Viking

Liquidity is one part of the equation. Price is another. Shares closed today at $207.67 and BV = $174 (at Dec 31). So shares are trading today a little under 1.2 x BV. (Yes, the stock portfolio is down so Dec 31 BV is overstated). Bottom line, if shares continue to fall they will be comfortably under 1.2 x BV which should also get Buffett excited about executing some buybacks in volume (a little like an undersexed guy in a brothel :-)

BRK (again) Buffett commented Berkshire would fall less than the general market in a sell off. Let’s hope that is true :-). Having 20% of market cap in deployable cash has to matter at some point.

Agreed. The challenge is when (and what) to buy. Good problem to have.

Also, who is going to want to be holdings stocks going into the weekend? Tomorrow could be another very interesting day. I wonder when global central banks get more visible... Markets seem to be on a one way train right now. Confidence is a very fragile thing.

Cigar, thanks for taking the time to post. I am not an insurance expert and find your posts to be helpful :-) I am back on the sideline with Fairfax. Their equity portfolio is getting hit pretty hard.

It looks to me like most countries are having a hard time accurately testing and reporting on the virus. That does not mean it is not growing in size. It simply means we do not know. Lets hope we do not get more surprises like Italy or Iran. A few more like these and the cat is likely out of the bag.

Definitely. And next year Q1 and Q2's earnings will look amazing in comparison... Market right now seems to be expecting these warnings, so we'll see what their magnitude is and how the market reacts. Liberty, pre-virus we had what looked to be close to a mild global manufacturing recession in 2H 2019. Germany and Japanese economies are not doing well. Europe looks weak. The watchout is if the virus causes consumer confidence to fall, particularly in the US (as they are driving the global engine at the moment). If the virus leads to a mild recession earnings in 2H 2020 then earnings next year might not look so good. I am not saying this is my base case. But the bond market is no longer flashing yellow they are on full stop red. And up until 2 days ago the stock market was at all time highs. Someone has it wrong (bond market or stock market). Should the virus outbreak get worse (spread to the US) my guess is the Fed will respond with anemergency cut. So even if things get worse stocks may do well :-)

If we knew, we'd be rich. © Warren Buffett. Jurgis, I think Buffett’s answer (do not try and time the market) is overly simplistic and not actionable for most investors. When we are in the midst of a bear market emotions get the best of most investors. I am simply trying to assess what the probabilities are that this out break starts to spread in the US to the point that it impacts the economy in a meaningful way. Two weeks ago my read was that the virus was not going to impact the US economy very much. Over the past 4 days my view has started to shift and it now appears the question is when the virus breaks out in the US (not if) and how bad it gets. Hopefully this thing just blows over. The next could of weeks are going to be very very interesting :-) Here in Canada we are being told to make preparations: stock up on prescriptions and perishable food. Canadians being told to prepare for a possible novel coronavirus pandemic - https://vancouversun.com/diseases-and-conditions/coronavirus/canadians-being-told-to-prepare-for-a-possible-novel-coronavirus-pandemic/wcm/f93197f0-8c56-4050-a50c-4de1f031c659 “Etches said people can take steps now, at home and at work, to prepare. Some of those steps include stocking up on needed prescriptions ahead of time so there is no need to do so during a possible pandemic. She also recommended people stock up on non-perishable food.”

1.) a bunch of cash (sold FFH) 2.) BRK 3.) And a little BAC and C. But post purchase i am thinking i am early with BAC and C :-) I am thinking we may only be in the early innings of this sell off so capital preservation is a focus. Patience...

Fairfax. It has been remarkably resilient the past 2 days as the market has sold off. I wonder if FFH is buying :-) Opportunity for me to lock in some nice gains and have lots of cash to redeploy should we see the stock market continue to sell off. I continue to like the insurance side of the Fairfax; it looks like they are in a hard market. However, bond yields are down significantly and could stay down which will decrease interest income as the year progresses. And their stock portfolio is taking a big hit; Their two big holdings, Seaspan and Eurobank, are down big time since Jan 1. My guess is equity markets will stay weak for Q1.

