investmd
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I had never seen this interview with Chou before, it's three months old, but still interesting.
https://robinrspeziale.com/2017/03/02/my-interview-with-francis-chou/
Thanks for sharing.
I see that Chou thinks that stocks are going nowhere: "...there is hardly anything to buy...I think if you break even over the next five years, you will have some of the best numbers five years down the road".
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Pabrai talks about commitment and consistency bias and how to be a better investor by avoiding it, with some tricks to do so, among them, ~"be fluent in the counter-thesis", and have some quick filters to avoid committing time to theses that aren't obvious.
Says Korea is cheap again. At the end gives a "treasure hunt" for a current position he's building in a "tire-related" company in Korea trading at 3x trailing earnings.
Thanks for sharing this. Good talk. Easy to listen to. Like the philosophy of being "unreasonable" as it relates to sticking to what appeals and letting other topics pass on - serves one well in investments but also other aspects of life.
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I suspect that they're under pressure as rates are falling again - U.S. rates are at 2017 lows.
While Fairfax itself doesn't own any bonds to book losses from, it does limit the income generation outlook for them. When Fairfax exited it's hedges and fixed income investments, it moved itself from being a hedging bet on the global economy to a pure investment/insurance exposure. While the insurance side is firing on all cylinders, the investment side is largely in cash.
With investment income/gains impaired by low rates (can't have BBRY/Eurobank/Tembec going up 60% every quarter...), the current earnings outlook is limited beyond the first two quarters.
While income potential relative to share price does seem high - particularly after accounting for a blowout quarter in gains - it isn't going to be continuously high without hitting homeruns in equities every quarter OR higher rates. I might be content to buy the shares now and wait, but I can understand why others aren't.
I suspect the interest rates are the main reason.
It's both...the number of shares that will need to be issued for Allied and the fed raising rates slightly. Funny thing is that Fairfax has over $10B cash in the portfolio which is sitting in 75% cash and bonds. It doesn't matter what Fairfax's price does as stocks fall or rates rise...they will be able to buy when everyone else is selling and looking for cash.
As PI said, you are essentially buying Fairfax at nominally higher than book value now. Their insurance businesses are now world-class and fully profitable across the board. The number of non-insurance businesses has increased dramatically and by region. Like Berkshire, as they add better and better insurance and non-insurance businesses, intrinsic value will start to increase faster than book value due to GAAP and IFRS. It is already a business that should be valued at 1.5 times book based on the cash flow of the underlying businesses and return on the investments per share.
The one area that I think they should remain cautious is their debt load. While still very manageable and staggered well, I hope they remain conscious and vigilant on this front. One of Berkshire's advantages is that they are beholden to none. I really would like Prem and Fairfax to follow that culture and model. Cheers!
Would Watsa consider a share buyback? If FFH has >$10B in cash, is looking for opportunity to deploy and it's own stock is trading at a substantial discount to where Parsad says it should be trading at (1.5x BV), does it make sense to do a buyback/set a floor on the stock price?
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Several of Fairfax’s holdings are doing quite well (as noted in the Tembec thread - Blackberry, Tembec, ICI Lombard and Eurobank all up substantially). I don’t see any major catastrophic events that would effect combined ratios dramatically, yet the share price of FFH continues to drop.
Would anyone venture to guess at any particular reason for this steady downward spiral in the share price? What am I missing?
We are down from $760 CDN in Sept to $570 today (about 25%).
Doesn’t FFH seem to be under priced at this point? I would be buying here, and may do so, but it is my largest holding already.
I am starting to think that there has to be a decent pop in price by the time we get the second quarter’s results next month.
Anyone buying here?
Cwericb: Am curious if you decided to buy more. I'm in the exact same position of wondering if I should be adding to my largest position already!
I was initially wondering if the recent 20% drop in price was a delayed reaction to removing his bearish hedges. Comments so far suggested negative reaction to purchase of Allied or interest rates (interest rates are at historical lows and any recent moves have been small in the larger picture of things).
