Fairfax chairmans letter 2015

[caprivenky]

http://s1.q4cdn.com/579586326/files/doc_financials/2016/2015-Shareholders'-Letter.pdf

 

I thought it deserved  a new thread

[thefatbaboon]

Prem! Stop using so many exclamation marks!

[petec]

Prem! Stop using so many exclamation marks!

 

+1!!!!

 

;)

[prevalou]

Fabulous...

 

annual report 2013: "...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2014: :"...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2015: "...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2016: "...we have warned you many times in our annual reports of the many risks that we see and the great disconnect between the markets and the economic fundamentals. These risks may be coming to a head in early 2016..."

 

 

 

[Ballinvarosig Investors]

Fabulous...

 

annual report 2013: "...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2014: :"...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2015: "...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2016: "...we have warned you many times in our annual reports of the many risks that we see and the great disconnect between the markets and the economic fundamentals. These risks may be coming to a head in early 2016..."

I hope so. I've been waiting with the elephant gun poised for the best part of a year and a half now.

[Ballinvarosig Investors]

There is a prevailing view today that common shares are great long term investments, irrespective of price. This is a

great example of long term investing gone astray. Of course, there is no country more entrepreneurial than the

United States, with the rule of law and deep capital markets that are the envy of the whole world. But as history

shows, being bullish in 1929, when the Dow Jones hit 400, meant you had to wait 25 years (until 1954) before the

Dow Jones saw 400 again. In the meantime you had to survive a 90% decrease in the index. More recently in Japan,

the Nikkei has yet to hit the 40,000 level it traded at in 1989 – almost 27 years ago. It is still over 50% below its all-

time high in 1989. As they say, caveat emptor!

[vinod1]

But as history

shows, being bullish in 1929, when the Dow Jones hit 400, meant you had to wait 25 years (until 1954) before the

Dow Jones saw 400 again. As they say, caveat emptor!

 

The implication seems to be that you had to wait 25 years to break even!

 

But adjusting for dividends and inflation, it only took 7 years for investors to break even!!

 

The dividend yield at the stock market bottom in 1933 was close to 14% !!!

 

http://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html?_r=0    !!!!

 

A better measure of market performance would be from Shiller data or even simulated S&P 500 numbers, since Dow is not a good representation of the market and it was unduly impacted by its decision in the late 1930's to drop IBM from its index!

 

Thank you!

 

Vinod!

 

 

[Cardboard]

Love the denial on Tom Ward and the bashing against activism. Even Buffett acknowledged in his last appearance on CNBC that activism at some companies is necessary.

 

Tom Ward created a monster loaded with debt, which was operating in three unrelated areas, funding a NBA basketball team, benefited from large over compensation, received a massive golden parachute and we will see if he was involved in the unfair land deals in which Aubrey Mclendon was indicted.

 

If Watsa had encouraged or perhaps not blocked, a deal for Repsol or others to acquire SandRidge, Fairfax would not be sitting with a potential total loss on this investment. If hedging oil for 3 years was the thing to save SandRidge, then I do believe that with their large position that they could have influenced current management (which I think is doing a good job considering what they have been handed) to enter into more hedges.

 

Cardboard

[prevalou]

interesting because when social media stocks tank, it is just the beginning and when its hedges tank, it is the end of the move and Prem will soon be proven right...

[Partner24]

Fabulous...

 

annual report 2013: "...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2014: :"...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2015: "...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2016: "...we have warned you many times in our annual reports of the many risks that we see and the great disconnect between the markets and the economic fundamentals. These risks may be coming to a head in early 2016..."

 

+1

 

Certainly later than he tought and let us tought.

[KCLarkin]

being bullish in 1929, when the Dow Jones hit 400, meant you had to wait 25 years (until 1954) before the

Dow Jones saw 400 again. In the meantime you had to survive a 90% decrease in the index.

 

Over those 25 years (using year-end dates not peak), your annualized return was 7%!

[petec]

being bullish in 1929, when the Dow Jones hit 400, meant you had to wait 25 years (until 1954) before the

Dow Jones saw 400 again. In the meantime you had to survive a 90% decrease in the index.

 

Over those 25 years (using year-end dates not peak), your annualized return was 7%!

 

Do you have the dataset for this?

[Jurgis]

But as history

shows, being bullish in 1929, when the Dow Jones hit 400, meant you had to wait 25 years (until 1954) before the

Dow Jones saw 400 again. As they say, caveat emptor!

 

The implication seems to be that you had to wait 25 years to break even!

 

But adjusting for dividends and inflation, it only took 7 years for investors to break even!!

 

The dividend yield at the stock market bottom in 1933 was close to 14% !!!

 

http://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html?_r=0    !!!!

 

A better measure of market performance would be from Shiller data or even simulated S&P 500 numbers, since Dow is not a good representation of the market and it was unduly impacted by its decision in the late 1930's to drop IBM from its index!

 

Thank you!

 

Vinod!

 

I love the exclamation points!!!!  8) +1 !!!!

[Jurgis]

Fabulous...

