Fairfax stock positions

[glider3834]

2 hours ago, petec said:

 

I think it is a bit too much to say Prem has been proven dead right. He spent much of the last few years saying things like Google and Amazon were overvalued. I don't think he was right and that's not the bubble that is bursting. The real bubble was in all the crap that was valued on P/S because there was no E, and that bubble formed and burst over the last 18 months. If Prem points to that as evidence that he is a sage, he will be being a little disingenuous.

Yes fair enough - I probably should have said

Speculative tech valuation bubble - i was thinking more about his Dec-20 interview where he pointed to valuations of ZM, SPOT, PTON

Edited February 24, 2022 by glider3834

[petec]

3 hours ago, nwoodman said:

Agree (1) It is more yield than duration, but potentially the beginning of the move out of “cash” . (2) I was thinking about your observation today too.  High probability that FFH keeps chipping away and ends up, at the very least, with a position size that leads to equity accounting.  If KW keeps buying back shares FFH might get their without any additional purchases after converting the warrants.  A possibility that is seven years out but consider it another placeholder.

 

Yes re both!

 

Fairfax has this "problem" with a number of holdings buying back shares - FIH, Stelco, RFP. The difference is I'd quite like to see them own KW outright as a platform for originating investments for their float. I was hoping Westaim and Arena might go that way too but it doesn't seem to be scaling.

[petec]

2 hours ago, glider3834 said:

Yes fair enough - I probably should have said

Speculative tech valuation bubble - i was thinking more about his Dec-20 interview where he pointed to valuations of ZM, SPOT, PTON

 

Yes, quite right.

 

[petec]

I'm expecting Prem to switch his Eurobank into Sberbank here 

[StubbleJumper]

56 minutes ago, petec said:

I'm expecting Prem to switch his Eurobank into Sberbank here 

 

Shhh!  Don't even suggest it!  That's the exact type of stinky investment that Prem seems to love.  Sometimes they work out, but it's usually five years or more of holding an unsaleable position before an exit opportunity arrives.

 

 

SJ

[petec]

1 hour ago, StubbleJumper said:

 

Shhh!  Don't even suggest it!  That's the exact type of stinky investment that Prem seems to love.  Sometimes they work out, but it's usually five years or more of holding an unsaleable position before an exit opportunity arrives.

 

 

SJ

Oh, don’t I know it.

[TwoCitiesCapital]

2 hours ago, petec said:

I'm expecting Prem to switch his Eurobank into Sberbank here 

 

I'd be lying if I said I hadn't considered it myself this AM. 

 

Instead, looking to take some profits from my call spreads on TLT and GLD once they expire tomorrow and will likely be adding on Monday.

 

Trying to temper this weird mix of excitement and nausea

[petec]

3 minutes ago, TwoCitiesCapital said:

Trying to temper this weird mix of excitement and nausea

so familiar!

[glider3834]

8 hours ago, petec said:

I'm expecting Prem to switch his Eurobank into Sberbank here 

lets hope not! Actually Fairfax added to their Eurobank stake in Q3 & took it to around 32%  - Eurobank sold off pretty hard today, along with other financial stocks in Europe & globally, but I think eventually things will settle down 

Edited February 24, 2022 by glider3834

[Xerxes]

17 hours ago, petec said:

 

I think it is a bit too much to say Prem has been proven dead right. He spent much of the last few years saying things like Google and Amazon were overvalued. I don't think he was right and that's not the bubble that is bursting. The real bubble was in all the crap that was valued on P/S because there was no E, and that bubble formed and burst over the last 18 months. If Prem points to that as evidence that he is a sage, he will be being a little disingenuous.

 

+1 well said,

 

To be a bear in the tech-growth names, one must first have been a bull in the them at the certain point in time, IMHO.

This is not his arena (and never will be) and that is totally fine. 

 

 

[Viking]

2 hours ago, Xerxes said:

 

+1 well said,

 

To be a bear in the tech-growth names, one must first have been a bull in the them at the certain point in time, IMHO.

This is not his arena (and never will be) and that is totally fine. 

What is much more important to me is what Fairfax is actually doing with its investment decisions. And its track record, in aggregate, the past 4-5 years has been stellar. Just look at the 2 decisions so far this year:

1.) Fairfax India - US$65 million

- 5.4 million shares at US$12/share (0.61 x BV)

- increases Fairfax ownership of Fairfax India to 41.8%

- BV of Fairfax India at Dec 31 = $19.65/share

2.) Kennedy Wilson

- US$300 million perpetual preferred equity. Dividend = 4.75% = $14.25 million per year

- increase in first mortgage debt platform by $3 billion (from $2 to $5 billion). If this earns Fairfax an incremental 2% = $60 million increase in interest income once funds are fully deployed. Incremental 3% = $90 million per year. (Anyone have thoughts of what rate will be earned here?)