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6% return over 17 years. Similar over past 5 years. Why does he not report 10 year result?
It's clear that he doesn't see value in current environment. Has been bearish for a long time. What is not clear is what his strategy is to navigate through current environment of high valuations. The only thing he mentions is that he is hoping for a correction in banking stocks to buy more and counting on higher oil price a year from now (Really?? This macro bet was a surprise for me to read from a deep value type investor!).
He's a brilliant investor, with strong ethics and aligned interests. But as with so many, the strategy doesn't work when charging to invest $'s for others. Perplexing! and frustrating.
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Sanjeev,
With all respect "averaging into" argument does not hold water for two reasons at least.
First, a fund is not a company. You cannot "value" a fund and buy when it's "cheap" and sell when it's "expensive". Yeah, you could try to do some kind of valuation on its holdings, but that's just second guessing the manager and I am sure you don't want anyone doing that to any managers you listed.
Second, if you average without valuation (e.g. just from outside cash flows), then you should be compare to averaging into indexes. And the underperformance remains the same if not worse.
Edit: In general, it is painful when highly ethical managers underperform. It is a decision for individual investor whether to stick with them or not. Best luck.
My point wasn't simply averaging in, but that the best managers can and will have periods (sometimes long periods) of underperformance. From 1971 to 1975, over a 5-year period, the brilliant Charlie Munger underperformed the market:
http://awealthofcommonsense.com/2014/09/charlies-munger-becoming-better-investor/
If Charlie Munger can underperform for 5 years, would it not make sense that merely very good investors might underperform for periods longer than 5 years?
If you had stayed with Munger from beginning to end, you would have done extremely well, even with that poor 5-year period. For most investors, it's difficult to stay with a manager during challenging periods.
Indirect has been a Pabrai Funds client from shortly after the 1st year. He has stuck with Mohnish through good and bad times, and thus has finished ahead of the index. He was also smart enough to buy when Mohnish was down and add to his account...thus he is miles ahead of the index, even though Mohnish is modestly ahead of the index over the life of PIF2. Cheers!
Agree that if one checked results of quarterly investments in Chou Assoc vs. index, the index would still win out. Few thoughts:
1) 5 yr results can definitely be poor -as shown above in your example - but 10 years is a reasonable time to assess an active money manager as 10 years allows for a combination of some boom and bust periods. Especially since we are not talking about absolute results but results relative to an index.
2)Re: the example of investing in Pabrai funds when it was down: One difference btw Pabrai Funds and Chou is that Pabrai has been open about mistakes, what he has learned from them and taken steps to prevent them from recurring, i.e.: the CheckList, explaining how he missed the leveraging and debt in HorseHold Holdings...While I'm sure that Chou is a smarter investor today than 10 years ago, he hasn't been open about what he has learned and what steps he has taken to avoid "value traps". He writes extensively about "margin of safety", but given the end result of VRX, SHLD, RFP, RadioShack and others, was the "margin of safety" adequate. He hasn't told us how he might avoid these type of situations in the future.
3)When we talk about passive vs. active management, there has to be a way of objectively assessing the active money manager beyond, nice guy, honest, smart etc...
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Has the opinion on Chou changed over the past 5 years? His 10 yr returns while not great (4%-Chou Associates, 5% Chou Asia & negative 0.5% Chou Europe) may be acceptable, if the philosophy is still sound. However, Chou has not given any insight as to why mistakes were made that lead to large losses, what he has learned and why it may be different going forward. The 2016 annual letter is disappointing when he explains results by saying one bad year can ruin your 5 or 10 year result. That doesn't cut it. There will always be negative years. However, over time they should be averaged out by great years.
Chou put in $80-90 million - approx 20% of assets of Chou Associates in Valeant Pharmaceuticals. The investment is down 60-70%. In the future, would he put >20% of the fund into a similar investment? An explanation as to why or if he would do the same in the future with a different company or has learnt something to prevent massive losses would be fair. Admitting that 10 years is a fair time to judge an investor would be honest.
