Fairfax nears deal to buy Allied World for $4.9B

[rb]

Here are a couple of interesting quotes from Prem regarding the rational for the purchase:

 

“The recent election . . . has a strong potential to make the business climate for growth great again,” he said. “We believe the US may see significant growth in GDP and our business in the US will benefit from any such positive development.”

 

Mr Watsa suggested that there could be more US deals in the future: “When the biggest economy in the world is on the way up we think the downside is significantly reduced and it becomes a value-oriented, stockpickers’ market. In the last few years we’ve played defence. We expect to play offence.”

 

https://www.ft.com/content/da6d1b3a-c5f5-11e6-9043-7e34c07b46ef?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev&yptr=yahoo

 

He sounds like a cartain manic depressive fellow I want to sell some shares to... really strange.

 

Yea - This is getting bizarre. I don't have any issues with the acquisition in and of itself, but the 180 degree turn on the U.S. markets as the result of the election with no commentary on rising rates, falling liquidity, strengthening dollar, declining corproate profits, levered corporations, and valuations that appear excessive certainly seems strange.

 

If you read what he's said carefully, he hasn't done a 180 on the US markets but on the US economy.

 

The hedges were not mainly explained in valuation (e.g. CAPE, Tobin's Q) terms.  They were explained in terms of protecting the company from another 1929-33 type selloff, which would have destroyed the company in the absence of the hedges.

 

They now feel that that kind of catastrophe has reduced in probability, because we have a quantum shift from a world in which politicians over-regulate and rely on central bankers to promote growth via leverage, to one in which (maybe) government gets out of the way and productivity drives gdp.

 

So the hedges have gone.  Doesn't mean they think the market goes up.  All they've said on that front is that it will become a stockpicker's market again.  Value starts to win again.

I have a problem with this idea that productivity is suddenly going to go up and all ills are cured because of the election. This implies something along the following lines: As a business owner I have a project that I can execute that would that would improve productivity of my labor force and I can make me more money. Interest rates are low so I have cheap capital available. But I don't execute the project because I don't like the guy in the White House?

 

In addition economies are large and complex mechanisms. They don't turn on a dime. You don't go from deflation risk and possibility of a great depression just because you had an election. The risk of a stock market crash definitely doesn't go down after you've had a 100% or so rally in stock prices.

 

Others here have said things along the lines of just go with it and don't ask any questions or Prem has a master plan that shouldn't be disclosed, trade secrets etc. Please! Managements are accountable to shareholders. Strategies reflect management thinking and should be disclosed. More disclosure is required when those strategies go bad and when they are dramatically changed. Take Berkshire for example. Their strategy is well defined and well communicated. They say what they will do and do what they said and it works. The fact that the strategy is public doesn't prevent them from implementing it. If Berkshire did something radically different like go and drop 50 billion on airlines or buy Twitter you can bet we'd get a way more detailed and reasoned explanation then "Trump won the election - problem solved".

 

So in 2010/2011 the strategy was buy quality companies at attractive prices (remember the big 3?), hedge the long portfolio and hedge against deflation (a macro call since the hedges were outsized relative to FFH risk). This was based on a view the the economy will stagnate and would be at risk of recession. Ok this is quite reasonable for an insurance company in the 2010 environment. Then they go ahead and ditch the quality companies and buy duds. Ok maybe they've made investment mistakes we're all allowed one or two of those. But one should acknowledge the mistakes, learn and correct.

 

Then we get back to the hedges. The economy in 2014/2015 was different that the one in 2010. They look at the facts and decide that the hedges are still appropriate. They don't take even a reduction. Now you get the election and it's 180 change? I'm sorry but "Trump won the election - problem solved" is just not good enough.

[Luckyone77]

Here are a couple of interesting quotes from Prem regarding the rational for the purchase:

 

“The recent election . . . has a strong potential to make the business climate for growth great again,” he said. “We believe the US may see significant growth in GDP and our business in the US will benefit from any such positive development.”

 

Mr Watsa suggested that there could be more US deals in the future: “When the biggest economy in the world is on the way up we think the downside is significantly reduced and it becomes a value-oriented, stockpickers’ market. In the last few years we’ve played defence. We expect to play offence.”

 

https://www.ft.com/content/da6d1b3a-c5f5-11e6-9043-7e34c07b46ef?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev&yptr=yahoo

 

He sounds like a cartain manic depressive fellow I want to sell some shares to... really strange.

 

Yea - This is getting bizarre. I don't have any issues with the acquisition in and of itself, but the 180 degree turn on the U.S. markets as the result of the election with no commentary on rising rates, falling liquidity, strengthening dollar, declining corproate profits, levered corporations, and valuations that appear excessive certainly seems strange.

 

If you read what he's said carefully, he hasn't done a 180 on the US markets but on the US economy.

 

The hedges were not mainly explained in valuation (e.g. CAPE, Tobin's Q) terms.  They were explained in terms of protecting the company from another 1929-33 type selloff, which would have destroyed the company in the absence of the hedges.

 

They now feel that that kind of catastrophe has reduced in probability, because we have a quantum shift from a world in which politicians over-regulate and rely on central bankers to promote growth via leverage, to one in which (maybe) government gets out of the way and productivity drives gdp.