- 7 year warrants for 13 million KW shares at a very reasonable strike price of $23 (about where shares are trading today)

 

Both investments are with long term partners. Fairfax India is a classic value purchase; expanding ownership of a business they already control and own a significant stake in at a remarkably low price (0.6 x BV). Very low risk and high return. The investment in Kennedy Wilson is expanding a long standing, very profitable and very successful partnership in a meaningful way. Significantly expands Fairfax’s investment portfolios exposure to real estate which is in the sweet spot right now (as an asset class). Low risk and solid return.

The Fairfax India purchase looks like a solid single (given its small size). The much larger Kennedy Wilson investment looks like a solid triple. Great investment decisions for Fairfax shareholders that build on the solid body of work we have been seeing for years now.

Edited February 25, 2022 by Viking

[Xerxes]

Viking

 

agreed on value creation. BUT

 

this is like me getting a house, doing all kind of interesting renovation on it, adding value. But the house (with my taste of value-add) at the end needs to “valued” in the market place by the greater community (and my personal taste are irrelevant).  
 

for better or worse. A lot of value has been created in FIH, but “marketplace” has not cared for that structure. And this is not about not seeing a mispricing or etc.

 

Prem hides it behind value being shunned away (disagree both Apple and MSFT were value trade 5-6 years ago), I say if you change the “menu” at your Restaurent you can get more customer. 

 

the only reason why I am still in FIH is the belief that the man who built a $15+ billion franchise knows more than me about the “Restaurent” business. 
 

[Parsad]

20 hours ago, petec said:

 

I think it is a bit too much to say Prem has been proven dead right. He spent much of the last few years saying things like Google and Amazon were overvalued. I don't think he was right and that's not the bubble that is bursting. The real bubble was in all the crap that was valued on P/S because there was no E, and that bubble formed and burst over the last 18 months. If Prem points to that as evidence that he is a sage, he will be being a little disingenuous.

 

From March 2021 Letter to Shareholders:

 

Last year at this time, it looked like the long drought in value investing was coming to an end. For the decade ended December 2019, value-oriented stocks had the worst ever relative decade versus growth stocks (particularly tech stocks) over the last 100 years. And then COVID-19 hit, and the NASDAQ went up 44% in 2020. The divergence in 2020 was the worst ever in a single year as the spread between growth and value indices averaged between 20 and 30 percentage points. Jeremy Grantham documents this well in his article ‘‘Waiting for the Last Dance’’. IPOs (including SPACs) in 2020 were back to the records set in 1999.

 

Current market conditions remind me of the phrase ‘‘Renaissance of Value’’, the title of a talk Ben Graham gave in 1974 after the demise of the Nifty Fifty – the growth stocks in the late 1960s and early 1970s that sold at P/Es of 50 - 100 times and higher – before they crashed in 1974, after which most never saw their 1972 highs for the next 15+ years. As Ben predicted, value stocks did extremely well over the next two decades.

 

More recently, we had the dot.com boom which peaked in 1999/2000. Many of you will remember Microsoft selling at $60 per share or 170x earnings in December 1999. A year later, in spite of record earnings, Microsoft was down 65%. It took Microsoft 16 years before it saw $60 again. Today, Microsoft sells at more than $234 (40 times earnings) as earnings have increased 16 times since 1999.

 

Cisco peaked on March 27, 2000 at $80 per share at 181 times earnings. One year later, it was down 80%. Today, 20 years later, Cisco still sells at $45 per share (16 times earnings), never having seen $80 again. This, in spite of earnings today being 6 times what they were in 1999.

 

Which brings us to the current period. Just recently, the FAANG stocks accounted for 25% of the S&P500 – never before have five stocks dominated the S&P500 index to that extent. Technology now accounts for about 40% of the S&P500 – a record only last seen in the dot.com era (37%).

 

Zoom had a market value of $130 billion – yes, $130 billion, with revenues of $2.7 billion. Shopify has a market cap in excess of Royal Bank even though Royal Bank earns more money annually than Shopify has revenue. Peloton has a market cap of $40 billion, Pinterest of $50 billion – companies which recently have gone public! And bitcoin hit $53,000 – a market value of $1 trillion – and I thought it was expensive at $19,000 in 2017. Massive speculation! And I can go on and on! As in the past, this will end - and it will not be pretty!