The CDC warned Tuesday that the novel coronavirus will spread in the U.S. An official with the Centers for Disease Control and Prevention said Tuesday that COVID-19, the new coronavirus that has sickened nearly 100,000 people worldwide, will eventually spread within the U.S. “Ultimately, we expect we will see community spread within this country,” said Nancy Messonnier, the director of the CDC’s National Center for Immunization and Respiratory Diseases. “It’s not so much a question of if this will happen anymore, but rather more a question of exactly when this will happen, and exactly how many people within this country will have severe illness.” Source: Barrons Bond yields have been tanking since the start of the outbreak. Yes, stocks have had two bad days. But are stock investors not way too optimistic about the potential impacts of this virus on the US economy? Is this a ‘buy the dip’ moment or will we see much lower stock prices in the near future?

Just finished watching the full interview. Here are some of my takeaways: 1.) Buffet is running Berkshire for shareholders but mostly for long term shareholders and the big foundations. He feels an enormous responsibility/loyalty to the long term shareholders. And he feels an enormous responsibility to the foundations that expect (and need) to receive ever growing sums of money in future years. As a result of this obligation to long term shareholders and the foundations safety of principal is of primary importance. (He is NOT running Berkshire to benefit short term shareholders who may see the shares as undervalued and who also see share buybacks as an obvious solution. Rather Berkshire should be viewed as a substitute to traditionally holding a bond in your portfolio. Safe, secure, safety of principal, adequate return. Much better than holding a bond is what i heard over and over again during the interview.) 2.) he expects BRK to outperform the S&P500 in a down market (he was quite emphatic about this). 3.) both he and Charlie do not understand negative interest rates and they have no idea how things will play out in the coming years. 4.) he is mystified who would want to lend money to the government for 10 years and get paid a 1.4% return (and pay taxes on that return) when the policy goal of that same government is to achieve a 2% inflation rate. 5.) he is mystified why anyone would pay 2% to own a 30 year government bond. It has a PE of 50 with no ability to grow interest payments over time. 6.) Banks pay a nice growing dividend and Berkshire’s share of ownership of the total business is growing 8% per year due to stock buybacks. Compare this to a 30 year government bond where you will earn 2% per year. He thinks Berkshire will do very well over the long term owning banks versus owning bonds.

What is a meaningful buyback for you? How many shares and up to what price? Mario, taking out 3 or 4% of outstanding shares would tell me he is serious about share buybacks. My view is anything under 1.5 x BV offers decent value; Buffett of course has a different opinion.

I judge Buffett by what he says but mostly by what he does. BRK has looked dirt cheap for 18 months. Berkshire has a growing mountain of cash. Yes, he has bought back 1% of shares outstanding. But that is simply not a significant number. And I find it highly unlikely that BRK buying back 1.5 or 2% of shares outstanding over the course of 12 months is going to materially move the share price. Are there not a few large forced sellers out there like the Gates foundation? Normally the simplest explanation is the correct one. Either Buffett does not think the shares are cheap at current levels. Or he simply has no interest in buying back Berkshire stock. With all the time he has spent over the years writing and talking about what it would take for Berkshire to buy back stock the fact there has been pretty much zero repurchases tells investors all they need to know (on this issue). With regards to stock repurchases it sounds like ‘big hat no cattle’. When i SEE meaningful buyback i will change my mind :-) Having said all that, i do like the company and i own shares :-)

LOL, maybe even more opportunities in the upturn considering you can make money even in poo-poo that goes bust in a downturn. Great comments.

So Buffett does not believe shares are currently selling for less than they are worth. And with shares increasing 10% in Q4 (and intrinsic value increasing closer to 3 or 4%) one could argue shares today are overvalued. So the cash hoard will continue to grow. At the start of the letter he made the case for retained earnings to be reinvested. Bottom line is more of the status quo. Not a surprise. Might be a hard pill to swallow for those who feel the shares are significantly undervalued. Hard to see the catalyst to drive the share price higher in the short term.

The simplest and most effective catalyst would be to institute a dividend with a meaningful yield (slightly better than S&P 500 current yield). Makes so much sense. Would make future CEO’s job so much easier. The world is changing; it is digitizing quickly. BRK’s largest stock holdings (Apple and BAC) are leading the way in their respective industries. I hope Buffett is learnings from these two companies and lighting a fire under all the large subsidiaries he owns (hello Geico). Let’s hope WFC and Kraft Heinz are one offs. Buffett was slow to recognize the rot at both companies.

