SafetyinNumbers

The actual ceremony was very dramatic! A few songs (including the Indian national anthem), lots of speeches and a candle lighting ceremony. The replay is available in the link below.

I guess they don't think of it as quality which makes sense. It will be interesting if they are patient on buying quality and then sitting on their hands.

I think they are trying to get the buybacks in before FFH goes in the 60. It would be surprising if that didn’t bring along some multiple expansion especially when FFH passes IFC in benchmark weight.

I had the exact opposite take. My guess is odds are better than 50% it happens in the next 12 months. Perhaps a few other things too as the election seems to be a catalyst. The below is from the AGM transcript.

Q124 showed only $34.8m of income from Poseidon and that’s much closer to 43% of Q423 reported income (just eyeballing the difference between 2023FS and Q323 reported income). I assume the same is true for Eurobank which doesn’t report Q1 until next week and Helios which also hasn’t reported Q1 yet.

The higher the multiple is the better.

I guess we can assume FFH reports ATCO earnings on a one quarter delay? That should be a big help to Associates income in Q2.

They seem to have a liquid grey market and there seems to be a reliable grey market premium for those who get allocations to do a quick flip. This article suggests it’s trading above Rs 350 in the grey market. https://thearcweb.com/article/go-digit-ipo-valuation-fairfax-prem-watsa-fyeU0WSqN1fQY2G6

It seems like FFH has marked its stake in Digit at ~US$1.9b being the sum of the compulsory preferred fair value and the common carrying value. If the IPO is being done at Rs 272 or ~US$3.25 at prevailing exchange rates and the pre-IPO share count is ~875m, then the pre raise market cap is ~US$2.85b. I recall seeing somewhere FFH had a 68% stake which means we wouldn’t see much of a gain on listing as that works out to ~US$1.9b. Does that make sense? If anyone has a better idea please share! I’m trying to understand how this all plays out for book value in Q2.

I’m a bit rusty on where Digit is marked on Fairfax’s books. i think most of the value is being marked on the convertible preferred despite most of the ownership being through the common equity.

I was the “analyst” and was just throwing a number out there with hopes they would correct me with the right number! I appreciate though that’s probably not a number they want us to know as it could lead to a lot of second guessing if they aren’t as aggressive as they could be if an opportunity does present itself. I do think it’s important for investors to think about as it’s more right tail optionality that markets are ignoring and is another reason for multiple expansion.

I’m not a macro expert by any means. I’m hardly a macrotourist and perhaps more of macrovoyeur but I think the plan is to use gold as the balancing currency since all the central banks seem to agree it has value. What price gold has to be to be able to support that function is an open question. The west is focused on cryptos while the east is buying all the gold it can. GLD is losing ounces and gold trades at a premium in Shanghai vs London. A higher gold price means a weaker USD even if the DXY is increasing. China seems to be stockpiling all kinds of commodities which makes a lot of sense. As a big net consumer of most commodities, low and less volatile prices are beneficial to planning. An overvalued USD means undervalued commodities which might lead to shortages as there is no price signal to incentivize production. China is incentivized to take prices to a level where natural resource companies will make build decisions to increase capacity. This seems like a much better use of reserves than holding US treasuries if one thinks USD is overvalued.

Quants gonna quant

I think I might be the only one who thinks the rupee has the potential to become a more relevant currency. Besides being the largest population, largest democracy, being strategically important to the BRICS countries and the G7, English law and language, about to be the 3rd largest economy, growing the fastest, Indians also own a lot of gold. I think gold is in the midst of revaluation vs reserve currencies (USD and its best friends in the DXY) much like it did in the 70s and 00s. The best part is that it’s a free option as Prem explained at the FIH AGM, the expected returns have to be higher to account for continued rupee devaluation but that might change and that would super charge returns in USD if it happens.

Does valuation enter into your process or just if it will still be here in 50 years?

I did. They have the same business model and size but very different set ups. I think Fairfax’s stock is an easier bet now than Berkshire”s stock was then based on the set ups. That’s the point I was trying to make.

The only things similar about Berkshire in 1995 and Fairfax is the market cap. The investments/share, float/share, premiums/share, surplus capital and P/B are all quite different.

BRK has returned a little over 12% CAGR since the late 90s and has had some multiple contraction. I find it difficult for FFH BV to not double or more in the next 5 years which is a nice start. If FFH can do that I think we will almost surely see multiple expansion over that period which makes it an even better start. How the compounding story goes after that is harder to predict but I think they are going to be disciplined which doesn’t mean they won’t make mistakes but as it stands now they are painting a masterpiece.

No one except for Bloomstran who thinks BRK’s surplus capital gives it a return advantage over FFH since it can invest more of its capital in equities which by definition have a higher return potential than fixed income. Of course, he ignores the leverage and one would think a quickly increasing surplus capital might be highly correlated to the multiple, but I digress. My question is, how much surplus capital do you think FFH could deploy into quality equities if there was a giant dislocation that created a big opportunity.

Another way to frame it is because of the profitable float leverage, the equity returns don’t have to be high to earn a 15% ROE but they could be and I’m betting they will be without having to pay for it.

I don’t think a probabilistic investor would come to that conclusion. The complexity is designed to reduce risk and increase returns. Regardless, it’s a poor argument to make now based on the outlook in which surplus capital is about to skyrocket. The thing that makes Bloomstran pick BRK over FFH is its surplus capital. FFH is about to be swimming in it. In theory the increased durability should increase social value and returns.

I’m glad the article is being associated with Berkshire. Quite frankly, it’s the biggest source of like-minded long term investors for FFH after the Canadian institutions. I rather get those individual shareholders first since the institutions don’t really care about the price they pay just the performance they get. I wanted to highlight how much better the set up is for FFH vs BRK both based on the size of the insurance business on a relative basis and the starting valuation. Of course, the forward macro conditions, execution and asset allocation decisions will determine what the future returns look like but I can see how quality investors might flock to FFH if they execute on the strategy of adding quality stocks on a big market dislocation. i think it’s important to note that BRK has been way better on the equity investments which is why it has so much more surplus capital than FFH. It’s the reason Bloomstran prefers BRK. FFH is now in a position to stack surplus capital which will increase durability and the potential to add high return equities.

Thanks! Many thanks to @NormR for helping so much with the editing and connecting me with his editor. I’m so excited to see it in the paper when it gets delivered tomorrow. Long time subscriber, first time contributor

It was a dumb joke that we get more snow in Toronto than Omaha (about 2x actually!). In reality, when BRK first hit the same market cap as FFH is now in 1995, it wasn’t set up as well as FFH is. BRK was trading at ~2.5x BV and had insurance premiums of only $3b. With that set up, I think FFH has a good chance of outperforming what BRK already accomplished in the last 29 years.

It’s one of things that gets me very excited about owning shares for a long time and being very resistant to selling too soon. In the late 1990’s we used expensive equity to buy float cheap but the combined ratios were high. The equity got expensive because FFH booked 4 years in a row of 20%+ ROE. Back then, the starting point was 1.8x BV and the stock went to 5x BV. It was really smart to sell back then but this time the earnings quality is so much higher. Instead of buying underperforming insurance companies if our stock gets expensive we may buy large quality companies at a fair price. This will dramatically increase surplus capital and increase returns. The snowball could get huge quickly which should probably be expected to happen easier in Canada vs Omaha from the same starting point.