FFH Flat in Bull Market

[investmd]

FFH is a core pillar in my portfolio strategy. Have taking a buy and hold approach over past dozen years with ongoing purchases on dips. Full confidence in the ability to run an insurance business well and effectively deploy float and ability to take advantage of opportunities.

Today, I noticed that price on Jan 1, 2015 is essentially identical to price on Jan 1, 2019. Completely flat over 4 years of a "bull market". Yes, I'm picking the dates, as if we go over 5 years, it's up a total of some 30%. So over 5 years, annual return of 7%'ish is not terrible. However, 4 years is a significant time period. To be flat (with 2% dividend yield) for past 4 years is raising some questions for me about management going forwards and questioning my long term core nature of this investment. Watsa is always so positive, energetic and bullish. Recent thoughts on this Board included that FFH was undervalued, was well positioned for regime of increased interest rates and would/should be buying back shares.

 

Is there full confidence that this company can AVERAGE 7%/yr over any 10 year investment period? Means some flat 4 year periods and some 30%+ years. I'm fine with lumpy returns, but over time they need to at least meet market return with potential for alpha.

[petec]

I’d look further than the stock price if I were you. Do you feel they’ve made good decisions? Created value? Surfaced value? Positioned themselves to create value in the future?

[no_free_lunch]

FFH is a core pillar in my portfolio strategy. Have taking a buy and hold approach over past dozen years with ongoing purchases on dips. Full confidence in the ability to run an insurance business well and effectively deploy float and ability to take advantage of opportunities.

Today, I noticed that price on Jan 1, 2015 is essentially identical to price on Jan 1, 2019. Completely flat over 4 years of a "bull market". Yes, I'm picking the dates, as if we go over 5 years, it's up a total of some 30%. So over 5 years, annual return of 7%'ish is not terrible. However, 4 years is a significant time period. To be flat (with 2% dividend yield) for past 4 years is raising some questions for me about management going forwards and questioning my long term core nature of this investment. Watsa is always so positive, energetic and bullish. Recent thoughts on this Board included that FFH was undervalued, was well positioned for regime of increased interest rates and would/should be buying back shares.

 

Is there full confidence that this company can AVERAGE 7%/yr over any 10 year investment period? Means some flat 4 year periods and some 30%+ years. I'm fine with lumpy returns, but over time they need to at least meet market return with potential for alpha.

 

If you look at their performance historically, they did do well over 2007-2017.  However, just about any period shorter than they aren't hitting 7% (from a bvps + dividend perspective) so I sure wouldn't expect it going forward either.

[obtuse_investor]

Let's use a gardening analogy.

 

From 2010-2016 (7 years); FFH management was getting ready for winter. They weren't planting any new plants. They were hoarding their seeds (cash) and keeping them safe (bonds). They were internally getting stronger (slowly but surely making their insurance operations profitable- lowering cost of capital). This was prudent management consider their weather forecast.

 

From 2017-current (2 years); FFH management suddenly realized that winter isn't coming any time soon. They cracked open their seed vault and started planting. And now they wait for the flowers to bloom, while the weather does it's own thing.

 

I don't want to digress into the validity of their forecast.

 

What I want to point out is that for ~7 years they didn't plant anything new. The meager BVPS growth we see right now is a result of that lack of investment. It takes a 2-5 years for the flowers to bloom, assuming winter doesn't actually arrive (and frost kills off some of those plants even before the buds formed).

 

[rb]

They weren't just getting ready for winter. They were shorting the market. They basically looked at valuations in 2010 and said that stocks are richly priced.

[investmd]

Thanks Peter, No free lunch, Obtuse investor and Rb. I'm re-assured that all of you are pointing out a similar theme. Very much appreciate the insight and calmness of the gardening analogy :) What I'm hearing is that mistakes were made (in terms of choosing a hedging strategy during a bull market) and it takes a while to grow out of the mistakes. Weeds are cleared and waiting for flowers to blossom. There is potential for a bountiful harvest.

 

[Gregmal]

I personally view FFH to be uninvestable.

 

This is a company I have really wanted to like for a long time, but could never get comfortable with it simply because there are others who do what they do, but are better at it. The investment decisions for the past decade have been atrocious. Off the top of my heads its what? BBRY, RFP, SHLD, VRX, SD... probably more that I am forgetting, all of which fit the same theme. Troubled companies, with mediocre management, and TONS OF DEBT. The results have been as expected given those things. Not only have these been heavily concentrated positions, but they've collectively shown poor judgment and demonstrated a lack of an ability to locate good investments in a fertile environment.

