Xerxes

Folks, i find this 2006 article extremely interesting. Not so much on the event surrounding the shorts, but just how FFH was perceived at the time. I guess that was when Globe & Mail had good business writers/journalists. ---------------------------------------------------------------------------------------- Published January 26, 2006 Updated January 26, 2006 In this war, there are no prisoners, no truces, no neutral parties. Few companies inspire deeper loyalty-and more bitter vitriol-than Fairfax Financial Holdings Inc., the largest Canadian-based property and casualty (P&C) insurance company. One camp, including a handful of shareholders who control the majority of Fairfax's shares, sees company founder, chairman and CEO Prem Watsa as a Canadian version of investing god Warren Buffett. But for his critics, including the short sellers who've been locked in trench warfare with Fairfax for years, Watsa is far short of a god. To them, he can do nothing right. The battle has been largely waged out of the public eye because Watsa has always shunned media interviews, preferring to let Fairfax's financial results do the talking. Until now, that is. Why the change of heart? Jovial and relaxed as he sits in Fairfax's boardroom in downtown Toronto, Watsa tries to shrug off the question: "Once in 20 years. Hey, you just got lucky." The reality, however, is that Watsa has some explaining to do. Company shares, which traded on the Toronto Stock Exchange as low as $3 in 1985, soared to peaks of $600 in 1998 and 1999. Since then, their value has deteriorated to around $175 lately as Fairfax has been battered on virtually all sides-by the shorts, by staggering claims costs from 9/11 and a wave of natural disasters, by volatile North American stock markets and by lingering hangovers from the company's ambitious acquisitions in the late 1990s. There's more. The shorts have been almost gleeful lately as Fairfax has been swept up in the U.S. imbroglio over complex arrangements known as "finite reinsurance." Last March, the scandal felled Hank Greenberg, the chairman and CEO of American International Group Inc. (AIG), the world's largest insurance company. Now Fairfax is being probed by Washington's Securities and Exchange Commission (SEC) and investigators with the U.S. Justice Department. Watsa insists that Fairfax's financial dealings have always been impeccably honest and fully disclosed in its annual reports and regulatory filings. Indeed, dozens of companies are also being probed in the wake of the AIG storm-Fairfax may just have been caught up in a police sweep. Still, given Watsa's background, it's a strange turn of fate that he would end up being automatically associated in investors' and analysts' minds with the fallen titan of the North American insurance business. But then, the previous twinning-with Buffett-was pretty unlikely too. Watsa was born in 1950 in Hyderabad, India's fifth-largest city. The place is known for its mosques and temples, but Watsa was raised an Anglican. In a cheery and nasal voice, with inflections that are part East Indian, part anglophile and part Bay Street jock talk, Watsa speaks warmly about his religious feelings. "In my story, there are tons of fortunate instances," he says. "I happen to have a spiritual faith, so I feel I'm blessed. Very hugely blessed." Watsa's father, orphaned as a toddler, was a self-made man who became principal of a school that Watsa describes as "the equivalent of Upper Canada College." Watsa was good at chemistry, "so my dad said I should do engineering." He graduated from the Indian Institute of Technology in 1972 with a bachelor's degree in chemical engineering. He met his wife-to-be, Nalini, while he was there, but he didn't actually like his courses much. Business was far more intriguing, so he enrolled at the Indian Institute of Management. But another paternal intervention precluded his completion of the program. Watsa's older brother, David, had settled in London, Ontario. Their father figured prospects were limited in India, so he told Prem that he, too, should go to Canada. Watsa arrived in London in 1972 and enrolled in the MBA program at the city's University of Western Ontario. Watsa recalls joking with the dean of UWO's Richard Ivey School of Business in 1999, before accepting an award for business leadership: "I didn't come here because the school was good. I came here because this was the only place I could afford to go." Watsa rented a room in his brother's house, and helped put himself through school by selling air conditioners and furnaces door to door. When he went looking for work after graduating in 1974, Watsa experienced one of those "fortunate instances." Three other candidates didn't show up for their interviews for an investment analyst job at Confederation Life. Watsa got the nod. At Confed, Watsa says he had his "road to Damascus moment"-his first boss, John Watson, handed him Benjamin Graham's The Intelligent Investor, a classic of value investing, the doctrine that urges investors to look for signs of underlying value in companies, rather than chasing after rapid growth. Story continues below advertisement Confed would eventually collapse because of disastrous speculation in real estate, and was liquidated in 1994. But in the 1970s, it was a solid insurer. Soon after arriving, Watsa was managing a portfolio of Canadian stocks. His value-investing discipline was put to the test during the oil and gas boom in the late 1970s and early 1980s. The value principle said: Stay out. "You had Dome Petroleum and all sorts of oil speculations, perhaps not unlike what we have today," says Watsa. "So we underperformed for about 18 months to two years." But then the energy bubble burst and Dome went bust. At Confed, Watsa began his practice of collecting investing colleagues: Five Confed alumni are still with him today. In 1983, Watsa moved to Gardiner Watson, a Toronto boutique investment firm. There he met one of the most improbable investment managers ever, and one of the most talented: Francis Chou. At the time, Chou, another immigrant from India, was a solder-wielding Bell Canada technician who'd earned his Chartered Financial Analyst designation in his spare time. He was introduced to Watsa by one of the firm's branch managers. "I was never more impressed in a 45-minute meeting than I was with Francis," says Watsa. Chou is now a vice-president at Fairfax. However, he's best