Viking
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Posts posted by Viking
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I think it is very unlikely we get any new mega oil/gas projects going in Canada that require federal approval (like new pipelines/LNG facilities). And this includes some provinces like BC (my understanding is they are not even approving new drilling permits let alone considering any new mega projects).
Now the energy situation could get much worse (i.e. oil and nat gas prices could spike higher and stay very high for years). Perhaps attitudes towards fossil fuels will change. And then perhaps governments will start to change their energy policies. But i think this is highly unlikely in Canada in the near term.
—————The main reason i see little change coming in Canada is the policy focus today is on Canada hitting its climate change commitments. The focus is not on helping the world hit its commitments. To hit its climate change commitments Canada will need to shrink its oil and gas production (given what we know today about the path the government wants to take). This will result in much higher coal use in the rest of the world (the non-West world prioritizes cheap energy over climate change). So Canada will hit its commitments and the world will be worse off. Because Canada could ramp production of nat gas - which is viewed as a much better transition fuel than coal - at the cost of Canada not hitting its climate change commitments.
It just looks to me like government energy policy (pretty much everywhere) is completely messed up. And i will freely admit i am not an expert on this topic.
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When i monitor Fairfax i focus on three broad buckets. Most importantly, what is the near term trend with each bucket:
1.) underwriting income
2.) interest and dividend income
3.) realized/unrealized investment gains
Powell on Friday suggested Fed funds would be moving higher in 2022/2023 likely to something in the 4% range. He also said rates would stay higher for longer (perhaps all of 2023). (Not all of Fairfax’s fixed income investments are in the US.)
Higher interest rates for longer in the US is very good news for Fairfax. This will also lead to higher rates in Canada (given the economic linkages). Europe is likely a different story (interest rates are likely to remain anemic).
Fairfax has a cash/bond portfolio of about $35/$36 billion. Most of it is domiciled in US/CAN. Let’s assume a 3.5% average interest rate is a reasonable estimate looking 1 year out = $1.2 billion in interest income/year = $300 million/quarter. For reference, Fairfax earned $176 million in interest income in Q2, 2022.
Fairfax also has an average duration of 1.2 years on its bond portfolio (most insurers are about 4 years). This means about 21% of Fairfax’s total bond portfolio will reset to higher rates each quarter. Each quarter we should see interest income continue to move higher.
Fairfax earned $176 million in interest income in Q2, 2022 = 2% average yield. Up from $154 million in Q1 = 1.8%. In Q3 interest income could be over $200 million = 2.3% yield.
Will Fairfax get to $300 million in interest income/quarter? It is possible.
Another catalyst will be if Fairfax is given the opportunity to shift into securities with higher yields (if we get a significant widening in spreads). And increasing duration could also result in higher yields (should we see yields move higher in 3-5 year duration). So an average yield of 3.5% on the bond portfolio might end up being a low estimate in another 12 or 18 months.
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This does not include dividends = $43 million in Q2. Or investment expenses = $17 million in Q2
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Interest & dividends = interest income + dividends - investment expenses.
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7 hours ago, Munger_Disciple said:
My wife & are planning to fly to Vancouver from San Diego to visit family in Bellingham WA and visit the city. IIRC @Parsad and others on this board live in Vancouver. I have two questions:
1. Can I rent a car in Vancouver & drive across the border to WA & return back to the Vancouver airport? I am assuming yes but wanted to be sure. Are the lines to enter /exit the border between US & Canada long?
2. What are some fun things to do in Vancouver/ nearby areas if we are planning to stay for 2-3 days?
Thanks
very much for your help! Please feel free to DM me.
@Munger_Disciple here are some thoughts:1.) car rental: i can’t really help you here. I would contact the car rental company and ask them. Insurance coverage would be important (especially if something happened while the car was in the US).
2.) what do you in Vancouver. So many good options if you are here only a couple of days.
- what kind of a vacation are you after? Busy or more relaxed?- how active are you and your wife? Very or not at all?
In terms of Vancouver here are some thoughts that quickly come to mind:
1.) one of my favourite activities is biking/walking the seawall around Stanley Park. Lots of nice beaches/places along the way to stop and simply hang out at. Nothing like it on a beautiful day.
2.) another nice activity is taking the tram up Grouse Mountain (one of the local ski hills). You get a beautiful birds eye view of Vancouver. There is a restaurant up top and some fun activities for visitors (lumber jack show, captive black bears). If you are fitness nuts you can actually do the Grouse Grind hike to get to the top of Grouse Mountain (and take the tram to get back down).
3.) Granville Island Public Market is a nice place to visit for lunch4.) if you want to shop most high end shops are on Robson street
5.) lots of great hiking options (too many to list, all rated by ability)
6.) if you have time for a coffee during your trip i would be happy to meet up somewhere (schedule permitting)
If you are looking for a day trip you might want to go to Whistler. The drive is pretty scenic (sea to sky highway) and Whistler is an all season resort (lots to do).
I love the ferry ride to Victoria, Vancouver Island - very scenic. And Victoria is a beautiful city (British charm… tea time etc). The ferries can be a mess (if you are taking a vehicle) especially during peak periods/long weekends but there are solutions (assured loading pass). Another option is to walk on the ferry and use transit to get to Victoria (my son did this recently so i could ask him for details).
