3rd Quarter results

[petec]

Question: to those (Dazel, to some extent me) who are frustrated and wish there was a core of high quality yielding equities...

 

...would you want them to buy those equities right now?

[giofranchi]

Question: to those (Dazel, to some extent me) who are frustrated and wish there was a core of high quality yielding equities...

 

...would you want them to buy those equities right now?

 

Given they keep holding their equity hedges, and they keep holding lots of cash, I would surely like them buying more high quality companies at attractive prices. The fact the general market might be a bit stretched at this point doesn’t mean there are no high quality stocks selling at attractive prices.

For instance, the companies controlled by Malone are cheap right now imo. And BRK has bought large investments in them during the last year or so. I surely would like FFH to follow suit.

You know I also think AAPL is cheap right now: think of Mr. Icahn, who has said he is more hedged today than at any time in the past, and who has publicly said he shares many of the concerns FFH has about the general economy, but still holds a very large investment in AAPL.

 

Cheers,

 

Gio

 

[DCG]

For instance, the companies controlled by Malone are cheap right now imo. And BRK has bought large investments in them during the last year or so. I surely would like FFH to follow suit.

 

 

What Malone companies has BRK bought shares of?

[giofranchi]

What Malone companies has BRK bought shares of?

 

I think CHRT, and I am not sure about LMCA... You might want to check it out!

 

Cheers,

 

Gio

[Guest Dazel]

I am not here for a witch hunt and certainly am not more qualified than the Fairfax team to pick stocks...not even close. You will remember they are incredible stock pickers...so lets not forget the absolute admiration and respect I have for this team....Eric is right...they had the right strategy and they changed it...they tried to market time yet they bought cigar butts.

 

As for my break from cheerleading...they had an opportunity to buy quality in quarter 3 and they did not...bonds or stocks. They were in the best position of any company in the world to so and they did nothing....and that has me questioning what their thinking is now.

 

in Benjamin Graham's book intelligent investor....I feel the "most' important information in the whole book is when Graham and Dodd conclude that the returns of "all" of their stock market actions over their careers...do "not"cumulatively add up to the returns that they made from one single investment...they do not give the name of that investment...but it was "Geico"....and this has them question their life's work. Fairfax itself is Geico....so I can question strategy all I want...but the end result of this talented team is Fairfax. They will figure it out...we all make mistakes.

 

Dazel

[Cardboard]

IMO, their biggest problem with stock picking is their love for businesses in secular decline: Canwest Global, Torstar, BlackBerry, Resolute, Tembec, etc.

 

I also agree with a previous poster that being successful at a few macro calls makes you an addict. They need to control that temptation.

 

And some of the hedges that they have carried since 2009 were not assymetric payouts (equivalent of straight shorts).

 

Cardboard

 

 

[ERICOPOLY]

Anyways, it's not like we can't just buy MKL if we want a good underwriter that buys high quality businesses to hold for the long term.  At least FFH offers variety.

 

[gary17]

Eric

I seem to recall you bought FFH... Did you buy MKL?  I'd be curious as to know why you chose one over the other!

Thanks

Gary

[ERICOPOLY]

Eric

I seem to recall you bought FFH... Did you buy MKL?  I'd be curious as to know why you chose one over the other!

Thanks

Gary

 

I did buy FFH maybe a year ago, then I sold it into it's rally. 

 

Then I bought a smaller amount at $570.932 CDN (according to my IB cost basis which carries it out to 3 decimal points) over the past few months -- still holding.  But I didn't mention that buy previously because it really doesn't matter what I do or don't do.  In fact, it's probably mostly rewarding to not listen to my noise at all because except for like 3 or 4 times in 10 years that's pretty much the truth.  Even then, I'm just amplifying what a group of other board members have already pieced together (I get it from them).

[gary17]

Thanks !

So when you were looking a year ago... did you also look at MKL ?  If so, I'm still curious as to why you went with FFH over MKL.  was it purely valuation and since you think it might be a short-term hold, FFH was more undervalued than MKL?  Or did the quality of the business come into consideration as well?

[ERICOPOLY]

Thanks !

So when you were looking a year ago... did you also look at MKL ?  If so, I'm still curious as to why you went with FFH over MKL.  was it purely valuation and since you think it might be a short-term hold, FFH was more undervalued than MKL?  Or did the quality of the business come into consideration as well?

 

I don't have any MKL.