I've just re-read each of his annual letters for the past 20 years. He is bright, has insight and good thought process. He definitely has the ability to pick stocks that have potential to be multi-baggers. However, has he been able to learn how to avoid value traps and large losses (Valeant, Sears, Radio Shack...) that have held back results? Is he a smarter investor today than 15 years ago and will that translate into improved outcomes?
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Francis is the kindest person I know in the financial industry, and that says alot because I know Prem, Mohnish and Tim McElvaine, and they are also some of the most generous people I know. But Francis is unique...very unique! If I were a captain in the investment industry, he is who you hire to be your right hand man. His honesty is beyond reproach! And he will never take credit for anything. Has anyone ever heard from Francis that the CDS idea was his? Nope! You heard it from Brian Bradstreet. We all know how talented the team is at Hamblin-Watsa, but all those principals there hold Francis in very high regard. That should tell you something. Everyone else can have Sprott, I'll take Francis. Cheers!
Has the opinion changed over the past 5 years? 10 yr returns of 4% (Chou Associates), 5% (Chou Asia) and negative 0.5% (Chou Europe) may be acceptable if the philosophy is still sound. However, Chou has not given any insight as to why mistakes were made that lead to large losses, what he has learned and why it may be different going forward. The 2016 annual letter is disappointing when he explains results by saying one bad year can ruin your 5 or 10 year result. That doesn't cut it. There will always be negative years. However, over time they should be averaged out by great years.
Chou put in $80-90 million - approx 20% of assets of Chou Associates in Valeant Pharmaceuticals. The investment is down 70%. Would he put >20% of the fund into a future investment? take a similar risk? An explanation as to why or if he would do the same in the future with a different company or has learnt something to prevent massive losses would be honest. Admitting that 10 years is a fair time to judge an investor would be honest.
Overall, he has great individual company analysis and has the ability to pick stocks that have potential to triple or more but has not been able to ward off the huge losses - Buffett's first rule.
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A good strategy for buying a mutual fund is to identify who the top managers are based on their long term results. Then, wait for them to have a very weak period. Buy into the weakness. Poor short term results don't indicate a loss of intelligence. Chou's Associates fund has been around for a long time. Since 1987, Chou has suffered 8 negative calendar year performances - 2 of which are 2015 and 2016. Go do the math for yourself to discover the kinds of returns you'd have if you patiently acquired units in his worst years.
... then revisit where the fund currently is.
I have a ton of respect for Francis. He is a great manager.
I think reducing or returning fees during periods of under-performance is a very admirable trait. Additionally, being in business since 1987 (30 years) is an awesome accomplishment by itself. With that said calculating the returns based on if you had acquired units in his worst years can start to sound a little like trying to time things. His return is what is---good years are factored in and bad years are factored in---they all matter.
Also agree, that return are what they are - you have to factor the bad in with the good. Out of a $500M fund, believe $80-90M was invested in Valeant which is down 70% from his average cost. Am OK with concentration and bets of conviction. We don't want to pay a money manger for their 65th best idea in the name of diversification. However, if a huge concentrated bet doesn't work out, it has to count in the results and the underlying reason for loss should be worked in to a future algorithm as how to avoid large losses. If he is continuously "holding his nose" & "buying when there is a stench" and the strategy hasn't delivered over 10 years...is it an appropriate strategy that can outperform a passive index fund investing strategy??
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A good strategy for buying a mutual fund is to identify who the top managers are based on their long term results. Then, wait for them to have a very weak period. Buy into the weakness. Poor short term results don't indicate a loss of intelligence. Chou's Associates fund has been around for a long time. Since 1987, Chou has suffered 8 negative calendar year performances - 2 of which are 2015 and 2016. Go do the math for yourself to discover the kinds of returns you'd have if you patiently acquired units in his worst years.
... then revisit where the fund currently is.
I have a ton of respect for Francis. He is a great manager.
