Prem Watsa Buys IBM, Bally Technologies, Rayonier Advanced Materials, Sells Iden

[Buffett_Groupie]

http://finance.yahoo.com/news/prem-watsa-buys-ibm-bally-211209491.html

[Uccmal]

Hmm, Someone at FFH is buying Pennwest? 

 

Mighty suspicious, I must say. 

[Guest glavacem]

I am very long Fairfax.

 

When I look at these positions I do worry a little about the large concentration and the quality of some of these businesses.

 

Does anyone else share this concern?

[benhacker]

When I look at these positions I do worry a little about the large concentration and the quality of some of these businesses.

 

Does anyone else share this concern?

 

Fairfax's portfolio has always been strange IMO.  However, you also need to realize that when you see these SEC filings, you are basically seeing reporting of Fairfax's, non-OTC, US listed equity (and some bonds) portfolio only.  You aren't generally seeing any foreign names (unless Fairfax is buying ADRs, etc).

 

So if you look at one of the nice sites like Datarama or Whale Wisdom, they will show you that Fairfax has like 30% of their portfolio in BBRY, and RFP, etc, but their total listed portfolio via the SEC is only ~$1.5B USD... their equity portfolio (including everything) as of the last quarter was >$8B USD (this number includes several consolidated but not wholly owned businesses as well).  So if they have 30% in a few names that make you scratch your head, just remember that they may be right or wrong, but the "bet" on those names usually isn't as big as it seems.

 

I like to bring the large investments back to a % of book value in my mind so I can understand the downside better in my mind.  So in this case maybe RFP is ~5% of Fairfax book... does that seem more reasonable?  Probably (I don't have a great feel for the RFP investment myself, but it seems reasonable).

 

Anyway, this is just another way to say that Fairfax has huge exposure to things we don't see directly in the 13HR, and also to some investments that we don't even know about.  If you want to track their exposure more accurately, you can track THRE.TH, BKIR.L, and their other global investments.  I'm not sure that is necessary to invest in Fairfax, but probably at least understanding the scope of what you don't see in the 13HR form is needed.

 

Perhaps you already made this mental adjustment and still think they are concentrated in too many low quality businesses (you would not be the first to think so!), but my guess is that because the US investments are so well disclosed and so easy to find via the websites I mentioned above, they get relatively too much focus and the perception is that their US portfolio is a greater % of the overall equities than it really is.

 

Just my perspective.

 

Ben

 

PS - The BBRY investment also needs to be adjusted for the Converts FFH owns which are probably marked at ~$750-800m ($500m cost) or so now, so that investment is actually larger than what is reported, but still not 30% of book).

 

PPS - On a related note, I think Fairfax tends to buy into more leveraged, or seemingly "binary" businesses generally because of two reasons: 1) they (I think) prefer the leveraged nature of equities with massive upside because of their conservative portfolio (I guess you could frame this as leveraged businesses being good inflation hedges) and 2) they have a unique ability to wait out other investors and to not have to worry about death spirals because they can always (assume assets are still backing the investment) double down via debt, converts and even DIP financing in BK, so I think the fat tail negative outcomes for Fairfax aren't as bad as perhaps they are for us as retail investors because Fairfax won't even be diluted (if they don't want to be) - they will be the ones diluting.  This may or may not be their mindset, but I think it makes some amount of sense from what I've seen over the years.  BBRY is a great case in point, they are I believe M2M profitable on their BBRY investment at this point (+/- a few % maybe) I would estimate (obviously not a good IRR, but we'll see how it plays out).  Same thing with LVLT... for years it was considered one of their big failures, but even when the stock was just in the crapper, their IRR was 7-9%, and their IRR over the life of the investments now I think is low teens (not certain here), due to their selling as well as doubling down in debt, converts, etc.

[Cageyone]

Ben, with nearly 50% of my portfolio in FFH I very much appreciate your insight! For example I'd been thinking that Prem was still under water on BlackBerry with a cost of about $17 but didn't realize that he may actually close to breakeven.

[benhacker]

Cageyone,

 

For example I'd been thinking that Prem was still under water on BlackBerry with a cost of about $17 but didn't realize that he may actually close to breakeven.

