bluedevil

I bought a chunk of Fairfax shares yesterday at 505. Higher than I have ever bought before on a P/B basis (I have never sold!), but it seems to me there is a lot of evidence that we are entering a "risk off" environment in which Fairfax should do extremely well, given the hedges, the CPI linked derivatives, the large holdings of high-quality long-term bonds and the large cash stockpile. I was particularly motivated by how the company has positioned itself vis a vis deflation. I thought about how low inflation is now and what might happen from the "shock" of equity prices in the US and Europe returning to a more normal level, and hit the purchase button.

Net earnings of $461.2 million; combined ratio of 91.2% :) http://www.fairfax.ca/files/doc_news/2014-Q3-Press-Release-FINAL.pdf

Interesting disclosure that I don't believe has been previously disclosed: On March 31, 2014 the company, through its subsidiaries, acquired a 40.0% interest in AFGRI Limited ("AgriCo") for cash consideration of $78.5. AgriCo is a leading South African agricultural services and foods group.

There is a table printed in every Fairfax annual report with one of the columns titled, "INTRINSIC VALUE % Change in US$ Book Value per Share", the context is comparing Fairfax's intrinsic value (in other words, book value) to its stock price. First of all this clearly draws a parallel between book value and intrinsic value. Second, the end result in these two columns is very similar (19% CAGR vs. 21% CAGR as of 2013). Third, Fairfax stock has on average traded at 1.06 book value over the past 13 years. This all strongly suggests that Fairfax's intrinsic value is equal to book value. Berkshire's intrinsic value is higher because it derives most of its earnings from operating companies that generate steady earnings every year and are valued based on earnings rather than book value. But Fairfax doesn't have any such businesses. In 2013, Fairfax's book value went down by 10% while the stock went up by 18%, a difference of 28%. Today it trades at around 1.25x book value. The highest multiple it has ever traded is 1.44x (according to GuruFocus). I think that Fairfax stock is significantly overvalued, which is both a good time for them to issue shares and a good time for Fairfax shareholders to be cautious. At times, FFH's stock price has been multiples of its book value. In 1996, it surpassed 3x book value. In the 1996 AR, Prem stated: We have mentioned in the past that we are very careful about issuing shares. In our 1986 Annual Report we said, "We consider our stock as good as cash. When we issue stock, we will ensure that we get as much value as we give." While we have been very clear about the "getting" part, we consider the "giving" part to be equally important. So, while we have raised money at higher and higher stock prices in 1996, we feel our new shareholders are getting excellent long term value - otherwise we would not issue shares at these prices. Remember we said long term. In the short term, we have no idea where our shares will trade.