 

Going off of a comment by rb, how the f*** was ANYONE, let alone a professional, looking at the market in 2010 and calling stocks richly valued????? I can understand having macro concerns, or thinking trouble lays ahead, but richly valued???? "Oh gee, let me short the market with the S&P trading at 13x!" Pure stupidity.

 

 

 

[shalab]

I see several issues with this setup - some of them below:

 

- Watsa is 70 or 70+ and is in the middle of transition to his kids

      - he is semi-retired and not clear how long he will continue

- They still promise to deliver 15% returns even after a decade when they haven't done it

- The dividend is static at 10$s/share - apparently this is for management that holds significant chunks of their assets in FRFHF. That shows the company's attitude - what about ordinary shareholders

- The investment return from the past decade speaks for itself

 

I personally view FFH to be uninvestable.

 

This is a company I have really wanted to like for a long time, but could never get comfortable with it simply because there are others who do what they do, but are better at it. The investment decisions for the past decade have been atrocious. Off the top of my heads its what? BBRY, RFP, SHLD, VRX, SD... probably more that I am forgetting, all of which fit the same theme. Troubled companies, with mediocre management, and TONS OF DEBT. The results have been as expected given those things. Not only have these been heavily concentrated positions, but they've collectively shown poor judgment and demonstrated a lack of an ability to locate good investments in a fertile environment.

 

Going off of a comment by rb, how the f*** was ANYONE, let alone a professional, looking at the market in 2010 and calling stocks richly valued????? I can understand having macro concerns, or thinking trouble lays ahead, but richly valued???? "Oh gee, let me short the market with the S&P trading at 13x!" Pure stupidity.

[wisowis]

...

This is a company I have really wanted to like for a long time, but could never get comfortable with it simply because there are others who do what they do, but are better at it. The investment decisions for the past decade have been atrocious. Off the top of my heads its what? BBRY, RFP, SHLD, VRX, SD... probably more that I am forgetting, all of which fit the same theme. Troubled companies, with mediocre management, and TONS OF DEBT. The results have been as expected given those things. Not only have these been heavily concentrated positions, but they've collectively shown poor judgment and demonstrated a lack of an ability to locate good investments in a fertile environment.

...

 

How big was their VRX position? I didn't know about that one...

[petec]

Lots of partial truths here! FWIW my view is that:

 

They didn't think the market was overvalued in 2010. Instead they made a macro call that a USA 1930's/Japan 1990s deflation was in the cards. They totally underestimated the power of printing fiat (as did I).

 

To say they didn't sow seeds for 7 years is false. They sowed a lot of them. The problem was that many of them didn't work. For every home run (e.g. Quess) there were two disasters (e.g. BBRY, Eurobank). This is partly, but by no means only, because they are value investors and value investing has been a nightmare for a long time.

 

In total they were more or less fully allocated to equity and also fully hedged. In other words they chose to keep their alpha but give away the market return, and then they generated negative alpha while the market took off. Oops.

 

Judging by the wholesale changeover in the investment team and the (somewhat) contrite tone of the last letter, some of these lessons might have been learned.

 

On the bond side they shot the lights out. The problem is that while there's a fairly deep bench on the equity investing side, on the bond side I don't think the team stretches much beyond Brian Bradstreet. Then again, I wonder if we give Bradstreet too much credit. He's been a phenomenal bond manager but I suspect some of the deflationary thinking that drove the equity hedges came from him.

 

In summary they’ve done nothing over the last 10 years to show that they can invest well on a sustained basis. You have to decide what the next 10 will look like. Do you like what they own now? Do you think they can turn the investing side around like they did the insurance side? (Worth remembering that in 2009 they had done nothing for over a decade to show that they could underwrite well. How that's changed…)

 

Prem has certainly given lots of people more power, partly I believe in response to growing discontent about the investing strategy. But I believe he is still very involved. If he is "semi-retired" please give evidence.

