StubbleJumper

Well, I guess that's one perspective. "I don't care if my business partner has integrity as long as I'm making money." Hopefully that perspective will work out well for you. More broadly, it's interesting that someone should say that they are making buckets of money on ffh. I guess if you have specific entry and exit points that are particularly favourable a guy could be beating the market by holding ffh. On the other hand, some of the decisions that we've spoken of at length on this board have driven a pretty ugly three-year and five-year chart (the ten year chart isn't much better). I'm optimistic about the next one to five years, but the past five have been forgettable. Sj

$225M is their conservative estimate of the worth. $300M is the realistic/optimistic view given real estate markets and the global economy humming along. Wow. This is a steal. I believe KW had a hand in checking the RE valuation. Not sure that I'd declare it a steal just yet, but at least the real estate places a nice floor on the outcome. I've seen too many "cheap" retailers where the value never worked out. Sears and radio shack come to mind. I don't know enough about toys r us to assess the sustainability of its ebitda, but at least the real estate is our put option.

1) reweighting the multiple voting shares to maintain control, and after losing the vote, holding a second vote (presumably after twisting some arms of institutional holders?). 2) Using the reweighted multiple voting shares to appoint Ben watsa to the bod, despite the fact that the kid is wet behind the ears and would never be appointed to any other board of a major Canadian corporation on the basis of merit. 3) outsourcing a portion of ffh's investment portfolio to be managed by Ben watsa despite the fact that there are scads of equally well qualified (better qualified) firms in Toronto that are arms length. 4) using the multiple voting shares to appoint Christine to the bod despite the fact that she would never qualify to sit on a bod of a major Corp with her current level of experience. So, it's not a partially favourable trend. It leaves the open question of whether ffh engaged in that shitty Canadian tradition of paying institutional holders for their vote. And it leaves us wondering what other things are being done for the family on ffh's dollar. When the family takes a trip to India related to the dakshana charity, we just hope to hell that it was paid for with family money rather than ascribing business purposes to it and having it paid by ffh. And that's the problem. Once you start with small abuses, the level of confidence amongst minority holders plunges. Sj I hear you! My impression of Prem is based on close monitoring of FFH over the past two years. I have listened intently to the conference calls and studied the results and his commentary. My conclusion is that he is pretty consistent and constantly emphasizes the Guiding Principles and the Fair and Friendly Culture. Now on to your concerns about governance. Points 1, 2 and 4. Multiple voting shares. He states clearly that the purpose behind this move is to prevent 'our' company from being taken over - "now and after I pass away because those shares will never be sold". He goes on to say that his son Ben and Daughter Christine joined the board for the very same reason. Point 3 - Ben managing a $50mil slice of the investment portfolio. "The fund has had excellent results over the six years since it began"...."We invested in the fund to get access to those excellent returns, but also to potentially do debt and warrant deals with some of the fund's investee companies". In otherwords these are all actions very consistent with his long term strategy (never selling etc..) AND fully disclosed, I don't have any issue with them. Now, worrying a little about Allied World...but times will tell.... Yes, an explanation was furnished for reweighted the multiple voting shares. The real question is whether that explanation is beneficial to shareholders broadly or just to the watsa family. Is it beneficial to grant control to the next generation that hasn't earned it and hasn't built a damned thing. The fact that two votes were required will pretty much answer that question. Multiple voting shares are a shitty governance approach to begin with, and reweighting was unconscionable. It is quite likely that talent will skip a generation and we might badly want someone to take over ffh if Ben and Christine don't cut the mustard...but we'll be stuck with them. How much of your money is currently in Power Corp which is the poster child for talent skipping a generation...or would the poster child be Seagram's? On the question of giving Ben a slice of the investment portfolio, my bullshit detector is ringing loudly. The explanation is tripe. There are any number of outfits in Toronto that have great records and operate at arms length. The decision was made for the pure benefit of the watsa family, and be damned about the interests of the rest of us who own 93% of the company. Disclosure was marginal, because I've seen no indication what we are paying in investment fees. Is it 1%, 2%, some other amount? So the family is getting some undisclosed financial benefit. I will acknowledge that the amount is small in the context of ffh's operations and assets, but integrity is not a matter of degree. I'm not at all worried about allied. Prems game is acquisitions. Some have been fabulous and some less than fabulous. There will be some disappointments, but those are part of the batting average. At least they do not raise questions about the family's integrity.

