Fairfax Valuation - $430

[Guest glavacem]

I might also add that FFH also acts as a hedge against the U.S. dollar.

 

Are you able to expand on this? As I am not familiar with this idea.

 

Thank you.

[cwericb]

Fairfax results and holdings are stated in US funds. So as a Canadian investor, FFH share price will fluctuate in correlation with the US/CDN dollar. If the CDN dollar drops against the US dollar,  FFH shares will increase in Canadian funds (aside from any fluctuations in actual share value). The reverse is true when the CDN dollar increases, share price will reflect a similar drop.

 

So when we had the runup in share price from October to March the price rose by about 30% in US$ but rose by about 43% in CDN$. During the same period the CDN$ dropped by 13%.

 

So FFH also works as a currency hedge if you reside outside the US.

[Guest glavacem]

Ahhhh yes thank you.

 

 

 

Fairfax results and holdings are stated in US funds. So as a Canadian investor, FFH share price will fluctuate in correlation with the US/CDN dollar. If the CDN dollar drops against the US dollar,  FFH shares will increase in Canadian funds (aside from any fluctuations in actual share value). The reverse is true when the CDN dollar increases, share price will reflect a similar drop.

 

So when we had the runup in share price from October to March the price rose by about 30% in US$ but rose by about 43% in CDN$. During the same period the CDN$ dropped by 13%.

 

So FFH also works as a currency hedge if you reside outside the US.

[benhacker]

Fairfax results and holdings are stated in US funds. So as a Canadian investor, FFH share price will fluctuate in correlation with the US/CDN dollar. If the CDN dollar drops against the US dollar,  FFH shares will increase in Canadian funds (aside from any fluctuations in actual share value). The reverse is true when the CDN dollar increases, share price will reflect a similar drop.

 

So when we had the runup in share price from October to March the price rose by about 30% in US$ but rose by about 43% in CDN$. During the same period the CDN$ dropped by 13%.

 

So FFH also works as a currency hedge if you reside outside the US.

 

I think there is some confusion here, or at a minimum, this explanation is not quite accurate.

 

Whether Fairfax or any other firms results (or stock price) are quoted or reported in USD has nothing to do with how the firms' business will perform vis a vis certain currency movements.

 

You can take any Canadian firm, and quote their stock in USD, and their results in USD, and nothing would change... if the CAD rises or falls, the CAD translated results will always be the same as the USD translated results (again, translated to a common currency).

 

Fairfax may indeed be a hedge against USD / CAD movements, but if it is, it must be because of the underlying assets they own, not because their financial results are quoted in CAD, YEN, USD, or Gold... it's irrelevant.

 

Fairfax is heavily long USD nominal assets (bonds) versus their liability base (salaries, CAD and other insurance liabilities)... thus, I would tend to agree that they are relatively a decent way to play CAD weakening vs. USD...

 

Hope that helps... currency and financial reports only provide a snapshot in time of assets, liabilities, and income/revenue.  Whatever currency you use as a measuring stick is irrelevant to how the assets behave over time with currency movements.  Everyone should focus on the latter, not the former.

[giofranchi]

Fairfax may indeed be a hedge against USD / CAD movements, but if it is, it must be because of the underlying assets they own, not because their financial results are quoted in CAD, YEN, USD, or Gold... it's irrelevant.

 

I do agree but:

Of course FFH’s assets are not 100% in the US. Yet, cwericb’s example shows an exact correlation between the difference in FFH USD denominated share price and FFH CAD denominated share price, and the USDCAD exchange rate.

How is it so?

 

Thank you!

 

Gio

 

[wknecht]

Fairfax may indeed be a hedge against USD / CAD movements, but if it is, it must be because of the underlying assets they own, not because their financial results are quoted in CAD, YEN, USD, or Gold... it's irrelevant.

 

I do agree but:

Of course FFH’s assets are not 100% in the US. Yet, cwericb’s example shows an exact correlation between the difference in FFH USD denominated share price and FFH CAD denominated share price, and the USDCAD exchange rate.

How is it so?

 

Thank you!

 

Gio

The two shares represent the same asset. The same asset should have the same price. Hence the only difference is the exchange rate the two are quoted in.

[giofranchi]

The two shares represent the same asset. The same asset should have the same price. Hence the only difference is the exchange rate the two are quoted in.

 

Ok… Therefore, who is right? Is FFH a “relatively decent” hedge against USDCAD movements, or is it an “exact” hedge?

 

Gio

 

PS

Not that I care much... Just curious! ;)

 

[cwericb]

 

Well it seems to be an exact hedge against FRFHF of course and it seems to run as a very close hedge against the US/CDN dollar, but I haven’t gone to the trouble to do the math.