 

In March 2020, because of COVID-19, the whole world was shut down – more than 180 countries closed their economies, something that has never happened before! Because of testing, therapies and more recently, very effective vaccines, the world can see normalcy returning. This is the environment in which value stocks will thrive. We feel our best investing days are ahead of us.

 

Inflation and interest rates have been going down from the early 1980s – we may well have forgotten that they can go up, sometimes quickly and significantly. 10-year treasury rates have gone up from a historical low of 0.5% in 2020 to 1.5% recently. With high savings rates and significant pent up demand combined with U.S. President Biden’s potential $1.9 trillion fiscal stimulus plan, we may see inflation and interest rates rise significantly. As I write this to you, commodity prices, especially copper, have gone up almost to decade highs. From current levels, a 100 basis point increase in rates for a 10-year treasury bond and a 30-year treasury bond results in a 9% and 22% decrease in the price of those bonds. These are very significant risks that we have reduced by having an average bond maturity of less than five years. For bond investors: caveat emptor!

 

Very few people have been correct in every decade...Buffett is one of a very small number that probably could be counted on one hand.  But I'm not sure Prem got anything wrong in the above excerpt, and very few were as right as him between then and now about so many things, and just about every critical period since 1985...Japan Crisis, Tech Bubble, Housing Crisis, SPACs/Crypto/Tech Stocks!

 

Who on this message board has held Amazon since 2000?  I'm probably one of a handful of people who held Overstock.com (an online retail business and early competitor to Amazon) on and off since 2002...and I did not imagine Bezos taking Amazon to the highs he has.  In fact, while Amazon's retail business is a juggernaut, it's really its AWS business that allowed it to scale profitably from 2005 on, while pouring all of the retail money back into the business.

 

So many on this message board read and knew about Google emulating Buffett's Owner's Manual just before its IPO, yet who invested in the Google IPO in 2004 and held their shares?  Ahhhh, no one on this message board!

 

My friend who knows very little about stocks, other than what she watches on Jim Cramer's show, was smart enough to buy a ton of Apple at about $16 pre-split and never sell...is she some sort of sage?  Nope!  Just damn lucky!

 

I know of very few people who actually got things right over the last 20 years.  Cheers!

[Viking]

17 minutes ago, Xerxes said:

Viking

 

agreed on value creation. BUT

 

this is like me getting a house, doing all kind of interesting renovation on it, adding value. But the house (with my taste of value-add) at the end needs to “valued” in the market place by the greater community (and my personal taste are irrelevant).  
 

for better or worse. A lot of value has been created in FIH, but “marketplace” has not cared for that structure. And this is not about not seeing a mispricing or etc.

 

Prem hides it behind value being shunned away (disagree both Apple and MSFT were value trade 5-6 years ago), I say if you change the “menu” at your Restaurent you can get more customer. 

 

the only reason why I am still in FIH is the belief that the man who built a $15+ billion franchise knows more than me about the “Restaurent” business. 

Xerxes, what i REALLY CARE ABOUT is what Fairfax is actually doing. With the levers that are IN THEIR CONTROL. 
 

I would love for Mr Market to agree with me (and drive Fairfax’s share price to at least BV = US$630). But Mr Market is not there YET. It took Fairfax years to damage its reputation. So my guess is it could take a couple years to re-build. And as a shareholder i am ok with that because that is somewhat out of Fairfax’s control today.
 

With my analysis of Fairfax i am mostly focussed on the decisions they are making today/recent years, what earnings will be this year and what earnings will likely be in the next couple of years. Fairfax delivered in 2021. If it delivers in 2022 and 2023 then at some point Mr Market will get back on the train. The timing is impossible to predict. 

Edited February 25, 2022 by Viking

[Parsad]

I would also say that the reason no one got it right over the last 20 years is because of the distortions monetary policy created.  Those that got the tech bubble and housing crisis right, didn't get it right from 2015-2020...so many, Prem, Rosenberg, Grantham, Klarman, Gundlach...pretty much every hard-core distressed investor.  They expected continued fallout and a full blown correction, but monetary policy refueled the bubble.  Those that missed the tech wreck and housing crisis, were generally non-value investors and got the growth aspect correct.  

