TwoCitiesCapital

You're falling victim to resulting. Nothing that they said they were preparing for in 2016 change of positioning happened. An entirely unrelated, and unforeseen, set of circumstances came to be 5-years after they made the bet to bail them out of it.

I've not done the $ calculations, but I'm guessing it worked out in their favor only because 1) the float that benefitted from higher rates was significantly larger than the float that was hurt by lower rates because of the unforeseen (in 2016) hard market for insurance that occurred AND because 2) COVID/stimulus caused rates to spike to their highest levels in 20-years at the fastest rate in 50-years. And it worked out in their favor only compared to the buy/hold alternative. If we assume they're active, and want them to be active, then we have to also give them credit for MISSING the last cycle and NOT adding duration in 2018 and dropping it in 2020 which would have been the correct way to play it adding missed capital gains to the losses from significantly reduced income. Neither COVID nor the hard market was the thesis for going to 100% t-bills in 2016 when Trump was elected. It "worked" out because they got lucky - and only got lucky because they stayed wrong for 5-years running after missing the turn in rates in 2018/2019. The other times they stayed wrong for 5+ years (deflation swaps, equity hedges/shorts) costed us billions. So I judge the decision based on how it was made, when it was made, and the information at the time it was made. Not because they happened to get lucky and have it work out.

It's both. There is more capital appreciation potential in long bonds, but my reasoning for wanting a minimum duration of their liabilities is to lock-in income for the foreseeable future without taking TOO much duration/price risk. A 4-year bond will appreciate slightly more than a 3-year bond as rates fall - all else equal. Fairfax COULD sell those bonds for more in a recession-like scenario. But it's the extra 12-months of income certainty and the elimination of roll-risk is more of where my mind is at. I'd rather 4-years at 3.8% then 3-years at 3.5% and the 4th year at 2% when they roll (using treasuries as a proxy - FFH portfolio yields more). Even if the fourth year eventually rolls at 5%, i'd prefer the stability and certainty rather than banking on rates being higher 3-years from now. They can still make plenty of alpha on equity and credit calls and without predicting interest rates which they've mixed success on doing.

And for entirely different reasons than they imagined in 2016 when the call was made. It wasn't a Trump-led economic blow out. It was Biden led stimulus paired supply chain disruptions that led to a blowout in inflation expectations. 6-years to get lucky on being "right". Then they can roll 1/3 - 1/3 of their exposure to higher rates over the next 12 months as insurance premiums are paid, interest is paid, and bonds mature. There would be little price impairment as the move from 4% to 6% is quite a bit different from 2% to 4% and 4-years is still hardly taking tons of duration risk. Yes. The convexity skew is quite a bit less threatening, the potential damage to the bond portfolio likely a lot less, and the potential for a significant rise in rates is tempered by falling inflation (vs rising in 2021) and leading indicators that have suggested a slowing economy for 2+ years vs leading indicators in expansionary territory in 2021. The situation is ENTIRELY different. I have no idea either. My bias is down, but they have remained more persistently higher than I previous have thought and am open to being wrong. But it's not like anybody gets wrecked by matching their liabilities. The risk with insurance/banking/pensions come precisely from having unmatched liabilities where liquidity or returns on the asset side gets you in trouble....

Why would a central bank want to protect BTCs price by buying it and slowly selling it over time vs letting Mt God just distribute and receivers sell? Also, why would receivers sell? I feel that most who wanted to sell already got out of the Mt Gox claims and sold to inst'l holder with long term time horizons wanting the BTC at a discount? Why would those entities now be compelled to sell?

It's been discussed here in multiple occasions that Fairfax owes it's duty to its shareholders and not the retail investors who also hold its investments. There are many examples of Fairfax doing things that retail investors in underlying targets/controlled subs felt wasn't in their best interest, but ultimately suited Fairfax. There was even a court case about one of them. Simply be aware when you're buying into underlying holdings in Fairfax's portfolio - particularly if those names are underperforming

