StubbleJumper

Yes, I agree with this. The investment in TRS was a decision to take a position in an undervalued security, which was effectively FFH's own shares. If the price of FFH shares should suddenly soar to 1.3x BV, the TRS would be very profitable and it might make sense to close them out, take the profit, pay the taxes and move on. But the decision to then use the proceeds to buyback and retire FFH shares is completely separate and needs to taken rationally. At a hypothetical level of 1.3x BV, I'd be disappointed if FFH actually bought back the shares because that might not be a rational price for FFH's shares. My guess is that position in the TRS was taken under the assumption that it would take a year or two for FFH's share price to rise to 0.9x or 1.0x book, and that FFH could close out the contract and take the proceeds plus some other cash and make a rational re-purchase decision. But, in the end, the re-purchase decision is completely separate from the TRS investment decision and it must stand on its own merit. SJ

It would likely be quite profitable, even if FFH entered into the typical deal with OMERS where OMERS seems to be basically guaranteed 9% for a few years. The question is whether it would be yet one more transaction that would be abusive of minority shareholders. If FFH offered, say US$14 or $15, it would once again call into question the company's integrity. A buyout at 0.8x BV would be yet one more transaction where FFH might appear to take advantage of its minority partners. Do you do something like that to potentially add ~US$350m of value to the holdco? History would say, yes.... SJ

Q1 Conference call transcript has been posted at: https://seekingalpha.com/article/4423036-fairfax-financial-holdings-limited-frfhf-ceo-prem-watsa-on-q1-2021-results-earnings-call

Give it a bit of time. Dumping Resolute at the top of the lumber price cycle is probably the thing to do. But, I wouldn't blame Prem if he was currently trying to find a sucker to takeover the whole company, which might provide an additional 15% or 20% control premium for existing shareholders. If Prem can offer that potential sucker a lock-up on FFH's shares and possibly Chou's shares or some other large holder's shares, it would provide a nice beachhead for a takeover. If there's no action taken on the Resolute shares by the end of Q3 or Q4, we should really question Prem's bona fides as a value investor. SJ

For forum members who do not read Canadian newspapers (or for Canadians who do not read the "Notional Pest"), the following is an article about Resolute's financial results and the forest industry's prospects: https://nationalpost.com/commodities/agriculture/sawmills-are-selling-boards-faster-than-they-can-cut-them/wcm/1f8a8c0e-d0c4-4610-8985-0cb51e33e16c SJ

A few observations: 1) Nice headline EPS number this quarter, and if you're the type to calculate TTM earnings, those look pretty good too! And this time, the quality of earnings is not really in question. 2) As we discussed a few weeks ago, the CR was a bit higher than we would have like to have seen. There were more cat points from the US winter storms than I had anticipated, but more concerning is that the favourable development seems to be evaporating (Cigarbutt invested a bit of time last year to discuss the trend in favourable development, and I am afraid that he seems to have been proven correct). As long as it doesn't flip over into adverse development.... 3) Nice increases in net written, with the exceptions of Crum and Brit. There was a good (and disturbing?) explanation of why Brit's net written shrunk in Q1, which is that it entered into a very large reinsurance arrangement that seems to cover everything but the kitchen sink. But, that strikes me as a bit of a funny thing to do, and it's unclear what kind of messes this was intended to manage. Anyway, for Brit, it is what it is. Does anyone have a good understanding about why Crum's premium growth was so tepid? Crum was capital constrained for part of 2020, but I had been hoping that was a thing of the past. Taking into account all of the anecdotes about double-digit price increases, it looks to me as if Crum might be non-renewing some policies. If anyone has any insight, I'd love to see it. 4) FFH hasn't done much with its fixed income duration and doesn't seem to be reaching for yield, so that strikes me as good. Looking at the fixed income disclosure on page 12 of the Q1, FFH is up to almost $2 billion in "Other government" bonds (not Cdn Federal or provincial, not US Federal, state or muni). It doesn't much matter in the grand scheme of things, but does anyone have any ideas what that might be? Agency debt of some form? Hopefully not Peruvian sovereign debt or some other dubious instrument! 5) The total return swaps are working out beautifully. FFH didn't have liquidity to mount a meaningful buyback, but they still managed to benefit from a long position in one of the cheapest stocks out there -- FFH itself! 6) BV is $497. Adjusted BV is what, about $515 or thereabout? FFH is still pretty cheap. SJ