Courtesy of Google translator: Sounds like it is a home improvement chain in Greece with 14 branches and 1,100 employees. According to the announcement, the contract has undertaken to carry out the Christopher Seagon, Manager of BM Praktiker International GmbH, signed yesterday. Both sides came to an agreement without further notice of the financial terms of the transaction. At the same time, the acquisition is still subject to the necessary approvals from the competent bodies of creditors. As indicated on the basis of annual sales, which touched 195 million, Praktiker Hellas is the largest operating company abroad. The Praktiker has presence in Greece with 14 branches and employs about 1,100 workers. Within a structured and competitive bidding process, the Manager Mr Christopher Seagon negotiating with several interested investors, by whom Fairfax submitted the most advantageous offer for everyone involved. The Fairfax will continue to maintain all of the stores and the company's employees, while maintaining unchanged the name Praktiker. Fairfax's known since 1985 for long-term development of corporate values ​​and has a significant track record of successful investments in international companies with strong growth prospects ( including investments in Greece and across Europe). For this reason Mr. Seagon considers Fairfax and Praktiker Hellas fit really well. "The product range of Praktiker in Greece is considerably broader than that of Germany," as noted by Mr. Seagon. Specifically, the range of Praktiker Hellas, along with the typical DIY products include household and electrical items such as washing machines and televisions. "Therefore, an investor with this range of investments and financial resources, it covers all the necessary conditions to successfully develop the business of Praktiker in Greece ', is convinced Mr. Seagon. "We continue to believe in recovery Greek economy under the leadership of Prime Minister Samaras' says Mr Prem Watsa, Chairman & CEO of Fairfax. Greece continues to make significant progress in revitalizing the economy by encouraging foreign investments that create positive momentum, thereby enhancing both employment and sustainable economic growth. "So we are excited about the acquisition of Praktiker Hellas, which is pioneering and stable leading company in the market of DIY & Home Improvement in Greece. Also, we are convinced that the Praktiker Hellas, under the command of John Selalmazidi and his team is one of the better managed companies in this market, "continues Mr. Watsa. H Praktiker Hellas is the sixth company of the Group abroad transferred to the investor by the Manager Mr. Seagon. Already by October 2013 completed the sale of its shares Batiself SA in Luxembourg, while in February 2014 followed by the subsidiaries Praktiker Ukraine, Bulgaria and Romania, and in March the Praktiker Poland. Historical BM Praktiker International The BM Praktiker International GmbH is a venture company group Praktiker, which brings together 11 companies shares. Following the filings group companies Praktiker in early October 2013, the BM Praktiker International filed for insolvency proceedings in a competent court of Hamburg. The competent court decided to open the process to 21 October 2013 as the operator defining the lawyer Mr Christopher Seagon. Fairfax Financial History H Fairfax Financial is a Canadian holding company, which operates through its subsidiaries in the areas of property and casualty insurance, reinsurance and investment management.

Would this be a fair way to think about Fairfax's current intrinsic value? I assume that Fairfax will maintain current float and will do so without cost; Fairfax has roughly $1100 of equity and float per share; I assume Fairfax will generate through its investments over time a return of 7% on that $1100 (vs. 9% long-term average), which equates to annual unlevered, normalized earnings per share of roughly $77 per share. Value that "earning power" at 10x for an IV estimate of $770 per share.

Thanks!

Brian Bradstreet may also be the guy who is most responsible for FFH's hedging strategy. He spoke at a small get together the day before the FFH meeting last year, and he was very, very bearish on the macroeconomic environment -- in a way that made it seem like he might be the one driving the macroeconomic focus at FFH. Very Austrian viewpoint on the world. For those of you who are going to the meeting this year, you might want to see if you can get Bradstreet's updated thoughts on the macroeconomic environment and the hedging strategy. Txlaw -- anything else you can share about what Brian said? Thanks.

SD: If I understand you right, I think the response is that they are betting that their stocks will outperform the hedges in the long run. They buy cheap stocks, they short an overvalued index, and those two things offset each other to some degree but over time the index will lose more than your stocks will and it will be a net benefit. So far they have been on the wrong side of that, but that is likely to reverse. As Prem put it today: So we are focused on protecting ourselves first and foremost, and not making as much. Again, we’ve -- some of you will say we are hedged and 100% hedged on the upside and 100% hedged on the downside, so Paul, how are we going to make any money? And what happens, we’ve realized a lot significant amount of gain, $1.3 billion from the common stock portfolios and we’ve reinvested it in things that we like which are significantly down from where they were. And we are protecting our portfolios, equity portfolios from significant drops, not a 5% and 10% drop, but like 30% plus drops. That’s what we are worried about Paul. And that environment, the fact that we’ve sold our common shares that have done very well and but things that haven’t done as well, means that we’ll be protecting on the downside, we don’t expect to go down as much as the indices. And that’s happen in the past, it happened more recently in 2008, that we came down significantly less and made a lot of money on our hedges and we think that yet to happen.

