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Prem's Comments At ACG Toronto Today


Parsad
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Not a major crash across the board, but you will have some serious consequences in commercial real estate in many areas, and as Prem said, over the next few years there will be some opportunity.  And I have to say, I believe it will be fairly significant opportunity...perhaps on par with what we are seeing in residential real estate in the U.S. in some overbuilt areas.  

 

It was a period of easy money, and unfortunately there is ultimately a trickle-down effect when significant wealth is destroyed.  The commercial real estate industry is probably one of the final receipients of that undesired gift.  Cheers!

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What did Prem mean by....

 

The Toronto-based owner of Canadian and U.S. insurers including Crum & Forster is 75 percent owned by about 10 individual shareholders, Watsa said. Most of those have been with the company “for a long time,” he said, without naming the investors.

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I suppose he means between Prem, Cundill, Southeastern, Markel, Templeton, other principals at Hamblin-Watsa, and Francis, they control close to 75% of the stock.  I was surprised by that number as well!  I thought it was probably closer to 55% or so.  Perhaps, they mean 75% of the votes, as Prem's multiple-voting stock would probably allow them to approach 80%.  Cheers!

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Al...just went back to the 91/92/93 annuals.  Not seeing where they had exceptional returns in CRE.  There was a $4.6M investment in a Calgary mall.

 

Watsa (1993 AR): "We are working at disposing of our real estate investments ($4.2 million) by the end of 1994. We will be pleased to get our money back.  I was too optimistic in the past!"

 

-O

 

and now the good news.... ffh made a killing on cre in 91-92 so they already know the terrain. 

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I sometimes see Watsa and Buffett compared but in my mind Watsa is very far from Buffet in both ability and integrity:

 

1) Performance.  The BVPS of FFH has gone similarly to BRK but 1) in a much more lumpy way (FFH was in no great shape some years back and things could have taken a turn for the worse fairly easily)  2) on a much smaller duration  and 3) with much more leverage (compare the equity/assets ratio even now of BRK vs FFH).

 

2) Integrity.  Buffett would not issue stock above fair value or own separate voting class stock.

 

So, yes Watsa is very very good but he is definitely very ver far from Buffett.

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I sometimes see Watsa and Buffett compared but in my mind Watsa is very far from Buffet in both ability and integrity:

 

1) Performance.  The BVPS of FFH has gone similarly to BRK but 1) in a much more lumpy way (FFH was in no great shape some years back and things could have taken a turn for the worse fairly easily)  2) on a much smaller duration  and 3) with much more leverage (compare the equity/assets ratio even now of BRK vs FFH).

 

2) Integrity.  Buffett would not issue stock above fair value or own separate voting class stock.

 

So, yes Watsa is very very good but he is definitely very ver far from Buffett.

 

Well, Hindsight is 20/20.  

 

 

Your Item 2 is utter bull__t.  Buffett issued stock above book two weeks ago (define fair value).  The separate voting class was necessary for Prem to keep his company.  When FFH started Prem was not rich and not able to hold more than a few percent of the total float, unlike Buffett who had millions from his partnership money to solidify his position.  

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Buffett issued the class B and it is a different class of stock. He still maintains control of the stock and will until he passes by holding the class A and converting any stock sold or given away to class B / C.

 

He also issued the B when Berkshire was overvalued and basically said so. He said it wasnt cheap and he wouldnt be buying it. He now claims that it was fairly valued but, actions speak louder then words to me.

 

A company is supposed to sell stock high and buy it back low. Thats the key to successful allocation. Prem knew the stock was overvalued and never sold a share. His only way to close the gap on the overvaluation was to issue shares and try to buy something that was deeply undervalued. You have to take advantage of the market. Thats the name of the game.

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I don't think comparing Buffett and Watsa are fair.  They are two different people, who started their businesses in two different periods.  Neither is above any sense of hypocrisy, since both have done things that they long talked about never doing.  Buffett just recently split B shares, which he said he would never do, as well as invested in derivatives, airlines and technology (BYD).  Prem's biggest turnabout was issuing stock below book, but he kind of had to do that to save the company!  

 

Unfortunately, we are all guilty of that, since you are constantly learning when investing.  You will make mistakes...Buffett has made his share and Watsa made his share.  Sometimes you have to eat your own words to correct mistakes, or you view the world a bit differently and take another approach.  

 

The only thing I wish Fairfax would emulate more of Berkshire is the reduced leverage...3-1 at Berkshire and 6-1 at Fairfax, although leverage has come down closer to 4-1 at Fairfax with the huge runup in book value, so Prem's headed in the right direction.  

 

But I don't believe there is any other insurance company that has acted with the same moral compass and decisive capital decisions as Berkshire...the closest is Fairfax, whether people like to admit it or not.  Not Markel, not White Mountains, etc.  If you look at what has transpired over the last 24 years at Fairfax, in particular the type of leadership it took to do what they have in the last six years, it is the stuff of what legends are made of.  Cheers!

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The only thing I wish Fairfax would emulate more of Berkshire is the reduced leverage...3-1 at Berkshire and 6-1 at Fairfax, although leverage has come down closer to 4-1 at Fairfax with the huge runup in book value, so Prem's headed in the right direction.

