Crip1

In addition to the previously discussed dynamics, all of which are relevant, one should consider the anticipated Fairfax “pivot”. For years they have almost exclusively been in very safe US Treasuries because the spread between treasury and corporate rates has not been sufficient relative to the risk. At some point, presumably, that’s going to change and they’re going to, likely selectively, shift a portion of their FI investments to Corporates which will presumably generate higher yields, offsetting a declining rate environment. Somewhat separately, all of the posts over the past couple of days illustrate and validate Viking’s consistent assertions that he’s not going to project out more than 2-3 years since there are so many variables at play. He’s right. The returns over the next couple of years are not guaranteed, but the $150/Year for the next couple of years looks to be reasonable. From 2026 forward, we’re only guessing. What we do know is that they will be playing from a position of strength with a VERY large balance sheet, a solid insurance operation and a demonstrated acumen in asset allocation. As an investor, I like my chances at that point. -Crip

Can they? Yes. Anyone lending money on real estate can do that. However, there's a lot of cost involved with foreclosing and re-selling. Virtually no entity who lends on real estate wants to own said real estate, be it residential or commercial. I think, that the point you're making is that foreclosure does limit downside so that the investment will technically not go to zero, but that's risk limitation, not elimination.

I'd appreciate anyone chiming in as something is not quite adding up here. Dividend capacity at the subs has been constrained for years during the hard market as premium volume has been increasing dramatically. All good. But last quarter we saw premium volume increase about 5% YOY, much lower than in previous years and most industry folks I've seen are not seeing double-digit premium increases. At the same time, capital is increasing at a faster rate than we've seen in years due to substantially increased interest income coupled with still profitable underwriting. If these trends continue into 2024, it seems the subs would soon have excess capital that could be dividended (not sure that's really a word but, oh well) to the parent. So, assuming this all plays out, there really should not be a need for additional cash at the holding company, unless I am missing something. -Crip

This is fascinating. Not only was Charlie brilliant, he was able to communicate his brilliance extraordinarily well. The ability to observe multiple, multiple things, see how those multiple things inter-relate, and then draw conclusions is brilliance. We have all observed this over the past several years but I doubt any of us could have said it in a way that Charlie did. Yes, very sad news about his passing, but it's vitally important to focus less on sadness and loss, and more on how the legacy he left is available for all of us to observe and learn, and relearn, and relearn. Thanks Charlie -Crip

This may be a matter of semantics but, while I agree that culture and structure can be a moat in commodity-like businesses, I’d also argue that it is not a durable moat the way that Coke or Mickey Mouse would be. As well, culture/structure moats are not as durable as the tower of financial strength moat that Berkshire has (in addition to Berkshire's own culture and structure). Culture and structure most definitely can and will cause companies to over-perform or under-perform, no question...but it’s far more fragile. As to whether FFH has a culture moat, I lack sufficient knowledge to say but if they do. -Crip

I think that they have meaningfully changed but understand your point, if for no other reason than to play devil’s advocate. We agree on Underwriting results and Bradstreet so no need to go over that. On Equities: • FFH made a really big financial commitment to BB and then doubled-down when it started to look problematic. Not only was this a bad move, they mortgaged the farm on BB which resulted in a major hit to equity…they underestimated the margin of safety, dramatically. This last investment, even if it goes to zero, will have minimal, bordering on minuscule, impact on the Balance Sheet. It’s akin to me playing Black Jack on a $1K table losing 6 figures compared to me playing on a $10 table and losing $1K…still losing, but a loss that is far more easily absorbed. Not the same old, same old. • The most recent commitment to Farmer’s Edge is a little more concerning if for no other reason that we’re talking a bigger financial investment. As with BB, the initial investment turned out to be quite bad for the company. This most recent one does fit into a “new FFH” modality in that it potential (maybe even probable) losses are quite small compared to overall capital such that if it goes to zero, it will not have dramatic impact on the company. If it plays out even reasonably well the benefit can be significant. It is a “Hail Mary” but if it falls incomplete it’s not a catastrophe and if it’s complete, it can be a touchdown. And, worth noting that the downside is further mitigated if the tax-loss recognition discussed above comes to fruition. • My own experience of cutting losses is mixed with examples of hanging on to losers that worked, and examples where it didn’t. Also have examples of cutting losers that worked, and some that didn’t. Bottom line is that I do live in a glass house so will hold off on throwing stones. • Finally, I’ve refrained from complaining about the market affording higher multiples to the company…if the company performs, higher multiples will come in time. In short, I do share your concern about a lack of objectivity here with an unwillingness to admit mistakes. But the size of these new “investments” gives me comfort that, even if we have a permanent loss of capital, that loss will not cause substantial harm. -Crip