 

So the hedges have gone.  Doesn't mean they think the market goes up.  All they've said on that front is that it will become a stockpicker's market again.  Value starts to win again.

I have a problem with this idea that productivity is suddenly going to go up and all ills are cured because of the election. This implies something along the following lines: As a business owner I have a project that I can execute that would that would improve productivity of my labor force and I can make me more money. Interest rates are low so I have cheap capital available. But I don't execute the project because I don't like the guy in the White House?

 

In addition economies are large and complex mechanisms. They don't turn on a dime. You don't go from deflation risk and possibility of a great depression just because you had an election. The risk of a stock market crash definitely doesn't go down after you've had a 100% or so rally in stock prices.

 

Others here have said things along the lines of just go with it and don't ask any questions or Prem has a master plan that shouldn't be disclosed, trade secrets etc. Please! Managements are accountable to shareholders. Strategies reflect management thinking and should be disclosed. More disclosure is required when those strategies go bad and when they are dramatically changed. Take Berkshire for example. Their strategy is well defined and well communicated. They say what they will do and do what they said and it works. The fact that the strategy is public doesn't prevent them from implementing it. If Berkshire did something radically different like go and drop 50 billion on airlines or buy Twitter you can bet we'd get a way more detailed and reasoned explanation then "Trump won the election - problem solved".

 

So in 2010/2011 the strategy was buy quality companies at attractive prices (remember the big 3?), hedge the long portfolio and hedge against deflation (a macro call since the hedges were outsized relative to FFH risk). This was based on a view the the economy will stagnate and would be at risk of recession. Ok this is quite reasonable for an insurance company in the 2010 environment. Then they go ahead and ditch the quality companies and buy duds. Ok maybe they've made investment mistakes we're all allowed one or two of those. But one should acknowledge the mistakes, learn and correct.

 

Then we get back to the hedges. The economy in 2014/2015 was different that the one in 2010. They look at the facts and decide that the hedges are still appropriate. They don't take even a reduction. Now you get the election and it's 180 change? I'm sorry but "Trump won the election - problem solved" is just not good enough.

 

Actually, an economy can turn around very quickly when the animal spirits are unleashed and the correct policies are enacted. Thomas Sowell describes that in an older interview with Peter Robinson in Uncommon Knowledge that you can download or watch on Youtube. I believe it was Harding, though my memory fails, that basically did it and the economy turned on a dime with a year. And he states it's been done before.

 

And to your point about a business owner not doing something because you don't like the guy in the White House, that's a bit simplistic. It's not the person but the policies and philosophy and it's ramifications that would gives them reason to pucker up and freeze. It happened to millions of us who were extremely wary of risking capital with such an anti-capitalist/socialist in charge.

[KinAlberta]

Here are a couple of interesting quotes from Prem regarding the rational for the purchase:

 

“The recent election . . . has a strong potential to make the business climate for growth great again,” he said. “We believe the US may see significant growth in GDP and our business in the US will benefit from any such positive development.”

 

Mr Watsa suggested that there could be more US deals in the future: “When the biggest economy in the world is on the way up we think the downside is significantly reduced and it becomes a value-oriented, stockpickers’ market. In the last few years we’ve played defence. We expect to play offence.”

 

https://www.ft.com/content/da6d1b3a-c5f5-11e6-9043-7e34c07b46ef?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev&yptr=yahoo

 

He sounds like a cartain manic depressive fellow I want to sell some shares to... really strange.

 

Yea - This is getting bizarre. I don't have any issues with the acquisition in and of itself, but the 180 degree turn on the U.S. markets as the result of the election with no commentary on rising rates, falling liquidity, strengthening dollar, declining corproate profits, levered corporations, and valuations that appear excessive certainly seems strange.

 

If you read what he's said carefully, he hasn't done a 180 on the US markets but on the US economy.

 

The hedges were not mainly explained in valuation (e.g. CAPE, Tobin's Q) terms.  They were explained in terms of protecting the company from another 1929-33 type selloff, which would have destroyed the company in the absence of the hedges.

 

They now feel that that kind of catastrophe has reduced in probability, because we have a quantum shift from a world in which politicians over-regulate and rely on central bankers to promote growth via leverage, to one in which (maybe) government gets out of the way and productivity drives gdp.

 

So the hedges have gone.  Doesn't mean they think the market goes up.  All they've said on that front is that it will become a stockpicker's market again.  Value starts to win again.

I have a problem with this idea that productivity is suddenly going to go up and all ills are cured because of the election. This implies something along the following lines: As a business owner I have a project that I can execute that would that would improve productivity of my labor force and I can make me more money. Interest rates are low so I have cheap capital available. But I don't execute the project because I don't like the guy in the White House?

 

In addition economies are large and complex mechanisms. They don't turn on a dime. You don't go from deflation risk and possibility of a great depression just because you had an election. The risk of a stock market crash definitely doesn't go down after you've had a 100% or so rally in stock prices.

 

Others here have said things along the lines of just go with it and don't ask any questions or Prem has a master plan that shouldn't be disclosed, trade secrets etc. Please! Managements are accountable to shareholders. Strategies reflect management thinking and should be disclosed. More disclosure is required when those strategies go bad and when they are dramatically changed. Take Berkshire for example. Their strategy is well defined and well communicated. They say what they will do and do what they said and it works. The fact that the strategy is public doesn't prevent them from implementing it. If Berkshire did something radically different like go and drop 50 billion on airlines or buy Twitter you can bet we'd get a way more detailed and reasoned explanation then "Trump won the election - problem solved".

