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Q1 2016 Results


giofranchi
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Can "107% Hedged" still be called a hedge, or is it "Fully hedged and speculating on a market decline"?

 

 

Agree with Gio in that I'm not selling as the insurance returns are great and could buy in more if the price takes a big enough whack...

 

 

 

-Crip

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Lol at "being hedged". There is a time to admit your mistake and I think it has come (a while ago). Remember by the end of 2009 when BV was $370? It's 10% more now plus six dividends. Well at least it's not negative. But to get to that expected 15% return (he actually said it again in the last letter), he'd need almost 40% annually in the next 4 years to be on track over a 10 year rolling period. They didn't even get that between '06-'10 when they hit the jackpot!

 

I wish him the best of luck. I'm just not sure he's going to get there again without "any" investment risk.

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Lol at "being hedged". There is a time to admit your mistake and I think it has come (a while ago). Remember by the end of 2009 when BV was $370? It's 10% more now plus six dividends. Well at least it's not negative. But to get to that expected 15% return (he actually said it again in the last letter), he'd need almost 40% annually in the next 4 years to be on track over a 10 year rolling period. They didn't even get that between '06-'10 when they hit the jackpot!

 

I wish him the best of luck. I'm just not sure he's going to get there again without "any" investment risk.

 

I'm not going to predict 15% or not, but I think it's too early to say he's wrong about deflation, there has been and continues to be so much QE that I think the world is swimming in overcapacity - that's most likely going lead to deflation - no matter how hard the central banks try, they're pushing on a string...

 

I believe the policy situation worldwide (since the 2000 bubble) is akin to trying to stop wildfires, eventually you fail and you end up with the "mother" of all wildfires...

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Can "107% Hedged" still be called a hedge, or is it "Fully hedged and speculating on a market decline"?

 

 

Agree with Gio in that I'm not selling as the insurance returns are great and could buy in more if the price takes a big enough whack...

 

 

 

-Crip

 

The hedges are Total Return swaps and are imperfect hedges to their equity holdings. It's possible at times they are over-hedged/under-hedged simply due to divergence between two.

 

Also, there's generally a fee associated with terminating swaps before their maturity. He probably waits for a maturity/rolling of contracts to re-size as opposed to regularly pay fees to unwind/add to trades given regular fluctuations in the market and the imperfect nature of the hedge.

 

Just my guess though.

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Can "107% Hedged" still be called a hedge, or is it "Fully hedged and speculating on a market decline"?

 

 

Agree with Gio in that I'm not selling as the insurance returns are great and could buy in more if the price takes a big enough whack...

 

 

 

-Crip

 

The hedges are Total Return swaps and are imperfect hedges to their equity holdings. It's possible at times they are over-hedged/under-hedged simply due to divergence between two.

 

Also, there's generally a fee associated with terminating swaps before their maturity. He probably waits for a maturity/rolling of contracts to re-size as opposed to regularly pay fees to unwind/add to trades given regular fluctuations in the market and the imperfect nature of the hedge.

 

Just my guess though.

 

I guess we'll have to wait and see - from the earnings release: "Remaining weighted average life of 6.3 years"

 

Also, he can always buy more or pay a fee to increase the strike/duration like he's done in the past. People thought deflation was a crazy concept when he talked about it in 2011ish. Now, everyone admits it's at least a possibility worth considering and are concerned by it, but the contracts remain cheap. At some point in the next 5 years, I imagine people will be once again impressed by his foresight and patience.

 

The world is awash in trillions in stimulus and all that bought us was 5 years of disinflation, sub-2% GDP growth, and a declining velocity of money. If you aren't amazed by that don't think that deflation would have been a certainty without meddling, than I don't know what else I could possibly say to get you to realize that there is, at the very least, a non-trivial probability that deflation does in fact occur.

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In the current situation, the market could go deep south at any time. I am with Prem, the hedge may bring us good returns in near future.  The only thing I am not satisfied with is FFH's equity holdings. Why Prem bought them was the question for the past, but why Prem still holds them, that is the question for now.