Anyways, there are a few ideas… let me know if you have any other questions
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@Xerxes you must be quite the hiker. My wife and i did the Garibaldi lake hike when we were much younger. A friend was a park ranger so he let us stay overnight in one of the ranger cabins on the lake (not sure if they are still there). If memory serves me right it was 11km hike to the lake, 13km hike up to the ridge - with view of the lake below and view of Black Tusk in the distance - and 11km out. Pretty busy couple of days! Great trip.
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FFH. < US $505
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When Fed Chair Powell spoke at the last FOMC meeting he came across as swinging to dovish. What did the stock market do? It rallied. Big time.
Today we got an update from Powell. He is a hawk again. What are financial markets doing? Selling off aggressively.
It appears to me that the Fed funds rate is going to 4%. Crazy low interest rates juiced asset prices… big time (stocks, bonds and real estate). As rates continue to increase it only makes sense to me that asset prices will… correct. Especially the asset prices that saw the largest increases (Canadian real estate, high PE multiple stocks etc).
Does this mean an investor should be 100% cash? No. It just means making money will be much more difficult moving forward. This has been the case since the Fed started on its tightening campaign. For most people NOT LOSING MONEY will be a very good outcome. Return of capital, not return on capital, will be the new mantra - until inflation is tamed.
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Most investors the past decade were monkeys throwing darts - to do exceptionally well all you had to do was be all in on risk assets. And the riskier the strategy the better. How has that been working out so far in 2022?
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5 hours ago, petec said:
I know what you’re saying but it’s a slightly false distinction. Buying in the minorities at Allied, Brit, and Odyssey effectively *is* a huge buyback, even if it doesn’t bring the share count down. You still own more of those business per share, and they’re the beating heart of Fairfax.
True. We know some amount (probably min US$750 million range) will be spent on buying back a chunk of Allied World. That would be a solid amount. I would like to see another big stock buyback with Fairfax shares trading so low (U$525 today). I do think Fairfax’s stock price is going to pop at some point in the next year or two and likely significantly. So i would like to see another big stock buyback this year (while the stock price is still cheap). I don’t know why Fairfax does not get rolling on the NCIB… perhaps the stock is traded too thinly for them to be able to buy back stock in volume without jacking the price.—————
And i don’t think it gets more expensive for Fairfax to hold off buying out the minority owners in Allied, Brit and Odyssey. I think they just need to keep making the dividend payments each year. But i could be wrong.
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Fairfax India is a strange animal to me. Given its stock is currently trading below $11 i am not sure it is a value trap at the current price. My guess is a new investor will earn an adequate return on their investment. (Legacy investors who bought at a much higher price… well that is a different matter.)
Fairfax India’s managements team’s performance has been very good (book value growth since inception). Their hit rate with investments has been very good. They own an impressive group of assets that look well positioned to grow in the future. They have started to monetize some legacy positions that have increased substantially in value and are re-deploying into new opportunities (like Maxop/Jaynix).
Management has been getting more aggressive with share buybacks (no brainer use of cash). They have a high cash balance today and will have much more when IIFL Wealth sale closes. This suggests to me another big buyback is coming (perhaps another Dutch auction). This use of funds is also is very good for Fairfax shareholders (significantly increasing ownership in a very well run company).
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The near term set up for Fairfax is looking very good:
1.) benign hurricane season (so far): positive for underwriting income
2.) interest rates are headed higher once again. 4% Fed funds rate later this year is possible; this would likely drive interest and div income to $1.3 billion (run rate). Each quarter moving forward should see a nice increase in this bucket.
3.) monetizations:
- pet insurance: $1.4 billion
- Resolute: $600 million +
- Stelco: do they tender?
- Digit IPO: timing?
- other monetizations? I wonder how much Exco is worth right now? Especially if nat gas prices spike higher as we get into the fall?
4.) other:
- Atlas: how does take private conclude?
- Recipe: how does take private conclude?
- minority owners Allied ($750 million debt offering): details?
5.) stock buybacks: when and how much?
- NCIB or another dutch auction
6.) what else will Fairfax do?
Bottom line, given all the tailwinds, i think US$505 is a great entry point. And i won’t be disappointed if it does lower (what do you do when one of your favourite cereals go on sale at the grocery store?).
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Near term risks:
1.) hurricanes
2.) Sept/Oct bear market in stocks
3.) Ukraine was escalation
4.) energy crisis in Europe worsening; spreading to rest of world
5.) Fairfax specific: one or more announced deals do not close -
4 hours ago, Thrifty3000 said:
@Viking I agree with your reasons for it being undervalued. A couple other factors...
1) I've also always assumed there would be a permanent, deserved, discount because of the dual share class structure giving control to the Watsa gene pool. I'm not sure how to quantify it, and I'm sure there will be times when Mr. Market overlooks the risk, but it's a relevant factor nonetheless. Probably not a bad idea to knock 10% to 20% off of a DCF or sum of the parts valuation to factor it in. (Some children of billionaires do a perfectly fine job selecting good operators to run the family business. Other children of billionaires go bat$hit crazy.)