 

So in 2010/2011 the strategy was buy quality companies at attractive prices (remember the big 3?), hedge the long portfolio and hedge against deflation (a macro call since the hedges were outsized relative to FFH risk). This was based on a view the the economy will stagnate and would be at risk of recession. Ok this is quite reasonable for an insurance company in the 2010 environment. Then they go ahead and ditch the quality companies and buy duds. Ok maybe they've made investment mistakes we're all allowed one or two of those. But one should acknowledge the mistakes, learn and correct.

 

Then we get back to the hedges. The economy in 2014/2015 was different that the one in 2010. They look at the facts and decide that the hedges are still appropriate. They don't take even a reduction. Now you get the election and it's 180 change? I'm sorry but "Trump won the election - problem solved" is just not good enough.

 

Actually, an economy can turn around very quickly when the animal spirits are unleashed and the correct policies are enacted. Thomas Sowell describes that in an older interview with Peter Robinson in Uncommon Knowledge that you can download or watch on Youtube. I believe it was Harding, though my memory fails, that basically did it and the economy turned on a dime with a year. And he states it's been done before.

 

And to your point about a business owner not doing something because you don't like the guy in the White House, that's a bit simplistic. It's not the person but the policies and philosophy and it's ramifications that would gives them reason to pucker up and freeze. It happened to millions of us who were extremely wary of risking capital with such an anti-capitalist/socialist in charge.

 

 

 

So you were "wary of risking capital" due to macro concerns?

 

That reminds me of Grantham's attack on 'value investors' by highlighting what animal spirits brings to the table.

(I should also mention that Buffett has said that value and growth are; 'two sides of the same investment coin'.)

 

 

GMO letter, Page 6, April 2010

 

Part 1: “Friends and Romans, I come to tease Graham andDodd, not to praise them.” (On the potential disadvantagesof Graham and Dodd-type investing.)

Jeremy Grantham

*

The Letters to the Investment Committee series is designed for a very focused market: members of institutional committees who are well informed but non-investment professionals.

 

page 7:

"

...when reasonable calculation is supplementedand supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers” – and nearly always overtakes Graham-and-Doddites – “is put aside as a healthy man puts aside the expectation of death.” You only undertake dramatic initiatives of the type that create the Microsofts or Apples of the world with a heavy dose of animal spirits. If you Graham-and-Dodded it, you would never do anything spectacularly successful.

...

When you buy a stock, because it has surplus assets or agood yield or a great safety margin, you are really making a bet on regression to the mean. We are really counting on the fact that current unpopularity will fade, that the current problems in the industry will dissipate, and that the fortunes of war will move back to normal. Well, as aprovable, statistical fact, industries are more dependably mean-reverting than stocks, for individual stocks can on rare occasion, permanently change their stripes à la Apple. (Or is that à l’Apple?) Sectors, like small caps, are more provably mean-reverting than industries. The aggregate stock market of a country is more provably mean-reverting when mispriced than sectors. And great asset classes are provably more mean-reverting than a single country. Asset classes are the most predictable of all: when a bubble occurs in a major asset class, it is a near certainty that it will go away. "

 

https://www.scribd.com/document/30407102/GMO-Grantham-Quarterly-Apr10

 

[Spekulatius]

I am a very recent shareholder (5% position)  and I just sold my shares today. Rarely ever had an investment left me as befuddled as Fairfax in such a short time after I bought.

[Packer16]

I think people are focusing too much on the politics of the election versus the economics.  The markers have rallied about 9% since election day.  The proposals on the table include corporate tax rate declines, which would encourage domestic investment as well as reduce taxes and a large infrastructure program with a private market tilt.  The tax rate reduction alone of at least 10% increases value by at least 15%.  Then you have the incentives to repatriate & possible move intangibles assets to the US because of the lower rates.  Then you have the infrastructure spending.  These working together will have huge networking effect.  From a political perspective you had the US take Kaopectate to cleanse the system of constipation that was occurring. 

 

There are many skeptics based upon Trump rhetoric but ask yourself if Marco Rubio won the election with these proposals would your opinion change?  The skepticism is where the opportunity lies & I think the folks at Fairfax see this.  The same was true with Reagan.  Folks thought he was going to get us into a nuclear war and cause us bankruptcy & poverty with his tax cuts.  We will see but I see Prem et al. making a smart bet before the everyone realizes it.  Focus on the actions not the words.

 

Packer   

 

But there haven't been any actions.  Some of the above is going to get snarled in congress, and have long lag times.  I am sticking my neck out but I figure we get a full on bear market soon.  All of the above will keep the US afloat but it will become a matter of minimizing damage rather than future growth forever more.  No one is using any data points, because there aren't any.  Fairfax is operating on a feeling. 

 

Corporate tax cuts would do a certain amount but where is the money coming from.  For most corps. it wont be a huge difference since their marginal tax rates are lower than the suggested new rates, anyway. 

