Fairfax stock positions

[Hoodlum]

Faron Mining announced new equity investments this morning with Fairfax taking part. 

 

https://foranmining.com/wp-content/uploads/2024/07/Foran-News-Release-Foran-Announces-Strategic-Investments-by-Fairfax-Financial-Agnico-Eagle-and-other-Cornerstone-Investors-Formal-Construction-Decision-for-Phase.pdf

 

$222 million brokered private placement, with participation indications received from various existing long-term shareholders, including Fairfax, underscoring continued strategic support

 

[petec]

2 hours ago, nwoodman said:

Another IRR 20%+ pre-tax?  12.2m shares @ 20.5 in 2018.  Say $65 adjusted sale price in 6 years.  I think it’s fair to say that this is supportive of the 15% CAGR thesis.  Well done.

 

The board HATED this investment when it was made! 

[SafetyinNumbers]

2 hours ago, petec said:

 

The board HATED this investment when it was made! 

Alan says it’s a 32% CAGR

 

[gfp]

Fairfax bought about a year after the IPO I believe.  That might not reduce their CAGR though.  This has been a good one for FFH.

 

edit:  looks like Stelco went public for $17/sh and Fairfax bought most of the position about a year later for $20.50/share

Edited July 15 by gfp

[Viking]

6 hours ago, petec said:

 

The board HATED this investment when it was made! 

I was one of them. 
 

Here is an update on Fairfax’s investment in Stelco. Stelco is just one example of the significant value that is building on Fairfax’s balance sheet that will be realized in the coming years. This is the big thing most investors do not grasp (leading them to undervalue the company - still). This is likely a big reason why Fairfax continues to aggressively buy back stock at current prices - they know the value (although hidden) is there.

 

 

Edited July 15 by Viking

[gfp]

Fairfax only bought 12.2 million shares at $20.5 in November 2028.  Does anybody remember when, and at what price, they increased their position to 13 million shares or whatever it is currently?

[Junior R]

the next thing I think could happen within the next 1 year is the Bangalore airport IPO...which should add more gains to FFH...I just hate that FIH is so hard to buy as there is no volume and I try to put low ball offers like $13.90 lol

[SafetyinNumbers]

50 minutes ago, gfp said:

Fairfax only bought 12.2 million shares at $20.5 in November 2028.  Does anybody remember when, and at what price, they increased their position to 13 million shares or whatever it is currently?

Looks like Q1 2019

 

[gfp]

Thanks!  So even cheaper - great

[TwoCitiesCapital]

Any of y'all know how much Cairo Mezzanine Fairfax holds from the prior spin-off/restructuring of Eurobank? 

 

according to IB - my shares are up ~4x since October and so am wondering what kind of impact that has on their balance sheet at as one of the largest holders of Eurobank prior to spinning off these loans. 

[Junior R]

25 minutes ago, SafetyinNumbers said:

Looks like Q1 2019

 

I think he posted top of the page but heres another screenshot from Canadian insder

 

 

[StubbleJumper]

4 hours ago, petec said:

 

The board HATED this investment when it was made! 

 

I hated this investment when it was made.  A heavily unionized company in a commodity industry that was targeted by then-president Trump as a strategic sector, and it had already gone bankrupt to boot.  But, I guess there's a price for everything.

 

Beyond that, I think I might have bitched about what FFH's exit-strategy would be, because there seemed to be no exit-strategy for existing crap-positions like Blackberry or Resolute.  Well, this is a great exit with a fully acceptable ROI.  Kudos to management for having gotten in, and then more importantly, having gotten OUT of stelco profitably.

 

 

SJ

[SafetyinNumbers]

43 minutes ago, TwoCitiesCapital said:

Any of y'all know how much Cairo Mezzanine Fairfax holds from the prior spin-off/restructuring of Eurobank? 

 

according to IB - my shares are up ~4x since October and so am wondering what kind of impact that has on their balance sheet at as one of the largest holders of Eurobank prior to spinning off these loans. 

I believe 1 share was distributed for every 12 EUROB shares so it can’t be that big. Presumably FFH would have to equity account for it as well but probably on a lag. Since they reported in April, maybe we get that in Q2 results.

[gfp]

2 hours ago, TwoCitiesCapital said:

Any of y'all know how much Cairo Mezzanine Fairfax holds from the prior spin-off/restructuring of Eurobank? 

 

according to IB - my shares are up ~4x since October and so am wondering what kind of impact that has on their balance sheet at as one of the largest holders of Eurobank prior to spinning off these loans. 

