Viking

The gang at Wall Street Bets have found an inefficiency in the market and they are exploiting it. Just like lots of very profitable hedge funds and investors do all the time. The difference is there is much more transparency (of some kinds)... The regulators will make a call on if rule changes are required. Over time we should expect the ‘alpha’ to be competed/regulated away like all money making strategies that work.

Here is what Fairfax had to say in the last 2 annual reports on Farmers Edge. 2018 AR: Farmers Edge. Farmers Edge was founded in 2005 by Wade Barnes in Winnipeg, Manitoba as a project-based consulting company providing value added agronomy services for large scale farmers. The business has since evolved into one of the leading SaaS (software as a service) farm management platforms with 24 million acres under management as of December 2018, with an anticipated increase to 40 million acres by the end of 2019. Key services offered under the Farmers Edge platform include: 1) One of the highest density of weather stations in North America. Farmers can have alerts sent to their phones, even at 4am, if there is to be frost on one of their farms. Important, as there is only one harvest! 2) Daily satellite imagery to track crop health via tablet, phone or PC. 3) Brand-agnostic telematics enabling passive data collection. 4) Soil sampling and variable rate fertilizer application, which allows farms to increase yields with less overall fertilizer application. Four-year customer contracts provide Farmers Edge with predictable recurring revenue and cash flows. Fairfax made a $95 million equity investment in March 2017 and has since provided additional funding of $64 million in the form of debentures plus warrants, based on an implied valuation of 4x projected December 2019 base business EBITDA. 2019 AR: Propelled by its founder, Wade Barnes, Farmers Edge has continued to grow acres under contract and, along with it, predictable recurring revenue and cash flows. Bill McFarland has become the Chair of Farmers Edge and will continue to support Wade as he builds out this valuable precision agriculture platform.

More positive press for Blackberry. The Globe’s stars and dogs for the week - https://www.theglobeandmail.com/investing/investment-ideas/article-the-globes-stars-and-dogs-for-the-week-139/ BlackBerry Ltd. (STAR) $17.85+5.37 (43.03%) Maybe it should be renamed BlackBerry In Motion. Shares in the company have been skyrocketing faster than the Waterloo housing market this year, almost doubling in value since the start of this year. There’s been a slew of good news of late, including a patent dispute settlement with Facebook and a partnership with Amazon to work on cloud-based vehicle software. But for now, it is stock market momentum that’s really got this former tech darling charged up. BlackBerry is back with a new kind of playbook – and, for a change, this one is getting rave reviews.

I listened to Gundlach’s 2021 outlook presentation. I think his basic conclusion is you need to have a barbell strategy to take advantage of either inflation happening or a continuation of disinflation/mild deflation. Smart people seem to be pretty stumped about which scenario we get in the coming year (s).

Is this a response to the superstockmarket and government monetary policy? Yes - at the risk of diverting this thread into the political quicksand, I am concerned about inflation as it seems to be a risk that many market participants are discounting right now. I'm cognizant of the fact that gold yields nothing, but I'm overexposed to USD as a US resident, and I think that the fiscal bias of the new administration will be towards more stimulus. We will have the most dovish Fed chair in history working with the second most dovish Fed chair in history (in her forthcoming role as Treasury Secretary) along with a new President who has voiced support for significant spending programs. The prudence of Paul Volcker is long past, we're now well over 100% debt-to-GDP in the US, and given our relatively anemic GDP growth over the past decade, I don't see us "growing out" of that debt, meaning that the only course for policymakers is full on fiscal repression. Anecdotally, I'm already seeing significant increases in grocery prices along with dastardly "shrinkflation" (same price, less food), and it seems like some of the current levitation in the stock market may simply be attributable to the sheer amount of liquidity surging into the system. That being said, I seem to be an excellent contrary indicator on macro, so those reading this might want to load up on NASDAQ calls :D My guess is we get a big inflation head fake later in 2021 as the economy gathers steam. And then the deflationary forces kick in again. I am in the Lacy Hunt / Hoisington camp that more debt = disinflation perhaps leading to mild deflation in a few years. The good news in the US is the consumer is in good shape (debt wise) unlike Canada. 2021 is setting up to be a blowout year for asset prices (driven primarily by free money). Where i live in Vancouver people are starting to predict record price increases for housing in the spring selling season (which of course would set nose-bleed record selling prices). Price increases for housing also look strong in the US. Makes sense to me stocks will also join the party (who wants to own bonds in their portfolio anymore?). Hang on tight... the roaring 20’s might just be getting started :-)