 

The infrastructure program is not alive yet, and I fail to see how it would be different than subsidizing solar and alternate energy is now.  Again, government has to pony up at least some of the money. 

 

Tax repatriation holidays have happened before and their effect has been unexpectedly mild. 

 

So, for the incumbent government, pulling out all the stops right away will get them quick growth, perhaps.  But it will kick the can down the road, and the added deficits and deregulation will get us back to eight years ago.  And they will get unelected if there is a bear market too close to the next fed. election.

 

There are no actions but look at what the conversation now is about in Washington versus before the election.  It has shifted to pro growth policies from policies of slow growth & redistribution.  With one party in charge of Congress & with Harry Reid's actions to weaken the minority in the Senate, the probability of something happening to reflect the discussion is much higher.  In terms of tax cuts does it matter where the money is coming from as long as the US is more frugal than others?  What choice do people have to place there savings but in dollars?  Increased money can be used to monetize the debt as long as the inflation caused by the monetization can be offset by the technology improvements. 

 

Smart infrastructure is investing things folks will use and benefit from versus the solar boondogle.  What do you think will be around generating economic benefits in 20 years, some outdated and obsolete solar cells or a road?  If the money is spent wisely it will make a difference if it blown in buying soon to obsolete technology it will be wasted.

 

As to the tax changes the losers will be the multi-nationals who as you say may have little or no benefit but the US based companies will benefit.  It will encourage generation of revenues in the US versus overseas which  IMO will have a positive effect on the US economy.

 

As to a bear market, my question is what alternative do folks have than to stay invested.  With LT rates at 2.5% and earnings yields at 7.0% (see Damodaran's site for details) there still is a large premium for owning stocks 180% of bond returns.  In all bear markets the ERP shrinks significantly so investing in bonds is not too bad of an option.  I just do not see it here unless LT rates double.  Rates that increase to that extent are caused by a large capital destructive event (war, famine or epidemic) which I do not see.

 

Packer

[giofranchi]

I am a very recent shareholder (5% position)  and I just sold my shares today. Rarely ever had an investment left me as befuddled as Fairfax in such a short time after I bought.

 

Thank you for sharing your decision!

Could you be a little more precise about the risks you see going forward?

I am trying to understand if I am missing something really important here.

 

Cheers,

 

Gio

[benhacker]

Well guys, have to say, kind of seems real strange to me.

 

Fairfax is on a rollup spree in insurance... but unlike a rollup they aren't doing anything strategic to get synergies.  They are running a decentralized rollup and paying prices that don't seem great, and funding from sources where they also don't have a cost advantage (debt or equity).

 

I think there are few charitable explanations of their recent actions, but there are a few bad explanations.

 

Hate to reign on the parade, but doesn't seem right to me. 

 

I'm out of my position here.  Will revisit and decide whether to re-enter.  Been an interesting >10 year hold for me... but I think the thesis has changed too much, and the negatives have accumulated too much for me to continue to hold.

 

Cheers,

 

Interesting Ben.  I came to this conclusion a while ago as you know. 

 

I dont understand why more insurance?  To get more float?  Why not just invest the float in really good companies, and increase it through cash flow? 

 

Prems economic comments scare me.  Is he just trying to justify selling off the hedges?

 

I dont believe it, for one second.  US markets, and the world at large have gone this long without a bear market, precisely once, before.  When Trump takes over and the markets realize he cant deliver on his promises, and that his economic advisors are incapable of operating in government this is going to get really bad. 

 

It scares me when everyone thinks sunny days are here again. 

 

And Prems economic comments just scare me more.

 

Sorry Al, I thought I responded here but I didn't.

 

Several things kind of led me to sell, and it's similar to your line of thinking.  I may rejoin the fray again, as I do like the management team.

1) The poor logic (my opinion) by those claiming a new era has arrived.  I find the logic humous because ideologically, I'm very closely aligned with the free market folks... just don't think that helps the stock market (I think it does help the economy and many issues we see... but those issues weren't holding back markets, so it's strange to think even a partial fixing would make the market even better!)

2) The complexity of Fairfax as an investment.  Perhaps for some, a reasonable multiple to book and Prem's stamp is enough, but for me when they are multiplying their asset base by buying huge companies, it makes the work needed to understand the business much harder.

3) The financing of their deals doesn't make sense to me.  They use *way* too much equity / JV funding (as well as debt!), and it either means something nefarious or that Prem and team are so conservative that I need to assume $2-4B in assets will just always be making $0 which changes my math on the name.  Also, I would extend this to them continuing to carry large debt while simultaneously carrying multi-year huge cash balances....

4) Fairfax's explanation of many of their actions have been lacking for a long time and I lost patience.

5) At this stage, Fairfax's equity investments have been utter dogs, and if you think they haven't lost it, then it's a way better deal to buy some their holdings as if you believe they are still good, then FFH has more $$$ to chase those stocks with.  You can also buy these holdings at 1x "book"

 

Don't mean to malign anyone who owns, just stating my logic. 

 

When the S&P trades for 25x+ TTM GAAP EPS though, and I see some of the logic recently displayed on this and other boards, I know which way to take my chips....

[bearprowler6]

Well guys, have to say, kind of seems real strange to me.