 

Fairfax owns 49.99% of Cairo Mezz PLC, mostly in Eurolife FFH Life Insurance (46.9%).

 

So... Around EUR 63.6 million at market price - just under $70m USD ?

(edit: I agree this is obviously not marked to market on Fairfax's books)

Edited July 15 by gfp

[TwoCitiesCapital]

16 hours ago, gfp said:

 

Fairfax owns 49.99% of Cairo Mezz PLC, mostly in Eurolife FFH Life Insurance (46.9%).

 

So... Around EUR 63.6 million at market price - just under $70m USD ?

(edit: I agree this is obviously not marked to market on Fairfax's books)

+1

 

18 hours ago, SafetyinNumbers said:

I believe 1 share was distributed for every 12 EUROB shares so it can’t be that big. Presumably FFH would have to equity account for it as well but probably on a lag. Since they reported in April, maybe we get that in Q2 results.

+1 

 

I didn't think it would be terribly significant - but anything that is up 400% can quickly become so. 

[Junior R]

another 52 week high

[Viking]

Stelco - Reaping the Rewards of New Fairfax

 

On July 15, 2024, Stelco announced that the company had been sold to Cleveland-Cliffs for about C$70/share (C$60/share cash + .454 share of CLF). Total proceeds to Fairfax should be about US$666 million ($570 million for Stelco + $96 million for CLF shares). The deal is expected to close in Q4 of 2024.

 

Stelco is a great example of what I like to call ‘new Fairfax.’ In about 2018, Fairfax appeared to ‘tweak’ their value investing framework when it came to new equity purchases. One of the important changes was putting a much higher premium on partnering with great CEO/founders/owners. Fairfax’s new equity purchases since 2018 have been very good.

 

Stelco was purchased in November 2018. Fairfax decided to partner with Alan Kestenbaum (CEO/founder/owner of Stelco). Over the past 7 years, Kestenbaum has put on a clinic on how to do capital allocation (see below for more). In short, Kestenbaum has been a rock star - even Billy Idol would agree.

 

How has Fairfax’s investment in Stelco performed?

 

I know… I know… Show me the money!

 

In November 2018, Fairfax paid $193 million for 14.7% of Stelco. Over the past 3 years Stelco has repurchased 38% of all shares outstanding - so Fairfax now owns 23.6% of Stelco.

 

When Fairfax announced their Stelco purchase in late 2018 I hated it. At the time, it screamed ‘old Fairfax’ to me. Boy was I wrong.

 

Over its 6 year holding period, Fairfax stands to earn a total return of about $588 million, or 305%, on its investment in Stelco. The 6-years CAGR is 26.3%. That is an outstanding return.

 

The return is made up of:

• Regular and special dividends = $115 million ($47 + $68).
• Expected proceeds from sale:
  • Stelco shares sold = $570 million
  • Cleveland-cliffs shares received = $96 million

Fairfax has a carrying value for Stelco of $275 million (Q1 2024). When the deal closes in Q4, Fairfax will likely book a total pre-tax gain of about $392 million.

 

 

New Fairfax - Reaping the Rewards

 

Stelco is only one of the very good new investments that Fairfax has made since 2018. Fairfax has also ‘fixed’ most of their underperforming legacy equity holdings (purchased before 2018). As a result, the quality and earnings power of Fairfax’s current collection of equity holdings has never been better. Most importantly, the intrinsic value of their collection of equity holdings has been marching higher each year.

 

Fairfax is monetizing one asset today. More asset sales are coming - I think this sale might be signalling the beginning of the next wave of equity monetizations. And like the sale of Stelco, when they happen they will surface significant hidden value for shareholders. I think most investors do not fully grasp this part of Fairfax’s business model. It has been so long since this part of Fairfax was working (equities) its like they have forgotten about it. This is leading many investors to underestimate the future earnings of Fairfax. Which is leading them to undervalue (still) the company. Yes, that sounds nuts. But I think it is true.

 

Value investing 101 - the Fairfax Model - Sell high and buy low

 

There is a second even bigger benefit to what Fairfax is doing. Realizing significant value hiding on the balance sheet is good (selling high). But reinvesting the proceeds back into undervalued assets (buying low) is even better - when you include the power/effect of compounding over time.

 

In recent years, Fairfax has been putting on a clinic of the benefits of the P/C insurance / value investing business model. As a result, earnings, ROE and book value are spiking.