So Blackberry shares traded at US$6.63 on Dec 31. Today they are trading at $11.75 = $5.12 increase. - Fairfax owns 46.7 million shares = $239 million increase. - Fairfax also owns debentures ($6 conversion) or 55 million more shares = $282 million increase. - total increase = $514 million / 26.5 million shares = about $19/share pretax - this is a mark to market position I agree, Blackberry looks to be in all the right segments. It is surprising to me that someone has not tried to take it out just to get the technology and/or people. Or perhaps Chen does have the right plan and he just needs another year or two for the results to start to come through (and justifying a much higher share price). In terms of where BB is trading, look at all the other companies in the segments they compete... are they not all trading at nosebleed levels? It does make some sense on a relative basis.

Xerxes, events like 1999 (and 2020) are a test for investors; experiencing adversity (bear markets) is a great test of skill and fit. There are always good lessons to be learned from looking at the past. How an investor does over the entire cycle (encompassing both bull and bear markets) should provide good feedback for an investor of his/her investment philosophy (does is generate an acceptable return and meet your other objectives) and fit (does it let you sleep at night). And as i get older i am noticing small adjustments over time (it is not static) as both objectives and tolerance to risk change.

I think there is a good chance Fairfax could trade over US$600 in 2021. With shares currently trading at $382 that would give investors a close to 60% return. How? At Sept 30, 2020 BV was US $442. By Q3, 2021 there is a good chance BV could be over $500. As earnings, BV and sentiment in the company improves we could see a 1.2 x multiple (hardly expensive) = shares at US $600. Not a crazy number. In Q4 we know their equity positions increased in value by over $1.4 billion. (Yes, a majority of the positions are not mark to market.) In the last 2 weeks Blackberry is up another $300 million. It looks like their stake in Digit may be worth $400 million more. Their other equity holdings are continuing to increase in value in Q1. We could see their equity holdings jump $2.5 billion in 6 months (i am lumping Digit in here). That is $90/share (yes, i understand this number is messed up given how the equities are accounted for; i put it out there more to provide some magnitude). Bottom line, this would be very good for shareholders were it to play out. The insurance business is in a hard market. There is a lag between price increases and higher earnings. 2021 should be the start price increases flowing through to earnings. RBC is forecasting that when this inflection point happens the market multiple will increase. This will provide a double benefit for shareholders of higher earnings and higher multiple from Mr Market. Earnings from associates should also become a tailwind in 2H 2021 as the economic recovery takes hold. Fairfax is highly motivated to monetize assets; they have said this repeatedly. Unfortunately the pandemic slowed sales in 2020. They have a slew of companies they could monetize... the challenge is we do not know the company, the timing or size/impact. The key here will be a continuation of the risk-on environment in financial markets. Fairfax could generate $500 million or more in proceeds in 2021 from selling off stakes in AGT, Farmers Edge, Peak Performance (Bauer), Toy’s R Us (real estate) etc. Fairfax also owns a few lottery tickets. A Blackberry sale? Digit IPO? Atlas could easily trade much higher than $11/share. US$ weakness; strength in EM could jack Indian investments. Stock buybacks: if Fairfax is successful with asset monetizations (the odds look good right now) there should be ample $ to grow insurance co’s in hard market AND to also buy back a material amount of stock. Watch the stock pop on news of a large stock buyback. Management credibility: Another opportunity for Fairfax is what management does in the coming year. If their words and actions instil confidence in investors then this should support multiple expansion. Will they pull another rabbit out of the hat? Fairfax also has a history every few years of doing something creative and unexpected that is good for shareholders. Recent examples are First Capital and Riverstone UK sales. With FFH shares this cheap my guess is they are highly motivated to find some $ to take out a significant number of shares :-) Bottom line, the company has a large number of significant tailwinds as we begin 2021. The key is a continuation of the current risk-on sentiment and shift to cyclicals/EM. If it continues into 2021 and Fairfax is able to monetize a few investments then shareholders could see a very solid return on their shares. We will see :-) PS: there are also lots of risks... like the virus mutating into a more deadly strain... like the Tesla stock bubble popping, taking the stock market averages down 30-40%... like a double dip recession hitting in 2H 2021 (instead of expected recovery)... like hard market coming to a screeching halt... like Fairfax management doing something very dumb... management at the large equity holdings doing something dumb (Atlas, Blackberry, Eurobank)... reserving issues rearing their ugly head...

