Fairfax 2017

[TwoCitiesCapital]

"They might stop making macro calls, they might not.  They've made two historically, one of which was a great success and one of which was a great failure."

 

False. They made at least 4. You have to include the bet against Japan in the late 80's and against the Nasdaq in 1998-2000.

 

 

Thanks, I'll read up on those.  Were they just early, or wrong?

 

I agree with your point on using leverage to fund low return bonds.  The warrants and converts give more equity exposure than is obvious, as do the investments in associates, but still.

 

Berkshire is less levered by debt and pref, but also less levered by cheap float.  Overall it's significantly less levered full stop (roughly 2x assets/equity vs 4x, and even more so on tangible equity).

 

They were right on all of them except the current situation. The problem with winning 3 out of 4 in investing though is that it's always the last time that can kill you. The amount they lost from equity hedges and inflation swaps this time around more than offsets the gains from the other 3 combined.

 

[Viking]

Cardboard, I agree with your post.

 

My concern with Fairfax is I am not convinced they have 'learned' the lessons from the past 7 years. Prem talks a lot about 'no ego'. I also see empire building and little concern for improving shareholder returns.

 

Having said that, I will invest in Fairfax with my eyes wide open. I think the stock is cheap. Their underwriting is much improved. I will closely monitor what they do with their investment portfolio over time and this will determine how much stock I hold. This was the approach I took with FFH in the past and it has served me well (I have not held a meaningful positioning he company for the past 7 years primarily because I did not like how the investment portfolio was positioned).

 

Dalzel, I am also hopeful that FFH starts to repurchase shares in a meaningful way. Prem used Teledyne as an example. We will see in the coming year if he walks the talk.

 

Here is the quote from page 21 of his shareholder letter in the 2016 Annual Report: "Having said that, we are raising our threshold for acquisitions now so as to benefit from the ones we have already made – and to buy back our stock. Our hero, Henry Singleton, whom I have mentioned before in our Annual Reports, built Teledyne by taking shares outstanding from seven million in 1960 to 88 million in 1972 and then down to 12 million in 1987 – an 87% drop in shares outstanding. Our long term focus is clear."

[Cardboard]

You have the hurricane season just getting started and it has been awfully quiet for what? 10 years now?

 

They also just made a pretty large insurance acquisition. Who wants to bet that there is zero skeleton in the closet?

 

I would wait for a great entry point vs one where things have to go right with investments, insurance ,etc. There is no one holding a gun to your head to buy at this point.

 

Cardboard

[Santayana]

Lots of valid points.  I'll just add that looking at a long term price history and ignoring the dividends seems pretty disingenuous.  My returns in Fairfax over the past 10 years are pretty comparable to what I would have made in BRK or the S&P. 

[Dazel]

 

 

What I really like is the negativity.

 

"If you wait for the Robins, Spring will be over" WB

 

 

[WneverLOSE]

 

 

What I really like is the negativity.

 

"If you wait for the Robins, Spring will be over" WB

 

Would you seed money to bernie madoff when everyone started hating him ?

 

Investing only because something is hated doesn't make any sense, the only thing that will determine future returns is what you pay and what will happen.

 

If we are into Buffett quotes

[Dazel]

 

That's funny.

[Dazel]

 

 

 

Prem being compared to Madoff...

I am sure to get some more cheap shares...and I will end my time here on that.

 

Good luck all.

 

Dazel

[racemize]

buybacks:

 

Andrew Hollingworth

 

Thank you and Good afternoon. I'm calling from London, we're shareholders of yours. I wonder if I could just ask Prem a couple of direct questions. And these sort of go back sort of six months or so to when references you made to sort of Henry Singleton and cancellations of shares and so on. Would be very interested to understand sort of what led to that sort of changes and whether that is a function of the attitude towards evaluation of the company today, whether it's a function of the scale of the underwriting facility that's now been built? And therefore it's not a sort of lasting change that we expect to have in place for many, many years and decades to come or is it more tactical to do with the sort of devaluation of the corporation you observe today? So I'd be grateful to answer that one and then I got one very small follow up.

 

Prem Watsa

 

Yeah, we talked about those Andrew at our annual meeting and it's a good question. Our share buybacks are basically I made the point that first we have to be financially very sound and then our focus will be on share buybacks. And so right now we've just completed Allied World, we want to make sure that the ICICI Lombard transactions, which I mentioned earlier go through. Make sure that our cash positions are through $1 billion at year end. And as the excess cash comes in and we just think our shares today not expensive and we think it's appropriate for us to buy them, buy as much as we can. And so that's how we look at it. We will never buy stock at the expense of our financial position. And it's only after our financial position is very strong that we look at buying back stock.