 

Then came the pandemic and really no one other than perhaps Bill Gates and Steven Soderbergh saw that coming!  Again, many missed the reinflation trade with all of the money pouring in from governments.  And growth investors all bought into crypto, SPAC's, meme stocks, pandemic winners, etc.  Those that were fat on the hog on those investments, completely missed the coming correction.  Cheers! 

[petec]

1 hour ago, Parsad said:

 

From March 2021 Letter to Shareholders:

 

Last year at this time, it looked like the long drought in value investing was coming to an end. For the decade ended December 2019, value-oriented stocks had the worst ever relative decade versus growth stocks (particularly tech stocks) over the last 100 years. And then COVID-19 hit, and the NASDAQ went up 44% in 2020. The divergence in 2020 was the worst ever in a single year as the spread between growth and value indices averaged between 20 and 30 percentage points. Jeremy Grantham documents this well in his article ‘‘Waiting for the Last Dance’’. IPOs (including SPACs) in 2020 were back to the records set in 1999.

 

Current market conditions remind me of the phrase ‘‘Renaissance of Value’’, the title of a talk Ben Graham gave in 1974 after the demise of the Nifty Fifty – the growth stocks in the late 1960s and early 1970s that sold at P/Es of 50 - 100 times and higher – before they crashed in 1974, after which most never saw their 1972 highs for the next 15+ years. As Ben predicted, value stocks did extremely well over the next two decades.

 

More recently, we had the dot.com boom which peaked in 1999/2000. Many of you will remember Microsoft selling at $60 per share or 170x earnings in December 1999. A year later, in spite of record earnings, Microsoft was down 65%. It took Microsoft 16 years before it saw $60 again. Today, Microsoft sells at more than $234 (40 times earnings) as earnings have increased 16 times since 1999.

 

Cisco peaked on March 27, 2000 at $80 per share at 181 times earnings. One year later, it was down 80%. Today, 20 years later, Cisco still sells at $45 per share (16 times earnings), never having seen $80 again. This, in spite of earnings today being 6 times what they were in 1999.

 

Which brings us to the current period. Just recently, the FAANG stocks accounted for 25% of the S&P500 – never before have five stocks dominated the S&P500 index to that extent. Technology now accounts for about 40% of the S&P500 – a record only last seen in the dot.com era (37%).

 

Zoom had a market value of $130 billion – yes, $130 billion, with revenues of $2.7 billion. Shopify has a market cap in excess of Royal Bank even though Royal Bank earns more money annually than Shopify has revenue. Peloton has a market cap of $40 billion, Pinterest of $50 billion – companies which recently have gone public! And bitcoin hit $53,000 – a market value of $1 trillion – and I thought it was expensive at $19,000 in 2017. Massive speculation! And I can go on and on! As in the past, this will end - and it will not be pretty!

 

In March 2020, because of COVID-19, the whole world was shut down – more than 180 countries closed their economies, something that has never happened before! Because of testing, therapies and more recently, very effective vaccines, the world can see normalcy returning. This is the environment in which value stocks will thrive. We feel our best investing days are ahead of us.

 

Inflation and interest rates have been going down from the early 1980s – we may well have forgotten that they can go up, sometimes quickly and significantly. 10-year treasury rates have gone up from a historical low of 0.5% in 2020 to 1.5% recently. With high savings rates and significant pent up demand combined with U.S. President Biden’s potential $1.9 trillion fiscal stimulus plan, we may see inflation and interest rates rise significantly. As I write this to you, commodity prices, especially copper, have gone up almost to decade highs. From current levels, a 100 basis point increase in rates for a 10-year treasury bond and a 30-year treasury bond results in a 9% and 22% decrease in the price of those bonds. These are very significant risks that we have reduced by having an average bond maturity of less than five years. For bond investors: caveat emptor!

 

Very few people have been correct in every decade...Buffett is one of a very small number that probably could be counted on one hand.  But I'm not sure Prem got anything wrong in the above excerpt, and very few were as right as him between then and now about so many things, and just about every critical period since 1985...Japan Crisis, Tech Bubble, Housing Crisis, SPACs/Crypto/Tech Stocks!

 

Who on this message board has held Amazon since 2000?  I'm probably one of a handful of people who held Overstock.com (an online retail business and early competitor to Amazon) on and off since 2002...and I did not imagine Bezos taking Amazon to the highs he has.  In fact, while Amazon's retail business is a juggernaut, it's really its AWS business that allowed it to scale profitably from 2005 on, while pouring all of the retail money back into the business.

