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Fairfax B shares?


Guest Dazel
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Berkshire created B shares and now have split them 50 to 1.  Leucadia splits whenever they can...Does Fairfax have to do something similar to get investors to have a look?

 

This board has always thought it was silly...I have read posts on ELF comparisons to Fairfax on how they are undervalued as well....is it the high share price? if you did a study I would bet that they correlated to companies that do not split...and have high share prices. With "b" shares you have both and sadly you get the liquidity that institutional investors crave...or percieved liquidity..whatever works for their brain.

 

Is it a sign of the times that the "b" shares do matter to investors?

 

I know the board would not be upset if Fairfax traded where it should at 1.3 to 1.5 times book. It would give Fairfax a lot more options. Not to mention that if they did it quickly the public would link it to Buffett's decision.

 

thoughts?

 

Dazel.

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I would guess that Prem is very against that idea.

 

I think Buffett has reluctantly created B shares and then split them purely out of fairness to small investors . . . not to help include them but only to make sure they weren't taken for a ride.

 

We all know he created the B shares to prevent a number of people from creating closed end funds holding BRK only and charging management fees . . . I'm sure it pissed him off not only that they were hosing small investors, but also that they were doing so by piggybacking off of Warren's work and reputation.

 

I'm sure he didn't want to split the B shares now, but the alternative would be that small holders of BNI wouldn't be able to get a tax-free exchange like large shareholders . ..  and since BRK couldn't (wouldn't) pay all cash, there was only one alternative to still treat everyone fairly.

 

I don't think FFH will ever split unless something like a closed-end FFH fund shows up.  Prem has already said he wouldn't sell at 4X book, so its pretty clear he doesn't care what the valuation of the stock is - except for when it provides an opportunity to buy back or use stock for an accquisition.

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Berkshire created B shares and now have split them 50 to 1.  Leucadia splits whenever they can...Does Fairfax have to do something similar to get investors to have a look?

 

This board has always thought it was silly...I have read posts on ELF comparisons to Fairfax on how they are undervalued as well....is it the high share price? if you did a study I would bet that they correlated to companies that do not split...and have high share prices. With "b" shares you have both and sadly you get the liquidity that institutional investors crave...or percieved liquidity..whatever works for their brain.

 

Is it a sign of the times that the "b" shares do matter to investors?

thoughts?

 

To me, a small retail investor, after the share price gets too high it makes things more difficult for 2 reasons.  First for BRK-B pre split at 2-4K a share it's tough to 'average in/average down' etc.  Second for any stock over $50 it's tougher to trade options on.  I like selling puts to acquire and selling calls to sell and lower my cost basis.  But options are in 100 share contracts.  So once the stock hits $50 you're up to 5K per shot so to speak.  To me that makes it more difficult.  So honestly I personally, as a retail investor, think it's a bit problematic to have a high share price.  I would actually think that institutional investors would have an easier time with the high share price, since if you're throwing around several million $, there's little difference...  Not sure if that's really the case or not...

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The prospect of owning thousands of BRK shares ain't what it used to be. :)

 

-O

 

To me, a small retail investor, after the share price gets too high it makes things more difficult for 2 reasons.  First for BRK-B pre split at 2-4K a share it's tough to 'average in/average down' etc.  Second for any stock over $50 it's tougher to trade options on.  I like selling puts to acquire and selling calls to sell and lower my cost basis.  But options are in 100 share contracts.  So once the stock hits $50 you're up to 5K per shot so to speak.  To me that makes it more difficult.  So honestly I personally, as a retail investor, think it's a bit problematic to have a high share price.  I would actually think that institutional investors would have an easier time with the high share price, since if you're throwing around several million $, there's little difference...  Not sure if that's really the case or not...

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if you did a study I would bet that they correlated to companies that do not split...and have high share prices.

 

There would be exceptions like MKL.  So the more interestion question is why, when both FFH and FFH are in the same industry with similar business models.

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Do not forget that the FFH shares that we currently own are already B shares.  Prem owns the multiple-voting A shares....

 

I guess the question is whether there should be a split for existing shares, or whether issuing a C share would be appropriate...  so far, I'm ok with the existing structure, as there is no real disadvantage to trading odd-lots, and I am reasonably able to access options when I want...

 

SJ

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Anyone wonder what the BRK AMG attendance numbers will be like once they do the 50-1 split on the B shares?  Omaha will be a madhouse that weekend....

 

I do think the attendance will continue to rise, as investors want to have their chance to experience "woodstock for capitalists" while charlie and warren are still around.

 

However, I don't think the split will have an impact.  If someone didn't have enough capital to buy a single B share before, then I doubt they would have the disposable income to fly or roadtrip to Omaha just for the meeting.  Besides, you don't have to be a shareholder to go to AGM.  I think Berkshire HQ made passes directly available for $5 to anyone that wanted them just to prevent a secondary market developing where shareholder credentials sell for a premium.