 

For the past 4 years most investors have been one step behind what is actually happening under the hood at Fairfax. I think this continues to be the case today. And I love it - because it tells me that despite the run up in the shares over the past 4 years, much more likely lies ahead (as Fairfax delivers earnings and ROE that continues to ‘surprise’ to the upside).

 

Stock buybacks

 

In 2024, Fairfax continues to aggressively buy their back stock. Why? They know the stock is still very undervalued. Why? They see the value of all the assets residing on their balance sheet - and they know many will be monetized in the future - surfacing an incredible amount of incremental shareholder value over time. And they know the proceeds will then be reinvested into wonderful undervalued opportunities - creating even more shareholder value over time. The set-up for Fairfax and its shareholders has never looked better.

 

Fairfax detractors

 

But talk to Fairfax detractors - and my guess is they still view Stelco as a shitty investment. They explain it away with ‘Fairfax got lucky.’ It is a commodity producer after all! It cracks me up when I hear the detractors talk about Fairfax’s equity holdings. They usually have no idea what they are talking about. But boy do they ever have a lot of conviction when they express their views.

 

What has made Stelco such a good investment for Fairfax?

 

The CEO of Stelco, Alan Kestenbaum.

 

Since buying Stelco out of bankruptcy in 2017 (via Bedrock Industries) his capital allocation decisions have been outstanding. Some examples:

• What did Stelco do with the earnings windfall from the historic bull market in steel in 2021 and 2022?

  • He bought back 38% of shares outstanding. And he did not overpay. That was freaking brilliant.

    • Fairfax’s ownership in Stelco increased from 14.7% to 23.6% - with no new money invested.

  • A significant amount was paid out in the past 6 years in dividends = C$11.03/share

    • Regular dividends = C$3.90/share and special dividends = $7.13/share.

• Two other brilliant moves by Kestenbaum:

  • April 2020 - Minntac deal: at a cost of $100 million, got an 8-year supply agreement with US Steel with option to purchase 25% of Minntac (the largest iron ore mine in the US) – done when Covid was raging. 

  • June 2022: real estate sale of ‘Stelco lands’ for C$518 million. The timing of this sale is looking brilliant - at what might be close to the peak of Canada’s real estate bubble.

• And the final act? Selling the entire company for C$70.00

Kestenbaum has been schooling the steel industry on capital allocation for the past 7 years.

 

—————

A short history of Fairfax’s investment in Stelco

 

In November of 2018, Fairfax invested US$193 million in Stelco, buying 13 million shares at C$20.50. At the time, it was a deeply contrarian purchase. I did not like it. It screamed ‘old Fairfax’ to me: buy a bad business in a bad industry. Boy, was I wrong.

—————

Stelco Corporate Presentation - Q1 2024 Results

• https://s201.q4cdn.com/143749161/files/doc_earnings/2024/q1/presentation/Q1-2024-Earnings-Presentation-FINAL.pdf

—————

News release on sale from Stelco

 

Cleveland-Cliffs to Acquire Stelco for C$70 per Share - July 15, 2024

• https://investors.stelco.com/news/news-details/2024/Cleveland-Cliffs-to-Acquire-Stelco-for-C70-per-Share/default.aspx

HAMILTON, Ontario--(BUSINESS WIRE)-- Stelco Holdings Inc. (TSX: STLC) (“Stelco” or the “Company”) is pleased to announce that it has entered into a definitive agreement (the “Arrangement Agreement”) with Cleveland-Cliffs Inc. (NYSE: CLF) (“Cliffs”), pursuant to which Cliffs has agreed to acquire all of the issued and outstanding common shares of Stelco (the “Transaction”) at a price of C$70.00 per share (the “Consideration”), consisting of C$60.00 in cash and 0.454 of a share of Cliffs common stock (equivalent to C$10.00 based on the closing price of Cliffs common stock on July 12, 2024) per Stelco share.

 

The total enterprise value pursuant to the Transaction is approximately C$3.4 billion. The Consideration represents an 87% premium to Stelco’s closing share price of C$37.36 on July 12, 2024, and a 37% premium to Stelco’s 52-week high.

 

Fairfax Financial Holdings, an affiliate of Lindsay Goldberg LLC, Alan Kestenbaum, and each of the other directors and executive officers of Stelco collectively holding approximately 45% of the current outstanding Stelco common shares have entered into support agreements to vote in favour of the Transaction, subject to customary exceptions.

—————

Comments from Prem about Stelco from Fairfax's 2022AR.

