FFH results

[petec]

It is by definition not required if you can and do choose not to have it.

 

"essential, needed, or necessary--set out by rule; compulsory"

 

100% agreed - it was a choice.

 

Question is, was it a good one because the thinking was sound (there is a risk of a depression; history suggests a depression could cost us the company; we are prepared to pay a high price to avoid even a small risk of that); or was it a bad one because there wasn't a depression?

 

Easy to argue both ways but for me the key is that 1. they were very clear about what they were doing so if you didn't like it you didn't have to own it, and 2. they didn't make hay on the long side when they should have done.

[vinod1]

 

They clearly stated on their call that Trump's protectionism could start a depression and that the market might return to 20-30% drawdowns in the normal course of business.  They have their eyes wide open to the risks.  The point is that they think the risks of a depression have reduced - and they never cared about a 20-30% stock market selloff - in fact they probably want one.  (They were hedging against a 1929-33 style 90% selloff.)

 

I've spent a lot of time trying to understand these hedges and I buy the idea that they were to protect the company against a very specific risk, which has reduced.  I find it much harder to accept the crappy stockpicking, and I find it very hard to square some of the stockpicking with their views of the macro risks (in some cases their stocks would have gone to zero and the hedges would not have come close to fully covering the losses).  So while it may seem like I am mindlessly defending Prem, I'm not: I just think that those of you who are focussed on "the hedges were a bet and they haven't admitted they were wrong" are asking the wrong questions.

 

You say, Trump's policies might cause a depression. A depression!! But somehow a depression would only cause a garden variety stock market correction of 20-30%.

 

I do not think depression means what you think it means.

 

Vinod

 

Perhaps I did not write clearly enough.

 

A depression - causing a 90% drawdown - is what they have been hedging against.

 

Trump's deregulatory policies reduce this risk.

 

However they still see clear risks.  One is that Trump's protectionist policies cause a depression.  Another is a 20-30% drawdown in the normal course of business (i.e. not in a depression).  This is my reading of what they said on the call.

 

This comment was in response to the idea that since Trump they do not see risks.  They do.  That is why they are at high cash levels and duration down to 1.  With that positioning, they no longer need the hedges.

 

I am just dumbfounded.

 

I had a rule before: Never debate with a Trump supporter.

 

Now I am going to add one more: Never debate with a Fairfax diehard.

 

Vinod

[petec]

 

They clearly stated on their call that Trump's protectionism could start a depression and that the market might return to 20-30% drawdowns in the normal course of business.  They have their eyes wide open to the risks.  The point is that they think the risks of a depression have reduced - and they never cared about a 20-30% stock market selloff - in fact they probably want one.  (They were hedging against a 1929-33 style 90% selloff.)

 

I've spent a lot of time trying to understand these hedges and I buy the idea that they were to protect the company against a very specific risk, which has reduced.  I find it much harder to accept the crappy stockpicking, and I find it very hard to square some of the stockpicking with their views of the macro risks (in some cases their stocks would have gone to zero and the hedges would not have come close to fully covering the losses).  So while it may seem like I am mindlessly defending Prem, I'm not: I just think that those of you who are focussed on "the hedges were a bet and they haven't admitted they were wrong" are asking the wrong questions.

 

You say, Trump's policies might cause a depression. A depression!! But somehow a depression would only cause a garden variety stock market correction of 20-30%.

 

I do not think depression means what you think it means.

 

Vinod

 

Perhaps I did not write clearly enough.

 

A depression - causing a 90% drawdown - is what they have been hedging against.

 

Trump's deregulatory policies reduce this risk.

 

However they still see clear risks.  One is that Trump's protectionist policies cause a depression.  Another is a 20-30% drawdown in the normal course of business (i.e. not in a depression).  This is my reading of what they said on the call.

 

This comment was in response to the idea that since Trump they do not see risks.  They do.  That is why they are at high cash levels and duration down to 1.  With that positioning, they no longer need the hedges.

 

I am just dumbfounded.

 

I had a rule before: Never debate with a Trump supporter.

 

Now I am going to add one more: Never debate with a Fairfax diehard.

 

Vinod

 

Ha!  You misread my post and decided that we have different definitions of depression.  I explained my post, showing that we don't, and explaining what I think FFH's views are based on what they said on the call.  This makes me a diehard.  You are not the only one who is dumbfounded.

 

FWIW I've reduced recently (FFH without hedges was too big a position for me).  I've defended the hedges, yes, but attacked the stockpicking.

 

[racemize]

It is by definition not required if you can and do choose not to have it.

 

"essential, needed, or necessary--set out by rule; compulsory"

 

100% agreed - it was a choice.

 

Question is, was it a good one because the thinking was sound (there is a risk of a depression; history suggests a depression could cost us the company; we are prepared to pay a high price to avoid even a small risk of that); or was it a bad one because there wasn't a depression?

