KFS

Ok, wow... I did some searching and found this. Absolutely bizarre. Don't click the link if you're epileptic. ;D There's more, this is just the first one I clicked... Holy Christ. I am absolutely gobsmacked to see a thread like that. Will FFH's BB investment be rescued by the sudden appearance of a collection of "greater fools?" I guess if you have a choice between being good or being lucky, you'd be well advised to choose the latter... SJ I have no words. I feel like I need a shower after reading this thread. It's like a cesspool of Red Bull, Adderall, and Dorito's dust mixed together, topped off with teenage sweat and hormones. Mind blown.

Ok, wow... I did some searching and found this. Absolutely bizarre. Don't click the link if you're epileptic. ;D There's more, this is just the first one I clicked...

https://www.theglobeandmail.com/business/article-blackberry-sells-90-patents-to-huawei-covering-key-smartphone/ This news is a couple days old. Really not sure why the 21% jump.

https://www.wsj.com/articles/warren-buffetts-latest-challenger-will-fizzle-like-the-rest-11610204581

Happy New Year all Cheers nwoodman Thank you for sharing. It's interesting to eyeball the chart showing the dramatic growth of alternate capital sources and relatively slow growth of traditional sources. "Reinsurance disintermediation appears to be gaining traction as global capital pools seek higher returns and uncorrelated asset classes in a low return world." (Slide 38.) This is a narrative heard before (i.e. MKL/Nephila), but the chart really helps illuminate the drastic change over the past 10 years or so.....

If this is true, it may be an incredibly important change, but I wish we had more insight into the investment style -- and the actual investments made by Burton/Chin. What exactly do we really know about this? I do remember Prem stating (about a year ago or so) that Wade Burton had a 19.5% compound return over 10 years, which is clearly outstanding, but I don't know any details. I suppose it's safe to assume he wasn't invested in RFP or BB during this time period!.... Edit: Prem stated this in the 2019 shareholders letter. "Wade has achieved outstanding results since he began managing portfolios for us in 2008. Over that period, up to June 2018, Wade had a 19.5% compound return on his stock portfolio. Since June 2018, Wade and Lawrence Chin, who joined us in 2016, have compounded a stock and bond portfolio at 9.8% annually. We are looking forward to Wade’s increasing impact on Fairfax’s investment portfolios over time."

+1 In my view, the market will stay expensive and "investors" will continue to speculate until the time comes when companies can fail again. The only way I see that happening is for the Fed to lose control, i.e. when inflation picks up to the point where investors in Treasury bonds demand higher rates to compensate for this. The Fed can't continue to force yields lower at this point by printing money, because this will only increase inflation expectations, and cause investors to demand an even higher yield as compensation. It will be a self-reinforcing fly-wheel, and a very ugly one at that. 100%. This is the dynamic that I simply can't wrap my head around. It amazes me that we are living in a world where everyone seems to believe inflation will remain low forever and interest rates will never go up again. If and/or when this changes, it will be the game changer for market valuations... suddenly gravity turns back on. I just don't know if it will happen in 1 year or in 20 years, but like you said, it has the potential to spiral out of control, and this is a good enough reason for me to play the game slightly cautiously for now.

I 100% completely understand the "all shorts are a bad idea" sentiment with regard to FFH's track record... My only point is that shorting a 1000+ P/E euphoria stock is not the same thing as shorting the S&P500 in 2011..... When your bartender, barber, and Uber driver are all bragging endlessly about their TSLA gains -- now up 600% in 9 months --- and a market cap greater than BRK with hardly a crumb of real earnings, all built on absurd growth projections in a capital heavy business, now is not the time to cover the short prematurely. I'd vote to let it play out. (Assuming it's in fact Tsla -- still speculation at this point.) That being said, long term, I am generally not a fan of shorting, and clearly with Prem's commitment to ending shorts, I'll not be very disappointed to see it come to an end. It should be a healthy and sobering change for the next decade at FFH... we are in agreement on this!

