Viking

Vinod, FFH for me is also a trade at this point in time. 1.) regarding insurance, Brit and Allied are the watchouts for me. Past experience shows it can be a bumpy ride for a few years post aquisition. 4.) my understanding is their long term bond results are among the best in the industry. Have they perfectly timed the changes in rates the past 2 years? No. 5.) FFH investment team is a big watch out. I do like the exposure to India and i do think this is a good fit. I have started reading up on Seaspan and the company is executing its plan well (and FFH has done well on its investment). Eurobank looks well positioned; if the Greek economy does ok this investment could perform very well. Blackberry trading at $6.50 does not look expensive to me and it is in the right spaces (QNX and cybersecurity). Many of the issues have already hit BV. Moving forward, yes, if the economy falls off a cliff their investments will take a hit. Or perhaps we bump along for a few years at 1.5% GDP growth... in this scenario their invesments should perform ok to very good. 6.) if bond yields stay low this will affect everyone in the industry. I think we can assume CR come down (perhaps this is what is driving the current hard market).

Pete, my guess is bond yields and combined ratio are connected. If bond yields in the US stay at current low levels or drop more then this will force all insurance companies to achieve a lower CR moving forward. Perhaps this is the key driver of the current hard market (not sure). This will take years to play out. So based on current yields and the outlook for the future i would expect FFH to get to a 95 or better CR in the coming years (similar to all companies they compete with). I read both the Q1 and Q2 conference call transcripts and was happy with the presentations and the answers to questions (and minimal promotion). I do have a certain level of trust in management and that is why i bought shares. I have found that over the years Fairfax has made decisions that appear to be focussed on making the company bigger (empire building) with the long term impact on shareholders a secondary concern. There has also been lots of discussion around corporate governance (family control and bringing the kids into the fold) that feed the ‘not shareholder friendly’ narrative. Is Prem’s number 1 focus to drive shareholder value? No, i don’t think so. Is it important to him? Yes.

Is Fairfax a $20 bill laying on the street that everyone is walking by? Lots of former investors in Fairfax have such a long history with this company it is easy to let emotions cloud the decision making process. It is sometimes difficult to separate past experiences and what you do not like about a company from where it is today and more importantly where it is going tomorrow. The calculus shifted for me over the weekend. There are lots of great threads regarding Fairfax (thanks to Petec, Stubblejumper and others) to help get up to speed on the company. Bought a big chunk of FFH today. The summary provided by Woodlock House pretty much sums up my thoughts on the company (i copied a chunk of it below). In addition, ex workers comp, we look to be in a hard market and Fairfax is growing its business nicely (it is after all an insurance company). Shares are trading today at US $420 P/BV ($465) = 0.9 look cheap to me. - Positives: Shares are trading at a 5 year low (absolute price and P/BV, sentiment might be at all time low, we are in a hard market, bond portfolio is positioned very conservatively. - The jury is still out: on equity investment decision process; saying better things, amd brought in some new blood but time will tell. - Negative: i am not sure the company is run in the best interests of shareholders. That alone might make this purchase a trade for me. - Impending: i am expecting news on taking out minority partners in the coming months (Brit and Eurolife). Down the road they need to do the same with Allied World. - stock buybacks: one big catalyst for the shares would be if managment decided buying back stock trading at 0.9X BV was a top priority. Right now it is clear that they would rather use excess cash to grow the business and taking out their minority partners. My hope is they get creative here and find a way to do a meaningful buyback. From Woodlock House letter: http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/woodlock-house-blog-post-about-ffh/ “Most of the investors I’ve talked to about FFH will bring up Watsa almost immediately as, basically, someone they no longer trust to make good decisions or deliver good returns. I can understand why. (The baffling macro bets of some years ago cost FFH shareholders billions of dollars. Watsa said he not would make such bets again. But the damage was done.) The insurance side of the operation has been strong for FFH in recent years. But even there, operations are below Watsa’s target of a 95% combined ratio. FFH’s Q2 number was 96.8%. Profitable – anything below 100% is profitable – but below target. So, as you can see, the valuation is not such a cut-and-dried matter. FFH has had some issues. Nonetheless, we own the stock at a price below book value. The most important reason is that the downside seems low. The valuation protects you, the company appears well-financed and management seems honest and well-intentioned. These are not small things. Moreover, I think the assets collectively could generate a ~10%-type ROE. Watsa has made a public goal of hitting 15%. (FFH’s ROE was 15% in the second quarter, thanks to investment gains). He says a 95% combined ratio and a 7% return on FFH’s investments gets to a 15% ROE. But in a low-interest rate environment, and given a large bond portfolio, a 7% return seems unlikely. But possible. Sustaining a double-digit ROE is key. (FFH can reach 10% by following a number of roads. For example, one road requires a ~95% combined ratio and ~5% return on its portfolio. That seems do-able.) Anyway, a consistent 10% would grow book value at a decent clip and then you’d likely get an additional lift from the valuation even if the stock moved just to 1.2x book. As RayJay reports, a comparable set of North American insurers with an 11% ROE trades for 1.7x book value per share. I admit, FFH is not exciting. It’s not fake meat or pot or sending billionaires into space. But it shouldn’t hurt you and has potential to deliver a very nice return.” https://www.woodlockhousefamilycapital.com/post/the-horse-story

