Thrifty3000

This group (DRASTIC) is to the covid lab leak theory what Wall Street Bets was to the GME thesis: https://www.newsweek.com/exclusive-how-amateur-sleuths-broke-wuhan-lab-story-embarrassed-media-1596958

I have a hunch India's current covid wave will play out like prior waves have played out in other countries - like Italy and the US. Now that hospitals are at max capacity and global media has all eyes on India, governments will lock down, people will mask up/distance, and case loads will peak in a couple weeks. It will then take several weeks for cases to decline to the pre-wave level.

Bravo, Sanjeev! Thanks for making the effort to upgrade the site. Being a tech entrepreneur myself, I know full well how difficult it can be to migrate from one system to another. I'd be willing to bet you have some entertaining war stories. I once had an executive coach advise me that the best way to derail a prosperous career is to take the lead on an IT project. Haha. I know I've proved him right at least a couple times. I can already see there are some awesome and very valuable new features. I can't wait to dive in further. Many many thanks!

No, I think that time for Fairfax was back in 2003. The decision that we are no longer going to buy crappy insurers and turn them around led to the group of quality insurers they have today. The second part of that was making Andy Barnard in charge of all of the insurers. Even with Fairfax's more eclectic style of investing, the real culprit behind their underperformance has been due to betting against and shorting the market after 2009. They took advantage of the 50% correction, but started hedging and that really hurt their performance. Even with minimal exposure to the stock market, they would have done very well just in their bond investments, conglomerate investments and the equities they did invest in...excluding their shorts and market bets which cost them significantly. Maybe the decision to stop shorting is a step in the right direction...simplifying their portfolio decisions. Cheers! Sanj, please stop describing what FFH did as "hedging." More than 100% of FFH's equity portfolio was "hedged." When your hedge-ratio exceeds your exposure to the underlying (ie, more than 100%) that's called speculation. It was one of the investment decisions where the excessive position sizing reflected poor risk management. SJ They were bets on values regressing to the mean. Historically he was able to wait out Mr. Market and take advantage of volatility (see dot com and housing bubbles). Unfortunately, Mr. Market hasn’t cooperated for over a decade and Prem learned his lessons the hard way. Prem is smart. He learned. He’s not just another run of the mill, self-made, Canadian, multi-billionaire from India. And, he has formally, in writing, taken shorting off the table. I don’t think he is addicted to shorting or to shareholder lawsuits. This issue is easy to understand and was even easier to solve. He also knows he doesn’t have to juice earnings with shorts anymore, now that he has more good investment opportunities than he has capital (for the foreseeable future). Now, all he has to do is reward a bunch of all-star insurance and non-insurance managers/investors like David Sokol, Byron Trott, Wade Burton, etc if they can grow capital by more than 15%. If they can do it, they get more capital. If they can’t then they don’t. The real story of the last ten years was not the shorts. It was the global network of non-insurance capital allocators he has been assembling. The next ten years won’t look like the last ten years. And, the stock will trade above BV again soon enough.

+1

This is what’s going on. I wish I was joking... https://www.reddit.com/r/wallstreetbets/

As a board member Prem could also be urging BB to issue tons of shares and build a war chest (like Tesla has done with their WSB-fueled lottery winnings).

"Dear Prem, Sell BlackBerry. Sighned, - God"

It looks like he bought at an average cost of $308 USD roughly or about $420-425 CDN per share. It says he bought in the last few days before the press release...I would imagine it was around the 9th, 10th, 11th and 12th, where the stock was around $425 CDN or less and volumes rose. If he is buying there, then I would imagine he is expecting a return of better than 15% annualized or more over the next few years. Cheers! The question then becomes is Prem expecting a 15% return a good predictor of future 15% returns. ...and one to ask: ''is 15% a realistic expectation?''. I am approaching a decade of holding FFH and I am seriously wondering if this is a realistic target as recent shareholders (10 years or less) are yet to benefit from such appreciation. It sure attracts new ( and naive) investors. I am tired of hearing the 30 years track record and while I focus on the last 10 years, I can only come to the realization that shareholders fell short of expectations. yeah , yeah ... I am still around and will for quite some time, but I needed to vent and share ;) Even during the depths of the hedge fund crisis, when Fairfax stock fell to $53 USD, I don't remember Prem buying shares in such a significant amount. Frankly, I'm shocked that he put $150M of outside capital into Fairfax...that would be a decades worth of dividends for him. And if he didn't borrow the money, I would imagine that's probably half his net worth outside of what is held in Sixty-Two Corporation. Then again, I've got half my net worth outside of Corner Market Capital in Fairfax and Atlas Corp right now, so maybe I shouldn't be surprised...and I'm very comfortable with both and think both have 50-100% upside over the next 2-3 years! Cheers! What is the thesis on ATCO? David Sokol