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I don't think anyone has had a problem with the deflation bets--they are asymmetric.

 

It's the 100% hedging of equities until they are "right". 100% hedging is not protection, it is a bet.  They could have just bought berkshire and their returns would have been astronomically better than what they have gotten.  Or any of those "permanent" holdings that lasted what, 3 years?

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All very good points. I have not sold a FFH share for 6 years. Though i am less comfortable with the company now vs back then. I am astounded at how many recent investments have seemed to have lost all their value. I would love to hear management say we have learned some lessons in this area that we will not make again.

 

It still puzzles me that with Fairfax India they want to partner with the best companies and management. With FFH it seems to be the opposite. Can anyone explain why they appear to have two different strategies?

 

I am slow to change and will still hold my shares, but it is getting harder....:)

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I'm an outsider to this board, so apologies in advance if this has been covered. 

 

If all the leaders of the world want to fight deflation with everything they've got, doesn't that make mid/long term defaltion very very unlikely?  I understand there are powerful forces pulling the world towards deflation, but the printing press is a near trump card, no?

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I'm an outsider to this board, so apologies in advance if this has been covered. 

 

If all the leaders of the world want to fight deflation with everything they've got, doesn't that make mid/long term defaltion very very unlikely?  I understand there are powerful forces pulling the world towards deflation, but the printing press is a near trump card, no?

 

Here's the deal - deflation is representative of overcapacity and malinvestment. That doesn't just go away when you print money and lower interest rates.

 

Lowering rates and printing money simply attempts to make unproductive debt burdens easier to bear to stretch out the pain over a decade instead of feeling it acutely for a year or two.

 

There's nothing that will repair the economy without allowing for the overcapacity and malinvestment to work their way through. That can be achieved through hyperinflation or deflation, but it still has to work its way through. So the question is - which ones will bankers opt for and how much control do they have over that decision.

 

I think we know which one they opt for - but considering every major central bank is failing at it suggests they don't have as much control over it as we gave them credit for.

 

 

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Prem's explanation of "100% hedging of equities" is that he doesn't want to wake up to 40%+ drop in the markets, very little to invest and need to get additional cushion for insurance businesses in the worst possible time.

 

Of course, I'd say he probably should just hold cash then. He has not shown himself to be a great market-neutral investor. There might be people who can show positive results with 100% hedges, but he doesn't seem to be one of them.

 

Disclosure: I hold a large position in FFH. I don't subscribe to a lot of Prem's theories, but at current market valuation, FFH may be pretty good investment for majority of scenarios. Rabid bull market - which is one risk for FFH - is quite unlikely at current valuations (at least in US).

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I wonder which one didn't quite make it to 100% CR this quarter?

 

At the subsidiary level the combined ratios in the first quarter was OdysseyRe 90.3%, Crum & Forster 97.6%, Northbridge in Canadian dollars 98.6%, Zenith 83.4%, Fairfax Asia 76.5% and Brit was 96%

 

Come on... it's ok to say it was over 100%.  Fairfax Asia and Brit certainly didn't need their currencies converted.

 

Ouch:

That’s a very good question, Tom. Very simply, we as we said in our press release and at year-end, we added to our Russell position, meaning we increased our short position to about a 100% in that quarter and timing wasn’t the best. And so, the Russell moved up after we increased our short position, so that’s part of it. And the other part of it, Tom, was very simply some individual names that we’ve shorted, went up. And so, the combination of the two resulted in about $100 million, we’d like to say fluctuation, but that’s what it was for the quarter.

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I wonder which one didn't quite make it to 100% CR this quarter?

 

At the subsidiary level the combined ratios in the first quarter was OdysseyRe 90.3%, Crum & Forster 97.6%, Northbridge in Canadian dollars 98.6%, Zenith 83.4%, Fairfax Asia 76.5% and Brit was 96%

 

Come on... it's ok to say it was over 100%.  Fairfax Asia and Brit certainly didn't need their currencies converted.