I think reducing or returning fees during periods of under-performance is a very admirable trait. Additionally, being in business since 1987 (30 years) is an awesome accomplishment by itself. With that said calculating the returns based on if you had acquired units in his worst years can start to sound a little like trying to time things. His return is what is---good years are factored in and bad years are factored in---they all matter.
Agree. Returning fees during periods of under performance is very difficult and a reflection of honesty. It's the kind of trait that makes him stand out as someone who is not following "herd mentality". However, I haven't seen him return fees for a few years - last I know was several years ago on the Chou Europe fund.
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investmd,
The Chou funds website is one of those sites where you may have to "actualize" the page to make the last report "appear". The 2016 report is available.
Spekulatius,
Good point. Investing on principles (à la Buffett) is likely (for most) to give more reliable (and good) results than investing on styles (à la Graham).
For some, the investing process anchor has to do with consistency. To improve is about evolution isn't it? Charles Darwin, the unconventional thinker behind the non-creationist revolution, deducted that most attempts to improve resulted in failure. Food for thought.
On top of that (like Mr. Chou), if you have good results for a stretch of time, confidence bias may combine with the quasi-automatic attention bias (tend to reject contradictory evidence especially if it is "negative" information). It is tough to be consistently different AND better.
To be consistently different or espouse the "wisdom" of the crowd is the question.
In the meantime, to be different may not look advantageous.
Invested with Chou because he is not afraid to go against the crowd, does his own work on valuation and has insight. This "different" approach is bound to have lumpy up and down results. Ten years is a good period of time to assess a money manager as it allows for boom and bust cycles. The past 10 years is a perfect example. Unfort. 10 year results have been below par. He has picks that have been doubles and triples but others that have lost >50% of value. Question I have is has he changed his strategy based on last 10 years? Has he come up some algorithms to avoid large future losses? I do NOT agree with his example in the annual letter saying that one negative 20% return can negatively affect 10 year result and that is the way it is.Thought that was weak on his part and dissapointing. Funds do not generally make 8% a year as in his example- they do that through lumpy results that average out to 8%. Over 10 years, index has done better.
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Don't see the 2016 annual report on choufunds.com website. 2015 is the latest one listed.
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I have emailed him and got variable responses in the past. He did not respond to this question a couple of months ago, but I did ask him to consider discussing in his annual letter.
why don't you email his office? (admin@choufunds.com, fchou@choufunds.com) I have emailed him in the past and he has called me back to discuss.
investmd,
I like your way of asking more questions than providing answers.
We should continue perhaps bottom fishing looking for value but the question you ask: "Are there any structural reasons to think that the next 10 years will be drastically different?" really haunts me. Obviously, there is a lot of noise. Always the case. To separate the wheat from the chaff is the challenge.
I would appreciate also hearing Mr. Chou on these questions.
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Have been a believer in the Chou philosophy and admired his candid nature, thoughtful analysis and ability to go against the grain. However, 10 year returns on all his funds have been less than 5% annualized. Whilst value investing is a long term game, 10 years is a fair time period to analyze a money manager. Are there any structural reasons to think that the next 10 years will be drastically different? I wish Francis Chou would explain what he has learned over the past decade and how he plans to avoid the same type of mistakes. Is there a fundamental flaw in his philosophy? Or does he believe decision making tree was appropriate and would do the same thing again?
His explanations for investing in SHLD, Valeant, RFP, Blackberry all seem insightful but 10 years later the result isn't there....
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Should there be any correlation btw BBY price and principle shareholder FFH? BBY up 25% over past 2 days, while FFH is flat. Conversely, would a sudden drop in BBY price move the needle on FFH price?
I do realize that while FFH is a big part of BBY, BBY makes up only a small percentage of FFH.
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I see above several references to Francis Chou liking/holding Torstar and I had the same recollection. However checked Chou's latest holdings in Assoc, Asia and Europe as of Dec 31st and Torstar is not listed. Does anyone know for sure if Chou was holding Torstar.
thanks,
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Ok guys, the equity hedges have been a great mistake…
Sincerely, I couldn’t care less now. Whoever reads this letter and doesn’t see the entrepreneurial global force FFH is becoming, simply lacks entrepreneurial spirit. It is so self-evident!
