Thrifty3000

Thrifty, I understand that the company is trading well below its book value. That point is not in dispute. A few questions need to be asked, first will the gap between the market price and book value close or at least narrow substantially and second, how long will it take to do so. My view and that all it is....the market has things about right at the current moment. Although there are exceptions (Atlas being one) for the most part the investment held by Fairfax are not very good and in many cases the onset of Covid has severely and permanently impaired the value of many of their investments. As for how long, I am solidly in the camp that the impact of Covid will last a lot longer than the general market seems to currently believe. As a result, I believe there are other investments (other than Fairfax) that offer better risk/reward profiles (with the emphasis on the risk aspect) than Fairfax currently does. I believe the perfect storm has arrived and the low quality level of many of Fairfax's investments along with its elevated debt levels has truly exposed Fairfax. I hope and pray that I am wrong but I have positioned my overall portfolio with these beliefs in mind. You are clearly positioning your portfolio otherwise and I respect that. Alright, let's imagine a pretty nightmarish 3 years to come: - The only bright spot is $900 million dividend income annually for 3 years - But, it's consumed by $800 million annual losses in associates (continuing the $205 million loss trend from Q1/2020) - $0 underwriting profits annually thanks to mega cat losses - $0 gains from investments annually - The dividend is canceled and holding company cash dwindles a few hundred million per year to cover various costs - While tax savings offset holding company interest expense. - In summary: book value declines to, say, $10 or $11 billion in 3 years. (And Fairfax will have been dropped from the title of this website.) Then in year 4 the sun comes out and it feels more like the 2017 - 2019 version of Fairfax: - gains from investments and associates offset holding company costs, interest, taxes, etc - underwriting profits return to a normalized $200 to $400 million - interest income holds steady at $800 to $900 million - $1.3 billion drops to the bottom line, of which $1 billion is attributed to common shareholders, and is celebrated by the owners of 28 million fully diluted common shares - The world finally awakens to Fairfax's "normalized" earnings potential of $35.71428571428571 USD per share, and slaps a 16 multiple on it for a per share value of $571.4285714285714. And there you have it, after buying your shares for $275 in 2020 you doubled your money in true Buffett-esqe style in less than 5 years. Obviously it could play out a few different ways (ex: upon canceling the dividend the share price drops to $50 per share and FFH buys back millions of shares.). But, am I willing to risk one twentieth of my liquid net worth (minus 25% held in cash) on it working out ok? In a word, yup.

Common equity is around $12 billion USD. The company is selling right now for $7.5 billion - a $4.5 billion haircut off of book value. Ouch. Investments in associates, India and Africa are marked to model (generously) and on the books for $7 billion. If Mr. Market was optimistic about those assets then Fairfax would easily trade at a premium to book value (ie. for more than $12 billion). But, Mr. Market is so down on them that he's basically written them off. It seems like at the current price you're getting a first-rate insurance operator for cheap (even if it has to pair back underwriting or renegotiate some debt covenants near term), and you're getting Recipe, Eurobank, the retailers, Thomas Cook, Bangalor Airport, etc, etc, etc for free (aka really really cheap). On top of that you have restructured, global, investment and operations management teams better able to grow whatever's left standing post-covid. (For example, even if Recipe loses half its locations in the next two years, the remaining locations could face a third the competition and twice the profitability after that - who knows. Eurobank could be the last bank standing in Greece. The retailers could band together and unseat Amazon - ok ok the retailers are dead.) Chances are there will be at least something left to work with in the portfolio a few years from now. In short, there's not even a hint of confidence, let alone optimism, priced into this stock right now.

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that? To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed: Retail Segment -Golf Town/Sporting Life -Toys R Us Canada -Kitchen Stuff Plus -William Ashley -Praktiker (in Greece) Other Segment -AGT Foods -Peak Performance (Bauer and Easton brands) -Boat Rocker -Rouge Media -Davos Spirits -Farmers Edge Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table. My thoughts on the list of private investments: -very heavily focus on retail -none large enough to move the needle at the overall Fairfax level -a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings -Praktikar (in Greece)---really---why bother? -a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide -Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done? -Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover. Thoughts/comments of others? I agree. You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too. Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong. It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts. I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc. In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant. I think this is exactly right. High five!