 

I went with FFH because it looked to be down near the low end of where it usually trades, and I sold it because it was up by the high end.  Rapid revaluation -- it happened very fast and i didn't think something like that would happen... when it did I was just shaken up by it.  I didn't feel like book value was going to compound at a high rate anytime soon because of the hedges, and if the hedges were going to be sold and working in our favor, it would come at a time of a big market dislocation.  As I keep pointing out a thousand times, FFH's valuation (price to book) got compressed the last time the hedges worked out in a major way (2008/2009). 

 

So I thought there was no reason to hang around with a lofty valuation for a market crash which would make them drop the hedges, which I feared would lead to price compression anyhow (suppressing a good deal of net book value growth gains from the hedges).

 

But I didn't really fear the market crash -- it was just as much the case that if a market crash never happened, then book value growth would still suck anyhow because of the hedges.

 

And I have no idea if I was right, or lucky, or neither.  Plus I felt nervous after making "hot money" so quickly that I reacted with the above logic, whether right or wrong.

[Crip1]

As I keep pointing out a thousand times, FFH's valuation (price to book) got compressed the last time the hedges worked out in a major way (2008/2009). 

 

 

 

I have no reason to disagree with your logic. Full disclosure, I am a long-term FFH holder. The quote above is isolated because I am not in agreement that the same thing will happen again should FFH's hedges work out down the road. The reason is that things have changed from then until now. In 2008/2009, FFH was a one-trick pony in that they could invest. Their insurance results were sub-par. Now, their insurance are substantively better, very profitable. If the insurance operations continue, then I would opine that multiple expansion overall would take place and that any contraction as a result of a macro bet would be muted compared to 2008-2009. Stated differently, a company with mediocre operations but that kicked-butt on a macro bet is less valuable than a company with solid ongoing operations that kicked-butt on a macro bet.

 

 

-Crip

 

 

P. S. I hated for years the usage of "bet" when discussing Fairfax...I thought it misrepresented the hedging aspect. The tune has changed to an extent.

[ERICOPOLY]

As I keep pointing out a thousand times, FFH's valuation (price to book) got compressed the last time the hedges worked out in a major way (2008/2009). 

 

 

 

I have no reason to disagree with your logic. Full disclosure, I am a long-term FFH holder. The quote above is isolated because I am not in agreement that the same thing will happen again should FFH's hedges work out down the road. The reason is that things have changed from then until now. In 2008/2009, FFH was a one-trick pony in that they could invest. Their insurance results were sub-par. Now, their insurance are substantively better, very profitable. If the insurance operations continue, then I would opine that multiple expansion overall would take place and that any contraction as a result of a macro bet would be muted compared to 2008-2009. Stated differently, a company with mediocre operations but that kicked-butt on a macro bet is less valuable than a company with solid ongoing operations that kicked-butt on a macro bet.

 

 

-Crip

 

 

P. S. I hated for years the usage of "bet" when discussing Fairfax...I thought it misrepresented the hedging aspect. The tune has changed to an extent.

 

It's true that underwriting results didn't look anywhere near as good back then.

 

However...

1)  the market put a multiple on the stock while also taking those sketchier underwriting results into consideration.

2)  the market crashed and the price to book compressed along with it

 

Correlation is not causation though.

 

MKL's price to book also compressed.  Berkshire's also compressed.

 

Coca Cola's valuation compressed.

 

It just looks to me like:

1)  pre-crash, every company has a given multiple

2)  during the crash, every company sees multiple compression

 

Why would FFH be an exception this time when all other high quality stocks see compression in crashes?  Well, you could argue because the hedges would be soaring, but yet that didn't prevent it from happening the last time around...

 

Anyway...  I'm not right, it's just how I view it.

[Uccmal]

IMO, their biggest problem with stock picking is their love for businesses in secular decline: Canwest Global, Torstar, BlackBerry, Resolute, Tembec, etc.

 

I also agree with a previous poster that being successful at a few macro calls makes you an addict. They need to control that temptation.

 

And some of the hedges that they have carried since 2009 were not assymetric payouts (equivalent of straight shorts).

 

Cardboard

 

You said what I wanted to much more elegantly.  Canwest baffled me at the time, as has RIM, Torstar, SD,  and especially Resolute. Buffett's buys almost never leave me shaking my head. 

 

I expect some of their macro bets will do well, at some point.  But the returns noted above by one poster (-6% for the last number of yrs) are not enough to make me want to hold FFh stock, even as a hedge.  Just because I think I can get better returns in other places doesn't detract from the fact that I admire the wonderful company that Prem has built.  I also admire Google, Tesla, and others but dont hold their stock, either.  Nor do I hold Berkshire. 