1) reweighting the multiple voting shares to maintain control, and after losing the vote, holding a second vote (presumably after twisting some arms of institutional holders?). 2) Using the reweighted multiple voting shares to appoint Ben watsa to the bod, despite the fact that the kid is wet behind the ears and would never be appointed to any other board of a major Canadian corporation on the basis of merit. 3) outsourcing a portion of ffh's investment portfolio to be managed by Ben watsa despite the fact that there are scads of equally well qualified (better qualified) firms in Toronto that are arms length. 4) using the multiple voting shares to appoint Christine to the bod despite the fact that she would never qualify to sit on a bod of a major Corp with her current level of experience. So, it's not a partially favourable trend. It leaves the open question of whether ffh engaged in that shitty Canadian tradition of paying institutional holders for their vote. And it leaves us wondering what other things are being done for the family on ffh's dollar. When the family takes a trip to India related to the dakshana charity, we just hope to hell that it was paid for with family money rather than ascribing business purposes to it and having it paid by ffh. And that's the problem. Once you start with small abuses, the level of confidence amongst minority holders plunges. Sj

Dazel, your enthusiasm is nice, but try to remain a little balanced. It's quite obvious that ffh is positioned to rack up decent operating earnings over the next 1 to 5 years, and it's quite obvious that the pricing in February/March was on the threshold of nicely cheap at approx 1x adjusted bv. That's all fine and it bodes well for the future. However, completely separately from the current valuation situation, ffh has undertaken a number of actions that are of dubious integrity from a corporate governance perspective. Integrity and not a matter of degree. Should we not be concerned about abuses of non-multiple voting shareholders? Really, is it okay if abusive decisions are made as long as the dollars are small? Imo, poor governance is poor governance and we should remain highly vigilant when we see it in small areas because often it's the tip of the iceberg (ie, what other decisions are being made that might benefit the watsa family without benefitting other shareholders? Are there other things happening that do not require disclosure, but are still of dubious integrity?) Fwiw, I am optimistic about ffh's short-term outlook, but in no way will that impact my concerns about some of the historical risk management errors that ffh has made or the ongoing governance concerns. In fact, you might argue that those issues were the driver's of the recent valuation opportunity... Sj

If eurolife trades at 3pe, to whom would ffh sell it at 12? It's possible that ffh might ultimately obtain 12 pe in 4 or 5 years, but my take is that a multiple like that is not on in the near future. The cash decision is what it is. I have offered an (unpopular) opinion that the buybacks will not be meaningful in the Teledyne sense because Prem is a serial acquirer. The cash will disappear for (hopefully) acquisitions that improve IV. At this stage, I just hope to Christ that Prem is hemming and hawing a fair bit when he sees ffh's own shares trading at a discounted of 20 or 30 percent to fair value. Buying back the minority interests in allied and brit might be nice, but it's not clear to me at this point that it's a superior use of cash than buybacks. Time will tell. SJ

Canada's dairy industry? Nobody buys directly from a dairy farmer (even the least processed dairy products, milk, is skimmed and pasteurized). Between the farm business and the ultimate consumer, there is plenty of room to hide the regulatory producer surplus. SJ

I was having trouble with Canadian security prices. For many years to get the Toronto price for the Royal Bank you could use the symbol RY.to. Suddenly yesterday the only thing that seemed to work was tse:RY. It's a little frustrating when Google randomly makes adjustments like that. I guess you can't really bellyache too much about something that is free.

I'm not sure most people realised *quite* how much value had been built! Most people were too busy getting their knickers in a twist about the hedges to notice what was happening on the other side of the world in FC and Lombard. As for what have you done for me lately: a) bought 44% of Seaspan at 5x earnings just as it exits a capex cycle springs to mind. b) the market will always pay a premium for predictable, or at least visible, gains. I prefer paying book value for companies that have a history of doing smart, but unpredictable things. Plenty of the investments here could do very well over the next 1-5 years and plenty more will be made. Well Pete, that was the point. You make your money when you buy, not when you sell. Crystallizing gains feels nice, but we should rather spend our time and attention focussed on what is currently being done to build value. I certainly don't question that good deals are being made that are improving IV, and seaspan is just one of those deals. More importantly, the insurance operations and investments seem to be aligning nicely for improved operating earnings. Those are the things that are being done lately that are actually creating value. sj