 

Don't take my word for it, but I believe the $17 / share cost was prior to the convertible investment, which again (just my rough guess) is probably showing $300m of (paper) profits.  They did  sell some common at a loss as well, so that has to factor in, but I think they are close to breakeven.

[A_Hamilton]

Cageyone,

 

For example I'd been thinking that Prem was still under water on BlackBerry with a cost of about $17 but didn't realize that he may actually close to breakeven.

 

Don't take my word for it, but I believe the $17 / share cost was prior to the convertible investment, which again (just my rough guess) is probably showing $300m of (paper) profits.  They did  sell some common at a loss as well, so that has to factor in, but I think they are close to breakeven.

 

I don't think the $17 includes the losses they took on total return swaps in BBRY before converting it into common. Without digging through right now, I believe cost is closer to $25 per share when including those losses.

[benhacker]

A_Hamilton,

 

I don't think the $17 includes the losses they took on total return swaps in BBRY before converting it into common. Without digging through right now, I believe cost is closer to $25 per share when including those losses.

 

You mentioned this before the last time my cost estimate came up on the board, I'd love to hear more if you have some definitive information.  You may be right, but Prem reinforced the $17 cost (re: bbry/rimm) at the annual meeting following our last discussion (after I made the same estimate).

 

I believe the individual name TRS (long positions) listed in ORH's insurance filings are often a form of tax arbitrage (potentially entered into across the Fairfax structure, not naked against an investment bank)... so they aren't really a hidden exposure to the underlying beyond what may be listed in a 13F-HR form.  It may be the case that FFH built the position first with TRS in certain cases (as in the $70m TRS used to be in ORH... maybe), then the timing and thus cost basis of RIMM would be higher than otherwise.  However, I believe in my notes while tracking this I took all that info into account.

 

I'm not certain about this, but I believe in the majority of cases, this may be right.  In the case of BBRY, I think it's right as Prem's stated cost jives with what i saw, and the M2M portfolio (from my memory) didn't seem to have a ton of additional BBRY losses that couldn't be explained in other ways.

 

Again, if you have time / inclination to dig in, anything additional you have to share would be appreciated.  Always trying to have a more complete picture.

[benhacker]

Just a quick follow up here, I ran through a quick spreadsheet from Datarama to determine cost of RIMM (for shares disclosed as owned by Form 13F-HR) and I get an average cost of $15.44... so with some TRS at ORH for RIMM, if they bought early, that could be right around $17.

 

Again, if you have any insurance filing data to share Hamilton, would be great.  My numbers show that they basically lost $250-300m (so far) on common, and basically have M2M gains on the bonds of about that same amount.  Terrible investment IRR to be sure... but breakeven.

[Guest glavacem]

Ben,

 

Thank you very much for the in depth reply. It does make me feel a little more at ease. I was unaware that the total equity portfolio was 8 billion.

 

Cheers

 

Mike

[Guest longinvestor]

When I look at these positions I do worry a little about the large concentration and the quality of some of these businesses.

 

Does anyone else share this concern?

 

Fairfax's portfolio has always been strange IMO.  However, you also need to realize that when you see these SEC filings, you are basically seeing reporting of Fairfax's, non-OTC, US listed equity (and some bonds) portfolio only.  You aren't generally seeing any foreign names (unless Fairfax is buying ADRs, etc).

 

So if you look at one of the nice sites like Datarama or Whale Wisdom, they will show you that Fairfax has like 30% of their portfolio in BBRY, and RFP, etc, but their total listed portfolio via the SEC is only ~$1.5B USD... their equity portfolio (including everything) as of the last quarter was >$8B USD (this number includes several consolidated but not wholly owned businesses as well).  So if they have 30% in a few names that make you scratch your head, just remember that they may be right or wrong, but the "bet" on those names usually isn't as big as it seems.

 

I like to bring the large investments back to a % of book value in my mind so I can understand the downside better in my mind.  So in this case maybe RFP is ~5% of Fairfax book... does that seem more reasonable?  Probably (I don't have a great feel for the RFP investment myself, but it seems reasonable).

