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Fairfax 2017


Dazel
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Hello all...

 

I feel it is time to way in on Fairfax Financial...by far my favourite company of all time. Some will remember I was here from the start when Sanjeev started posting...once again thanks Sanjeev for this forum!

 

We went through the lean 7 years...then we won big time in 2007 and 2008...the last lean 7 years were self inflicted wounds which at times looked like Prem and his team would be right. In fact if it were not for global central bankers they would have been right! The past however does not matter. Rear view mirror thinking is for the masses...

 

Fairfax today is nothing like the Fairfax of old...and after some serious thought of where Prem and his team are headed we have once again been buying their shares hand and fist.

Why?

Despite the dismal common stock returns over the last 7 years...Brian Bradstreet remains the single greatest Bond investor in the world...a Great portion of the 10 billion in gains have come from him while he generated interest income. He is the unsung hero of the bond world (check out his track record which include the cds wins from 2007 and 2008)...he gets a pass on the inflation hedges for sure! Now he has $40b to work with. We think Prem should use him for other investments which would include massive positions in Citigroup for example...which are typically viewed as common stock. The dividend yield and cash flow at Citi and Bof A can be looked at like a bond...as can their preferred shares...Let Brian play more! A 5% yield is $2 billion now!

We don't need the capital gains of the past....time to bend it like Buffett. Reality that is....Cash flow Cash Flow Cash flow....

Fairfax has become to big for Ben Graham principles...unless you are an activist. Which I am glad to say they are not....The Resolute, Torstar, And other value plays need someone to go in and create the value...that is not their game.

Prem's game is buying and building companies...Lombard is a huge win...buying the rest of

Orh,Nb,Zenith etc are massive home runs...runoff, Asian and global insurance operations are out of the park wins. What's Fairfax problem common stock investing!!!Who would have thought? Everything else in the company is world class.

I will reiterate from the past that I am biased and grateful because Prem and his team have made me a fortune since 2003...but I believe they have learned a very humbling and hard lesson since 2009.

 

Remember the big short? Of course you do. Steve Eisman? Blew up his fund...Mr. Burry...hope he is well, Ackman, etc....well fairfax has lost $5 billion in hedges since 2007 even with the $2b gain. So why am I looking back? Because Prem and his team have never ran a $40b portfolio in the past Fairfax thrived on capital gains. That is how they moved the needle...

 

The new Fairfax will resemble Berkshire Hathaway....the unfotunate part is Prem did not have Charlie Munger to tell him this 7 years ago...now it is all about quality. Allied is an example of this change in strategy which scared many...Markel has kicked Fairfax ass...by following Buffett's example early. Cash is the hedge....buy when distress comes you do not have to make money on the way down...welcome corrections to buy more cash flow. They have done this extremely well in buying whole companies and this will lead them to let Brian Bradstreet buy equities with cash flow coupons....

 

There is value in their broken down holdings Eurobank,Blackberry etc will come back somewhat but

that should not be the focus anymore...they are rounding errors compared to how much Cash flow that can be created with very good insurance operations...and simply matching the global stock indexes...they need 95 comps and a little over 5% returns on the now $40b investment portfolio to reach 15% return on equity. They will win big in India (doing great things there) and Greece will work out ok which will take the shares higher but it is the Cash flow culture that will make Fairfax future bright. We should expect Prem should tell shareholders that the shares are cheap (they are) and let shareholders know that he will buy huge amounts of stock if they remain here as warning and a heads up to existing holders. Mr. Buffett did this in 1999 this is the right thing to do even though it may take the shares higher and hurt the buy back potential...It is a class move as many have wondered on Fairfax's direction (obvious on this board!!!) they want to know that Fairfax has moved towards Berkshire Hathaway....they have already...investors just don't know it.

 

Disclosure:I am betting that Fairfax gets it right....big time.

 

Cheers,

 

Dazel

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Thanks for this Dazel. Think you are right on in what you say. A lot of people seem to overlook the fact that Fairfax has been building a world class insurance company over the past few years.

 

Believe Fairfax are releasing Q2 results next week. May be interesting. Brian Bradstreet didn't buy 2,000 shares last month just for fun.

 

Welcome back "newbie".  :)

 

Any chance of getting your 2 cents worth over on the ALS thread?

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I will comment on Altius as they are now a Fairfax company :)!

Linealdin and others have  done a fabulous job on that thread...can't add much other than Brian Dalton and his team will win in the end they are world class and it looks like Altius will buy back a lot of stock which is a very very good sign...and also I expect Fairfax to participate in other large deals along side them which will be big winners for both companies.

 

It's a theme...good businesses with great managers.

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Disclosure:I am betting that Fairfax gets it right....big time.

 

Cheers,

 

Dazel

 

Agree with your comments and adding significantly also.  They have really stepped it up this year and grown IV significantly. At these prices it is a 1' hurdle by my reckoning.

 

Cheers

 

nwoodman

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Thank you for the post and I also agree that the future is bright. 

 

Following your Citigroup train of thought, that is what they are doing with the Westaim, Altius, etc. preferred share deals with ~5% interest, right?  I believe that in the letter to shareholders he mentioned wanting to do more of these deals. 

