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is Fairfax a 33 cent dollar?

oldye

By oldye
in Fairfax Financial

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oldye Newbie

oldye

Posted
Posted

(Warning: this is meant to be a little silly. I hope to make a point about how all projections really do is let the right side of your brain be a little creative.  It doesn't matter if you do multiple of book or project 15% growth into infinity, standard deviation will ensure that you won't be precisely correct but if you are conservative you can be relatively correct which is all I want to be!)

 

 

is Fairfax a 33 cent dollar?

 

more specifically are you receiving 3$ of value 5 years from now for every dollar you invest today?

 

Lets assume todays base price of 300$ a share, what would make someone want to pay you 900$ 5 years from now?

 

I didn't spend 4 years of my life learning to work with 2 variables and projecting growth into the future indefinitely for nothing. I'm going to put my hammer to use!

 

Assumptions:

Fairfax is finding enough opportunities in equities today to put another 1.2 billion dollars to work in the first 2 quarters leaving them with a 5 billion dollar portfolio with an equity+dividend coupon of 10% or 500 million. 

From that point the company makes no new equity investments for the next 4.5 years.  The rest of the company, you know the insurance, convertible, muni and corporate bonds break even over 4.5 years(ok not even, makes just enough money to offset any taxes they pay on their equities.. ).  the only thing that happens in 5 years is that the Equity Yield on their 5 billion dollar investment doubles from 500 million to 1 billion dollars.  Slap on a 15x multiple on the yield (appropriate for market leading companies in many different industries) and boom shareholder equity is at 15 billion or 3$ for every $ you invest today. 

 

This implies that FFH could average more than 100$ a share of BV growth over 5 years using only 25% of their portfolio  :o

 

 

 

 

SharperDingaan Veteran

SharperDingaan

Posted
Posted

 

Oldeye we had pretty much the same thought, but came at it a little differently.

As Prem seems to work with 5yr intervals, what do we need to get to CAD 1000/share if the average ROE between now & then is 20%/yr ?

 

The BV multiple at the end of yr 5 would need to expand to 1.14x  [282.70/.8004 x1.2x1.2x1.2x1.2x1.2x1.34]. Today its 1.02x  [uSD 282.70/USD 278.28], the closing BOC CAD/US FX rate is .8004, & we still need to get through a truly historic recession/depression. The 5yr compound return (ex divs) would be 23% & seems a reasonable proposition. With divs included the return is even higher.

CAD $353.20 today for $CAD 1,000.00 in 5yrs - a 35 cent dollar.

 

But .....

You have to hold for the entire 5yrs. May be the intent, but most on this board will not hold that long.

Very bumpy ride. Human nature is to react, averages conveniently ignores that.

Variables. ROE average, multiple expansion, FX rate, recessions length. They all need to line up.

 

So ...

If you lock the stock away, & treat it essentially as a 5yr bond, it is a 33c dollar with approx a 25% YTM.

Over the next 5 yrs, comparable equities need to be at least 3-baggers (& higher if more risky)

This should be viewed as the benchmark holding

 

All kinds of PM implications

 

SD

 

 

oldye Newbie

oldye

Posted
  • Author
Posted

"Over the next 5 yrs, comparable equities need to be at least 3-baggers (& higher if more risky)

This should be viewed as the benchmark holding "

 

Ah but how to quantify risk, how much more of a return must you demand from Fairfax compared to Berkshire Hathaway?  Of course it doesn't have to be either or but what if it was. 

Guest ericopoly

Guest ericopoly

Posted
Posted

My thinking is that it closed at about 6x after-tax operating earnings.

 

 

SFValue Newbie

SFValue

Posted
Posted

well...I am trying to understand the market's reaction to the report.

 

I think the market does not care for FFH now that the CDS are mostly gone (and Tys). 

 

Market is repricing based on latest 13F would be my guess.

 

never mind the munis, corporates, CDS still in the port, cash...does the market care that BRK insures most munis?

 

I hope the company is buying back more stock , based on last years actions I would guess they are....

 

any thoughts?

Vizi1 Newbie

Vizi1

Posted
Posted

So with FFH down 25% in 4 trading days, at which point do you, as an individual, start getting back into FFH?  I am nearing my purchasing point.

 

 

T-bone1 Newbie

T-bone1

Posted
Posted

the company repurchased 1,066,000 (rounded) shares during 2008 for $282 per share.

 

The company is worth more now, and the other opportunities are better, so I consider it a wash.

 

I am with Prem and consider $282 a good purchase price, I would bet the company is buying today.

Viking Grand Master

Viking

Posted
Posted

I think Fairfax is a very hard company for most people to wrap their head around. I am not sure how institutions would value the company. Their business model has evolved so much over the past 36 months. You cannot simply look at what has happened the past 5 or 10 years and then simply roll that forward.

 

For insurance companies, most analysts lean heavily on predictable operating earnings. Looking at FFH the past 5 or 10 years on this metric would be difficult. How do you build in investment gains? Canwest? Abitibi? They have made some interesting purchases.