 

So many on this message board read and knew about Google emulating Buffett's Owner's Manual just before its IPO, yet who invested in the Google IPO in 2004 and held their shares?  Ahhhh, no one on this message board!

 

My friend who knows very little about stocks, other than what she watches on Jim Cramer's show, was smart enough to buy a ton of Apple at about $16 pre-split and never sell...is she some sort of sage?  Nope!  Just damn lucky!

 

I know of very few people who actually got things right over the last 20 years.  Cheers!

 

I agree with all of this, but "it's hard to be right" doesn't change the fact that Prem has been wrong to call a bubble in high quality big tech names over the last 5-6 years. I am not criticising him for not owning the stocks. But the point is he said repeatedly and loudly that they were overvalued, and I am not sure history has or will prove him right on that.

 

He also called out a bubble in lower quality Covid-beneficiary smaller cap tech names in 2021, and was right to do so. Props to him there.

 

All I am saying is that if he conflates these two and declares overall victory, he's being a bit naughty in my view. 

[petec]

1 hour ago, Parsad said:

I would also say that the reason no one got it right over the last 20 years is because of the distortions monetary policy created. 

 

I agree with your point but not your wording. 

 

Monetary policy has dominated 5-10 year returns over the last 20 years but then if you look back 200 years, I think it always does, and in that sense it is not a distortion but a fundamental part of investing. One could equally stand at the bottom in 1933 and say, well, the reason I lost 90% of my money was distortions in monetary policy.

 

It took me a long time to come to this view, and I'm not criticising anyone here, or saying it's easy. 

[Viking]

2 hours ago, Parsad said:

I would also say that the reason no one got it right over the last 20 years is because of the distortions monetary policy created.  Those that got the tech bubble and housing crisis right, didn't get it right from 2015-2020...so many, Prem, Rosenberg, Grantham, Klarman, Gundlach...pretty much every hard-core distressed investor.  They expected continued fallout and a full blown correction, but monetary policy refueled the bubble.  Those that missed the tech wreck and housing crisis, were generally non-value investors and got the growth aspect correct.  

 

Then came the pandemic and really no one other than perhaps Bill Gates and Steven Soderbergh saw that coming!  Again, many missed the reinflation trade with all of the money pouring in from governments.  And growth investors all bought into crypto, SPAC's, meme stocks, pandemic winners, etc.  Those that were fat on the hog on those investments, completely missed the coming correction.  Cheers! 

I agree the Fed has completely changed the investing landscape the past 10 years (follow what they are doing with liquidity…). Druckenmiller is another super smart investor who openly says what the Fed has been doing the past 10 years has completely messed with his old methods. 
 

But is also think Fairfax’s terrible recent performance (7 years worth) was largely self inflicted:

1.) short strategy which cost it $450 million per year on average for 7 straight years finally ending in 2020 (CPI bet also cost about additional $50 million per year over same time period). 

2.) prior to 2018 Fairfax made a lot of poor equity purchases (not all but far too many). And they usually doubled down on these poor purchases (buying more ‘cheaper’ shares, restructurings, take private deals etc). So the many poor equity purchases were another drain on Fairfax’s cash resources for many years (right up to present).

 

But something happened in 2018 and in the years since. Fairfax has been making much, much better decisions with new equity purchases. 2018 is going to go down as a best ever year for Fairfax (kind of like analyzing draft years for a sports team): Digit, Seaspan, Stelco, Carillion Canada - now Dexterra, Toys R US. And the decisions (draft picks) in the years since have been good. TRS on FFH in 2021 being a great recent example. (So the team is very well stocked with young, high-end talent.) And over the past 4 years Fairfax has fixed most of the problem equity holdings they had at the start of 2018. (Lots of players from the old team have been let go and lots of those that remain have had their careers rejuvenated.)
 

And that is why i like to refer to Fairfax 2018 and after as the ‘new Fairfax’. It is simply amazing the turnaround they have engineered in dramatically improving the quality of their equity portfolio the past 4 years. I think they are using changed/new, better methodologies when allocating capital. 2021 was a stellar year for equity returns for Fairfax. And shareholders should see much better results from the equity investments in the coming years… as ‘time is the friend of the wonderful business’. (Team Fairfax is, once again, ready to play at a championship level.)

