3rd Quarter results

[Luckyone77]

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.

 

Stated as Munger taught Buffet: "It's better to buy a great company at a fair price then fair company at a great price." Fairfax forgot that lesson and is buying crap and at a bad price. Hard to believe really.

[james22]

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.

 

Fairfax works as a hedge for me both ways - relatively better off in a crash and better than cash otherwise.

 

And I'd like to see Fairfax buying quality too, but I'm happy they didn't buy BRK at 1.27 P/B last month (for example) for the same reason I didn't: while quality at good value, given a thesis of overvalued markets, the best thing to do is to hold no equity whatsoever.

 

 

This probably about right:

 

Prong #1: Deflationary spiral returns. Market selloff starts, causing FFH stock to drop too as Mr. Market forgets about their hedges.  Prem goes for the kill and issues buyback press release; and market shrugs and stock drops anyway. And there is the little me, happily competing with FFH buying back its stock at large discounts to book.

 

Prong #2: Deflationary spiral returns. Market selloff starts, causing FFH stock to rise as Mr. Market values their CPI and stock hedges. I continue sitting on the sidelines and miss out. Buybacks are never called because the price never quite came down enough.

 

Prong #3: Status quo. Mild inflation. Financial repression. My cash reserves lose value. Stock market goes even higher and sells at even larger PEs. FFH muddles along as their hedges decay completely. FFH produces half decent returns and it is all very lackluster.

 

If it is prong #1, cash is the place to be right now. If it is prong #2, buy FFH, now. If prong #3, FFH is not a bad place to be but there are better non-cash alternatives out there.

 

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/watsa-on-share-buybacks/msg112515/#msg112515

[petec]

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.

 

Eric,

 

I absolutely agree with your broad point here and I do think that all multiples will compress in the next crash.  I don't expect to make money in Fairfax the first 6 months of a crash.  That said, I do think you're picking your dates a bit too carefully!  I just (fairly randomly) chose Nov 2006-Nov 2010 to graph FFH CN, and it basically goes from bottom left to top right.  The selloff starting March 08 lasted five months, took you back to where you would have been in Sept 07, and reversed rapidly.  The same thing happened starting early 2009.  So yes, the start of the storm felt shitty both times, and maybe that'll happen again and we'll will get a great opportunity; but all the graph really tells us is that this is a volatile stock that performed extremely well through the crisis.  And we all know that what matters far more is how IV trends, and I believe FFH's IV could explode in the next crash if there is a deflationary panic.

 

I think 2008 is not comparable to today in two ways: as soon as the next crash happens people will look to Fairfax, remembering what happened last time, which is bullish; but the starting multiple is higher, which is bearish.

 

P

[petec]

As for my break from cheerleading...they had an opportunity to buy quality in quarter 3 and they did not...bonds or stocks.

 

 

This is the only bit of your post that I don't agree with.  They have repeatedly said that they fear a real meltdown.  The 3q correction wasn't a meltdown, and most of the real selloffs were not in the kind of quality names we are discussing here because most of it was focussed on China-exposed cyclicals which, if their thesis is right, won't bounce back fast when the crash comes.

 

Now, I'm sure everyone can name one or two stocks that they think reached real bargain levels.  But no fund manager can watch every stock all the time so I don't criticise them for missing the odd individual opportunity.  My point is there was not a broad based opportunity for someone with their macro view, and I think their inactivity is evidence of consistently-applied thinking.

 

(It goes without saying on a value board that the fact that the market went back up again does not disprove the idea that there was not a broad-based opportunity for a bear looking for a margin of safety!  If their view comes to pass, the market will re-assess its idea of IV for virtually every company out there by much more than 20%, and I think they have this firmly in mind when things fall 20%.)

 

None of that has anything to do with the fact that I wish they'd build a core portfolio of great companies instead of picking up cigar butts in dying ones.

 

P

[Uccmal]

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.

