MMM20

I just want to add that FFH is now trading at something like 5x what seems to be its sustainable (albeit year to year volatile) underlying free cash flowing power, or like a 20% yield. That ~5x is what matters economically and is, what, roughly a third of peers like BRK and MKL? Book value as an accounting concept seems to obfuscate that reality for many who look at the stock.

Thanks for the good reminder to trade as little as possible. Whenever I’m about to buy or sell, I like to picture Ken’s $100mm (guessing) Miami mansion and think twice. I see FRFHF as a solid core holding going forward and suck at timing so need a damn good reason to do anything but let it sit there.

@Wilmesbm I believe Fidelity is still $0 cost on FRFHF

Same here. If you don't cringe at yourself looking back 5 or 10 years, then maybe you're not growing enough. That said, treat your former self with grace

I wonder if there's any plan to preserve Buffett's office as a museum after his passing. Free entry for shareholders.

Right. If I'm understanding correctly, this gets at the concerns around alignment of interests. While FIH have clearly made shareholder friendly decisions recently, it seems like in the longer run FFH's incentive skews toward FIH getting bigger even if maybe at the cost of higher per share returns. That's not the case in FFH where Prem has the vast majority of his wealth invested and would like to regain majority voting control and it's all about compounding on a per share basis. So even if FIH's underlying returns are good, that could be one reason why they're not as good as they could be and the discount to NAV stays wide. Is this characterization unfair?

The ethics stuff reminded me of one of my favorite business books: The Billionaire Who Wasn't: How Chuck Feeney Secretly Made and Gave Away a Fortune https://www.amazon.com/Billionaire-Who-Wasnt-Secretly-Fortune/dp/1610393341 “If you have the right heroes in life, you’re 90% of the way home. Chuck Feeney is a good hero to have.” - Buffett

The part I always refer back to is below. I think their sort of business ethics will prove enduring and the top down bureaucratic version en vogue these days will fade away. The sociopathic and psychopathic CEO types *should* be called out and shunned - maybe that’s the bright side of all this - but Berkshire should indeed be viewed as a national asset, and it will be by enough of us. Maybe that’s wishful thinking. Buffett: Charlie Munger: Warren Buffett: Charlie Munger:

The Real Story of Buffett, Berkshire, and Tobacco https://invariant.substack.com/p/buffett-berkshire-tobacco

Ah yeah makes sense — I must’ve seen the ~$2.4B ish and now ~$3B in the FFH accounts and just remembered that. I know ~$4B ish is the total FFH minority interest so should’ve figured that could be it. I haven’t looked much at FIH standalone so I wasn’t aware of the exact size of the overall pie. My bad! Ok, so then my question is why FFH hasn’t yet bought more FIH, since FIH is trading at such a discount and FFH has flipped to generating lots of cash. I believe Digit is economically a ~$3B fair value for FFH at this point if you believe the press reports about the potential IPO. Now I know that dwarfs FIH and yet Prem isn’t buying more FIH. I know FIH is buying its own stock so FFH’s % ownership is increasing. Does it make sense to buy more FIH when Prem himself buys more? What am I missing this time?

From latest FFH report — “Fairfax India cash, portfolio investments and associates (fair value $3,079.1; December 31, 2022 – $3,079.6; January 1, 2022 – $3,336.4)” Seems like ~15% of FFH NAV. ~5% of the nearly $60B total investment portfolio including cash and the like… but effectively lots of (good float) leverage on their equity investments. It’s a meaningful allocation for FFH, economically like a ~15% exposure. Am I thinking about this wrong?

+1. FFH is now trading at like 5x earnings and things have really seemed to line up for them. With FFH you also get both the Fairfax India assets *and* others… the potential issue with FIH is that FFH can cherry pick the best assets — like Digit which is in FFH but not FIH b/c it’s an insurance company, I guess? And Digit was prob most squarely in FFH’s circle of competence and has worked out the best so far, right? So in FFH you have full alignment with Prem purely in terms of where his capital is invested *and* arguably his best India investments + the FIH holdings. That said, I would prob swap some FFH into FIH if the valuation discrepancy got wide enough and/or I got really bullish on India and less so on Atlas etc. Short answer = with FFH you get Fairfax’s pretty big as a % of NAV (~15%?) investment in FIH plus others (maybe their best) + full alignment with Prem + valuation much cheaper on cash flows

Thanks @Parsad for the confirmation and insight.