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Petec,

 

I had a long winded response that I lost...do not have a lot of time...so here is the quick answer!

 

-Lombard Canada was folded into Northbride which was the foundation of Fairfax...that growth came from Markel Canada (a small trucking insurer) that was recapitalized from $3m a year premium Company into a global powerhouse with $14b in premiums

 

-2001 Lombard-ICICI started commercial insurance operations to become the largest commercial insurer in India...the extent of Fairfax involvement I do not know but Prem served on the board of ICICI bank from 2004-2011 (Fairfax made a Lot of money in their shares) and ICiCI-prudential board as well (they went public last year)

 

-Fairfax involvement in raising capital and their trustworthy actions make them the go to foreign source of capital for Indian companies.

 

-They will build a large insurance footprint in India as they have been directly involved in building out the insurance market there for over a decade....they have to sell their Lombard position to 10% to do this....

 

-The $5bin capital they have invested in India has a first mover advantage but it is the reputation of Prem Watsa and Fairfax that has tremendous value. they are the go to foreign company for raising capital and selling assets.

 

-India is growing at 7% and will be source of global growth over the next decade...Prem has voiced his optimism over this and put his money where his mouth is. The Lombard-ICICI should not be viewed as an exit of insurance in India...in fact Fairfax would like a bigger piece of the pie by controlling their own operations

 

- this does two things...the sale allows the cash to flow directly into the Holding company for buy backs and will NOT effect profitability as it is a very small piece of Fairfax global premiums

 

-the build out of their insurance operations in India will be done with large cash reserves in the insurance companies...

 

-Prem Watsa has evolved from the "Canadian Warren Buffett" into a global player and India will be a big piece of that as their investment of time, patience, and trust is paying off in a country where it is very difficult to gain entry. Global investors will take notice as we have because we cannot get the deals that Prem is getting (sound like Warren Buffet?). Fairfax India large share price rise this year is an indication of investors view on the growth opportunities....Fairfax India is too small an investment vehicle for the big players...they will gravitate to Fairfax as we have seen with Mason Hawkins Long Leaf Funds reentry as shareholders.

 

-in a perfect world we will see the Lombard sale' proceeds all go into share buy backs before the investing world wakes up to this story.

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Thanks.

 

I have a growing impression that on the investment side Fairfax is becoming a brain trust of good executives, which allows it to build platforms that create value over time.  Obvious examples are Fairfax India and Africa, but I'd add Cara (restaurants acquisition platform created by Fairfax and run by the ex-CEO of an old Fairfax investment, The Brick) and arguably TCIL and Grivalia (which is now controlled by FFH).  Even Blackberry brings John Chen into the fold and Richie Boucher is now on the board at Eurobank.  I am starting to think people are wrong to say that Watsa hasn't learned the lesson that Munger taught Buffett about quality.  Sure there's some cigar butt stuff but the equities increasingly seem to be concentrated in good platforms containing growth companies bought cheaply and run by exceptional people, often founders.  The convert+warrant deals seem to lean the same way - exceptional people involved in all of them and Fairfax is starting to look like the centre of a web of good people and deep knowledge (e.g. in ag commodity storage and distribution via AFGRI, NCM, AGT).

 

Interesting to know a bit more about ICICI Lombard in this context.

 

I thought they had to sell ICICI Lombard completely, rather than just down to 10%.

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-in a perfect world we will see the Lombard sale' proceeds all go into share buy backs before the investing world wakes up to this story.

 

You mean Fairfax?  Has Fairfax ever meaningfully repurchased (and wisely too)?

 

Is there still issue with their debt?

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I just love how this board goes through love hate cycles of companies.

 

Love cycle on for Fairfax.

 

For now.

 

8)

 

My love has been fairly consistent, actually.  Possibly too consistent.

 

Yes, part of the cycle is that lovers (predominantly) post. Then haters predominantly post. Repeat.

The other part of the cycle are company specific events (or non-events).

 

8)

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Pete & Jurgis,

 

The more I think of it, the more I come to the conclusion, that it's actually true what you are posting. It's so Fairfax specific on this board - for historical reasons.

 

It's cyclical push back on the board. I love it, because one always learn something from it, no matter where the sentiment pendulum is with regard to Fairfax.

 

- - - o 0 o - - -

 

With Berkshire it is totally different on this board - Imagine the mud slinging from the Berkaholics that would take place if some presumptuous board member would dare to post in the separate Berkshire forum that he or she has started to short the heck out of Berkshire! - Perhaps even calling it a turd! Sanjeev would become soo busy! lol.

 

- - - o 0 o - - -

 

Now back to Fairfax.

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Jurgis, investors move from love to hate and back again; as a result stock prices make massive moves. The interesting thing to me is these developments take years to play out. I think most investors miss them because they are too short term focussed.

 

In April 2013 Apple traded below $60; two years later it traded just below $150.

In Feb 2016 C stock traded below $40; today it is approaching $70 with lots more upside in the coming years.