My wife’s niece (in her early ‘30’s and no investing knowledge) texted her this weekend asking if this was a good time to buy Tesla. A buddy of mine texted me last week. His son was keen to invest in two companies (they were small; i had never heard of them) and wanted to know if they were a good investment. This is starting to feel a little like the late ‘90’s... ————————— My recollection of the late ‘90’s was it was a VERY bifurcated market.... new economy = bubble; old economy = on sale. I do think there are parallels today. Tesla = bubble; however lots of sectors are cheap = telecom, pipelines, energy and lots of other stuff is not crazy expensive = financials, insurance, some reits and more. —————————- Where do we go from here? The .com bubble blew bigger for 4 or 5 years so we could just be getting started with this version. Perhaps at some point we see a crash in the high flyers and a rotation into the cheap stuff (similar to what happened when the .com bubble popped).

Some good news... ——————————— ...Ms. Home is part of a growing army of volunteers who have pushed Britain’s vaccination effort harder and faster than anyone expected. Hundreds of village halls, recreation centres, churches and community clinics have been turned into makeshift vaccination sites and tens of thousands of volunteers have manned phone banks and gone door-to-door to make sure that as many people as possible get their jab. ...If the current pace continues, government officials believe that everyone over 50 – roughly 32 million people – could receive their first dose by the end of March and that all adults could be vaccinated by the end of June, three months earlier than expected. Britain’s mass volunteer effort sets blistering pace in COVID-19 vaccination effort - https://www.theglobeandmail.com/world/article-mass-volunteer-effort-puts-uk-ahead-of-schedule-on-vaccine-rollout/

Cigarbutt, you make a very good point. The drop in bond yields is the ‘in plain sight’ big issue for insurers, given it is relentlessly driving investment earnings lower. The ‘out of sight’ potentially big issue for insurers is being under-reserved. Perhaps both explain the current hard market and also why the hard market may last for some time (a couple years). Fairfax in recent years has had a pretty good record with reserve releases. Lets hope it continues in the coming quarters/years. This is something i look at when they report. I think Q4 is when they do a complete review (so if there are issues this is when they will likely surface). One area i will watching in Q4 is runoff. Now that the good part of runoff has been sold (Riverstone) it will no longer be possible to hide the increase to reserves from the ugly part (asbestos). I think last year in Q4 they took a $200 million hit. I would not be surprised to see another big hit this year. Obviously, this is just a guess on my part.

Yes, i would love to see continued stock buybacks in Q4 (hopefully they took out another 2% of shares). Brk, Apple and BAC all flush with cash and buying back meaningful amounts of stock all at the same time. Has to benefit shareholders of BRK at some point in time :-) PS: yes, i hope BRK continues to sell Apple shares, given current valuation and position size. The issue is what to do with the proceeds - we keep circling back to this core ‘high class’ problem of BRK holding (apparently indefinitely) too much cash!

The key catalyst for Berkshire stock is what Buffett does with the cash hoard of $145 billion over the next year. If he is able to put a significant amount to work this will drive the stock price (improving both earnings and sentiment in shares). Immediately after the pandemic broke out he got extremely risk averse. Not only did he not buy anything he sold out of some positions like airlines. His commentary during the AGM was pretty dour. And preservation of capital for long term shareholders was clearly his core objective. As 2020 progressed it appears Buffett got more comfortable with the pandemic. More optimistic. And you could see this with his purchases as the year progressed: - Japanese stocks - big pharma - meaningful buybacks of BRK stock The new news (November) is we now have vaccine’s approved and actually in arm. It makes sense that this should help make Buffett even more comfortable/optimistic and further shift from capital preservation to more of a risk on approach. So i think there is a good chance we may start to see the cash hoard decrease in size each quarter moving forward: - BRK stock buybacks? - pipelines? - lots of cheap opportunities here; in BRK circle of competence - energy? - other international? - other domestic US?