 

Also Ben is right. The value of Fairfax is directly related to their holdings which now are pretty well all over the world. But this does protect me against a decrease in the value of our currency. (It will also be a negative as our dollar increases vs the US dollar)

 

The bottom line here, for me at least, is that I find Fairfax to be a comfortable investment for three main factors. First, Fairfax is a good company for various reasons. Second, it’s share price fluctuates with the US dollar and provides me with protection against a fall in our currency.  Thirdly, it is also a hedge against deflation.

 

If one or two of those factors becomes a negative, I have hope that the remaining factor or factors will help offset that, at least in the long run. So I see it as a relatively safe place to invest.

 

The biggest concern I have with Fairfax is if we run into several catastrophic events that seriously impacts the insurance industry. However, should that happen I assume that it would precipitate a hard market in the industry that might drive some competition out of the business and would also lead to higher  premiums and thereby increase the float over time. Am I correct in that assumption?

[giofranchi]

The bottom line here, for me at least, is that I find Fairfax to be a comfortable investment for three main factors. First, Fairfax is a good company for various reasons. Second, it’s share price fluctuates with the US dollar and provides me with protection against a fall in our currency.  Thirdly, it is also a hedge against deflation.

 

If one or two of those factors becomes a negative, I have hope that the remaining factor or factors will help offset that, at least in the long run. So I see it as a relatively safe place to invest.

 

The biggest concern I have with Fairfax is if we run into several catastrophic events that seriously impacts the insurance industry. However, should that happen I assume that it would precipitate a hard market in the industry that might drive some competition out of the business and would also lead to higher  premiums and thereby increase the float over time. Am I correct in that assumption?

 

+1! :)

 

Gio

[Valuebo]

The two shares represent the same asset. The same asset should have the same price. Hence the only difference is the exchange rate the two are quoted in.

 

Ok… Therefore, who is right? Is FFH a “relatively decent” hedge against USDCAD movements, or is it an “exact” hedge?

 

Gio

 

PS

Not that I care much... Just curious! ;)

 

 

Huh? I'd read benhacker's post again, really no other way of explaining it. Unless I'm misunderstanding you. Fairfax holds a lot of USD nominated assets that increase in value if the CAD weakens versus the USD. So you have a hedge against USDCAD rising further but as a foreigner you also have to look at your own currency. If the EURUSD stays the same, you'll just have CAD currency losses as a EU investor when EURCAD rises, partly offset by USD nominated assets that increase in value in CAD. Canadians are partly hedged against their own currency of course and in that way it is possibly a relatively decent hedge.

 

What do you mean with an exact hedge btw? How could it ever be? The fluctuations between those two different shares have nothing to do with all the underlying assets and liabilities, partly nominated in various currencies, and are just different currency quotations of the same thing. I'm confused.

[giofranchi]

What do you mean with an exact hedge btw? How could it ever be? The fluctuations between those two different shares have nothing to do with all the underlying assets and liabilities, partly nominated in various currencies, and are just different currency quotations of the same thing. I'm confused.

 

Fairfax may indeed be a hedge against USD / CAD movements, but if it is, it must be because of the underlying assets they own, not because their financial results are quoted in CAD, YEN, USD, or Gold... it's irrelevant.

 

I do agree but:

Of course FFHs assets are not 100% in the US. Yet, cwericbs example shows an exact correlation between the difference in FFH USD denominated share price and FFH CAD denominated share price, and the USDCAD exchange rate.

How is it so?

 

Thank you!

 

Gio

 

 

 

Gio

[giofranchi]

In other words, if I were a Canadian and owned 1 FFH share, and FRFHF increases 30%, while the CAD depreciates 13% against the USD, and if I want to sell my FFH share and use the proceeds to make a trip across the border, my purchasing power would be exactly the same if my FFH share had increased 43%. That’s what cwericb said it has happened, and that’s what I mean by an exact hedge.

 

Gio

 

[mcliu]

FFH and FRFHF has to trade in-line with the USDCAD exchange rates, or else you can make an arbitrage profit by buying FRFHF OTC and selling the shares as FFH on the TSX while shorting CAD.

[frommi]

After thinking about FFH i sold my shares today and i am now 80% in cash. Its pretty close to fair value and was never in the last 10 years more expensive than currently based on bookvalue multiple.

 

I have 3 scenarios for the next 2-3 years:

 

1) Prem is right, deflation hits, stocks tank and bookvalue goes up 30%, expected win: 30-40%

2) like 1, but bookvalue multiple goes back to 1, so zero gain.

3) Prem is wrong and bonds get further slaughtered, 30% loss.

 

The expected value of this is zero when you equal weight these scenarios, so i stay on the sidelines and watch from now on.