 

FFH has had a very challenging 7 years with investments and there is lots of hate out there. With shares recently trading below CAN$550 I wonder if we have seen the bottom. For the first time in many years I have also established a decent position in Fairfax (just today). If Fairfax can get its investing mojo back in the coming years the stock will do very, very well.

 

From my perspective the 'love cycle' has not even started for Fairfax; its share price has been falling like a stone (until just recently). It will take years for Fairfax to hit the 'love cycle'. At that point I will be happy to sell my shares and shift into another opportunity. :-)

 

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Let's be clear the only reason I am here is because Fairfax is really hated....and I feel obligated to stand up for them with my capital and my voice here as I will forever be grateful for the pile of money they made me but also for the lessons of their thoughts, success and failure over the years.

 

We have made piles of money in Bank of America and Citigroup too because we bought good companies when they were hated... This is one of those times to buy one of the best performing companies in stock market history cheap and make piles of money.

 

I have said my piece and it is completely biased...buy it or not....I am betting that Prem gets redemption...and Fairfax outperforms Markel and Berkshire substantially over the next Five years.

 

 

 

 

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As Prem mentioned on a conference call earlier this year Fairfax repurchased 20% of their shares back in 1990.....He used Henry Singleton and Teledyne as an example of  rising share count to grow and Singleton's legendary buy backs that retired 80% of Teledyne's shares.

 

No one was listening.

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As Prem mentioned on a conference call earlier this year Fairfax repurchased 20% of their shares back in 1990.....He used Henry Singleton and Teledyne as an example of  rising share count to grow and Singleton's legendary buy backs that retired 80% of Teledyne's shares.

 

No one was listening.

 

I was definitely listening, although I found it pretty confusing.  Singleton was only able to do that because of the huge discount the market applied to his business.  Without the discount, he couldn't have pulled it off, so it seems a little weird to predict that you can do the same thing that he did without knowing the future? 

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Let's be clear the only reason I am here is because Fairfax is really hated....and I feel obligated to stand up for them with my capital and my voice here as I will forever be grateful for the pile of money they made me but also for the lessons of their thoughts, success and failure over the years.

 

We have made piles of money in Bank of America and Citigroup too because we bought good companies when they were hated... This is one of those times to buy one of the best performing companies in stock market history cheap and make piles of money.

 

I have said my piece and it is completely biased...buy it or not....I am betting that Prem gets redemption...and Fairfax outperforms Markel and Berkshire substantially over the next Five years.

 

The *only* reason I'm in Fairfax is expected returns.

 

If they've lost their way, I'm out.

 

But I'm optimistic.

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As Prem mentioned on a conference call earlier this year Fairfax repurchased 20% of their shares back in 1990.....He used Henry Singleton and Teledyne as an example of  rising share count to grow and Singleton's legendary buy backs that retired 80% of Teledyne's shares.

 

No one was listening.

 

Yes and no.  What they did was restructure their agreement with Markel, selling them F-M Acquisition Corporation in return for cash, 23% of Fairfax, and some prefs.  It wasn't a buyback in the open market, bought-for-cash sense.  That would be new.

 

Also worth noting that they have the Brit and AW minorities to buy out over the next 5 years, and plan to raise cash at the holdco, so I'm not holding my breath for major buybacks.

 

Racemize: You're right.  The argument hinges on Fairfax's assertion that intrinsic value has been growing much faster than (and therefore presumably is above) book value.  If that's right then buybacks make sense.  I think it probably is right when I look at the platforms they've built in insurance and investing.  They're doing a lot of smart things that in aggregate will be better than average and just might be brilliant.

 

 

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Also worth noting that they have the Brit and AW minorities to buy out over the next 5 years, and plan to raise cash at the holdco, so I'm not holding my breath for major buybacks.

 

Racemize: You're right.  The argument hinges on Fairfax's assertion that intrinsic value has been growing much faster than (and therefore presumably is above) book value.  If that's right then buybacks make sense.  I think it probably is right when I look at the platforms they've built in insurance and investing.  They're doing a lot of smart things that in aggregate will be better than average and just might be brilliant.

 

 

 

That's right, it was the Brit and AW minority stakes that I was thinking of.  As well as perhaps growing the capacity to not have to rely on OMERS or other partner investors - or is that actually to Fairfax's advantage?

 

I am not familiar with how much cash Fairfax would need to keep around, just wondering what would be theoretical size of any repurchase.

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I'm looking at fairfax at the moment but let me play devil advocate for a minute.

 

During the last 6 years the average ROE is about 4% (12.7% if you ignore the hedging losses, But I'm not sure you really wanna do that since every company in the world earns at least 15% ROE if you just pick the good use of that equity).

 

FFH is selling at about 1.2 book value if I understand the adjustments correctly regarding the Allied World acquisition and the India investments.

 

What returns do we realistically can expect FFH to make at such low interest rate, high prices and large influx of money going into insurance and reinsurance environment ?

 

Why Allied World that had 12% ROE is worth 1.4 book value ? can they really boost ROE by investments that much that paying 1.4 book will lead to 15% ROI ? (by my math ROE should go up to 19% starting today to make that 15% ROI)

 

When you guys say it is extremely cheap, what returns range do you expect ?

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