Couldn't the same argument that you all are making now have not also been made seven years ago -- in early 2007? The reason I keep most of my invested money with Fairfax is because their investment managers have demonstrated long-term success, the right theoretical foundation as long-term value investors, and they have the organizational and business structure, patience and courage to stand apart from the herd. They are doing that right now, and as shareholders I believe we will reap the rewards in the not too distant future. Yes, I wish with the benefit of hindsight they had ridden up with the stock market and put their hedges on now. I also wish they had ridden the last three or four bubbles up to the top, then got out at exactly the right time. But as Prem said today, better to be wrong, wrong, wrong, right, than to be right, right, right, wrong. Stocks are overvalued. (Does anyone disagree with that?) Risk premiums are too narrow. (Does anyone disagree with that?) That will change, eventually. And Fairfax will be positioned well. In the meantime, they will also keep building an insurance platform that has steadily improved for years now. It is simple in my mind. When you pair great investors with good underwriting, the results will be very good, especially when you buy in at a reasonable valuation. I think Fairfax has still got each of those ingredients.

Fairfax began putting its hedges on when the SP500 was below 1100, so I do not think that they will be picking up large amounts of equity at these prices.

I'm listening to the conference call now. The same slick, relentlessly optimistic sales pitch. (Of course, they lost money in the quarter.) Claim that they saw no softening at all in demand.

Look at the last annual report letter. It has a good chart about cumulative results since 2002.

http://www.marketwatch.com/story/netapp-warning-sparks-fear-of-corporate-it-slump-2011-08-18?link=MW_home_latest_news For those of us that are short salesforce.com, it looks the needle prick needed to pop this stock may nearly be upon us. NetApp today noted a "dramatic slowdown" in business in July. Given Salesforce's questionable treatment of accounting in the past, I'm not sure how Salesforce will massage this post-quarter slowdown, but they will have to face the music next quarter. Given the lofty valuations of the stock, even a hiccup should hit the stock pretty hard.

I think HWIC will sell when the yield on the 30 yr treasury goes below 3%. That is when he sold in 2008 and factors in the low levels of inflation HWIC expects in medium-term future.

Anyone have any approximate idea of the size of this acquisition?

No. Right now corporate margins are extremely high. Chances are they regress to the mean. Exactly the reason that the 10-year average has proven a superior valuation measure over time.

Ericopoly, what do you think AIG is worth? More than its book value of $50 bucks a share? I bought a very small position today. I haven't had the time to study the company because of work (hence the little position), but I thought if Berkowitz is willing to pay in the 40s, what the heck.

All the hot money that flowed to Berkowitz may now fly out. Regardless of the ultimate merits of his investments, he may have to liquidate some holdings and realize losses to pay redemptions.

I think BAC made a huge mistake when it tried to settle out of its mortgage backed securities problems. Once you do that, it becomes a feeding frenzy, everybody sues you, whether they have real claims or not. You have to fight such claims tooth and nail while selectively settling the strongest claims.

We may be in much better shape than in 2008/2009, but it seems to me like there is a lot of room for the market to go down. If you look at the fundamental valuation metrics -- price to last 10 years earnings, total stock market cap v. GDP, or price to book value of the stock market -- the stock market is significantly overvalued compared to historical norms. I'm sure there's items in the store that are underpriced and you can do well with those items, but there's a good chance that everything in the store will be marked down 30% in the next year or two, and that's assuming the market does not swing into "cheap" territory. So, if i can muster the willpower, i am going to wait. And while I understand that Fairfax's investment dynamics are fundamentally different than the individual investor's, Prem has said that stocks are priced "irrationally". Just my thoughts . . .

By Jeremy Grantham's calculations, the S&P 500 is still 30% overvalued. If we simply get a drop to fair value, then far more compelling bargains will be available. I for one am really hoping for a correction. Like, others here, I am heavily invested in Fairfax, and until there is a correction Fairfax won't have an opportunity to unhedge and aggressively go after capital gains. Also, like others on this board, I have bought long-term puts on salesforce.com. I think we'll need a market shakeout to see that stock go down to where it belongs.