 

Eric,

 

I absolutely agree with your broad point here and I do think that all multiples will compress in the next crash.  I don't expect to make money in Fairfax the first 6 months of a crash.  That said, I do think you're picking your dates a bit too carefully!  I just (fairly randomly) chose Nov 2006-Nov 2010 to graph FFH CN, and it basically goes from bottom left to top right.  The selloff starting March 08 lasted five months, took you back to where you would have been in Sept 07, and reversed rapidly.  The same thing happened starting early 2009.  So yes, the start of the storm felt shitty both times, and maybe that'll happen again and we'll will get a great opportunity; but all the graph really tells us is that this is a volatile stock that performed extremely well through the crisis.  And we all know that what matters far more is how IV trends, and I believe FFH's IV could explode in the next crash if there is a deflationary panic.

 

I think 2008 is not comparable to today in two ways: as soon as the next crash happens people will look to Fairfax, remembering what happened last time, which is bullish; but the starting multiple is higher, which is bearish.

 

P

 

People may look to Fairfax in a crash, but they will be selling none-the-less.  The reason is fairly simple: the need to raise money for margin calls, and generalized panic.  It absolutely will happan again.  Your naive to assume otherwise.  Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings.  I know because I was buying FFH at the time.  Its posted somewhere on this board. 

[giofranchi]

People may look to Fairfax in a crash, but they will be selling none-the-less.  The reason is fairly simple: the need to raise money for margin calls, and generalized panic.  It absolutely will happan again.  Your naive to assume otherwise.  Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings.  I know because I was buying FFH at the time.  Its posted somewhere on this board.

 

If I am not wrong, FFH during the first quarter of 2009 wasn’t hedged anymore. It had taken its hedges away at the end of 2008.

 

This being said, I think no one is expecting FFH to stay at the level it is trading today in a market crash. But you have two options:

1) To hold cash,

2) To hold a company whose stock might decrease less than your other holdings in a crash, in order to sell it and buy more of those companies you like and which have been more hardly punished in the crash. In other words, to sell a cheap stock in order of buying an even cheaper one.

I don’t know of a third alternative (or maybe yes: simply being 100% invested all the time… but I guess that doesn’t suit everybody well!).

 

Cheers,

 

Gio

 

[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.

 

Eric,

 

I absolutely agree with your broad point here and I do think that all multiples will compress in the next crash.  I don't expect to make money in Fairfax the first 6 months of a crash.  That said, I do think you're picking your dates a bit too carefully!  I just (fairly randomly) chose Nov 2006-Nov 2010 to graph FFH CN, and it basically goes from bottom left to top right.  The selloff starting March 08 lasted five months, took you back to where you would have been in Sept 07, and reversed rapidly.  The same thing happened starting early 2009.  So yes, the start of the storm felt shitty both times, and maybe that'll happen again and we'll will get a great opportunity; but all the graph really tells us is that this is a volatile stock that performed extremely well through the crisis.  And we all know that what matters far more is how IV trends, and I believe FFH's IV could explode in the next crash if there is a deflationary panic.

 

I think 2008 is not comparable to today in two ways: as soon as the next crash happens people will look to Fairfax, remembering what happened last time, which is bullish; but the starting multiple is higher, which is bearish.

 

P

 

People may look to Fairfax in a crash, but they will be selling none-the-less.  The reason is fairly simple: the need to raise money for margin calls, and generalized panic.  It absolutely will happan again.  Your naive to assume otherwise.  Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings.  I know because I was buying FFH at the time.  Its posted somewhere on this board.

 

 

I believe that people will see other stocks they love down 80%, and they'll dump FFH to buy those stocks.

 

I've said this before:  once you think the bottom is in, FFH is the wrong stock to own.

 

I think they only had like 50% of their book value in stocks in March 2009, and a lot of it was stuff that wasn't all that compressed (JNJ for example).

 

 

THE BIGGEST mistake I made in early 2009 was smugly believing that FFH would be backing up the truck and loading up on bargains.  HARDLY!  Not a single share of AXP for example. 

 

And MKL?  I think the only thing they bought through the crisis was a teensy weensy bit more KMX. 

 

So look, there won't be much buying pressure on FFH stock itself if people remember what happened last time.  But that was my mistake in misreading them -- they probably were uneasy after dropping their hedges and/or couldn't add more risk being an insurance company.

[Uccmal]

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.