I just listened to the WR Berkley Q2 call and Rob Berkely stated they feel pricing is firming. Fairfax said on the Q2 call that growing the business at their operations is a priority (to take advantage of the hard market that is developing) and you can see this in the growth they are posting. Fairfax also mentioned they are required to take out minority stakes in Brit and Eurolife in 2019. They also need to take out OMERS and their minority stake at Allied World at some point and this will be a big use of cash. So i am not expecting aggressive share repurchases until we get more clarity on how much new business they can write in the hard market and timing and cost on the minority buyouts. They also appear focussed on harvesting some gains (ICICI Lombard) and also exiting some positions (Reitmans). If they do more of this then perhaps they will get more aggressive with share buybacks.

For posterity sake, here is a summary of Fairfax investment in ICICI (from page 5 of 2017 Fairfax Annual Report). An example of when they are right the result can be quite spectacular. As i start getting back up to speed with Fairfax i am surprised at their focus on ‘harvesting’ gains sitting in their investment portfolio. “ICICI Lombard is an Indian insurance company that we began in 2001 from scratch as a minority partner with ICICI Bank. Over the following 16 years, ICICI Lombard went on to become the largest non-government-owned property and casualty insurance company in India. Until fairly recently, our ownership interest was limited to 26% by government mandate. About three years ago, the government allowed the foreign ownership to go to 49%, which resulted in our going to 35% by buying 9% from ICICI Bank. Since then, given ICICI Lombard’s intent to go public, ICICI Bank wanting to control ICICI Lombard with at least 55% ownership, and Indian law requiring that the public own at least 25% of a public company, our ownership would be reduced to a mere 20%. As property and casualty insurance is our core business and we are very optimistic about the growth prospects in India, and as Indian law does not permit an ownership of 10% or more in more than one insurance company, we agreed with ICICI Bank that we would reduce our interest in ICICI Lombard to below 10% so that we could start our own property and casualty company in India, Digit. ICICI Lombard is a great company led by an exceptional leader, Bhargav Dasgupta, and we wish them much success in the years to come. We have thoroughly enjoyed our partnership with ICICI Bank and its CEO Chanda Kochhar and we wish them also much success in the future. The reduction in our equity interest in ICICI Lombard from 35% to 9.9% resulted in cash proceeds of $909 million plus our continuing to own 45 million shares of ICICI Lombard worth $450 million at the IPO (now worth about $550 million) resulting in an after-tax gain of $930 million.”

