MMM20

I mean, I completely agree... but it’s also a sizing question around the fair value and risk/reward. I know I'm not alone here with a big position now vs a typical core holding.

FFH traded at ~1x BV in 1H 2013 = ~CAD$300-350 stock. This was roughly 15-20x earnings at the time, if my data is right. It now trades at ~1x BV (really ~0.8x properly adjusted, but whatever) = ~CAD$950 stock. But this is ~6x earnings right now. In other words, FFH generated a ~12%+ annualized total return over the last 10 years despite the fact that the earnings multiple derated by, like, two thirds (again, if i have good data). And if the earnings base has in fact reset much higher with their (1) smart/lucky insurance acquisitions right ahead of the hard market, (2) short duration fixed income positioning right ahead of inflation/rate hiking cycle, and (3) transformation to something resembling an endowment-style decentralized "great manager" strategy on the equity investment side, not to mention (4) willingness/ability to buy back chunks of stock at discounts to IV... well, then it's not about the repeatability of some home run scenario in which the stock doubles over 2 years. That already happened and yet the stock still screams cheap on earnings when you dig into it a little. Accounting book value doesn't come close to telling investors what they need to know... right now, looking forward. So I just think it’s *also* worth doing the math on expected returns in a *bull* (my base ) case in which the valuation expands back to a peer multiple (coincidentally the same level as ~10 years ago... from which the expected return would again look something like ~12%) layered onto low-mid teens EPS growth. To me, EPS doubling and P/E multiple doubling or tripling over the next half decade or so is a reasonable, realistic scenario. That's something like a ~5x over ~5 years, or a ~40% annualized total return. Meanwhile, when I bring up the stock, I mostly still hear something like, "lol, the Blackberry guys?"

Super conservative!

So am I out on an island (even here at the cobf!) arguing that IV is a mid-teens multiple of '23E earnings? Of course it will probably never trade at ~2.5x BVPS again and instead by retaining earnings and unlocking embedded value, FFH will push BVPS higher over time and the stock will follow b/c that's how it trades. But that doesn't mean IV isn't ~2.5x BVPS right now! That'd be a MKL-like multiple of earnings which in itself suggests FFH's BVPS understates earnings power - which recent moves like the pet insurance sale seem to support - and equate to an IMHO fair ~10-12% expected CAGR from that valuation. The IV math is simple and backed up by the more granular expected returns analysis. I'm talking value to a permanent owner so I care about range of outcomes and not volatility, and I agree with most that the range of outcomes is wider for FFH, but that doesn't mean IV is necessarily lower! And that's the most common rebuttal I hear to this point, especially vis-a-vis a MKL. I have no problem being alone with this view but I'm still trying to figure out what I'm missing b/c it seems like the fundamental shift in earnings power still widely misunderstood b/c they had a bad stretch in the early/mid 2010s and almost no one believes that it won't be repeated. I don't want to get stuck in a groundhog's day loop here so sorry I keep coming back to this, but I really do believe it's the most important thing to figure out and I'm still trying to kill the thesis.

To Buffett's point...tastes in chocolate shouldn't be so regional...but they are, persistently. I like Hershey's!

What if 2x BV is still a discount to IV? Ultimately don't we want their CoC to be fair? Match rate to risk!

Sounds horrible to think of it as a major growth area over time but it’s seems like that’s the reality. Just need to match rate to risk and avoid the blowups, right? Rich people aren’t gonna just stop living in south Florida anytime soon. One reason FFH will never be an ESG darling and so I think the share count to continue to shrink with buybacks at 20%+ ROIC.

Ive argued here that the lower multiple is justifiable from a permanent owner perspective only insofar as there is a wider range of outcomes, ie real scenario of close to 0 return for a decade in a worst case scenario. But the flip side is that with FFH’s higher float-based leverage, more idiosyncratic investment portfolio, and short duration fixed income starting point, the upside scenarios are much higher than a BRK or a MKL from this point. It is up to how you consider and weight the various scenarios but I think FFH’s intrinsic value to a permanent owner is now roughly the same as those peers, and that’s an opportunity for the permanent owner oriented value investor. More specifically, I put IV at $1500-2000/share, or a ~7-10% FCF yield — with many good reinvestment opportunities, not the least of which is buying back their own stock, such that the median total return on a per share basis would pencil out to a fair low teens ish from that price. I am wrong all the time and could end up looking dumb, but also very happy to own a bunch of this indefinitely alongside things like BRK, tobacco, plain vanilla indexes in my retired parents accounts. Not investment advice.

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.