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Fairfax Stock this week


Tommm50
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Any thoughts as to the strange behavior of the stock price this week? It's down over 20 points over a couple of days on above average volume. I'd thought it might be speculation the Odyssey transaction would not complete but it has and the stock is down again today. All signs point to a sterling quarter about to be announced next week so I'm stumped. Any insights?

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Guest longinvestor

Take it...the down days. Mr. Market has not been very clever with FFH. Say thanks....leave the insight to others.

:P

 

 

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Be careful Valuebuff!  It's not a 40% allocation stock right now (are there any?), unless you are comfortable with volatility and consider holding it for the long-term...or your name is Prem Watsa and you own the company.  Cheers! 

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Be careful Valuebuff!  It's not a 40% allocation stock right now (are there any?), unless you are comfortable with volatility and consider holding it for the long-term...or your name is Prem Watsa and you own the company.  Cheers!  

 

QUE?

 

 I guess it depends on whether your implicit goal is wealth creation or maintaining wealth...long term wealth creation usually comes from concentration of assets.   And if the goal is wealth preservation, you'd be perfectly fine putting 40% or more in Berkshire at these prices...

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QUE?

 

  I guess it depends on whether your implicit goal is wealth creation or maintaining wealth...long term wealth creation usually comes from concentration of assets.  And if the goal is wealth preservation, you'd be perfectly fine putting 40% or more in Berkshire at these prices...

 

It's all dependent on the individual's tolerance.  As I mentioned, if he's comfortable holding long-term and can handle the volatility then that is fine.  I'd beg to differ on the definition of wealth creation and wealth preservation...they are intertwined...you cannot have long-term wealth creation without wealth preservation in mind.  Concentration is only useful if the assets are undervalued.   

 

Unfortunately, we have 680+ members, and I would say that their psychological make-up, regardless of how much Ben Graham they've ingested, isn't probably that far off the psychological representation of the general public.  There were alot of people on this board who weren't interested in WFC at $9 or GE at $7.  Even after everything Buffett said, they still weren't interested.  How many here wanted to buy Steak'n Shake under $5?  You can probably count them on one hand.   

 

I remember alot of people who did not want to touch Fairfax at $60 a share in 2003.  At $360 a share, Fairfax is no longer the deep-discounted value stock most of us have owned in the past...neither is Berkshire at $100K compared to what else is available.  They are businesses that are in great shape, and their market value is representative as such.  As Francis said last year, never underestimate how cheap things can get.  Cheers! 

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At 360 a share, you are getting Fairfax at less than the liquidation value...the share offering didn't impress me one bit...how hard is it to get people to pick up dollars on the street? 

As far as volatility...any stock can go down to 10% of its intrinsic value or lower.  When Wells was at 8 Fairfax was at 212...if Fairfax traded at 12x earnings, it wouldn't look so lopsided right now. 

 

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One of the great strength of Warren Buffett is not to be impressed by the recent past. For instance the fact a stock was at 4$ a couple of months ago does'nt mean necessarely that it is not a bargain at 10$ or 15$ (See Singleton too).

In 1950, Even his mentor was pessimist but Buffett bought because he looked forward and not in the rearview mirror

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One of the great strength of Warren Buffett is not to be impressed by the recent past. For instance the fact a stock was at 4$ a couple of months ago does'nt mean necessarely that it is not a bargain at 10$ or 15$ (See Singleton too).

In 1950, Even his mentor was pessimist but Buffett bought because he looked forward and not in the rearview mirror

 

I think the greater tragedy is when investors become transfixed on a company.  I'm more attached to Fairfax than anyone on this board, other than those that may work at HW or are directly related to employees there, but regardless of who is running a firm, investors always have to weigh return in value relative to market risk.  In 1950, circumstances had changed significantly compared to a decade earlier.  What exactly has transpired in the past 12 months that makes people think that we are past tough times and a renewed optimistic view is warranted of market prices?

