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A Fairfax critic


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For those who can read French (or translate it), Bernard Mooney from the Journal Les Affaires (Quebec) has written a critical, but honest, view of Fairfax that was released today. It's really far from being Peter Eavis like stuff (from those who remember it).  Unfortunately, as far as I know,I think that there is no online version of it.

 

In short:

 

- He said that in a 1995 article, he compared Berkshire to Fairfax, saying that Fairfax was a canadian version of Berkshire Hathaway. He now regrets this past enthousiasm.

 

- There is some points that the two companies share (insurance and reinsurance, two famous investors).

 

- Prem the investor deserve congragulations for his investment acumen shown. His portfolio management returns are exceptional.

 

(to be continued)

 

 

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- That being said, Prem the director is not subject to no critic. There is major differences between Fairfax and Berkshire. Fairfax is speculating with it's capital while Berkshire is particulary conservative.

 

- It's the fourth time that Fairfax sell new shares since 1998 and the only one that has been profitable so far by the buyers is the december 2004 one.

 

- In 2003, Fairfax nearly reached a disaster.

 

- In a top of a good cycle for the insurance industry in 1998, Fairfax bought insurance businesses that were in bad shape and it's size tripled. Losses accumulated.

 

- Since then, Fairfax is in a better shape, but Prem wanted to grow fast and he did put Fairfax in a dangerous situation. Warren would never do that.

One of the consequences of that is the shares outstanding more than doubled since 1998.

 

 

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The rest of the article show that Berkshire also has done some mistakes, but not at the expense of a solid balance sheet and Berkshire issued some shares at more than 2 times book in 1998 while Fairfax issued shares near book recently He did put some of Fairfax subsidiaries public to privatize them later. To him, it's what is called playing with the stock market.

 

Even if it is critical and I don't agree with everything, I think it is an honest critic (unlike what we often saw over the past few years) and a must read for any Fairfax shareholder who is open to critics.

 

Cheers!

 

 

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I'm sure some of the criticism is fair.  A couple of points he didn't make.  

 

- He commented on shares increasing, but did not note the growth in book value and investments per share, or for that matter earnings.  All grew significantly faster than the growth in shares.  

- Yes, the company did face a situation that was very precarious back in 2003, but errors in judgement happen.  Today the company is in better shape than ever.

- Only a handful of people around the world would have been able to turn this ship around when it began floundering in 2003.  Prem deserves to be recognized in the category of great insurance executives, along with the likes of Warren Buffett.  Cheers!  

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- That being said, Prem the director is not subject to no critic. There is major differences between Fairfax and Berkshire. Fairfax is speculating with it's capital while Berkshire is particulary conservative.

 

 

WEB takes risk, however nobody talks about it. He invested in 2 Irish banks that failed. And investing in energy at the top of the cycle, that was risky.

Back when Berkshire was still small, taking a large position in GEICO, which was almost on the brink of bankruptcy ... was risky.

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I think my first shareholder meeting was in 1997 and Prem remarked that FFH stock was as good as cash.  There was alot of hubris back then.  There were no conference calls, virtually no press releases, and minimal information.  You were meant to glean a whole year of development based on the Annual Report.  To that point the results had been so good that no one questioned him.  Then came the big miscalculations:  TIG and C&F.  At the same time the asbestos comp claims heated up and the results were the near death experience by 2003. 

 

I would suggest that Prem has learned a great deal and been suitably humbled by the experience as has everyone in the organization that went through that ordeal, including the shareholders who beleived they could do no wrong.  The risks they take now are much smaller relative to the capital involved, with higher potential payouts.  The CDS for example originally cost 300 M. 

 

I can tell you that If they committed 5 billion to a division of AIG or something similar no matter how well it may be run I would unload my stock the next day.  I am sure I am not alone in that sentiment which of course basically means they wouldn't be able to raise the cash for such an acquisition.  I forget the name Buffett coined for having so much cash in your pocket that you feel compelled to spend it.  Anyway...   

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Al, I think you have done some very good remarks here.

 

The difference of Prem 1998 and 2009 versions are important enough I guess. Everybody do some mistakes and has his own house of horrors.

 

The most important things is not betting the company on a given deal and to always keep a solid balance sheet, even if you think that there is plenty of fish to shoot in barrels around (by the way, some of them shoot back).

 

Then, the first step is to try to clearly identify your mistakes. What went wrong with me? Let me give you an example of one of my two items in my house of horrors. Few years ago, I bought some First Marblehead shares. I tought that it would be a phenomenal gain (higher odds) or nearly lose it all (lower odds) situation. I was a little bit fearful of a credit freeze few months before it actually happened and I wrote to the investors relationship department. I've asked them if they tought that if a credit freeze was to happen, would investors flight more to safer products? Someone told me from FMD that he tought that, on the contrary, if that would happen, it would attract investors to FMD financial products.

 

Oh boy, what history can teach us! Who made the mistake? The guy at FMD or me? ME!

...

