FFH Results

[gary17]

It is interesting the two sides of the argument I'm hearing isn't helping me solve the similar argument going on in my head.... 

 

I like what FFH has been doing

- underwriting improved ... Although the soft market has just started, we will see

- like his European investments and other international investments

- I actually like the rim investment

- low cost of leverage via float... Assuming they can do around 100 combine ratio or even better moving forward

 

Things I don't like

- macro bets

- some of the things he writes in his letter vs reality

- the lumpy performance. I get the long term trend , but I don't buy why results should be so volatile. What if his shareholders need money for some sort of emergency?

[giofranchi]

I've heard Gio talking about underpromising and overdelivering management in the VRX thread. Well, this seems to be quite the opposite! If this doesn't shake your beliefs, I don't know what will!

 

Tom,

I focus more on ownership + management, than on management alone.

I do so because I experience in everyday business life the difference it truly makes.

And, as I go on studying the methods of great entrepreneurs of the past, I find they had very similar experiences about the importance of partnering with great people.

Have you read my last quote on the thread about George F. Baker? ;)

 

Be sure that also Mr. Buffett agrees! 3 out of 8 great entrepreneurs profiled in “Outsiders” he invested with, a fourth was he himself, a fifth, Mr. Singleton, came just a little bit too early! ;)

 

This doesn’t mean you will do awesomely all the times… No one knows the future, right? But if the people we partner with truly deliver what they promise 5 or 6 times out of 10, we might get very rich indeed! ;)

 

Cheers,

 

Gio

 

[shalab]

I would say look at the conf call transcript Gio posted and the quarterly report.

 

  - gives color on why they sold stock in Q4 2013

  - mark to market gains in bonds big reason for book value increase

  - the hedges decreased in comparison to equity exposure

  - bought more cpi linked derivatives in Q1 2014 ( US and Europe )

     

 

It is interesting the two sides of the argument I'm hearing isn't helping me solve the similar argument going on in my head.... 

 

I like what FFH has been doing

- underwriting improved ... Although the soft market has just started, we will see

- like his European investments and other international investments

- I actually like the rim investment

- low cost of leverage via float... Assuming they can do around 100 combine ratio or even better moving forward

 

Things I don't like

- macro bets

- some of the things he writes in his letter vs reality

- the lumpy performance. I get the long term trend , but I don't buy why results should be so volatile. What if his shareholders need money for some sort of emergency?

[giofranchi]

Things I don't like

- macro bets

- some of the things he writes in his letter vs reality

- the lumpy performance. I get the long term trend , but I don't buy why results should be so volatile. What if his shareholders need money for some sort of emergency?

 

Gary,

with this I undoubtedly agree!

Unfortunately, I cannot help you… That’s just the way they do business… If you don’t like what you see, then you should stay away!

But this has nothing to do with price… ;)

 

Gio

 

[giofranchi]

I dont get this notion of why FFh has more intrinsic value than Book Value.  It strikes me as a bit of wishful thinking. 

 

Al,

It is a mathematical reality the fact anything that grows BV at a higher rate than its cost of capital has IV higher than BV.

 

Gio

 

[Valuebo]

I've heard Gio talking about underpromising and overdelivering management in the VRX thread. Well, this seems to be quite the opposite! If this doesn't shake your beliefs, I don't know what will!

 

Tom,

I focus more on ownership + management, than on management alone.

I do so because I experience in everyday business life the difference it truly makes.

And, as I go on studying the methods of great entrepreneurs of the past, I find they had very similar experiences about the importance of partnering with great people.

Have you read my last quote on the thread about George F. Baker? ;)

 

Be sure that also Mr. Buffett agrees! 3 out of 8 great entrepreneurs profiled in “Outsiders” he invested with, a fourth was he himself, a fifth, Mr. Singleton, came just a little bit too early! ;)

 

This doesn’t mean you will do awesomely all the times… No one knows the future, right? But if the people you partner with truly deliver what they can achieve 5 or 6 times out of 10, we might get very rich indeed! ;)

 

Cheers,

 

Gio

 

 

My whole point is that Prem, who you label as a great business man, hasn't lived up to the expectations and has a history of overpromising and underdelivering instead of the opposite (which you value highly!). You are simply choosing to ignore those facts and are guided by hope. You can't just throw around some quotes and show how Buffett (only one of the very best investors and business men ever with a wide stable of connections!) did well by picking great people to prove your reasoning. Of course anyone will agree that this is a sensible way to go if one is able to pick those people as needles out of a haystack! The hard part is being right on who those great people and not being late to the party. In Prem's/Fairfax' case, you might be way to late if you're goal is to compound capital at 15%.