—————

‘Old (bad) Fairfax’: Cara (2013), Reitmans (2013), Torstar (2014), EXCO Resouces (2014), Eurobank (2015), APR (2015), Fairfax Africa (2016), Farmers Edge (2016), Mosaic (2016), Chorus (2016), AGT (2017)

 

Edited February 25, 2022 by Viking

[petec]

1 hour ago, Viking said:

I agree the Fed has completely changed the investing landscape the past 10 years (follow what they are doing with liquidity…). Druckenmiller is another super smart investor who openly says what the Fed has been doing the past 10 years has completely messed with his old methods. 
 

But is also think Fairfax’s terrible recent performance (7 years worth) was largely self inflicted:

1.) short strategy which cost it $450 million per year on average for 7 straight years finally ending in 2020 (CPI bet also cost about additional $50 million per year over same time period). 

2.) prior to 2018 Fairfax made a lot of poor equity purchases (not all but far too many). And they usually doubled down on these poor purchases (buying more ‘cheaper’ shares, restructurings, take private deals etc). So the many poor equity purchases were another drain on Fairfax’s cash resources for many years (right up to present).

 

But something happened in 2018 and in the years since. Fairfax has been making much, much better decisions with new equity purchases. 2018 is going to go down as a best ever year for Fairfax (kind of like analyzing draft years for a sports team): Digit, Seaspan, Stelco, Carillion Canada - now Dexterra, Toys R US. And the decisions (draft picks) in the years since have been good. TRS on FFH in 2021 being a great recent example. (So the team is very well stocked with young, high-end talent.) And over the past 4 years Fairfax has fixed most of the problem equity holdings they had at the start of 2018. (Lots of players from the old team have been let go and lots of those that remain have had their careers rejuvenated.)
 

And that is why i like to refer to Fairfax 2018 and after as the ‘new Fairfax’. It is simply amazing the turnaround they have engineered in dramatically improving the quality of their equity portfolio the past 4 years. I think they are using changed/new, better methodologies when allocating capital. 2021 was a stellar year for equity returns for Fairfax. And shareholders should see much better results from the equity investments in the coming years… as ‘time is the friend of the wonderful business’. (Team Fairfax is, once again, ready to play at a championship level.)

—————

‘Old (bad) Fairfax’: Cara (2013), Reitmans (2013), Torstar (2014), EXCO Resouces (2014), Eurobank (2015), APR (2015), Fairfax Africa (2016), Farmers Edge (2016), Mosaic (2016), Chorus (2016), AGT (2017)

 

 

I think this take is largely wrong.

 

First, the reasons the shorts didn't work and Fairfax's type of value investing didn't work has a lot to do with monetary policy, so I think Parsad's point stands.

 

Second, a lot of the equity holdings that you're so excited about are the same ones, or the same type of ones, that didn't work for so long. What has changed is the cycle. Stelco had exceptional pricing. RFP had exceptional pricing. Atlas had a once in a generation opportunity to deploy capital after issuing a lot of shares to fix its balance sheet. Eurobank has finally worked through its NPL issues and Greece has finally got a pro-market government. Exco is still there and may well bounce back on higher oil & gas pricing.

 

So the fundamentals, and the extent to which the market cares about value stocks, have changed. Fairfax's style of investing has not changed. I think they have got better at it - I think Stelco's management and balance sheet when Fairfax bought in were better than Resolute's were, for example, although even that is a false comparison because Fairfax initially bought Resolute debt - but you're not seeing Fairfax dump its value investments in favour of putting $2bn in Google. Even Digit is not indicative of new thinking on Fairfax's part - what they are doing in building Digit from scratch is exactly the same as what they did building ICICI Lombard from scratch.

 

What has changed is the cycle.

 

EDIT: for evidence, go back and look at comments on here when Fairfax bought Seaspan and Stelco. It was all "oh, God, more of the same, I really wish Prem would stop buying cyclical crap and buy high quality compounders". This has changed (somewhat) because the fortunes of the cyclical businesses have changed (for now).

 

 

Edited February 25, 2022 by petec

[Xerxes]

5 hours ago, Parsad said:

I would also say that the reason no one got it right over the last 20 years is because of the distortions monetary policy created.  Those that got the tech bubble and housing crisis right, didn't get it right from 2015-2020...so many, Prem, Rosenberg, Grantham, Klarman, Gundlach...pretty much every hard-core distressed investor.  They expected continued fallout and a full blown correction, but monetary policy refueled the bubble.  Those that missed the tech wreck and housing crisis, were generally non-value investors and got the growth aspect correct.  