known to investors for his own line of Chou Funds, which Watsa helped him launch in 1984. In 2004, Chou won a Canadian Investment Award as mutual fund manager of the decade. To preclude the possibility of conflicts of interest, Chou collects no salary at Fairfax, but he still has company shares he bought in the early days at around $3.25 apiece. Soon after meeting Chou in 1984, Watsa left Gardiner Watson to found his own pension-fund management firm, Hamblin Watsa Investment Counsel, along with a former boss from Confed, Tony Hamblin, and a handful of others. They began with just $30,000 of their own money. It took Watsa almost a year to get their first client, Pratt & Whitney. They quickly landed nine more, and Hamblin Watsa went on to become a permanent part of the Fairfax group. Watsa might have happily remained a pension manager but for Chou. He had planted a key concept in Watsa's head: that of float. "Francis tells me: Do you know how [Warren Buffett's]Berkshire Hathaway made money? And Henry Singleton's Teledyne? And Larry Tisch?" Those value-investing legends ran companies that generated lots of cash every year-pools of cash that have to be invested. If invested wisely, that investment portfolio can generate huge profits. To that end, Buffett had started acquiring P&C insurers in the 1960s. In 1980, Watsa began making the pilgrimage to Berkshire's annual meeting in Omaha, where 20,000 acolytes now gather each year in search of homespun wisdom from Buffett. In 1985, Watsa found a P&C of his own to buy: Markel Financial Holdings, a Canadian-based specialist in trucking insurance. Controlled by the Virginia-based Markel family, it was virtually bankrupt. But Watsa figured it just needed a capital injection. He hit it off with Steven Markel, who is still a friend. In 1987, Watsa reorganized the company and renamed it Fairfax, short for fair, friendly acquisitions. Although Watsa says he "didn't have a clue" at the start how huge Fairfax would get, the Markel acquisition set a pattern for astonishing expansion in the late 1980s and early 1990s. Fairfax bought up beat-up P&Cs on the cheap, and turned them around by improving their core operations and by generating more profits from their investment portfolio. By 1993, Fairfax had over $1 billion in assets. Watsa will also tell you-and tell you again and again-that as Fairfax has looked for opportunities from year to year, it has remained true to a set of 15 "guiding principles" listed in its annual report. The most important of these is to build shareholder value over the long term. There is even a specific target: a 15% annual return on shareholders' equity. To stay focused on the long term, Fairfax says it will "always be a very small holding company and not an operating company." There are just 30 employees at head office in Toronto, although the operating divisions employ almost 8,000. Watsa says that maintaining focus also requires that one person has to have a controlling interest-namely Prem Watsa. His 10-for-1 multiple voting shares give him just over 50% ownership. "I put the group together," he says, "so I had control from that day onwards." And, at 55, he has no plans to give it up or retire any time soon. "I love what I do," he says. "I'm planning to be there for another 10 years at least. Another 20, to be exact." Of course, multiple voting shares start red flags waving in the good-governance camp, as does combining the chairman and CEO's office. Ditto for boards that are small and populated partly by insiders-like Fairfax's, which consists of just Watsa and five other directors, one being his friend Robbert Hartog. But some of Fairfax's major shareholders prefer a company controlled by a strong guiding force. "I love Frank Stronach. I know he pays himself too much. And l love Gerry Schwartz. These guys are business guys," says Wade Burton, a portfolio manager at Peter Cundill & Associates. "Prem made this thing survive." Companies run in imperial fashion can work fine, of course. Unless the leader bites off more than he can chew. In 1998, it looked like Watsa and Fairfax could do no wrong. The company's revenues had tripled in the previous four years alone, and the share price had soared, even after Fairfax issued millions of new shares at prices as high as $500. Watsa had steadfastly maintained his media blackout, which in some eyes made him principled, and which added to his mystique. Chief financial officer Greg Taylor, who has been with Fairfax since 2002, was working for Merrill Lynch Canada during those heady days. "I remember reading the brokerage reports on [Fairfax] and the targets were $800 a share," he says. Then came two huge U.S. acquisitions that again more than doubled the size of Fairfax. The first was Crum & Forster, a poorly performing division of Xerox that Fairfax bought for $565 million (U.S.) in August, 1998. The second was TIG Holdings of New York, which Fairfax bought in April, 1999, for $847 million (U.S.). Both acquisitions soon went off the rails. As it turned out, 1997 proved to be the beginning of a four-year stretch of so-called soft pricing in the P&C and reinsurance business. The industry tends to go in cycles: During the soft portion, companies compete hard, often by taking on riskier business. But then they're jolted back to reality by a disaster, and premium rates harden-they shoot up. So long as the insurer survives the claims hit. Like many other P&Cs, Fairfax staggered after the 9/11 catastrophe. The company posted its first annual loss ever: $346 million. The following year, it had to put much of TIG into "runoff." In this industry practice, a company or unit stops writing new business and, it's hoped, has enough reserves left to pay out any remaining claims. Crum & Forster's troubles were exposed by its combined ratio, the standard measure of an insurer's operating performance. Basically, the combined ratio is the claims paid during the year, net of reinsurance, plus the company's operating expenses, including commissions and administrative costs, all divided by the premium income the company earns that year. If the ratio is greater than 100%, the company is losing money on operations. In 2001, Crum & Forster's combined ratio shot up to 131%, helping to push the average ratio for Fairfax as a whole to 121%. Matters improved in 2002, however, with Crum & Forster's combined ratio declining to 108% and Fairfax as a whole working its way down to 102%.