 

Bottom line is the majority on this board feel good about FFH's future because they TRUST management and feel the bets they have made (and will make in the future) will work out (similar to the past 5 years).

 

FFH appears to be evolving into a hedge/mutual fund with their core business being earning above average earnings off their investment float. I expect their share price to continue to have a lot of volatility as Mr Market does its thing.

  • 16 years later...
cwericb Experienced

cwericb

Posted
Posted
On 2/25/2009 at 12:00 AM, Viking said:

I think Fairfax is a very hard company for most people to wrap their head around. I am not sure how institutions would value the company. Their business model has evolved so much over the past 36 months. You cannot simply look at what has happened the past 5 or 10 years and then simply roll that forward.

 

For insurance companies, most analysts lean heavily on predictable operating earnings. Looking at FFH the past 5 or 10 years on this metric would be difficult. How do you build in investment gains? Canwest? Abitibi? They have made some interesting purchases.

 

Bottom line is the majority on this board feel good about FFH's future because they TRUST management and feel the bets they have made (and will make in the future) will work out (similar to the past 5 years).

 

FFH appears to be evolving into a hedge/mutual fund with their core business being earning above average earnings off their investment float. I expect their share price to continue to have a lot of volatility as Mr Market does its thing.

 

On the subject of trusting management, from an investor's standpoint I think there is one important item that I don't see mentioned very often.

 

In these days of 8 and 9 figure yearly salaries for CEO's, Prem Watsa's salary has been pegged at $600,000 for about the past 20 years. His wealth primarily comes from the the shares he holds in Fairfax. To me, at least, that it is important that the CEO of the company's financial interests are aligned with shareholders and the CEO is not going to jump to another company that offers more pay.

 

I am quite surprised that this is rarely ever mentioned in media coverage of Fairfax.

 

 

UK Grand Master

UK

Posted
Posted
22 minutes ago, cwericb said:

Prem Watsa's salary has been pegged at $600,000 for about the past 20 years. His wealth primarily comes from the the shares he holds in Fairfax. To me, at least, that it is important that the CEO of the company's financial interests are aligned with shareholders and the CEO is not going to jump to another company that offers more pay.

+1!

Viking Grand Master

Viking

Posted
Posted (edited)
10 hours ago, cwericb said:

 

On the subject of trusting management, from an investor's standpoint I think there is one important item that I don't see mentioned very often.

 

In these days of 8 and 9 figure yearly salaries for CEO's, Prem Watsa's salary has been pegged at $600,000 for about the past 20 years. His wealth primarily comes from the the shares he holds in Fairfax. To me, at least, that it is important that the CEO of the company's financial interests are aligned with shareholders and the CEO is not going to jump to another company that offers more pay.

 

I am quite surprised that this is rarely ever mentioned in media coverage of Fairfax.


@cwericb, I agree. One of the grossly under-appreciated aspects of Fairfax is how shareholder friendly they are. CEO salary (lack of) is one example. There are many more:

  • Ownership of stock (which you also mention)
  • Focus is driving per share value over the long term (not empire building)
  • Disclosure is generally very good (versus what they are required to do), with Prem’s annual letter being the best example
  • Annual meeting: events and Q&A

PS: thanks for the trip down memory lane… 2009! How time flies…

Edited by Viking
Txvestor Collaborator

Txvestor

Posted
Posted

Wow 2009! The year I bought my first Fairfax shares, as I recall somewhere in the mid 300s. 
Was a miserable 10yrs afterwards.
Def. didn't feel like a 33c dollar.
But they have definitely been doing better lately. The irony of course is that at that time they had just come off a good 2-3yr run having won big on their bet on CDSs and rolled much of those gains over into long value stocks like JNJ etc. Then they stepped in it. Hopefully they've learned! 

investmd Community Regular

investmd

Posted
Posted

thanks for resurrecting this thread from 2009! I'm presuming @oldye is no longer on this Board, but what a great thread they started! 

 

I started buying in 2005 and adding each year. Holding through the 2010-2020 period was so so challenging. Thanks to @Viking & so many board members who helped me keep the trust. 

cwericb Experienced

cwericb

Posted
Posted

Yup, bought my first good chunk of FFH in 2007 and added through the years. So glad that I never succumbed to the temptation to dump shares during the slow years. I would humbly suggest that those of us who have held Fairfax through the years is primarily because of this board and it's posters. Thanks so much to all! 🙂 

KFRCanuk Enthusiast

KFRCanuk

Posted
Posted
10 hours ago, Buffett_Groupie said:

It's important to attend https://www.stingyinvestor.com/FairfaxWeek2026.html in person each year to reinforce our own commitment/confirmation bias with folks of similar belief for more social proof and group-think 😎

 

Delayed gratification is the willingness to look foolish and wrong for more than 23 out of the 28 years of being a shareholder before becoming lucky: 
https://vimeo.com/1062974002/cffcbcce7f 🙏

 

Fairfax has a private Vimeo account? What the heck

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