 

Easy to argue both ways but for me the key is that 1. they were very clear about what they were doing so if you didn't like it you didn't have to own it, and 2. they didn't make hay on the long side when they should have done.

 

I agree, I've just been a little tired of the "hedges were required" argument--Markel didn't do it, BRK didn't do it, and FFH varied the amount of hedges based on their macro whims (first 0%, then 100%, then they said it would slowly fall off as they grew, then it was 120%, then it was 50%, now it is 0%). 

 

I was in it for some of the hedges, but after one of the meetings where they said they were convinced you could make no money until the next crash and still beat the market--that was just too much.  So I was out for the last 3-4 years.  Just got back in now that the hedges are off.  I just want them to do their bread and butter.

[SharperDingaan]

You might want to consider that a large block of cash and a very short bond duration IS a hedge.

There is quite some opportunity cost to doing this, even in today's very low return environment.

 

They are value investors; they buy cigar butts, and wait for them to turn around. They also carry the additional burden of not writing off their failures, & continuing to invest in them - explicitly recognizing that every dog eventually has a day in the sun. They use compound return as a metric for a reason - and it does not mean a steady rise of X% every year.

 

FHH is a particular view on the market. They have a lot of very smart people, and it is highly likely that their view is continually vetted while it is being executed. If you don't agree with it, you don't have to own the stock. 

 

If your intent is to buy and hold 'forever', the up & down returns from hedging don't matter.

The priority is that you didn't lose $, you maintained your buying power, and over time you've drawn out less than growth and dividends have contributed. If your intent is something other than this, the error is yours - not that of the company.

 

Obviously not a popular view.

 

SD

 

[petec]

It is by definition not required if you can and do choose not to have it.

 

"essential, needed, or necessary--set out by rule; compulsory"

 

100% agreed - it was a choice.

 

Question is, was it a good one because the thinking was sound (there is a risk of a depression; history suggests a depression could cost us the company; we are prepared to pay a high price to avoid even a small risk of that); or was it a bad one because there wasn't a depression?

 

Easy to argue both ways but for me the key is that 1. they were very clear about what they were doing so if you didn't like it you didn't have to own it, and 2. they didn't make hay on the long side when they should have done.

 

I agree, I've just been a little tired of the "hedges were required" argument--Markel didn't do it, BRK didn't do it, and FFH varied the amount of hedges based on their macro whims (first 0%, then 100%, then they said it would slowly fall off as they grew, then it was 120%, then it was 50%, now it is 0%). 

 

I was in it for some of the hedges, but after one of the meetings where they said they were convinced you could make no money until the next crash and still beat the market--that was just too much.  So I was out for the last 3-4 years.  Just got back in now that the hedges are off.  I just want them to do their bread and butter.

 

Totally agree it was a choice and not required.  Slightly disagree on the comparison with Markel and Berkshire given higher leverage and investing styles - the hedges were more of a requirement here but the same goal could have been achieved by investing in higher quality equities.  The overall strategy - hedge and invest in crap - was very poor.

 

I've lightened because I had a big position for the hedges but in terms of Fairfax itself I agree, want them to go back to bread and butter.

[petec]

You might want to consider that a large block of cash and a very short bond duration IS a hedge.

There is quite some opportunity cost to doing this, even in today's very low return environment.

 

They are value investors; they buy cigar butts, and wait for them to turn around. They also carry the additional burden of not writing off their failures, & continuing to invest in them - explicitly recognizing that every dog eventually has a day in the sun. They use compound return as a metric for a reason - and it does not mean a steady rise of X% every year.

 

FHH is a particular view on the market. They have a lot of very smart people, and it is highly likely that their view is continually vetted while it is being executed. If you don't agree with it, you don't have to own the stock. 

 

If your intent is to buy and hold 'forever', the up & down returns from hedging don't matter.

The priority is that you didn't lose $, you maintained your buying power, and over time you've drawn out less than growth and dividends have contributed. If your intent is something other than this, the error is yours - not that of the company.

 

Obviously not a popular view.

 

SD

 

But an entirely correct one.

[RichardGibbons]

It is by definition not required if you can and do choose not to have it.

 

"essential, needed, or necessary--set out by rule; compulsory"

 

Ah, I see.  You're not interested in providing insight about Fairfax, but ensuring that everyone understands the semantics of particular words. If that's your priority, then I'll assure you that I agree with you--that is a definition of "required".

[cwericb]

And, by the way, the insurance on my house is not required either, it is a choice. It is a hedge against my home burning down.

 

Perhaps there may be a difference between hedging and insurance, hedging certainly can be and often is, used as insurance.

[racemize]

I think this house insurance analogy isn't that good though.  Ignoring that it is required for most people since they have a mortgage, house insurance is a typically prudent thing to do, that almost everyone does.  They also do it consistently.  They don't decide, this year, no insurance!  And then next year I'll insure half my house.  And the year after that all of the house.  And then later I'll insure more than the value of my house.  And a few years later, no more insurance. 