 

 

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I don't think Prem would, and I truly hope he never does, split Fairfax shares.  I'm actually VERY disappointed that Berkshire is doing that.  You are going to attract an inferior group of shareholders, whose time horizon will now be at the same level as shareholders in any other company.  It's the same reason we don't take fund of fund money in MPIC...we want individual partners who understand the culture and philosophy.  And remember, for Fairfax loyalty is paramount.  This company was on the precipice at one point, but their shareholders held true.  You want to propagate that type of mindset, not diminish it.  Cheers! 

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Guest longinvestor

I don't think Prem would, and I truly hope he never does, split Fairfax shares.  I'm actually VERY disappointed that Berkshire is doing that.  You are going to attract an inferior group of shareholders, whose time horizon will now be at the same level as shareholders in any other company.  It's the same reason we don't take fund of fund money in MPIC...we want individual partners who understand the culture and philosophy.  And remember, for Fairfax loyalty is paramount.  This company was on the precipice at one point, but their shareholders held true.  You want to propagate that type of mindset, not diminish it.  Cheers! 

 

Share the sentiment about inferior (short sighted) shareholders. Yet on the other hand, I look at how I have stood in the other corner from these guys over the past 5 years and am literally laughing my way to the bank. Sure, it was sweaty at times. But going against the shorts-gone-wrong can be profitable, don't we know that ;D. They will likely come and we will surely grind them out.

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I don't think Prem would, and I truly hope he never does, split Fairfax shares.  I'm actually VERY disappointed that Berkshire is doing that.  You are going to attract an inferior group of shareholders, whose time horizon will now be at the same level as shareholders in any other company.  It's the same reason we don't take fund of fund money in MPIC...we want individual partners who understand the culture and philosophy.  And remember, for Fairfax loyalty is paramount.  This company was on the precipice at one point, but their shareholders held true.  You want to propagate that type of mindset, not diminish it.  Cheers! 

 

Sanj - you make the exact point I was trying to make when I expressed my shock (and yes, disappointment) in the BRK B-split on the Burlington Northern thread.

 

cheers

Zorro

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The reality is that once you get into the low hundreds/share, the share base becomes primarily institutional & a lot less liquid. The closed end fund is really just the markets solution to providing that liquidity - at a very high price.

 

Most companies try to keep their share price within the average range of their perceived peers ... & it tends to ensure that they get the same valuation as their peers (long/short arbitrage within the portfolios P&C allocation).

 

While we think its largely enevitable, we'd prefer they not do it untill after they do another acquisition.

There is really no need to wake up Mr Market just yet  ;D

 

SD

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I don't think Prem would, and I truly hope he never does, split Fairfax shares.  I'm actually VERY disappointed that Berkshire is doing that.  You are going to attract an inferior group of shareholders, whose time horizon will now be at the same level as shareholders in any other company.  It's the same reason we don't take fund of fund money in MPIC...we want individual partners who understand the culture and philosophy.  And remember, for Fairfax loyalty is paramount.  This company was on the precipice at one point, but their shareholders held true.  You want to propagate that type of mindset, not diminish it.  Cheers! 

 

Sanj - you make the exact point I was trying to make when I expressed my shock (and yes, disappointment) in the BRK B-split on the Burlington Northern thread.

 

cheers

Zorro

 

Honestly, though, I'm not sure it matters.  Mr. Market still gets his thing wrong since the price is set by the margin--despite having more people with a long term investment focus.  There's also always been plenty of turnover in Berkshire amongst investors who buy it on value principals rather than long-term investment principals.  And doing it this way means you can be fair to smaller investors in the BNI deal, so that they can get the same terms as the big boys.

 

For any investor, $300-400 for a share of fairfax is not an unreasonable chunk of money.  Back in december, brk was nearly $5000, which is really pricing  out those small investors getting started (or those who want to invest income at regular intervals). 

 

In short, other than the slight increase in commissions, I don't see this as a particularly big deal.  It surprised me at first but thinking about it has lead me to this conclusion.

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I have subscribed to the snobby culture of not splitting shares because it makes no difference to the market value...# of shares X share price = market cap. I have agreed with all of the posts that think it would be unFairfax like to split the shares. However, like Munger I figured I will invert. You notice I said "B" shares and not split the shares...very different.

 

Why not split the shares? Is there a moral code that makes a company more honest for not splitting? Sanjeev...the shareholders you talk about that were all about the Fairfax culture sold out taking the shares from $600 to $60. I do not think Longleaf, Cundill and Markel would have cared whether they bought 10 times as many shares. No one else cared when they ran for the exits.

 

Are Leucadia shareholders worse than Fairfax holders because they have split their shares about 20 times? Are they less loyal? less long term? You could most definately say no. Has it hurt their share price? They have a constant premium!

