Xerxes

Not too contaminate this thread with Brookfield, but wouldn't the Canadian Pacific deal value for Kansas be more applicable for a smaller name like Genesee & Wyoming which is now under Brookfield. Given its smaller size, Genesee & Wyoming would be both marketable to a larger buyer and also the current owner's business is to flip. Lastly, (i dont know if it was mentioned here), it was said on news that an earlier all-cash offer for Kansas by Blackstone was rejected.

Sorry for late reply. Was out of town. When Blackstone carved out the quant division out of Reuters to merge it with London Stock Exchange, I saw the latter as a strategic co-investor. Without it no deal was possible. When ONEX bought WestJet that was entirely out of its funds (so Onex itself + its client), but 15 years before when they bought Beechcraft from the old Raytheon, they did it with Goldman Sachs with the latter as a co-investor. Whenever you see Brookfield bought XXXX, i assume it to be through its funds (so its client + its own equity). But sometimes i believe when they have a strategic partner they mention them in the press release. For instance, believe Caisse was the co-investor in this case. I realize that the press release is (obviously) not saying anything who pays whom management fee. https://www.bnnbloomberg.ca/brookfield-to-buy-johnson-controls-unit-for-us-13-2b-1.1167280 this is obviously speculation and how i kind placed these in my head

ok maybe i am confused. My understanding was that entities like Blackstone, Brookfield, Onex etc, when they invest in assets, there could be several different layers/ways of doing it. (1) investing their fund (which has their client money + some of their own many); this is exposed to management fee and carry. Some of them like Onex have a much larger portion of their own equity into the fund, some which are more asset-light like managers have less. (2) investing directly from their balance sheet alongside their own fund. Additionally, (as we have seen with Softbank), they could have their fund invested (in which they are also investor), but can also use their own balance sheet to bring in additional firepower. Effectively this allows the asset manager to get more of an upside for its own balance sheet at the expense of the management fee it charges the client. (3) getting a co-investor to share the risk. So this would be completely outside the fund and the co-investor brings something that the asset manager doesn't have. In this case, I do not believe that the co-investor is paying the management fee/carry. They are implicitly "paying" because they are sharing the risk and maybe without them a Brookfield wouldn't want to go at it on his own. Call these cornerstone institutional investors. So, in my head, i was kind of placing OMERS in the bucket #3 and not #1

I agree with Pete's post except at this point the third-party capital is purely a guess. Based on what we know now it is not FairfaxAfrica/Brookfield-like asset manager model. Which brings me to my earlier point that OMERS-like entity do not want to own FIH directly because (1) of the fees it pays FFH and (2) non-infrastructure asset exposure that it has like financials services companies and banks. Anchorage gives that freedom. It is no different than when Brookfield allows an institutional investor to invest alongside it, as oppose to that entity being part of a fund (which extract management fees) Anchorage is defined as a "holding company" with permanent capital in the annual letter. So at this point it is no different than FIH as a close-end fund. OMERS (and others in the future) are coming in as equity shareholder with permanent capital. OMERS will own 11% of Anchorage, which currently has only the airport, but will be a 11% owner of everything else Anchorage might invests in the future. Then FIH can either sell more of its 89% stake to other OMERS like entity or (unlikely) issue equity at Anchorage-level. I do recall Prem Watsa accidently blurting out the word "Brookfield" in Q3 or Q4 2019 conference call when discussing India. Transforming his business into an asset manager with third-party capital would bring much needed dry powder. Specially now that Government in India is unloading assets. Saw an article on WSJ just now saying Shipping Corp of India is on the block. Of course us being here in the West, probably do not see the whole scale.

Sorry Bryggen i don't know much about these conferences. otherwise i would have commented it.

Thanks for the link, Very much in line with what we have been hearing from Brookfield, that cash strapped government post-pandemic will be looking to offload assets. Brookfield has third-party capital and dry powder to deploy while Fairfax India somewhat lacks in that area. i.e. FIH has permanent capital that was more or less fully deployed and equity issuance is out of options. The solution is Anchorage. Interestingly, I think as a 'product', the equity of Anchorage is really geared toward institutional investors (i.e. pension), who want the India infrastructure as pure-play but do not want to own it through FIH, where (1) it pays fees to FFH (2) has financials in the portfolio. When a pension fund buys into the equity of Anchorage, effectively, they own the best piece of FIH but without the fees that it pays to FFH. Of course, that also means that Anchorage would have an overhead and management team that need to procured or outsourced back to FIH.

