FFH Flat in Bull Market

[Daphne]

Excellent analysis and IMO the critics sound more like trolls

[shalab]

I am fairly comfortable with Howard Buffett on the board as a BRK shareholder - his integrity is beyond reproach. He has been compared to his grand father and father in that respect. 

 

However, there is very little information available about Watsa kids. One shouldn't compare Berkshire and Fairfax.

 

I am certain some folks would be offended if one compares Watsa and Biglari. I dont believe any comparison exists between Fairfax and Biglari.

 

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

[Crip1]

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.

 

 

As a long-term shareholder, I feel your pain, completely. I do feel that the flat share performance over the past 4 years needs to be tempered to a certain extent by the understanding that share price does not necessarily follow intrinsic value. Taking a page from Buffet, intrinsic value does follow book value, more or less. From Y/E 2014 through the end of Q3 2018 (the last period for which we have measured Book Value) BV has increased just under 3.34%/year ($395/share to 451/share). Add the $10 divvy and you’re up to a little over 5.5%. Certainly not a compounding machine, and well behind the S&P 500, but certainly better than flat money.

 

-Crip

[Dazel]

 

It’s fair to criticize poor performance....with that comes the emotional disappointment of a falling stock price and often the reaction of humans  to kick a star when they are down. NO ONE should invest in something they don’t like or trust. Fairfax like all value investors have been hit by the new momentum driven central bank fueled asset market. I don’t think anyone would be happy at Greenlight capital these days...they likely would like more communication there too.

Equity selection on the whole has been bad fair enough....hedges are the worst bet I have ever seen in there result they had many chances to cash out gains and limit losses they did not. They are the past...but the past sensational bets that make Fairfax one of the top performing stocks over the last 30 years more than off set them.

What matters where are we headed? If you don’t trust Fairfax don’t buy the stock...and is ok to publically voice these opinions so good on everyone for posting.

 

I have a major concern and that is the issuance of stock as bonuses or compensation...I would like some clarification from Prem in his letter....when you don’t perform you should not get extra pay. I am comfortable with where they are and India will likely be a big win...Bradstreet once again dominated the bond market this year....looking forward to see what he is doing these days.

 

We will see what 2019 has in store...I would speculate it will be a very good year. That is my opinion and everyone else should make their own assessment.

 

If you have not been humbled by the stock market... then you have not been around long enough.

 

Cheers,

 

Dazel

[Viking]

 

It’s fair to criticize poor performance....with that comes the emotional disappointment of a falling stock price and often the reaction of humans  to kick a star when they are down. NO ONE should invest in something they don’t like or trust. Fairfax like all value investors have been hit by the new momentum driven central bank fueled asset market. I don’t think anyone would be happy at Greenlight capital these days...they likely would like more communication there too.

Equity selection on the whole has been bad fair enough....hedges are the worst bet I have ever seen in there result they had many chances to cash out gains and limit losses they did not. They are the past...but the past sensational bets that make Fairfax one of the top performing stocks over the last 30 years more than off set them.

What matters where are we headed? If you don’t trust Fairfax don’t buy the stock...and is ok to publically voice these opinions so good on everyone for posting.

 

I have a major concern and that is the issuance of stock as bonuses or compensation...I would like some clarification from Prem in his letter....when you don’t perform you should not get extra pay. I am comfortable with where they are and India will likely be a big win...Bradstreet once again dominated the bond market this year....looking forward to see what he is doing these days.

 

We will see what 2019 has in store...I would speculate it will be a very good year. That is my opinion and everyone else should make their own assessment.

 

If you have not been humbled by the stock market... then you have not been around long enough.

 

Cheers,

 

Dazel

 

Well said. I have stayed away from Fairfax for years because of different reasons. Today:

1.) their brand of value investing (more Ben Graham - cheap - than Buffett - cheapish quality)

2.) Prem is too promotional in communication

3.) extra cash will likely be used to buy back minority stakes in subs

4.) managements focus does not appear to be shareholders, but rather empire building

 

Having said all that, i do have Fairfax on a watch list. I am very impressed with the insurance side of the business they have built over the years. And yes, Bradstreet/bond investing has been very good.

[meiroy]

Fairfax like all value investors have been hit by the new momentum driven central bank fueled asset market.

 

Never invested in this company or followed it, but just by reading the last couple of pages it seemed they tried to time the market like some macro tourists. (read:  they are not value-investors.)  Is my understanding correct?

 

 

 

[Spekulatius]

Fairfax like all value investors have been hit by the new momentum driven central bank fueled asset market.

 

Never invested in this company or followed it, but just by reading the last couple of pages it seemed they tried to time the market like some macro tourists. (read:  they are not value-investors.)  Is my understanding correct?