2) This is actually more of a question. Will there be a liquidity/visibility discount for not being listed on the NYSE anymore? I'm curious if that takes it off the radar of a lot of algorithmic traders and ETFs. Furthermore, I know firsthand Vanguard won't even let US clients purchase Fairfax. That has to sting a bit. It seems we're left with the handful of value investors that do their own independent research and thinking to support the value of Fairfax; many of whom were burned holding Fairfax over the last decade.
^ that's why I think we may need a couple years of solid book value growth before Fairfax starts showing up on stock screens and garnering attention from more big money managers. In the meantime I hope the price stays crazy discounted while FFH buys back hand over fist.
@Thrifty3000 here are some thoughts:1.) dual share class structure: has always existed. Didn’t seem to matter to investors in the past. Yes, Prem is getting older… but some would argue Fairfax stock might go higher if he was no longer involved. I am not worried the kids will mess it up (at least for a few years).
2.) NYSE listing: Fairfax delisted from NYSE in 2009. This didn’t seem to matter for many years… Would NYSE listing help? Yes. Demand for shares would be higher.
What will help Fairfax shares? Delivering great results. What to do with earnings? With the hard market rolling over:
1.) continue to buy out minority shareholders
2.) buy back stock
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Adding to FFH. US$505 is a great price.
Continuing to lighten up on my oil holdings today… up 16-17%; single digit weighting now. Love the wicked volatility in energy stocks. Happy to take quick gains with my commodity holdings.
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Nice to see Europe has its energy issues resolved. After all, winter is coming. Inflation of 18% in the UK in 2023? Phew… i was getting worried there for a while…
My guess is the energy crisis in Europe is no where near resolved and with each passing month the news will likely get worse. Sounds like the UK will have gas… just at astronomical prices. Just like a Monty Python movie we keep hearing… nothing to worry about… “just a flesh wound.” Meanwhile, still no plans to meaningfully pivot government energy policy (short term to address the supply or demand sides of the problem).
And with Europe vacuuming up world energy/LNG supplies this will simply push the shortages to other regions. Anyone who understands how all of this is going to play out over the next 6-8 months should get very rich
(I have no idea.)
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UK inflation will hit 18% in early 2023, says leading bank Citi
- https://www.theguardian.com/business/2022/aug/22/uk-inflation-will-hit-18-per-cent-in-early-2023-says-leading-bank-citi-gas-electricityInflation in the UK will hit 18% early next year as consumers count the cost of the deepening energy crisis, one of the world’s biggest banks has predicted.
The US financial services group Citi said it expected the consumer prices index to breach 18% in the first quarter of 2023, while the retail prices index inflation rate would soar to 21%.
Citi’s prediction is significantly higher than previous modelling of the impact of rising costs. Earlier this month the Bank of England said it expected inflation to reach 13% by the end of the year, while the Resolution Foundation thinktank has forecast it could reach as high as 15% by early 2023.
Asked about the possibility of blackouts this winter, Downing Street downplayed concerns. A No 10 spokesperson said: “Households, businesses and industry can be confident they will get the electricity and gas that they need over the winter. That’s because we have one of the most reliable and diverse energy systems in the world.”
She said consumers should not panic or feel they should cut down on energy use. “These decisions, in terms of energy consumption, remain decisions for individuals. But what I’m saying is that households, businesses and industry can be confident that they will have the electricity and gas that they need.”
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56 minutes ago, wondering said:
Thanks @Viking. Great analysis as always. Not to be nit-picky, but I think one investment bucket which was overlooked was regular S&P500 TSX liquid stock investments like J&J, Bank of America, Wells Fargo (sold a while ago) etc. I guess they have done a lot of investing in this bucket because they have felt the margin of error wasn't there
@wondering i added an edit to my original post… yes, i did not include a bucket for ‘large cap stock purchases/sales”’ as that is a pretty standard type of investment (and there are lots of transactions and its is often hard to get accurate buy/sell information).
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Is Fairfax undervalued today trading at US$505? My vote is yes. And probably by a lot. Ok, smarty pants… Why is it undervalued?
1.) i think the primary reason is very poor past performance. This has been discussed quite a bit already so i am going to move on.
2.) another important reason is its misunderstood (and/or under-appreciated) business model. Fairfax has a business model that is unique in the insurance industry. If investors do not understand what you are doing, and you have underperformed for the better part of a decade, then your shares are going to trade at a discount. Welcome to Fairfax 2022.
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Rather than discuss what Fairfax has in common with other insurers, i am going to discuss what makes it different than most. Do I have the buckets below about right? My goal is to capture the full range / types of investments Fairfax makes. Yes, some positions could be included in more than one bucket. Successfully investing in each bucket requires a very different skill set. Just one example: it has taken Fairfax years to build out its investment team in India; that investment in time and people has been completed and Fairfax shareholders are now reaping the reward. The amount of $ invested in each bucket is also significant. It is pretty interesting what Fairfax has built out over the years. What is also VERY INTERESTING - after hitting a rough patch from 2016/2017 - Fairfax's hit rate (success rate) with new investments has improved quite a bit over the past 5 years...