 

 

[Uccmal]

As I keep pointing out a thousand times, FFH's valuation (price to book) got compressed the last time the hedges worked out in a major way (2008/2009). 

 

 

 

I have no reason to disagree with your logic. Full disclosure, I am a long-term FFH holder. The quote above is isolated because I am not in agreement that the same thing will happen again should FFH's hedges work out down the road. The reason is that things have changed from then until now. In 2008/2009, FFH was a one-trick pony in that they could invest. Their insurance results were sub-par. Now, their insurance are substantively better, very profitable. If the insurance operations continue, then I would opine that multiple expansion overall would take place and that any contraction as a result of a macro bet would be muted compared to 2008-2009. Stated differently, a company with mediocre operations but that kicked-butt on a macro bet is less valuable than a company with solid ongoing operations that kicked-butt on a macro bet.

 

 

-Crip

 

 

P. S. I hated for years the usage of "bet" when discussing Fairfax...I thought it misrepresented the hedging aspect. The tune has changed to an extent.

 

It's true that underwriting results didn't look anywhere near as good back then.

 

However...

1)  the market put a multiple on the stock while also taking those sketchier underwriting results into consideration.

2)  the market crashed and the price to book compressed along with it

 

Correlation is not causation though.

 

MKL's price to book also compressed.  Berkshire's also compressed.

 

Coca Cola's valuation compressed.

 

It just looks to me like:

1)  pre-crash, every company has a given multiple

2)  during the crash, every company sees multiple compression

 

Why would FFH be an exception this time when all other high quality stocks see compression in crashes?  Well, you could argue because the hedges would be soaring, but yet that didn't prevent it from happening the last time around...

 

Anyway...  I'm not right, it's just how I view it.

 

FFH dropped by $100 cdn top to bottom in FEB/March 2008 (35%) after reporting record earnings for 2007/2008.  They will get caught in the tide like everything else in a major crash.  And it will have nothing to do with Fairfax. 

[gary17]

Thanks !

So when you were looking a year ago... did you also look at MKL ?  If so, I'm still curious as to why you went with FFH over MKL.  was it purely valuation and since you think it might be a short-term hold, FFH was more undervalued than MKL?  Or did the quality of the business come into consideration as well?

 

I don't have any MKL.

 

I went with FFH because it looked to be down near the low end of where it usually trades, and I sold it because it was up by the high end.  Rapid revaluation -- it happened very fast and i didn't think something like that would happen... when it did I was just shaken up by it.  I didn't feel like book value was going to compound at a high rate anytime soon because of the hedges, and if the hedges were going to be sold and working in our favor, it would come at a time of a big market dislocation.  As I keep pointing out a thousand times, FFH's valuation (price to book) got compressed the last time the hedges worked out in a major way (2008/2009). 

 

So I thought there was no reason to hang around with a lofty valuation for a market crash which would make them drop the hedges, which I feared would lead to price compression anyhow (suppressing a good deal of net book value growth gains from the hedges).

 

But I didn't really fear the market crash -- it was just as much the case that if a market crash never happened, then book value growth would still suck anyhow because of the hedges.

 

And I have no idea if I was right, or lucky, or neither.  Plus I felt nervous after making "hot money" so quickly that I reacted with the above logic, whether right or wrong.

 

Thanks.  Well, if I recall correctly ... last year they had about 21M shares trading at $500 CAD...  and the reported book value was 9B USD= 10.6B based on the 85c exchange rate then...

 

So they just reported 12B in book value.. at today's exchange rate that's about $15B CAD .... they now have about 22M shares trading at 650CAD = 14.3B...      Feels like similar valuation as last year !

[TwoCitiesCapital]

I would agree that they'll likely fall. When investors are caught in a massive drawdown, they have two options - sell something that has fallen significantly to pay down your leverage and incur significant capital losses OR sell something that hasn't gone down as much to realize fewer gains and hold for the rebound.

 

The only reason that I can think that may cause it to be different the next time is that people saw what happened in 2008 - they saw that Fairfax made a killing and quickly deployed those earnings into depressed asset valuations etc. to catapult it to new highs shortly thereafter. With that knowledge, if you see the exact same circumstance coming to fruition again, people may be more inclined to enter Fairfax on any weakness with the knowledge that it will likely be significantly higher soon.

 

I think scenario two is unlikely to offset the tide of the investor exodus from forced selling and panic, but I never really know and don't try to trade around my Fairfax position much for this reason.