In case others have not already seen it, the following is a Bloomberg article about what is currently happening in the US lumber market: https://www.bloomberg.com/news/articles/2021-04-20/lumber-s-version-of-a-crack-spread-is-exploding-from-cheap-trees SJ

So, that tells you that there is either a market pricing inefficiency, or that the market believes that only a fraction of the FCF that will be generated this year will end up in shareholders' pockets and the other fraction will be retained and end up being a deadweight loss (ie, ultimately capital destruction). With Abitibi, we've seen plenty of capital destruction in the past. SJ

Wait a minute. Do we know for certain that purchase of securities is structured as an option? In the quote that Viking provided, Prem used the word "opportunity" which almost (but not quite) implies that it's an option. But, in the AR, it is also written, "Pursuant to the agreement with CVC, prior to closing the company entered into an arrangement with RiverStone Barbados to purchase (unless sold earlier) certain investments owned by RiverStone Barbados at a fixed price of approximately $1.2 billion prior to the end of 2022." This latter sentence is more suggestive of a contractual arrangement that is not optional, but rather obligatory. So, when Prem used the word "opportunity" did he mean that it was an opportunity that FFH had already exercised by entering into a contract, or did he mean that it was a discretionary opportunity (option) over which FFH could make an independent decision in the future? In the end, my take is that FFH will be buying the securities in either case, but I think Prem may have used some imprecise English and as a result you might have taken a somewhat too favourable interpretation of this arrangement. Does anyone else have any insight about whether this arrangement is truly an option? SJ

The history of commodity cycles would suggest that this will be a short-term situation. Over the next few months, FFH might have the opportunity to find a sucker to buyout RFP at the top of the cycle. For FFH, this would be manna from heaven, as it could provide the opportunity to exit what has been an absolute dog of an investment. Unfortunately, they were unable to exit one of their other dogs (BB) a few months ago. Marking RFP to market would at least generate some temporary paper gains and push the accounting BV higher at least temporarily. But, my take is that the lumber and paper industry sucks and has terrible long-term economics. Today's sky-high prices will likely trigger a supply response which will result in a reversion to more historical norms. If the opportunity presents itself, I'd prefer to see this one fully converted to cash, and for FFH to dedicate the proceeds to some other investment with better long-term prospects. SJ

AbitibiBowater has been a dog. So, now that the share price is soaring, what's the opportunistic exit-strategy? Prem has explained why FFH could not dump its BB position when the price was high, but what will be the excuse if they don't dump RFP at the top of the commodity cycle?

Nothing in this release that is particularly surprising. Viking has done a great public service for this forum by maintaining his spreadsheet to track changes in market value for the various categories of investments (ie, those that are marked, those that are equity accounted and those which are consolidated). The interesting part of the pre-announcement for me was actually the underwriting. Gross Written has continued to increase at a ridiculous rate, which is a happy place to be. But, what's up with that CR? With a CR of 96, it looks to me as if there's about 3 or 4 cat points embedded in it. I understand that there were probably some claims from the winter storms in Texas, but usually Q1 is a pretty benign quarter. Or, perhaps there was less favourable development than in 2020? The other thing that will be interesting will be to see how/whether FFH's use of reinsurance has changed, as they seem to be retaining progressively less premium over the past 6 or 8 quarters. From a process perspective, I found that it was interesting that Prem elected to pre-announce the results this year. I understand why it was a necessary or desirable thing to have done in 2020, when markets were jittery, FFH had taken several body-blows in its equity portfolio, and there was much uncertainty of the impact of covid on insurance claims. Pre-announcing in that context was useful and valuable disclosure for market participants. But in 2021? Not so much. I wonder whether this will become an annual thing on a going-forward basis... SJ

No, your policy observation is spot on. Ignoring the constitutional inappropriateness of Ottawa providing vitamin D to citizens, it would certainly be a measure that should have been stacked-up and compared to the myriad of other spending and regulatory measures that the federal government has employed over the past year. For all of those, cabinet should have been provided analysis to evaluate the costs and the potential benefits. A vitamin D initiative would likely stack up favourably in the long list of measures that have been considered (at the top of the list would have been the covid app which held the potential to significantly facilitate trace-back at a trivial cost, and the bottom of the list would be the establishment of domestic vaccine production capacity not slated to come on line until December 2021 which is likely to be useless irrespective of cost). Effectively, there is precious little difference between taking measures like mask mandates on the hope that it reduces transmission, shutting down outdoor events with the notion that it might help to some degree, and a vitamin D program. Ex ante, there is scant evidence that any of them would work in practice, so you recognize that the costs and outcomes could quite possibly be asymmetric and you make a decision. SJ