Sure, it's great that ffh is demonstrating it's intrinsic value through transactions like the Keg and Thomas Cook. But, that's really about value built 3, 4, 5 years ago that is getting crystallized. Great, but we all knew that value had been built, so the question is, "What have you done for me lately?' There will be something of a quality of earnings challenge for investors in the next little while as the numbers will be juiced with no real value being immediately built. We need to maintain focus on quality earnings, notably those drive by a 95 CR and predicable higher returns for bonds. The CR and the bond returns reflect operational performance of the recent period, not some fluffy accounting revaluation of an existing asset. It is, nonetheless, gratifying to see assets revalued and a hidden gain unlocked. SJ

Let's just hope that they are making maximum use of the normal course issuer bid while the stock price is still bouncing around BV.

Why? Both are just an arbitrary list of relatively static securities. The s&p is a list of 500 companies chosen with an arbitrary set of rules, including the cap weight rule. I could create SJ's Scrabble 500, which would be the 500 listed companies whose names form the highest Scrabble score. In fact, I think I would have it Scrabble score weighted instead of market cap weighted. If people recognized the genius of my passive investment find, and piled scads of capital into it, why would it be any different than the observation that semper Augustus has raised about the s&p funds? Sj

With respect, you've looked at the sharecount over the past 20 years, right? Do those numbers suggest to you that buybacks have truly been a goal, or do those numbers suggest to do that acquisitions have truly been a goal? So, yes Prem has talked about buybacks on several occasions and the sharecount keeps trending up. With that observation, I take his comments about Teledyne with a hefty dose of salt. As I said, my money is on more acquisitions rather than buybacks. And, as I noted, this isn't necessarily a bad thing. If your own shares aren't the best use of your cash, then don't buy them. Allocate cash to the best opportunity available. Finally, if the world does evolve as Prem has suggested, in the short term a good chunk of the $2.5b cash held in the holdco could be used for a buyback. I've thrown out the round number of a Bil, but it wouldn't be outrageous to bump that to $1.5 Bil which would still leave a respectable holdco cash balance. For that kind of magnitude there's a practical decision to be made about the vehicle. The normal course issuer bid is a boiler plate filing every year, but it could actually be used in this case. I just think a tender might work better for the potential volumes that I've posited. On the other hand, if it's just us$400m or something, the normal course issuer bid would probably work fine. SJ Just to be really clear what we're talking about here. You said this: He didn't talk about it anywhere close to 50% of the letters. He didn't promise a bunch of buybacks like he is now and not follow through as you suggested. That's all I was addressing as it didn't sound right to me. I'm not making any assertions other than to address specifically what you asserted with the facts of what he said in the letters. Moreover, I didn't say he didn't issue shares--he did. I'm saying he didn't before say "we are done with buying companies and are going to start reducing sharecount". In fact, as I quoted, in 2010, he said "Please do not think we have forgotten about common stock buybacks. We have historically purchased significant amounts of our stock, but have recently chosen instead to buy some excellent companies which became available and that we think will create significant intrinsic value in the future." So, to me, it seems pretty clear that he talked about acquisitions and then made some. Now he's saying those are no longer necessary, and he's talking about buying back shares. This all seems reasonable to me and does not show a pattern of talking one way and doing another with respect to share buybacks. You seem seized upon my intro that, working from memory, buybacks were mentioned in about half the letters. That's the danger of working from memory of course, but I am away from my office for two months in some interesting, but rural places. I cannot peruse 20 years of letters, so rough recollection, as good or poor as it is, must do. The broad message, however, doesn't change. I fully expect the serial acquisitions to continue, and I fully expect a higher sharecount five years from today. And, that's not necessarily a bad thing. There'll be buybacks just as there are small repurchases every year, but I'm not holding my breath for a Teledyne model, because that's just not Prem's style. Cheers SJ