If BB is not going anywhere, then John Chen got good terms for the covert. He sold the call option to FFH, that isn't worth much. From 2013 shareholder return below. What I underlined still have some value and is applicable today. The rest of paragraph changed so much that what you read below cannot be reconcile to the blackberry story today. I am still positive that BB has merits post-phone era, and you are paying only 3 times sales for it. Markets fluctuate – and very often in extreme directions. Remember the tech boom, when companies with no sales were valued at tens of billions of dollars? In 2000, Northern Telecom accounted for 36.5% of the Toronto Stock Exchange index and was worth almost Cdn$400 billion; by 2009, it was bankrupt! Well, last year the opposite happened to Research in Motion (now known as BlackBerry). At its low of approximately $61⁄2 per share, it sold at 1⁄3 of book value per share and a little above cash per share (it has no debt). The stock price had declined 95% from its high! The company produces the BlackBerry which for years was synonymous with the smart phone. The BlackBerry brand name is perhaps one of the more recognizable brand names in the world and the company has 79 million subscribers worldwide. Revenues went from essentially zero to $20 billion in about 15 years – and then it hit an air pocket! The company got complacent, perhaps overconfident, and did not respond quickly enough to Apple and Android. Mike Lazaridis, the founder and a technological genius – and a good friend – asked me to join the Board, which I did after meeting Thorsten Heins, whom Mike recommended as the next CEO of the firm. Thorsten’s 27 years of experience in all types of leadership jobs in small and large divisions at Siemens, combined with his five years at BlackBerry, were exactly what was needed. Thorsten hired a very capable management team and then focused on producing a high quality BB10 – the next generation of BlackBerries. The brand name, a security system second to none, a distribution network across 650 telecom carriers worldwide, a 79 million subscriber base, enterprise customers accounting for 90% of the Fortune 500, almost exclusive usage by governments in Canada, the U.S. and the U.K., a huge original patent portfolio, an outstanding new operating system developed by QNX and $2.9 billion in cash with no debt, are all formidable strengths as BlackBerry makes its comeback! The stock price recently moved as high as $18 per share, a far cry from the $140 per share it sold at a few years ago. And please note, 1.8 billion cell phones are sold worldwide annually, and of the 6 billion cell phones in the world, only 1 billion are smart phones. Lots of opportunity for Canada’s greatest technology company! What is striking, even for a person like me who has seen many bull and bear markets, is that at $61⁄2 per share, all the Wall Street and Bay Street analysts were uniformly negative – just as they were uniformly positive only a few years ago at prices north of $100 per share. John Templeton’s advice to us: “Buy at the point of maximum pessimism”, still rings in our ears!! We own approximately 10% of the company at an average cost of $17 per share and we are excited about its prospects under Thorsten’s leadership and Mike’s technical genius.