 

Anyway, this is just another way to say that Fairfax has huge exposure to things we don't see directly in the 13HR, and also to some investments that we don't even know about.  If you want to track their exposure more accurately, you can track THRE.TH, BKIR.L, and their other global investments.  I'm not sure that is necessary to invest in Fairfax, but probably at least understanding the scope of what you don't see in the 13HR form is needed.

 

Perhaps you already made this mental adjustment and still think they are concentrated in too many low quality businesses (you would not be the first to think so!), but my guess is that because the US investments are so well disclosed and so easy to find via the websites I mentioned above, they get relatively too much focus and the perception is that their US portfolio is a greater % of the overall equities than it really is.

 

Just my perspective.

 

Ben

 

PS - The BBRY investment also needs to be adjusted for the Converts FFH owns which are probably marked at ~$750-800m ($500m cost) or so now, so that investment is actually larger than what is reported, but still not 30% of book).

 

PPS - On a related note, I think Fairfax tends to buy into more leveraged, or seemingly "binary" businesses generally because of two reasons: 1) they (I think) prefer the leveraged nature of equities with massive upside because of their conservative portfolio (I guess you could frame this as leveraged businesses being good inflation hedges) and 2) they have a unique ability to wait out other investors and to not have to worry about death spirals because they can always (assume assets are still backing the investment) double down via debt, converts and even DIP financing in BK, so I think the fat tail negative outcomes for Fairfax aren't as bad as perhaps they are for us as retail investors because Fairfax won't even be diluted (if they don't want to be) - they will be the ones diluting.  This may or may not be their mindset, but I think it makes some amount of sense from what I've seen over the years.  BBRY is a great case in point, they are I believe M2M profitable on their BBRY investment at this point (+/- a few % maybe) I would estimate (obviously not a good IRR, but we'll see how it plays out).  Same thing with LVLT... for years it was considered one of their big failures, but even when the stock was just in the crapper, their IRR was 7-9%, and their IRR over the life of the investments now I think is low teens (not certain here), due to their selling as well as doubling down in debt, converts, etc.

Re:LVLT, I don't have all the detail, but I agree w you that they made an overall 15%. But the timing of their exit from LVLT was a lost opportunity cost. Best I know, they exited between $25 and $28. Why they exited then, have no idea but they missed out on a clear double in the same timeframe as their BBRY holding. Two years, that is.

 

[benhacker]

Re:LVLT, I don't have all the detail, but I agree w you that they made an overall 15%. But the timing of their exit from LVLT was a lost opportunity cost. Best I know, they exited between $25 and $28. Why they exited then, have no idea but they missed out on a clear double in the same timeframe as their BBRY holding. Two years, that is.

 

They held $90m worth of converts until the end of Q3 '13, so I think they completely exits a bit later.  But again, I don't have strong opinions about their investments, I just like to track how they actually did / are doing on them.

 

Strangely I owned LVLT for a near 3x return (tiny size though) from just prior to the reverse split until this year... should have bought more.

 

Ben

[Uccmal]

When I look at these positions I do worry a little about the large concentration and the quality of some of these businesses.

 

Does anyone else share this concern?

 

Fairfax's portfolio has always been strange IMO.  However, you also need to realize that when you see these SEC filings, you are basically seeing reporting of Fairfax's, non-OTC, US listed equity (and some bonds) portfolio only.  You aren't generally seeing any foreign names (unless Fairfax is buying ADRs, etc).

 

So if you look at one of the nice sites like Datarama or Whale Wisdom, they will show you that Fairfax has like 30% of their portfolio in BBRY, and RFP, etc, but their total listed portfolio via the SEC is only ~$1.5B USD... their equity portfolio (including everything) as of the last quarter was >$8B USD (this number includes several consolidated but not wholly owned businesses as well).  So if they have 30% in a few names that make you scratch your head, just remember that they may be right or wrong, but the "bet" on those names usually isn't as big as it seems.

 

I like to bring the large investments back to a % of book value in my mind so I can understand the downside better in my mind.  So in this case maybe RFP is ~5% of Fairfax book... does that seem more reasonable?  Probably (I don't have a great feel for the RFP investment myself, but it seems reasonable).