So, if I've understood you correctly, your money is on repurchases rather than acquisitions? I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate. I guess we'll see whether there's a tender offer. Time will tell SJ Mostly, it seemed you were making a few assertions about how often FFH has talked about buybacks and whether they followed through, so I wanted to see if that was accurate or not. It seems to me they haven't talked a big game and not followed through before, as you suggested. With respect, you've looked at the sharecount over the past 20 years, right? Do those numbers suggest to you that buybacks have truly been a goal, or do those numbers suggest to you that acquisitions have truly been a goal? So, yes Prem has talked about buybacks on several occasions and the sharecount keeps trending up. With that observation, I take his comments about Teledyne with a hefty dose of salt. As I said, my money is on more acquisitions rather than buybacks. And, as I noted, this isn't necessarily a bad thing. If your own shares aren't the best use of your cash, then don't buy them. Allocate cash to the best opportunity available. Finally, if the world does evolve as Prem has suggested, in the short term a good chunk of the $2.5b cash held in the holdco could be used for a buyback. I've thrown out the round number of a Bil, but it wouldn't be outrageous to bump that to $1.5 Bil which would still leave a respectable holdco cash balance. For that kind of magnitude there's a practical decision to be made about the vehicle. The normal course issuer bid is a boiler plate filing every year, but it could actually be used in this case. I just think a tender might work better for the potential volumes that I've posited. On the other hand, if it's just us$400m or something, the normal course issuer bid would probably work fine. SJ

So, if I've understood you correctly, your money is on repurchases rather than acquisitions? I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate. I guess we'll see whether there's a tender offer. Time will tell SJ Yes, I saw those pressers too. But, it strikes me as a wee bit impractical to absorb a quarter of the daily volume over almost a whole year to buy back $1b of shares. The price would likely end up moving enough that you might need to rethink the magnitude of that kind of buying programme. For that kind of large buyback, a reverse auction tender offer capped at say 1.1 or 1.15x bv (ie, us$550 or a shade higher) seems to me a more realistic way of actually getting that many shares at a price that FFH might actually be prepared to pay. SJ

So, if I've understood you correctly, your money is on repurchases rather than acquisitions? I'm clearly on the other side as Prem always seems to find a target that he finds attractive.To buy back say $1b of shares, the normal course issuer bid hardly seems adequate. I guess we'll see whether there's a tender offer. Time will tell SJ

Agreed, but he hasn't made a commitment and they are value monkeys at heart. My guess is they will be very disciplined. I think of it more as a floor, like the Buffet 1.2x BV floor. That said he clearly thinks IV is well above book so it will be interesting to see where they stop! Prem talking about buybacks is a bit like a teenager talking about sex. They both engage the subject with a great deal of enthusiasm, but when the rubber hits the road (or something!), they don't actually do it anywhere near as often or as successfully as their optimistic plans would suggest. Working from memory, Prem has made enthusiastic references to buybacks in about half of the annual letters -- on some occasions promising to go on offence while on other occasions trying to contextualize a share issuance. My observation is that Prem is a serial acquirer, picking up a new meaningful sub every second year or so. As long as that's his approach, FFH will be capital constrained. There will be no meaningful buyback unless he runs out of insurance subs to buy and actually allows cash to accumulate for a couple of years. While I'm not shy to criticize Prem's management when I think it is merited, in this case it amounts to a question of the relative value proposition of buying your own shares vs buying somebody else's. He mostly finds reasonably priced subs to acquire, so it's not obvious that buybacks would necessarily have been better. Going forward, my sense is that FFH could throw a Bil at buybacks during 2018 if it so desired. A tender offer for 2m shares at US$550 would likely get the desired response. But, I would be shocked to see it happen. I'm guessing that the over/under for sharecount in 2023 would be 30m. SJ