 

Eric,

 

I absolutely agree with your broad point here and I do think that all multiples will compress in the next crash.  I don't expect to make money in Fairfax the first 6 months of a crash.  That said, I do think you're picking your dates a bit too carefully!  I just (fairly randomly) chose Nov 2006-Nov 2010 to graph FFH CN, and it basically goes from bottom left to top right.  The selloff starting March 08 lasted five months, took you back to where you would have been in Sept 07, and reversed rapidly.  The same thing happened starting early 2009.  So yes, the start of the storm felt shitty both times, and maybe that'll happen again and we'll will get a great opportunity; but all the graph really tells us is that this is a volatile stock that performed extremely well through the crisis.  And we all know that what matters far more is how IV trends, and I believe FFH's IV could explode in the next crash if there is a deflationary panic.

 

I think 2008 is not comparable to today in two ways: as soon as the next crash happens people will look to Fairfax, remembering what happened last time, which is bullish; but the starting multiple is higher, which is bearish.

 

P

 

People may look to Fairfax in a crash, but they will be selling none-the-less.  The reason is fairly simple: the need to raise money for margin calls, and generalized panic.  It absolutely will happan again.  Your naive to assume otherwise.  Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings.  I know because I was buying FFH at the time.  Its posted somewhere on this board.

 

 

I believe that people will see other stocks they love down 80%, and they'll dump FFH to buy those stocks.

 

I've said this before:  once you think the bottom is in, FFH is the wrong stock to own.

 

I think they only had like 50% of their book value in stocks in March 2009, and a lot of it was stuff that wasn't all that compressed (JNJ for example).

 

 

THE BIGGEST mistake I made in early 2009 was smugly believing that FFH would be backing up the truck and loading up on bargains.  HARDLY!  Not a single share of AXP for example. 

 

And MKL?  I think the only thing they bought through the crisis was a teensy weensy bit more KMX. 

 

So look, there won't be much buying pressure on FFH stock itself if people remember what happened last time.  But that was my mistake in misreading them -- they probably were uneasy after dropping their hedges and/or couldn't add more risk being an insurance company.

 

Yes, you have said this before. 

 

I was buying the Leaps back then.  FFh did some merchant banking as I recollect including H&R Reit, and Mullen Group.  Most of my money in spring 2009 was going into SBux, GE, Axp, wfc, hd, and a couple of others.  The others were much cheaper than FFH in March/ April 2009. 

 

Which begs the question: Why hold FFh at all?  Returns now are middlng, and getting to the bogey of 15% for any further 10 year period is unlikely.  Please dont take it that I hate the company at all.  Its just there better investments. 

[TwoCitiesCapital]

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.

 

Eric,

 

I absolutely agree with your broad point here and I do think that all multiples will compress in the next crash.  I don't expect to make money in Fairfax the first 6 months of a crash.  That said, I do think you're picking your dates a bit too carefully!  I just (fairly randomly) chose Nov 2006-Nov 2010 to graph FFH CN, and it basically goes from bottom left to top right.  The selloff starting March 08 lasted five months, took you back to where you would have been in Sept 07, and reversed rapidly.  The same thing happened starting early 2009.  So yes, the start of the storm felt shitty both times, and maybe that'll happen again and we'll will get a great opportunity; but all the graph really tells us is that this is a volatile stock that performed extremely well through the crisis.  And we all know that what matters far more is how IV trends, and I believe FFH's IV could explode in the next crash if there is a deflationary panic.

 

I think 2008 is not comparable to today in two ways: as soon as the next crash happens people will look to Fairfax, remembering what happened last time, which is bullish; but the starting multiple is higher, which is bearish.

 

P

 

People may look to Fairfax in a crash, but they will be selling none-the-less.  The reason is fairly simple: the need to raise money for margin calls, and generalized panic.  It absolutely will happan again.  Your naive to assume otherwise.  Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings.  I know because I was buying FFH at the time.  Its posted somewhere on this board.

 

 

I believe that people will see other stocks they love down 80%, and they'll dump FFH to buy those stocks.

 

I've said this before:  once you think the bottom is in, FFH is the wrong stock to own.

 

I think they only had like 50% of their book value in stocks in March 2009, and a lot of it was stuff that wasn't all that compressed (JNJ for example).