 

Anyway, this is just another way to say that Fairfax has huge exposure to things we don't see directly in the 13HR, and also to some investments that we don't even know about.  If you want to track their exposure more accurately, you can track THRE.TH, BKIR.L, and their other global investments.  I'm not sure that is necessary to invest in Fairfax, but probably at least understanding the scope of what you don't see in the 13HR form is needed.

 

Perhaps you already made this mental adjustment and still think they are concentrated in too many low quality businesses (you would not be the first to think so!), but my guess is that because the US investments are so well disclosed and so easy to find via the websites I mentioned above, they get relatively too much focus and the perception is that their US portfolio is a greater % of the overall equities than it really is.

 

Just my perspective.

 

Ben

 

PS - The BBRY investment also needs to be adjusted for the Converts FFH owns which are probably marked at ~$750-800m ($500m cost) or so now, so that investment is actually larger than what is reported, but still not 30% of book).

 

PPS - On a related note, I think Fairfax tends to buy into more leveraged, or seemingly "binary" businesses generally because of two reasons: 1) they (I think) prefer the leveraged nature of equities with massive upside because of their conservative portfolio (I guess you could frame this as leveraged businesses being good inflation hedges) and 2) they have a unique ability to wait out other investors and to not have to worry about death spirals because they can always (assume assets are still backing the investment) double down via debt, converts and even DIP financing in BK, so I think the fat tail negative outcomes for Fairfax aren't as bad as perhaps they are for us as retail investors because Fairfax won't even be diluted (if they don't want to be) - they will be the ones diluting.  This may or may not be their mindset, but I think it makes some amount of sense from what I've seen over the years.  BBRY is a great case in point, they are I believe M2M profitable on their BBRY investment at this point (+/- a few % maybe) I would estimate (obviously not a good IRR, but we'll see how it plays out).  Same thing with LVLT... for years it was considered one of their big failures, but even when the stock was just in the crapper, their IRR was 7-9%, and their IRR over the life of the investments now I think is low teens (not certain here), due to their selling as well as doubling down in debt, converts, etc.

 

Ben, That is an awesome summary of the way FFH operates.  It squares with my observations over the years. 

[Guest longinvestor]

Re:LVLT, I don't have all the detail, but I agree w you that they made an overall 15%. But the timing of their exit from LVLT was a lost opportunity cost. Best I know, they exited between $25 and $28. Why they exited then, have no idea but they missed out on a clear double in the same timeframe as their BBRY holding. Two years, that is.

 

They held $90m worth of converts until the end of Q3 '13, so I think they completely exits a bit later.  But again, I don't have strong opinions about their investments, I just like to track how they actually did / are doing on them.

 

Strangely I owned LVLT for a near 3x return (tiny size though) from just prior to the reverse split until this year... should have bought more.

 

Ben

Error of omission:-) I'm especially pleased for not making that mistake. I had small positions for six years leading upto that rs but ploughed in at a buck or less. On it's own LVLT has ballooned into a 30% position. Enuff of me, back to FFH's exit timing. They had it completely correct investing in bonds early on but appear to have completely missed the emerging equity story. I was scratching my head, still am. Maybe they read the LVLT pages on COBF and let that influence them, ha.

[benhacker]

Longinvestor,

 

Error of omission:-) I'm especially pleased for not making that mistake. I had small positions for six years leading upto that rs but ploughed in at a buck or less. On it's own LVLT has ballooned into a 30% position. Enuff of me, back to FFH's exit timing. They had it completely correct investing in bonds early on but appear to have completely missed the emerging equity story. I was scratching my head, still am. Maybe they read the LVLT pages on COBF and let that influence them, ha.

 

Consider this a light poke, as I remember your posts from the LVLT board.  Here is one that I find interesting to contrast with your above statement.

 

From 9/11/2013 (bolding is mine):

 

I have also been a long term holder (11 years), a meaningful owner since 2007, coinciding with equity purchases by Prem / SEAM (they were primarily bond holders before that).