wabuffo, thank you for a gracious, thoughtful, beautiful explanation. I'd like to first mention that a young guy named Nathan Tankus gained a lot of notoriety over the last year posting blogs explaining complexities of the financial system using the same kind of visual, T table-based, explanations you use. His fan base exploded when Bloomberg featured his blog in a story. You might like his posts: https://nathantankus.substack.com/ Also, just to be sure I'm correctly synthesizing the Hunt/Hoisington position with your explanation above, is it fair to say scenario 2 cannot legally happen independent of a corresponding tax receipt or treasury issuance? In other words, the government cannot legally create new private sector assets without taxing the private sector or increasing public sector debt to pay for those assets? Thus, making the Hunt/Hoisington case that deficit spending is near term inflationary (6 to 18 months) due to temporary supply constraints, but longer term deflationary, because the additional public sector debt decreases prospects for longer term private sector productivity/growth (as the private sector will be on the hook for servicing the additional debt). I believe this has been the ongoing rationale for Hoisington's position in long term treasuries - that the global, central bank-driven, debt explosion of recent years is long term deflationary. However, I believe in a recent newsletter Hoisington warned if the US congress legalizes scenario 2 above without requiring corresponding taxation/debt - aka legalizes true money printing - that all bets are off. Sounded like if that happened Hoisington would unload their long positions overnight, while expecting devastating, Weimar Republic-style, economic consequences (hence, the reason true US government money printing has been illegal thus far).

+1

FFH average EPS: - 2005 to 2009: $33 - 2010 to 2014: $17 - 2015 to 2019: $28 - 15 year average EPS: $26 Still under the same management. Actually generates earnings over time and pays consistent dividends! (Not a money losing unicorn. Not a negative yielding bond.) Was recently selling for less than 10x very long term historical average earnings. Current price is slightly above where the CEO was willing to buy $150 million more. Unfortunately, it feels like bitterness from those who bought into the hype of 2005 to 2009 - paying close to $400 per share - is clouding a lot of judgment about the opportunities/risks presented today. People seem to want to vent frustration, while it seems a perfectly prudent investment is right in front of us. Maybe there should be a “Vent frustration with Prem” thread to provide therapy and isolate emotionally charged frustrations. Maybe a “Show love for Prem” thread too for balance. Haha.

“How about he misread the impact of low interest rates and Fed policy intervention?” - Maybe they just mistimed it by a decade or two. Time will tell. Debt markets are definitely a competency of theirs. They were concerned about unprecedented implications of total debt to GDP ratio, and the Fed being nearly out of ammo with rates at the zero bound. Debt has continued ballooning. The US is all but in a debt trap. There are plenty of reasons to believe markets will be more sensitive to interest rate fluctuations and increasingly volatile. I hope they continue hedging if they find bargain opportunities to do so. “How about he didn't understand the impact of technology on so many industry and sectors.” - He did understand. He was inundated by Blackberries at work, and ended up picking the wrong horse.

I think we are near the edge in terms of the market being overvalued. All the indicators of the s&p 500 are in the all times high (schiller pe, buffet indicator) and that while the real economy is nowhere near to recover. Most of Europe is in a second lockdown of some sort, and even the US now sees steady growth of cases. I feel like the market is way ahead of itself and a lot of people will get burnt in the downturn. Here's a fun site that I think shows what Chuck is talking about: https://www.usdebtclock.org/index.html US Federal Debt to GDP Ratio 1980: 34% US Federal Debt to GDP Ratio now: 128% I think he's saying there's a point of no return on the grand, worldwide, central banking experiment of debt issuance and interest rate manipulation. There's a point where any government, including the US, simply cannot raise more debt to meet financial obligations, and is forced to either cut expenditures, default, or print money/inflate. Nobody knows what that point is for the US. Maybe it's $40 trillion. Maybe it's $100 trillion. But, the point Chuck and Buffett have long made is it makes absolutely no sense to get anywhere close to learning where the limit is on that one. Our government representatives seem to have zero notion of this anymore. They literally think debt can be issued without consequence. What happened to all the hawks?? Buffett recently quipped if governments could actually issue endless debt without consequence, then why did it take governments thousands of years to figure that one out?? Buffett assumes a government able to print its own currency will opt to inflate its way out of trouble. But, that's the killer. Inflation and/or risk of default push interest rates higher. If the US government were to push the debt to $40 trillion, and if inflation/risk pushed interest rates back closer to a long term average around 5%, all of a sudden the interest expense alone is eating up half the government's tax revenue (impossible to pay that kind of interest while also paying for all that social security, Medicare, defense, education, etc). Ergo, more cost cutting, more taxation, more inflation, less productivity, less taxable income, more vicious cycle. Definitely playing with fire on this one. Could be a long headwind to work through.