[benhacker]

cwericb,

 

Well it seems to be an exact hedge against FRFHF of course and it seems to run as a very close hedge against the US/CDN dollar, but I haven’t gone to the trouble to do the math.

 

and

 

Gio,

 

I do agree but:

Of course FFH’s assets are not 100% in the US. Yet, cwericb’s example shows an exact correlation between the difference in FFH USD denominated share price and FFH CAD denominated share price, and the USDCAD exchange rate.

How is it so?

 

--

 

You guys are talking about a hedge in a strange way, and I think I can clarify for you... it is not the correct way to approach thinking about owning foreign securities, and it's actually quite important:

 

1) An investor buys an assets out of their *cash* pile.

2) If an investor is Canadian, presumably they would buy the investment with CAD, and US investor would buy with USD.

 

I think the 2nd step is confusing the discussion of both Fairfax and what a hedge really is.

 

If you take two investors who are buying Fairfax (either FFH, or FRFHF) they are making an identical decision, so how can one get different results?  The answer is they can't, so it's easier to think about when you separate the decision to "buy" into two transactions (same for sell transaction) which is more accurate but generally irrelevant to think about (so we ignore it) - in this case it is not irrelevant:

 

Step #1 - *Sell* currency to receive USD (or CAD, or ???) - this could be a loan, or more accurately just a reduction in outstanding cash holdings.

Step #2 - Use currency to buy asset (in same currency)

Step #3 - Sell asset, receive currency (in same currency)

Step #4 - Sell currency to extinguish currency *loan* (or more accurately, just add to cash balance)

 

--

 

If you look at the above, and then compare to the quotes at the top of the post, it is clear that FRFHF vs. FFH is a "hedge" only in the sense that a buyer has to hold USD currency to make the purchase.  I would not call this a hedge.  You are simply imposing a requirement on the investor that they held some USD instead of selling their CAD currency to USD to buy FRFHF.  If you think this through, the investor is really just doing two transactions:

 

1) Currency conversion (CAD to USD) -- Yes, this is a "perfect" hedge... because you are selling the thing you are hedging.

2) Buying Fairfax, this is not currency specific, and not required to get the hedge, or even related to it.

 

--

 

This is something very explicitly understood for those who have IBKR as their broker because as a US investor, I can buy FFH in CAD, but if I do, IBKR opens up a CAD loan to make the purchase (because I don't hold CAD currency in my account by default), and if I don't want a CAD loan, I simply extinguish it on purchase (at the going CAD / USD rate).  Thus buying a foreign stock (or selling) requires the two steps I mention above.

 

*if* I chose to leave the CAD loan open when I bought FFH.T instead of closing out the loan, you could describe me as hedging CAD dollar with the purchase (I'm short CAD explicitly)... but that is frankly an inaccurate way to talk about my FFH.T investment.  I am long FFH, and I am explicitly short CAD... two separate transactions.  I can do one without the other.  If I want to protect myself from a falling CAD, I can just short CAD... Fairfax doesn't help me do this.  Buying USD with CAD (aka, borrowing CAD) helps this.

 

Hope that helps.

 

To clarify, my prior post above assumed that everyone understood this... and thus I was only talking about if FFH itself (meaning the assets it owns, etc) benefits from CAD depreciation, and is thus an investment that is a "good hedge"... that is an entirely separate discussion it seems from what cwericb was getting at when talking about a hedge... so I just wanted to clarify what I meant originally and what I am explaining in this post.

 

 

[cwericb]

“...exact hedge against FRFHF...”  Ha, even I am not sure what I was trying to say there! FRFHF is simply Fairfax shares priced in US dollars.

 

What I was getting at and to put it simply, is that if the Canadian dollar sinks against the US dollar the price of FFH shares in Canadian dollars tends to rise by a similar amount - in addition to any increase or decrease in the value of the shares themselves.

 

Because of that - for me at least - it works as protection against a fall in the CDN $ vs the US $.

[benhacker]

Because of that - for me at least - it works as protection against a fall in the CDN $ vs the US $.

 

Yes, my point is only that this effect has nothing to do with Fairfax.  Any company with shares in both USD and CAD will do the same.  This is not Fairfax specific, it's just the math of currency movements coupled with cross border share arbitrage.

[cwericb]

Ben, but the point I was trying to make is that Fairfax holds a lot of investments that are outside of Canada.

 

Eg, take two Canadian companies with a share price of $50 CDN. One has all their holdings in Canada and one has all their holdings in the US. If the Canadian dollar suddenly dropped, say 30%, the share price of the company with the US holdings would jump by about 30% in Canadian dollars while the company with the Canadian holdings would remain stable.