 

Prem is not handing over to his kids - yet. The kids have joined the board. They don't work at the firm or hold executive positions. It's clear Paul Rivett is the heir to the executive throne and there's also been a wholesale shakeup of the investing team that hasn't involved employing the kids. In short there's a generational management change going on which the kids aren't part of. The worrying bit is that when Prem dies his kids will get the multivoters (and if they've bought in a lot of shares like they promise, the multivoters will have even more power than they do today). As Prem gets older understanding how the kids will use that power will be very important, but I am very glad that they are on the board because they need a decade or so of watching how the company works before they get the votes.

 

At a deeper level FFH has an incredible bench of talent working for it and few people seem to leave. Every time they discuss an entity it seems to have someone impressive running it.

 

It's also worth remembering that the model of using float to lever equity works very well when you do it right. Fairfax have absolutely nailed the underwriting side in a way that few predicted 10 years ago. They've also completely ballsed up the investing side in a way that few predicted 10 years ago. I personally suspect one of those changes is permanent but the other isn't. That's partly because I think they're smart enough to change, and I hope the recent reorg of the investing team is evidence of this. It's also partly because I am starting to really like some of the individual positions they own.

 

They have the dividend because Prem is paid a pittance compared to similar executives (WR Berkeley cough cough). Plenty of people think they shouldn't pay one at all. I'd far rather have a CEO compensated primarily by dividends than by higher pay, because I am more aligned. But not growing the divi while BV wasn't growing much is a credit to Prem, not a failure.

 

FD: I am heavily long FFH and intend to remain so. Under the bonnet they've been building an impressive machine - huge and profitable underwriting platforms with the capital to grow plus an ever-growing bench of long term control equity positions including FIH, FAH, Recipe, and the private operations. Unfortunately they've also hidden that machine well with poor investing results and too much expensive financing at the holdco. But I like what they have built and, I like the current equity positions, and it is currently reasonably cheap. My biggest fear is that for this to really fly maybe you need higher rates and I don't see much of a pathway to that at the moment, although if jobs reports keep coming like the one earlier this week we might get there.

 

All that said, the argument that it is uninvestable has basis and is promulgated by intelligent people worth listening to. I happen to disagree but don't dismiss their arguments.

 

[Gregmal]

...

This is a company I have really wanted to like for a long time, but could never get comfortable with it simply because there are others who do what they do, but are better at it. The investment decisions for the past decade have been atrocious. Off the top of my heads its what? BBRY, RFP, SHLD, VRX, SD... probably more that I am forgetting, all of which fit the same theme. Troubled companies, with mediocre management, and TONS OF DEBT. The results have been as expected given those things. Not only have these been heavily concentrated positions, but they've collectively shown poor judgment and demonstrated a lack of an ability to locate good investments in a fertile environment.

...

 

How big was their VRX position? I didn't know about that one...

 

I don't recall specifically, and to be 100% forthright I could be thinking of Francis Chou(who seems to mirror Watsa with his portfolio quite a bit) but I'm pretty sure it was FFH, but maybe 1-2 years ago I saw VRX pop up in the filings. It wasn't anywhere near the top. Perhaps when VRX had crashed and was in the 30's or 40's. But the thing that stuck out for me was the pattern. WTF is the obsession with these heavily levered problem child companies? Like, you're bearish on everything; OK. I get it. But then what the heck are you doing allocating money to companies that look like this??? SD, BBRY, RFP, SSW.... Thats the whole portfolio betting on companies that more or less constitute the same sort of macro bet. You don't get home run turn arounds, if the broader market is, as you say it is(ie overvalued and headed towards chaos). That is what I've never been comfortable with. I am ok betting on managers who express differing views than me. I understand others have a circle of competence where I don't. But for the past decade, I can't reconcile the logic used for the FFH portfolio. It just hasn't made sense and the results have more or less been what I'd expect given how out there they are.

[petec]

...

This is a company I have really wanted to like for a long time, but could never get comfortable with it simply because there are others who do what they do, but are better at it. The investment decisions for the past decade have been atrocious. Off the top of my heads its what? BBRY, RFP, SHLD, VRX, SD... probably more that I am forgetting, all of which fit the same theme. Troubled companies, with mediocre management, and TONS OF DEBT. The results have been as expected given those things. Not only have these been heavily concentrated positions, but they've collectively shown poor judgment and demonstrated a lack of an ability to locate good investments in a fertile environment.

...

 

How big was their VRX position? I didn't know about that one...