1) The best way to play the emerging markets story: FFH.
2) The best way to play an European recovery: FFH.
3) Even in North America, despite the headwind of high general market prices, FFH will go on purchasing whole businesses.
People have been fixating on these equity hedges and are completely missing the whole FFH story.
Nothing else to say.
Gio
Even ignoring the equity hedge, the investment portfolio produced less than 5% return in 2013! Hard to fathom. Thoughts around the poor 5 year results on investments with or without hedging? On the other hand glad to see the insurance business is doing well with operating margins <100%.
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I spent a good amount of time this weekend reading Buffett's old letters to shareholders and it struck me that it would be interesting to compare Berkshire's performance after its first 28 years to that of Fairfax (which just completed its 28th year).
Annual Increase in Book Value Per Share
Berkshire: 23.6%, Fairfax: 21.3%
Shareholders' Equity
Berkshire: $8,926 million, Fairfax: $7,187 million
Total Assets
Berkshire: $17,132 million, Fairfax: $35,959 million
Debt
Berkshire: $1,155 million, Fairfax: $2,969 million
Total Dividends Declared Per Share
Berkshire: 0, Fairfax: $70 (roughly)
Annual Increase In Shares Outstanding
Berkshire: 0.05%, Fairfax: 5.3%
Number Of Years With Declining Book Value Per Share
Berkshire: 1, Fairfax: 6
Berkshire's insurance operations did not look too good at the end of 1992; they had had underwriting losses for the previous ten years or so. Fairfax's insurance operations look just fine in comparison, I think.
Overall, Fairfax's performance doesn't quite measure up to Berkshire's but it is not very far off. One big difference is that Berkshire had an annual increase in book value per share of 27.1% between 1978 and 1992 -- the last 14 years of the 28 year period. Fairfax, on the other hand, increased book value per share by only 5.7% per year in the last 14 years. Perhaps size has become an anchor for Fairfax much faster than it did for Berkshire?
And one final thing -- Prem writes pretty good letters, but Buffett's old ones are brilliant!
Even though BRK and FFH are based on the same principles of writing good insurance, & using the float to invest, the tone of the respective 2013 annual letters is completely different. While Buffett is clearly very optimistic about the future of America, Watsa has decided to play for the one in 50 event and admits to being very bearish.
Tough climate when 2 very similarly minded individuals think so differently. Delimma for investors who follow the two.
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Am optimistic about the positive changes since John Chen has come on board and am a fan of Watsa's intellect, insight and deep value approach. However, am troubled by Watsa's opinions on management for this company. When he first bought in, he made a point of stating how good Lazardis and Balsille were and strong management was a major reason for him to buy in. When that fell apart, he was confident that Thorsten Heins was the man and spoke highly of him. Now similar words about Chen with no explanations as to why his previous choices did not work out.
A certain lack of clarity in the process.
goevisit.com
in General Discussion
Posted
This type of platform is part of the future of medicine. Benefits the patients (clients), reduces burden on healthcare by improving access and allowing early treatment before medical issues intensify. In the long run, some (not all) of the questions being dealt with on this telemedicine platform can be done via Artificial Intelligence and decrease the need for medical personnel.
So, it's a great idea. However, from an investment point of view, hard to see where the earnings come from unless you have AI. By the time, the company pays for hourly physician salary, nurse salary, some overhead and malpractice insurance (as errors could be more easily made when direct patient contact is not available), there is little left in terms of profit.
The following shows how much the province of Alberta would pay for a visit - prob $15-$30 - not much:
Telehealthassistanceservice ....................... 33.78V
Physician to patient secure videoconference ................ 15.88
In summary, this type of service should be supported by the government. However, unless very high volume, or use of artificial intelligence to defray cost, monetizing is difficult. Doesn't mean it's not the right thing to do