[ERICOPOLY]

Although I said it does not really matter what I do, I sold my FFH today after reviewing the logic I applied last year. 

 

negative macro:  Low interest rates  (mitigated by better underwriting)

positive macro:  better underwriting (but low interest rates)

capital gains (my negative view is that the hedges cut both ways -- they also hedge out gains)

 

So upwards revaluation in the face of low compounding looks to be the bull thesis (actually, not "the" bull thesis but rather my own), but given what we've already seen as potential and actual lows in valuation this year and last, I feel like it's equal weighted perhaps at best either way.  Just as much to lose from negative sentiment as to gain for richer valuation.

 

I also have some VRX losses to soak up -- no tax due on the gain.

 

[gary17]

well, if the jobs report is half decent, according to Yellen there's a good chance of a higher interest rates to come... fwiw

 

Although I said it does not really matter what I do, I sold my FFH today after reviewing the logic I applied last year. 

 

negative macro:  Low interest rates  (mitigated by better underwriting)

positive macro:  better underwriting (but low interest rates)

capital gains (my negative view is that the hedges cut both ways -- they also hedge out gains)

 

So upwards revaluation in the face of low compounding looks to be the bull thesis (actually, not "the" bull thesis but rather my own), but given what we've already seen as potential and actual lows in valuation this year and last, I feel like it's equal weighted perhaps at best either way.  Just as much to lose from negative sentiment as to gain for richer valuation.

 

I also have some VRX losses to soak up -- no tax due on the gain.

[ERICOPOLY]

I know it seems funny to call better underwriting a "macro" in my edit, but I think the underwriting environment swings along with interest rates.  So I'm lumping those two as paired realities, although I think Prem has articulated the view that industry underwriting does not yet gel with his low interest rate thesis (believe he thinks rates will be low for a longer time than people expect and they haven't yet come to accept it in their industry's underwriting pricing)

[ERICOPOLY]

well, if the jobs report is half decent, according to Yellen there's a good chance of a higher interest rates to come... fwiw

 

Although I said it does not really matter what I do, I sold my FFH today after reviewing the logic I applied last year. 

 

negative macro:  Low interest rates  (mitigated by better underwriting)

positive macro:  better underwriting (but low interest rates)

capital gains (my negative view is that the hedges cut both ways -- they also hedge out gains)

 

So upwards revaluation in the face of low compounding looks to be the bull thesis (actually, not "the" bull thesis but rather my own), but given what we've already seen as potential and actual lows in valuation this year and last, I feel like it's equal weighted perhaps at best either way.  Just as much to lose from negative sentiment as to gain for richer valuation.

 

I also have some VRX losses to soak up -- no tax due on the gain.

 

Higher interest rates will lead to softer industry underwriting pricing.

[ERICOPOLY]

Also, I don't mean to imply that today's underwriting results at FFH are entirely due to low interest rates.  It must be at least part of it though is my thinking.  Anyway, if you piece together the after-tax underwriting profit and investment income, the two tend to be intertwined.  The industry would care somewhat less about the pricing of the insurance if they could make 4% on short-term money.  But they can't make 4% on short term money so it must be having somewhat of an effect on their pricing strategy.

[bluedevil]

This ZIRP induced insanity will correct sooner and later, and when it does, that will be the time to evaluate how Fairfax has handled itself.  We'll see.  I'm just glad the company is showing the fortitude to stick it out.

 

If you do not share FFH's view that equity and corporate bond markets are currently EXTREMELY overvalued, I think you are probably in the wrong stock.

 

 

 

[ERICOPOLY]

If you do not share FFH's view that equity and corporate bond markets are currently EXTREMELY overvalued, I think you are probably in the wrong stock.

 

I agree with that.

 

However you could make the exact same statement that you just made back in late 2007.

 

Then 2008 came and the best thing that you could have done in late 2007, given Fairfax's thesis of overvalued markets, is to hold no equity whatsoever... including that of Fairfax.

 

But you were relatively better off in FFH if the gun was put to your head to be in the equity markets.

 

[ERICOPOLY]

And sorry, I do recognize that it grows tiresome when I say "it didn't work in 2008".  Full credit to viewpoints that it could be otherwise next time.

 

Sometimes I feel though that there are all these people in it waiting for the payout when it comes.

 

And I was like that last time...

 

Until I realized that being down 30% sometime around late August 2008 REALLY FELT SHITTY!!!  Especially since I was supposed to be so clever as to be in this stock that was so well hedged you just couldn't lose.

 

So maybe I'm tainted by a negative one-time experience.