 

 

THE BIGGEST mistake I made in early 2009 was smugly believing that FFH would be backing up the truck and loading up on bargains.  HARDLY!  Not a single share of AXP for example. 

 

And MKL?  I think the only thing they bought through the crisis was a teensy weensy bit more KMX. 

 

So look, there won't be much buying pressure on FFH stock itself if people remember what happened last time.  But that was my mistake in misreading them -- they probably were uneasy after dropping their hedges and/or couldn't add more risk being an insurance company.

 

Yes, you have said this before. 

 

I was buying the Leaps back then.  FFh did some merchant banking as I recollect including H&R Reit, and Mullen Group.  Most of my money in spring 2009 was going into SBux, GE, Axp, wfc, hd, and a couple of others.  The others were much cheaper than FFH in March/ April 2009. 

 

Which begs the question: Why hold FFh at all?  Returns now are middlng, and getting to the bogey of 15% for any further 10 year period is unlikely.  Please dont take it that I hate the company at all.  Its just there better investments.

 

I have more confidence in understanding what value accrues to FFH in a deflationary scenario. If we get mass deflation, it's hard for me to work that through how it would directly impact companies based on the changes in prices but also the potential changes in consumer psyche. Also, it'd be hard to know how much deflation we'd get to know when a good multiple could be had on the stocks.

 

With Fairfax I know that if we get deflation that it will directly benefit their hedges by a calculable amount. It will impact their bonds by estimable amount. I don't really care about the equities because they'd largely be hedged. So the only unknown for me is the insurance business. I'm ok with that uncertainty with the certainty surrounding bonds/hedges/CPIs linked derivatives.

 

I don't expect Fairfax to be the best investment at the top or the bottom. I expect it to be a decent investment all the way through that doesn't require constant monitoring from me to ensure that it remains that way.

[petec]

 

People may look to Fairfax in a crash, but they will be selling none-the-less.  The reason is fairly simple: the need to raise money for margin calls, and generalized panic.  It absolutely will happan again.  Your naive to assume otherwise.  Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings.  I know because I was buying FFH at the time.  Its posted somewhere on this board.

 

So was I.  But you've missed the point of the post.  I didn't say that I assumed it would not happen again.  I said I didn't care because I know that IV will be growing and that, in the end, will determine my investment outcome.  If we get into a situation that makes us doubt everything we think we know - and I don't count 2008/9 as one of those, for me personally - I want something in my portfolio that I *don't* have to worry about selling because I *know* IV is rising.  That doesn't apply to anything else I own.

[ERICOPOLY]

If we get into a situation that makes us doubt everything we think we know - and I don't count 2008/9 as one of those, for me personally - I want something in my portfolio that I *don't* have to worry about selling because I *know* IV is rising.  That doesn't apply to anything else I own.

 

I agree with that.

 

However it's not a reason for me to own the stock because based on that logic I might as well put that portion of my portfolio in cash.  The reason is because they aren't compounding at a high rate while hedged, and I strongly believe FFH will go down a good deal in price in a generalized market collapse (driven by deflation or whatever).  So I feel like it's picking up nickels in front of a steamroller.  Rather just not stand in the road at all if the steamroller is my worry.

 

It's not quite nickels by the way... not the best analogy.  It's more like if the crash happens several years away, then FFH is better than cash quite likely.  But if it happens next quarter (or in 18 months) before any significantly offsetting low-rate compounding, then I think cash is way better.

[james22]

THE BIGGEST mistake I made in early 2009 was smugly believing that FFH would be backing up the truck and loading up on bargains.  HARDLY!  Not a single share of AXP for example.

 

Was it a mistake? We only see one version of history.

 

The smart money bought at -50% in the Great Depression too, only to see another -80%.

 

Fairfax (and Hussman) may have rightly played the odds and just just been beat by a lucky draw.

[ERICOPOLY]

THE BIGGEST mistake I made in early 2009 was smugly believing that FFH would be backing up the truck and loading up on bargains.  HARDLY!  Not a single share of AXP for example.

 

Was it a mistake? We only see one version of history.

 

The smart money bought at -50% in the Great Depression too, only to see another -80%.