 

Ouch:

That’s a very good question, Tom. Very simply, we as we said in our press release and at year-end, we added to our Russell position, meaning we increased our short position to about a 100% in that quarter and timing wasn’t the best. And so, the Russell moved up after we increased our short position, so that’s part of it. And the other part of it, Tom, was very simply some individual names that we’ve shorted, went up. And so, the combination of the two resulted in about $100 million, we’d like to say fluctuation, but that’s what it was for the quarter.

 

I don't know why Prem said Canadian dollars here on Northbridge. It doesn't matter what currency its in, the combined ratio for Northbridge (or any other entity) is the same. Here, 98.6%.

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I wonder which one didn't quite make it to 100% CR this quarter?

 

At the subsidiary level the combined ratios in the first quarter was OdysseyRe 90.3%, Crum & Forster 97.6%, Northbridge in Canadian dollars 98.6%, Zenith 83.4%, Fairfax Asia 76.5% and Brit was 96%

 

Come on... it's ok to say it was over 100%.  Fairfax Asia and Brit certainly didn't need their currencies converted.

 

Ouch:

That’s a very good question, Tom. Very simply, we as we said in our press release and at year-end, we added to our Russell position, meaning we increased our short position to about a 100% in that quarter and timing wasn’t the best. And so, the Russell moved up after we increased our short position, so that’s part of it. And the other part of it, Tom, was very simply some individual names that we’ve shorted, went up. And so, the combination of the two resulted in about $100 million, we’d like to say fluctuation, but that’s what it was for the quarter.

 

I don't know why Prem said Canadian dollars here on Northbridge. It doesn't matter what currency its in, the combined ratio for Northbridge (or any other entity) is the same. Here, 98.6%.

 

I was thinking the same thing. As a ratio, it shouldn't matter what the reporting currency is - the ratio will always be the same no matter how the numbers are converted because the numerator and denominator would change by the same factor.

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There's no possibility of taking in Canadian, but having to pay out in USD?  If it is always the same units, then I agree, and it was just confusing to throw it in the middle of the statement.  I assume he's reading it from a script, so it would seem like someone wrote that down for him to say.

 

Edit: looked at the quarter report and it is constant currency, so you are right, it was just a weird thing to say.

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There's no possibility of taking in Canadian, but having to pay out in USD?  If it is always the same units, then I agree, and it was just confusing to throw it in the middle of the statement.  I assume he's reading it from a script, so it would seem like someone wrote that down for him to say.

 

 

There is definitely that possibility. However, this would show up in the loss & lae/commissions or other SG&A. So when reported you'd see the losses.

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All very good points. I have not sold a FFH share for 6 years. Though i am less comfortable with the company now vs back then. I am astounded at how many recent investments have seemed to have lost all their value. I would love to hear management say we have learned some lessons in this area that we will not make again.

 

It still puzzles me that with Fairfax India they want to partner with the best companies and management. With FFH it seems to be the opposite. Can anyone explain why they appear to have two different strategies?

 

I am slow to change and will still hold my shares, but it is getting harder....:)

 

I'm with you brother. I'm holding my nose more than I ever thought I would. I totally get the deflation bet and the hedging. It's pretty much why I bought this stock. Their stock picking, however, is too often atrocious, indefensible and bordering on amateurish... if not already there. I simply don't get their thinking or analysis.

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All very good points. I have not sold a FFH share for 6 years. Though i am less comfortable with the company now vs back then. I am astounded at how many recent investments have seemed to have lost all their value. I would love to hear management say we have learned some lessons in this area that we will not make again.

 

It still puzzles me that with Fairfax India they want to partner with the best companies and management. With FFH it seems to be the opposite. Can anyone explain why they appear to have two different strategies?

 

I am slow to change and will still hold my shares, but it is getting harder....:)

 

I'm with you brother. I'm holding my nose more than I ever thought I would. I totally get the deflation bet and the hedging. It's pretty much why I bought this stock. Their stock picking, however, is too often atrocious, indefensible and bordering on amateurish... if not already there. I simply don't get their thinking or analysis.

 

This is fair on the listed equity side, but not on the bond side nor the control side (buying businesses to operate).  They haven't *entirely* lost their mojo!

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