 

Yes, they made a bet going long garbage and short the general market, which didn’t work out. They also had a deflationary macro view and did lose money on inflation bets. The latter are gone or worthless , as are the shorts on the general markets, but they are still long garbage and even adding to it (Seaspan). The latter may work out due to better protection and management (Sokol), but you know what they say when good management runs a bad business...

[Guest longinvestor]

A bet on FFH is a bet on Prem’s impulsiveness. It worked in 1987 and 2008. There was a wolf sighting both those times. The good thing since the last wolf sighting is that they are tending their sheep (insurance) better. Time will tell if they survive a pack of wolves (multiple insurable events).

[Gregmal]

A bet on FFH is a bet on Prem’s impulsiveness. It worked in 1987 and 2008. There was a wolf sighting both those times. The good thing since the last wolf sighting is that they are tending their sheep (insurance) better. Time will tell if they survive a pack of wolves (multiple insurable events).

 

This is kind of how I see that aspect of it as well. I could look at BRK and even without Buffett, say to myself, these are businesses I want to own. The primary reason I see most people investing in FFH is Watsa. Outside of that, as I said earlier, there isn't much, and even on the insurance side, there's better insurance related investments out there.

[petec]

Good discussion here. Apologies for the long post coming...

 

@SJ: you've been one of the most helpful commentators for me in honing my views on FFH - thanks. I've come to agree that the hedges were egregiously mis-sized (although I can't really criticise as I liked them at the time). On BB your analysis regarding an exit looks right to me - I suspect that's either a permanent holding for them or it gets sold outright. It's fair to debate whether they should enter positions they can't exit easily, but they do it quite consistently so it's just something you have to be happy with if you own the shares. I think they have an impressive record of using their influence to pick managers and build businesses so, with reservations, I am happy. I don't follow BBRY closely but I like what I see happening there at the moment.

 

As for the multivoters and kids on the board: I like family firms. Clearly they come with generational/handover risks but they can also eliminate agency issues. If you get a good family, you can do well. So far I like the Watsas. Prem doesn’t pay himself much except via dividends which benefit me too. He has built a hell of a platform, attracting and keeping great people which is hard if you're only working in your own interests. I like the emphasis on community involvement in the annual letters and I like the employee share purchase scheme which can help relatively junior employees amass lifechanging wealth. I like the fact that the kids don't work at the firm.  I dislike that Ben got money to manage without very clear disclosure on his record and fee - again communication is lacking - but beyond that I do not see much evidence that this company is run for the family rather than by it. I will be watching carefully to see if the kids have inherited the same traits. 

 

Given all that I like the control block, and therefore I don't mind that the control block was maintained by increasing the number of votes. You either like the control block or you don't. If you do, frankly, how many votes they have is irrelevant. If you don't then any multivoting structure should worry you.

 

I like the fact that the kids are on the board - frankly if they are not qualified then it's crucial that they're on the board and learning, if they are going to inherit the votes. There is no limit on the number of board seats so there's still room for good advisers/challengers and their presence does not make the board an echo chamber. The only improvement I'd suggest is that they shouldn’t have votes for 5 years but it's all rather academic given Prem's multivoting shares. More broadly, when I look at the quality of the people Prem attracts and retains I find it hard to believe they don't challenge him. As understand it the recent revamp of the investment team was partly due to discontent among the second generation, who now have more responsibility. That's not an echo chamber, that's a leadership team listening. That said, I accept something went badly wrong in the decision process re: sizing the hedges. That's a big bit of evidence in your favour, and it's important we hold them to their promise not to do it again.

 

Finally you mention spurning large cap value in plain sight. That's true, and I think they've recognised that failure (evidence: the comments in the last letter about how much the left on the table). They made an egregious error. I doubt they will make it again, if they get a similar opportunity. (As an aside I don't care much about that particular error. Ideally I want FFH mainly to do things I can't do myself, like providing the capital to turn SSW around on good terms or making private investments in India. Their failure to buy large cap value didn't affect my returns that much, because I owned plenty of large cap value directly. What did affect my returns is that they bought too many dogs and hedged a rising market.)

 

@RB: perhaps the just election was a face-saving excuse to remove the hedges, but I suspect the real explanation lies somewhere in the middle: the obvious failure of the hedges and the effectiveness of QE in preventing a depression was making them reassess their thinking anyway, and a tax-cutting, deregulating president was the final straw (not just an excuse). The idea that election results are somehow not investable facts, as you imply, seems odd to me. Politics dramatically impacts economics. Perhaps stock-picks shouldn’t be greatly impacted by politics but macro bets absolutely should be, and the hedges were a macro bet. I don't think the S&P would have gone to 2900 without the Trump tax cuts, although I could be wrong. Fairfax's thinking on this is entirely consistent: much of their investment in India was predicated on the idea that Modi's reforms would have a big economic impact, and they included similar factors in their analysis of Ireland and Greece and probably others. Incidentally, one risk that no-one has mentioned yet is that Modi does not win again in May.