 

Parsad,

 

How did you calculate Bershire's leverage (Assets/Equity) to be 3:1? I get a much lower number. If you consider their insurance ops, it is very small (222B assets, 62B float). I agree with you that one of Fairfax's problems is too much leverage in the insurance ops. Your comparison however implies it is closer to Berkshire's leverage when it is not.

 

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I forgive you the rude comments, ...

 

You can't dispute the performance comparison so you are rude?  Fair value is Fair IV.  In the past Watsa has issued stock way above fair value.

 

Frog03, I wasn't asking your forgiveness.  What you said about Prem lacking integrity was ridiculous. 

 

My comment regarding performance was that hindsight is 20/20. 

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In the past Watsa has issued stock way above fair value.

 

 

Where is the fault in that?

 

Is it unethical to sell FFH above fair value?  What if he unloads his WFC stake above fair value, is there a duty to tell the buyer that he is getting ripped off?

 

Has Warren ever sold anything above fair value, taking advantage of some rube?

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In the past Watsa has issued stock way above fair value.

 

Where is the fault in that?

 

Is it unethical to sell FFH above fair value?  What if he unloads his WFC stake above fair value, is there a duty to tell the buyer that he is getting ripped off?

 

Has Warren ever sold anything above fair value, taking advantage of some rube?

 

Exactly! And, how is selling high above fair value any different from buying way below fair value in terms of ethics? Frog, should we impugn Buffett's integrity because he charged Goldman an arm and a leg for the preferreds?

 

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Parsad,

 

How did you calculate Bershire's leverage (Assets/Equity) to be 3:1? I get a much lower number. If you consider their insurance ops, it is very small (222B assets, 62B float). I agree with you that one of Fairfax's problems is too much leverage in the insurance ops. Your comparison however implies it is closer to Berkshire's leverage when it is not.

 

Hi Sreenr,

 

Sorry, I was just rounding.  Berkshire's leverage historically over the last few years has been around 2.5-1.  If you include off-balance stuff like their derivatives exposure, finance business, etc. it's probably a little higher, so I just rounded to 3-1.  Cheers!

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I forgive you the rude comments, ...

 

You can't dispute the performance comparison so you are rude?  Fair value is Fair IV.  In the past Watsa has issued stock way above fair value.

Warren has issued BRK stock in many acquisitions if my memory is not faulty in every case he did it when he felt that he was getting more than he was giving. On another stream there has been discussion re splitting the B's. Given that the bulk of Warrens A are going to be converted to B,s and sold into the mkt over the next 20 years. I suspect that splitting the B's has a lot to do with the fact that it is now going to be a MUCH more liquid stock in the future Splitting the B's is only going to make the liquidity of the B's that much greater as now every one will be able to particapte . I still have not figured out when control of BRK comes into play but it is  a certainty at some point.
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GE will likely have large write-downs in their commercial real-estate portfolio over the next few years.  I guess Prem figures the rest of GE will more than offset this.

 

http://www.reuters.com/article/businessNews/idUSTRE59F3YH20091016

 

"General Electric Co's $84 billion real estate portfolio remains a worry for investors, who wonder if the conglomerate will have to take big write-downs to reflect the lower value of real estate debt and equity holdings."

 

The financing available to roll over a lot of commercial debt coming due in the next few years is limited. Much of GE's commercial real estate equity is not worth what the company paid for it, especially assets bought near the market peak in 2006 and 2007.

 

"They're still not taking impairments on the commercial real estate portfolio and there's a lot of concern about that," said Jack De Gan, chief investment officer at Harbor Advisory Corp, which owns GE shares in client portfolios.

 

"They acquired that portfolio very late in the rally for commercial real estate," De Gan said. "There's a lot of concern among investors there are significant write-downs yet to come out of that portfolio."

 

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1) Performance.  The BVPS of FFH has gone similarly to BRK but 1) in a much more lumpy way (FFH was in no great shape some years back and things could have taken a turn for the worse fairly easily)  2) on a much smaller duration  and 3) with much more leverage (compare the equity/assets ratio even now of BRK vs FFH).

 

Actually, if we look at the last almost 24 years, then the book value per common share of Fairfax has increased 26% annually (taking dividends into account). For comparison, Berkshire has increased book per share by 20% annually over the 25 year period from 1984-2008.

As for the lumpyness, Berkshires change in book value from year to year have a Gini coefficient of 0.42 from 1984-2008, where the Gini Coefficient for Fairfax' book increase is 0.50 for the period 1985-2009´Q3.

So yes, the returns for Fairfax is more lumpy - but not that much.

In fact, the lumpyness in Fairfax' return on book might be thought of as additional return when compared with Berkshire.

 

24 years is pretty long duration - but for obvious reasons it is smaller than Berkshire' full history.

 

True, the leverage is higher for Fairfax, but there's another thing to consider: Risk management.

It seems to me that Fairfax hedges risk more carefully than Berkshire.

Take for instance the recent period with shorting of the S&P500 - during this time, Fairfax did maintain call options to put a cap on the potential loss, along with some equities.

Or the CDS' and the reinsurance recoverables and other stuff.

It seems to me, that Fairfax typically have two legs in the deals, where one leg might go wrong but then the other leg will compensate.

Berkshire on the other hand, seems to make more pure one-way deals. For instance that equities will increase.

Consider what will happen if the more pure one-way deals go against Berkshire.

 

cheers  :)

 

 

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