In the past 3 weeks Fairfax has made 2 large sales in ICICI Lombard divesting the last of its holdings. If my math is correct both sales = $730 million. Am i calculating this right? Surprising that FFH did not issue a press release given the sizes of the transactions. What to do with the proceeds? In the Q2 conference call Paul Rivett was asked by the RBC analyst what the plan was about use of cash (low share price, large cash balance, why such low share buybacks?). The answer was the priority today was to support growth of insurance companies in current hard market; and Fairfax is obligated to take out minority partners in Brit and Eurolife in next 12 months. I think one of the overhangs right now for FFH is lack of share buybacks. And until their partners in Brit and Eurolife are taken out stock buybacks will remain low. From page 51 of Fairfax Q2 report: “The company's 9.9% equity interest in ICICI Lombard is classified as a common stock portfolio investment and included in holding company cash and investments in the Fairfax Asia reporting segment with a fair value at June 30, 2019 of $649.8 (December 31, 2018 - $497.1).” Sale 1 Sept 27 (hat tip wisdom and Jeast): sold 4.99 per cent equity stake in ICICI Lombard general insurance for Rs 2,562 crore ($36x10,000,000 = US $360 million) https://www.business-standard.com/article/companies/fairfax-financial-holdings-sells-5-in-icici-lombard-for-rs-2-562-crore-119092700048_1.html Sale 2 Oct 17: sold its entire remaining stake in ICICI Lombard General Insurance Co. Ltd shares worth Rs2,626.5 crore ($37x10,000,000= US $370 million) https://www.livemint.com/companies/news/prem-watsa-s-fairfax-sells-remainder-stake-in-icici-lombard-ending-18-year-run-11571239694267.html

Also recently bought a small position in my old employer SAP.TO (Saputo). Stock is trading at close to a 3.5 year low band. Based on current ernings i would not call it crazy cheap. However, as they digest their recent aquisitions in Australia and the UK profitability should improve. This will likely take 12 to 24 months to play out (i am not expecting a quick turnaround). They are now the number one dairy in Canada and Australia, the number 3 cheese producer in the US and the number 1 branded cheese producer in UK. They are a consolidator; they have had to pay up for recent large aquisitions but they are playing the long term game and building out a pretty impressive international platform.

GIL.TO. Re-established a small position on the 25% sell off today. Saputo). Stock is trading at close to a 4.5 year low band.Their largest and most profitable business (selling t-shirts and fleece to screen printers) continues to chug along. Every couple of years cotton prices swing and 6 months later it hits their short term results, the stock sells off aggressively.

I believe the value of this board is the diversity of the people who post on it. We all come at this thing called investing in very different ways. I tend to he highly concentrated. When i find something i really like (the stars align) i then tend to post a great deal (in a pretty focussed way). Recently, it was the big US banks. Before that it was Apple. Go back far enough and it was Fairfax (and their publicly traded subs like Odyssey Re). I also mostly only look at large caps, mostly US. When postingbon one of my ‘big’ ideas i try and lay out the rationale was much as possible (usually over many posts). At that point in time i am looking for why i am wrong... what am i missing? If it is such a good idea why do others not see it? I am hoping other posters rip my thesis apart - i am really looking for the logic. I kind of get like a dog with a bone (some might get sick of how many posts they see on a single topic :-). Unfortunately, i only come up with a great ‘big’ idea once every couple of years. Fortunately that is more than enough for me :-) I also will post on other smaller, ideas. These might be singles, offering a small return (to use a baseball term). Berkshire has been a recent example of this. So what i am holding in my portfolio tends to really impact what i post about. Today (and this year) i am mostly cash so my posting is more erratic and is more high level. I also will change my mind on investments and i do not always post on this. The biggest challenge i find with helping family/friends with investing is the need to constantly communicate your thought process/rationale, especially when you change your mind on something. You might buy a stock and be 70% convinced; other times you might be 90%. New news might come out and you might like a stock a little less (from 70% to 60%). Try explaining that to someone else. Too complicated for me. Same thing happens when posting; some ideas get better and some get worse... it is very difficult to constantly post the new scorecard in a coherent way. What i love about anonymity is that i do not have constantly explain/justify every purchase or sale or what is going on in my head. That is one thing i really like about posting... you post when you feel like it. The flip side of this is buyer beware. I have never made a purchase based on what others said, lost money and then blamed them (in my mind). I do not expect people who are bullish on a company to tell me when they change their mind. They are not my financial adviser. I am looking for investment ideas, and i love it when people supply some basic rationale. I can then start my due dilligence. I am constantly looking for that next ‘big’ idea. Once I start my research i own the idea, not the person who gave it to me. Bottom line, i have come to really enjoy the diversity of the people who post on this board. I have stolen many things from many of you over the years :-) Big thank you, as has been stated, to Sanjeev for starting and then managing this board for so many years. Simply amazing what he has done and the value it has provided to many of us.

