over 100% - it's just that the cost of that leverage is lower with a lower CR. That's why this model is so powerful for compounding if you can get both underwriting and investing right. - the debenture + warrant deals are great in theory because the downside is bondlike, so the regulator looks at these as bonds, but in most cases the warrant strike price is quite close to the share price at inception, and the shares look reasonably cheap, so there is near-full equity upside. That's powerful, if they can do it with a significant proportion of that big bond portfolio. If they can do $1bn a year on 5-7 year terms then they can basically convert $5-7bn of that bond portfolio into securities that have bond downside but equity upside. That more or less doubles their equity exposure but only on the upside. Get that right and lever it with float and the impact on shareholder's equity could be spectacular. I hope this helps but sorry if I am teaching grandma to suck eggs. petec, My only quibble is that I don't believe it is as easy to increase the leverage as your post may imply. They need to find profitable insurance to write (100% or less CR) or acquire. If Fairfax does increase book value by 15% (straight book value, not per share), it seems to me as though it will be a challenge to maintain the current leverage. If they grow 15%/share/year, and some of that is through share buybacks, that should be a little less difficult. That is one of the reasons why I like opportunistic buybacks. It helps alleviate some size/growth problems. I think I have that right. Any reason you think maintaining the leverage won't be an issue? StevieV

I see. My bad. Taxes, expenses, etc.

Vinod, Thanks for correcting my calculations. Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations). My earlier post on this should be ignored. I was reading and posting too fast. 7% for the equity portion of the portfolio and 7% for a blended portolio is much different. A 14-16% return for the equity portion isn't plausible. I need to look more closely at this later today. The numbers below are a little hasty. It looks to me as though the book value is about $12.5B US. A little under $10B CAD. (most I see are per share; so perhaps I have this total book value incorrect). If there are $40B in investments, at a 95% combined ratio, why would they need a 7% return to grow book at 15% (about 1.8B USD)? Anyway, I've gotten myself confused here and need to take a fresh look. I guess I need help here. Here is the quote from the letter. "With $40 billion in investments, a current run rate of $11.5 billion in net premiums written and $12.5 billion in common shareholders’ equity, we need an investment return of approximately 7% in order to achieve an annual 15% increase in book value per share, assuming a consolidated combined ratio of 95% at our insurance operations." 7% return on $40B is $2.8B. $2.8B would much greater than a 15% increase in the book value. It seems to me as though they are subtracting from the $40B in investments to get the 7% number, but I don't understand the steps. Some of the 40B is certainly necessary for claims, but they should keep the investment returns. That being said, they don't have a free hand on the entire 40B given the necessity to be able to pay out claims. Is that what they are taking out, or is there something else? Thanks in advance for any assistance.

Vinod, Thanks for correcting my calculations. Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations). My earlier post on this should be ignored. I was reading and posting too fast. 7% for the equity portion of the portfolio and 7% for a blended portolio is much different. A 14-16% return for the equity portion isn't plausible. I need to look more closely at this later today. The numbers below are a little hasty. It looks to me as though the book value is about $12.5B US. A little under $10B CAD. (most I see are per share; so perhaps I have this total book value incorrect). If there are $40B in investments, at a 95% combined ratio, why would they need a 7% return to grow book at 15% (about 1.8B USD)? Anyway, I've gotten myself confused here and need to take a fresh look.

Vinod, Thanks for correcting my calculations. Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations). My earlier post on this should be ignored. I was reading and posting too fast. 7% for the equity portion of the portfolio and 7% for a blended portolio is much different. A 14-16% return for the equity portion isn't plausible.

I think that is a fair concern, but if forward returns for the market are low, that could still mean significant outperformance for Fairfax. Let's say they add and subtract no value in their investing. If the market returns 7% CAGR over the next 5 years (and Fairfax matches the market), Fairfax thinks they can grow at 15%. I don't think 7% is unreasonable, but the market may very well fall short of that. Let's say the market returns 3% (and, again, Fairfax matches). Fairfax wouldn't hit 15%, but could do very well on a relative performance basis against the 3% market. Lots of assumptions baked in. Just saying that Fairfax might be a good relative performer in a challenged equity market.

If they get the 15%, I would expect some multiple expansion. That would give shareholders a somewhat better than 15% return. Certainly could double in 3-4 years if they get 15% BVPS growth over that time. Of course, actually achieving the 15% is the key.