SafetyinNumbers

Float to market cap and float to BV would also be an interesting comparison over time and currently vs peers.

The best part about is that they could do it without putting any new cash in using Stelco’s cash on hand and some term debt.

I can tell you exactly how something like Morningstar happens. They are paid directly by discount brokers who by settlement post the dot com bubble have to provide research. Morningstar having a good brand name adds a new business line selling equity research. Because they are quants, they use their models to come up with target prices and earnings estimates. The analyst then just has to write a narrative to support the “AI” valuation. With ChatGPT, maybe AI is writing that too. Every analyst covers a lot of companies and probably gets paid very little. He covers a lot of companies. He can’t be an expert. At the crux of it, quants can’t value a lumpy 15% very well. They don’t understand the business model and the structurally high ROE. All they do is look at history and weigh the recent history extra because that’s what works for the rest of the stocks in their universe whose businesses are more predictable. It doesn’t matter by the way that it’s bad at valuing Fairfax in particular. I think regulators should look at banning this type of research because individuals read it and think that it’s Fairfax specific research when in fact it’s a snippet of a big data project that is being shared with an individual in a more personalized way via the analyst narrative. A fund managed based on that quant strategy might still beat the market! It’s a big reason why an obviously cheap liquid company like Fairfax can stay so obviously undervalued when everybody has the same information. The number of active managers has diminished significantly in the past 20 years and the ones left for the most part are good at hugging the index and/or using quant screens to pick stocks. They might as well be following Morningstar research because their quant screen knocked Fairfax out of consideration. None of this should be surprising. If passive and quant based funds are taking all of your assets it makes business sense to mimic your peers. It’s a very hard job. I know I would find it very difficult to make money with those constraints. That’s a big reason why I don’t do it but if I found myself needing a job I might give it a shot! I would try to find an unconstrained seat first of course! Frankly, I don’t think there has been a better time for unconstrained investors in decades. It’s one of the reasons I’m so bullish on Fairfax. They are an unconstrained investor with the potential to make 10%+ returns on the equity portfolio while the fixed income portfolio is making 5%. That all translates to 20%+ ROE potential. Viking’s brilliant well written post above spells out how easily that can happen. Buying insurance subsidiaries at < 10x earnings is also a 10%+ return on investment. I think selling 10% of Odyssey at a premium valuation to fund the SIB was a Singleton move. When I talk to investors about Fairfax, the focus is still on the downside and I fear that’s why there is selling at these prices on a daily basis. People are worried about a near term drawdown which could absolutely happen and likely will but that has nothing to do with intrinsic value. I know a lot of people are hoping for more buybacks but I hope Fairfax keeps making buying what they know (Stelco could be next) and making the company more durable. That will make it easier for shareholders to hang on and worry less about drawdowns. That will gives Fairfax a much better chance of a premium valuation as the index huggers and momentum quants keep buying which I’m sure Prem will use to issue equity (Singleton!) and increase book value that much more When I was in UBS Equity Sales as a desk analyst, one of my bosses clients gave me the nickname “The Dream”. My boss actually said he gave me the nickname but as a 27 year old kid at the time I remember thinking it was awesome that a hedge fund manager running billions of dollars knew who I was. He didn’t know my name though which is why he called me The Dream. My ego took it like I was at a Hakeem Olajuwon level but in reality he was just referring to my propensity to figuring out the narrative where everything goes right. At the time we were trading a lot of risk arbitrage and event driven trades so some creativity was helpful and paid off big time as there was a lot of money to be made in 2004. To that end, I’m clearly focusing on what could right for Fairfax. I think that’s an important part of the expected returns and focusing on the downside might make me let shares go too early which I will almost certainly will regret doing.

All else being equal (rates stay flat, premiums are growing) discounting the reserves under IFRS results in higher underwriting profit than under the old paradigm. While FFH is still reporting the old combined ratio metrics, when I calculate the combined ratio from the disclosure I get a lower IFRS-adjusted combined ratio. That makes intuitive sense. Besides the discounting of new reserves, by moving one period forward, the balance of reserves accrete each quarter. That offsets some of the benefit but is also included in the adjusted combined ratio. If rates are coming down, that should increase the accretion as the whole reserve balance is discounted at a lower rate and we are moving forward a quarter. There should be an offsetting gain in bonds but I can see in that scenario how the IFRS adjusted combined ratio may not be lower than the reported combined ratio but I don’t know if it’s possible to do a sensitivity given the reserves are opaque. Intact Financial discloses two combined ratios to illustrate the difference when they report with almost a 400bps difference between the two last quarter. You can see the spread is smaller last year when the interest rate curve was lower. I’m not sure if I’m right in how I’m interpreting it despite formerly practicing as a CA/CPA and having a MAcc so if anyone knows better please share.

He specifically pointed out to me on the Twitter machine but kudos to you too!

I think there is a good chance we see another SIB in the next 5 months.

Great highlights Viking. Trevor Scott pointed out that Fair Value of Associates over Carrying Value has grown to $33/share and adds it to BV to get what I’m calling adjusted book value (ABV). On that measure ABV grew from $822 to $867 which is more than it’s been in a very long time and was very recently very negative. Given how cheap Eurobank and FIH are alone, I expect this number to keep growing. I think it will be easy for PMs to justify paying over IFRS book value if they can point to ABV and I think they will be absolutely right to do so. It probably has better correlation to the stock price too.

My guess is the stock gaps up to book value or higher on Friday and then it spend some time backing and filling during hurricane season. My book value over/under for the quarter is US$850. If I had to bet, I would take the over.

How long before it has the biggest market cap in Canada? I’m thinking in terms of decades. Constant reinvestment instead of dividends like the other high ROE comps makes a big difference.

Applies to Eurobank as well following H1 earnings out earlier today. Should be true for FFH after earnings on Thursday night too! https://www.eurobankholdings.gr/-/media/holding/omilos/grafeio-tupou/etairikes-anakoinoseis/2023/2q-2023/2q2023-results-pr-en.pdf

They usually give notice the Friday before. So I’m guessing tomorrow.

Does anyone do a mark to market model on Fairfax India? Seems like a lot of holdings are making new highs but I haven’t bothered to build a model.

If book value understates intrinsic value then ROE should be above 10% assuming 10% is a reasonable return on IV. MKL and BRK trade at around 1.5x suggesting the market expects 15% ROE going forward. Alternatively, the market has much lower return expectations for MKL and BRK which might also be true. 10% ROE on a 1.5x book is only a 6.7% return.

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