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Not included below is the usual buy/sell large cap US/Can stocks (too many buys and sell to try and list everything). With the list below I am trying to highlight what Fairfax is doing in addition to this traditional strategy.
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1.) Fairfax is a venture capital investor: funding given to startups or other young businesses that show potential for long-term growth
- ICICI Lombard (1994) - sold for @ $1.2 billion 2017/18
- Quess - formerly IKYA (2013) - via Thomas Cook - still owns - home run
- Digit (2016) - IPO likely coming late 2022 or 2023
- Davos Brands, Rouge Media, Blue Ant Media (2016)
- Farmers Edge (2017) - looks like a big miss
- Boat Rocker (2018)
- Ki (2020)
2.) venture debt investor: using warrants as sweetener.
- pre-2016 i think there were lots of these deals; too many to list.
- EXCO Resources (I think)
- APR (2016)
- Chorus Aviation (2016)
- Mosaic Capital (2017)
- Altius minerals (2017)
- AGT Food and Ingredients (2017)
- Westaim (2017)
- Seaspan (2018) - massive $500 million
- Leon’s (2020)
3.) Incubator/accelerator investor: fostering early-stage companies through the different developmental phases (including funding to accelerate growth) until the companies have sufficient financial, human, and physical resources to function on their own.
- First Capital - Singapore (2002) - sold for $1.7 billion 2016
- Riverstone UK - run-off (GFIC 2010) - sold for @ $1.5 billion 2020/21
- Hartville Group (2013) & Pet Health (2014) - sold for $1.4 billion 2022
- Others?
4.) distressed/bankruptcy investor: don't have the cash flow to service their debts and are fighting the clock
- Bank of Ireland (2011) - sold for +$1.4 billion 2014-17
- Eurobank (2014)
- Golf Town (2016) - merged with Sporting Life
- Performance Sports (2017) - Bauer/Easton/Cascade
- Carillion Canada/Dexterra (2018) - merged with Horizon North 2020
- Toys “R” Us (2018) - sold retail operations 2021
5.) Real estate investor
- Kennedy Wilson (2010) - ongoing, growing and very successful partnership
- Grivalia - Greece (2011) - very successful; merged with Eurobank in 2019
6.) asset manager
- Fairfax India (2015) - ownership has increase from 28% to 42%
- Fairfax Africa (2017) - merged with Helios 2020 - spectacular failure
7.) private equity investor (via external fund managers) - funds allocated here continue to meaningfully grow
- BDT Capital
- ShawKwei
- Lots more
8.) turnaround investor: not fighting the clock. Many of Fairfax’s investments became ‘turnaround’ situations after Fairfax made their initial investment especially 2015-2017 vintage.
- Sandridge Energy (2008/09) - bankrupt 2016?
- Abitibi/Resolute (2008) - sold 2022
- The Brick - merged with Leon’s 2012 - sold Leon’s 2021
- Blackberry (2011) - still owns full position
- Torstar - sold
- Reitmans (2013) - sold 2019
- EXCO Resources - bankruptcy - take private 2019 (Fairfax owns +40%)
- Fairfax Africa (2015) - merged with Helios 2020
- APR (2016) - sold to Seaspan/Atlas 2019
- Chorus Aviation (2016) - current status ?
- AGT Food Ingredients (2017) - take private 2019
- Mosaic Capital (2017) - take private 2021 (not managed by Fairfax)
- Farmers Edge (2017) - to be determined
9.) Resource investor
- International Coal Group (2006-09) - coal play - sold for big gains
- Sandridge Energy (2008/09) - bankrupt 2016?
- Abitibi/SFK Pulp/Resolute (2006-09) - paper, pulp & later lumber - sold 2022
- Tembec (2015) - lumber - sold 2017
- EXCO Resources - natural gas - bankruptcy/take private 2019
- Altius Resources (2017) - resource royalty play
- Ensign Energy Services (2018) - oil and gas services
- Stelco (2018) - steel play
- Foran Mining (2021) - copper play
10.) international investor (2014 was a big year)
- Bank of Ireland (2011)
- Grivalia (2011)
- Mytileneos (2013)
- Thomas Cook (2014)
- CIB Bank (2014)
- Eurobank (2014)
- IIFL
- John Keells
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Just another strange day in oil markets…
————OPEC+ Is Now Almost 3 Million Bpd Behind Its Production Target
The gap between overall quota and actual oil production from the OPEC+ members has been growing for more than a year, with many producers unable to raise production due to capacity and/or investment constraints, while the alliance has added more barrels to its monthly oil production target. Moreover, production in Russia, albeit stabilized at a level from February, just before the invasion of Ukraine, hasn’t increased as it should have been under the OPEC+ agreement.
But while the Saudis have been raising production in recent months, Russia has not. In addition, many OPEC+ members, especially OPEC’s African producers Nigeria and Angola, have been significantly lagging behind their respective quotas.
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Saudi Minister Says OPEC+ Could Cut Production At Any TimeCiting “disconnect” in the oil futures market, Saudi Energy Minister Prince Abdulaziz bin Salman dangled the threat of potential OPEC+ production cuts that could come at any time.