Stock market capitalization is closing in on 185% of GDP...long-term interest rates are near zero...you have bubbles in other assets classes...tech stocks are frothing at the mouth with Tesla leading the way at a 1,000+ P/E...government debt as a percent of GDP is hovering over 100%+ for most developed countries...consumers while paying down debt in 2020, still live hand to mouth for the most part...what happens when stimulus stops...I'd say the short position this time may have some legs going forward compared to after the tech wreck when they didn't invest heavily and held short positions. Cheers! After posting my last comment and thought about it a little more I also wondered if shorting Tesla right now actually makes some sense (not that we know that is the name FFH was short at end of Q3). So, yes, I agree with you :-) I’m not a fan of shorting...but if I had to pick one, even though I really like the company and Musk...that would be the one. Extremely overvalued...one miss and boom! Cheers! I am thrilled if FFH is short Tesla (seems very likely at this point). It would easily explain the heavy short losses and would rule out something much worse, i.e. Amazon, etc, IMO. I've been searching for a cost-effective way to insulate myself from the inevitable collapse of certain ridiculous tech prices, with Tesla at or near the top of the list. As it turns out, this may already be partly built-into my FFH investment. We are speculating, but I hope this is correct. TSLA is up 40% since the end of Q3. That strikes me as less than thrilling. Sure, TSLA looks overvalued. Looked overvalued at half the price. At a quarter of the price. If the short is TSLA and FFH has held, they need a big move down just to counter the move of the last 2 months. Yeah, of course, if the crystal ball had been working right, the short would have been initiated at today's TSLA price instead of months ago. Mr. Market goes on his wild whiskey binge, and the crystal ball works more like a lead marble. I will not fault FFH if they shorted TSLA at half or quarter of today's price. I probably would have shorted it even sooner, personally. I have no idea when TSLA stock will collapse, but if we agree it is ridiculously overvalued, and it is, time is on our side. And yes, for now, big losses will show for FFH's shorts in the next report, and those losses will be once again baked into FFH's books, and I'll keep holding my FFH shares that I acquired at below 70% book on the "Prem's antics discount" and will see how this plays out. When sanity finally returns to the market, it should be an interesting ride.

Stock market capitalization is closing in on 185% of GDP...long-term interest rates are near zero...you have bubbles in other assets classes...tech stocks are frothing at the mouth with Tesla leading the way at a 1,000+ P/E...government debt as a percent of GDP is hovering over 100%+ for most developed countries...consumers while paying down debt in 2020, still live hand to mouth for the most part...what happens when stimulus stops...I'd say the short position this time may have some legs going forward compared to after the tech wreck when they didn't invest heavily and held short positions. Cheers! After posting my last comment and thought about it a little more I also wondered if shorting Tesla right now actually makes some sense (not that we know that is the name FFH was short at end of Q3). So, yes, I agree with you :-) I’m not a fan of shorting...but if I had to pick one, even though I really like the company and Musk...that would be the one. Extremely overvalued...one miss and boom! Cheers! I am thrilled if FFH is short Tesla (seems very likely at this point). It would easily explain the heavy short losses and would rule out something much worse, i.e. Amazon, etc, IMO. I've been searching for a cost-effective way to insulate myself from the inevitable collapse of certain ridiculous tech prices, with Tesla at or near the top of the list. As it turns out, this may already be partly built-into my FFH investment. We are speculating, but I hope this is correct.

100%. Let's be honest -- this is the ticking time bomb. I was re-reading Shiller's Irrational Exuberance; Chapter 2 hits the nail on the head. “It is easy to see a positive contemporaneous relation between interest rates and preceding long-term inflation rates for much of the time – especially the most recent half century – but there appears to be practically no relation between long-term interest rates and future long-term inflation. It is the future inflation that ought to matter more if investors successfully priced long-term bonds to protect their real returns from inflation over the future life of the bond they are investing in, just the opposite of what we see.” I'm not interested in making macro predictions, but at this point I think it would be wise to be prepared for anything. History shows us that the market has done a very poor job of predicting future inflation.