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The second important thing is to learn for your mistake and do your best to not repeat them in the future. That's the "rinse your cottage cheese" part. Discipline. What did I learned? First, to avoid very high gain potential, but at a significant fundamental risk "expense". So, since then, I did let pass some situations like that, and I effectively avoided some significant gains situations, but losses as well. I put more emphasis on the downside than before this experience.

 

Now, back to Prem. Do you think guys he learned from his 7 lean years experience? From some value traps he recently falled into?

 

I would guess that the answer is mostly yes. So far what I've seen with Fairfax is that they do care more than before on the solidity of our balance sheet. We're not a AAA company à la Berkshire, but we are in safer position than few years ago.

 

Regarding FFH issuing shares since 1998, to me, it's a question of intrinsic value of what you give and what you get. If you issue shares at a discount to their intrinsic value for something that has less value in return, you're expanding your domain at shareholders expense. If what you issue has approximately the same value than what you buy, you're exchanging 4X25 cents for a dollar (fine with me, as long as it makes sense) If you buy something that has more intrinsic value than what you give, then your shareholders profit and it also makes sense.

 

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I have made my share of mistakes along the way.  Buy and holding crap has to be one of the biggest ones.  Buying at prices that were too high.  Buying high fliers such as FFH at 385 Cdn in 1997. 

 

The worst is probably buying things I dont really know.  By this I mean not knowing how they make their money.  One can invest in Intel at the right price without knowing much about semi-conductors because it is relatively easy to indentify how they make money.  Nortel on the other hand never made money.  The same would apply today to companies that make solar systems, electric cars etc.  I have made this same mistake in different guises.  Fortunately I have avoided gross errors. 

 

I dont consider sfk.un to be an error at $6.00 for myself or FFH.  Management was honest and capable - the economy worked against them.

 

Regarding the share issuances by FFH.  The ones since 2003 were at poor prices but we understood why.  The one last week was at a price that in my estimate is less than the asset they will receive - ORH

 

I am acutely interested in how the DIP will work out with Abitibi.  FFH should come out as a major shareholder of a very valuable, financially restructered going concern just as business starts to pick up.   

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The risk that you have when you want to privatize a company is that suddenly, the atmosphere become more charged, outside lawyers firm suddenly care so much about "fair prices" and some shareholders become very thirsty, while others new entrants want to speculate about how far they can stretch you on the price. That's not a situation that tend to help the potential buyer. Since the atmosphere is charged, he can fall into the trap of overpaying. So to avoid mistakes, it's a good idea to issue shares at their full intrinsic value first.

 

But then, if you don't have sufficient cash on hands, what you should prefer? Buying big stuff by issuing debt or equity? If the debt might threatening the business life in the perfect storm scenario, you're better of having 3/4 X of something that has still some value than 4/4 X of something that is worth zero. That being said, like I said before, I prefer to be diluted at a fair price in the first place.

 

Lastly, if you want to compare Berkshire and Fairfax solidity, let me ask you this very theorical and no numbers question: you want to buy a long term life insurance policy. You have only two insurers available, Berkshire and Fairfax, and the premiums are approximately the same. There is no reinsurance on any of them and no outside firm to garantee anything. Wich one would you actually choose?

 

Frankly, I'm very confident that Prem and team made very significant steps in the right direction over the last few years. Their 2009 version is better than their 1998 version and it's where the puck is likely going to be that interest me most. In 2019, as a long term shareholder in the company, I'm looking forward to say that our balance sheet is stronger than ever, our intrinsic value per share over the last 10 years have compounded at a satisfying pace and our management team is also better than ever.

 

Cheers!

 

 

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People & organizations change over the years. In your 20's the high return 'bet the farm' punt was great, by your 30's you'd either won or learned otherwise, in your 40's it was 'stay rich' vs 'get rich'. Similar thing for companies; but in both cases its really about maturity & learning from your mistakes.

 

Companies are really about people & ensuring that they have the opportunity to thrive at what they do. And our IV derives from the decisions those folks make, not the coy products - which are often commodity items or interchangeable, & perhaps not even neccessary. Arcs are great, but to thrive you need to periodically open the hatches & let a fresh breeze in.

 

If FFH took a chunk of AIG (with partners) we'd be very happy, but we'd also hedge ourselves against a material drop in price of the stock - & keep the hedge untill we saw hard evidence that it was working. We would also expect FFH itself to have done much the same thing, & would see the hedges as overt signs of maturity.

 

FFH has enormous potential, but they will have to continiously evolve.

Everyday business risk.

 

SD     

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People & organizations change over the years. In your 20's the high return 'bet the farm' punt was great, by your 30's you'd either won or learned otherwise, in your 40's it was 'stay rich' vs 'get rich'. Similar thing for companies; but in both cases its really about maturity & learning from your mistakes.

 

SD      

 

Yeah you're right about this Sharp. As I think about it. I remember WEB says things along the lines of "if you're rich, to give up what you've got for more by using leverage and potentially risking it all is foolish" when he talks about LTCM. And he says stuff like "reputation is more important than money" to his line managers at BRK.

WEB is definitely alot more conservative these days. He's got a good life too so why not.

 

He still invested in two Irish banks that failed but.  ;)

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