SafetyinNumbers

I think book value is entirely appropriate metric to trade on for Fairfax. Most financials that are balance sheet centric trade on book and expected ROE. I wouldn’t want it to change just as our book value is growing 3-5% a quarter. Plus earnings streams are volatile in the insurance business so a P/B multiple in theory should dampen volatility which makes it easier to hold.

That’s awesome. My trader instincts have diminished significantly since leaving the bank. I don’t even try any more.

You might be absolutely right but I think there is a chance the quarter is good enough that we don’t revert back under 0.82x book despite technical conditions. I can’t say I hope you get a chance to buy those shares back cheaper!

Thankfully, Fairfax is not a commodity but that still doesn’t mean we won’t have another drawdown at any moment. Investing to avoid drawdowns is hard and I think it’s part of the reason we are stuck near a $1000. Today was the 6th time through. Maybe the sellers are finally done or we’ll chop away all summer. Ultimately, it shouldn’t matter in the long term.

Thanks for sharing! I’m really grateful to Bill for having Charlie and I on the podcast. I’m really lucky to know both of them and call them friends. Please share any feedback. It’s always appreciated!

Great posts as always Viking! Thank you! I like that GIG might earn the entirety of the instalment payments over the payment period. I really appreciate how cleverly they structure deals. Fairfax has so much leverage that just earning the risk free rate on extra capital supports a 15% ROE. Anything that defers payments like GIG or the TRS is hugely accretive.

They also started that period trading at the same P/B multiple but Fairfax’s multiple down by almost 30% and BRK’s went up by an identical amount. I showed that makes up most of the difference between the two returns. I also think most of Fairfax’s positions are further away from intrinsic value so perhaps the return are even closer than they look when normalized. I think the exercise is interesting to show that Fairfax fundamental performance wasn’t as bad as the stock would suggest and that’s the margin of safety/opportunity now. The blog chose that date because that’s when it started.

I don’t think Prem is a seller, thankfully.

I did the math to solve for the DRIP and the multiple expansion for BRK and contraction for FFH. The spread narrows quite a bit. That’s what I call margin of safety.

Value investors already own their shares and are likely the sellers near a $1000 because it’s a big figure and we are entering hurricane season. Investors are trying to avoid drawdowns but there seems to be decent demand keeping the stock close to all time highs. I think the buyers are the vast majority of closet indexers and index enhancers. That’s most of actively managed institutional capital benchmarked to the S&P/TSX Composite. The market cap of the benchmark is 3.1T but I’m not sure how much is benchmarked to it. Some estimates suggest 8% is owned directly by ETFs. For Fairfax, I think another 18% is owned between Prem and the TRS. I think FFH is pretty tightly held since the share turnover is relatively low vs the average stock but that could change if the stock gets closer to intrinsic value. I don’t have access to the data but I think this might have happened with FFH from 1995-1998. The stock went up 6x from C$98 to almost C$600 ending above 3x book at the end of 1998. The share count went up at the time and book value was growing fast at the time going from US$39 to US$112. The P/B multiple went up a lot too. I think the current situation is an analog except, the starting valuation is incredibly low, it’s very cheap on earnings and while book value is growing quickly it’s not growing as quickly as 95-98.

I’m going with $850

It trades a bit more when including all the ATS besides just the TSX but your point is well taken. The link below lets one look at the last three months. https://www.stockwatch.com/Quote/Detail?C:FFH&snapshot=SX

Probably a bit closer to 12% but close enough. As someone else pointed out, the performance fees are already accrued up to the current book value so net fees for someone buying now are a lot lower.

I just took performance 20% - management fees 1.5% = net 18.5% - hurdle rate 5% = 13.5% * performance fee 20% = 2.7% So total fees are management fee 1.5% + performance fee 2.7% = 4.2%. That's how I understand the performance fee works for illustrative purposes off of memory so please let me know if anyone disagrees. The calculation would have to be adjusted for three years but I think it makes sense if thinking about it on an annual basis.

Having a short duration heading into a hard market when rates are rising allowed them to write a lot of business when others couldn’t. Anyway, if someone wants to do the calculations with some reasonable assumptions, it would be an interesting analysis.

Sleepydragon is explaining why BRK has a premium valuation to FFH based on how it trades but not based on expected returns. A lot of people don’t own Fairfax for this reason but it’s not a good reason for long term investors. "Warren Buffett always puts it best: 'We prefer a lumpy 15% return to a smooth 12% return.' Investors who’d rather have the reverse...should ask themselves whether their aversion to volatility is mostly financial or mostly emotional." — Howard Marks

Where is this from? At 20% returns and 1.5% management fees, I calculate 4.2% in fees if FIH is trading at book value. If FIH traded at a 25% premium to book, it would net reduce the dilution so the effective fee would be closer to 3.7%. Right now we have the opposite, as we are trading at a discount, the performance fee becomes more expensive the bigger the discount. The accrued performance fee isn’t very big (given the 5% hurdle is actually pretty high) right now but that might change by year end when it’s due. I think whatever institution (my guess OMERS and Fidelity) negotiated this with Fairfax were thinking like long term rational shareholders with unlimited capital. This feature is there to incentivize closing the discount if it’s ever material and in fact to have the shares trade at a premium to NAV which would let FIH raise capital and grow faster at a low cost of capital. Unfortunately, those people have probably retired and the people left have turned over the funds to ESG Quant junkies. It probably wouldn’t take much buying to close the discount, share buybacks cleared up a lot of supply. If I ran the position for OMERS, I would have a plan to close the discount by year end. It would increase my position at an attractive price and my mark at an even better price. It would also be timely ahead of the Anchorage IPO when speculators might show up and reduce the cost of dilution from the management fee. Strong price movement would probably also attract momentum investors and the potential to once again trade at a premium to book.

The float should grow infinitely in a well run insurance operation but I think it makes sense to never let investment duration get to long because a mismatch adds unnecessary risk and perhaps more importantly gives up optionality.

Have you figured out how much it did cost from '16-22 vs the benefit of being able to grow aggressively during a hard market by keeping the optionality? I think there is an answer to that question and it's complicated. Would make for a good case study in capital allocation.

Another way to frame is that wasn’t the bet, that was taking part of the bet off. The bet was and continues to be keeping bond duration below the claims duration. It just makes less sense to take that big an active risk when rates are higher across the curve.

Good point. Effectively as long as the duration of the portfolio is lower than the duration of the claims, book value shoild net benefit from higher rates. I don’t invest based on macro but my bet is that long rates end up going higher than short rates at some point during this cycle. They seem positioned well for that outcome if it happens.

Thanks Viking. I find it easier to think in per share terms or about US$110/share vs the US$745 share price. The big holdings with decent capital gains potential really seem to add up although arguably less than zero priced in for any appreciation at this valuation.

Thanks for highlighting Viking! Do you have the current $/share invested in Greece? I think it’s a pretty decenf percentage of the market cap even though a small percentage of assets given the float leverage.

I own Fairfax India too. Most of the push back I hear is related to fees and that FFH is cheap anyway so might as well own the parent. Some of my other recent thoughts are here: https://twitter.com/BrownMarubozu/status/1669853492108840962?s=20

The optimistic part of me thinks that the recent BIAL add-on was to clean up the shareholder list before the long awaited Anchorage IPO. After two years of waiting it makes sense no one has to hurry to buy it but in theory, it could happen soon.