In an interview with Bloomberg on Monday, the Saudi energy minister said that “extreme volatility” was “undermining the market’s essential function of efficient price discovery”, in turn rendering it impossible for physical users to manage the costs of hedging or navigate the inherent risk.
“This vicious circle is amplified by the flow of unsubstantiated stories about demand destruction, recurring news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps, embargoes, and sanctions,” the Prince told Bloomberg.
Without sufficient liquidity, he said, there is a high level of disconnect, which means the “markets can’t reflect the realities of the physical fundamentals in a meaningful way…”.
The Prince described the markets as being in a state of “schizophrenia” and creating a “yo-yo” market that has lent a false sense of security.
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1 hour ago, glider3834 said:
viking I think they increased the CV when they exercised the warrants, so at Jun-22 the CV (excl Riverstone) is $1336
If deal goes ahead, Fairfax exchanges their Atlas shares at the merger price for BidCo shares.
@glider3834 thanks for providing the clarity! So assuming deal goes though at $14.45 we could see a further markup by Fairfax of the Atlas position by about $460 million? -
Will the Atlas take private deal result in Fairfax booking a $880 million pre-tax gain on its Atlas? If so, would this amount (less any tax impacts) flow though both earnings and BV after the deal closes?
At Dec 31 Fairfax carried its Atlas stake on its book at $922 million. In April they exercised 25 million warrants (so they now own 125 million shares). I think they still hold 6 million warrants.
$14.45 x 125 million shares = $1.8 billion
$1,800 - $922 = $880 million
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Interesting that some on the board feel $14.45 is an opportunistic low ball offer. Perhaps Atlas is an example of one part of BV of Fairfax that is understated.
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2 hours ago, Xerxes said:
Thanks Viking,
I must have misunderstood your earlier comment, few pages back.
I thought you were making an argument that over time FFH will start to be valued on an earning multiple (P/E) as the earning grows and not be based on book value (P/B).
So my last comment was really an answer to that
@Xerxes perhaps a simpler way to look at this is: What is the proper price to BV multiple an investor should pay for a P&C insurers who grows BV by:A.) 2% per year + 2.5% div = 4.5% (Fairfax 2010 to 2020)
- BV was $376 at YE2010 and $478 at YE2020
B.) 17% per year + 2% div = 19% (Fairfax 2021 to 2025)- BV was 478 YE 2020 and est $1,050 at YE 2025
I think B.) will command a higher price to book multiple.
I think Fairfax is transitioning from A.) to B.). Mr Market is expecting Fairfax to continue to deliver A.) = 4 to 5% total return on average from 2021-2025.
So we will see what happens. My guess is by year three (2023) investors will finally start to understand that the higher earnings growth IS sustainable. And that is when the higher price to BV multiple will likely come.
—————Below is one possible scenario of how things might play out for Fairfax. I view the numbers below as a reasonable base case. Fairfax could do worse… and i also think they could do better (a 1 x BV multiple in 2024 is very possible). Fairfax stock price is highly volatile so what actually happens will likely not be nice and clean like i model below (that volatility thing).
Aug 19. 2022YE. 2023YE. 2024YE
Stock Price $517. $570. $710. $87510%. 25%. 23%
BV. $588. $670. $790. $920
14%. 18%. 16%
Price to BV 0.88. 0.85 0.90 0.95
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Shares outstanding: Prem on the Q2 conference call highlighted buying back shares as a priority for use of excess capital. I don’t think the 2 million stock buyback in Dec 2021 was a one off. I think more large buybacks are coming. I am waiting to see how big the take out of minority shareholders in Allied World will be. If it is modest ($500 miilion), where Fairfax buys out only a portion this year, then i think another $1 billion stock buyback might be possible in Q4. Regardless, I do see share count coming down meaningfully over the next couple of years (4 to 5% per year on average). Especially if the stock price continues to trade so low. Constantly falling share count really starts to impact per share metrics a few years later.
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10 hours ago, Xerxes said:
Wouldn't an earning multiple be more appropriate for a business that does not have "lumpy" returns. And Fairfax's lumpy returns at that, happen to have a wide variety of "quality".
Perhaps in a distant future it will be like that, but for now its valuation will remain anchored based on sum of the parts (i.e. BV). What do you think ?
@Xerxes My view is the current multiple on Fairfax stock is not because of lumpy results. It simply reflects terrible long term past performance. The multiple Fairfax has today was earned over many, many years. Fairfax will have to demonstrate to investors that past errors will not be repeated (the 'what has changed' thing). And it will need to deliver great results... over many years. And lumpy is OK.
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Fairfax’s past results have been a hot mess since 2010. For over a decade. As a result, my view is most investors have no idea what Fairfax’s earnings power is on a go forward basis. Based on the businesses they currently own. And the strategies the company has in place today. Looking at historical results does NOT inform an investor what Fairfax’s likely future results will be. Fairfax’s past results are grossly understated for a number of reasons i will get to shortly.
I also think Fairfax destroyed its former investor base. Terrible results for a decade will do that. As a result Fairfax shares receive a very low multiple from Mr Market - and rightly so. Looking only at past results - going back to 2010 - an investor would have to be an idiot to own Fairfax today, especially as a long term investment.