 

Then came the pandemic and really no one other than perhaps Bill Gates and Steven Soderbergh saw that coming!  Again, many missed the reinflation trade with all of the money pouring in from governments.  And growth investors all bought into crypto, SPAC's, meme stocks, pandemic winners, etc.  Those that were fat on the hog on those investments, completely missed the coming correction.  Cheers! 

basically, none of them had a nimble mind. 

their bearish-biased served them well in ‘08 (eventually they were right) but ruined them for the next 10 years. 
 

and those with bullish-biased (were eventually right), but the rug got pulled under them even as they reached out into the heaven and grasp for Dow 45,000
 

While Buffett made money in most of the cycles. 

[gary17]

6 hours ago, Viking said:

I agree the Fed has completely changed the investing landscape the past 10 years (follow what they are doing with liquidity…). Druckenmiller is another super smart investor who openly says what the Fed has been doing the past 10 years has completely messed with his old methods. 
 

But is also think Fairfax’s terrible recent performance (7 years worth) was largely self inflicted:

1.) short strategy which cost it $450 million per year on average for 7 straight years finally ending in 2020 (CPI bet also cost about additional $50 million per year over same time period). 

2.) prior to 2018 Fairfax made a lot of poor equity purchases (not all but far too many). And they usually doubled down on these poor purchases (buying more ‘cheaper’ shares, restructurings, take private deals etc). So the many poor equity purchases were another drain on Fairfax’s cash resources for many years (right up to present).

 

But something happened in 2018 and in the years since. Fairfax has been making much, much better decisions with new equity purchases. 2018 is going to go down as a best ever year for Fairfax (kind of like analyzing draft years for a sports team): Digit, Seaspan, Stelco, Carillion Canada - now Dexterra, Toys R US. And the decisions (draft picks) in the years since have been good. TRS on FFH in 2021 being a great recent example. (So the team is very well stocked with young, high-end talent.) And over the past 4 years Fairfax has fixed most of the problem equity holdings they had at the start of 2018. (Lots of players from the old team have been let go and lots of those that remain have had their careers rejuvenated.)
 

And that is why i like to refer to Fairfax 2018 and after as the ‘new Fairfax’. It is simply amazing the turnaround they have engineered in dramatically improving the quality of their equity portfolio the past 4 years. I think they are using changed/new, better methodologies when allocating capital. 2021 was a stellar year for equity returns for Fairfax. And shareholders should see much better results from the equity investments in the coming years… as ‘time is the friend of the wonderful business’. (Team Fairfax is, once again, ready to play at a championship level.)

—————

‘Old (bad) Fairfax’: Cara (2013), Reitmans (2013), Torstar (2014), EXCO Resouces (2014), Eurobank (2015), APR (2015), Fairfax Africa (2016), Farmers Edge (2016), Mosaic (2016), Chorus (2016), AGT (2017)

 

 

Would Allied World be considered a good purchase?  just curious...

[petec]

2 hours ago, gary17 said:

 

Would Allied World be considered a good purchase?  just curious...

 

Personally I think it is too early to say. I know that sounds ridiculous but it has sometimes taken FFH years to get acquired insurance subsidiaries right, but when they get there, they can be super-valuable.

[TwoCitiesCapital]

8 hours ago, petec said:

 

I think this take is largely wrong.

 

First, the reasons the shorts didn't work and Fairfax's type of value investing didn't work has a lot to do with monetary policy, so I think Parsad's point stands.

 

Second, a lot of the equity holdings that you're so excited about are the same ones, or the same type of ones, that didn't work for so long. What has changed is the cycle. Stelco had exceptional pricing. RFP had exceptional pricing. Atlas had a once in a generation opportunity to deploy capital after issuing a lot of shares to fix its balance sheet. Eurobank has finally worked through its NPL issues and Greece has finally got a pro-market government. Exco is still there and may well bounce back on higher oil & gas pricing.

 

So the fundamentals, and the extent to which the market cares about value stocks, have changed. Fairfax's style of investing has not changed. I think they have got better at it - I think Stelco's management and balance sheet when Fairfax bought in were better than Resolute's were, for example, although even that is a false comparison because Fairfax initially bought Resolute debt - but you're not seeing Fairfax dump its value investments in favour of putting $2bn in Google. Even Digit is not indicative of new thinking on Fairfax's part - what they are doing in building Digit from scratch is exactly the same as what they did building ICICI Lombard from scratch.

 

What has changed is the cycle.

