Xerxes
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Posts posted by Xerxes
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By the way I have a very long story with Fairfax. It is probably responsible for half of my net worth. First buy in 1993 and sold at 3x BV for a ten bagger. I was one of the first to discuss about FFH with Sanjeev on MSN. Was lucky enough to buy back in 2003 in the exact day of the bottom at 70 and sold at about 8x that price. I run a concentrate portfolio of 8 to 10 stocks. I had a couple of in and out since that for a wash. Now i'm in for the ride back to BV.
Superb ! your timing the market definitely beat the timing in the market for the buy-and-hold folks.
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Eurobank results are out. This company has done a super job of navigating the past few years and based on guidance it trades on 4.3x 2022 earnings and 0.43x 2022 book value. I think it will double in the next 18 months. Unfortunately this won’t all feed into FFH book value since it is already carried well above market, but there is scope for a nice gain.
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.
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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.
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"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.
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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.
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"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!
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"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.
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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.
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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.
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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.
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At the same time, because of these faults, it's given investors several chances at making money investing in the company. Even those that hold for the long-term...as long as they dollar-cost averaged in over time...would have done quite well too.
The downside of all of this is that investors would have less opportunity to buy the swings in the company's price. So you can have Fairfax as is, and make money in broad swings...or you can have an insurer more like Berkshire or Markel, but have less opportunity to buy cheaply. Cheers!
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.
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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 ?
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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 !
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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
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John
I think of Buffet comment about $100 billion return in the same vein as I do of Watsa being able to pull something close Teledyne’ buyback program. More or less as aspirational goals.
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.
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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.
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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.
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Berkshire buybacks:
2018: $1.3 bil
2019: $5 bil
2020: $25 bil ($9 bil in Q4)
As I think thepupil pointed out, the company has been repurchasing shares at a 6.3% annualized rate over the past 5 months.
I think the implications of this activity for Berkshire's future are very positive.
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.
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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.
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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.
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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, but might one day become a global currency for international trade, but never a local currency in a given nation.
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.
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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.
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So it looks like Farmers Edge IPO is happening at CAN$17/share (upper end). Fairfax will own 25 million shares = $425 million. What is this carried on the books at? Fairfax will likely be booking a significant gain when they report Q1 results and it will increase BV. It will be nice to see :-)
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.
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I CANNOT recommend Yellowstone enough ! (on Prime)
I like midwestern folks, my type of people, even though i have a liberal tilt
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Yes, i saw the same thing late in trading today. Bottom line, Fairfax has exposure to a little over 100 million BB shares. So every US$1 increase in BB share price = $100 million gain for FFH (pre-tax). This entire position is mark-to-market accounted; meaning it will also directly impact reported book value when Fairfax reports Q1 results. As a reminder, BB was trading at Dec 31 at US$6.63. So with shares trading $12.39 after hours = about $600 million gain = about $22-23 per share pre tax. Significant :-)
Great
we are going to have some "hot air" being marked-to-market on March 31.
As long as it stays hot, i am all good.
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Check this out: Fairfax Launches C$850 Million Senior Notes Offering
https://finance.yahoo.com/news/fairfax-launches-c-850-million-155300225.html
Great news! FFH pushing back debt and lowering rates.
Yes, this is good. They definitely needed to get some cash into the holdco and stop relying on revolving credit to fund the company's operations. It is noteworthy that this is a relatively large debt issuance for FFH and the interest rate is considerably lower at 3.95%. I have expressed misgivings in the past about FFH failing to deleverage, and this does not really change the fact that they are more leveraged than I would like and their risk management has been disappointing at times. But, it's a positive step towards at least managing their maturities and reducing the routine reliance on that revolver.
SJ
i think the proceeds are going entirely to refinance old debt .. and not pay back the revolver.
i think Prem did mention that the revolve will be paid via proceeds from asset sale
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I would think they could begin locking in significantly before year 20. It obviously depends on starting yields/durations and how quickly rates are rising, but in prior bond bear markets you could recoup the principal losses from rising rates with higher income/higher reinvestment income by year ~4.