Why are Fairfax’s past results understated? The primary reason was its failed shorting strategy. Back in 2010 Fairfax was convinced that deflation was coming (Great Depression 1929, Japan 1990 and Great Financial Crisis 2008) so they shorted/hedged 100% of their equity exposure (I think they were Lacy Hunt deciples at the time). They did not really start to remove the equity hedges until 2016 (Trump’s election being the reason given). And they did not remove their final short until 2020 (despite saying they were done shorting previously). Over 11 years ‘equity hedges cost Fairfax $5.4 billion in aggregate. This averages to $494 million each and every year from 2010 to 2020. The final loss in 2020 was $529 million.
The amazing thing is Fairfax was able to eat a $500 million loss every year for 11 years straight (on average) AND STILL GROW AS A COMPANY. Lots of very good things were happening at Fairfax from 2010-2020. Most importantly, it significantly expanded its insurance business and now has a global platform that has been completely digested within Fairfax (headed up by the very capable Andy Bernard). The size of its investment portfolio is now massive (+$50 billion) and looks well positioned to deliver record results moving forward. (I will have much more to say on the positive changes that have been happening in the investment portfolio in a future post.)
Fairfax is a turnaround today. Looking at past results (in aggregate) is next to useless to determine what it will earn in the future or what it should be valued at today. With turnarounds you have to do a detailed bottom up calculation of what the company will earn in the future. Ending the shorting campaign has completely changed Fairfax’s future earnings trajectory and in a big way.
What will remedy the situation (very low stock price)? Sustained improved performance (yes, it will be lumpy quarter to quarter). And that is what we have been seeing at Fairfax for the past 7 quarters. As Fairfax delivers investors will eventually come to understand what the true earnings power is of the company. My guess is that is when we will see the multiple expand. Perhaps the next stop on the Fairfax train is for the stock to be valued at 1 X book value. Hardly expensive for a quality insurance company (with lumpy earnings).
Equity Hedge Results 2010 to 2020
2020 -$529 2019 -$58 2018 -$38 2017 -$418 2016 -$1,192 2015 $502 2014 -$195 2013 -$1,982 2012 -$1,006 2011 $414 2010 -$937 Total -$5,438 avg -$494 -
24 minutes ago, This2ShallPass said:
I would be disappointed with this, for the 5-yr period from 2022 it would just be a double. Fairfax seems to be in a position with almost everything going right and all the positives that has been discussed in the board.
With all of this, 15% 5-yr cagr feels too low. Just curious on what should be the expectation for % BV growth over the next 4 years? If Fairfax consistently delivers BV/share improvement for the next 4 years, then it's reasonable to expect a much higher multiple (1.2-1.3x BV?)..
@This2ShallPass great question. My focus with Fairfax is earnings. Trying to predict multiple is even more difficult. My thesis is Fairfax is going to deliver VERY good earnings the next couple of years. It makes sense that Mr Market would also reward the stock with a higher multiple as Fairfax delivers.
—————So i think it is likely that Fairfax stock delivers a trifecta for investors in the next couple of years:
1.) rapidly growing earnings and BV
2.) Mr Market rewarding the stock with a higher multiple
3.) much lower share count (via stock buybacks)
If this happens then Fairfax at US$1,000 in 4 years is likely too low.
I also do not get too anchored in what might happen in 3 or 4 years. That is too far away to really know much. My focus is this year (2022) and next year (2023) and getting that right.
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It is great to see so many board members doing so well with their investments. Well done! The other super interesting take away is how different each of the many strategies have been. Holy shit. And i love it.
i (my family) have been living solely off our investments since i was 40 (since about 2006). I walked away from my senior management job at Saputo. My wife and i and our three kids under 6 moved back to our home town in rural BC. I needed to recharge may batteries and we wanted the kids to get to know grandparents and the rest of the family better. We didn’t have enough to retire but we had enough to pay cash for a beautiful house, no debts and enough in the bank to last a few years. My plan was to take couple of years off and then figure out what my next day job would be. I always have managed our investments and done reasonably well. But being able to focus on investing full time resulted in returns that greatly exceeded our expenses (which were about C$45,000/year… not an lie - and we lived a great life). By 2010 we had a big enough nest egg we were able to move back to Vancouver and live the same lifestyle (and we realized rural BC was a great place to raise young kids but Vancouver was likely a better place to raise teenagers). For about 10 years our investment gains roughly equalled our expenses (which had ballooned to about $120,000/year). But we owned a house in Vancouver (we had a small mortgage) so we had won the real estate lottery. Last year we sold our house. 2021 was also the best year for our investment portfolio (+60%). Bottom line, my wife and i can now officially say we are retired
Keys: i never viewed myself as ‘retired’. I never put pressure on myself to earn a big return (my target has ALWAYS been 6 or 8% per year). I always expected i would likely need to get a real job one day (i.e. my investments could run out). Investing has always been a blue job - not a pink job (my wife’s jobs) - and definitely not a purple job (what a disaster that would have been). Bottom line, my wife completely stays out of my gig and she likes that arrangement (she actually gets super stressed if i talk to her about what i am doing). Before we sold our house, all of our investments were in tax free accounts (LIRA’s, RRSP’’s, TFSA’s, RESP); not having to think about taxes was a big, big tailwind for returns. I also am happy to trade in a pretty narrow range of stocks - companies i have followed over the past 20 or so years (i keep adding a few new ones every year).How did you do it? My investment returns > my expenses (and by a lot some years). We also won the real estate lottery.