 

“2022 was an active and successful year for Alan Kestenbaum and the talented team at Stelco. The company ended the year with its second-best fiscal result since going public despite an approximately 50% decline in steel prices over the summer. Stelco is benefiting from the Cdn$900 million it has invested in its Lake Erie Works mill since 2017, which has made the mill one of the lowest-cost operators in North America. Stelco entered 2022 with an extremely strong balance sheet and put its capital to good use, completing three substantial issuer bids during the year, thereby repurchasing approximately 29% of its outstanding shares. These repurchases have resulted in Fairfax’s ownership increasing to 24% from 17% at the beginning of the year. In addition to share repurchases, Stelco paid a Cdn$3 per share special dividend and increased its regular dividend to Cdn$1.68 per share from Cdn$1.20 per share. Stelco maintains over Cdn$700 million of net cash on its balance sheet and we anticipate that it will continue to be active both investing in its operations and efficiently returning excess capital to shareholders. We are excited to continue as a significant investor in Alan Kestenbaum’s leadership at Stelco.” Prem Watsa – Fairfax 2022AR

—————

Details of Stelco’s Hamilton land sale in 2022, for proceeds of $518 million.

 

“Stelco Holdings Inc. (TSX: STLC) (“Stelco” or the “Company”) announced today that its wholly-owned subsidiary, Stelco Inc., has successfully closed a sale-leaseback transaction with an affiliate of Slate Asset Management (“Slate”). Stelco Inc. has sold the entirety of its interest in the approximately 800-acre parcel of land it occupies on the shores of Hamilton Harbour in Hamilton, Ontario to Slate for gross consideration of $518 million. In conjunction with the sale, Stelco Inc. has entered into a long-term lease arrangement for certain portions of the lands to continue its cokemaking and value-added steel finishing operations at its Hamilton Works site in Hamilton, Ontario.”

• https://www.thespec.com/news/hamilton-region/all-of-stelco-s-hamilton-land-sold-in-deal-that-would-see-it-transformed-into/article_17a333af-8198-5f97-9866-8c61ed8f799f.html?

—————

Details of Stelco’s agreement with US Steel in 2020 to securing long term supply for iron ore pellets.

 

Stelco Announces Option To Acquire 25% Interest In Minntac, The Largest Iron Ore Mine In The United States, And Entry Into Long-Term Extension Of Pellet Supply Agreement With U.S. Steel

 

“Stelco will pay US$100 million, in cash, to U.S. Steel in consideration for the Option (the "Initial Consideration"). The Initial Consideration is payable in five US$20 million installments, with the first installment paid upon closing of the Option Agreement and the remaining four installments payable every two months thereafter. Upon the exercise of the Option, Stelco would pay a net exercise price of US$500 million.”

 

Transaction Highlights:

• Secures long-term future of Stelco's steel production and solidifies Stelco's low-cost advantage
• Provides supply of high-quality iron ore pellets from a well-understood and consistent source for the next eight years, or longer if the Option is exercised
• Increases annual pellet supply to level required for Stelco's higher production capacity following this year's blast furnace upgrade project
• Supports Stelco's tactical flexibility model to deliver highest margin outcomes based on prevailing market conditions
• Creates a secure pathway for Stelco to become a vertically integrated player in the future through ownership in a low-cost iron ore source which is the largest producing iron ore mine in the Mesabi iron range
• Structured in stages that will preserve Stelco's strong balance sheet and financial flexibility

https://investors.stelco.com/news/news-details/2020/Stelco-Announces-Option-to-Acquire-25-Interest-in-Minntac-the-Largest-Iron-Ore-Mine-in-the-United-States-and-Entry-into-Long-Term-Extension-of-Pellet-Supply-Agreement-with-U.S.-Steel-04-20-2020/default.aspx

 —————

Here is a little more information of Kestenbaum’s initial investment in Stelco in 2017.

 

Purchase of Stelco out of bankruptcy: Bedrock gets steelmaker for less than $500 million

• https://www.thespec.com/business/stelco-deal-bedrock-gets-steelmaker-for-less-than-500-million/article_da943b70-1a93-5a35-acb4-92a6da05946a.html?

Edited July 17 by Viking

[Haryana]

Could this change to New Fairfax from old be totally unrelated to depature of ex President Paul Rivett?

 

I mean look at this press release. They are telling how he is going to retire full time and that is all to it.