 

EDIT: for evidence, go back and look at comments on here when Fairfax bought Seaspan and Stelco. It was all "oh, God, more of the same, I really wish Prem would stop buying cyclical crap and buy high quality compounders". This has changed (somewhat) because the fortunes of the cyclical businesses have changed (for now).

 

 

 

+1 

[Parsad]

10 hours ago, petec said:

 

I agree with your point but not your wording. 

 

Monetary policy has dominated 5-10 year returns over the last 20 years but then if you look back 200 years, I think it always does, and in that sense it is not a distortion but a fundamental part of investing. One could equally stand at the bottom in 1933 and say, well, the reason I lost 90% of my money was distortions in monetary policy.

 

It took me a long time to come to this view, and I'm not criticising anyone here, or saying it's easy. 

 

Not quite accurate.  The level of monetary and fiscal manipulation implemented using modern economic theory has been extraordinary during the last 20 years since the beginning of the tech bubble and well into the pandemic.  Outside of Japan during the 90's and early 2000's, the level of manipulation of interest rates and capital injections, alongside completely unprecedented asset purchases used since the housing bubble crash...all of this was done for the first time. 

 

We don't understand the distortions this created or the massive bubbles (3 times) in 20 years we have been exposed to.  Sure, some of us have benefited from these rapid cycles, but no one has experienced this before.  This is not dissimilar to when interest rates spiked in the late 70's and early 80's...outlier events and the eventual unpredictable outcome...except in hindsight.  And I think that's where alot of the reflection of Prem is coming from...hindsight!  I don't know of a single investor on this message board that got it right over the last 20 years.  Even Buffett didn't get it completely right. 

 

Were there mistakes?  Absolutely...shorting, lack of quality targets, etc.  Were there winners?  Also for sure.  Could they have done better?  Well, let's measure that over periods...the last 10 weren't good...let's see how those numbers change progressively over the next 5 years.  Cheers!  

[Parsad]

8 hours ago, petec said:

 

I think this take is largely wrong.

 

First, the reasons the shorts didn't work and Fairfax's type of value investing didn't work has a lot to do with monetary policy, so I think Parsad's point stands.

 

Second, a lot of the equity holdings that you're so excited about are the same ones, or the same type of ones, that didn't work for so long. What has changed is the cycle. Stelco had exceptional pricing. RFP had exceptional pricing. Atlas had a once in a generation opportunity to deploy capital after issuing a lot of shares to fix its balance sheet. Eurobank has finally worked through its NPL issues and Greece has finally got a pro-market government. Exco is still there and may well bounce back on higher oil & gas pricing.

 

So the fundamentals, and the extent to which the market cares about value stocks, have changed. Fairfax's style of investing has not changed. I think they have got better at it - I think Stelco's management and balance sheet when Fairfax bought in were better than Resolute's were, for example, although even that is a false comparison because Fairfax initially bought Resolute debt - but you're not seeing Fairfax dump its value investments in favour of putting $2bn in Google. Even Digit is not indicative of new thinking on Fairfax's part - what they are doing in building Digit from scratch is exactly the same as what they did building ICICI Lombard from scratch.

 

What has changed is the cycle.

 

EDIT: for evidence, go back and look at comments on here when Fairfax bought Seaspan and Stelco. It was all "oh, God, more of the same, I really wish Prem would stop buying cyclical crap and buy high quality compounders". This has changed (somewhat) because the fortunes of the cyclical businesses have changed (for now).

 

 

 

Yes, I totally agree with this.  That's kind of my point.  That distortions created a period where massive growth occurred, but for traditional value investors, the normal collapse of the cycle (both tech bubble, housing crisis and now the pandemic) never were fulfilled because governments simply kept reinflating.  Thus the eventual rebound in the cycle of traditional value stocks including commodities. 

 

Buffett is no longer a traditional value investor.  Munger and Phil Fisher's influence has made him more of a hybrid...traditional distressed value investor who pays up for growth...essentially just an "investor" now...and that may be the best model and what we should all aspire to.  But it is hard to change when you've done the same thing for so long...Buffett and especially Munger are incredibly unique in this way. 

 

Fairfax remains a Ben Graham distressed value investing firm...they have not changed, nor are the old guard likely to ever change...so damn hard to go against your nature.  I personally have an incredibly hard time paying up!  Wade and Lawrence may have some influence on Fairfax, but the team that was together for nearly 50 years won't change their stripes.  So we have these cycles where Prem will be right and Prem will be wrong as distressed value investing moves through time.  Cheers!