 

Fairfax is on a rollup spree in insurance... but unlike a rollup they aren't doing anything strategic to get synergies.  They are running a decentralized rollup and paying prices that don't seem great, and funding from sources where they also don't have a cost advantage (debt or equity).

 

I think there are few charitable explanations of their recent actions, but there are a few bad explanations.

 

Hate to reign on the parade, but doesn't seem right to me. 

 

I'm out of my position here.  Will revisit and decide whether to re-enter.  Been an interesting >10 year hold for me... but I think the thesis has changed too much, and the negatives have accumulated too much for me to continue to hold.

 

Cheers,

 

Interesting Ben.  I came to this conclusion a while ago as you know. 

 

I dont understand why more insurance?  To get more float?  Why not just invest the float in really good companies, and increase it through cash flow? 

 

Prems economic comments scare me.  Is he just trying to justify selling off the hedges?

 

I dont believe it, for one second.  US markets, and the world at large have gone this long without a bear market, precisely once, before.  When Trump takes over and the markets realize he cant deliver on his promises, and that his economic advisors are incapable of operating in government this is going to get really bad. 

 

It scares me when everyone thinks sunny days are here again. 

 

And Prems economic comments just scare me more.

 

Sorry Al, I thought I responded here but I didn't.

 

Several things kind of led me to sell, and it's similar to your line of thinking.  I may rejoin the fray again, as I do like the management team.

1) The poor logic (my opinion) by those claiming a new era has arrived.  I find the logic humous because ideologically, I'm very closely aligned with the free market folks... just don't think that helps the stock market (I think it does help the economy and many issues we see... but those issues weren't holding back markets, so it's strange to think even a partial fixing would make the market even better!)

2) The complexity of Fairfax as an investment.  Perhaps for some, a reasonable multiple to book and Prem's stamp is enough, but for me when they are multiplying their asset base by buying huge companies, it makes the work needed to understand the business much harder.

3) The financing of their deals doesn't make sense to me.  They use *way* too much equity / JV funding (as well as debt!), and it either means something nefarious or that Prem and team are so conservative that I need to assume $2-4B in assets will just always be making $0 which changes my math on the name.  Also, I would extend this to them continuing to carry large debt while simultaneously carrying multi-year huge cash balances....

4) Fairfax's explanation of many of their actions have been lacking for a long time and I lost patience.

5) At this stage, Fairfax's equity investments have been utter dogs, and if you think they haven't lost it, then it's a way better deal to buy some their holdings as if you believe they are still good, then FFH has more $$$ to chase those stocks with.  You can also buy these holdings at 1x "book"

 

Don't mean to malign anyone who owns, just stating my logic. 

 

When the S&P trades for 25x+ TTM GAAP EPS though, and I see some of the logic recently displayed on this and other boards, I know which way to take my chips....

 

+1

I just sold 15% of my position in FFH. I am now below my core position in the company for the first time since I initiated the position in November 1999. I did this after much thought, reflection and discussions/debate with individuals I trust.

 

I echo the comments made by both Uccmal and Benhacker---something is not right at FFH and hasn’t been for a VERY long time. Seriously---would anyone actually hold Blackberry, Resolute Forest and Eurobank as their 3 largest equity positions? Prem owes us (the shareholders of the company) a detailed explanation for what the exit strategy is for these and other underwater equity holdings. Simply saying that over the long term everything will work out is inadequate at best. The statement is meaningless without defining what “long term” means.

 

As outlined by Benhacker---the deal financing strategy being deployed recently by FFH (buy first / finance second) also concerns me greatly. Bringing in outside investors to finance these deals greatly changes the metrics and not favourably from a FFH shareholder perspective.

 

I remain a large shareholder of FFH however it was appropriate for me to reduce my equity exposure to the company because of the real concerns I have. Prem is now on a very short leash---it will be much easier for me to sell my remaining shares should he not deliver in short order.

 

As for capturing the animal spirits that have supposedly been unleashed by the Trump victory (I remain a huge skeptic) ----- I would suggest that holding shares of Goldman Sachs, AIG and Cheniere Energy would give you a much better opportunity to do this than by holding shares in FFH.

 

BP6

 

[Uccmal]

Ben, BP6,

 

I dont want to be seen as maligning those who choose to hold FFH.  I do think that critical thinking is in order though.  And you both have summarized the issues quite well.  My history with FFh goes back to 1997 when I first bought shares around 350-375 cdn (cant quite remember and dont want to look it up).  Not exactly a value investment at the time. 

 

I learned an enormous amount from FFH, and by holding the stock.  It also led me to this message boards predecessor, where like minded, value investors in training, were hanging out.  We picked apart FFh and tried to understand everything about it, during the near death experience, and ultimately did very well. 

 

Like any investment, those who invest in FFH get anchored to a certain way of thinking.  None of us is immune to it.  What I see on the FFh thread is a constant reset in what people seem to be willing to accept.  As follows:

 

A few years ago the narrative was that the investment results were good, but the insurance results were poor.  Now, the investment results are weak, but insurance results are great.  There is alot of "if only they did this, or did that" returns would be better. 

 

Another narrative common on FFH threads recently has been the: "they will do well in a market crash because they are hedged".  But, this has changed. 

 

Another common narrative is that over the long term FFH stock will do well.  The long term, is long gone, and the returns are acceptable but not stellar.  There are a multitued of Cdn firms with better long term returns over the last 12-13 years, and many more in other countries. 