Agreed. Two others that i appreciate readings posts from are John Hjorth (thoughtful, respectful) and spekulatius (ideas and logic).

Interesting that they did not talk about what Berkshire is actually worth. Yes, the market appears to be underappreciating BRK and the share price has gone sideways for a few years. However, the value of the underlying business continues to grow nicely. BRK looks cheap today when compared to the overall market.

Bought a small sliver of FFH. Stock is at 52 week (and 5 year) low. What i like: insurance businesses and large cash position they have in their investment portfolio. Will be interesting to learn over time what new hires in invesmtent team decide to do with portfolio.

Sold my BRK today for a nice quick 3.5% gain. Buy BRK under $200 and sell for a small gain has worked well for me a few times this year. I tend to buy a large amount (10 to 20% position) so am happy to book a small gain. Back to cash and wait for the next shitstorm. The economic news continues to slowly deteriorate.

Here are links to a couple of presentations. Thanks to the original posters for providing the links (i have forgotton who they were :-). I thought it would be good to add these to this thread. 1.) Semper Augustus Feb 2019: https://static.fmgsuite.com/media/documents/9f6a56c7-a1a3-4eb2-94b3-fe89cc110254.pdf - page 72 Semper Augustus Feb 2018: https://static.fmgsuite.com/media/documents/8e6a3c88-859d-483b-bbf0-dda6f5e24fc1.pdf - page 45 2.) Empire (Tilson): https://assets.empirefinancialresearch.com/uploads/2019/08/Berkshire-Hathaway-analysis-Whitney-Tilson-8-21-19.pdf 3.) Check Capital: https://www.checkcapital.com/Research_Reports/BRKB_Report_0819.pdf

Simply put, this line of thinking by Spekulatius, has some merit, to me. Agreed. The Occidental preferred stock deal has just started to pay Berkshire $800 million per year. What i also like about Berkshire is it is likely that Buffett will be a buyer, and perhaps in volume, if shares fall much below $190. That should provide a nice floor for the stock price. I also like that they are not highly leveraged. They are the opposite, with $100 billion in cash which can be used should businesses go on sale in the next year or two. Brk, below $200, is my favourite stock pick given the current environment. Decent value. Some downside protection. $100 billion in cash.

I am re-reading prior letters... BRK has grown nicely in value during 2019. Shares under $200 look cheap :-)

Omagh, thanks for posting the BRK summary from Morningstar. Below $200 it certainly looks like a reasonable buy. It will be interesting to see what Buffett does if the share price falls into the $180’s should we see more selling in the overall market due to economic weakness. Key weakness: a large chunk of the businesses are cyclical (railraod, banking etc) which will slow if the economy slows Important question: how will large drop in bond yields affect the large insurance business. Perhaps this will affect competitors more (who rely on bond yields more than BRK does in their investment portfolio). How Buffett invests the insurance float (equities) may prove to be an advantage versus competitors if bond yields continue to move lower.