Depends when you want to start the clock I guess. Just like it is not Prem's fault that covid-19 bended the market, the bounce back from here is not Prem's gain ... unless he TAKES advantage of it. Beefing up core liquidity is not taking advantage. That is just being a good swimmer in a storm. That is as far as giving credit goes. He is going to say it in Q2 results, "see guys I told you it will bounce back"; hell, Blackberry shares shooting up from oblivion should provided enough mark to market juice to help things out. As long as market doesn't think FFH will eat Blackberry whole, then down it goes. To have a 15% on book value over the long term, he needs to have a massive lumpy return on the upside to undo the Lost Decade. Or we could just take the clock based on the year the company was founded, to let the earlier years great gains average up the total compounded long term rate of return. I am ok with 5-10 return on book value per annum. What I like is the optionality.

Agreed. I meant the execution. The whole 9 yard. In fact the space rocket in Tin Tin comic was reusable rocket in a sense.

I figured since a cruise line can get debt at +6%, a company like BB that is not impaired can do better that. Even debt raised in the market for the same rate as the FFH convert (3.75%), but without the call option embedded within, is worth more than the FFH convert.

RB, I recall watching an interview with the Boeing CEO Muilenburg, believe it was on Bloomberg, few years ago. It was a good interview I thought at the time. He was the first non-GE leader at Boeing since the merger from McDonnel Douglas and he rose up through the engineering ranks and he was bold. In the interview, Muilenburg made a few bold and fun statement (at the time) poking at Airbus and SpaceX. Interviewer (David Rubstein) asked him what he tells his mother. Muilenburg says something along the lines of only flying on Boeing products, implying other products from Airbus are unsafe. He also poked fun at SpaceX (maybe at a different interview) when he was asked about Elon Musk' stunt of throwing a Tesla in space that Boeing will be the company that not only make it to Mars ,,, and will bring the car back on its way back. Bottom line, fast forward by a few years, we had 737 MAX crashing, the entire fiasco as to how it was handled, and then their debacle Boeing space launch etc. etc. Muilenburg was just manager squeezing the cash machine through buybacks … he was not amazing. Elon was and is amazing. Naturally in hindsight his idea of re-using rockets seems like an obvious thing to do. Airbus was and is amazing by insisting to be boring and risk averse. Boeing was not amazing.

But why BB would not want to get rid of the expensive converts. Would it not be beneficial for BB to have on the right hand side of B/S, newly issued corporate debt at lower rate than the expensive convert.

Looks like I have a short memory. I forgot BB was a phone company competing with Apple at the time when FFH got in. LOL. I was thinking cybersecurity and its IP portfolio. On the positive side, if I forgot about that, that means the 100 year turn around is turning around just fine.