 

I just think people are too forgiving of FFH's foibles.

 

Its not that I hate the company or Prem (or that he even cares either way).  I actually admire him, and the great company he has built, and am somewhat envious (in a minor non-negative way).  I could never have accomplished such an incredible feat.  I really wish they do well.  Whenever, we hear about the hollowing out of Canada's business sector,  because companies like Stelco, Dofasco, or,Rona get bought out, I love to point to FFH, BAM, and a few others who are buying elsewhere at dollar multiples above what Canadians think they are losing. 

 

But I am a good passive investor, so far, and FFH doesn't meet my needs for returns, and isn't likely too, as best I can tell. 

[John Hjorth]

Thank you to all participants in this topic. It's really food for thought.

[KinAlberta]

Ben, BP6,

 

I dont want to be seen as maligning those who choose to hold FFH.  I do think that critical thinking is in order though.  And you both have summarized the issues quite well.  My history with FFh goes back to 1997 when I first bought shares around 350-375 cdn (cant quite remember and dont want to look it up).  Not exactly a value investment at the time. 

 

I learned an enormous amount from FFH, and by holding the stock.  It also led me to this message boards predecessor, where like minded, value investors in training, were hanging out.  We picked apart FFh and tried to understand everything about it, during the near death experience, and ultimately did very well. 

 

Like any investment, those who invest in FFH get anchored to a certain way of thinking.  None of us is immune to it.  What I see on the FFh thread is a constant reset in what people seem to be willing to accept.  As follows:

 

A few years ago the narrative was that the investment results were good, but the insurance results were poor.  Now, the investment results are weak, but insurance results are great.  There is alot of "if only they did this, or did that" returns would be better. 

 

Another narrative common on FFH threads recently has been the: "they will do well in a market crash because they are hedged".  But, this has changed. 

 

Another common narrative is that over the long term FFH stock will do well.  The long term, is long gone, and the returns are acceptable but not stellar.  There are a multitued of Cdn firms with better long term returns over the last 12-13 years, and many more in other countries. 

 

I just think people are too forgiving of FFH's foibles.

 

Its not that I hate the company or Prem (or that he even cares either way).  I actually admire him, and the great company he has built, and am somewhat envious (in a minor non-negative way).  I could never have accomplished such an incredible feat.  I really wish they do well.  Whenever, we hear about the hollowing out of Canada's business sector,  because companies like Stelco, Dofasco, or,Rona get bought out, I love to point to FFH, BAM, and a few others who are buying elsewhere at dollar multiples above what Canadians think they are losing. 

 

But I am a good passive investor, so far, and FFH doesn't meet my needs for returns, and isn't likely too, as best I can tell.

 

Interesting comments thanks. I too first bought FFH around the same time (around 1997). ...though lately, for the first time I can recall in years if since the 1990s I am completely out of FFH.

 

In the past I've been in and out of it but always held some shares. Compared to BRK or even say Markel, I've never had a great deal of confidence in it.  I mentally place it down among Loews/CNA and Leucadia in terms of its willingness to make some pretty big but measured bets with high payoff potential but when the payoffs don't come there's nothing all too foolproof to them. BRK is more like a bank account - always building value even when the market doesn't price it in. FFH though seems to rely on turnarounds, etc.  Its movements into India, etc. are great and not turnaround orientated. They are growth orientated.

 

I guess what I'd like to see in this forum is a thread comparing BRK to FFH (and others) in terms of what seemingly makes BRK such a sustainable economic enterprise, even in tough times, compared to say FFH where one feels that its gains are more 'luck' than calculation and deeply thought and considered foresight.

 

BTW - I am a great fan of Watsa but there's just something missing in comparison to Buffett. I'm just not too sure what.

[Viking]

KinAlberta, the main difference I see between Watsa and Buffet is I find Prem's comments much more promotional and self serving in nature. This is likely due to the fact that FFH employs a crazy complicated process when it comes to how it invests its assets. These investments tend to be very large and non-traditional and bring lots of questions that are difficult if not impossible to answer consistently over time.

 

Buffett comments are also promotional and self serving but he buys much higher quality companies so has less to explain. It is much easier to follow Buffett's logic.

 

This is not to say that both companies are not great companies in their own right. I find as I age that I do not like surprises in my portfolio. This makes it much harder for me to own FFH and easier to own BRK.

 

Currently I only own FFH having just bought it at US$460; at that price it was cheap enough to put up with all the complexity and poor investment returns of the past 5 years. Will it be a long term hold? No.

[giofranchi]

+1

I just sold 15% of my position in FFH. I am now below my core position in the company for the first time since I initiated the position in November 1999. I did this after much thought, reflection and discussions/debate with individuals I trust.

 

I echo the comments made by both Uccmal and Benhacker---something is not right at FFH and hasn’t been for a VERY long time. Seriously---would anyone actually hold Blackberry, Resolute Forest and Eurobank as their 3 largest equity positions? Prem owes us (the shareholders of the company) a detailed explanation for what the exit strategy is for these and other underwater equity holdings. Simply saying that over the long term everything will work out is inadequate at best. The statement is meaningless without defining what “long term” means.