The govt had an implicit backing before the NWS. If the govt wants to charge a fee for that - they are entitled to, should, and I agree. Stealing 100% of the companies is NOT the payment for implicit/explicit backing. The companies were insolvent AFTER the govt stepped in, forced the write down of a ton of assets (that were eventually reversed with 100% of the reversal flowing to gov't coffers). Privatized the loss - socialized the reversal of those losses. I'm not going to argue whether the bailouts were needed or not - I don't want to second guess decisions made in a moment of crisis and understand why the decisions were made. But forcing accounting entries to make them seem insolvent on paper, giving them cash to plug that imaginary hole, and then changing the terms years after the crisis so the cash can never be repaid once the hole was discovered to be imaginary, isn't the 'saving' of the companies as you've painted it. It's an abuse of power and theft of private property. Then they should have allowed the company to go through bankruptcy - at which point its very possible that it would have been seen for what it was - a liquidity crisis, not an insolvency crisis, and there would have been residual value for equity holders upon their release. They didn't do this and is thus bankruptcy is an irrelevant comparison. What they did do is force write downs, lend money to plug the whole from those write downs, negotiate with themselves to change the terms the money was lent at, and then assumed 100% control/profits/capital when it was obvious the entire downs weren't needed and would be reversing. And they did without ever paying to convert their warrants for 80% ownership and without paying shareholders for the remaining 20% on the table. Shareholders don't like that they were lied to and that the government was able to steal 100% of the companies with what essentially worked out to be a short term loan for a fraction of the cost.

I don't disagree but is the case with basically every developed economy in the world and HAs been for decades. Why is it that suddenly in 2021 - 2025 it started to matter? I tend to agree that inflation is higher this decade than the last 1-2, but that is largely because of the low water mark of the last two decades with financial crisis and globalisation - not necessarily because I expect inflation to be huge. Plenty of signs one is coming - but they've been signaling for a bit. Hard to know if ALL prior indicators are just entirely broken OR if it's just been delayed by the massive amounts of excess liquidity injected during COVID. I'm thinking the latter. I don't think anyone is suggesting that they increase the duration for the extra 0.5%. it's for the extra 1-2% they'll be getting for years afterwards if rates do come back down - which they've already started to do. I'd rather the risk being 1-2% below prevailing rates if inflation remains - and still getting par back - versus riding rates down to get 0% even while inflation remains (as to always does). People can disagree about the path of inflation and rates - but that is exactly why matching your liabilities is the neutral stance.

Someone trading a stock on inside information isn't reason for you to sell the stock - it's reason to convict the inside trader

I'm seeing it reported all over Twitter from various sources that a handful of wallets shorted hundreds of millions of BTC and ETH on varying exchanges just minutes before Trump's announcement on China that sent crypto spiraling. Seems like someone was given advance notice and traded on it. Probably why this administration is so favorable on crypto - much easier for them to abuse and trade on information semi-anonymously to make hundreds of millions. Gains are estimated to have been in the ballpark of $250-300 million....

+1 We're not yet at the point where car companies are rolling vehicles downhill and IPO'ing for billions or someone thinks a stationary bike company is the next Apple. It has further to go IMO, but that doesn't mean prices now won't prove a good exit in hindsight. Best to phase your way in/out instead of trying to call tops/bottoms.

Share price goes up.

+1 What were the risks of going to 0 in 2016 and staying there until 2022? It's no coincidence Fairfax stock did terribly over this period and was very slow to recover post-covid. Which provided the opportunity for me to re-enter in size, but I don't want that opportunity to come by again because of 6-years of going back to zero. We can all debate the next decade will be different, that rates will be secularly higher, etc. I'm sympathetic to that view, but people were making that argument in 2010...and took a decade to maybe be right. I'd rather them drop swinging for the fences with the duration calls - match their liabilities (maybe +/- 0.5 years based on their view for rates), and provide some stability to interest income. They can always make the spread on credit when the opportunities present themselves for the alpha.

Perhaps this explains some of the continuous elevated valuations? More retail money chasing fewer names with fewer shares each year as fewer IPOs occur?

I don't really see anything new mentioned in the article - most are references to discussions this past Summer. The tid bit I found interesting was this: "Midway through the presentation, Trump invited in a group of athletes from his council on sports and fitness. Solomon continued speaking as former professional wrestler Paul “Triple H” Levesque and golfer Bryson DeChambeau looked on." You know - so Trump is taking it so seriously that he involved Triple H on the discussions with Goldman's David Solomon

Yes - in a "technical" sense. I would argue it depends on how we look at/measure it. Technically, if it matches the liability, the liability is also fluctuating with the rates and no real impairment occurs if perfectly matched. Now, there's risks to this because you're never perfectly matched and until recently the liability fluctuation wasn't captured on the balance sheet so you only had the asset side swinging wildly. But now that the liability impact also flows through, from a reporting standard little impairment would occur as you'd expect movement in the assets and liabilities to largely offset on another. There might be some debate on impacts to liquidity and the ability to sell the bonds vs realize a loss and etc. but from an asset/liability view (i.e. balance sheet), you should have little impairment matching your liability. The impairment comes for mismatches and being wrong which is where Fairfax was playing from 2016 - 2021 until 2022 - 2024 turned it around.