 

I don't recall specifically, and to be 100% forthright I could be thinking of Francis Chou(who seems to mirror Watsa with his portfolio quite a bit) but I'm pretty sure it was FFH, but maybe 1-2 years ago I saw VRX pop up in the filings. It wasn't anywhere near the top. Perhaps when VRX had crashed and was in the 30's or 40's. But the thing that stuck out for me was the pattern. WTF is the obsession with these heavily levered problem child companies? Like, you're bearish on everything; OK. I get it. But then what the heck are you doing allocating money to companies that look like this??? SD, BBRY, RFP, SSW.... Thats the whole portfolio betting on companies that more or less constitute the same sort of macro bet. You don't get home run turn arounds, if the broader market is, as you say it is(ie overvalued and headed towards chaos). That is what I've never been comfortable with. I am ok betting on managers who express differing views than me. I understand others have a circle of competence where I don't. But for the past decade, I can't reconcile the logic used for the FFH portfolio. It just hasn't made sense and the results have more or less been what I'd expect given how out there they are.

 

I don't recall their investing in VRX so if you ever come across the filing again please post it.

 

I think you're being a but (bit arguably only a bit) simplistic in your characterisation. SD was a perfect example of what you're talking about, but was very popular as a value investment and hotly debated here as I recall. BBRY wasn't levered, it just got steamrollered by the iPhone which FFH underestmated badly. SSW only became an investment as it embarked on a dramatic deleveraging under a new and proven hard-asset management team.

 

The bottom line is that FFH are value investors. Sometimes they see value in fast growing companies (Quess) and sometimes its in great businsses at silly prices (Grivalia) but sometimes it's in levered junk at (what they think are) silly prices. By and large that third category hasn't worked for them in this cycle, partly because they chose the wrong horses and partly because value hasn't worked for a while. That doesn't mean it's all they do and beware detractors who focus solely on these losers. Equally, don't hope they will fill the portfolio with KO and WFC and JNJ and just sit there for years. I just don't think that's their style.

 

As to whether investing in levered junk while hedging the portfolio was contradictory, I'm not so sure. This is pure speculation but it's not entirely irrational to hedge your positions in case there's a collapse but to have some levered junk in case there isn't. You don't buy Eurobank if you think there's a deflationary collapse coming, but maybe you do if you feel you're fully hedged against a deflationary collapse and want some value exposure to its not happening. Equity hedge+deflation swaps+Eurobank could be viewed as a macro barbell. I have no idea if this is what they were thinking but it's not a daft framework. What it didn't give exposure to is the epic rerating of quality over the last decade despite (or because of) record margins, but that's unlikely to recur.

 

There is much to criticise in what FFH have done over the last decade, but it's also easy to oversimplify that criticism. My biggest criticism is actually that they are terrible communicators. Maybe that will change with Rivett doing the calls but it would be nice to get to a point where we don't spend ages debating what they meant when they said X or Y.

 

[rb]

Well I don't share Gremal's writing style, but he has a point. Yes, mistakes were made. But the type of mistakes matter. For example, Berkshire made a mistake when they bought IBM. They broke even for a few years on that capital. Fairfax shorted a massive bull market. Different sort of mistake. If they didn't think that stocks were expensive, then why short? That's not value investing.

 

Then there's the individual picks. Then there's the macro stuff. I agree that there was a macro case to be made in 2010 that you could have a replay of the 1930s, albeit in a lighter way. But if you're still thinking that in 2014, then you're no good at macro. So did they swear it off? Did they say never again? No. In fact, in my opinion it was shameful the way they took the shorts off. Oh Trump get elected, stocks are good value now. Yea, after the S&P did a 100% run which they shorted.

 

These were big mistakes which should raise serious questions about what they're doing. They can't just be brushed off. Are they still really good capital allocators?  Do I want my capital to be handled in this manner?

 

I'm not saying that they're uninvestible. But they're trading around book. Why would I buy them at book when I can buy BRK at 1.3x book? (yes I know both books need to be adjusted). How many fiascoes happened at BRK?

[rb]

I don't recall their investing in VRX so if you ever come across the filing again please post it.

I just took a quick look and I don't think they bought VRX. I think Gregmal may be confusing it with Chou whom I remember did buy VRX.