Do you think it’s fair to ballpark a Hurricane Andrew scenario at $500mm-$1b in losses for FFH? In other words likely much less than 1 year of run-rate interest and dividends at this point.

Ah ok, I must’ve misunderstood. I wonder if FFH’s analogous worst case would be about 1 year of interest+dividend income at this new run rate. Maybe I’m way off!

I should really have a more precise sense of that but i guess I put that in the known and manageable risks bucket. [removed incorrect comment on BRK FL exposure] Maybe my glasses are too rose colored, but it seems like from FFH’s current position of strength and generally more long tail oriented exposures, that would of course mean volatility in the stock but might even be accretive to intrinsic value by magnifying and extending the hard market as others retrench further. Wonder if others here see it differently.

Same here. Added a bunch in the low $690s and it was already my biggest by a lot. I’m having trouble recalling a better setup. Hope we’re not missing something. Not investment advice.

$900-1000+ USD stock would be in line with the post-'08 average P/B multiple of ~1.1-1.2x when you adjust for gains from Brit, GIG, and Digit. BVPS is really ~$830+ USD and ~$850+ fully marked to market. Intrinsic value is clearly $1500-2000+ USD.

I think it's also worth highlighting that they bought back 0.7% of shares last quarter and still didn't unwind the total return swaps. There are attractive alternative uses of cash right now, but seems like the Teledyne plan is still on track.

That a majority stake in BIAL would likely trade at a significant premium to that valuation. Everything else is likely valued at a large negative number.

Yup. Looking more and more like (good) endowment style portfolio management. Market is slow to recognize the value of that for high incremental return opportunities across asset classes and geographies. KW stock may or may not be cheap but what we can bank on is that they’ll bring FFH good coinvestment opportunities that may arise from CRE distress, and FFH should have $2-3B+ annual cash flow to allocate to such things over the next few years at minimum. I could see them doubling their capital allocated here over the next few years if things break a certain way.

@OliverSung Don’t sell yourself short. All-time great first post. I’ve been a fan of your work for years but must’ve dropped off your list when I switched jobs, so thanks for sharing! A few of my favorite parts: “While everyone ran around discussing whether Prem and co had lost their magic touch, Fairfax’s insurance group marched ahead in the background to build a track record of growth that would put it on par with a thriving tech company.” “A $55.5bln investment portfolio, roughly half of which is financed by 5% negative-interest float (Fairfax’s current 95% combined ratio) is coiled to churn out vastly different earnings numbers in a higher-interest environment than Fairfax has ever witnessed. Due to this humongous increase in cash-making float, Fairfax is in another form than it’s ever been and the company’s past history gives poor clues as to how it may perform in the future” ”Family-controlled insurers are, ceteris paribus, better positioned for opportunism on the investment side. The result? As Fairfax slowly ramped up the duration in conjunction with rising interest rates, it took its run rate of $530mln in interests and dividends and tripled it to a current run rate of $1.5bln which now approaches a three-year duration. I’ve heard a lot of Fairfaxers are disappointed about Fairfax not extending those durations further but I don’t see why Hamblin Watsa would settle for 3-4% when they have lots of other options, including writing >7% mortgages with Kennedy Wilson at average three-year terms. Cash and cheap stocks may also be better options as of now.”

keep hoovering up shares instead!

I took it to mean *originating* at 60% LTV in aggregate, which is much more conservative than the average underwriter as I understand it. Fair enough point that the average doesn’t tell us about the distribution but I’d be surprised if they underwrote any loans >80% LTV if 60% is the average. Also fair point that floating is good for inflation protection until a bunch of underwater borrowers hand you the keys. On the flip side, if you have the ability to foreclose and finance the assets and hold longer term, your recovery should be quite good unless things really fall apart. Just look at returns on CRE last decade. Still, I like that risk reward at ~60% LTV (even if it’s now looking more like 70-80%? after valuations reset) with some inherent inflation protection in the underlying assets. Much better than most other fixed income. It’s possible I’m missing something but it seems like it would take cap rates nearly doubling (valuations on mid cycle ish earnings getting cut in half) for Fairfax to lose money on these loans. To Buffett/Munger’s point yesterday, in this sort of environment the assets won’t go anywhere but the ownership may change hands. Maybe an opportunistic Fairfax will end up a beneficiary of that, starting as they are from this position of short duration strength in fixed income.