 

I just read the quarterly letter from the Baobab Fund, whose manager happens to be an analyst at Hamblin-Watsa.  He certainly doesn't believe a rosy scenario is in the works.  I don't know if those sentiments are shared by the rest of the team at Hamblin-Watsa, but it might be interesting to see exactly how much of their equity position Fairfax has taken gains from when the report comes out next week.  I'm not quite as bearish as Martin, but I think things will get tougher for a lot longer before they get better.  We may not see the lows of the recent past, but we will most certainly tread deep waters over the next couple of years.  Cheers!

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Fairfax is not a good bargain at $360 per share.  It's a decent price and you'll get a 12-15% annualized return going forward with a 2% dividend kicker, but it's not a deep-discounted bargain.  If you were an investor who was agnostic on the market last year, you got killed. 

 

People should invest when things are cheap, regardless of the market, but there are varying degrees of cheapness.  My original comment was based on the premise that a board member had put 40% of their portfolio into Fairfax at current prices.  My response was just be cautious.  Cheers!

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hey sanj,

 

I did mean 40% of my FFH postion within my overall portfolio.  Not 40% of my portfolio is the one position :P

 

I have held FFH as high as 50% weight at 275,

 

However, I meant I took 40% of an regular weight position for me.  Usually I would hold 10-15 stock divided equal.  So 40% of 10% is only a 4% weight of total assets.  I have a lot of cash and equivelents now. 

 

I am hoping FFH gets down to 330 or so, then I would "back the truck up"  

 

thanks for looking out for me!

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Sanjeev,

 

I am not quite as bearish as Martin, but I think things will get tougher for a lot longer before they get better.  We may not see the lows of the recent past, but we will most certainly tread deep waters over the next couple of years.

 

Not speaking specially about the Fairfax posting here but this is why I am of the belief that the importance of managements abilities over the next 3-5 years has been magnified many fold. If a person is wrong about the "new normal" you will still do quite well, and if they are right they are still in a great position to build value over the very tough economic times that result from the "new normal"!

 

Example:

Berkshire Hathaway

1974- $38/share

1980- $400/share

*Alot of value can be built in very different economic times!

 

It goes without saying though that these "abilities" are only part of the valuation process and must be purchased at attractive long term values! I am a majority in Sanjeev's camp as everyday there seems to be less value around..... with this said though, I have been finding enough!

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What exactly has transpired in the past 12 months that makes people think that we are past tough times and a renewed optimistic view is warranted of market prices?

 

Personally, I can't tell you... but I think I can use HWIC as a proxy for smart money.  (one strategy -- of many -- is to follow the smart money)

 

Today, the S&P500 is up 16% since the peak of December 2008.

 

Did HWIC invest "all in" (or nearly all in) for a mere 16%?  To be that far into equities last December without any selling or hedging, are we to infer anything from it other than that they expect the risk of loss to be less than the potential of gain?  Does a 16% pop materially change that view?

 

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Fairfax is not a good bargain at $360 per share.  It's a decent price and you'll get a 12-15% annualized return going forward with a 2% dividend kicker, but it's not a deep-discounted bargain.  If you were an investor who was agnostic on the market last year, you got killed. 

 

People should invest when things are cheap, regardless of the market, but there are varying degrees of cheapness.  My original comment was based on the premise that a board member had put 40% of their portfolio into Fairfax at current prices.  My response was just be cautious.  Cheers!

 

Sanjeev,

 

I realize that other stocks are cheaper now than they were two years ago, but I am surprised by your comment.  

 

It looks to me that FFH is trading under book value. Is likely overreserved and still has a lot of cash to deploy. If the market tanks from here FFH should be able to profitably grow its insurance book (as other insurance companies will not have the capital) . ..  if the market keeps rising this company has a big equity portfolio.

 

I realize that you probably want to err on the side of caution and certainly feel some sense of responsibility as you did create this board, but I for one would sleep like a baby if I went to the moon for ten years and had my entire net worth in FFH shares (in a safe deposit box in Switzerland).