[petec]

Well I don't share Gremal's writing style, but he has a point. Yes, mistakes were made. But the type of mistakes matter. For example, Berkshire made a mistake when they bought IBM. They broke even for a few years on that capital. Fairfax shorted a massive bull market. Different sort of mistake. If they didn't think that stocks were expensive, then why short? That's not value investing.

 

Then there's the individual picks. Then there's the macro stuff. I agree that there was a macro case to be made in 2010 that you could have a replay of the 1930s, albeit in a lighter way. But if you're still thinking that in 2014, then you're no good at macro. So did they swear it off? Did they say never again? No. In fact, in my opinion it was shameful the way they took the shorts off. Oh Trump get elected, stocks are good value now. Yea, after the S&P did a 100% run which they shorted.

 

These were big mistakes which should raise serious questions about what they're doing. They can't just be brushed off. Are they still really good capital allocators?  Do I want my capital to be handled in this manner?

 

I'm not saying that they're uninvestible. But they're trading around book. Why would I buy them at book when I can buy BRK at 1.3x book? (yes I know both books need to be adjusted). How many fiascoes happened at BRK?

 

I agree with much of this and also own BRK (but smaller, for various reasons including the impact of geographic exposure on my overall portfolio which has a lot of US as it is). FWIW:

- the short wasn't value, it was macro, and I think they were pretty clear on why they did it.

- you're right they have a very mixed macro record. They got the CDS bet and much of the bond stuff right, but the equity hedge and deflation swaps wrong (both direction and especially sizing).

- removing the hedge was the right thing to do and for the right reason. They said Trump would unleash animal spirits and he did. Holding the hedge through 2900 on the S&P would have been disastrous. They took the long bonds off at the same time for the same reason, a decision which has been lauded on here. They did NOT say stocks were good value - in fact they said they still had worries about valuations, and bought almost no stocks, focussing instead on converts.

- I would add to your list of questions "have they learned?". It will be interesting to look back on the next decade.

 

I'm not defending them here. The errors have been gargantuan. I'm just trying to help make the critique more accurate.

 

[shalab]

FRFHF or FFH is mostly invested in the US - that is why they report their book value and dividend in USD. So you aren't getting more geo diversification by holding it.

 

Well I don't share Gremal's writing style, but he has a point. Yes, mistakes were made. But the type of mistakes matter. For example, Berkshire made a mistake when they bought IBM. They broke even for a few years on that capital. Fairfax shorted a massive bull market. Different sort of mistake. If they didn't think that stocks were expensive, then why short? That's not value investing.

 

Then there's the individual picks. Then there's the macro stuff. I agree that there was a macro case to be made in 2010 that you could have a replay of the 1930s, albeit in a lighter way. But if you're still thinking that in 2014, then you're no good at macro. So did they swear it off? Did they say never again? No. In fact, in my opinion it was shameful the way they took the shorts off. Oh Trump get elected, stocks are good value now. Yea, after the S&P did a 100% run which they shorted.

 

These were big mistakes which should raise serious questions about what they're doing. They can't just be brushed off. Are they still really good capital allocators?  Do I want my capital to be handled in this manner?

 

I'm not saying that they're uninvestible. But they're trading around book. Why would I buy them at book when I can buy BRK at 1.3x book? (yes I know both books need to be adjusted). How many fiascoes happened at BRK?

 

I agree with much of this and also own BRK (but smaller, for various reasons including the impact of geographic exposure on my overall portfolio which has a lot of US as it is). FWIW:

- the short wasn't value, it was macro, and I think they were pretty clear on why they did it.

- you're right they have a very mixed macro record. They got the CDS bet and much of the bond stuff right, but the equity hedge and deflation swaps wrong (both direction and especially sizing).

- removing the hedge was the right thing to do and for the right reason. They said Trump would unleash animal spirits and he did. Holding the hedge through 2900 on the S&P would have been disastrous. They took the long bonds off at the same time for the same reason, a decision which has been lauded on here. They did NOT say stocks were good value - in fact they said they still had worries about valuations, and bought almost no stocks, focussing instead on converts.

- I would add to your list of questions "have they learned?". It will be interesting to look back on the next decade.

 

I'm not defending them here. The errors have been gargantuan. I'm just trying to help make the critique more accurate.

[petec]

FRFHF or FFH is mostly invested in the US - that is why they report their book value and dividend in USD. So you aren't getting more geo diversification by holding it.