Here is a summary from RBC of what they heard about insurance pricing on Q4 conference calls: “What we heard was really bullish. We heard current rate increases were averaging anywhere from mid-single digits to low double digits depending on business mix. The more specialty, the more large account, the more excess casualty and D&O the more likely the average had two digits. The more workers comp, the more small account, the more standard lines, the more likely the average was around +/-5%. Heading in we expected the latter group would be around 5% and it was. We expected the former group however to be around 8% and we would say based on commentary it was probably a little higher than that. As far as how long pricing conditions would last, again we were positively surprised. Our going in expectation was that companies would be cagey about addressing this topic and would give luke warm responses like ‘several more quarters’ or something like that. To our surprise there was pretty good unanimity that pricing power would persist throughout 2020. To our further surprise there were plenty suggesting the good times could roll well into 2021. While the latter corresponds with our own bullish viewpoint, we did not really expect to hear it said aloud. It was. Which gives us quite a bit of confidence in our conviction that we are only in the first or maybe second innings of a very favorable P&C market.”

That might be true, but it is better to withhold an opinion until we understand who the buyer is and what sort of incentives may have come into play. I raised an eyebrow about this transaction because it seems strange that a 5% stake of a long-term asset would be sold. So, why did Fairfax sell it? Did they need to drop their stake to 49% to keep the nationalists at bay? Were they desperate for an infusion of $134m of cash? Did they find a partner with specific expertise that they wanted to bring aboard? Was there some other strategic motivation that was not articulated in the presser? One potential motivation that needs to be kept in the back of our head is that this minor transaction gives Fairfax the latitude to re-value that asset on its books. Fairfax India will book a gain of $500m based on a transaction of only $134m. And then what happens? Well, the Fairfax India's booked assets will suddenly be pumped up, which gives FFH a nice little boost to its annual management fee as well as the likelihood of a 20% performance fee in 2020. So, how much wealth will be extracted from Fairfax India unit holders from that little transaction? I'm guessing that the buyer's price for the 5% slice of that airport will be somewhat similar to the amount of money that FFH extracts from unit-holders. Maybe Prem will expand on this transaction in his annual letter and the annual report to provide more disclosure? For now, I am wary, but keeping an open mind. SJ https://www.vccircle.com/north-american-pension-fund-backs-fairfax-s-india-airport-investment-plan OMERS infrastrucure - strategic investor , this was probably done to get outside validation of big mark up in book value Okay, that makes me yet a little more uncomfortable. I had been holding out hope that it was a completely new player to the FFH world. FFH sold a chunk of the airport at roughly the same time as they sold a chunk of Riverstone runoff. I just hope to hell that there was no quid pro quo on those two deals and that the BIAL transaction was done at true fair market value rather than an inflated value designed to get a favourable mark on the value of the assets. There really should be no question about this, but unfortunately on more than one occasion, Prem has been too cute by half. SJ The quid pro quo being a sweet deal on Riverstone? Can’t see why that benefits FFH. Okay, so this is all hypothetical and nothing more. We have no knowledge that would support the existence of any quid pro quo between the two transactions. We have no actual knowledge of any wrong-doing or any other nefarious behaviour. But, the math is pretty basic and that's what creates the risk: The primary impact is that for every dollar that the value of that 5% BIAL deal is overestimated, the mark for Fairfax India goes up by $10. The secondary impact is that the annual management fee (1.5%) to FFH goes up by $0.15 based on the $10 mark and, possibly the performance bonus (20% of everything over the hurdle) could go up by $2 based on the $10 mark. So if you have the same buyer for two deals being conducted more or less simultaneously, and if you could convince the buyer to over-value one asset and under-value the other, you could create value for yourself. There's an argument that the buyer would only care about the combined value of the two cheques that he must write and wouldn't much care about the specific amounts on each cheque, so maybe it wouldn't be so hard to twist his arm. A portion of the $1 overvaluation would be attributable to minority Fairfax India holders, but that would be swamped by the secondary impact. So yes, I am a little uncomfortable with the idea of there being two transactions made to the same buyer at roughly the same time. If it true that the buyers are the same for both transactions, I wonder why there hasn't been better disclosure. And once again, to my knowledge, there is no evidence that anything like this has actually occurred. SJ Stubble, i think you are going down the rabbit hole on this one. Fairfax has a long, mutually beneficial history of partnering with OMERS on many large deals. It also looks to be doing more deals with Mitsui Sumitomo. Both of these two organizations look to be quality, well run organizations. Neither organization is going to do anything that is not in its own interests (including maximizing returns for their owners). 