 

I guess the real question that matters is...has it helped? In the longterm shareholders care about returns...

 

It is human nature for someone to do the math...$250 to $400 is a big move...well how about $2.50 to $4...not so much..

 

The institutional investors being talked about for the most part are morons..they do the same equation as above. The thought of the Fairfax stock going to a $1000 is impossible. The thought of a $2.50 stock going to $10 is not only possible we have all seen it happen dozens of times in the last 6 months. It is sad but true.  

 

If Fairfax traded for $35 and could have gotten a premium of 1.35 times book and traded at $50...How happy would we be with the ORH deal?

 

When I bought Leucadia .... I did not think...well these guys are fakes because they split their stock but I will buy it anyways! I knew like everyone else that they would get their premium back when people realized what their assets were. They were able to use their premium pre crash to buy Jefferies which may be one of their best investments yet. Fairfax is buying at discounts to book.

 

I do not know the answer guys but trading at a discount sucks...It takes away a lot of Fairfax options. Look at what Mr. Bufett just did at 1.35 times book. If the probabilities of trading at a premium or in Fairfax case at book value, were increased by splitting the shares would you do it?

 

 

Dazel.

 

 

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Look at what Mr. Bufett just did at 1.35 times book.

 

1.35x for Berkshire is equal to a much smaller multiple for Fairfax.

 

Fairfax at book value might mean that you are paying a large multiple of book.  Use the look-through idea of book value (what is the weighted P/B of the shares in the Fairfax portfolio?).  Berkshire has so many operating companies that are wholly owned and the book value reflects a much lower number than the market would value those businesses at if they traded as shares marked-to-market.

 

 

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Even with FFH being at it's current levels, you see quite a bit of volatility. IMO, the longer I've played this game the more I appreciate their approach at Leucadia. They don't fight Mr. Market, they take advantage of him. So I've come to accept splits as part of the game. It's a non-event from a business owner perspective, but it allows Mr. Market to play games too.

 

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I agree with the tone of the last few posters. The risk of Berkshire attracting "Mad Money" types will decrease with the company's CAGR. Going forward, Berkshire will probably beat the pants of the S&P in risk adjusted terms, with more modest nominal results. That alone should chase away many speculators.

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For the psychological reasons Dazel mentioned I think that Fairfax needs to split the shares and keep them in the 30-60 range. 

 

If I split it ten for one the recent price moves would have looked like this:  Nov: 08 - 27; Feb 09 - 32; mar 9th - 21; sept 30 - 37.

 

The range for one year has been from a low of 21 to a high of 37.  This stock is definitely not particularly volatile when compared on a split basis.  It has moved around much less than most in the past year.  And yet we act as if it is extremely volatile.  That is the illusion given to us by the high dollar value of the stock. 

 

I for one get periodically pissed at the share price.  Sure its a deal at this price.  But then it has basically been a deal for 4 years.  I have bought all I ever want.  Anymore is irresponsible without hedging.  So I would like to see the price go up alot.  At this point a high share price would be much more useful to Fairfax as a currency than one that is below 2 x book.  As has been suggested previously on the board part of Fairfax's book value growth has come from issuing shares at high prices and buying back at low prices (financial engineering if you want). 

 

The greater liquidity after a share split, may allow for greater volatility, which would certainly let FFH do more financial engineering.  It has nothing to do with reality and everthing to do with perception.  One perceives a move from 280 to 350 as more volatile than 28 to 35.  or 2.80 to 3.50 (I have stocks that do this on a near daily basis).  It also has nothing to do with loyalty or trading cost anymore. 

 

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Well Al, I think you're approaching this with a completely selfish point of view...which isn't wrong considering how much you own now!   ;D  You can view share splits several ways:

 

- First and foremost in our minds is that it encourages an inferior, more speculative shareholder group

- Second, it generally increases liquidity, as the share volumes will increase with more speculative trading and smaller shareholders

- Third, it could possibly encourage Fairfax to be added to various market indices, which enhances price and reputation

- Fourth, custodial and administrative costs go up, since the more shares issued, the higher the listing costs and custodial costs

- Fifth, it promotes the idea that market price is more important than growth in intrinsic value

 

I'm sure there are a number of other pros and cons that can be mentioned.  I'm of the opinion you don't do things purely to increase marketability.  Would a share split increase Fairfax's intrinsic value?  Nope.  It would only increase volatility and allow some shareholders to prosper at the expense of other more ignorant shareholders...which in Berkshire's case, and ultimately other companies like Fairfax or Markel, completely obliterates the premise that all shareholders are equal partners.  

 

It's like Dave Letterman and the interns.  Sure there are a whole lot of other people who have done what he has done (Bob Barker comes to mind), and geez I wouldn't fault him for it entirely, but you just didn't want to hear that he had done it...not Dave!  Now I can't even watch the guy.  Sheesh!  Cheers!  