Fairfax says that it will go wherever there is value, and the events of the last few weeks have borne that out -- private equity investments in India, the BOI transaction, and now a PE investment in the shipping industry! Each of them seems like a shrewd move. Very excited to see how these investments play out.

Interesting news. ----------------- http://www.livemint.com/2011/07/14223323/Fairfax-enters-India-to-invest.html?atype=tp ------------------ Fairfax Financial Holdings Ltd, a $30 billion (Rs.1.3 trillion)-plus diversified financial services company that owns stakes in Kraft Foods Inc. and Dell Inc., is entering India to invest in listed and unlisted Indian companies, a senior company official said. It will buy both minority as well as controlling stakes. Founded by Indian-born Prem Watsa, 61, popularly known as the Warren Buffett of Canada, Fairfax has appointed Harsha Raghavan, former India head of private equity firm Candover Investments Plc, as head of the unit. The investments in Indian companies will be made through Fairbridge Capital Pvt. Ltd, an affiliate of Fairfax. “We have the ability to invest long-term, patient capital into Indian businesses,” said Raghavan who, before moving to Candover, was executive director at the Principal Investment Area (PIA), the flagship $20 billion private equity fund sponsored by Goldman Sachs. “We are free of any constraints around stage, capital structure, industry, etc. as long as the investment makes long-term business sense,” he said. “We strongly believe in the India growth story and particularly see opportunities in consumer products, consumer services and niche manufacturing sectors.” Fairfax will also selectively incubate companies or build platform companies from scratch alongside partners—a strategy the firm follows in global markets. For instance, ICICI Lombard General Insurance Co. Ltd, the largest private sector general insurance company in India, is a 74:26 joint venture between ICICI Bank Ltd, India’s largest private lender by assets, and Fairfax. Some private equity funds see merit in Fairfax’s strategy while others say there are challenges. “New entrants in India are trying to take (a) diversified approach to investing,” said Raja Parthasarathy, partner at IDFC Private Equity Co. Ltd. “A lot of them feel that the valuations have run up in India, so they have a ground-up approach so that all the value is accrued by them, even though it takes time.” According to him, incubation or platform deals happen in fragmented sectors, which offer robust growth potential in the long term. The financial services sector is one such area. “They seem to have a lot more flexibility in investing, but when it comes to deals where specialization is needed or operational value has to be added, they will face competition from private equity firms that have entered the market earlier,” said Avinash Gupta, head (financial advisory) at audit and consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd. “Fairfax got its name due to its philosophy of doing fair and friendly acquisitions. We decided to use the name Fairbridge to reflect this philosophy as well as the need for long-term capital,” said Raghavan, who had helped Goldman Sachs PIA purchase low-cost cast metal parts maker Sigma Electric Manufacturing Corp. for $172 million. Fairfax, in a way, is similar to Buffett’s investment firm Berkshire Hathaway Inc., which in March announced that it will enter India’s insurance turf as a corporate agent for Bajaj Allianz General Insurance Co. Ltd. Apart from the insurance and reinsurance businesses, Fairfax has interests in other North American companies. The Canadian firm has invested in pulp and paper maker AbitibiBowater Inc., American bank Wells Fargo and Co. and coal miner International Coal Group Inc., among others. Berkshire owns stakes in a diverse range of businesses—confectionery, retail, railroad, home furnishings, vacuum cleaners, jewellery and media. In 2008, Berkshire and Fairfax announced their first co-investment—Chicago-based building materials company USG Corp., in which Fairfax invested $100 million and Berkshire $300 million. Fairfax’s book value has grown 25% every year, compounded, in the last 25 years, while its stock price has compounded by 21% every year, Watsa, a chemical engineer from India who founded the company in 1985, told his shareholders after its 2010 annual results.

http://www.nbfc.com/pdf/June-20-Northbridge-Announcement.pdf