 

annual report 2013: "...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2014: :"...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2015: "...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

annual report 2016: "...we have warned you many times in our annual reports of the many risks that we see and the great disconnect between the markets and the economic fundamentals. These risks may be coming to a head in early 2016..."

 

annual report 2017: "...these losses are significant but we consider them unrealized and expect both of them to reverse when the grand disconnect disappears-perhaps sooner than you think..."

 

or not?

 

We'll see in a year!

 

Grab popcorn!!

[Partner24]

Grab popcorn!!

 

Mine is now warm and dry  ;)

[Guest longinvestor]

Personally, I'd like to see Fairfax achieve lots of success with their contrarian view of the world. I used to be a shareholder from 2002-12.

 

I attended the 2012 meeting at Toronto and then the Berkshire meeting within 30 days of one another. Watsa talked about the world coming apart, Buffett said that the best days are ahead. Only one of them could be right. I sold completely out of FFH and went with BRK. Who knows, Watsa may be still right and the world will end and so will my money. But I do sleep well in the meantime! 

[vinod1]

being bullish in 1929, when the Dow Jones hit 400, meant you had to wait 25 years (until 1954) before the

Dow Jones saw 400 again. In the meantime you had to survive a 90% decrease in the index.

 

Over those 25 years (using year-end dates not peak), your annualized return was 7%!

 

Do you have the dataset for this?

 

I find this quite useful

 

http://dqydj.net/sp-500-return-calculator/

 

Vinod

[TwoCitiesCapital]

being bullish in 1929, when the Dow Jones hit 400, meant you had to wait 25 years (until 1954) before the

Dow Jones saw 400 again. In the meantime you had to survive a 90% decrease in the index.

 

Over those 25 years (using year-end dates not peak), your annualized return was 7%!

 

Do you have the dataset for this?

 

I find this quite useful

 

http://dqydj.net/sp-500-return-calculator/

 

Vinod

 

Using Vinod's website, the returns from Sept 1929 (the peak) to Sep 1954 were 5.8% with dividends reinvested - though, the majority of that return comes in the late 40s and early 50s as nominal compounded returns including reinvested dividend were actually negative through 1944. It was only the 10 year equity bull market that averaged 16% per year from 1944-1954 that saved your compounded returns over the full 25 year period.

 

Prem's point isn't that you should've stayed out of the market for the full 25 years  as much as it was that most people don't really have a 15 year time horizon to break even on a nominal basis (and even longer on an inflation adjusted basis). Especially an insurance company that is required to use it's investment portfolio as capital to support insurance operations. The drop in capital also means a drop in underwriting volumes/profits - a double whammy to the bottom line. 

 

Prem's concern is the 90% drop and the subsequent 15-20 years to get back to even and all of the lost opportunity cost not just from investment portfolio losses but also from reduced insurance underwriting. If he can avoid just half of that 50% loss, it makes a massive difference over the following 15-20 year period.

 

To the detractors credit - it has only cost shareholders money for the last 6 years and the opportunity cost has been large just about anyway you measure it.

To Prem's credit, just about everything he was concerned about is currently happening, but equity markets have shrugged it off to date.

 

Maybe we'll continue to climb the wall of worry and Prem will eventually throw in the towel. Or maybe Prem will continue being right until equity markets can no longer ignore his warnings and those losses reverse. Only time will tell.

 

 

[handycap5]

i just calculated the total return from 12.31.29 to 12.31.54 and Bloomberg tells me it is 2.0% annualized. So pretty bad for a while....

[prevalou]

Funny is the story of the 90 years old grand mother invested at 85 % in equities ! Yes  85% !

What would he say  about old grand father Munger invested at 95% in equities !

 

[nodnub]

But as history

shows, being bullish in 1929, when the Dow Jones hit 400, meant you had to wait 25 years (until 1954) before the

Dow Jones saw 400 again. As they say, caveat emptor!

 

The implication seems to be that you had to wait 25 years to break even!

 

But adjusting for dividends and inflation, it only took 7 years for investors to break even!!

 

The dividend yield at the stock market bottom in 1933 was close to 14% !!!

 

http://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html?_r=0    !!!!

 

A better measure of market performance would be from Shiller data or even simulated S&P 500 numbers, since Dow is not a good representation of the market and it was unduly impacted by its decision in the late 1930's to drop IBM from its index!

 

Thank you!

 

Vinod!

 

 

Vinod!

 

There is a problem with thinking people can just sit through a downturn.

 

In the 1930s many people lost their jobs and had to liquidate all investments just to pay mortgage and groceries!

 

Even successful professionals like doctors/lawyers that didn't lose their jobs, couldn't collect their receivables because all of their customers were broke. There was simply no money around! But they still had to pay their overhead.

 

"The Great Depression: a Diary" by Benjamin Roth is a great insight into this (it has one or two entries per week). He was a lawyer living in a steel town and his town may have been worse off than some places.  He continuously complains "if only he had a few spare dollars to invest" and how cheaply priced the stocks are.  He barely had a spare nickel.

 

My point is: if we do see a repeat of the Great Depression some day I think just about everyone will be surprised at how bad things can get!   