Nwoodman, thanks for posting. Can someone explain what a new $1.9 billion total co valuation for Digit Insurance means for Fairfax? Does Fairfax still own 49%? Will this new, much higher valuation for Digit flow though to BV for Fairfax when Q1 report comes out? Fairfax certainly has a lot of significant tailwinds. The news just keeps getting better :-) Here is a review of Fairfax’s ownership in Digit from 2019 AR. Page 68: On December 23, 2019 Go Digit Infoworks Services Private Limited (‘‘Digit’’) entered into definitive agreements whereby its general insurance subsidiary Go Digit Insurance Limited (‘‘Digit Insurance’’) subsequently issued approximately $91 (6.5 billion Indian rupees) of new equity shares primarily to three Indian investors. This transaction valued Digit Insurance at approximately $858 (61.2 billion Indian rupees) and resulted in the company recording net unrealized gains on investments of $350.9 on its investment in Digit compulsory convertible preferred shares. The company also holds a 49.0% equity interest in Digit as described in note 6. Page 72: On December 23, 2019 Digit entered into definitive agreements whereby its general insurance subsidiary Digit Insurance subsequently issued approximately $91 (6.5 billion Indian rupees) of new equity shares primarily to three Indian investors. This transaction valued Digit Insurance at approximately $858 (61.2 billion Indian rupees) and valued the company’s 49.0% equity interest in Digit at $122.3 at December 31, 2019. The company’s 49.0% equity interest in Digit is comprised of a 45.3% interest in Digit common shares and a 3.7% interest through Digit compulsory convertible preferred shares that are considered in-substance equity. Foreign direct ownership in the insurance sector in India is limited to 49.0% and as a result the remainder of the company’s investment in Digit compulsory convertible preferred shares are recorded at FVTPL as described in note 5.

Eventually yes, but what really matters now is that the stock price sticks. I think it is true to say that equity gains = capital = more underwriting in a hard market = more subsidiary profit = more dividend capacity to holdco = holdco deleverage etc. If so, the simple fact that their holdings are going up unlocks a lot of good things. Definitely a big piece of good news, and as you said, if the BB price is sustainably higher FFH could write more business. My concern is that the BB YOLO effect could end up being a short-term phenomenon. At some point, reality must kick in for some of the tech stock YOLO investments. Will that be six months from now? A year? I don't know, but at a certain point I would be much happier to see cash or some other more predictable investment on FFH's balance sheet and not such a large slug of BB. But, we now have a happier "problem" today than what has prevailed for the past decade. SJ A good example of this is Quess. It was trading at nosebleed levels for a while (then it was still embedded in Thomas Cook India). A small portion (i think it was 10%) was cashed out for something like $100 million. Years later the stock is trading down more than 50%. Looks like a great company. But selling more aggressively at peak prices makes some sense. Especially when you have other very good uses for the cash. Imagine what Fairfax could do with the gains from a Blackberry sale... grow insurance op co’s in hard market, take out shares well below BV; reduce debt; buy another chunk of Allied from minority holders.

Resign from BB's board of directors, and then begin to trim the BB position as the stock price rises? I know, I know, it's a crazy idea! SJ If BB continues even higher is there anything FFH could do in the options market to lock in a certain price. Giving them some time to exit the whole investment? I know, i know... no more derivative bets! :-)

BRK. Decided it was time to lock in some FFH gains from the past 8 weeks (still own a bunch); still like FFH, just not as much as when it was 20% cheaper. Happy to add BRK at $233.

So why so bullish on BRK? Is it absolute value? Relative value? Cyclical play? What are a catalysts to get the stock moving? More buybacks? Mystery new purchase? Buffett finally putting cash hard to work? One headwind is Apple valuation (very expensive and could come way down if we get a sell off). Do you really like financials? I do like BRK; it looks cheap... is it crazy cheap (to warrant big overweight)? Just trying to understand...