"In 1997, Mr. Zuccaro founded Grand Prix Fund--oriented toward aggressive growth stocks. The new fund achieved distinction as one of only seven mutual funds in history to achieve back-to-back years of triple-digit returns. Grand Prix Fund returned 112% in 1998 and 148% in 1999 before it got caught in the throes of the vicious bear market that took hold in early 2000." Ha! Perfect. I'm honestly tempted to read this, just to find some interesting parallel narratives with today's market, if I could find a very cheap or free version. It struck me this morning that Tesla's market cap is rapidly approaching Berkshire's market cap. I wouldn't be shocked if it exceeds by year-end at this rate.... *heavy sigh*

I'll go on the record here and say that in the past few weeks I've made FFH into my largest investment ever at an average price that just happens to be pretty close to Prem's recent 150M purchase. A couple years ago, I called FFH "statistically cheap" when it was selling at slightly below 1.0 x book and made an initial investment. I would have considered a fair, reasonable value to be around 1.3 or 1.4 x book. Today, at 0.7 x book, this has easily entered the "stupid-cheap" category. I look forward to revisiting this post in 5-10 years and reflecting on Mr Market's extreme depressive outlook on FFH during this time. I view this as a long-term investment and have no plans to sell.

Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here? "Incentives are too powerful a control over human cognition or human behavior." The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc. It feels very similar to discussion on the BAM board. If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned. The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares. One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those. The priority hasn't changed and I don't think it will.

Wade Burton has had a 19.5% compound return over 10 years. Just imagine how different FFH would look today if Wade had been the leader of the FFH investment team during this entire period.

Some additional notes: - Repurchased 479k shares in 2019. 1.2 million since 2017. Repurchases are expected to be significant but over a long term (i.e. 10 years) as stated in previous annual report, not necessarily in short term or every quarter. (Singleton repurchased 85% of shares outstanding over a 10-15 year stretch.) - Coronavirus: minimal or insignificant impact on insurance. - Stock market overall valuations are high, but... for example, from 1999 to 2002 the overall market dropped 50% while Fairfax value-focused investments increased 100% over the same period. - Fairfax india clearly undervalued. Great potential for BIAL, 3rd largest city in India, community of software engineers; re-election of Modi.

Some comments from Markel's Richie Whitt: "As for market conditions, the themes that mentioning throughout the year continued in the fourth quarter and during the important January 1 renewals. Market conditions continue to improve in an incremental fashion. We continue to see month over month pricing improvement in almost all lines. It's clear that the market continues to transition with carriers reassessing their expectations for CAT frequency and severity and professional and casualty claims trends creating uncertainty. January one renewals continued the trend of gradual price improvement. As has been noted by others, there were some disappointment around property reinsurance rate increases at this renewal. Our sense is that the Japanese renewals at April 1 and the Florida renewals at June 1 will tell us much more about the health of price momentum in the reinsurance market. We are optimistic that this incremental rating environment improvement will continue during 2020. ..... The reunderwriting that's been taking place at a number of organizations over the last 12 to 24 months is clearly driving business into the E&S markets you've probably seen the reports about the activity in the stamping offices being up large numbers 20%-plus in some cases. So, there is no doubt there is a realignment readjustment going on in the market. I'm still not going to call it a hard market. But it's certainly a much more favorable market than we've seen in a long time. And yeah, as you would expect submission activity is up significantly. We are obviously growing very nicely. So, it's an exciting time. I have to say it's a lot of hard work for our underwriters right now because they are inundated. But I would say they're all very excited about it because history has proven you don't get these opportunities, but so often and when they happen, you need to. You need to take advantage of them, and I will say, I think we did a nice job. Our folks did a nice job of staying disciplined as the markets were going down such that we are in great position to take advantage of this market today. I feel really good about our opportunity."