So even if you expect rates to rise, you can buy a 10-year bond today and still be ahead of short-term bonds by years 5-6 even if you're right about rates moving higher.
I don't mind Fairfax's move to short term bonds. It's certainly saved them from some pain. But I would hope that they'd start moving incrementally back to 10 year and longer bonds if rates exceeds 1.5 -2.0%. Just in recognition that these things don't move in a straight line, roll down yield becomes more attractive as the curve gets steeper (short term still anchored @ 0%), and any unrealized losses from rising rates will likely be mitigated by year 4-5 of holding the bond anyways.
And given my ultimate views that we are NOT in a sustainable inflation environment, I would think this exposes them to potential gains from a disinflationary/deflationary environment that they missed in 2018, and again in 2020, when 10-year yields dropped from 3 25% all the way down to 0.5% over that 2.5-3 year period.
This is my view. I'm very heavy into commodity companies - but mostly because they're cheap and not because I'm expecting massive inflation.
I think we'll get a pop in 2021 due to the trillions pushed into circulation during 2020, but I do think at some point in 2022 we get back to disinflation as rates can never rise significantly with debt loads/equity markets where they're at.
Great discussion with J. Currie
Going back to the reasons as to why we had such a long bull market in bonds, economist typically point to three major points:
1 - deflationary nature of technology
2 - changing in demographic, the baby-boomers hitting peak salary in the past few decades, therefore in aggregate creating a surplus of capital at about the time when the demand for capital was diminishing (point below)
3 - last couple of decades most of the investment has been in information technology sector that doesn't require as much capital as CAPEX heavy old economy. Therefore less capital was needed, putting downward pressure on rates.
I think going forward, (1) still is in play more than ever, but (2) will flip as old economy + infrastructure that have been starved for capital need major investment
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Awesome interview with Grantham. Longer than the one on Bloomberg Front Row, and more interesting. The part about the comment people left for him after Front Row is pretty funny. For a value investor he has a good sense of humor, in fact i think funnier than Bloomstran's humour.
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ICUMD
My view has been that both FIH and ex-FAH were more investment firm with permanent capital that could really make additional investment either by (1) selling another holding (2) issuing equity. The latter was out of option given the huge discount and if you are riding a macro wave, it doesn't makes sense also to sell a holding that has long term potential. Flipping asset makes more sense in a more developed economies.
The missing key has been third-party fee, which now they are getting through their revamped African business re-named Helios, and hopefully through something similar with Anchorage. Major difference between the two but ultimate aim is to get that fee machine going.
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So, the general idea is that we had a four-decade bull market (1980 through say 2020 for simplicity).
And for argument sake let's say we will have a slow grinding bear market over the next 40 years (2020 through 2060).
Fairfax long term view was that the bull market ended (or was soon to end) when they switched out in 2016, and have been keeping on the short end only. After a few false start, (i.e. The initial stages of the pandemic contributed to the pause on the narrative), lets say it is now slowly heading that way.
I understand if they were to stay on the short end, they will float like a boat and ride that wave, while never having material exposure to capital loss. But at some point, let's say 20 years from now for illustration's sake, they will gradually lock in because they perceive that the rate has peaked. That "lock-in" itself could be 20 years too early, if the actual peak rate arrives in 2060. That is what I meant.
These long term interest rate movements are very long term and very gradual, where you could be in the middle inning of what is actually a larger first inning (i.e an inning within inning). Think these are very much outside the scope of most observers. Even now, only in hindsight, economists are looking back to explain why we had a 40 years long drop in interest rate.
But maybe none of this matters, because by then we wont be around anyways i think and/or already enjoying retirement on Planet Mars, thanks to SpaceX-Tesla consortium.
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Either he'll disappear 10 years from now or he'll be huge. There's no middle ground here with him. We've seen these shows before...they go one way or the other. Cheers!
well said !
Fairfax 2021
in Fairfax Financial
Posted
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.