I am offline more than online these days, but I gave the letter a quick read on my phone. The tone was better, but the governance issues persist. I will say it because nobody else has. Prem's underhanded move to reweight his multiple voting shares continues to manifest itself in poorer governance. 1) Does anybody actually believe his explanation of shifting $50m of shareholders' money to be invested by his son? Suddenly in 2017 it became critically important to put a tiny portion of the port into small and med caps? So since 1986 it wasn't important, but now it is? And the existing brains in hamblin Watsa couldn't do it in house? My bullshit detector is ringing rather loudly. 2) Minority shareholders need independent board members to keep Prem from doing wacky and reckless things from his little echo chamber. Actually, I should say MAJORITY shareholders need this because the Watsa family has only a small minority economic interest in FFH. So, Prem is going to use his multiple voting shares to appoint his daughter to the board. Yet another appointee who lacks business and life experience. We need these board members to challenge Prem's tendency to do wacky things. Young family members who are beholden to Prem for any future ownership of FFH shares cannot do this effectively. And damned few people under age 50 do a good job of this sort of challenge function because they just don't have the range of experience required to do it. 3) After 5 shitty years due mainly to Prem's ill considered hedging strategy, the company is finally well positioned to make some money in the next few years. We just need him to not make the next position sizing error like blackberry or the hedging (hedging was a position sizing problem, principally). 4) After the pathetic governance abuses over the past 3 or 4 years, all we can do is hope to Christ that Prem doesn't do the ultimately stupid move and give one of his kids a real job at FFH where their lack of experience can really fuck things up. At least with Ben, the worst fuck-up is likely the shortfall of 300 or 400 bps of return on a risk adjusted basis. If they are ever given the role of president in one of the subs, we may be in deep trouble. Some things never seem to improve. SJ

As a reminder, when people are executing a NG, do not forget about superficial loss rules. For example, suppose you or your wife sold 100 shares of Royal Bank to crystallize a capital loss. Then, without thinking, a few weeks later you decide to do a NG using the Royal Bank because it's a highly liquid interlisted stock. Your wife's capital loss would then be refused by the CRA because you inadvertently re-purchased RY during the superficial loss period. To avoid this, I try to pick a liquid, interlisted stock that I am pretty sure that neither my spouse nor I have owned recently. SJ

In your mind you price FFH in Canadian dollars? I mentally gravitate to the US dollar price because their financial reporting is all in US dollars and the only Canadian sub is NB, which is pretty small in the grand scheme of things. If you think of FFH in US dollar terms, then the past month hasn't been so great because there are many small subs that report in non-US and non-Euro currencies which have generally not done well over the past month. SJ

I don't recall seeing anything about meaningful currency hedging. In principle, it shouldn't be required. All of the subs have presumably matched off their assets against their liabilities in local currency, and each is regulated by a national regulator and must keep adequate capital for the specific country in which they operate. The only thing where currency hedging might be helpful would be for the holdco to hedge enough to ensure that it can meet its interest and debt repayment obligations, as well as its annual dividend. However, given that most of the interest and debt, and the common dividend are denominated in US dollars and FFH's largest subs are US based, one would think that they would have plenty of capacity to meet their US dollar obligations using dividends from their US subs. Other than that, currency hedging would serve the purpose of managing consolidated income? I'd say that FFH has traditionally not worried much about income lumpiness, so managing EPS movements triggered by currency fluctuations doesn't seem like something that they'd do. SJ

Yep, about now it would be nice to buy a US$600 leap expiring in Jan 2020.

On days like today when it traded below adjusted book, I think wistfully about the past when we were able to buy leaps on FFH shares. I don't see how this doesn't trade for ~US$650 at some point in 2019. SJ

The difference is conceptual, and it's also half-assed. With BRK, why would one bump BV to reflect and updated value of Kraft Heinz but not MidAmerican or BNSF? We know that MidAmerican and BNSF are probably worth considerably more than their carrying value on the balance sheet, but we don't adjust their valuation because we wouldn't have the foggiest idea where to begin. But, if you monkey around with the value of one large asset but not the others, your adjusted book value is neither fish nor fowl. For Fairfax, some of us monkey around with BV to reflect the evidence from the market that certain assets are worth considerably more than their carrying value. However, with Fairfax, it's less of an issue because with few exceptions their assets and liabilities are financial in nature, are relatively easily measured and are updated annually. So at least with FFH, the updated BV isn't missing large chunks (the non-insurance subs are not so large). It's still an interesting and worthwhile exercise to do, but it's just important to understand that it is half-assed by necessity. SJ

Well, I'm not sure that's exactly what he said. My read of it was that he was basically rehashing the letter from four or five years ago in which he railed against all of the "helpers" in the financial industry who consume an inordinate amount of the return from equities. That's why he made his bet against the hedgies beating the market; he knew that over 10 years, all of the alpha offered by a group of hedgies would be more than offset by their 2 and 20 fee structure. The lesson here is not that indexing is necessarily the only solution, but rather that you need to avoid paying 2 and 20. While an index fund will definitely do the trick because its costs are usually <20 bps, it can be equally well achieved through the judicious purchase of individual equities and not churning your account. SJ