 

Honestly, am I the only one thinking like this?  :o Sorry for being so blunt about it. I simply think it's a shocking way to think about investing and business, no offense. That doesn't mean I deem it entirely unlikely that Fairfax does indeed do very well in the future. Given history, I just don't rely much on specific return guidance anymore.

[gary17]

Gio - what do you think is FFH's "cost of capital"?

I believe this question was asked yesterday at the Berkshire meeting - both Warren & Charlie did not give a very direct answer.... I believe they said they focus more on opportunity cost..... 

 

What is the cost capital --- is that possible to explain like I just finished highschool?

 

Is it simply the portion of combine ratio over 100?  Is it that simple?

 

Thanks!

Gary

[giofranchi]

Part 3: ( to all) I wont buy FFh at this price because I think one day I might get it at much lower prices.  In a major correction for example. 

 

Al,

of course you might be right.

I don’t play that game, but you might be right! ;)

 

Gio

 

[giofranchi]

My whole point is that Prem, who you label as a great business man, hasn't lived up to the expectations and has a history of overpromising and underdelivering instead of the opposite (which you value highly!). You are simply choosing to ignore those facts and are guided by hope. You can't just throw around some quotes and show how Buffett (only one of the very best investors and business men ever with a wide stable of connections!) did well by picking great people to prove your reasoning. Of course anyone will agree that this is a sensible way to go if one is able to pick those people as needles out of a haystack! The hard part is being right on who those great people and not being late to the party. In Prem's/Fairfax' case, you might be way to late if you're goal is to compound capital at 15%.

 

Honestly, am I the only one thinking like this?  :o Sorry for being so blunt about it. I simply think it's a shocking way to think about investing and business, no offense. That doesn't mean I deem it entirely unlikely that Fairfax does indeed do very well in the future. Given history, I just don't rely much on specific return guidance anymore.

 

Tom,

please read what I write with carefulness, before you quote and answer my post…

Read very well line number 3 of my post and think it over a little bit…

I am not only quoting… I am giving you my daily experience… working with many entrepreneurs, engaged in many different endeavors!

Then, of course, I am also pleased by the fact that, studying the methods of the best entrepreneurs present and past, I find proof of what I experience every day. ;)

 

You think Mr. Watsa didn’t live up to the test? Well, then put him among those 4 or 5 out of 10 that under delivered! Imo it simply makes no sense at all!

 

Gio

 

[gary17]

Thanks --

I don't see where he explains why he sold Wells Fargo,etc. It was noted in the annual letter...  But a verbal explanation would probably shed more light.  Gary

 

I would say look at the conf call transcript Gio posted and the quarterly report.

 

  - gives color on why they sold stock in Q4 2013

  - mark to market gains in bonds big reason for book value increase

  - the hedges decreased in comparison to equity exposure

  - bought more cpi linked derivatives in Q1 2014 ( US and Europe )

     

 

It is interesting the two sides of the argument I'm hearing isn't helping me solve the similar argument going on in my head.... 

 

I like what FFH has been doing

- underwriting improved ... Although the soft market has just started, we will see

- like his European investments and other international investments

- I actually like the rim investment

- low cost of leverage via float... Assuming they can do around 100 combine ratio or even better moving forward

 

Things I don't like

- macro bets

- some of the things he writes in his letter vs reality

- the lumpy performance. I get the long term trend , but I don't buy why results should be so volatile. What if his shareholders need money for some sort of emergency?

[giofranchi]

Gio - what do you think is FFH's "cost of capital"?

I believe this question was asked yesterday at the Berkshire meeting - both Warren & Charlie did not give a very direct answer.... I believe they said they focus more on opportunity cost..... 

 

What is the cost capital --- is that possible to explain like I just finished highschool?

 

Is it simply the portion of combine ratio over 100?  Is it that simple?

 

Thanks!

Gary

 

Gary,

The cost of capital for FFH imo is:

 

Cost of equity: I would say that is the opportunity cost Mr. Buffett talked about, and I would grab 2013 BRK AR, page 4, look at the compounded annual gain 1965-2013 for the S&P500 and get that number.

+

Cost of float: I would grab FFH 2014 AM presentation and look at page 18.

+

Cost of debt: I would look at how much FFH pays on its long-term debt.

 

Total capital is Equity + Float + Debt, and its cost should be calculated proportionally.

 

It clearly is lower than the opportunity cost Mr. Buffett talked about. Therefore, I use 9% for FFH (conservatively enough!).

 

Gio

 

[Uccmal]

I dont get this notion of why FFh has more intrinsic value than Book Value.  It strikes me as a bit of wishful thinking. 

 

Al,

It is a mathematical reality the fact anything that grows BV at a higher rate than its cost of capital has IV higher than BV.