1.) Yes, Fairfax is in the process of completing a deal to sell 40% of Riverstone UK to OMERS for $600 million. My guess is if someone on this investment board proposed this exact deal (before it was announced) they would have been laughed at; few would have said that the Riverstone UK runoff business was worth $1.5 billion. The cash will likely be used by Fairfax to grow the business at the insurance subs that need $; we are in a hard market that may only last a year or two. Some of the cash may also be used to buy out minority partners (sounds like the timing is contractual). The deal will result in an increase in BV for Fairfax of $10/share. It sounds like the new Riverstone UK will have better access to capital needed to be able to grow their business more aggressively moving forward (likely due to OMERS involvement). This looks to me to be a very good deal for Fairfax and also a very good deal for OMERS. Nothing nefarious. 2.) Yes, Fairfax India is also in the process of creating a new subsidiary (Anchorage) to invest in the airport sector in India. This makes alot of sense as infrastructure investments are big money and it is good to have partners with deep pockets. Their investments in BIAL was $650 million, which is a massive number and not repeatable for Fairfax on their own. If they see other airport opportunities they will need to spend big money and will likely need partners to come up with the high price tag. And it sounds like there might be some big opportunities in India (see rohitc99’s comments). They have sold an 11.5% stake in Anchorage to someone for $134 million. This transaction will decrease Fairfax India’s ownership of BIAL from 54% to 49%. These is lots we do not know and when Fairfax India releases its annual report (March 6? Same as Fairfax?) i am sure we will know more. Is the new purchaser OMERS? I hope so as that would be a huge positive as they are a known entity and the perfect partner on this sort of transaction: a quality company with a long term focus (just like Fairfax) and they have deep pockets (access to capital). And it looks like OMERS is looking to grow their investments in Asia and they want to grow their exposure to infrastructure projects (in a low interest rate world with stock markets shrinking in size more money is moving to private markets). With OMERS as the partner i see nice growth opportunities with Anchorage, especially if they are able to bring another partner or two over time. This will be a big win for Fairfax India shareholders as they will slowly be able to monetize BIAL at a very good price and also grow in a new direction. Part of all the lack of communication currently may have to do with getting all the ducks lined up. Selling a chunk of BIAL may not be simple... current owners might have first right of refusal. Setting up Anchorage may require local government approval. I have no idea; but this is India so my guess is they have some hoops to jump through. The fact a buyer was not named in the press release (or would not be confirmed by Prem on the conference call) does not suggest anything untoward to me. We will know more when they can tell us. Regarding the price, perhaps the high price paid for 11.5% of Anchorage reflects the value the purchaser sees in not only the BIAL asset (which is all everyone is focussed on right now) but also the value of partnering with Fairfax in India and the value that will be created in the coming decade. Fairfax has a long successful history in India: ICICI Lombard, IIFL, Thomas Cook, Quess and more recently Digit and BIAL (just off the top of my head). Fairfax is very plugged in to India (understand the region and have the contacts) and it would be very rational for someone like OMERS to want to partner with them there (especially if they are not already well established in the region). It is also very encouraging to see the speed with which Fairfax is moving to develop BIAL; This shows a deep understanding of how to do business in India and also having the contacts to fill important positions with quality people. This will be a major drawing card for Anchorage as it expands. The sale of 11.5% of Anchorage might be an example of Fairfax actually earning its high fee from Fairfax India. If BIAL is worth anything close to $2.6 billion then Fairfax India shareholders are going to make out like bandits (and it looks like it just might be :-)