How much annual earnings does the $1.5 billion buy?

close .. "We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. The effect of this acquisition is shown in the table below, which was previously presented to you at our 2017 annual shareholders’ meeting:" "Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned $111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and his team at Eurolife as they build a very successful company in Greece." unless i am reading this wrong, Eurolife is pretty insignificant ref: 2018 letter So, you are saying it's more like: 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> $181m 5.) take out Allied partners (OMERS) ==> $1B So, it might be ~$2.3B to do all four. If they have EPS=$30/sh, that basically will eat up three years of a conservative Net Income number. SJ Are you factoring in the tidal wave of extra cash/profits that flood in during a legit hard market? Their discipline/ability to ramp up premium volume by 50% (from which claims will be paid out over years/decades) while at least doubling underwriting margins is a big part of the fun of owning BRK or FFH, and doesn't happen that often. For FFH we’re talking at least a couple billion of extra cash for owners overnight (during a legit hard market). Nope, I'm not counting on anything weird or wonderful happening that results in outrageous profitability. About a month or six weeks ago, I tossed out a pro-forma income statement for 2021 in this forum to stimulate discussion. Working from memory, my assumptions were pretty conservative, with ~6% growth in Net Written, a 94 CR and a 2% return on investments. If price increases remain strong, perhaps the CR might be a shade better, but I wouldn't want to get too ambitious about that (historically a 94 CR is already exceptional). The growth in Net Written could definitely be larger (ie double-digits), but again, no need to go too crazy. With my cautious assumptions, I arrived at EPS of $30, but certainly with a bit of underwriting luck, or a couple of good outcomes on the major equity positions it could be considerably higher. The one thing that I would caution you about is to not go to extreme on FFH's ability to increase Net Written. On page 16 and on page 195 of the AR, there are a couple of nice tables which present the premiums to surplus ratio from Dec 31, 2019. There was much variation in this ratio amongst the subs, but NB, C&F and Brit were of particular interest because they were 1.4x, 1.7x and 1.3x respectively. Usually you don't see that ratio go above 2.0 because the regulators demand that companies keep enough reserves to pay indemnities. So, unless capital is added to those three subs, you won't likely see their Net Written increase by 50% any time soon because they just don't have adequate capital to do so. On the other hand, ORH, Allied, and Fairfax Asia could easily increase their premiums by 50%. The other thing to look at is Note 19 on page 95 of the annual report which depicts the dividend capacity of the subs. If you see a sub that can only dividend $100-150m to the parent, it's capital constrained and cannot crank up it's underwriting (because it needs to keep reserves when it writes policies). SJ Hahahahaha. Love it: “ I'm not counting on anything weird or wonderful happening that results in outrageous profitability.” I’m actually with you pretty much 100%. For my personal model I forecast “normal” EPS of $28, and earnings growth barely to modestly outpacing inflation. I recognize the professionals are expecting EPS of $32+, but I can’t allow myself to assume the next couple decades will be much, if any, better than the last decade. (I also assume the really good ol’ days of taking advantage of hard markets have to be dampened by companies like BRK, FFH, and MRK sitting on the sidelines of a maybe $700 billion market with over $100 billion of dry powder. But, I guess it doesn’t hurt that most of the competition is yield-starved.)

close .. "We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. The effect of this acquisition is shown in the table below, which was previously presented to you at our 2017 annual shareholders’ meeting:" "Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned $111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and his team at Eurolife as they build a very successful company in Greece." unless i am reading this wrong, Eurolife is pretty insignificant ref: 2018 letter So, you are saying it's more like: 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> $181m 5.) take out Allied partners (OMERS) ==> $1B So, it might be ~$2.3B to do all four. If they have EPS=$30/sh, that basically will eat up three years of a conservative Net Income number. SJ Are you factoring in the tidal wave of extra cash/profits that flood in during a legit hard market? Their discipline/ability to ramp up premium volume by 50% (from which claims will be paid out over years/decades) while at least doubling underwriting margins is a big part of the fun of owning BRK or FFH, and doesn't happen that often. For FFH we’re talking at least a couple billion of extra cash for owners overnight (during a legit hard market).