 

Including bonds you're right but unless rates rise bonds won't contribute much to the equity return. Incidentally that's why the float-levered equity model won't deliver the returns it did in the past. Having 3x your equity invested in bonds at a 7% return gave a great nominal return on equity. Not so much fun at 3%.

 

Their equities are global: India, Greece, Egypt, Canada, Africa, etc.

 

I suspect they report in USD less because of where they are invested and more because of where their insurance subs operate and are domiciled.

[John Hjorth]

... I don't recall their investing in VRX so if you ever come across the filing again please post it. ...

 

I'm just kicking in a footnote here. I looked up the FFH portfolio at Dataroma, using the "activity" button for Fairfax. [it would be like searching for a needle in a haystack that perhaps not was there to walk through the filings directly.] There is no sign of VRX for the FFH portfolio on Dataroma. So I think it's safe to say that FFH has not been long VRX in the last few years [after 2013 - VRX tanked in 2016].

 

Thank you for a great discussion in this forum [not only in this topic] about FFH lately, especially to Pete.

[StubbleJumper]

...

This is a company I have really wanted to like for a long time, but could never get comfortable with it simply because there are others who do what they do, but are better at it. The investment decisions for the past decade have been atrocious. Off the top of my heads its what? BBRY, RFP, SHLD, VRX, SD... probably more that I am forgetting, all of which fit the same theme. Troubled companies, with mediocre management, and TONS OF DEBT. The results have been as expected given those things. Not only have these been heavily concentrated positions, but they've collectively shown poor judgment and demonstrated a lack of an ability to locate good investments in a fertile environment.

...

 

How big was their VRX position? I didn't know about that one...

 

I don't recall specifically, and to be 100% forthright I could be thinking of Francis Chou(who seems to mirror Watsa with his portfolio quite a bit) but I'm pretty sure it was FFH, but maybe 1-2 years ago I saw VRX pop up in the filings. It wasn't anywhere near the top. Perhaps when VRX had crashed and was in the 30's or 40's. But the thing that stuck out for me was the pattern. WTF is the obsession with these heavily levered problem child companies? Like, you're bearish on everything; OK. I get it. But then what the heck are you doing allocating money to companies that look like this??? SD, BBRY, RFP, SSW.... Thats the whole portfolio betting on companies that more or less constitute the same sort of macro bet. You don't get home run turn arounds, if the broader market is, as you say it is(ie overvalued and headed towards chaos). That is what I've never been comfortable with. I am ok betting on managers who express differing views than me. I understand others have a circle of competence where I don't. But for the past decade, I can't reconcile the logic used for the FFH portfolio. It just hasn't made sense and the results have more or less been what I'd expect given how out there they are.

 

I don't recall their investing in VRX so if you ever come across the filing again please post it.

 

I think you're being a but (bit arguably only a bit) simplistic in your characterisation. SD was a perfect example of what you're talking about, but was very popular as a value investment and hotly debated here as I recall. BBRY wasn't levered, it just got steamrollered by the iPhone which FFH underestmated badly. SSW only became an investment as it embarked on a dramatic deleveraging under a new and proven hard-asset management team.

 

The bottom line is that FFH are value investors. Sometimes they see value in fast growing companies (Quess) and sometimes its in great businsses at silly prices (Grivalia) but sometimes it's in levered junk at (what they think are) silly prices. By and large that third category hasn't worked for them in this cycle, partly because they chose the wrong horses and partly because value hasn't worked for a while. That doesn't mean it's all they do and beware detractors who focus solely on these losers. Equally, don't hope they will fill the portfolio with KO and WFC and JNJ and just sit there for years. I just don't think that's their style.

 

As to whether investing in levered junk while hedging the portfolio was contradictory, I'm not so sure. This is pure speculation but it's not entirely irrational to hedge your positions in case there's a collapse but to have some levered junk in case there isn't. You don't buy Eurobank if you think there's a deflationary collapse coming, but maybe you do if you feel you're fully hedged against a deflationary collapse and want some value exposure to its not happening. Equity hedge+deflation swaps+Eurobank could be viewed as a macro barbell. I have no idea if this is what they were thinking but it's not a daft framework. What it didn't give exposure to is the epic rerating of quality over the last decade despite (or because of) record margins, but that's unlikely to recur.