A potential win/not-lose aspect is that: "One pill every two weeks fights diabetes, cancers, heart failure, and 18 other diseases". :) Covid-19 was recently added to this list. Isn't there an analytical risk here? Disclosure 1: over the years, i've had to periodically participate in committees which had to decide if the single payer should pay for certain propositions (there was typically a few participants whose main line of argument was: what is there to lose? a similar line of argument is used now to justify the 2T fiscal shot in the arm). Apologies: i tend to focus (too much?) on second and other higher order effects (the 'unseen' ones). Disclosure 2: i'm in the process of being enrolled in a study (based on strong foundations) which will follow people at relatively high risk to be exposed and to contract covid over the next few months. One arm of the study will receive vitamin D supplementation and the other arm will get a placebo. (i may receive a placebo but will watch for the side effects; you must be aware that the placebo group will also report side effects?) Yes, there is a big analytical risk here, but not a big practical risk. The analytical risk is that you kind of need to twist yourself into a bit of a pretzel to make the logical jump from correlation to causation when considering vitamin D deficiency and adverse covid outcomes. And for some (most?) of the conditions that are portrayed in that chart, the correlation is likely only that -- correlation. On the other hand, there is approximately zero downside to taking 1000 IU of vitamin D during the period between the two equinoxes, which is my point of there being very little practical risk. If you do go down that road of twisting yourself into a pretzel, at worst you are only out $10. With respect to the study in which you are participating, why are they initiating a vitamin D supplementation study to coincide with the arrival of the spring equinox? That is as silly as it gets when you are dealing with a city located on the 45th parallel with an overwhelmingly white population. In three weeks, you'll be sitting in the sun in a sheltered area of your back yard, drinking a beer and wearing short-sleeves. With the rapidly strengthening sun, your pasty-white skin will enable you to soak up more vitamin D in an hour of drinking beer in the sun than what your daily 1000 IU tablet could give you over a week. The logical timing to conduct that study would have been from November 1 to February 28th, when the sun in Mtl is at its weakest and when nearly every square inch of our body is covered with insulating clothing. Even pasty-white guys have trouble getting enough vitamin D during that period. SJ

The outrageous part of the calcifediol issue is that it basically boils down to the most mundane recommendation: "Be good and goddamned sure that you are not vitamin D deficient when there is covid floating around your community. If you are white and in the middle of the winter, think hard about whether you are getting adequate vitamin D from dietary sources because you'll be getting nothing from exposure to the sun. If you have a darker complexion, even in the middle of summer, think hard about whether your body will be producing adequate vitamin D from exposure to the sun." For $10 per year, anybody can go to WalMart and buy vitamin D supplements. Heads you win, tails you don't lose. SJ

I, for one, am delighted that FFH cut bait once it was apparent that the asset was not commercially viable and has no prospect of a reasonable financial return. Holding out for some ethereal value that *might* appear in 30 of 40 years is a fool's errand. Take that ethereal future value and discount it back to today. When you divide X by 1.08^30 or 1.08^40 even that imagined future value isn't worth anything today. SJ

No, I think that time for Fairfax was back in 2003. The decision that we are no longer going to buy crappy insurers and turn them around led to the group of quality insurers they have today. The second part of that was making Andy Barnard in charge of all of the insurers. Even with Fairfax's more eclectic style of investing, the real culprit behind their underperformance has been due to betting against and shorting the market after 2009. They took advantage of the 50% correction, but started hedging and that really hurt their performance. Even with minimal exposure to the stock market, they would have done very well just in their bond investments, conglomerate investments and the equities they did invest in...excluding their shorts and market bets which cost them significantly. Maybe the decision to stop shorting is a step in the right direction...simplifying their portfolio decisions. Cheers! Sanj, please stop describing what FFH did as "hedging." More than 100% of FFH's equity portfolio was "hedged." When your hedge-ratio exceeds your exposure to the underlying (ie, more than 100%) that's called speculation. It was one of the investment decisions where the excessive position sizing reflected poor risk management. SJ