Thanks for commenting. Very helpful to understand the GVK purchases in 2009 and 2011 and the bigger picture. The growth of the airport the past 10 years has been impressive. Phase 1 (Terminal A1) expansion was completed in 2013 increasing passenger capacity to 25 million. The second runway was just completed in Dec 2019. And the new terminal (phase 1) is scheduled to open March of next year (2021) and when fully completed will add passenger capacity of 25 million. And they already have plans to add a third runway. Bottom line, the development of the airport is in the early innings of another growth phase. Link to article discussing plans for the new terminal: - https://www.trbusiness.com/regional-news/asia-pacific/bial-outlines-commercial-vision-ahead-of-t2-opening/170859

The key to Fairfax India is BIAL. It is the 800 pound gorilla in the BV calculation. Are there some other ways we can get a fix on some other measures that might help us understand what might be fair value for that asset? How about looking at all the historical sales since 1999 (when BIAL was born)? There have not been many transactions as stakes in trophy assets like this do not come up for sale often. - 2009 GVK purchases 2 stakes for 12% and 17%; implied value for BIAL = $800 million. - 2011 GVK purchased 14% (total ownership to 43%); implied value for BIAL = $964 million. - 2016 Fairfax purchased 33% for $336 million; implied value for BIAL = $1,018 million - 2016 Fairfax purchased 5% for $49 million; implied value for BIAL = $980 million - 2017 Fairfax purchased 10% for $200 million; implied value for BIAL = $2,000 million (this purchase is the outlier of recent transactions; it gave Fairfax control and they subsequently made management changes) - March 2018 Fairfax purchased 6% (total stake = 54%) for $67 million; implied value for BIAL = $1,117 million - Dec 2019 Fairfax sell 5% for $134 million; implied value for BIAL = $2,680 million Based off what GVK paid back in 2009 and 2011 it looks like FFH may have gotten a steal of a deal on 3 of its purchases (time value of money, plus the actual asset is much more valuable given all the improvements made over 5 years). Perhaps the one higher purchase ($200 million for 10%) was closer to what Fairfax felt was actual fair value for BIAL (still worth doing to get management control of the asset). Interesting :-) In the attachment below I constructed a timeline for BIAL from 1999 to today with all transactions entered. _____________________________ It is interesting to see that L&T IDPL was part of the original consortium when BIAL was birthed back in 2001. I think they were awarded the contract to build the 2nd runway (recently opened) and also the new terminal. _____________________________ Another thing to understand would be how BIAL's value compares to the other big airports in India, like Mumbai. when it made its purchases of BIAL back in 2009 and 2011, GVK also was majority owner of the Mumbai airport. Here is a quote from an article (Aug 2011) commenting on its 14% purchase: "Aviation experts say GVK must have exercised its right reluctantly considering the money involved, but BIAL was too important an asset to let go. "In the long term, BIAL will be a stronger asset for GVK even better than the Mumbai airport. The revenue share of the government in Mumbai airport with GVK is 37% whereas in BIAL it is only 4%," said Kapil Kaul, CEO, India and Middle-East, Centre for Asia Pacific Aviation, an aviation research and advisory firm. "Also, Mumbai has structural issues and is a locked airport whereas BIAL has a lot of scope of expansion and development," he added. https://economictimes.indiatimes.com/industry/transportation/airlines-/-aviation/gvk-power-and-infrastructure-buys-bial-stake-for-rs-614-crore-threat-from-changi-tatas-forces-co-to-pay-premium-for-siemens-14/articleshow/9700380.cms Fairfax_Equity_Holdings.xlsx

I found the old BIAL AR doing a search on the internet. I think it was released in Dec. So my guess is the 'new' 2018-2019 report should be out shortly. BIAL has a spot for it on their web site but the link is not active.

Attached below is the 2017-18 BIAL AR (PDF). BIAL_AR_2017-18.pdf

I think they needed capital. If the deal was intended to give RUK capital to grow, it would have been structured as a capital injection rather than a partial sale. Frustrating they can’t be more honest when they describe these things. Plus, they said they’d never sell the insurance subs and now they’ve sold (part of) two in two years. Agree re what’s going on under the bonnet. It’s felt like that for a couple of years. I agree, they need capital. But not to put out a fire. Rather, they need capital to take advantage of some once in 10 year opportunities: 1.) aggressively grow business in hard market at some insurance subs 2.) stock price below BV They also need $ to buy out minority partners. Bottom line, their need for cash today is what i would call a good problem. Also, my guess is the market will never value the runoff businesses favourably (in the Fairfax family). In the current environment i am very much in favour of them selling/monetizing undervalued assets (like Riverstone) to fund hard market growth and share buybacks (the hard market in pricing will not last forever and when it ends we can expect Fairfax to get very aggressive on share buybacks). It will be interesting to see what Fairfax plans to do with Seaspan. This has become such a large position. Another first class type of problem to have :-) My guess is nothing happens until after the APR aquisition which is expected to close some time in 1H 2020 if memory serves me correctly. Seaspan reports Feb 19.

Agreed. I missed this in my previous point. It looks to me like EM and India in particular was starting to come back into favour the end of Q4 and start of 2020 (before Caronavirus hit). I think this trade may come back into favour in another month or two which would help investments like FIH.