 

If you feel comfortable answering, I am curious if you think either that FFH is not trading at or below book value or that you don't think this is a great price to pay for a company like this. I have always been firmly in the camp that a well run insurer is worth a lot more than tangible book (and I agree with the earlier comment that ICICI now negates goodwill from ORH and NB, so GAAP is roughly tangible in my mind). I think 15-20% returns on book value PLUS an eventual revaluation to above book value is something to be very excited about.

 

To look at it another way, I think this is a great time to be a bank . . . but their aren't any big flexible banks I trust.  I applaude those on the board who had the conviction to invest in WFC and others in the single digits. . . I didn't.  For all I know they are still insolvent (not that it matters with government support I guess). FFH is definately solvent and able to play the same (temporarily rigged in their favor) game the banks are. Instead of cheap deposits FFH takes in low cost float, but they don't have to worry about embarassment and can buy cheap CDOs (as evidenced by the ORH NAIC filing) or anything else that the "real banks" cough up. This is a great time to be a conservative leveraged investor (safely leveraged through deposits or well-written insurance float).

 

Other than the recent opportunity to buy $100 cheaper (which is a large psychological barrier to buying more here) . . I don't think FFH has ever been cheaper.

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I think Sanjeev has made some very good points on this thread.

 

There is the potential for a bit of positively-biased group think when it comes to FFH on this board.  Heck, it was (in a former incarnation) one of the few bullish sources during the bear raids.

 

Now that some of the big problems appear to have been solved, what sort of multiple should FFH go for?  It's obviously an interesting question.  How low will it go should pessimism return?  What's the upside?

 

 

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Sanjeev,

 

I realize that other stocks are cheaper now than they were two years ago, but I am surprised by your comment. 

 

It looks to me that FFH is trading under book value. Is likely overreserved and still has a lot of cash to deploy. If the market tanks from here FFH should be able to profitably grow its insurance book (as other insurance companies will not have the capital) . ..  if the market keeps rising this company has a big equity portfolio.

 

I realize that you probably want to err on the side of caution and certainly feel some sense of responsibility as you did create this board, but I for one would sleep like a baby if I went to the moon for ten years and had my entire net worth in FFH shares (in a safe deposit box in Switzerland).

 

Hi T-bone, again it all depends on your tolerance for volatility.  We own both Fairfax and Berkshire in our corporate accounts, but that is mainly out of loyalty, for the annual reports, and because we can handle the ups and downs.  In our funds, we have no Berkshire and have reduced our Fairfax holdings considerably.

 

If you feel comfortable answering, I am curious if you think either that FFH is not trading at or below book value or that you don't think this is a great price to pay for a company like this. I have always been firmly in the camp that a well run insurer is worth a lot more than tangible book (and I agree with the earlier comment that ICICI now negates goodwill from ORH and NB, so GAAP is roughly tangible in my mind). I think 15-20% returns on book value PLUS an eventual revaluation to above book value is something to be very excited about.

 

No, I certainly agree that Fairfax is trading below current book value.  Unfortunately, Fairfax is now also a little more exposed to the whims of the stock market...thus book will move up and down...possibly dramatically depending on what scenario you see unfolding.  I'm sure Fairfax will hedge based on their views, so that volatility will be tempered, but shareholder equity will fluctuate unlike the last couple of years where they held enormous amounts of cash.

 

To look at it another way, I think this is a great time to be a bank . . . but their aren't any big flexible banks I trust.  I applaude those on the board who had the conviction to invest in WFC and others in the single digits. . . I didn't.  For all I know they are still insolvent (not that it matters with government support I guess). FFH is definately solvent and able to play the same (temporarily rigged in their favor) game the banks are. Instead of cheap deposits FFH takes in low cost float, but they don't have to worry about embarassment and can buy cheap CDOs (as evidenced by the ORH NAIC filing) or anything else that the "real banks" cough up. This is a great time to be a conservative leveraged investor (safely leveraged through deposits or well-written insurance float).