Understood, let's just say i am a romantic for anything related to Canadian North and Arctic. In fact was also looking into going up to Churchill next year maybe.

Not happy about this. Not saying this was a crown jewel. But i do recall at the 2018 AGM, management talking about the potential some decades down the road, as the Arctic opens up for trade, and how they had very limited exposure for a large upside. Two years later it is all gone. I guess if Masayoshi Son can be forgiven to shrink his 300 years vision into managing quarterly results and shorter 5 year timeframe, than we can forgive Fairfax for letting this go. If it was a substantial financial gain maybe that make sense, but they are not disclosing, which means it was not.

Food for thoughts. What does Markel's and FFH's equity portfolio have in common ? Nothing ... For Markel, it is more of list of nameless equity that it shuffles around based on valuations. No sentiment attached. Just a list. For Fairfax, the static concentrated portion of the portfolio that is not run by Wade and Lawrence, seem to be viewed not as stocks but as owning a portion of businesses. You really get a sense of that with Prem walking the reader through the big equity position in his annual report, talking about the CEO and details of the business. The other portion of Fairfax's equity portfolio, (which presumably ran by Wade and Lawrence) seem to capture the beta of the broader market. But is the static concentrated portion of the portfolio make Fairfax look like an unwieldy conglomerate as seen by the market. Personally I like that. Buffet calls conglomerate a term applied to holding companies that own a hodge-podge of unrelated businesses, arguing that in Berkshire' case, although a conglomerate, they do not pay control premium and are happy to have non-controlling stakes. Same goes for Fairfax as the last time they bought a full company at a premium was Allied World. So far so good. Speaking of conglomerates, today Larry Culp is tearing down General Electric. About 20 years ago, GE was so addicted to its cash flows from GE Capital that it couldn't even think of walking away from it and then there was the shadow of Jack Welch looming over the new guy. It took 2008-09 and GE's near demise for the new CEO to step out of the shadow and decide on a vector, but then again took nearly 7 more years before lots of its were spun off as Synchrony Financial and other parts sold to Blackstone. Even that wasn't enough, it took an outsider and a pandemic to make drastic change. Where is Fairfax vis a vis that timeline in its lifetime. Was 2020 for Fairfax, what 2008-09 was for General Electric. Meaning that it was life-changing but not drastic enough for the CEO to truly take the jackhammer out Larry Culp' style.

Superb ! your timing the market definitely beat the timing in the market for the buy-and-hold folks.

It shouldn't matter. Whether the carrying value is above or below the market value, FFH's portion of earning (net of dividends) will continue to stack up on FFH's book value (i.e. carrying value). In equity accounting, market value is only relevant as a yardstick for analyst to question the carrying value.