 

As outlined by Benhacker---the deal financing strategy being deployed recently by FFH (buy first / finance second) also concerns me greatly. Bringing in outside investors to finance these deals greatly changes the metrics and not favourably from a FFH shareholder perspective.

 

I remain a large shareholder of FFH however it was appropriate for me to reduce my equity exposure to the company because of the real concerns I have. Prem is now on a very short leash---it will be much easier for me to sell my remaining shares should he not deliver in short order.

 

As for capturing the animal spirits that have supposedly been unleashed by the Trump victory (I remain a huge skeptic) ----- I would suggest that holding shares of Goldman Sachs, AIG and Cheniere Energy would give you a much better opportunity to do this than by holding shares in FFH.

 

BP6

 

Thank you BP6,

If I have understood correctly, the main risks you see are:

1) Their stock picking performance will continue to generate very poor results,

2) They are financing the acquisition of Allied in a way that won't maximize shareholders' return.

You said you have discussed a lot about FFH with people you trust and who know FFH very well. And you have come to the conclusion there is something wrong at FFH.

Do you see other risks beside 1 and 2? I am really interested to understand if people who know FFH very well see risks that I might have overlooked.

 

Cheers,

 

Gio

[wisdom]

Looking at a $1 billion fund to invest in Africa.

[giofranchi]

Looking at a $1 billion fund to invest in Africa.

 

Could you explain? Another FFI, this time called FFA? India I understand and like. In Africa what is their edge?

 

Cheers,

 

Gio

[eclecticvalue]

Looking at a $1 billion fund to invest in Africa.

 

Could you explain? Another FFI, this time called FFA? India I understand and like. In Africa what is their edge?

 

Cheers,

 

Gio

 

What edge do they have in India?

[wisdom]

Similar to the India fund. From reports, they will partner with someone to target countries that will grow.

 

They already have the first $500 mil (includes some funds from fairfax) and need to raise an additional  $500 mil.

[Guest longinvestor]

Looking at a $1 billion fund to invest in Africa.

 

Could you explain? Another FFI, this time called FFA? India I understand and like. In Africa what is their edge?

 

Cheers,

 

Gio

 

What's FFH's edge in India? Prem born there? Now that we're talking about what Prem is versus Buffett, folks may remember that Berkshire tried working with Bajaj Insurance in India for a couple of years and completely pulled out their money. Surely they saw downside risks that they don't like. Their thesis was not that Jain is Indian thus let's put a Billion there. Insurance is a game that requires the environment to be very right, including legal systems. FFH has invested in just about every emerging economy around the globe. Sounds great, which of those could turn into a turd? Cause collateral damage to the holding company? What edge does FFH have in each of these countries?

 

Empire building doesn't have to necessarily mean wealth creation. Risk avoidance does. That's why there is only one Berkshire. Watsa is no Jain, let alone Buffett.

[giofranchi]

What edge do they have in India?

 

I don't think they need an edge in India. The demographic story is compelling enough to justify the investment imo. (Just look at the money AMZN is spending in India!)

 

Cheers,

 

Gio

[wisdom]

BTW - these funds are not for insurance if you read up.

 

Their insurance arm is ICICI Lombard. Berkshire most likely pulled out because the insurance market in India is small and not as profitable. Fairfax tied up with one of the largest players very early in the game. Bajaj as you said has no edge in finance in India.

[giofranchi]

Empire building doesn't have to necessarily mean wealth creation. Risk avoidance does.

 

I agree: I like North America, large cap cos, strong balance sheets, lots of fcf, great brands.

 

Cheers,

 

Gio

[bearprowler6]

+1

I just sold 15% of my position in FFH. I am now below my core position in the company for the first time since I initiated the position in November 1999. I did this after much thought, reflection and discussions/debate with individuals I trust.

 

I echo the comments made by both Uccmal and Benhacker---something is not right at FFH and hasn’t been for a VERY long time. Seriously---would anyone actually hold Blackberry, Resolute Forest and Eurobank as their 3 largest equity positions? Prem owes us (the shareholders of the company) a detailed explanation for what the exit strategy is for these and other underwater equity holdings. Simply saying that over the long term everything will work out is inadequate at best. The statement is meaningless without defining what “long term” means.

 

As outlined by Benhacker---the deal financing strategy being deployed recently by FFH (buy first / finance second) also concerns me greatly. Bringing in outside investors to finance these deals greatly changes the metrics and not favourably from a FFH shareholder perspective.

 

I remain a large shareholder of FFH however it was appropriate for me to reduce my equity exposure to the company because of the real concerns I have. Prem is now on a very short leash---it will be much easier for me to sell my remaining shares should he not deliver in short order.

 

As for capturing the animal spirits that have supposedly been unleashed by the Trump victory (I remain a huge skeptic) ----- I would suggest that holding shares of Goldman Sachs, AIG and Cheniere Energy would give you a much better opportunity to do this than by holding shares in FFH.

 

BP6

 

Thank you BP6,

If I have understood correctly, the main risks you see are:

1) Their stock picking performance will continue to generate very poor results,

2) They are financing the acquisition of Allied in a way that won't maximize shareholders' return.

You said you have discussed a lot about FFH with people you trust and who know FFH very well. And you have come to the conclusion there is something wrong at FFH.

