Munger_Disciple

+1 Every time I listen to Dalio on TV, I get a headache. So I stopped watching his interviews.

It is almost a given that ROE will go down as the asset base increases in size. It happened to Berkshire and will happen to Fairfax.

Thanks @glider3834!

Thanks @Cigarbutt!

A couple of questions for Fairfax experts: I was going through the cashflow statement in Q3 report. At first glance, it seemed odd that the cashflow from operations for the first nine months was negative $1B. Then I realized it was due to the line item called "Net purchases of investments classified at FVTPL". I would think purchases of investments would belong in investing activities, not operating activities? Is it related to adoption of IFRS? Why do they classify share buybacks into two separate line items, i.e., purchases for treasury and purchases for cancellation? Thanks in advance.

https://www.cnbc.com/video/2023/11/07/the-surge-in-stock-prices-goes-hand-in-hand-with-dropping-yields-says-interactive-brokers-peterffy.html According to Peterffy, the treasury basis traders use 100 to 1 leverage.

The underlined statement was the best point the author made. It is the first time I see a mainstream reporter make this point. I guess what he was saying (& the Fed worries about) is that if for whatever reason the hedge funds (acting like primary dealers) had to undo their basis trade, the treasury yields can go thru' the roof parabolically because they are big players in these markets and use ungodly amounts of leverage. In other words, something similar to the October 1987 Black Monday crash can happen. Edit (added): Since the Fed cannot "theoretically" extend their credit facilities to hedge funds like they can for primary dealers it will make the problem that much worse. IIIRC, the Fed arranged a bailout of LTCM by banks, not directly rescued the hedge fund. But push comes to shove, IMO the Fed will "invent" some novel reason to rescue the hedge funds doing the carry trade.

@Cigarbutt Thanks for your response. If I understand you correctly, wildfire risk is an evolving issue for regulators, and ultimately all the capex required to implement better shut-off systems will be borne by the public that receives the service. In the meantime, utilities that have not so hot balance sheets to handle current legal payments may go bankrupt so that creates an opportunity for a financially strong entity like BHE to pick up their equity for nothing. So it is painful in the short-term for BHE (a hit to current earnings) but a great opportunity to acquire other utilities long term.

More on wildfire looses at PacifiCorp. from 10-Q (underlined emphasis mine): PacifiCorp increased its liability for estimated pre-tax probable Wildfire losses, before expected related insurance recoveries, by $1.4 billion in the third quarter and by $1.9 billion in the first nine months of 2023. Expected probable Wildfire losses, net of expected insurance recoveries, were approximately $1.3 billion in the third quarter and $1.7 billion in the first nine months of 2023. Such amounts were included in energy operating expenses in the accompanying Consolidated Statements of Earnings. PacifiCorp’s cumulative charges to date for estimated probable Wildfire losses were $2.4 billion through September 30, 2023. It is reasonably possible PacifiCorp will incur significant additional Wildfire losses beyond the amounts currently accrued; however, we are currently unable to reasonably estimate the range of possible additional losses that could be incurred due to the number of properties and parties involved, including claimants in the class to the James case, the variation in those types of properties and lack of available details and the ultimate outcome of legal actions.

I think we are just hearing one side of the story regarding the Pilot lawsuit. It is hard to believe that Berkshire is not abiding by the contract. It is also clear that Berkshire was very unhappy with the way Pilot was being run before gaining 80% control and Abel moved quickly after getting control to replace Pilot's management. I suggest we all wait for the Berkshire side of the story to emerge before speculating too much.

+1. Utility earnings were impacted due to reserves for wildfire law suit costs. From 10-Q: After-tax earnings of BHE declined 68.9% in the third quarter and 46.3% in the first nine months of 2023 compared to 2022. The earnings decline in the first nine months reflected lower earnings from the U.S. regulated utilities, reflecting increased wildfire loss estimates, as well as lower earnings from other energy businesses and real estate brokerage businesses. It is crazy that regulated utilities (where all the capex needs to be approved by regulators) have to pay for wildfire costs.

I don't think this is true. Page 52 of 10-Q shows share buybacks on a monthly basis. During Q3, they bought back both A & B shares only in the month of September; A shares were purchased at a premium of just 2.8% above B shares. However they bought back an order of magnitude more (in dollars spent) A shares, so there is clearly a preference for A shares but only when the premium over B shares is reasonable. Very logical & shareholder friendly execution of buyback as always from Warren.

+1

Seems like the relations between Canada & India have gone to hell pretty fast. At a minimum Trudeau seemed to have handled it very poorly with Modi. You don't make such allegations against an important country like India w/o offering significant evidence. I find it interesting that the western allies of India US, UK & Australia have stayed very quiet.