 

Fairfax (and Hussman) may have rightly played the odds and just just been beat by a lucky draw.

 

Yes, it was 100% a mistake.

 

I expected them to load up and they didn't.  I admit my mistake.  I shouldn't have made assumptions about what they would be doing, instead I should have sold it and just bought them all directly.

 

I didn't say they made the mistake.  I said that I made a mistake in remaining with FFH under the assumption that they were loading up.  I effectively only had 50% of my capital in the stock market when I had imaginings of much, much more..

[Luckyone77]

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.

 

Eric,

 

I absolutely agree with your broad point here and I do think that all multiples will compress in the next crash.  I don't expect to make money in Fairfax the first 6 months of a crash.  That said, I do think you're picking your dates a bit too carefully!  I just (fairly randomly) chose Nov 2006-Nov 2010 to graph FFH CN, and it basically goes from bottom left to top right.  The selloff starting March 08 lasted five months, took you back to where you would have been in Sept 07, and reversed rapidly.  The same thing happened starting early 2009.  So yes, the start of the storm felt shitty both times, and maybe that'll happen again and we'll will get a great opportunity; but all the graph really tells us is that this is a volatile stock that performed extremely well through the crisis.  And we all know that what matters far more is how IV trends, and I believe FFH's IV could explode in the next crash if there is a deflationary panic.

 

I think 2008 is not comparable to today in two ways: as soon as the next crash happens people will look to Fairfax, remembering what happened last time, which is bullish; but the starting multiple is higher, which is bearish.

 

P

 

People may look to Fairfax in a crash, but they will be selling none-the-less.  The reason is fairly simple: the need to raise money for margin calls, and generalized panic.  It absolutely will happan again.  Your naive to assume otherwise.  Going into March 2009 FFH dropped by 100 on the heels on extremely high earnings.  I know because I was buying FFH at the time.  Its posted somewhere on this board.

 

 

I believe that people will see other stocks they love down 80%, and they'll dump FFH to buy those stocks.

 

I've said this before:  once you think the bottom is in, FFH is the wrong stock to own.

 

I think they only had like 50% of their book value in stocks in March 2009, and a lot of it was stuff that wasn't all that compressed (JNJ for example).

 

 

THE BIGGEST mistake I made in early 2009 was smugly believing that FFH would be backing up the truck and loading up on bargains.  HARDLY!  Not a single share of AXP for example. 

 

And MKL?  I think the only thing they bought through the crisis was a teensy weensy bit more KMX. 

 

So look, there won't be much buying pressure on FFH stock itself if people remember what happened last time.  But that was my mistake in misreading them -- they probably were uneasy after dropping their hedges and/or couldn't add more risk being an insurance company.

 

Yes, you have said this before. 

 

I was buying the Leaps back then.  FFh did some merchant banking as I recollect including H&R Reit, and Mullen Group.  Most of my money in spring 2009 was going into SBux, GE, Axp, wfc, hd, and a couple of others.  The others were much cheaper than FFH in March/ April 2009. 

 

Which begs the question: Why hold FFh at all?  Returns now are middlng, and getting to the bogey of 15% for any further 10 year period is unlikely.  Please dont take it that I hate the company at all.  Its just there better investments.

 

 

It really is the question to ask. Why hold it at all? If you're in it because of the hedging and the stock goes down anyway, then what's the point? Sit in cash and wait. Hmmm.

[Phoenix01]

Prong #1: Deflationary spiral returns. Market selloff starts, causing FFH stock to drop too as Mr. Market forgets about their hedges.  Prem goes for the kill and issues buyback press release; and market shrugs and stock drops anyway. And there is the little me, happily competing with FFH buying back its stock at large discounts to book.

 

Prong #2: Deflationary spiral returns. Market selloff starts, causing FFH stock to rise as Mr. Market values their CPI and stock hedges. I continue sitting on the sidelines and miss out. Buybacks are never called because the price never quite came down enough.

 

Prong #3: Status quo. Mild inflation. Financial repression. My cash reserves lose value. Stock market goes even higher and sells at even larger PEs. FFH muddles along as their hedges decay completely. FFH produces half decent returns and it is all very lackluster.