I just read the FFH letter. Some comments: "The world stopped in 2020. Literally! COVID-19 closed down the economies of more than 180 countries." :-) the letter started off like opening scroll of a Star Wars movie. Fairfax Strikes Back. Overall, I like the length and the level of detail. But here are some nitpicks. -------------------------- "Everything included, we have $21.5 billion in gross premiums worldwide with an investment portfolio of $47.7 billion." Is that a typo; i am pretty sure their investment portfolio is $39-40 billion. -------------------------- I appreciate the effort put in into the equity investment and classification. Interestingly, I couldn't see Toy'R Us which was bought $400 million (i think) and therefore should have fully consolidated as part of the third bucket and is rather a significant sum. I am not sure why IIFL Wealth and IIFL Finance are shown separately on page 10, if they are part of Fairfax India. -------------------------- "During the period from March to May 2020, when corporate bond spreads widened significantly, we added $3.9 billion in investment grade corporate bonds at a yield of 4.1% and term of 4 years Net gains on bonds of $460 million includes net gains on corporate bonds of $474 million and net losses of$35 million on government bonds (inclusive of losses on treasury locks of $102 million). The majority of the gains on corporate bonds were from bonds purchased in the first and second quarters of 2020 when credit spreads widened." Very happy, that we have a definite closure on these in terms of returns. 11% return over six months! -------------------------- "After the March/April crash in the stock market, we could not resist buying Exxon shares at a dividend yield of 10.5%, Canadian banks at an average yield of 6.1% and some other companies like Royal Dutch Shell, Alphabet, FedEx and Helmerich & Payne at very attractive prices. We sold approximately half of them in 2020 for a profit of $212 million or an average gain of 40% on our investment." "Wade and Lawrence had an excellent year in 2020 managing $1.5 billion in invested assets. They did so well that we will give them another $1.5 billion to manage in 2021. At that rate, they will soon be managing the whole portfolio" Couple of points: - The mindless passive S&P500 returned 60% in the same time frame; unless you are building long term position at attractive prices, which is not the case since they sold half, your short term return will be compared with the index. - What was the source of funding for these investments. Readily available cash or other equities were sold at distress price in March to buy these (potentially with better upside). If the latter than you are only riding the beta of the market to play the bounce back, so it is fair being compared to S&P500 return. - Were these $200 million returns managed by Wade and Lawrence ? Using $200 million realized return, 40% return and "we sold half" statement as guide, I can back calculate a $1 billion investment in equities in March 2020. -------------------------- BDT Capital Partner Found this to be interesting holding. I think there was someone on the board that few years ago was talking about BDT Capital Partner and was asking for details. Looks like we got some. -------------------------- A gentleman upthread made a comment about Tesla. Not sure where is that coming from. FFH never disclosed anything about its shorts positions. Folks on this board were speculating about Tesla being a short name, but that was about it. "Over the last 15 years, our insurance business has had a combined ratio less than 100%, but our investment returns in the 2011 – 2016 time period were very poor because of a cautious approach to financial markets (hedging our common stocks) and a stock performance impacted by poor stock selection and ‘‘value investing’’ being out of favour. I said in our 2019 annual report that we would not short stock market indices (like the S&P500) or common stocks of individual companies ever again, and our last remaining short position was closed out in 2020 (not soon enough, as it cost us $529 million in 2020)" I disagree with Prem here. A certain archaic way of defining value investing may be out of favour, but value investing is never out of favour. Microsoft was a value-play in 2011-2013, Apple was value play 2015-2017. Charter was probably a value play few years ago Etc. etc. -------------------------- I am excited about FFH and FIH going forward. I should also say that i have been buying lots of shares of ONEX as well. It is a bit less than Fairfax in dollar terms, but am planning to make the equal dollar term holding. Then it is going to be a horse-race to see who has the most return by 2025. Gerry or Prem.

Although I agree on the description above about opportunity to new comers and existing holders, I don't equate lump return with bad return. Lumpy returns to me, means eventually over a long term horizon you will be made whole, as oppose to smooth return, that is more predictable. I am ok with either one. While I am in your camp + Viking' generally, I do not believe that past the initial value-bounce back that has the advantage of starting off from a low-BV-base, there would be enough fuel in the tank, to push long-term ROE back to 15%. At best, past the initial bump, going forward, we can look forward to 10-15% if all goes well. And I seem to be okay with that. My point is however, the front-loaded positive lumpiness will not be enough to undo the lost decade.

Is it mostly all Scott and some (~1%) Greg Abdel as per Barrons' Did David Sokol sold all of his when he left BRK back in 2011 ?

Thanks The article makes no mention of upcoming disruption of utilities - ie. Chamath's view that the utilities are about to be turned "upside down", whatever that means !

indeed, yet it all makes sense: cheap at the start of new economic cycle >> cheap at the end of the previous economic cycle Just needed a GDP vector + a dearth of other opportunities Maybe 5 years from now, we would say that the dearth of 'big' opportunities in 2020 was the best thing that happened to BRK

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.

Agree I think i was saying the samething by saying levering. Just that they could do it now with the D/E being more in their favor, fuel up the tanks vs few quarters ago with their back against the ratio.

The previous $850 million offering went to re-finance previous higher interest debt; so leverage change net zero. The one with $600 million doesn't' have an "allocated objective" in the filing. Wonder if with improvement in its equity and the bounce back in share, they are not using the opportunity to re-lever the D/E back.

I got to remind myself, with meaningful share buybacks, you don't need to double market capitalization to double the share price. Not to say that it will get there, but just saying.