OK, let's tap the brakes a little here. Yes, BB was a terrible mistake...it happens. But I think "Nothing has changed----same old Fairfax..." is a dramatic overstatement. The headline does not look good but this latest addition is for less than a half million dollars. That's little more than a rounding error for a company earning billions. Peculiar purchase? Yes, but not nearly enough to remotely move the needle. -Crip

Perhaps I misunderstand the mechanics on these transactions, but there has to be an entity on the other side of the trade who is losing money on this.

Does the counterparty have the ability to terminate the contract?

For years my wife earned the reputation of seldom answering her phone when my sons or I would call her. All of us would remark about that to her, either individually or when we all got together. It started to bother her which prompted her to ask me “How can I get you guys to stop saying that?”. My response: “Answer your phone, baby”. Over the past few years her “answer rate” has gone up significantly and when she doesn’t answer, she normally calls back within a couple of minutes (which is just as good as answering). The reputation she had is all but gone, now. To be clear, if she started to answer on the first ring vs the second ring vs the third ring, it would not really matter. The important thing was avoiding NOT answering. This is analogous to FFH. The concern amongst detractors out there is not that they can make good or better cap allocation decisions, it’s that they still have the reputation of making mistakes, and a few biggies at that. How to lose that reputation? Stop making mistakes. It’s just going to take time to lose that reputation. -Crip P. S. In the meantime, the company and the individual shareholders can add more at good prices…not a bad thing.

This is something of which I have knowledge, but would not categorize myself as an expert, analogous to the fact that I know a fair amount about American Football, but am not nearly qualified enough to be an NFL coach. The mechanics of rates spiking on Refi concerns is not something on which I have significant expertise but let me throw a little out there. Mortgage rates are comprised of the value of MBSs and the Servicing Premium. Servicing Premiums are sensitive to refi-risk as holding the servicing rights of a group of 4% loans are far less likely to suffer from refinances than a group of 6% loans. If the market anticipates rates moving higher, the market assigns a higher value to the servicing rights for new loans since the chances of refinances moves lower as rates move higher. Conversely, if the market anticipates rates moving lower, the perceived value of Servicing Rights on a new loan is lower (with higher refi-risk on higher rate loans). So, the two work against each other. But, the primary driver on rates paid by the street is the MBS pricing. Mortgage Backed Securities (MBS) are most commonly linked to the 10-Year Treasury. The 10 Year had been moving lower for the past 3 months where the news clearly showed that inflation was ebbing. It seemed to me that the market overshot the inflation threat. The MBS market moved even lower-faster than the 10-year which looked to me to be even more of an overshoot. That was the thesis. -Crip

Kinda No, seriously, just illustrating out how the 10-year spiked in October. I am in the mortgage business in the US and remarked to colleagues last month that the market look oversold. But, offering an opinion is one thing...executing on that opinion is another and FFH looks to have done just that. Impressive. -Crip

So...this is when they extended durations?

+1

No need, IMHO, to go very long or very short. I like the idea of not trying to make too much in terms of big macro moves here so a barbell strategy makes sense. Locking in a big chunk longer term at current rates with another big chunk still earning solid returns at the shorter duration which can be reinvested in short-term instruments or moved into Corporates/Munis/Etc as opportunity presents itself. -Crip

Well, our crystal balls are not totally clear, but as someone who holds all 3 companies, I’d be willing to bet that Fairfax grows BV at a faster rate in the next year or so than the other two. Couple that with the fact that Fairfax has a better chance of P/BV multiple expansion and one can understand why I have more FFH than I do MKL and Berkshire combined. Back to the question…I hate that this is going to sound snippy but I minimally care if FFH trades at a premium or a discount to MKL. Multiple expansion has been debated a fair amount on this board which, in and of itself, is harmless, but I don’t really care that much. What I DO care about is execution by the company. Fairfax is executing, and has been for a number of years. The interesting thing (to me, at least) is that they’ve morphed from a company who has to do something(s) very smart (very difficult) to a company who has to not do something stupid (difficult as well, but easier). Avoiding something stupid should allow them to grow BV by 15%/Year (thanks Viking) which is in excess of a 50% increase. If that happens, the chances are extraordinarily good that Price/Book will expand. To what extent, God only knows, but adding 3 years on top of what we’ve already seen will, doubtlessly resonate with investors, and that happens by avoiding something stupid. 1.2x Book, 1.3x, 1.4? Who knows? But growing book at a 15% clip will result in a nice return for shareholders. -Crip

You're not the only one.