 

Thus, if the leverage alone caused hedging to be necessary: 1) other companies with similar leverage would also be hedging their portfolio completely, and 2) FFH could not continually change the hedging amount between 0 and 125% based on factors other than the leverage itself.

 

Thus, my point is that the argument "the hedges are required because of the leverage" is not plausible, because 1) it was not required by others; and 2) the fluctuations in hedges were not tied to their leverage, but instead to their macro views.  The hedges are there because they had an expectation of some particular scenario to happen, which they've changed their mind on.

 

If we are sticking with some kind of house insurance, it would be buying flood insurance in an area that doesn't flood based on a reason that changes and no one else participates in.

 

Richard's example also has a lot more consistency than Fairfax--his was based on the amount of money he had saved.  In contrast, at one point Fairfax tried to say that they would let the hedges roll off naturally, but then they changed their mind and increased to over 100% and then reduced it completely, again not based on leverage, but their changing macro views.

 

[cwericb]

I think this house insurance analogy isn't that good though.  Ignoring that it is required for most people since they have a mortgage, house insurance is a typically prudent thing to do, that almost everyone does.  They also do it consistently.  They don't decide, this year, no insurance!  And then next year I'll insure half my house.  And the year after that all of the house.  And then later I'll insure more than the value of my house.  And a few years later, no more insurance.

 

Okay, as Richard says. I used to have life insurance, but I have chosen to believe it is no longer necessary. Things change.

 

Thus, if the leverage alone caused hedging to be necessary: 1) other companies with similar leverage would also be hedging their portfolio completely, and 2) FFH could not continually change the hedging amount between 0 and 125% based on factors other than the leverage itself.

 

No one said it was necessary, it was a choice. Other companies also did not buy CDS 10 years ago either.

 

Thus, my point is that the argument "the hedges are required because of the leverage" is not plausible, because 1) it was not required by others; and 2) the fluctuations in hedges were not tied to their leverage, but instead to their macro views.  The hedges are there because they had an expectation of some particular scenario to happen, which they've changed their mind on.

 

Not necessarily an expectation. I didn’t buy life insurance because I had an expectation I would die. And no one said they were "required", they felt it was a prudent choice at the time.

 

If we are sticking with some kind of house insurance, it would be buying flood insurance in an area that doesn't flood based on a reason that changes and no one else participates in.

 

As per the example of the Credit Default Swaps above

 

Richard's example also has a lot more consistency than Fairfax--his was based on the amount of money he had saved.  In contrast, at one point Fairfax tried to say that they would let the hedges roll off naturally, but then they changed their mind and increased to over 100% and then reduced it completely, again not based on leverage, but their changing macro views.

 

I would be disappointed if management were not flexible enough to change its mind when they felt it necessary. Circumstances change. No one has a crystal ball.

[racemize]

Well, again, I was making the argument that a common assertion is that the leverage was what was the driving force for the hedges and the hedges were therefore only the result of having that leverage.  My argument is that the driving force must be the view that they took, not the leverage. 

 

In other words, the argument I am rebutting is that the hedges depend on leverage.  It is easy to test this argument.  Do the hedges vary with leverage?  The answer is no, they do not.  FFH had leverage before, with no hedges.  Then they added 50%, then they added to 100%, then they said they would roll off invoking this "leverage" argument, then they increased in 125%, then they killed them off entirely.  During all this time, they had a lot of leverage.  So I think it is very safe to say that the variable "hedges" did not depend on the variable "leverage". 

 

Instead, it depended on the variable "macro views".  Thus, it does not make sense to say that the hedges were driven by leverage--they were driven by their particular macro view.

 

Anyway, both of you seem to agree that this was a choice and not required by the leverage, which is all I said in the first place.  Then we all agree.  Why are you arguing with me?

[RichardGibbons]

Fair point, Racemize.

[Packer16]

The other factor for the hedges & leverage is the distressed stuff FFH invests in.  I no of no other insurance company that invests in distress like FFH.  So I think the hedges may be a blend of a macro view and the amount of cash vs. investments they have to pay claims.

 

Packer

[TwoCitiesCapital]

https://seekingalpha.com/pr/16906943-fairfax-financial-holdings-limited-second-quarter-financial-results

 

Q2 results are out.

 

 

Also, anyone have any clue what happened here? Was just reading the transcript and it looks like Prem skipped over this guy. Just curious if the transcript contains an error that makes it look this way or if he really did skip over someone?

 

Operator: Our next question comes from Junior Raw of Private Investors. Your line is now open.

 

Prem Watsa: Good morning Junior. No, Natalie, next question please.

 

Operator: I show no other questions in queue.

[gary17]

The private investor was not on the call when the operator turned it over to the guy 

so they moved on