"Paul Rivett has decided to retire as President of Fairfax in order to spend full time with his family."

https://www.fairfax.ca/press-releases/fairfax-financial-holdings-limited-executive-announcement-2020-10-13/

 

Just 2 years later we learn of him fighting hard and bitter on corporate control.

"The clash of the media barons: Inside Jordan Bitove and Paul Rivett's battle to control Torstar"

https://www.theglobeandmail.com/business/article-torstar-ownership-jordan-bitove-paul-rivett/

"After airing dirty laundry publicly, warring Torstar partners retreating behind closed doors"

https://nationalpost.com/news/publisher-apologizes-to-staff-for-public-spectacle-as-bitter-toronto-star-feud-heads-to-court

 

Edited July 16 by Haryana
clarity

[nwoodman]

5 hours ago, Haryana said:

Could this change to New Fairfax from old be totally unrelated to depature of ex President Paul Rivett?

 

I mean look at this press release. They are telling how he is going to retire full time and that is all to it.

"Paul Rivett has decided to retire as President of Fairfax in order to spend full time with his family."

https://www.fairfax.ca/press-releases/fairfax-financial-holdings-limited-executive-announcement-2020-10-13/

 

Just 2 years later we learn of him fighting hard and bitter on corporate control.

"The clash of the media barons: Inside Jordan Bitove and Paul Rivett's battle to control Torstar"

https://www.theglobeandmail.com/business/article-torstar-ownership-jordan-bitove-paul-rivett/

"After airing dirty laundry publicly, warring Torstar partners retreating behind closed doors"

https://nationalpost.com/news/publisher-apologizes-to-staff-for-public-spectacle-as-bitter-toronto-star-feud-heads-to-court

 

This has been my feeling for a while now.  Just not sure whether this line of thinking is all that constructive.  I think it is much better to be forward looking, and appreciate the changes that have taken place while preserving a framework that has served them well.  Hat’s off to @Viking in this regard.

[Parsad]

6 hours ago, Haryana said:

Could this change to New Fairfax from old be totally unrelated to depature of ex President Paul Rivett?

 

I mean look at this press release. They are telling how he is going to retire full time and that is all to it.

"Paul Rivett has decided to retire as President of Fairfax in order to spend full time with his family."

https://www.fairfax.ca/press-releases/fairfax-financial-holdings-limited-executive-announcement-2020-10-13/

 

Just 2 years later we learn of him fighting hard and bitter on corporate control.

"The clash of the media barons: Inside Jordan Bitove and Paul Rivett's battle to control Torstar"

https://www.theglobeandmail.com/business/article-torstar-ownership-jordan-bitove-paul-rivett/

"After airing dirty laundry publicly, warring Torstar partners retreating behind closed doors"

https://nationalpost.com/news/publisher-apologizes-to-staff-for-public-spectacle-as-bitter-toronto-star-feud-heads-to-court

 

 

Well, are you then going to give credit to Paul for the move to put Andy Barnard as President of all of the insurance businesses?  What about the credit default swap investments?  How about bringing in Wade Burton?

 

It's easy to discount what happened during Paul's watch because things are going so well now.  Fairfax is a team...no egos...no individuals!  The team has done better. 

 

Cheers!

[Haryana]

31 minutes ago, Parsad said:

 

Well, are you then going to give credit to Paul for the move to put Andy Barnard as President of all of the insurance businesses?  What about the credit default swap investments?  How about bringing in Wade Burton?

 

It's easy to discount what happened during Paul's watch because things are going so well now.  Fairfax is a team...no egos...no individuals!  The team has done better. 

 

Cheers!

 

Sure.

I know nothing really.

Just human brain has a tendency to shoot in the darkness of ignorance trying to connect the dots looking for a pattern. 

 

[Parsad]

5 minutes ago, Haryana said:

 

Sure.

I know nothing really.

Just human brain has a tendency to shoot in the darkness of ignorance trying to connect the dots looking for a pattern. 

 

 

I spoke to Paul after he left.  The decision to leave was completely personal and family related.  Fairfax had no intention of letting Paul go...his family needed him around more.

 

Cheers!

[Viking]

Corporate Bonds – 2021 – Value Investing 101 / Protecting the Balance Sheet

 

Below is the next instalment in my review of asset sales at Fairfax from the past 7 years. My goal is to provide some additional insight into the transformation that has happened at Fairfax (especially earnings). And help us better understand what might be coming in the future. Please share your thoughts.

—————

To set the table, below is a prescient quote from Warren Buffett from Berkshire Hathaway’s 2020AR:

 

“And bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.”