Yeah, at this point, with hindsight 20/20, I'd imagine Buffett would agree with you that his stewardship of capital has not been ideal. However, that being said, I'm not ready to proclaim that he was wrong in doing so over the past few years, with no crystal ball available to show him the future along the way. Below is a transcript from the 2017 annual meeting afternoon session... He literally said, "There’s no way I can come back here three years from now and tell you that we hold 150 billion or so in cash or more, and we think we’re doing something brilliant by doing it." 2. Pressure to deploy Berkshire’s cash grows as it nears $100B WARREN BUFFETT: Jay? JAY GELB: Berkshire’s cash and Treasury bill holdings are approaching $100 billion. Warren, a year ago, you said Berkshire might increase its minimum valuation for share buybacks above 1.2 times book value if this occurred. What are your latest thoughts on raising the share repurchase threshold? WARREN BUFFETT: Yeah, the — when the time comes — and it could come reasonably soon, even while I’m around — but [if] we really don’t think we can get the money out in a reasonable period of time into things we like, we have to reexamine then what we do with those funds that we don’t think can be deployed well. And at that time, we’d make a decision. And it might include both, but it could be repurchases. It could be dividends. There are different inferences that people draw from a dividend policy than from a repurchase policy that, in terms of expectations that you won’t cut a dividend and that sort of thing. So you have to factor that all in. But if we really — if we felt that we had cash that was unlikely to be used — excess cash — in a reasonable period of time, and we thought repurchases at a price that was still attractive to continuing shareholders was feasible in a substantial sum, that could make a lot of sense. At the moment, we’re still optimistic enough about deploying the capital that we wouldn’t be inclined to move to a price much closer where there’s only a narrow spread between an intrinsic value and the repurchase price. But at a point, the burden of proof is definitely on us. I mean, that — I — the last thing we like to do is own something at a hundred times earnings where the earnings can’t grow. I mean, we’re — as you point out, we’ve got almost a hundred billion — it’s $90-plus billion invested in a business, we’ll call it a business, where we’re paying almost a hundred times earnings. And it’s kind of a lousy business. CHARLIE MUNGER: It’s more after after-tax earnings. WARREN BUFFETT: Yeah. So, it — you know, we don’t like that. And we shouldn’t use your money that way for a long period of time. And, then, the question is, you know, are we going to be able to deploy it? And I would say that history is on our side, but it’d be more fun if the phone would ring instead of just relying on history books. And, you know, I am sure that sometime in the next 10 years — and it could be next week or it could be nine years from now — there will be markets in which we can do intelligent things on a big scale. But it would be no fun if that happens to be nine years off. And I don’t think it will be, but just based on how humans behave and how governments behave and how the world behaves. But like I say, at a point, the burden of proof really shifts to us, big-time. And there’s no way I can come back here three years from now and tell you that we hold 150 billion or so in cash or more, and we think we’re doing something brilliant by doing it. Charlie? CHARLIE MUNGER: Well, I agree with you. The answer is maybe. (Laughter) WARREN BUFFETT: He does have a tendency to elaborate. (Laughter)

This thing is trading at around 90% of book value. I understand the concerns and frustrations and I'd probably agree if this was at 1.4x book, and folks on this site could argue all day long whether the intrinsic value should be 1.1x book or 1.5x book, or whatever. I just do not see how we reach 0.9x book. Compare this to other insurers (Markel at 1.56x, CB at 1.35x, TRV at 1.47x, WRB, etc...) At "peak optimism" in 1996, FFH traded at 3.3x book, and this turned out to be a terrible time to buy. Today, the pendulum has swung pretty far in the opposite direction. On the investments, instead of rear-view mirror driving, the question is where do we go from here. Prem has stated that it's extremely unlikely he will resort to macro hedges or significant short selling in the future. His long term investment performance is not bad. He has placed Wade Burton in charge of the investment team, and Wade supposedly has a very good track record (it would be interesting to see more detail/clarity on his past investments...). In any case, I don't think it's safe to assume the future investment performance will resemble the recent past. At the current stock price, I don't need their investments to be brilliant. Their insurance business has drastically improved. I keep going back and re-reading Ben Comston's article on this (link below). If someone has an argument to make against the sustainability of this improvement, I'd love to hear it. https://seekingalpha.com/article/3974653-fairfax-financials-meaningfully-improved-underwriting With the stock trading at book value, you essentially get the float per share for nothing, and below book value, you essentially get a discount on the investments, correct? Please explain if I'm going crazy.

Press Release Details Fairfax Financial Holdings Limited: Intention to Make a Normal Course Issuer Bid for Subordinate Voting Shares and Preferred Shares 09/26/2019 https://www.fairfax.ca/news/press-releases/press-release-details/2019/Fairfax-Financial-Holdings-Limited-Intention-to-Make-a-Normal-Course-Issuer-Bid-for-Subordinate-Voting-Shares-and-Preferred-Shares/default.aspx

https://www.wsj.com/articles/value-stocks-beckon-investors-in-aging-bull-market-11569412801?mod=hp_lead_pos4 Value Stocks Beckon Investors in Aging Bull Market "Diane Jaffee, a senior portfolio manager running $3.7 billion in value-focused funds at TCW Group Inc., notes the spread between the trailing price/earnings ratios of growth and value stocks on the Russell 1000 index hasn’t been this wide since the dot-com crash of 2001."