:-\

[adesigar]

being bullish in 1929, when the Dow Jones hit 400, meant you had to wait 25 years (until 1954) before the

Dow Jones saw 400 again. In the meantime you had to survive a 90% decrease in the index.

 

Over those 25 years (using year-end dates not peak), your annualized return was 7%!

 

Do you have the dataset for this?

 

I find this quite useful

 

http://dqydj.net/sp-500-return-calculator/

 

Vinod

 

Using Vinod's website, the returns from Sept 1929 (the peak) to Sep 1954 were 5.8% with dividends reinvested - though, the majority of that return comes in the late 40s and early 50s as nominal compounded returns including reinvested dividend were actually negative through 1944. It was only the 10 year equity bull market that averaged 16% per year from 1944-1954 that saved your compounded returns over the full 25 year period.

 

Prem's point isn't that you should've stayed out of the market for the full 25 years  as much as it was that most people don't really have a 15 year time horizon to break even on a nominal basis (and even longer on an inflation adjusted basis). Especially an insurance company that is required to use it's investment portfolio as capital to support insurance operations. The drop in capital also means a drop in underwriting volumes/profits - a double whammy to the bottom line. 

 

Prem's concern is the 90% drop and the subsequent 15-20 years to get back to even and all of the lost opportunity cost not just from investment portfolio losses but also from reduced insurance underwriting. If he can avoid just half of that 50% loss, it makes a massive difference over the following 15-20 year period.

 

To the detractors credit - it has only cost shareholders money for the last 6 years and the opportunity cost has been large just about anyway you measure it.

To Prem's credit, just about everything he was concerned about is currently happening, but equity markets have shrugged it off to date.

 

Maybe we'll continue to climb the wall of worry and Prem will eventually throw in the towel. Or maybe Prem will continue being right until equity markets can no longer ignore his warnings and those losses reverse. Only time will tell.

 

Isnt the comparison starting from the 1929 peak dumb? Shouldn't Prem be comparing from the time he went bearish and include the lost opportunity cost of the last few years? So maybe a better comparison would be start a few years before the Peak of 1929. Say start in 1924 or 1925.

 

Also maybe include adjustments for a World War since we don't seem to be getting them every 25 year period.

[vinod1]

But as history

shows, being bullish in 1929, when the Dow Jones hit 400, meant you had to wait 25 years (until 1954) before the

Dow Jones saw 400 again. As they say, caveat emptor!

 

The implication seems to be that you had to wait 25 years to break even!

 

But adjusting for dividends and inflation, it only took 7 years for investors to break even!!

 

The dividend yield at the stock market bottom in 1933 was close to 14% !!!

 

http://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html?_r=0    !!!!

 

A better measure of market performance would be from Shiller data or even simulated S&P 500 numbers, since Dow is not a good representation of the market and it was unduly impacted by its decision in the late 1930's to drop IBM from its index!

 

Thank you!

 

Vinod!

 

 

Vinod!

 

There is a problem with thinking people can just sit through a downturn.

 

In the 1930s many people lost their jobs and had to liquidate all investments just to pay mortgage and groceries!

 

Even successful professionals like doctors/lawyers that didn't lose their jobs, couldn't collect their receivables because all of their customers were broke. There was simply no money around! But they still had to pay their overhead.

 

"The Great Depression: a Diary" by Benjamin Roth is a great insight into this (it has one or two entries per week). He was a lawyer living in a steel town and his town may have been worse off than some places.  He continuously complains "if only he had a few spare dollars to invest" and how cheaply priced the stocks are.  He barely had a spare nickel.

 

My point is: if we do see a repeat of the Great Depression some day I think just about everyone will be surprised at how bad things can get!   

:-\

 

I agree with pretty much everything you said.

 

I did read that book.

 

If we do get another GD, I doubt if Fairfax would be able to collect its gains on deflation hedges.

 

My point is, reading Prem Watsa's letters, I get the feeling that the likelihood of another GD is something of order of 20% or 30% or something like that. He never mentioned the probabilities, but just reading between the lines that is what I would infer - maybe not the right interpretation. I think the odds are an order of magnitude lower.

 

Vinod

 

 

[benhacker]

If we do get another GD, I doubt if Fairfax would be able to collect its gains on deflation hedges.

 

These are collateralized contracts, so unless Citi goes under in one quarter, it seems nearly certain, they will in fact collect.

 

Not defending the position itself, only the mechanics of posting collateral on a derivative contract... I would ascribe minute risk, and only to the last quarterly portion of value accrual.

[vinod1]

If we do get another GD, I doubt if Fairfax would be able to collect its gains on deflation hedges.

 

These are collateralized contracts, so unless Citi goes under in one quarter, it seems nearly certain, they will in fact collect.

 

Not defending the position itself, only the mechanics of posting collateral on a derivative contract... I would ascribe minute risk, and only to the last quarterly portion of value accrual.

 

Good point. I did not realize that.

 

I would think that the gains would not really show up in one quarter. Deflation would be a long drawn out process so the gains would have be to realized over many years. Again I could be wrong.

 

Vinod