BAC, MS, LUV, SU.TO, FFH, WFT.TO Still about 70% cash

Rosenberg has been pretty bearish but he is growling even louder. My concern is i still do not understand what negative bond yields are signaling. Also, how can it be that Italy is able to borrow at the same rate as the US? Or that Argentina bonds are back in demand? Lots of things that make no sense... looks to me like the Greater Fool Theory is alive and well. Everyone knows it makes no sense and that we are likely in the late innings. And everyone thinks they will be able to get out before the carnage hits. https://www.theglobeandmail.com/investing/markets/inside-the-market/article-investors-be-as-liquid-as-possible-these-are-truly-historic-and/ Investors, be as liquid as possible. These are truly historic and dangerous times Conclusion of article: “To cap off, look at all the information at our disposal. Gold prices surging. Bond yields plunging. Central banks in a confused state. The breakdown of the world order. Here we have a trade and currency war going on between the world’s two dominant powers – with no end-game in sight. Think about what I am describing – gold soaring, bonds rallying sharply, an equity market rolling off the highs, deepening racism, and a tariff and currency war. This sounds a lot like the 1930s to me. Back then it became a real war that cost millions of lives. This war won’t cost lives, but it will cost livelihoods. Investment recommendation: cash, gold, silver, long Treasuries – and limit your equity exposure to noncyclical sectors with strong balance sheets and reliable dividend/cash flow streams (even in the Great Recession, Walmart still made you money). Most important – be as liquid as possible for the next several months.” David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.

I think this is right. He significantly reduced his equity exposure both in 1969 (by closing his partnerships) and in 1998 (via the GenRe transaction), both at/near major inflation adjusted cyclical peaks, and then loaded up later when things got cheaper. Will this be his third time? We shall see... Let’s hope this is true. Bottom line, i think a shitstorm is coming. It this happens it increases the odds that Buffett will find an elephant at a price he likes (similar to his railroad purchase). Perhaps something he already owns a piece of. The fact Buffett has been building cash for years is a positive for investors who are buying stock today at prices under $200.

Now I understand why BRK went up $4 in the last 4 hours of trading... too much buying from people on this board.

Reestablished a position in BRK.

I don't really understand this. There shouldn't be a lower limit for yields if ECB will buy at any price. Yields don't matter anymore if ECB can buy at ever higher prices. Even when yields are negative, expected (nominal) return can be positive because you can sell to ECB at higher prices. I was listening to an analsyst last week; i think it was Bloomberg Surveillance. The analyst was asked why anyone in their right mind would buy European debt that has a negative yield. His reponse was if you believed prices would be going higher (yields lower) then it was rational to buy bonds today even if they have a negative yield. My immediate reaction was to think of the greater fool theory. We are in very interesting times.

Agreed, GOOG at a bit more than $1000 seemed like an obvious value - almost $50 in real earnings run rate or 20x earnings for a 20% grower. I had some from the dips in 2018 and loaded up more, such that it became one of my largest positions on par with BRKB. I take this any day over these money loosing tech stocks that may not grow all that much faster and trade at mind boggling valuations with huge GAAP losses. Same with FB last year. Of course even these things can go wrong, but odds are pretty good they those bets work out. Agreed. What sometimes messes me up is i get too cute with timing. When great companies get cheap you buy and patiently wait. Life is full of good lessons... :-)

RuleNumberOne, i just shake my head at where yields are at today. What i wonder, however, is what if yields fall lower. Instead of a 1% or so move higher, what if we see a significant move lower? I am now wondering not if but when 10 year US treasuries go to a negative yield. The Fed appears to be giving financial markets whatever they want. We are going to get a rate cut shortly, even with the economy doing ok. Should the economic data get worse, the Market will clamor for more and the Fed will oblige. As the US cuts, the $US will go down. Other central banks will then also cut (or engage in more QE). And we will have a race to the bottom. Lots of things going on that i clearly do not understand :-)