jfan, thanks for breaking it down. I think one of the main reasons Helios did a deal with Prem was to boost their brand and get a seat at the "Value Investor Legends Club" table - similar to what Charlie Munger did for Li Liu. I'm assuming much of the appeal of associating with Prem is an ability to at least triple or quadruple AUM over the next few years. To be honest I don't know why they'd give up half their future earnings stream in exchange for a group of somewhat crappy, illiquid, assets, if they didn't think associating with Prem would pretty much guarantee at least $12 billion AUM in 10 years (they could have probably pretty easily grown to $6 billion AUM on their own). I know the payout ratios for future funds will be more favorable for Fairfax Helios. What would the returns look like 10 years out if Helios grows AUM to $10 or $15 billion?

https://www.fairfaxafrica.ca/News/Press-Releases/Press-Release-Details/2020/Fairfax-Africa-Holdings-Corporation-Third-Quarter-Financial-Results/default.aspx

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt I think you're referencing cash & equivs from the 2019 annual report. Their position is radically different now. During the financial panic earlier this year they basically had to step in as the de facto Federal Reserve for their bank investees. Now their cash & equivs position is down to $68 million of unrestricted cash (and an additional $18 million of restricted cash - locked in bank accounts at investee banks to help them avoid being forced by regulators to raise super-expensive capital). Regarding downside risk of a failed Helios deal I think you have to look at: - liquidation value of the assets after a failed deal - future value of assets in a deteriorating portfolio that has been poorly managed since inception (improperly sized investments in geographies and businesses outside of management's circle of competence) - odds Prem will either liquidate the portfolio and return more cash to shareholders than the current market price, or find new management that can shore up the portfolio and better execute the Africa investment strategy. If the Helios deal fails you might be able to make the case for a liquidation value of as much as, say, $325 million. But, I don't think there's as much margin of safety as you might think. I think the portfolio is basically one negative economic shock - like war or another oil price collapse - away from being impaired to $225 million or less. Also, the portfolio's current manager is not right for the job, but how do you attract a new management team with the requisite talent to manage such a small portfolio? I'm assuming you would need at least a billion dollar portfolio to attract/compensate an effective management team. Further, how would Prem be able to raise a billion dollars to right-size the portfolio given the failed track record? Honestly, I think Prem pretty much HAS to either do the deal with Helios or liquidate ASAP - and both sides know it. I think Prem and Tope are reasonable and will deal fairly with each other. But, I think Prem is in a tough situation. Does he give up majority control (I doubt it, but it might be the best solution)? Does he commit Fairfax to buy/guarantee more of the assets (tough call)? Does he infuse more cash into FAH by issuing more FAH shares - diluting current owners (another tough one)? After all those considerations my opinion is the range of outcomes is too broad for FAH to be a sound investment for a minority equity owner. I think there are plenty of scenarios resulting in permanent loss of capital, thereby making this a value investing anathema. (PS. I'm going to feel REALLY dumb when this deal sails through as it was originally laid out and the stock price jumps 50%. Haha. Oh well.) one of the conditions of closing " As of immediately prior to Closing, the Buyer Entities shall have Cash equal to at least the sum of $102,000,000, including Cash deposits held at any Portfolio Investment of the Buyer, plus the undrawn amount under the Atlas Mara Facility less any Transaction Expenses paid for by any Buyer Entity prior to such calculation of Cash; Hmm. In the Liquidity Risk and Subsequent Events sections of the recent quarterly report that statement is worded a bit differently: "Furthermore, immediately prior to closing of the Transaction, the company must hold at least $102,000 in cash and cash equivalents, restricted cash and marketable securities, less any Transaction expenses." I guess it's not really specific enough to know whether they're falling short on that one. The $40 million Atlas Mara Facility has been fully drawn. No telling if they're able to pay some of it down.