 

Gio

 

 

Huh, A mathematical reality based on a philosophical definition:

 

http://www.investopedia.com/terms/i/intrinsicvalue.asp

 

http://en.wikipedia.org/wiki/Intrinsic_value_(finance)

 

Are you counting the share dilutions?

How are you determining your future returns, and discounting them to PV?  It cant be done with FFh. 

 

Book value is intrinsic value, and in some cases may be inflated due to goodwill. 

 

Also, you are double counting.  The book value already includes the gains made from borrowings, and share dilutions. 

 

Gary, the easier way to ask the question of yourself is:

Can I compound my capital at a better rate than FFH going forward?  It's as simple as that.

 

 

[gary17]

LOL!! That's the question I have been asking myself !!!!

 

I did buy a tiny amount of FFH & LRE & MKL like 3 months ago... and I had to let them go.... because I felt I wasn't thinking clearly.... 

 

I am now back to where I was... still thinking....  I am in my early 30s... have a (relatively) stable job....  and I do enjoy investing... (even when I am not making money -- sometimes I wonder if I have a gambling problem!) 

 

Will it be better to give my money to Prem or other compounders or should I manage it myself? 

 

Prem does get access to cheap leverage that I can't get

AND he can buy some of these companies in such good terms that I can't get - e..g, Eurobank at 0.30/share! And The Keg (privately held previously?)

 

I just need to make sure I don't let my overconfidence / ego / unproven investing skills get in the way of this decision making process :)

 

Gary

[giofranchi]

Huh, A mathematical reality based on a philosophical definition:

 

http://www.investopedia.com/terms/i/intrinsicvalue.asp

 

http://en.wikipedia.org/wiki/Intrinsic_value_(finance)

 

Are you counting the share dilutions?

How are you determining your future returns, and discounting them to PV?  It cant be done with FFh. 

 

Book value is intrinsic value, and in some cases may be inflated due to goodwill. 

 

Also, you are double counting.  The book value already includes the gains made from borrowings, and share dilutions. 

 

If BVPS multiplied by the number of shares a shareholder owns represents his/her true capital (goodwill may detract only if FFH paid too much for an acquisition… and I don’t see Mr. Watsa paying too much…), and that capital grows faster than FFH’s cost of capital, which is the discount rate you should use to calculate its present value of equity per share or IVPS (please, refer to “Accounting for Value” by prof. Stephen Penman), then it is a mathematical reality that IVPS is higher than BVPS. Period.

 

Gary, the easier way to ask the question of yourself is:

Can I compound my capital at a better rate than FFH going forward?  It's as simple as that.

 

This has nothing to do with the question: is BVPS equal to IVPS?

Of course, why should you own ANY business that gives you X %, when you could trade and gain X+Y %???

 

Gio

 

[ERICOPOLY]

I just need to make sure I don't let my overconfidence / ego / unproven investing skills get in the way of this decision making process :)

 

On the other hand...

 

suppose both A & B:

A)  you know very little (tiny circle of competence)

B)  you truly understand how little you know

 

Therefore you have a terrific advantage.  Once you finally come across an investment you feel that you clearly understand and at a screaming buy price, you can load up.  That will be a punchcard fat pitch stock.

 

You see, due to both A & B above, you've ruled out all the "too hard" pile  :D

 

So you have a huge advantage over the professional investors who keep wading into the too hard pile and get bogged down.  You'll stay clear of those stocks as long as you truly stock with A & B.

 

[gary17]

Thanks!!  This reads like the Intelligent Investor summarized in less than 100 words  ;D

 

Great, this has been a productive morning - thanks to all :)

 

Gary

[Liberty]

(goodwill may detract only if FFH paid too much for an acquisition… and I don’t see Mr. Watsa paying too much…)

 

I wasn't around back then, but wouldn't you say that Mr. Watsa overpaid for some acquisitions that turned out to be very problematic around the early 2000s (from memory: TIG, Crum & Forster).

[giofranchi]

I wasn't around back then, but wouldn't you say that Mr. Watsa overpaid for some acquisitions that turned out to be very problematic around the early 2000s (from memory: TIG, Crum & Forster).

 

What do you mean?

He paid less than BV for those acquisitions, therefore no goodwill was recorded…

 

Gio

 

[giofranchi]

Of course anyone will agree that this is a sensible way to go if one is able to pick those people as needles out of a haystack! The hard part is being right on who those great people and not being late to the party. In Prem's/Fairfax' case, you might be way to late if you're goal is to compound capital at 15%.

 

Btw, Tom, I have never said it would be easy… Far from me! Yet, I know exactly which kind of people I like to partner with, and I constantly look for them.

Those people are a necessary prerequisite to develop conviction in (almost… ok, with the exception of KO and JNJ!! ;)) any organization!