[WneverLOSE]

 

 

 

Prem being compared to Madoff...

I am sure to get some more cheap shares...and I will end my time here on that.

 

Good luck all.

 

Dazel

 

Not sure how you got it that I compare the two people, Just said the strategy is not smart and gave an example.

Do you think that the things I write effect billions of dollar movements ? I bet the total holding value of all the people who read my comments is less than say a few million dollars. not enough to move to stock even 0.1% if I was able to scare everyone.

 

 

[SharperDingaan]

You might want to look out a little more long term - and apply some context.

 

Prem's getting old, and planning for the next generation; it's why there have been all the spin-offs into Africa, India, etc. - paid for by issuing stock. Referring to Singleton strongly suggests that the stock was issued at a high price, and that over time - the intent is to opportunistically buy much of it back at a lower price. They hold their treasuries in part because it's an OSFI requirement of most FI's; but it also allows them to buy back what they've issued at any time.

http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/LAR_index.aspx

http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/tlac.aspx

 

They haven't had any big UW losses in a while; but we all know it's a numbers game, and that both the frequency and severity of weather related loss is getting higher. While it's highly likely they've re-insured much of the risk, it's pretty much a given that at some point they're going to take a hit. Lowering price, and triggering Singleton strategy buy-backs.

 

So you are really buying a quality shop + an implied put (Singleton strategy buy-back). All good.

But as an investor - could you not do the same thing for less? Simply sell when Prem issues, sit in treasuries, & buy when he repurchases.

 

They haven't had any big realized wins on their bow-wow investments in a while either.

However, if they were going to fail - most would expect that they would have done so by now, and that these things are going to be worth quite a bit as the economy starts to improve.

 

SD

[Uccmal]

To me, the negative opinions on Fairfax are far too extreme because, based on the outcome of a single event, people seem to have concluded that Fairfax can't do macro.  But suppose that, at the time the last macro bet were made, there was a 50% chance that the bet was right.

 

If that were the case, Fairfax was betting on a coin flip, where, if it came up tails, they'd lose $X, and if it came up heads, they'd make, say, $6X.  Well, it turns out the coin came up tails, so they lost $X.

 

But now to claim because of that single bet that Fairfax's are likely to be low in the future--particularly when that single bet may have been a good bet to take--simply because the bet had a bad outcome seems illogical.  It kind of smells like outcome-oriented thinking unless you believed strongly seven years ago that the bet was a bad one.  And to my (faulty) memory, I don't remember many people making strong claims back then that the macro bets were a bad idea.

 

(In fact, if it were the case that the odds were like the coin-flip described above, I'd be delighted if Prem et al make those macro bets again and again.  The more the better.)

 

I didn't like the macro bets, and it is documented on this board, somewheres.  I could never get past why they didn't collar them on the upside.  I also didn't like the large investments in Resolute, and Blackberry in particular.  I could never figure out why they didn't buy Tim Hortons, instead letting Buffett have it.  I sold all my stock and really haven't looked back. 

 

Fairfax is a big company and the returns are never going to get that good.  Years ago, it was a problem with insurance losing money.  If only they would get their combined ratios down, everything would be rosy, because they are such good investors.  The last few years they have been getting the CRs down, but the investment side has been weak.  If only they could make better investments.  If only comes up alot with this company. 

 

They may be the best bond investors going but that has become increasingly difficult to duplicate.  It worked in a dropping rate environment but there will be no big hits in a stable or rising rate scenario. 

 

And no I am not a hater, by any means.  I am not a hoper either.  I just see Fairfax as a mediocre investment.  One could do worse, and one could certaiinly do better.

[petec]

SD - why are the spinoffs, as you call them, related to Prem's age and succession planning?  It looks to me like Prem has built a deep bench, with Paul Rivett and Andy Barnard at the forefront - that's to do with succession planning.  But I don't understand what FIH and FAH have to do with it.

 

Uccmal - BKIR and ICICI Lombard spring to mind as realised successes.  But why are realised gains more important than unrealised ones?  One thing many have said on this board is that they wish the investing was more Buffett-like, long term investments in high quality compounders.  I think they are moving that way, with the platforms they have built in FIH, FAH, Thomas Cook, Cara and maybe Grivalia (they didn't build Grivalia, but they have recently taken control and I am intrigued to know whether it is intended to be another close-to-permanent investment).  Anyway, my point is that I'll be delighted if they can turn these into great businesses and never realise the gains. 