On the comments about letter being rather empty given the eventful year we had, i kind of felt that aspect of the letter, given all the stuff that happened in 2020, made the Berkshire actually look timeless and durable for decades to come. Not to say that the tragedies were just a blip. Just my impression. I bet neither Bruce Flatt nor Prem Watsa could get away by writing a letter like that. They are still in prove-me mode. On BHE, me too, don't know much about it, other than it is gobbling cash flows for god knows what. Sounds like they are building the next Death Star.

Had a read through it just now. Good letter. I like the bits about middle America. I view the buybacks to be more a testament on the directionality of the economy, and less so on BRK itself being cheap. Said differently, no matter how cheap BRK would be, they would not go in significantly and consistently with buybacks quarter after quarter if the worse was about to come on the macro front. I had maintained the view that (1) the pandemic provided a re-baseline view, from which Omaha now has an economic vector to work with, which it didn't have back in 2018, when first the buyback limits were lifted; (2) unrealized gain on Apple, provided a mental equity base and a much larger margin of safety No doubt, sceptic would point to March-April 2020, and how BRK is buying back at higher highs but it didnt buy en masse then.

A pack of cigarette could be a medium of exchange in a prison (i.e. currency), but it cannot be used to pay taxes. Outside the prison, the pack of cigarette has competition and alternative in its role as a medium of exchange, so it looses its 'shine' and reverts to only being something to be consumed. Fiat currency (be it digital or paper) is just the most convenient use case because everybody accepts it. I see BTC as the digital commodity. I am in that camp as oppose to the currency camp. Anybody has good suggestion on books on the topic, please let me know I finished reading Digital Gold (came back in 2015 i think) and bought Blockchain Revolution.

So, it's good if FFH can IPO these outfits and book a gain. It pushes up their equity number and gives a bit of slack on the revolving credit facility covenants. It might even enable some of the insurance subs to increase their underwriting volume. It also gives a higher profile to those companies which might turn them into acquisition targets in the future (ie, it could facilitate an exit). However, while this will increase reported earnings, it looks like there will once again be a bit of a quality of earnings issue in 2021. If all four IPOs come to fruition during 2021, it will likely give the appearance of high earnings, but clearly this is not something which is repeatable every year, nor do the "earnings" from these exercises result in any cash that can be used by the holdco for debt repayment, dividends or share buybacks. While the gains are a credit to management and reflect good decisions made in the past, when thinking about the longer term valuation of FFH, it might become important during 2021 to use some sort of adjusted income number. It's a good outcome, but it will definitely muddy the accounting numbers for the next year or two. SJ Stubble, i like many things about what Fairfax is doing with the IPO process: 1.) additional disclosure provided on companies and their business models 2.) significant funds raised from IPO will help companies be successful in future 3.) timing of IPO’s is very opportunistic (given high demand) and look to be at premium valuations 4.) significant funds raised from IPO will hopefully eliminate need for Fairfax to provide any further funding in future. This is a big deal and should help cash flow at Fairfax moving forward. 5.) with shares publicly traded Fairfax will have mechanism to exit more of position in future if that is what they want to do 6.) post IPO, with shares publicly traded, investors will have much better visibility into valuation of Fairfax’s many equity holdings (and reported BV) Absolutely right. The point about cash flows is huge. These things can now grow without imperilling Fairfax's ability to do the same. It's true that earnings are overstated when there is a gain. But equally they are understated when there isn't one (hopefully). Personally I think it's wiser to value this using book value and a sense of what X% CR + Y% investment returns - holdco costs could yield on average over time. I no longer worry about cash at the holdco. Prem has proven that whether it is outright (Riverstone UK) or via the discount window at his personal LOLR (OMERS) he can access cash by selling stakes pretty much whenever he wants. And crucially, he can do it well above BV, which "underwrites" the goodwill at the holdco. Disagree on #4. Prem had mentioned during the depth of the Covid crisis that holding company had no need to fund/finance non-insurance operations and businesses. If those assets didnt need funding in the worse of time, surely they dont need funding from FFH's balance sheet in the best of time. So, based on this, i don't think there is significant saving on cash flow usage because of the IPOs. The most signifcant operational use of cash flow at holding company level was the capitalization of the insurance company, which Prem declared it to be compelete in the Q4 call few weeks ago. That said, the IPO will allow these companies to fund their growth from a new avenue (capital market) than just internally. As far as book value one-time gain in Q1, so be it. It is an insurance/investment firm, the lumpiness will always be there even if it is paper gain.