@Viking I think @StubbleJumper explained very well the difference between our views. At a high level you are focusing on 2 or 3-year estimates whereas I am looking at what sustainable normalized earnings may look like. Your arguments about me not taking compounding into account & thus looking at FFH as a non-growing static entity are not valid. With my assumptions, I implicitly assumed FFH can compound at 10% per year by reinvesting earnings back into its business with any added P/B expansion juicing the results a tiny bit (thus adding an additional 1-2% return per annum for awhile, but not forever). And I would be happy with 10% compounded results over the next decade. More importantly, you seem to be thinking that $160 per share earnings for the next couple of years are already in the bag. This ignores a fundamental fact. Insurance underwriting is a probabilistic game. One could be right about the odds and still lose money on any single bet (or in any single accident year). You only know whether you are winning or losing in a probabilistic game with a large number of repeated trials, or in the case of an insurance company over many years covering long cycles. As an example let us say someone offers you 3 to 1 odds on a fair coin toss coming up heads. You would take that bet all day. But on any given coin toss you could lose; that doesn't mean you made a mistake in underwriting that bet. And the Kelly Criterion tells us what % of bankroll we should bet on a game where the expected value of the outcome is positive but we could naturally lose money on any single throw. Similarly, Fairfax could lose a ton of money in insurance next year due to hurricanes, fires, mud slides, terrorism, whatever; that doesn't necessarily mean that their insurance underwriting is bad. It just means that they are playing a probabilistic game. So no, your $160 estimate is not in the bag because you incorrectly assume that underwriting profit is a given in the next year or two.

To each his own

I can only conclude from your post that you disagree that one should look at normalized earnings for FFH. If so, we can agree to disagree. As I said before, it doesn't bother me that others have higher estimates for FFH & it shouldn't bother you that someone else may have lower estimates. That's what makes it a market anyhow.

@Viking I don't expect you or anyone else to agree with my estimate of normalized earnings for Fairfax. I did it for my own benefit. I try to be conservative in my estimates, and that is my margin of safety. Since I received so much value from others' posts including yours, I decided to share my view. It doesn't bother me that you have way higher & different estimates. To each his own..... I would just add a few more things: It is much more important to look at normalized earnings power than temporarily high earnings in the next few quarters for any company. None of the cyclicals like mining companies or commodity companies trade based on cyclical peak earnings for a reason. Believe it or not , insurance is a cyclical business. As you very well know, intrinsic value of any company doesn't take into account just the next few quarters. The main difference (from what I can tell) between your view & mine is that you are willing to assume way better CR for the insurance businesses than I am. I would caution you to heed Buffett's advice that almost all surprises in insurance tend to be negative. Furthermore, assuming 100CR is not the worst case scenario for insurance over the cycles, so I am trying to give benefit to FFH for their possibly improved operations. I would be happy to be wrong on the upside but it would really suck to be wrong on the downside given the high insurance operating leverage at Fairfax. Regarding valuation, I tend to focus more on the downside of any investment than the upside. You can call it a lesson learned at the school of hard knocks. If I am wrong about the upside potential, I would be delighted; it is always the left tail that bites us in the a$$. Finally I would echo @StubbleJumper's sentiment that neither you nor me are saying that FFH is overvalued. We just have different views on its cheapness.

+1 Yes, I have tried to estimate "normalized earnings" of Fairfax, not what they are in the next year or two.

Somewhat Conservative Valuation of Fairfax I know several members on this board are posting super high valuations of FFH. I wanted to independently estimate for myself a very crude, somewhat conservative (but not a totally low ball estimate) earnings power of Fairfax. Assumptions: Combined ratio of 100%. So float is cost free but there is no underwriting profit. I know people are throwing around way better numbers for CR but let us keep in mind that the goal of the best insurer on the planet (Berkshire) is to underwrite at 100CR over the cycles. As of Q2, Fairfax had cash+fixed income securities of $40.6B. Given the short duration of FI portfolio, I assume that this bucket earns 4.5% for the next few years. Fairfax has $2.4B of preferred stocks. Let us also assume that this bucket earns 7% (remember this is a crude+conservative estimate). Fairfax also has a total of $13B of equity securities+investment in associates+stake in Fairfax India. Let us assume that this bucket earns 10%. Fairfax has $8.8B of debt costing $520mm in interest payments & annual corporate overhead of $400mm. I ignored everything else (remember this is a crude estimate) and assumed 20% corporate tax rate. So I get an earnings figure of $1.9B after tax. So that gives a P/E ratio of roughly 10 for Fairfax. Pretty decent value but not as ridiculously cheap as others claim.

Can you please provide a more detailed summary? Thanks

BNSF Logistics selling brokerage business to JB Hunt: https://www.wsj.com/articles/j-b-hunt-transport-will-acquire-bnsf-brokerage-business-a7598c10