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that? To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed: Retail Segment -Golf Town/Sporting Life -Toys R Us Canada -Kitchen Stuff Plus -William Ashley -Praktiker (in Greece) Other Segment -AGT Foods -Peak Performance (Bauer and Easton brands) -Boat Rocker -Rouge Media -Davos Spirits -Farmers Edge Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table. My thoughts on the list of private investments: -very heavily focus on retail -none large enough to move the needle at the overall Fairfax level -a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings -Praktikar (in Greece)---really---why bother? -a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide -Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done? -Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover. Thoughts/comments of others? I agree. You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too. Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong. It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts. I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc. In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant. That is an interesting take on what Fairfax is doing....and if accurate may prove beneficial to Fairfax's bottom line over the medium to longer term. Sadly as a result of Covid many retail stores and restaurants will suffer and not be able to achieve a reasonable level of profitability in any reasonable period. I am attaching an interview with Rivett from yesterday (for a retired guy he sures seems busy) where he addresses the difficulties at Recipe: https://www.bnnbloomberg.ca/recipe-unlimited-chair-urges-landlords-to-play-ball-help-tenants-1.1441853 Industry difficulties create some of the best opportunity for long term capital allocators like Fairfax. If you’re a restaurant company flying solo then you are nothing but terrified right now. If you are a restaurant company backed by an insurance company with a $40 billion dollar portfolio printing $100 million of cash monthly, you call up Prem and say “hey we might have a cheap acquisition opportunity pretty soon. It will be a total dog during Covid, but after that your family will make a killing for as long as humans still like eating.” We will have to agree to disagree on the future for Recipe as a result of Covid......even if/when a vaccine is available the cost structure of dine in restaurants such as those offered under the Recipe umbrella are no longer economically viable as a result of the permanent changes imposed on the restaurants (and many retailers) as a result of Covid.... Restaurants, many retailers and numerous other businesses only make economic sense if they are crowded. The permanent social distancing including severe limits on crowd sizes simply make the fast casual restaurant segment uneconomical. It is for this reason that I believe landlords are not willing to provide rent relief or rent deferrals now.....they do not believe they will be repaid in the future. Just my take on things. Then the dine-in assets of Recipe will be starved of new capital and will dwindle. In the meantime they may find ways to capitalize on the continuing demand for food preparation. A capitalist with cash flow has options.

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that? To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed: Retail Segment -Golf Town/Sporting Life -Toys R Us Canada -Kitchen Stuff Plus -William Ashley -Praktiker (in Greece) Other Segment -AGT Foods -Peak Performance (Bauer and Easton brands) -Boat Rocker -Rouge Media -Davos Spirits -Farmers Edge Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table. My thoughts on the list of private investments: -very heavily focus on retail -none large enough to move the needle at the overall Fairfax level -a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings -Praktikar (in Greece)---really---why bother? -a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide -Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done? -Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover. Thoughts/comments of others? I agree. You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too. Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong. It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts. I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc. In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant. That is an interesting take on what Fairfax is doing....and if accurate may prove beneficial to Fairfax's bottom line over the medium to longer term. Sadly as a result of Covid many retail stores and restaurants will suffer and not be able to achieve a reasonable level of profitability in any reasonable period. I am attaching an interview with Rivett from yesterday (for a retired guy he sures seems busy) where he addresses the difficulties at Recipe: https://www.bnnbloomberg.ca/recipe-unlimited-chair-urges-landlords-to-play-ball-help-tenants-1.1441853 Industry difficulties create some of the best opportunity for long term capital allocators like Fairfax. If you’re a restaurant company flying solo then you are nothing but terrified right now. If you are a restaurant company backed by an insurance company with a $40 billion dollar portfolio printing $100 million of cash monthly, you call up Prem and say “hey we might have a cheap acquisition opportunity pretty soon. It will be a total dog during Covid, but after that your family will make a killing for as long as humans still like eating.”

I think an examination of Fairfax's private/control equity investing activities would be a very worth while exercise. Performance in this segment of Fairfax's portfolio has been underwhelming at best. Why is that? To answer this question I think we need to agree on the investments we are talking about. I assembled the following list after a quick review of the recent annual report----feel free to add names that I may have missed: Retail Segment -Golf Town/Sporting Life -Toys R Us Canada -Kitchen Stuff Plus -William Ashley -Praktiker (in Greece) Other Segment -AGT Foods -Peak Performance (Bauer and Easton brands) -Boat Rocker -Rouge Media -Davos Spirits -Farmers Edge Dexterra would have been listed under the Other segment however its recent merger with Horizons Logistics with Fairfax taking back shares of the resulting public company seems to take this one off the table. My thoughts on the list of private investments: -very heavily focus on retail -none large enough to move the needle at the overall Fairfax level -a number of them were decent turnaround/restructuring opportunities however do not make for very good long term cash generating holdings -Praktikar (in Greece)---really---why bother? -a number operate in industries requiring massive scale and investment (e.g., Boat Rocker) which Fairfax cannot provide -Toys R Us Canada -- if the value was in the underlying real estate than steps should have been taken immediately upon completing the acquisition to realize on that valuu. One has to wonder why this was not done? -Some offer good longer term value although the extent of that value is hard to assess: AGT, Farmers Edge Overall I sense the private equity holdings are small, don't really offer much upside, are currently providing a poor return on invested capital, require considerable management time and attention and generally are operating in segments of the economy that have been hit very hard by Covid and will take years to recover. Thoughts/comments of others? I agree. You missed Quantum, the McEwan Group, Blue Ant, Arctic Gateway (partly in AGT). I am sure I have missed some too. Also, minor point but I think Peak Performance is the Bauer/Easton unit and Peak Achievement is the name for the merged Sporting Life and Golf Town. I may be wrong. It looks to me like they’re implementing a pretty clear strategy to improve overall ROI from their private companies and associates. They seem to be picking a leader in a given industry/region, and then seeking to merge like-companies under that leader to better manage/allocate the capital. Look at all the brands under Recipe now, Eurobank’s acquisition of Grivalia, and Seaspan/APR under Sokol. They’re basically using their influence to create mini-holding companies, with specialist managers that can recommend the best use of capital among the brands in their domain. I think the strategy was already starting to work at Recipe. Despite industry headwinds Recipe was shuttering failing locations, sharing best practices with lower performers, and reallocating capital to the winning concepts. I think the whole purpose of this strategy is to get lots of business experiments into the hands of several different, proven, managers, so they can more quickly ramp up the winners while letting the losers dwindle. Theoretically these managers will have their ear closer to the ground in their various industries and be able to make acquisition recommendations, etc. In a way, they’re taking the model they used to allocate capital among insurance subsidiaries, and expanding it to how they will manage private companies and associates going forward. (They did the same thing with investment management teams too.) It might be kind of brilliant.