Regarding BB, the spike in price clearly ‘efficient market theory’ at work :-) Now if it keeps going higher is there something Fairfax can do to take advantage?

Fairfax has been moving up pretty steadily each day since Jan 1 (9% total). Chug, chug, chug... Many of their largest equity holdings are also up nicely since the start of the year: Atlas, Blackberry (what’s up with the 17% move today?), Stelco, many of the India holdings etc.

Here is an update on J&J. We need a few more manufacturers to be successful/approved. Johnson & Johnson confident of March rollout for its COVID-19 vaccine, still aims for 1 billion doses in 2021 - https://www.theglobeandmail.com/business/international-business/us-business/article-johnson-johnson-confident-of-march-rollout-for-its-covid-19-vaccine/ Johnson & Johnson is on track to roll out its single-shot coronavirus vaccine in March, and plans to have clear data on how effective it is by the end of this month or early February, the U.S. healthcare company’s chief science officer said. Dr. Paul Stoffels in an interview on Tuesday also said J&J expects to meet its stated target of delivering 1 billion doses of its vaccine by the end of this year as the company ramps up production. The New York Times reported earlier on Wednesday that J&J was experiencing manufacturing delays that would reduce the number of doses initially available. Stoffels declined to say how many doses would be ready to go into people’s arms in March, presuming it receives emergency authorization from the U.S. Food and Drug Administration. “We are aiming for 1 billion doses in 2021. If it is a single dose, that means 1 billion people. But it will be in a ramp-up throughout the year,” Stoffels said.

I saw the stats for India and wondered why they were such an outlier (in a good way). The article suggests there could be very good news coming on the treatment front (separate from the vaccine front). Encouraging as it allows us to tackle the virus on multiple fronts. Still so much we do not understand...

Gary, nwoodman posted a link to a 100 page report that provides the best overview of the insurance industry that i have read. Perfect for the non-insurance type like me. It answers your question. The link to his post is below. - https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-2020/msg444399/#msg444399 The simple question is not so simple. The hard market that followed 2001 allowed FFH to increase premiums significantly especially at OdysseyRe (see page 18 slides) and, by 2005, overall float had increased by 50%. FFH was still swallowing reserve deficiencies of the past but the best was yet to come with the buildup leading to a capital scarcity episode for which they were ready for. https://s1.q4cdn.com/579586326/files/2011%20AGM.pdf Is the simple answer: as long as rate increases > loss cost trends then, given time, we should see better EPS? (All else being equal.) It takes time as written premiums become earned premiums. From nwoodmans link, the report estimates 75% of EPS for P&C is investments returns; 20% is renewal and 5% is new business. Only 25% of earnings for most insurance companies is underwriting? Plummeting bond yields has got to be killing 75% of earnings of most P&C companies. For the 25% bucket to make up this decline we are going to need to see big price increases or large price increases for insurance over many years. Perhaps this is the biggest reason we are hearing the hard market may run for years. For Fairfax, they have underperformed on the investing side for so many years the bar is now very low. Improving CR and better investment results happening at the same time would definitely juice the stock price. The set up for 2021 is encouraging.

FFH. Shares continue to trade at a historically low valuation band (P/BV). Lots of tailwinds. 1.) underwriting results are looking up - hard market has arrived 2.) investment results are looking up - Fairfax’s equity portfolio is heavy in cyclicals (Stelco, Resolute, Eurobank ) which are spiking; also heavy in emerging market stocks (Quess, Fairfax India, IIFL quartet) which are increasing nicely; turnaround plays like Blackberry are also spiking; Atlas is chugging away. Digit is chugging away. 3.) asset sales: risk on sentiment should help Fairfax accelerate number of divestitures in 2021 - proceeds of $750 million from Riverstone UK sale coming in Q1 4.) $10 dividend (3% yield) is coming Jan 21 Key risks: total debt/growth in debt during 2020; status of final mystery short position; management doing something unexpected/dumb.

Gary, nwoodman posted a link to a 100 page report that provides the best overview of the insurance industry that i have read. Perfect for the non-insurance type like me. It answers your question. The link to his post is below. - https://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/fairfax-2020/msg444399/#msg444399