Sorry to say this, but doing business is not like sitting at your desk and reading thousands of pages of 10-Ks and 10-Qs… I have witnessed businesses with hundreds of million in sales brought down by a couple of very stupid decisions… The fact it is not easy to find people who are truly worthy of our trust and respect, doesn’t mean we can do business without them…

 

Look, it is really as simple as this:

If you want to own a business for the value it is going to create in the future, you MUST absolutely have confidence in the people you are partnering with.

Instead, if you buy a stock, because it is too cheap no matter what management does, then you better get out as soon as you have the chance to take that last puff! (In this case I would advise a very diversified portfolio a la Kraven!)

 

As far as FFH is concerned, Mr. Watsa is 20 years younger than Mr. Buffett and still runs a much smaller organization than BRK. He undoubtedly is the kind of person I like to partner with, and he can grow FFH at 15% for many years to come.

But, the fact I like what I see doesn’t mean he will surely achieve that goal! This we all agree with and imo is self-evident!

My conviction in FFH is not driven by the fact that, if Mr. Watsa makes the right choices, it will compound capital at 15%… My conviction in FFH, instead, is driven by the fact that, even if Mr. Watsa might make some bad moves, it will turn out to be a solid investment.

When you partner with those people, it is always the downside you get protected, and for a long time! When you know you have taken care of the downside, you can develop conviction.

 

Gio

 

[StubbleJumper]

I wasn't around back then, but wouldn't you say that Mr. Watsa overpaid for some acquisitions that turned out to be very problematic around the early 2000s (from memory: TIG, Crum & Forster).

 

What do you mean?

He paid less than BV for those acquisitions, therefore no goodwill was recorded…

 

Gio

 

 

Prem should have paid even less than what he did for TIG and C&F.  But, hindsight is 20/20.

[Liberty]

I wasn't around back then, but wouldn't you say that Mr. Watsa overpaid for some acquisitions that turned out to be very problematic around the early 2000s (from memory: TIG, Crum & Forster).

 

What do you mean?

He paid less than BV for those acquisitions, therefore no goodwill was recorded…

 

Gio

 

 

Prem should have paid even less than what he did for TIG and C&F.  But, hindsight is 20/20.

 

That's what I meant. Even below book value, fixing these rather low quality businesses seem to have cost a lot in extra money, management attention and time, and opportunity cost. I wonder what their IRR would look like... I doubt it's too high.

 

I'm glad that Fairfax now seems to be focusing on higher quality insurance acquisitions (f.ex. Zenith). It seems very hard to change the whole underwriting culture at an insurer and make sure you catch and discount all of the skeletons in the closet when you acquire...

[giofranchi]

I wasn't around back then, but wouldn't you say that Mr. Watsa overpaid for some acquisitions that turned out to be very problematic around the early 2000s (from memory: TIG, Crum & Forster).

 

What do you mean?

He paid less than BV for those acquisitions, therefore no goodwill was recorded…

 

Gio

 

 

Prem should have paid even less than what he did for TIG and C&F.  But, hindsight is 20/20.

 

Maybe… But we were talking about how goodwill might sometimes inflate BV.

Those two were clearly not the cases. ;)

 

Gio

 

[giofranchi]

That's what I meant. Even below book value, fixing these rather low quality businesses seem to have cost a lot in extra money, management attention and time, and opportunity cost. I wonder what their IRR would look like... I doubt it's too high.

 

Those costs flowed directly to BV. No artificial inflation of BV there!

 

Gio

 

[Liberty]

That's what I meant. Even below book value, fixing these rather low quality businesses seem to have cost a lot in extra money, management attention and time, and opportunity cost. I wonder what their IRR would look like... I doubt it's too high.

 

Those costs flowed directly to BV. No artificial inflation of BV there!

 

Gio

 

I generalized what you said into "Prem won't overpay" rather than just on a GAAP/goodwill basis. Sorry for the confusion.

 

IV matters a lot more than GAAP, and I'd rather see him pay 3x book for a business that is worth even more than that than 0.4 book for a business that is worth less, and I'm sure you'd agree.

[Uccmal]

Gio, I held FFh shares for 15 years in some form or another so I have really paid attention to FFh over the years.  I got so I would cringe everytime they announced a new stock buy.  FFh has not shown the same ability by any stretch of the imagination as Buffett has in assessing people or businesses. 

 

A few names come to mind: Canwest; sfk/fbk/ resolute; tom ward; RIM (although Chen seems like the real deal finally); TIG/C&f, midland walwyn, lindsey morden.  This is not an argument about character or integrity, but capability.  I admire where Watsa has bought the company but I think he needs a very strong Munger or Buffett on board these days. 

 

We have had this argument before but it is unlikely they will reach their 15% bogey, and they are still a small company.  It is getting harder each day. 

 

Whatever they have compounded book value at in the last 10 years is likely closer to the norm going forward.