 

There is much to criticise in what FFH have done over the last decade, but it's also easy to oversimplify that criticism. My biggest criticism is actually that they are terrible communicators. Maybe that will change with Rivett doing the calls but it would be nice to get to a point where we don't spend ages debating what they meant when they said X or Y.

 

 

They are terrible communicators?  Not on your life.  The communications has not been the problem at all.  The problem has been recurring corporate governance abuses and reckless investment practices. 

 

-they communicated very well each major chunk of BB that they acquired, they communicated that Prem was joining the board of directors, and they communicated that they were looking at a complete takeover of BB.  Nothing ambiguous here, they just took a recklessly large position size that FFH cannot easily exit.

 

-they communicated very well that they were re-weighting the multiple voting shares and, when it looked like it might fail, they communicated that they were taking a few extra weeks to twist the arms of a few institutional shareholders to ensure that they got enough votes.  There was nothing ambiguous here.  The only question that I have on my mind about this is whether they paid off any of the institution shareholders to make it happen (like the two-tiered share structure, paying off large shareholders for their vote is a crappy Canadian tradition).  There's been no declaration from Prem about whether any FFH resources were ever shifted to the large shareholders during or around the voting period.

 

-they communicated very well the hedging strategy, including the fact that their hedge ratio was 100%+.  Nothing ambiguous here, it was just very poor risk management.

 

-Prem communicated very clearly that his son would be added to the BoD, even though he would never be considered for a board position for any other Canadian company based on merit.  Then he did the same thing with Christine.  Nothing ambiguous here, it's just a couple of board positions being used up for unqualified family members who are beholden to their father for their future wealth.  They'll surely be able to effectively play the challenge function when their billions of inheritance is contingent on not pissing daddy off, right?

 

-Prem communicated clearly that a portion of FFH's portfolio would be hived off to be invested by his son's investment firm.  The details were scant, but the overall messaging was clear that daddy was creating a job for his son, irrespective of whether his son would ever be able to attract that type of capital on the basis of merit alone.

 

-FFH was very clear that it was spurning large cap value in plain sight (you know, it was stuff that was a dead easy way to make money?) in favour of throwing money into obscure, risky investments that are not easily exited.  There was no ambiguity, but that looks like a major unforced error.

 

 

No, I'd say that communication was generally pretty clear.  It was the decision making and integrity where I have issues.

 

 

SJ

[petec]

Heh, I wondered how long it would take you to react SJ ;)

 

Fair points all. My comment about communications is related to the fact that I’ve often had to go direct to the company to clarify comments made on calls etc, and often they didn’t mean what people on here thought they meant. By definition that’s bad communications.

 

Serious question to which I don’t know the answer: why is Howard Buffett qualified to be on the BRK board?

[StubbleJumper]

Heh, I wondered how long it would take you to react SJ ;)

 

Fair points all. My comment about communications is related to the fact that I’ve often had to go direct to the company to clarify comments made on calls etc, and often they didn’t mean what people on here thought they meant. By definition that’s bad communications.

 

Serious question to which I don’t know the answer: why is Howard Buffett qualified to be on the BRK board?

 

 

He isn't qualified to be on the BRK board.  That's a pipe-dream that WEB cooked up with the notion that it will perpetuate the BRK culture.  Nice dream, but IMO, that culture is toast after a couple of CEOs post-WEB.

 

 

SJ

[rb]

Heh, I wondered how long it would take you to react SJ ;)

 

Fair points all. My comment about communications is related to the fact that I’ve often had to go direct to the company to clarify comments made on calls etc, and often they didn’t mean what people on here thought they meant. By definition that’s bad communications.

 

Serious question to which I don’t know the answer: why is Howard Buffett qualified to be on the BRK board?

He isn't qualified to be on the BRK board.  That's a pipe-dream that WEB cooked up with the notion that it will perpetuate the BRK culture.  Nice dream, but IMO, that culture is toast after a couple of CEOs post-WEB.

 

SJ

Howard Buffett did serve on a number of boards over a 20 year period. Some of them Fortune 500 companies. But it still smells like nepotism. At least he won't be wielding a shitload of multiple voting shares as well.

[rb]

Well I don't share Gremal's writing style, but he has a point. Yes, mistakes were made. But the type of mistakes matter. For example, Berkshire made a mistake when they bought IBM. They broke even for a few years on that capital. Fairfax shorted a massive bull market. Different sort of mistake. If they didn't think that stocks were expensive, then why short? That's not value investing.