Do you see other risks beside 1 and 2? I am really interested to understand if people who know FFH very well see risks that I might have overlooked.

 

Cheers,

 

Gio

 

Gio,

 

Your summary of my comments are not entirely accurate however I will try my best to respond to your questions.

 

My conclusion to sell a portion of the shares in FFH that I have held for 16 years was made after consideration of a number of factors however bottom line my ability to simply ``trust in Prem`` is not what it once was.

 

I did not say that FFH`s stock picking will continue to generate very poor results. I do not know what the future holds neither does the FFH team or any poster on this board. I did say that Prem owes his shareholders a detailed explanation of his exit strategy for 3 of his largest losing equity positions (Blackberry, Eurobank, Resolute Forest). Others may disagree with this—that`s okay.

 

I will not reiterate the numerous concerns that have been written about by other posters however they all factored into my decision. In addition however I have become concerned with the following items:

 

1) FFH`s leverage was often discussed as the reason for the equity hedges. I accepted this explanation. What disturbs me is that FFH did not take advantage of a sell-off in the preferred share market to lower their leverage by buying back the preferred shares in the market at well below their issue price. The various FFH preferred share issues were done at $25 per share and yielded about 5% at issue. They all traded down substantially to levels as low as $11-12 per share earlier in the year due to the drop in bond yields. Despite having the authority to buyback these shares in the open market FFH chose not to do so. I don`t know about you but issuing shares at $25 and buying them back at $11-12 seems like a good trade to me.

 

2) Prem continually touts the longevity and experience of the management team as a key positive for FFH. This was great when the team was in their 40`s however they are now approaching their 70`s. It is time for Prem to also articulate the succession plan for all the key members of the management and investment team. As one individual I know says—``when Brian Bradstreet retires I will sell all of my FFH shares``. Prem has agreed to stay on until at least his 75th birthday. Great---what about the rest of them. I do not believe we can count on all of the key members to stay around as long as Buffett and Munger have done at Berkshire.

 

3) Board governance is also an area I have some concerns with. The lack of diversity and new blood (and in my view Ben Watsa does not count) on the board cannot be overlooked.

 

4) What is the Eurolife acquisition really about. As we all know—life insurance is a vastly different business than property and casualty insurance. It`s okay if FFH is now diversifying into life insurance but tell us that. I suspect that FFH`s Eurolife investment was simply another capital raising exercise for Eurobank disguised in another form.

 

5) The conference call to discuss the Q3 2016 results was held on November 4, 2016. At that time Prem was still extremely concerned about the US and global economies and as a resulted maintained the equity hedges and deflation protection.  One week later---after the US election---FFH announces that everything is all right with the world and reduces the equity hedges  by 50% because of Trump`s election win in the US.  Simply put---I call bullshit on that explanation.

 

I could go on however I will stop here. I trust you get a sense that my decision to sell is well thought out and based on a detailed analysis of the issues as I see them. Hopefully these comments assist you in deciding what to do with your FFH shares.

 

As Uccmal said in an earlier post---what Prem has created at FFH is amazing. I could not have done it. He is to be applauded for what he has accomplished. Despite this I can no longer give him a pass when there are a series of issues at FFH that I have grave concern with which are not being addressed to my satisfaction.

 

BP6

 

 

[SharperDingaan]

Looking at a $1 billion fund to invest in Africa.

 

Could you explain? Another FFI, this time called FFA? India I understand and like. In Africa what is their edge?

 

Cheers,

 

Gio

 

What's FFH's edge in India? Prem born there? Now that we're talking about what Prem is versus Buffett, folks may remember that Berkshire tried working with Bajaj Insurance in India for a couple of years and completely pulled out their money. Surely they saw downside risks that they don't like. Their thesis was not that Jain is Indian thus let's put a Billion there. Insurance is a game that requires the environment to be very right, including legal systems. FFH has invested in just about every emerging economy around the globe. Sounds great, which of those could turn into a turd? Cause collateral damage to the holding company? What edge does FFH have in each of these countries?

 

Empire building doesn't have to necessarily mean wealth creation. Risk avoidance does. That's why there is only one Berkshire. Watsa is no Jain, let alone Buffett.

 

This is very similar to the age-old mercantile approach of provisioning & sending ships to the new world.

It's very much a future focused orientation.

 

Invest a total of $X in 2-3 ships per adventure, spread the risk per ship over multiple partners, and send them to different parts of the new world; in the investment world we know this as sector diversification across a clutch of names. But in the real world - we also recognize that if it works, we will also need trading posts in the new world to fill the homebound ships. For inspiration look to the Dutch East India Company, the British East India Company, the British South Africa Company, etc.

 

Insurance is about getting paid to take on risk, & successfully mitigating it.

But one must take on the risk.

 

SD

 

 

 

 

 

[giofranchi]

Hopefully these comments assist you in deciding what to do with your FFH shares.

 

Yes! They certainly do! Thank you.

 

Cheers,

 

Gio

[TwoCitiesCapital]

Can anyone share the details, in print, about this Africa fund? First I'm hearing of it. Would be excited by that opportunity though - especially if run in a fund format as opposed to Fairfax risking all of it's own capital.

 

The asset management business is a great model and using it to leverage their exposure, but protect their downside, to place like India and Africa seems brilliant IMO.