I think these are different buckets. Capital allocated to growing sub-insurance will not compete with the portfolio resources being used to buy portion BB or anything else (if this is even true). Prem has been clear that he is not buying back his shares, so there is no conflict there as he is not doing it and in any case if he were, that would compete with resources allocated to grow sub-insurance. You’re right it is different buckets. But Prem is buying back his own stock, slowly. Not until he has paid back the debt he recently raised on the right hand side of his balance sheet, which he said that it will remain at cash/near cash. That was meant to only to fortify the business. He will not use those dollars to buyback shares. He could do that, then he would have contradicted a clear statement he made in Q1. But very slowly to your point.

I think these are different buckets. Capital allocated to growing sub-insurance will not compete with the portfolio resources being used to buy portion BB or anything else (if this is even true). Prem has been clear that he is not buying back his shares, so there is no conflict there as he is not doing it and in any case if he were, that would compete with resources allocated to grow sub-insurance.

I think unlike Torstar, Stelco or Resolute (why?why?), BB had merits in the right hand. Folks, might bundle all of FFH mistakes into one bucket, but I don't think BB belongs there in the pile of stupid ideas. They should keep it and partner with someone for the privatization. I don't know if folks noticed, I recall seeing on the news feed somewhere in the Teachers' 13F that they had invested in BB common shares in Q4 or Q1. I ll try to find the source. What BB should do first is to raise capital at very low rate, to pay off the convert and stop paying that high rate to FFH. that would save it money and allow FFH to get its principal back for better use.

I just cross checked on Google, the Prem Watsa with Templeton. I got a book, where Prem calls Templeton, "perhaps greatest investor of all time" https://books.google.ca/books?id=lAzBNSKVIjwC&pg=PR7&lpg=PR7&dq=templeton+fund+manager+prem+watsa&source=bl&ots=bEWQoKzEf4&sig=ACfU3U1Zf3R58xEEeWsZL3OAilqafhFapg&hl=en&sa=X&ved=2ahUKEwjQ-v2KptfpAhXYHc0KHXhWAQUQ6AEwA3oECAsQAQ#v=onepage&q=templeton%20fund%20manager%20prem%20watsa&f=false

I think the above makes it clear, how time consuming are these "FFH platforms" from capital allocation point of view. Not even the operating aspect of it, which you can leave it in the hands of a great operator, if you find one. So good thing that they didn't keep Torstar. Less bandwidth on the collective brain trust. Folks, lets move up from the weeds and trenches to a nice cruising altitude of 50,000 feet. I have listened to many interviews (well few) with Prem Watsa, and my takeaway has been always on the following two statements that he always repeat, (1) he very often talks about John Templeton and is obviously very much fond of him, I believe he once stated on BNN that he even has a Templeton bust in his office (2) he very strongly believes in one outperformance going a long away to compensate a few laggards and then some On (1), on this board we often compare Buffet and Watsa, shouldn't we compare Watsa to his own idol, which is John Templeton. Not saying if it is going to better, but just to have the right baseline On (2) while the statement sounds obvious, maybe all FFH needs is a Seaspan going right Hopefully, with the value of his holding shaved off 40-45%, he has the right incentives now ...

Buffet is probably waiting for Fed to pull the rug out so that he can go to work. Fine by me. And what leads him or anyone else to believe that they will? People having been saying these same things about the Fed, and the music stopping, and the "stock market doesnt match the economy" for the past decade. For a 90+ year old dude, Im not sure thats a great game to be playing. Or, as we've seen from time to time in the markets, the Fed may in fact do that, and the story doesnt play out the way the pundits think it will. Ive become more and more convinced that the rallying cry of "the markets are overvalued" is just a convenient and pride saving way of admitting "I missed the opportunity". From what I've seen generally the bunch that point that "ABC" has missed the opportunity just because the markets went up tend to correlate well with the bunch that claim that nobody could have seen "XYZ" event coming when asked why they don't have any money anymore. Also, pretty sure Buffett doesn't give a shit about "the game" or how he should play it. Like who? Can you name any? Because once again, we saw most of the guys on top of their game, even some of the more prominent bears buying stocks in March. We saw BX and BAM buying RE hand over fist. We saw the Saudi Wealth fund buying hotels and entertainment companies. And we saw the guy who invented "the game" who "doesnt give a shit" about it now, capitulate at the bottom.... Gregmal Saudi wealth fund invested less than $10B at bargain price, while they got hoodwinked into investing $45B to SoftBank vision fund. That $45B is now value trapped. The game is about doing less stupid things and knowing the downside risk over the long term. It doesn’t help that they did one right thing after one large stupid thing.