I suppose it depends on what "prioritize" means in terms of scale. Exor has been doing buybacks for many of the last 10-years I have owned them - the stock is now near the widest discount it's ever been during that period. Alibaba was doing significant buybacks for over a year and the price kept going lower - it's recent pop from $70 - $190 wasn't as much fueled by buybacks as much as it has been powered AI optimism. Buybacks aren't a panacea for immediate value-gap closure. They just immediately created value. And FIH has been doing them - but I imagine they prioritize liquidity for future investments and taking additional stakes (like the many add-ons to BIAl) as well as gathering resources for a bid on something large like IBDI. I'd prefer they did more buybacls but under the competition for capital in a structure like this intended for long-term investing. It still took awhile for Prosus to get it done and the NAV gap is still there...just smaller. Could it be that it wasn't the buybacks that closed the gap as much as it was the narrative shifts in China that resulted in ALL of its tech stocks popping? Not just the ones buying back shares? Waiting for an IPO of Anchorage also gives Fairfax more optionality on the buybacks front by giving it something liquid it can trim. I think it's a risk as Fairfax has demonstrated - but I don't know why they'd have listed the public vehicle just to take it private. At some point, they felt they needed a separate vehicle to do this and I expect whatever those reasons are to probably still be valid.

I'm similar but it's 5-6x. Went way heavier into Fairfax as there was a more clear view on how the discount would close - earnings. And earnings were obvious with rising interest rates and exploding float. At this point, I think the value skews to Fairfax India, but also is a less clear path to how that's unearthed. We've been talking about Anchorage forever - it hasn't happened yet. IDB bank hasn't happened yet. Tender offers/repurchases have been small and/or irregular. The value is there, and still adding, but is less clear to me how/when the shares re-rate versus FFH which has the clear catalysts despite maybe not being as "cheap".

No doubt - but it's not like they're in a position to buy more BIAL at this time and it already dominates the portfolio? So they have successfully weighted the most attractive opportunity way larger than anything else in the portfolio...so the complaint is then that there are other names in the portfolio at all? Instead of holding cash and earning less returns? I don't mind them earning in excess of cash on the remainder while also making relationships connections that may result in larger deals and/or roll-ups along the way.

I wouldn't read too much into it. The problem with DCF is that the terminal growth rate and discount rates dramatically change the valuation - even if the changes in those rates are small because the impact compounds. I wouldn't put much weight that Fairfax is getting growth rates, terminal growth rates, and discount rates exactly correct in marking their books. But they have to mark something. Perhaps make you own adjustments and get a range of values. Or use the observed growth rate for the last three years and stretch it forward for three years. Slap a a reasonable multiple on that and then figure out the discount rate that gets it back to today's value. Does that discount rate seem like a reasonable return for the risk of holding the position? If so - it's being carried at a reasonable valuation and your discount rate is your expected IRR over the next 3-years. .

Maybe I'm just jaded from being burned in 2021 on the DeFi opportunity - but generally have told myself that when DeFi talk becomes widespread again is when I'd start lightening up on my BTC holdings in anticipation of the sentiment top being put in.

I'm staying long the beer-money calls for this reason. Bitcoin seasonality is here and is positive. Traditionally the next 1-3 months is where the cycle would end if we're repeating - which means blow off tops which is positive. And despite the PIPE deal expected to deal a blow to ASST share price, there's still plenty of wiggle room before that should hit SMLR given the current large discount to offer price.

Good call. Didn't realize that had happened or were unlocking later this month

I agree. Everything seems rosy in the recent corporate earnings/GDP figures and etc But I'm looking at buying small businesses in my local area - and a number of the bars that I've been looking through saw YoY declines of 20+% in 2024 sales. 2025 is tracking similarly for them.

You'll have underperformed, yes. But in the world of Fairfax, where duration of liabilities is ~3-4 years, also an inaccurate example. If rates go from 0% to 10% over 4-years, you don't go to zero by owning a 4-year Treasury. You also don't go to zero by having a 5-6 year Treasury ladder with an average maturity/duration of 4. And there are TIPS if you're really concerned OR you could decide to be under your liability by 1 year, or 2-years. The options aren't 4-year nominal bonds or overnight rates for 6-years waiting for higher rates. It worked out for Fairfax in 2021 only because COVID supply shock plus trillions in direct stimulus - items that were unforeseeable in 2016 during Trump's first presidency and didn't even occur in is first term which was thesis for dumping the bonds right after the election. There is hardly risk in 1-year bonds. There is little risk in 2-year bonds. Fairfax made a choice, after a presidential election in 2016, to basically move to overnight rates and sit there for years despite their liability remaining unchanged. It was a macro bet and shouldn't be controversial to label it as such. If it was about price, why was it made in 2016, after an election, when rates were higher than they were in 2015 before the election? The election WAS the catalyst - ergo it was a macro bet.