It seems like everyone here is fixated on the cash position and WB's apparent resistance to putting the cash to work.... But I think it would be interesting to challenge this with an updated analysis of cash/cash equivalents vs growth in float, similar to the brooklyn investor's article below from a couple years ago. It basically concludes that the cash stockpile is actually a reflection of Buffet's bearishness on bonds (bond balance down, cash up), and not really a reflection of Buffett hoarding or stockpiling.... The total of cash, cash equivalents, and fixed income investments as a percentage of float has been pretty consistent for a long time, and the cash/equiv just appears to be very high because the fixed income is relatively low in the mix. http://brooklyninvestor.blogspot.com/2017/11/is-buffett-bearish.html His bearishness on bonds is very clear and has been reiterated several times recently, for instance here and here... Interest rates may not rise in the immediate future, but WEB is a patient man. He has stated over recent years "It is idiotic to buy bonds." This also fits with his large investments in banks/financials which will benefit from rising interest rates over time, so of course he sees a lot of value there.

2018 shareholders letter https://s1.q4cdn.com/579586326/files/doc_financials/2019/2018-Shareholders-Letter.pdf

Some noteworthy remarks from Prem with respect to interest rates: "As of June 30, 2018, we have $10.7 billion in cash and short term investments in our portfolios, which is 29% of our portfolio investments. We have another approximately $7.3 million of one year treasury bills that are classified as bonds and are approximately $1.4 billion of high quality corporate bonds with an average maturity of 1.8 years. In total, we have approximately $19.4 billion in cash and short date of securities, which is 52% of our investment portfolio. Our investment portfolios will be largely unimpacted by rising interest rates as we have not reached for yield. In fact, we will benefit from rising investment income." "...We moved to the two-year treasuries and moved up the curve in terms of getting more income. We've gone into predominantly singly and above one and-a-half, two years covered bonds, picking up to 3%, 3.25% as interest rates have gone up. But we haven't gone into five and 10 years because we think that there's a lot of risk..... Remember, there's pent up demand. We've talked about that in the past. Pent up demand for the last eight years where prior to this administration, where the economic growth was like less than 2%. Given that pent up demand and with these very attractive economic policies, the risk we think is interest rates rising and perhaps rising significantly. You'll see when you examine insurance companies, Mark, that the book values haven't grown because there's mark-to-market losses on that fixed income portfolio. And our experience, like we have 50% effectively in cash. While most companies have very little cash, it doesn't yield much -- and most companies, I'm talking insurance companies now, have reached for yield. Spreads are very low, Mark. Record-low spreads, interest rates very low. When interest rates go up and for whatever reason, spreads you can't forecast this, but some time, this will happen, spreads will widen and they are unexpected and they can widen dramatically. That of course will hit capital and perhaps hard whereas we might have the opportunity of putting on money to work at very good rates. So that's the fixed income side, that's what Brian is looking at....... We are very excited. We think we are well-positioned to benefit, the interest income has gone up by $100 million to $700 million, should continue to go up as we deploy the cash in one and-a-half to two year bonds. We think loan interest rates are bottomed and are on their way up. They're bottomed like 10-year rates are bottomed at maybe 1.5% to 2%. They're now close to 3%, but in a total perspective of history 3% is very low for long term U.S. treasuries, 10-year treasuries and above. We can see them going up much more and spreads widening. So in that environment, you have to be very careful with your fixed income portfolio. That's how we're looking at it, Mark. We're looking at the fact that interest income will continue to rise over time as we deploy the cash." When Prem says he is excited, I get excited. And with the CAPE ratio sitting at a nosebleed level of 32.80 and past-year S&P500 PE at 24.5, we may see blood in the streets if/when/as interest rates do in fact rise and overall market valuations fall..... Long term, I don't see too many companies prepared for this possibility the way that Fairfax is prepared.

Thank you.... very good material..... I've been a quiet reader of this forum for some time now, just now emerging from the shadows