 

Interesting thought on Tim Hortons!

[shalab]

Sd is right on the ball on this one. UCCAML is also correct. One has to remember that Watsa is from India and he puts family above everything. Watsa is getting on in age at around 70 years or so. Time for him to hand over reigns to his family.

 

You might want to look out a little more long term - and apply some context.

 

Prem's getting old, and planning for the next generation; it's why there have been all the spin-offs into Africa, India, etc. - paid for by issuing stock. Referring to Singleton strongly suggests that the stock was issued at a high price, and that over time - the intent is to opportunistically buy much of it back at a lower price. They hold their treasuries in part because it's an OSFI requirement of most FI's; but it also allows them to buy back what they've issued at any time.

http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/LAR_index.aspx

http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/tlac.aspx

 

They haven't had any big UW losses in a while; but we all know it's a numbers game, and that both the frequency and severity of weather related loss is getting higher. While it's highly likely they've re-insured much of the risk, it's pretty much a given that at some point they're going to take a hit. Lowering price, and triggering Singleton strategy buy-backs.

 

So you are really buying a quality shop + an implied put (Singleton strategy buy-back). All good.

But as an investor - could you not do the same thing for less? Simply sell when Prem issues, sit in treasuries, & buy when he repurchases.

 

They haven't had any big realized wins on their bow-wow investments in a while either.

However, if they were going to fail - most would expect that they would have done so by now, and that these things are going to be worth quite a bit as the economy starts to improve.

 

SD

[SharperDingaan]

"SD - why are the spinoffs, as you call them, related to Prem's age and succession planning?  It looks to me like Prem has built a deep bench, with Paul Rivett and Andy Barnard at the forefront - that's to do with succession planning.  But I don't understand what FIH and FAH have to do with it."

 

FIH and FAH are akin to our time-worn mercantile adage of 'sending ships to the new world'.

Send 2-3 ships at a time, split the cost of the venture across multiple parties, and put the ships in the hands of the next generations of all those parties. If it works out; the ships return, everyone gets rich, and those next generations command the new trading route. If it fails; it's not enough to put any of them under, and they get practice working with each other - for next time out. Win-win.

 

But while those ships are away, & the fledglings are learning to fly - their home base is protected, & strengthened over time.

Papa's job until he eventually retires.

 

SD

 

 

[petec]

"SD - why are the spinoffs, as you call them, related to Prem's age and succession planning?  It looks to me like Prem has built a deep bench, with Paul Rivett and Andy Barnard at the forefront - that's to do with succession planning.  But I don't understand what FIH and FAH have to do with it."

 

FIH and FAH are akin to our time-worn mercantile adage of 'sending ships to the new world'.

Send 2-3 ships at a time, split the cost of the venture across multiple parties, and put the ships in the hands of the next generations of all those parties. If it works out; the ships return, everyone gets rich, and those next generations command the new trading route. If it fails; it's not enough to put any of them under, and they get practice working with each other - for next time out. Win-win.

 

But while those ships are away, & the fledglings are learning to fly - their home base is protected, & strengthened over time.

Papa's job until he eventually retires.

 

SD

 

I think they're just investment vehicles that allow Fairfax to pool knowledge and get real scale without overcommitting themselves (charging a fee into the bargain).

 

 

[Luckyone77]

To me, the negative opinions on Fairfax are far too extreme because, based on the outcome of a single event, people seem to have concluded that Fairfax can't do macro.  But suppose that, at the time the last macro bet were made, there was a 50% chance that the bet was right.

 

If that were the case, Fairfax was betting on a coin flip, where, if it came up tails, they'd lose $X, and if it came up heads, they'd make, say, $6X.  Well, it turns out the coin came up tails, so they lost $X.

 

But now to claim because of that single bet that Fairfax's are likely to be low in the future--particularly when that single bet may have been a good bet to take--simply because the bet had a bad outcome seems illogical.  It kind of smells like outcome-oriented thinking unless you believed strongly seven years ago that the bet was a bad one.  And to my (faulty) memory, I don't remember many people making strong claims back then that the macro bets were a bad idea.

 

(In fact, if it were the case that the odds were like the coin-flip described above, I'd be delighted if Prem et al make those macro bets again and again.  The more the better.)

It wasn't just the bet on deflation that soured my opinion of Fairfax. I agreed with that play and, IMO, your take on it is exactly correct. Who knows, it still may play out. It was the poor quality of equity purchases that was the nail in the coffin for me and, frankly, inexplicable at this level. Too many Hail Mary's for my taste.