 

@shalab - it's imperative to compare any investment to other businesses and if anyone takes offence all it will do is impede their learning.

 

@Dazel, I haven't got to the bottom of the share issuance but I believe it is at least partly related to the revamp of the investment team - newly senior people being given skin in the game. If so the devil is in the details: who got what, and why, and whether it is one-time or ongoing. Again better communication is in order - this should have been a key topic on the last call.

 

@meiroy, yes, they're value investors when it comes to picking stocks but with a macro-driven derivatives overlay historically which I suspect has at least partly come from their bond thinking where they have made very successful macro bets over time.

 

Incidentally, I am always struck by how much of the investing discussion focuses on Prem. Clearly he's highly influential. But if you read the letters and the history there are a lot of other people involved - Bradstreet, Lace, Rivett, Mitchell, Burton, etc. Some of those have stuck around a loooong time and people have regularly joined the team, which makes me think the atmosphere is reasonably collegiate - few self-respecting investors stick around if they're not being listened to and even fewer join a company that has that reputation.

[meiroy]

petec,

 

Thing is about timing the market (this includes going short) is that you have to be right ALL the time to make money in the long-term and there's only one Druckenmiller.  I have no idea if it is cheap enough to buy here, just a general comment.

 

[cwericb]

For years FFH were very good investors. But as insurers, not so great.

 

In recent years they have become quite good insurers.  But as investors, not so great.

 

I think there is a very good chance that they can put it all together going forward.

 

Senior staff of FFH have been around for a long time. They are not stupid and learn from their miscues.

[petec]

petec,

 

Thing is about timing the market (this includes going short) is that you have to be right ALL the time to make money in the long-term and there's only one Druckenmiller.  I have no idea if it is cheap enough to buy here, just a general comment.

 

True, but FWIW they don't time the market. They take macro bets. There's a difference. All of the CDS, equity hedge, and deflation bets were held for 6+ years. They took a view on what was going to happen, not so much when. They feared a depression. They weren't wrong about the timing, they were wrong about the probability of a depression in a fiat currency system.

[Gregmal]

I've never understood this style of shorting the market. It sounds like a good idea and is definitely sexier, but execution is quite difficult, and even then you are still basically timing things. It's quite interesting to look at many of the guys who became legends by shorting the housing crisis. Most of them haven't done too well since. Its not cuz they aren't smart or whatever, but rather the way they make their bets. I'd much rather just take the Tepper approach, where you shift your exposure. I think in mid 2009 he was levered like 3:1 at some point or something to that degree. Whereas when he's been bearish I've seen his portfolio at something like 40% equities. At least this way you still have something going for you if your macro views aren't playing out.

[petec]

I've never understood this style of shorting the market. It sounds like a good idea and is definitely sexier, but execution is quite difficult, and even then you are still basically timing things. It's quite interesting to look at many of the guys who became legends by shorting the housing crisis. Most of them haven't done too well since. Its not cuz they aren't smart or whatever, but rather the way they make their bets. I'd much rather just take the Tepper approach, where you shift your exposure. I think in mid 2009 he was levered like 3:1 at some point or something to that degree. Whereas when he's been bearish I've seen his portfolio at something like 40% equities. At least this way you still have something going for you if your macro views aren't playing out.

 

I agree. I think the FFH method works much better with things like the credit default and deflation swaps, where for a relatively limited outlay you generate an outsized return in a scenario the market thinks is improbable. That's the kind of hedge you can buy and sit with for a long time. We have bashed FFH for hedging equities and for the size of the bet, but I've often wondered whether they could have structured it as a cheap, deep out of the money index put option rather than a TRS.

[petec]

Incidentally while it may or may not be true that Prem's daughter Christine wouldn't get a board position at any other public company, she's Director of Research at Sprucegrove which has $20bn AUM and which appears to invest in exactly the kinds of stocks that the "why don't they just buy quality and hold forever?" crowd like.

[zippy1]

Incidentally while it may or may not be true that Prem's daughter Christine wouldn't get a board position at any other public company, she's Director of Research at Sprucegrove which has $20bn AUM and which appears to invest in exactly the kinds of stocks that the "why don't they just buy quality and hold forever?" crowd like.

;) ;) ;) ;)

Well Done!

[John Hjorth]

Holdings Channel : All Stocks Held By Sprucegrove Investment Management Ltd. as of September 30^th 2018.