What is the tax law on estate in USA? In Canada if the shares are for the children they have to pay the tax that would be calculated on a sale so you have to sell around 25% just to pay the tax for the kind of gain a long term holder have on BRKA. It is interesting that the record volume happen with upticks. High probability that Berkshire is buying a lots I have no idea what kind of tax arrangement that a large US domiciled holder would face. My thinking was simply reflecting my bias that often one generation accumulates a large pile of wealth and then their good-for-nothing children anxiously await the death of their parents so they can either "manage the wealth properly instead of letting it languish in BRK" or "use the wealth (spend) for the benefit of the family rather than living miserly." Both of those behaviours result in the sale of assets when the estate is settled. Not every kid is a loser, but if you have 4 or 5 of them, it's likely that at least a couple of them will be spendthrifts or married to a spendthrift. SJ

Yes, the volume of A trades over recent weeks has 5 or 6 times what it usually is. I had assumed that somebody who bought them in 1980s must have died and the estate was finally settled. If you get a situation where a long-term holder dies and the estate is split up amongst 4 or 5 children, there is almost always a considerable portion of the estate that ends up getting converted to cash because the children have immediate plans for their windfall. SJ

True. With a typical trading volume of, say, 300 A shares per day, you'd need to be on the buyer of every single A-trade for a whole year to get that 10% voting stake by buying only the A's. Not impossible, but... SJ

Sadly, your scenario of activists gaining control strikes me as implausible due to BRK's market cap and the post-WEB dispersed shareholder base. In particular, BRK currently has a $600 billion market cap. Buffett still owns a healthy chunk, but we know that this will soon be donated to the Bill and Melinda Gates Foundation and will be systematically liquidated over a few years. Similarly, there are some old-time shareholders who own a decent chunk, but they are mostly as old as Warren and Charlie, so those holdings will soon be cleaved up among their estate beneficiaries. So, there will be very few holders who will have a meaningful chunk of the voting shares. While it's quite plausible for Bill Ackman or somebody like that to scrape together, say, $10B to initiate an activist campaign, that's only 1.5% of the votes. You'd need 10 Bill Ackman's to work together just to accumulate 15% and get a few board seats. In a post-Buffett world, BRK runs the risk of having no large shareholders available to discipline a future incompetent or self-interested management group. A process of spinning off the divisions might be economically beneficial to shareholders, but why would a lazy, thieving, loser CEO be motivated to do it? It would be much better for that CEO to gradually stack the board with management friendly directors, slowly crank up his own salary and benefits to a ridiculous level, and just enjoy the job. SJ

...and on the day that the annual letter is to be released, BB shares have dropped back down to US$9. Let's hope that we see some sort of explanation. SJ

I don't view it that way. FFH has had no shortage of places to allocate its capital (some have been good, some have been disappointing), but it has been chronically in need of more to fund its acquisitions, pay that annual divvy and to (not) repay debt. Prem's assertions about buybacks require a fundamental shift in corporate strategy, which is not an impossible outcome but as they say, I'm from Missouri. In contrast, BRK generates about $40b of cash from operations per year, and the investment portion of its SCFP and the cash balance sadly demonstrates a lack of opportunities to deploy that capital. So, FFH might be willing to initiate a long-term significant return of capital, but it is largely unable to do so without a drastic change in corporate strategy. BRK is *fully able* to return $20B per year, but is seemingly unwilling to do so. The outcome has been similar, but the underlying problem is quite different. I would not describe Prem's or Warren's statements as "aspirational" but rather as "disingenuous" in both cases. SJ Thank you to you both for replies, Xerxes & StubbleJumper, Somehow, the whole thing boils down to "hunger" [for returns] vs. risk awareness. [ ; - ) ] - If & when I start selling out of the [monster] Berkshire position owned by my family and I, I'll post about it here on CoBF - You'll likely get no better buying signal! [ ; - ) ] John Don't sell !! :) Berkshire buybacks (pulled from the other thread): 2018: $1.3 bil 2019: $5 bil 2020: $25 bil That is $30 billion right there out of the $100 billion Buffet tossed out in his FT interview in 2018. The ten year timeline has been front-loaded and accelerated by the pandemic. Yes, we have finally seen some meaningful buybacks. I'm still not sure why it took until 2020 to do it. The cash to do it has been there for quite some time, and heaven knows that the valuation has been reasonable for a lengthy period. It's good to finally see. SJ

No, the holdco will need some cash during 2021. The sale of Riverstone will help as will the Brit transaction, but so far the IPOs are not adding any liquidity to the holdco (they are merely revealing the potential value of unsold positions). So, in the middle of a ridiculous hard market, do you dividend money from the subs up to the holdco? Do you maintain a draw on your revolver? Or do you float some debt for cheap while you are on a roll and keep the revolver for some flexibility? Good move. SJ

I had assumed that the US has been at herd immunity for about a month now. SJ