[petec]

To me, the negative opinions on Fairfax are far too extreme because, based on the outcome of a single event, people seem to have concluded that Fairfax can't do macro.  But suppose that, at the time the last macro bet were made, there was a 50% chance that the bet was right.

 

If that were the case, Fairfax was betting on a coin flip, where, if it came up tails, they'd lose $X, and if it came up heads, they'd make, say, $6X.  Well, it turns out the coin came up tails, so they lost $X.

 

But now to claim because of that single bet that Fairfax's are likely to be low in the future--particularly when that single bet may have been a good bet to take--simply because the bet had a bad outcome seems illogical.  It kind of smells like outcome-oriented thinking unless you believed strongly seven years ago that the bet was a bad one.  And to my (faulty) memory, I don't remember many people making strong claims back then that the macro bets were a bad idea.

 

(In fact, if it were the case that the odds were like the coin-flip described above, I'd be delighted if Prem et al make those macro bets again and again.  The more the better.)

It wasn't just the bet on deflation that soured my opinion of Fairfax. I agreed with that play and, IMO, your take on it is exactly correct. Who knows, it still may play out. It was the poor quality of equity purchases that was the nail in the coffin for me and, frankly, inexplicable at this level. Too many Hail Mary's for my taste.

 

Six months ago I would have agreed with this entirely.  I'm now moving to a more balanced view.  There have certainly been some major duds.  But there have been some solid winners too: TCIL/Quess, Fairfax India and its contents, BKIR, Grivalia, and potentially in the future Eurobank (I haven't made up my mind on Cara and Blackberry yet).  I'd also add Zenith, the Odyssey Re stub, and hopefully Brit and Allied - I realise these aren't what you meant by equity investments but they are huge permanent equity commitments so I include them.  I also like the pref/warrant investments they've made recently.  So overall I'm feeling more positive on the investment side, FWIW.

[Dazel]

 

 

While the timing of my post was lucky in regards to share price rise the fundamentals behind it were not lucky. Prem told all in march that the operating companies were vastly undervalued on a book value basis. He told you all that if the shares remained undervalued he would buy them and used an example of Henry Singleton. Prem has one of the best all time records in the world as an operator and the investing world still doubts him. He just did what he said he would...and will continue to do so...he has said he would like to die at his desk so for those that think he is setting up exit plan are not listening. Berkshire is too big and sadly Mr. Buffett is actually getting old...Markel is priced richly. Where do you think all of that capital will go looking for the next Berkshire?

The new Fairfax era started awhile ago with a change of focus and the new company armed with $3b plus in cash (deferred tax assets are over $700m) at year end is a game changer. I am not here to debate...take it or leave it.

The next decade at Fairfax will be a different one as the company has now become a "Blue Chip". I expect the ratings agencies to be the first to react as negativity around Fairfax is extremely high.

 

Cheers and good luck. I felt I owed to Prem and Fairfax to come to their defence here..there is no shame in doubting greatness. But it is a hell of lot more fun (and prosperous) to back one the best operators in the world over the last 30 years!

Congrats on your deals Prem! We think your encore of the next decades will be heroic.

 

Dazel

[John Hjorth]

Prem being compared to Madoff...

I am sure to get some more cheap shares...and I will end my time here on that.

 

Good luck all.

 

Dazel

 

Thank you for your latest post in this topic, Dazel [not the one quoted here],

 

I sincerely hope that you will stay around active here on CoBF. Message boards evolve over time. For my part, your posts about Fairfax are very, very much appreciated.

[villainx]

I bought some too, large part due to this thread.  So I appreciate what everyone shares.  And so far it's been fairly civil.

[John Hjorth]

I bought some too, large part due to this thread.  So I appreciate what everyone shares.  And so far it's been fairly civil.

 

It's a it more complicated  than that. Thank you.

[Valuehalla]

Mason Hawkins added FFH during 2Q at the Longleaf Partners Funds, 6,17 % of the funds portfolio

 

His comment on it:

http://longleafpartners.com/sites/default/files/categories/Documents/2Q17-Longleaf-Partners-Commentary.pdf

[james22]

Fairfax is underwriting more successfully than when we previously owned it, is about to complete a value-accretive merger with Allied World, and still has the investing prowess of Watsa and his team.

 

Because the merger is on the come and Watsa is holding a large amount of cash that is not producing income, near-term reported earnings per share are well below the company’s long run earnings power.

[Dazel]

https://www.vccircle.com/fairfax-backed-icici-lombard-gets-regulator-nod-for-ipo/