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt I think you're referencing cash & equivs from the 2019 annual report. Their position is radically different now. During the financial panic earlier this year they basically had to step in as the de facto Federal Reserve for their bank investees. Now their cash & equivs position is down to $68 million of unrestricted cash (and an additional $18 million of restricted cash - locked in bank accounts at investee banks to help them avoid being forced by regulators to raise super-expensive capital). Regarding downside risk of a failed Helios deal I think you have to look at: - liquidation value of the assets after a failed deal - future value of assets in a deteriorating portfolio that has been poorly managed since inception (improperly sized investments in geographies and businesses outside of management's circle of competence) - odds Prem will either liquidate the portfolio and return more cash to shareholders than the current market price, or find new management that can shore up the portfolio and better execute the Africa investment strategy. If the Helios deal fails you might be able to make the case for a liquidation value of as much as, say, $325 million. But, I don't think there's as much margin of safety as you might think. I think the portfolio is basically one negative economic shock - like war or another oil price collapse - away from being impaired to $225 million or less. Also, the portfolio's current manager is not right for the job, but how do you attract a new management team with the requisite talent to manage such a small portfolio? I'm assuming you would need at least a billion dollar portfolio to attract/compensate an effective management team. Further, how would Prem be able to raise a billion dollars to right-size the portfolio given the failed track record? Honestly, I think Prem pretty much HAS to either do the deal with Helios or liquidate ASAP - and both sides know it. I think Prem and Tope are reasonable and will deal fairly with each other. But, I think Prem is in a tough situation. Does he give up majority control (I doubt it, but it might be the best solution)? Does he commit Fairfax to buy/guarantee more of the assets (tough call)? Does he infuse more cash into FAH by issuing more FAH shares - diluting current owners (another tough one)? After all those considerations my opinion is the range of outcomes is too broad for FAH to be a sound investment for a minority equity owner. I think there are plenty of scenarios resulting in permanent loss of capital, thereby making this a value investing anathema. (PS. I'm going to feel REALLY dumb when this deal sails through as it was originally laid out and the stock price jumps 50%. Haha. Oh well.)

Just for kicks I reached out to an M&A investment banker to hear his thoughts. He said over the course of a quarter if negative developments cause a revaluation of 10% the deal is virtually guaranteed to get renegotiated (or dissolve). He said pulling the webinar from the website is super shady - a giant red flag. Posting the webinar signaled the deal was progressing. However, removing the webinar is almost a sure sign that Helios contacted FAH and said we no longer have a deal. He said the standard M&A playbook for a negative development would be for Helios to jockey for a significant downward revision of FAH's valuation (maybe from $400 million to $300 million) to provide a margin of safety in the event of further negative surprises. Obviously that would throw a huge wrench in Prem's desire to maintain control. If a CIG bankruptcy will destroy $15 million of value, then there only needs to be $20 million or so worth of additional negative developments this quarter to spook Helios. Considering AGH and GroCapital experienced declining valuations totaling $13 million last quarter, I don't think it's farfetched to think we might see similar declines in those or other assets this quarter.

I went ahead and dug into the CIG-related investments as of the last quarterly report, just to try to ring fence the bankruptcy-related risk: - CIG stock = $6 million - CIG loan = $15.5 million - PGR2 loan = $18.5 million Total = $40 million Bankruptcy scenario: - CIG stock = $0 - CIG loan appears to be secured against CIG assets, so I'm completely guessing there might be a 30% recovery: $5 million - PGR2 - some good news here is that even though it's collateralized against CIG equity, the loan was to Peregrine so Peregrine could buy CIG shares during the rights offering. It accrues 15% interest annually for FAH, and has to be repaid by Peregrine in 2021 (Peregrine was recently acquired and appears healthy/solvent): $20 million Total value after bankruptcy: $25 million So, it looks like the financial risk in the event of a CIG bankruptcy is maybe $15 million. I wouldn't think that amount on it's own would derail the deal with Helios. I think CIG is only a deal-breaking risk if Helios is concerned about the reputational risk/optics, distraction, and general headache of overseeing a bankruptcy proceeding immediately after a merger. But, like Petec said, that's purely speculation.

Darn, still no CIG results or circular. Clock is ticking, and time kills deals. I found a headline from 2 weeks ago (Oct. 1) announcing changes to CIG's board of directors and sub-committees. But, I can't access the article's content, and I can't find an official release from CIG. But, it may lend support to SD's theory that the CIG board is the hold up. The CIG board certainly understands the deal disrupting consequences of tardiness and discord. Bad form.

One other key consideration... Much of the value of this deal for Helios is for future publicity and marketing. In fact, the success of Helios's private equity efforts long term will be directly tied to the success of Fairfax Africa. In the future, any prospective Helios PE investor will have complete visibility into the publicly available Fairfax Africa investment performance. If this deal creates negative press for Helios (like having 25% or more of book value evaporate within a year or two of doing the deal) then it will become a vicious cycle for Helios and Fairfax Africa. A massive blunder like that could set Helios back by a decade.