I have never traded any derivatives. The closest i got was then Ericopoly was explaining what he was doing with Fairfax when they were sitting on all their CDS gains in 2007 or 2008. He made millions (i think). I still hit a home run holding only Fairfax shares and a very concentrated position. I also have never bought a stock for a dividend yield… i only look at total return.
Do you have a part-time gig that tops it up while waiting for investments to mature? No
Do you go for some bold risk taking and make a fortune on some security each year? When i see a low risk high return opportunity i like to concentrate. I probably make one or perhaps two very big bet every year or two. And watch it like a hawk (i know, my posting on one topic likely drives some people nuts at times). My big bets often carry over for more than one year. As an example: in 2013 i was 100% Apple. We went on a family vacation to Hawaii and right before we left i put the last of our savings into Apple. Getting that concentrated did weigh on my mind; however, my conviction/logic won out. The investment ended up being one of my best ever. Go check out Apple June/July 2013 and you probably will find a bunch of posts from me
Seems to me if you make some mistakes or the equity does not compound fast enough your withdrawal rate has to be very small in the first decade or two of this activity? ‘Don’t lose what you got’ has been a key part of my investment decision making process for 20 years. I am quick to move to cash when i don’t like risk/reward situation. It works for me. Not having to think about taxes is a big benefit.
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1 hour ago, Parsad said:
I don't consider FFH as cheap as Viking does presently. When I first started loading up, it was at 0.6 times book...and I kept buying till about 0.75 times book. I have not added since. But it made up about 60% of the portfolio at that point...now at about 30%.
Assuming FFH has risen back up to its Q1 book value of $630 USD after being down in Q2, that would give it a price to book of 0.85-0.87 or so. It's undervalued, but not dirt cheap. I personally like a larger margin of safety.
Now is it cheaper than many other stocks in the market? Maybe not significantly cheaper, but the upside looks as good if not better.
Cheers!
@Parsad I am bullish on Fairfax today primarily because i see its near term earnings power increasing quite a bit.I think price to BV is a useful rough guide to use to value an insurance stock - it is one measure. But even Buffett says price to BV is not a great way to value BRK today given its evolution and many assets worth far more than what is captured in BV (and future earnings power of the various businesses). I think Fairfax is now of a size and age that using BV is getting less useful.
Most importantly, BV can under-value legacy assets that are growing nicely over many years. Fairfax has a bunch of these. BV is also a rear view mirror measure - it reflects past results. Looking primarily at BV (to value a company) in ‘turnaround’ situations (which is how i view Fairfax today), where earnings are set to increase like a coiled spring, i think way undervalues the company. .
1.) The pet insurance sale for $1.4 billion, and a $950 million after tax gain. Where was that asset captured in BV pre sale announcement? It wasn’t. Historical cost was. And the earnings over the years. But BV messed up big time reflecting intrinsic value of the pet insurance business. Of course post sale things get trued up and BV now does reflect the value of the pet insurance business. Poof, like magic, BV will be $40 higher.
2.) Fairfax is growing its net written premiums by 20% and growth has been strong for 3 years. At the same time underwriting has been improving (CR has been coming down). That means Fairfax is now delivering record underwriting income. 2023 should be even better. Where is that reflected in BV? An investor should give Fairfax a higher price to BV multiple (if future earnings are expected to be higher).
3.) future interest income. Will also be in record territory shortly.
4.) future share of profit of associates: will be in record territory shortly (if it is not there already)
Some have commented that they think Fairfax might be cheaper today than when it was trading at US$260 in Oct 2020. From a BV perspective that is clearly not true. However, when you do the valuation in terms of future earnings power of the various businesses (growth in Digit and possible IPO etc) i think the valuation today is likely pretty close to that of Oct 2020. Very cheap and possibly crazy cheap, i would say
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29 minutes ago, SafetyinNumbers said:
I rather FFH owns ATCO forever and earn a 10-15% CAGR rather than having to find something else that does the same thing. I imagine, ATCO wouldn't be a favored counterparty for other shippers if ONE owned all of it.
For other shippers, especially those from the other alliances (the alliances ONE is not part of), i just wonder how ONE owning 30 or 35% of Altas is all that different from ONE owning 100%? My guess is this deal makes the other shippers nervous and likely to want to do business elsewhere - which is not good for Seaspan and their future growth prospects. It appears a recent sale of a vessel did not go through for Seaspan… perhaps another shipper got wind of this deal and walked away? I am speculating (big time) but i have seen no discussion/analysis of ONE and this deal and that is surprising to me as ONE is the elephant in the room.