 

If it is prong #1, cash is the place to be right now. If it is prong #2, buy FFH, now. If prong #3, FFH is not a bad place to be but there are better non-cash alternatives out there.

 

I like this analysis. 

Re #1 - Prem has already issued the press release for buybacks.  FFH is in a much better financial state than they were in 2008.

Re #2 - Best case for FFH shareholders. 

Re #3 - Not likely to happen.

 

 

 

 

[Jurgis]

It is concerning that investors have to rely on crash/recession/deflation/doomsday scenarios to make the case for FFH.

 

I hold a somewhat large position in FFH, but I need to reevaluate if it's not better to rebalance to BRK.

[Luckyone77]

It is concerning that investors have to rely on crash/recession/deflation/doomsday scenarios to make the case for FFH.

 

I hold a somewhat large position in FFH, but I need to reevaluate if it's not better to rebalance to BRK.

 

I'm in the exact same boat.

[RichardGibbons]

This is an interesting conversation. Some of the questions I've been thinking about--and I'm not directing these at anyone in particular--are:

 

Did you originally consider investing in Fairfax because you believe that the Hamblin Watsa team are good investors who, in the insurance company structure, are likely to outperform the market over the long term?

 

If so, do you now believe they aren't good?  Or do you now think you can evaluate the odds of success of their approach significantly more accurately than they can, and you find their approach lacking?  (i.e. are you a better investor than them?) 

 

How much does outcome-oriented thinking factor into your analysis?  (i.e. are we sure Watsa's approach was likely to underperform, or is it more like he was the house playing craps, and a bunch of sevens came up in a row?)

 

I'm pretty sure I'm a worse investor than them, particularly when you look at bonds, though their hedged equity investments have horrendously underperformed recently.  I'm unclear about how much of their hedged equity results were foreseeable and likely versus bad luck (and if they were likely to underperform, was their record before these missteps just a bunch of good luck?)

 

When I weight the probabilities, I'd guess that there's an above average chance Fairfax's future returns will outperform the market from here--their bond returns are awesome, and their equity returns were great for so long!  But I'm not particularly confident in that assessment.

 

One thing I am certain of is that they do provide diversification of thought in my portfolio.  I almost always buy the types of stocks I like to buy. :)  I will never mess around with deflation derivatives or credit default swaps.  So, there's a reasonable chance Fairfax will zig when I zag, and to me, that has some value.

 

So, I'll keep holding because of this combination of a) diversification of thought and b) my believe that there's still an above average chance that they'll outperform.

 

[Jurgis]

This is an interesting conversation. Some of the questions I've been thinking about--and I'm not directing these at anyone in particular--are:

 

Did you originally consider investing in Fairfax because you believe that the Hamblin Watsa team are good investors who, in the insurance company structure, are likely to outperform the market over the long term?

 

If so, do you now believe they aren't good?  Or do you now think you can evaluate the odds of success of their approach significantly more accurately than they can, and you find their approach lacking?  (i.e. are you a better investor than them?) 

 

How much does outcome-oriented thinking factor into your analysis?  (i.e. are we sure Watsa's approach was likely to underperform, or is it more like he was the house playing craps, and a bunch of sevens came up in a row?)

 

I'm pretty sure I'm a worse investor than them, particularly when you look at bonds, though their hedged equity investments have horrendously underperformed recently.  I'm unclear about how much of their hedged equity results were foreseeable and likely versus bad luck (and if they were likely to underperform, was their record before these missteps just a bunch of good luck?)

 

When I weight the probabilities, I'd guess that there's an above average chance Fairfax's future returns will outperform the market from here--their bond returns are awesome, and their equity returns were great for so long!  But I'm not particularly confident in that assessment.

 

One thing I am certain of is that they do provide diversification of thought in my portfolio.  I almost always buy the types of stocks I like to buy. :)  I will never mess around with deflation derivatives or credit default swaps.  So, there's a reasonable chance Fairfax will zig when I zag, and to me, that has some value.

 

So, I'll keep holding because of this combination of a) diversification of thought and b) my believe that there's still an above average chance that they'll outperform.