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Just for balance.

 

If the shares split 10:1, & the major players held their relative positions, you'd simply increase the float by 10x. Whether its 'good' or not, really depends on how that additional float gets used. The wider & deeper the pool of investors the better the pricing, & the liquidity, but there is also more potential for abuse.

 

While a trapped short can be highly profitable, they can also be severely disruptive. Is the long period of distorted pricing better than a short period of severe swings ? .. or does it just move future gains forward? (ie: that bigger take by stringing the short out, was at the expense of a lower future multiple). The bigger the float the easier it is to get out - & for some other idiot to try their luck. Then recall that its also a lot easier to buy back some float  ;) should the multiple become silly.

 

FFH has long been criticized for having too small a float; and now that both ORH and NB are gone, the issue has grown worse. A modest share split at some point, has to be almost a given.

 

SD

 

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Would a share split increase Fairfax's intrinsic value?  Nope.  

 

It might actually.  Potentially.  On a per share basis.

 

To the extent that it encourages a dramatically higher P/B valuation, and they use the shares as a currency for acquisitions, then it does.  If the acquisition were to happen anyhow, but the split allowed it to happen at a more favorable share price, then it increases IV per share.

 

However, if it does not encourage a higher P/B valuation, then it doesn't.

 

 

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FFH has long been criticized for having too small a float; and now that both ORH and NB are gone, the issue has grown worse. A modest share split at some point, has to be almost a given.

 

Not necessarily.  Berkshire has done perfectly fine and their share price went well over $100K each.  There is absolutely no need to split Fairfax shares.

 

To the extent that it encourages a dramatically higher P/B valuation, and they use the shares as a currency for acquisitions, then it does.  If the acquisition were to happen anyhow, but the split allowed it to happen at a more favorable share price, then it increases IV per share.

 

This could easily happen without a split.  Remember that Fairfax once traded at four times book...$600/share...and no one was complaining that the stock needed more liquidity to enhance shareholder value in any way.  Berkshire traded at two times around the same time, and the stock was almost $90K per share then.  As recently as a year and a half ago, Markel was trading at over two times book.  Again, liquidity is not an issue.  Fairfax has not split their shares, yet they managed to increase shareholder value by nearly 180% over the last five years.  Do they really need overvalued stock to make a bigger dent?  Cheers!

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"1.35x for Berkshire is equal to a much smaller multiple for Fairfax.

 

Fairfax at book value might mean that you are paying a large multiple of book.  Use the look-through idea of book value (what is the weighted P/B of the shares in the Fairfax portfolio?).  Berkshire has so many operating companies that are wholly owned and the book value reflects a much lower number than the market would value those businesses at if they traded as shares marked-to-market."

 

 

I would argue you are wrong...25% plus of Berkshire's book value is goodwill ($24 billion) last time I checked...and counting after Sante Fe.

 

A lot of Berkshire's businesses are terrible right now and will be for awhile so look through earnings are not what they used to be...Fairfax book value should trade at a premium because it is mostly liquid...Per share investments at Fairfax are mulitples of Berkshire...

 

ie would you rather have liquid assets to take advantage of the discounts out there or would you rather own...10 furniture stores, carpet, paint and acme brick etc? and now a $44 billion dollar railroad company.

 

Forgive me but who should have the higher multiple for book value.

 

I know guns will come a blazing after this post...I am ready...Mr. Buffett is god in my world but I would rather own Fairfax and I think he would say the same. Size is on Fairfax's side when it comes to book value.

 

Dazel.

 

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I think this entire discussion is highly over blown.  On the list of 'things that are wrong with corporate America and governance in general', splitting shares is pretty far down the list of things I'd be concerned with.  (assuming I believed there was something wrong with doing so, which I'm not convinced that I do.

 

If I remember correctly Buffet started selling B shares when BRK was pretty overvalued no?  So he was essentially selling BRK shares at a very high price.  I seem to remember that from Alice's book.  I mean really it should be up to management to take advantage of the market as they see fit.  Smart management should buy back shares when the price is cheap, and sell shares, raising equity when the price is high.  I remember back during the height of the Internet boom I read something about Amazon raising cash via debt!  At the height of the boom when their shares were floating above the clouds they went for debt instead of issuing shares!  Amazing.

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Sanjeev...I think your post is relevant because those that remember Fairfax at $600 a share more than !0 years ago know what a disaster happened. They saw it go to $600 and back to $60..and now 10 years later...It is still down almost 50%. While we benefitted from this... many institutions were killed by it...and it is not a memory that has served Fairfax well...they barely ever get appraised at book value in the market.

They still trade in the market where they are worth more dead than alive.

 

Would a split change that?

 

Dazel.

 

 

 

 

 

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