Regarding Fairfax, i am impatient and i like to keep things simple. An Atlas sale at +$20 would likely allow Fairfax to greatly simplify their structure and build a more fortress like balance sheet:
1.) buy out any remaining minority shareholders - eliminate those dividend payments
2.) right size total debt - if needed
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2 minutes ago, SafetyinNumbers said:
To be fair, there isn't any deal to vote on yet. The consortium made an opening proposal that might be too low for most shareholders. Let's see what the special committee bankers comes back with and if they are able to negotiate a price that they feel comfortable recommending to shareholders.
Why is ONE not buying all of Atlas? ONE already accounts for 24% of Seaspan’s business (its largest customer). ONE earned something like $6 billion in the last quarter so they can afford to buy whole company.
Perhaps step 1 is get Atlas private. And step 2 in a year of two is to take out Fairfax at a nice premium (+$20/share). A Fairfax shareholder can dream…
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1 hour ago, Xerxes said:
The reality is Prem is not sharing the canvas he has in mind. It all makes sense to him and his team, I am sure, but no narrative is being communicated to the shareholder base.
At a certain price you get the deep value guys in, that is all fine and well. But at a certain point to bring the long term buy-and-hold you need to build and clearly communicate a narrative.
even in the shareholder letters you are being dragged into the rabbit hole of some back story, which while fine and educational does not tell the would be buy-and-hold crowd where that canvas is going.
Contrast that to Markel simplicity when it comes to communication to shareholders. For clarity we are not talking the merit of one capital allocator to another. But the effectiveness of their communication.
That being said, looks like Greg is jumping in with both feet !!! (Or soon)
@Xerxes i am thinking along slightly different lines. I am not trying to be adversarial… i just like taking the other side of the argument. Because this is important stuff to debate.i think Prem actually communicates too much. He says too much. So the important, core message gets lost. I find he has been getting better of late.
I think Fairfax’s basic business model is pretty straight forward and is understood by most sophisticated investors: underwriting profit + Interest and dividend income + (lumpy) investment gains. They are done building out their global insurance platform so future acquisitions will be tuck in’s (like the recent Singapore Re purchase). Future cash flows will be directed at:
1.) supporting subs in hard market (nearing the end of this use)
2.) buying out minority partners: Allied World, Brit and Odyssey Re.- i.e. the Eurolife acquisition last year and the recent Allied World announcement
3.) share buybacks
- i.e. December 2021
Now Fairfax is not Berkshire or Markel. The types of businesses it invests in are often very different. And to state the obvious, even Berkshire’s stock often trades at large discounts over time. If investors don’t understand Buffett and Berkshire they certainly will not be able to understand Fairfax. Just look at the trouble most investors have when trying to explain their valuation of Berkshire… it often looks like a hot mess (so many different ways, none of which really get the job done in a neat and tidy fashion). What drives Berkshire stock is trust in Warren Buffett. And people trust Buffett because of his exceptional long term performance (yes, it has been slowing in recent years… but it is still good enough).
Fairfax’s core issue, in my humble opinion, is performance. It has sucked for the past decade. Why would Fairfax have any long term shareholders today? I do think Fairfax today is a very misunderstood animal. The core issue causing the dreadful performance has been fixed - they are no longer shorting so the last $500? million loss was taken in 2020 when they closed out the last short position. The second big issue causing underperformance (very poor equity selection) has also largely been fixed since 2018 or so. Covid then threw sand in the gears for a year or so (hitting insurance results primarily at Brit, dropping interest income through the floor - interest rates at zero - and hammering equity positions all at the same time).
Today we have an insurance business growing +20% (and has been for years) with improving underwriting results (falling CR). Spiking bond yields are spiking interest income. And the equity holdings have, for the most part, bounced back strongly. Runoff and pet insurance businesses were sold bringing in +$2 billion. Lots of equity positions have been sold. The future for Fairfax has never looked better. This has all been communicated by Fairfax to shareholders. But investors are not drinking the Kool-Aid. Yet.
As Fairfax delivers improving results i think investors will get interested again. Fairfax has been delivering for 7 quarters but clearly investors want to see further proof of improvement. And if Fairfax can string together 4 or 5 years in a row of solid results then i think long term shareholders will return.
Where Does the Global Economy Go From Here?
in General Discussion
Posted · Edited by Viking
I see lots of rear view forecasting. It IS clear TODAY what happened over the last year - just to state the obvious. And just to be equally clear NO ONE was predicting anything close to what actually happened over the past year:
- tech stock beatdown - lots down 70%
- bear market in all stocks
- bear market in bonds (worst ever?)
- oil prices over $100; oil stocks on fire (best performing asset class)
- inflation at 8%
- war in Ukraine; Russia a pariah in the West
- energy crisis in Europe
- Federal reserve are now hawks (aggressively raising rates and QT)
- Fed funds forecasted to go to 4%
- bond yields across the curve much higher than anyone predicted
- housing slowing dramatically
- Chinese economic growth slowing (zero covid policy; crackdown on real estate)
So my guess is no one really has a clue how things will look in another 12 months (economic growth, inflation, unemployment, bond yields etc).
Most investors have seen big declines in their investment portfolio so far in 2022. 2023? No one has a clue how it will play out. And that is one of the things i love about investing…