SafetyinNumbers

This is really profound. A lot of investors like to invest based on analogs and so they look at charts to get comfort on what might come next even if all of the facts have changed.

P/B matters for balance sheet businesses but it should be looked at in conjunction with ROE. Assets that are marked below FV but are earning an appropriate return will increase ROE all else being equal. The relationship between the BV and ROE should be exponential. At a 10% ROE a P/B of 1x makes sense for a 10% required return. At a 20% ROE P/B should be much higher than 2x because the compounding effect over time of the return on incremental capital. For Fairfax, I use BVPS + float, 15x earnings and 2.5x BVPS to triangulate intrinsic value.

A multiple between 1.3-1.5 suggests a very high return expectation vs long term equity index expectations of 10%. I think there are a few ways to triangulate intrinsic value and all get me well above 1.5x BV. I also don’t think Fairfax would be buying stock back at fair value. They would want a discount.

Great point. The buybacks above book value also reduce equity. Both actions are boosting forward ROE which in theory should boost the forward multiple. The conservative valuation of the equity portfolio and the high reserves also both act to boost current ROE but over time they make their way into earnings.

I don’t think the insurance acquisitions were mistakes. They were risk adjusted bets that worked out on an economic basis but didn’t look great on an accounting basis after the initial acquisition. As for the investing side, we should expect them to be wrong a third of the time. We just don’t which ahead of time or the sequence of the mistakes. Otherwise, I fully agree!

They had very high ROE in those early years but I think the multiple really exploded because investment to equity leverage increased significantly. They were buying float so cheap and analysts couldn’t fathom how much of that float would get paid out over the years so forward ROE was likely overestimated. Still great deals but not as good as they looked. Now underwriting and investments are contributing to returns. If ROE were based on economic returns, it’s much higher than the accounting returns the last 4 years as Viking”s work highlights and a big part of the reason I have such high confidence in accounting ROE for the next 4 years.

I think you are willing to make a forecast while the more pessimistic holders are basing their decision on historical valuation.

They don’t need the equity capital to grow BIAL so it doesn’t make sense to use political capital to get the IPO done faster.

John, What do you base your outlook for Fairfax on? What’s your expected return and why?

2029 potentially

Doesn’t make sense from capital treatment perspective. I assume they think very long term. There are other ways to add value with a public vehicle. I think return expectations are very high because the market is particularly inefficient.

I think the odds are low of this but it’s possible. I think more than likely the discount persists but they will be able to sell some Anchorage to buy stock. I also think BIAL will start paying out dividends at some point which will provide capital as well for growth or buybacks.

Intrinsic value is likely in the $35-45 range so probably closer to 13% CAGR vs 10%.

Actual fees have been 1.9%. I think we all agree that IV is significantly higher than BV so is there a benefit from deferring fees that should be included in the analysis? Also, is there any mitigation to fees from the benefit of cheap leverage in part due to the relationship with Fairfax? What fee would be fair? Also, if you own Fairfax are you frustrated they pay fees to outside managers?

They have bought shares back in the past. I suspect when they have more capital they will buy more.

Fairfax owns ~77.5% of WEF III and WEF III has increased its stake in Greenfire (GFR) ahead of a rights issue that went ex today to 71%. Fairfax will be effectively increasing its position by another ~80% when WEF III exercises their rights. The shares are trading very well so far but the rights haven’t started trading yet despite being listed. I can see the shares rerating post rights issue given it trades cheap, won’t need any new capital and will be debt free. https://www.businesswire.com/news/home/20251114867395/en/Waterous-Energy-Fund-Acquires-Shares-of-Greenfire-Resources-Ltd.

I think this one from RBC is better because it has financing costs and head office expenses built in. I like breaking out returns on each asset class but that can easily be incorporated below.

I think he’s friends with Prem, they both invest for absolute returns and the Dhando Investor is a great book. I like it.

My understanding is that FIH is considered a listed stock on the TSX so has different capital treatment. I’m not making an argument, just explaining why it’s not something I am concerned about. On a side note, FFH happily pays fees to other money managers like WEF, BDT, Shawkwei and others so I find it amusing that it’s such a hang up for retail investors who pass on FIH.

This is terrific. Pre 2011, investments made up for underwriting losses and post 2011 underwriting made up for poor investments (hedges) and low rates. Now that both are clicking, 20% ROE seems more likely than 15% ROE.

Another way, FFH understates earnings is by giving the preferred return shareholders who purchase the minority interest so many rights that they are deemed common shares by the accountants which understates operating earnings until they are brought back in. The issuance Ki made in 2022 as noted above are also these types of common shares. The preferred return is 8% and they get paid back in cash on the IPO at the IPO price. It’s why FFH’s economic interest in Ki is closer to 40% vs 20% as it appears.

i have about the same as you @giulio. If we are right @Txvestor, FFH just got $100/sh cheaper for you.

How do you calculate that?

Strathcona has a poor reputation too. It hasn’t hurt the returns.

Are you familiar with the financials? They contributed $38.8m in profit in Q3 but maybe that’s not repeatable?