SafetyinNumbers

I’m not close to the situation but I have personal experience in how journalists and courts interpret data differently from practitioners. I assumed the stock was trading poorly and the company needed capital but the cost of capital was too high so when Resolute stepped up they agreed to a lockup. Please correct me if I’m wrong. The judges valuation is like a lot of value investor valuations, irrelevant, unless someone is willing to write a cheque. I know I have lost a lot money betting on what things should be worth only to watch them trade for years below that.

I thought Resolute was the acquirer. FFH may have valued it badly but the minority shareholders were the marginal buyers and sellers. They set the price on which the premium was paid. When a stock trades below for intrinsic value for a long period, its holders start thinking the market is efficient. It continues to be a problem for stocks that don’t screen well as most shareholders and Boards do premium analysis to determine the fairness of an acquisition value.

You take all responsibility off of the minority shareholders who need to approve the transactions. I think that’s what makes it fair and friendly. For Atlas, FFH didn’t put any new cash up so it’s not a great comparison but again the minority approved the transaction.

Public companies have more liquidity than private companies.

It’s not a judgment on value. It’s a bet on price given human psychology and flows. The beauty is the stop losses means you don’t end up owning losers for too long. It seems like a better way to live. I find owning businesses hard especially if they don’t screen well.

I’m not familiar with all of the context around that transaction. I know they bumped after getting the largest shareholder to sign a lock up agreement. Fairfax was also trading at a similar multiple although it wasn’t a great time to be an investor as book value didn’t grow much for the next 11 years as a result of the hedges and low interest rates. Maybe cash to buy other stocks in September 2009 was actually quite valuable at the time as there were a lot of bargains post GFC. You don’t think so?

I read that a few years ago and took it under consideration.

I used to think this way but have come to appreciate that it’s clear some traders have skill when it comes to applying technical analysis much like many of us think we do when applying fundamental analysis. All traders and investors are looking for high probability set ups. Successful traders tend to use flow and technical analysis to look for favourable chart patterns and then apply very stringent risk management heuristics. I don’t have the personality for it personally but it seems to work for a lot of people. Instead, my personality forces me to torture myself with fundamental analysis and the inevitable resulting when I’m wrong or at least the price says I’m wrong.

I have a lot of empathy for Fairfax and Prem in this Fibrek situation. With context, I think Fairfax acted appropriately in this situation. I know that’s not the opinion of most investors and maybe the courts but as a value investor that has signed a lock up agreement, I appreciate the situation they were in.

They have a regulatory benefit in the insurance subsidiaries by owning a public company. Plus they paid all of the fees to go public and in the very long term there is optionality by remaining public although with the exception of accretive buybacks it’s hard to see right now. I don’t think going private is a likely scenario although it might effectively look that way when they have excess capital to resume buybacks.

I think it’s the combination of discriminate sellers and indiscriminate buyers that decide the multiple. Sellers are usually value and price sensitive. They sell because the multiple has reached a certain level and because they don’t want to experiment a drawdown. Most of the institutional trading is based on a percentage of volume and because institutions are way underweight FFH, I think those flows favour FFH. However, because they are on a % of volume they are price takers. The sellers set the price. Indiscriminate buyers are quants and passive. They don’t care about value or price but instead factors and weighting. They will buy on upticks. Going into the S&P/TSX 60 will likely help our multiple even if it’s short lived b/c active investors tend to sell on a scale and it’s hard to come up with enough supply otherwise. IFC has expanded its multiple by 0.6x+ since it went into the 60 in March 2022 and that’s without the earnings momentum that FFH has as IFC has only grown its book value single digits since then.

Quants gonna quant.

Looks like the stock got hit yesterday because an analyst cut estimates bigly.

I like the investment. Analysts aren’t modeling income from non-fixed income sources very well but they are growing and are becoming less cyclical. If that eventually translates to expected increases in annual earnings then it will allow more quants to buy the shares which will help with multiple expansion. Every investment deal where the expected returns are > 5% increases the odds of the company as a whole earning a 15% return given the leverage.

Presumably when the Anchorage IPO happens, the BV of FIH will increase substantially. I think the real question is at what discount will the marginal investor give up it shares. Currently at a ~30% discount there are sellers every day but I’m convinced they make their decision based on price as opposed to the level of the discount so the discount might widen.

I think that’s right.

The equity component is less than a quarter’s earnings and It’s got a growing earnings yield higher than treasuries. I prefer them buying assets vs buybacks to a certain extent because it increases durability but I know I’m in the minority on that point.

I think you’re right but you are assuming that they are perpetuating a mistake. I assume they are trying to make the best capital allocation decision given the context (which we don’t fully know as outsiders). From my experience people who point to BlackBerry as a reason not to invest are just looking for an excuse. They really don’t want to invest ahead of the next mistake which may have already happened but it’s a position that investors generally like. Kind of like the hedges until 2016. They were loved (as expressed in the premium P/B multiple) back then but it was clearly a mistake with hindsight or maybe that’s just resulting.

I don’t Fairfax is interested in hiding their mistakes like a lot of active institutional money managers often do. I have mistakes in my portfolio that I don’t sell because the expected return higher or because if I tried to sell, I wouldn’t actually get the price on the screen because I own too much. You are right though that it might hurt the multiple but eventually I assume our shareholder base will be willing to afford the shares a higher multiple.

Is this because you think the forward expected return is less than 5% or you just don't like seeing Blackberry in the portfolio because it's obviously not material to forward returns?

The sales are great because they boost book value which is what investors focus in but I’m really excited about what they buy and how much it can boost returns. The minority interests in the insurance subsidiaries seems like a layup. Maybe after hurricane season is over we will get an announcement on something. After that corporates on spreads widening and quality equities including something like IDBI or large liquid stocks if there is an indiscriminate market sell off. There is so much optionality to returns if they are able to buy well.

Issue 10% of shares at 8x BV and increase BV by ~63%. That’s decent growth!

Selling quality with high growth rates ahead usually leads to regret for me. I hope they hold on and enjoy the ride.

GWO has a low weighting because most of its market cap is included in POW’s float cap as @bearprowler6noted. It doesn’t make sense to add the 63rd biggest weight to the 60 over the 27th (FFH). FFH has not been overlooked yet but it might be with the next opening. That’s probably better in the long run for most shareholders as they might be tempted to sell on the multiple expansion when the compounding in BV should go on forever. It’s just too big to not go in eventually. It’s a matter of when not if.

I believe 1 share was distributed for every 12 EUROB shares so it can’t be that big. Presumably FFH would have to equity account for it as well but probably on a lag. Since they reported in April, maybe we get that in Q2 results.