 

Other than the recent opportunity to buy $100 cheaper (which is a large psychological barrier to buying more here) . . I don't think FFH has ever been cheaper.

 

Oh, it's been cheaper.  Significantly so!  At the low point, it traded at about a quarter of shareholder equity.  But that's my point.  It's a very different company today than even a couple of years ago.  This company is now a very solid, well-run ship.  We don't invest in solid ships...we invest in broken-down ships.  Why?  Because they protect on the downside and carry far more upside.  And the solid ships we do invest in are far smaller and less well-known, so they generally have an advantage as far as future growth is concerned. 

 

Does that mean we wouldn't own Fairfax or Berkshire in the future?  Of course not!  If the market does something stupid, we would be the first ones on board.  We don't like rosy, optimistic scenarios.  We prefer fear and desperation.  Cheers! 

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Guest misterstockwell

I think there is risk in NOT owning Fairfax or some of the other insurance companies in the face of an eventual hard market.  This will be the part of the cycle when revenues jump, book value jumps, and most importantly, the multiple of book people are willing to pay jumps. You get a variety of tailwinds helping you out. Once Mr. Market says "Hmm.....we love insurance companies again," we could see 2X book in a heartbeat. That could be on a significantly higher book. My favorite type of investment is one where I buy deep value, and sell my shares years later to the momo crowd. I think that happens here eventually(as long as they underwrite correctly).

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Unless we think the reserves are too low (and the the book value is overvaluated actually), I think Fairfax is cheap and 10 years from now, their owners should be happy. Can they compound book value per 12-15% over the next 10 years? How about:

 

- a huge investment portfolio

- managed by overall some of the better investors that I've ever seen

- with insurance operations side under control

- some underwriting gains with a hard cycle that's reasonable to think that will happen over the next 5 years (just ice on cake, you can ignore it if you want).

 

So, it's a price to book of 1,5 would be a fair deal between the seller and the buyer? I'm in the "yes" camp. Will that happen over the next 10 years? I would be very surprised if it will not happen at some point.

 

Is it cheap and attractive enough? Yes. So I've been buying lately. It it insanely cheap? No.

 

We've been buying all the remaining shares of a private business lately. We didn't have any daily quote, volatility and anything like that. The fact that it's a private business 100% owned or a 0,00001% position in a public company doesn't change the most basic facts to me. I can handle a lot of volatility and anxiety if the deal make sense. What matter is the intrinsic value of the business.

 

I've also been buying a home lately (after 5  years of waiting to get a good home at a decent price). The seller was in a hurry to sell so I did get a fair price. When you only have few days to make the deal on a home, not unlike volatility in the stock market, some people get too much anxious and let some deals go. I can handle some temporary anxiety and keep my head very cold if a deal make sense.

 

FFH deal make sense. Like I said before I've been buying lately and would be happy to buy more at these prices (but will have to sell some since I'm funding 20% of the home). I know far too much that the few FFH shares that I will sell will be a good deal for the buyer (not me), but you know your children rather prefer to live in a good home than to have a stock certificate on the wall of their appartment bedroom. My 4 years old son took a look at the pool and raised his thumb with a smile.

 

Cheers!

 

 

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So, it's a price to book of 1,5 would be a fair deal between the seller and the buyer? I'm in the "yes" camp. Will that happen over the next 10 years? I would be very surprised if it will not happen at some point.

 

Say 1.5x in 6 yrs from today's base of approximately 0.95x.  That's 8% per annum tailwind from the book value expansion.  Then add in 12-15% per annum from investments/operations, and you've got 20-23% per annum.  That's tax-deferred compounding -- equivalent to getting more than 30% annualized from short-term trading (I paid 35% tax on that stuff this year).  And with fund manager fees, you're looking at more than 40% to beat it... unless you are the fund manager  :)

 

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