Buffet is probably waiting for Fed to pull the rug out so that he can go to work. Fine by me.

As an investor, would one rather pay high performance/mgmt fee to Ackman to buy BRK on one’s behalf or does one directly buys Berk, and implicitly pays $100K salary to Buffet as CEO. Ackman thesis was that Berk will deploy its cash. That didn’t happen. He can buy it later. and keep in mind that as Fed ramps down its support there will be distress opportunities both for Berkshire and Howard Marks from Oaktree. Us, the individual BRK shareholders, are just doing time arbitrage while the above takes place (real distress opportunities) . Ackman, the hunter, will be going for a few kills before coming back to BRK. He is paid to hunt. That is his job.

I think Ackman did the right thing. A hedge fund should be actively looking for opportunities rather than invest into a long-term hold. Folks don't pay Ackman his fees so that he parks money into Berkshire.

Did Prem got the best return for his shareholder (I.e fiduciary duty) under the present condition for Tor Star. The optics looks weird with Paul but if the answer to the above is Yes, than we are all good. At least in my simple mind.

Thanks Thrifty That would be awesome, though given that he was referring to the dividend, it kinda tells me he was thinking as an equity position and a contributor to his $1 billion interest/dividend target. Those equity swap seem like an interesting way to take a directional bet on the market with minimum upfront outlay, but if a market bounce is your bet, I think the swap are best employed against the overall market, rather than individual names. What is the point of doing that unless you were doing on technology "stay-home" specific names. Anyways, these swaps are completely outside my plain vanilla area of expertise, not that I am an expert in plain vanilla investing either. but I do know common sense.

Good news is that as Resolute marches into oblivion it represents an ever smaller portion of the equity portfolio, so less damage going forward. Bad news is that Resolute is not marked to market, so its quarter to quarter valuation never really hit the bottom line in a good or bad way. Good news is that it has seen a few write offs and those had already hit the book, so unlikely to see more. I never looked at Resolute earnings in the past ten years, no clue if the earning it contributed diminished in a massive way.

Absolutely, he even referred to the exact same CNBC interview that the Exxon CEO was talking about the dividend. And I had watched that interview prior. Funny thing when 13F came out last week, although I did not see Exxon I did see Chevron as part of their holding. And was just wondering if between Prem and his managers if there was a mistake on what exactly they bought. I hope that is not the case but with these guys losing money on their shorts in Q1 ... who knows what’s going in the black box. I hope that there is a perfectly good explanations for these snd that my biases are just biases. Unrelated to 13F mishaps, buying Exxon and Chevron at their cyclical low is the right way to invest as a value investor. Buying Stelco at its cyclical high is a bad value investment as a value investor.. No margin of safety will protect you when the denominator “earning” collapses in a recession. In fact often times, (Not related to Stelco) the stock value drops less than the earning collapse, in which case, you actually get multiple expansion even as the absolute dollar value of your investment goes down and your ROI gets to the cleaners.

I am new, didn't get to read most of your RE views in the past 10 years. That said, Enjoy the time off ! All the best and enjoy the summer.

Ok so it is really a yield thing. Getting higher yield, which was otherwise unavailable prior. I thought credit spread snap back would mean meaningful capital gain.

It says average age of 4 years for the corporate bonds. In their pre AGM memo update.

Folks Would it be fair to say that the $2.9 billion that FFH invested in March when credit spread blew out, now that Fed stepped in and closed opportunity for distress fixed income investor, those spread have narrowed, so ... does it mean that a significant portion of that capital gain would be marked-to-market as unrealized gain by close of June (Q2). I think that capital gain is front-loaded where you see most of the snap back happen in Q2 ... and the rest panned over several quarters. This is 7% of the $39 billion portfolio. The position is significantly larger than Blackberry, Resolute and Seaspan combined. This fixed income unrealized gain on its own might in turn snap back the discount between market and BV. What am I missing here ?