 

That's a nice post. I can offer couple thoughts from myself:

 

- When I bought most of my FRFHF position (throughout this year), I was mostly looking at past results. I did not spend much time thinking about their current business/holdings/etc. Now I know more, which is both blessing and a curse. ;)

 

- I can't say if I would have bought FRFHF in 2012-2014. Part of the reason I bought it this year is that market is expensive and FRFHF is cheap(ish). If a lot of attractive companies dropped a lot and Fairfax stayed at current price, I'd probably switch.

 

- As I mentioned before, based on various reasons, my FRFHF allocation is currently higher than BRK. Looking at both companies and their prices and their holdings, I think that this might be misallocation. If all things were equal, I'd strongly prefer BRK. (Things are not equal: Buffett's age is a factor and BRK size is a factor). So for me personally, I might decide to rebalance. This does not mean that Fairfax is a bad investment.

 

- With all this said, it's tough to predict the future. How many here predicted the huge MKL outperformance vs BRK and FRFHF this year? At the beginning of the year I wouldn't have picked MKL out of these three. And yet so far it performed best. There are definitely scenarios in which Fairfax performs best going forward.

 

Anyway, this is just purely based on my current situation and thoughts.

 

Peace.

[james22]

THE BIGGEST mistake I made in early 2009 was smugly believing that FFH would be backing up the truck and loading up on bargains.  HARDLY!  Not a single share of AXP for example.

 

Was it a mistake? We only see one version of history.

 

The smart money bought at -50% in the Great Depression too, only to see another -80%.

 

Fairfax (and Hussman) may have rightly played the odds and just just been beat by a lucky draw.

 

Yes, it was 100% a mistake.

 

I expected them to load up and they didn't.  I admit my mistake.  I shouldn't have made assumptions about what they would be doing, instead I should have sold it and just bought them all directly.

 

I didn't say they made the mistake.  I said that I made a mistake in remaining with FFH under the assumption that they were loading up.  I effectively only had 50% of my capital in the stock market when I had imaginings of much, much more..

 

Sorry, gotcha.

 

But while I'd think it a mistake to remain with FFH assuming they were loading up in last month's dip (they've been pretty clear that's not the opportunity they've been waiting for), I'd not think it your mistake in early 2009 unless they were as clear they wouldn't be loading up - what were they communicating then?

 

Because if clear communication important, it might be a mistake remaining with them today if you believe they proved themselves unclear back then.

[james22]

It really is the question to ask. Why hold it at all? If you're in it because of the hedging and the stock goes down anyway, then what's the point? Sit in cash and wait. Hmmm.

 

Why hold anything but your highest conviction?

 

Because no matter how convinced by Hussman I might be, against the possibility of a not-crash I hold some defensive socks too, knowing they'll drop in a crash, but knowing they'll do better than cash otherwise.

[giofranchi]

It's more like if the crash happens several years away, then FFH is better than cash quite likely.  But if it happens next quarter (or in 18 months) before any significantly offsetting low-rate compounding, then I think cash is way better.

 

+1

 

Then what?

 

1) You are not worried about a crash at all and you are 100% invested,

2) You are worried about a crash that might come soon and you hold cash,

3) You are worried about a crash that might come some years from now and you hold FFH,

4) You are worried about a crash, but you don’t know when it might come, and you hold both cash and FFH.

 

Which of the 4 cases? Is there a fifth?

 

Cheers,

 

Gio

 

[obtuse_investor]

Very interesting discussion. One observation I made is this fixation with 2008/09 market crash, and this almost uniform belief that we need to do things to not relive the pain of 2008/09.

 

This pure and simple recency bias.

 

The next market crisis will not be like 2008/09. It will be something quite different.

I can guarantee that.

 

[vinod1]

The assumption that FFH would do spectacularly well in crash might not hold. Prem Watsa has a view of how the crash might happen (heavily influenced by the the great depression and the Japanese crash) and optimized FFH for that particular view of the world. If crash happens say due to inflationary reasons - FFH would likely suffer just as much as others.

 

Of course, it seems like nearly everyone seems to discount inflationary risks. Or do 100 year storms come only from what everyone worries about?

 

Vinod

[vinod1]

My point is, if you see FFH as a portfolio diversifier, I can understand but as a cash substitute I am not so sure.

 

Vinod