I think a dispassionate appraisal of Fairfax, assuming a continuation of the last decade’s performance as your base case, lands you somewhere in the neighborhood of: - normalized earnings of $25 to $30 USD per share - with earnings growth exceeding the pace of share dilution by a couple percentage points. I’m certain Prem assumes a (much) higher growth rate. And, I’m intrigued by some of the new strategies in progress to achieve faster growth. Structuring specialized investment and management teams around targeted geographies and business models is interesting - and will create multiple channels for deploying capital to the highest return opportunities. For example, if Africa sucks while India thrives we’ll see much more capital concentrated in India than Africa over time (while many on this message board will be overlooking India and whining about Africa. Haha). The Fairfax insurance operations are a cash machine, minting something like a hundred million dollars a month that has to be re-deployed. That’s not the world’s worst problem to have. If you or I had to deploy a hundred million a month for the next 10 years we’d probably make some billion dollar mistakes too. The main questions are: - are you comfortable with the baseline assumption - if so, then what’s $25 to $30 per share - and growing - of passive, look-through, earnings worth to you (what will it likely be worth to others down the road) - Are there better alternatives The short answer is Fairfax is probably worth a good bit more than $270 USD.

A total return swap entitles the buyer to receive payments for capital gains and dividends (the total return). https://www.investopedia.com/terms/t/totalreturnswap.asp

Prem did mention Exxon by name at the Annual Meeting conference call. He made reference to a 10% dividend rate. If they bought it in March and already sold it a few weeks later, they might have made a quick 20% or 25%. SJ Could it be that they purchased after March 31st which is the current filing date? The call was few weeks after that, right? That could explain why it isn't showing. On page 17 of the recent quarterly report it says: "During the first quarter of 2020 the company entered into $676.3 notional amount of long equity total return swaps for investment purposes following significant declines in global equity markets in the quarter. At March 31, 2020 the company held long equity total return swaps on individual equities for investment purposes with an original notional amount of $1,138.3 (December 31, 2019 - $501.5)." I have a hunch the Exxon investment was via a total return swap.

How about tens of millions of people working remotely for the first time ever? Many are communicating over unsecured networks or using vulnerable systems like Zoom, etc. I suspect the odds of a serious cyber attack couldn’t be much higher.

Here is an article that sheds some light on buffett's perspective ("As pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”): http://www.gurufocus.com/stock-market-valuations.php

Prem 's 2006 letter does a good job explaining his expectations for the market and treasuries. According to Prem we haven't finished regressing to the mean: "We continue to be fascinated – morbidly – by the recent Japanese experience. The Nikkei Dow dropped from 39,000 in 1989 to 7,600 15 years later while 10-year Japanese government bonds collapsed from 8.2% to 0.5%, totally contrary to normal historical investment experience. Japanese market capitalization dropped from 149% of GDP to 53% in 2002. The U.S. market capitalization is still at about 120% of GDP, down from over 170% in 2000 but way above its 80-year average of 58% and even higher than its 1929 high of 87%!! Speaking of 1929, it took the Dow Jones index 25 years to trade again at the 1929 level, even though long treasuries dropped for much of that time period. In last year’s Annual Report, we mentioned Jeremy Grantham of Grantham Mayo, who said in a Barron’s article that of the 28 bubbles that they have studied in all asset categories (including gold, silver, Japanese equities and 1929), this recent bubble in the U.S. stock market is the only one that has not completely reversed itself (just as it was about to in 2003, it turned and rebounded). Given that recent after-tax profit margins in the U.S. have only been experienced rarely in the past 50 years, regression to the mean is the great danger facing the U.S. stock markets."

Good point. From FFH 2009 report: "Our U.S. Treasury bond position was to a large extent replaced by $4.1 billion in U.S. state, municipal and other tax-exempt bonds (of which $3.6 billion carry a Berkshire Hathaway guarantee) with an average yield (at purchase) of approximately 5.79% per annum."

From the FFH annual report: "In 2009, for the first time ever, a significant portion of our pre-tax investment income (approximately $241 million) was derived from U.S. “Muni” bonds, the majority of which are taxed at very low rates (approximately 5%)."