Meanwhile... Interest rates have been volatile for the past few weeks as the 10-year has moved 45 basis points in less than a month. Besides the Fed saying “Higher for Longer” there has not been much news showing inflation getting worse. Though it’s been sticky, it is moving lower. Besides that, the resumption of student loan payments and likelihood of a Government shutdown are only going to take steam out of the economy. Noteworthy is that the inversion of the yield curve is moving lower, seemingly each day. It will be REALLY interesting to see what Fairfax does on their Fixed Income investments in the next few months. For the past year or two the risk-reward of buying long-term debt was skewed towards risk over reward. The more than longer-term rates move higher and inflation measures continue to look more benign, the risk-reward analysis will at some point flip to reward. When this happens, the returns which are currently locked in through 2025 will extend depending on what percentage of their fixed income investments they move into longer-term bonds. -Crip

Viking, you asking me a question like this is not unlike Bill Belichick asking me about football! Interest rates most definitely have an impact on combined ratio as higher interest rates will, all things being equal, allow for higher combined ratio. Laws of supply and demand factor in as well as excess capital will apply upward pressure to CRs. -Crip

Mae West: Too much of a good thing can be wonderful.

Respectful disagreement discussions allow far better opportunity to learn than any other, so thanks to all for the viewpoints and the means by which said viewpoints are presented. A perfect crystal ball does not exist, so nobody is going to be right. What looks to be clear now is that Fairfax is in the middle of an extraordinary (albeit finite) growth period where the hard market is juicing the returns for the company. I think that Viking makes a compelling case that 2023 – 2025 will show extraordinary returns, so I like the idea of using his 3 year projection (with a haircut if one is so inclined). As the ’23-’25 projections are not guaranteed, any projections beyond that time are most certainly unknown. Munger_Disciple’s projections (Combined Ratio, returns on Fixed Income and Equity Portfolios, etc) present a reasonable look at what we can expect 2026 and beyond. The goal would be two fold. First, look at Viking’s projection to calculate the annual cash flows between now and 2025. Second, using the size of the company at the end of 2025, apply the MD’s methodology to project the next 3-5 years cash flows. From there, the company will clearly still have a value which we can approximate as BV at the end of the 3-5 year period. Finally, discount all of these back to present value and that will give us an implied value now. The more that value is above current price, the better a buy the company is today (and, of course, if that value is less than current price, the company is not worth the investment. Obviously, there are so many variables that this cannot be counted upon with precision. Rather, it gives an idea of what the company should be worth right now. Any attempts to be more precise are likely going to be fruitless, rather, we’re going to have to be happy with being approximately right as opposed to being precisely wrong. -Crip

+1 (actually, I'd plus more than one if it was possible) -Crip

I had FFHI as a moderate holding until spring of 2022 when I went overweight. Since then I’ve bought and sold a portion of holdings a few times to lower the average cost. The ping-ponging from below US$12 to around US$14 has allowed for this. I am still overweight as this is my #2 holding as a little over 10% of total assets. As it gets closer to NAV, I’ll pare back the position to get it to normal weight (5%). -Crip

Dude, you are speaking my language. Considering FFH is my largest holding, by far, I clearly like the company and the story. But, there is one aspect of Fairfax that is highly problematic, IMHO, and that’s Prem’s reluctance to candidly admit errors. Buffett has always been extraordinarily good at this and I think it’s healthy for any individual, especially one in a leadership position. It is almost impossible to change unless there is valid reason, and the valid reason needs to be admitting errors or, at minimum, admitting that things could have been done better. Prem is reluctant to do this. He was looked at very favorably during the financial crisis based on how well he navigated Fairfax through that. The ensuing 8-10 years were substantially less successful. Will we see a repeat now? I don’t think so, but I am not as sure with Prem because of the lack of candidly admitting errors. -Crip