 

Then there's the individual picks. Then there's the macro stuff. I agree that there was a macro case to be made in 2010 that you could have a replay of the 1930s, albeit in a lighter way. But if you're still thinking that in 2014, then you're no good at macro. So did they swear it off? Did they say never again? No. In fact, in my opinion it was shameful the way they took the shorts off. Oh Trump get elected, stocks are good value now. Yea, after the S&P did a 100% run which they shorted.

 

These were big mistakes which should raise serious questions about what they're doing. They can't just be brushed off. Are they still really good capital allocators?  Do I want my capital to be handled in this manner?

 

I'm not saying that they're uninvestible. But they're trading around book. Why would I buy them at book when I can buy BRK at 1.3x book? (yes I know both books need to be adjusted). How many fiascoes happened at BRK?

 

I agree with much of this and also own BRK (but smaller, for various reasons including the impact of geographic exposure on my overall portfolio which has a lot of US as it is). FWIW:

- the short wasn't value, it was macro, and I think they were pretty clear on why they did it.

- you're right they have a very mixed macro record. They got the CDS bet and much of the bond stuff right, but the equity hedge and deflation swaps wrong (both direction and especially sizing).

- removing the hedge was the right thing to do and for the right reason. They said Trump would unleash animal spirits and he did. Holding the hedge through 2900 on the S&P would have been disastrous. They took the long bonds off at the same time for the same reason, a decision which has been lauded on here. They did NOT say stocks were good value - in fact they said they still had worries about valuations, and bought almost no stocks, focussing instead on converts.

- I would add to your list of questions "have they learned?". It will be interesting to look back on the next decade.

 

I'm not defending them here. The errors have been gargantuan. I'm just trying to help make the critique more accurate.

I wasn't trying to be inaccurate. Let me put it another way.

 

Thank God for shareholders that they took the shorts and the long bonds off. It saved them another world of pain. But I don't believe for one second their explanation. I think by that point they knew they screwed up and they just looked for a way to save face. If that was the case it was horrible behaviour.

 

If they really meant what they've said, then I really think that Fairfax is univestible. Because it means that they make investment decisions based on election results and feelings, not facts, figures, and rational thought.

[Spekulatius]

I can live with terrible Communication when the execution is good. Terrible execution with terrible communicsti9n however is a real problem.

 

FWIW, I own several insurance co. with decent underwriting, and they can do high single digit ROE currently with zero equity exposure. FFH has ~$4.6B in equity exposure (this has been flat over the years with ~$12.5B in equity (numbers are from memeory, so may be a bit off), that’s roughly 37% of their equity. I am guessing they can’t go higher, unless their stocks actually start to appreciate so the addition mal equity exposure becomes “House money”, and not necessary to support the insurance business statutory capital, like is the case with BRK.

[StubbleJumper]

Heh, I wondered how long it would take you to react SJ ;)

 

Fair points all. My comment about communications is related to the fact that I’ve often had to go direct to the company to clarify comments made on calls etc, and often they didn’t mean what people on here thought they meant. By definition that’s bad communications.

 

Serious question to which I don’t know the answer: why is Howard Buffett qualified to be on the BRK board?

He isn't qualified to be on the BRK board.  That's a pipe-dream that WEB cooked up with the notion that it will perpetuate the BRK culture.  Nice dream, but IMO, that culture is toast after a couple of CEOs post-WEB.

 

SJ

Howard Buffett did serve on a number of boards over a 20 year period. Some of them Fortune 500 companies. But it still smells like nepotism. At least he won't be wielding a shitload of multiple voting shares as well.

 

 

Well, more importantly, at BRK Charlie has been playing the role of providing the challenge function to ensure that WEB doesn't execute wacky ideas.  As a result, BRK has been managed well and conservatively.  In contrast, Prem very badly needs a board with strong external voices to tell him when he's being wacky.  Without that, Prem keeps rolling around in his little echo-chamber.

 

The other detail is that WEB owned more than 7% of the economic interest when Howard was appointed, and he didn't re-weight his multiple voting shares a year before engaging in nepotism.  In contrast, the Watsa family, which owns 7% of the economic interest, has three BoD positions.

 

Bad governance all around, but egregious in Prem's case.

 

 

SJ