 

Will the fiber-optic backbone eventually pay off? I wish I could tell anyone that as much as I wish it does. One thing is certain, a "low-low tech" approach with (3) would have been far better during the heady days of the "new" telecom/dotcom, because one would have put it in the "too hard" pile just due to the debt load anchor. I suspect that many got into Level 3 just because of the hi tech glamour to the point of ignoring the debt anchor. I was not one of them, investing in Level (3) post the dotcom bust but I obviously overestimated their ability to overcome the debt anchor.

 

As I have learned (later, of course) that Level (3) is in a  fast - commoditizing business, the lack of pricing power made worse by the Bush admin blessed re-monopolization of the legacy telecom business in T & VZ. The long haul basis of Level 3's network needed a complete makeover in light of this govt largesse. (3) is trying to be an enterprise biz now, to me this is one more science experiment in their blighted history. Will this work, who knows?

 

The recent run-up in price gives me hope of an orderly exit for me, I've long written off the opportunity cost. But I've learned a lot about investment behavior owning this.

 

Your confidence seems much stronger in the rear view mirror, than it did in the throws of uncertainty in the stock price.

 

Not trying to call you out, but I thought the juxtaposition was interesting.  We are always much more confident in our analysis *after* we have been proven right.

[Guest longinvestor]

Longinvestor,

 

Error of omission:-) I'm especially pleased for not making that mistake. I had small positions for six years leading upto that rs but ploughed in at a buck or less. On it's own LVLT has ballooned into a 30% position. Enuff of me, back to FFH's exit timing. They had it completely correct investing in bonds early on but appear to have completely missed the emerging equity story. I was scratching my head, still am. Maybe they read the LVLT pages on COBF and let that influence them, ha.

 

Consider this a light poke, as I remember your posts from the LVLT board.  Here is one that I find interesting to contrast with your above statement.

 

From 9/11/2013 (bolding is mine):

 

I have also been a long term holder (11 years), a meaningful owner since 2007, coinciding with equity purchases by Prem / SEAM (they were primarily bond holders before that).

 

Will the fiber-optic backbone eventually pay off? I wish I could tell anyone that as much as I wish it does. One thing is certain, a "low-low tech" approach with (3) would have been far better during the heady days of the "new" telecom/dotcom, because one would have put it in the "too hard" pile just due to the debt load anchor. I suspect that many got into Level 3 just because of the hi tech glamour to the point of ignoring the debt anchor. I was not one of them, investing in Level (3) post the dotcom bust but I obviously overestimated their ability to overcome the debt anchor.

 

As I have learned (later, of course) that Level (3) is in a  fast - commoditizing business, the lack of pricing power made worse by the Bush admin blessed re-monopolization of the legacy telecom business in T & VZ. The long haul basis of Level 3's network needed a complete makeover in light of this govt largesse. (3) is trying to be an enterprise biz now, to me this is one more science experiment in their blighted history. Will this work, who knows?

 

The recent run-up in price gives me hope of an orderly exit for me, I've long written off the opportunity cost. But I've learned a lot about investment behavior owning this.

 

Your confidence seems much stronger in the rear view mirror, than it did in the throws of uncertainty in the stock price.

 

Not trying to call you out, but I thought the juxtaposition was interesting.  We are always much more confident in our analysis *after* we have been proven right.

I have been called out on that post of mine by LVLT fans. That brick is attached  Ok, O I was having a bad day in 12 years ownership. I still stand by what you've bolded. I learned a lot, i still plan to exit, did make a mistake in opportunity cost, ignored the debt anchor etc.

Re:the rearview mirror thing, ironically, I'd posted around the RS time (2007)that there was another rear view mirror psychology at work w LVLT. Their blighted history, the rear view mirror, clouded the windshield, or front view mirror and the opportunity ahead. 

[benhacker]

Longinvestor,

 

Their blighted history, the rear view mirror, clouded the windshield, or front view mirror and the opportunity ahead.

 

I'm certain of two things. 

1) Your quote is very much true, and applicable to many companies and many situations.

2) Your huge position in LVLT has led to your performance being much better than mine this year! ;-)

 

I hope LVLT's future is bright, I thought the company was quite interesting, but it was never high conviction for me, but I think the history of that business will make a great case study some day!