—————

In 2021, Fairfax sold $5.2 billion of corporate bonds and realized a $253 million gain. The bonds were sold at a yield of approximately 1%. Most of the bonds had been purchased in March/April of 2020 during the Covid panic which caused credit spreads (and yields) to spike temporarily.

 

The greatest bond bubble in history

 

2020 and 2021, bonds were in the blow off top (bubble high) part of the greatest bull market in history. Like .com stocks in 1999, bonds were selling at crazy high prices (well over their intrinsic value) - and their yields were at record low levels.

 

In 2020 and 2021, there was no ‘margin of safety’ when purchasing bonds, especially those of longer duration. Instead, there was actually a very high probability that future returns for investors would be terrible. In 2020 and 2021 the risks of owning bonds had never been higher.

 

Like past bubbles, when it came to bonds, Mr. Market had lost its mind.

 

Value investing 101

 

Value investing is the central framework used by Fairfax and is used in both of its core businesses: insurance and investments (equities and bonds).

 

What is a value investor to do when a historic bubble is blowing ever bigger? A value investor sells.

 

And that is what Fairfax did in 2021 when they sold $5.2 billion in corporate bonds. It was a brilliant move. And highly contrarian; especially for a P/C insurance company.

 

Protect the balance sheet

 

And they did another thing that was even better. They moved the average duration of their fixed income portfolio to 1.2 years (they had been doing this for years). They did this to protect their balance sheet - protect it from significant losses should bond yields unexpectedly rise.

 

Who else was thinking along the same lines as Fairfax?

 

Some guy named Warren Buffett who manages a company called Berkshire Hathaway.

 

What about other P/C insurance companies?

 

Most P/C insurance companies have a stated policy of matching the average duration of their fixed income portfolio with the average duration of their insurance liabilities.

 

This makes good sense - almost all of the time. But it is a terrible thing to do in an historic bond bubble.

 

So why did they continue to do it? Even when it was obviously becoming more and more risky?

 

The institutional imperative

 

What is the institutional imperative? Warren Buffett defines it in Berkshire Hathaway’s 1990AR: “the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.”

 

Pretty much all P/C insurance companies match the average duration of their bond portfolio with the average duration of their insurance liabilities.

 

What would be the consequences if this strategy blew up? There would be none - because they were all doing it. As a result they were all safe. Who could have known?

 

What happened to P/C insurance companies when the bond bubble popped in 2022?

 

When the bond bubble popped in 2022, the balance sheets of most P/C insurance companies got shredded - for many companies their book value fell 10% to 15% - for some it was more.

 

The management teams at most P/C insurance companies had completely dropped the ball. Their risk management had been terrible. They were reckless and their shareholders would now pay a steep price.

 

And what happened to the management teams? Nothing, of course. ‘Who could have known’ they all collectively said.

 

How about Fairfax?

 

Book value at Fairfax increased in 2022. Fairfax shielded their shareholders from billions in losses. That is outstanding risk management.

 

Narrative

 

Fairfax realized a nice gain of $253 million on their sale of $5.2 billion in corporate bonds in 2021. More importantly, by shortening the average duration of their fixed income portfolio to 1.2 years in late 2011, they protect their balance sheet - and shielded the company and investors from billions in losses. This is a great example of exceptional risk management.

 

This is just another of many recent examples of how Fairfax has been running circles around the management teams of other P/C insurance companies in recent years. Fairfax’s growth in book value over the past 5 years has left peers in the dust.

 

It is a testament to the benefits of active management. And value investing. And superior management.

 

It is also an example of the benefit of having a majority/controlling shareholder. It’s not a fluke that it was all the publicly traded P/C insurance companies that were blindly following the herd over the cliff in 2020 and 2021.

 

————

Interest income update

 

Interest income at Fairfax bottomed out at $568.4 million in 2021. When you add in the gain from the sale of $5.2 billion in corporate bonds, the total return on the fixed income portfolio was $821.4 million or 2.5% (calculated off the average size of $33.3 billion).

 

Given the exceptionally low average duration of of the fixed income portfolio of 1.2 years at Dec 31, 2021, the earn though over the past 2.5 years from spiking interest rates has been much quicker for Fairfax than pretty much all other P/C insurance companies.

 

As of Q1, 2024, interest income at Fairfax has ballooned to about $570 million per quarter and the yield on the fixed income portfolio (now $46 billion in size) is now 5%. It is amazing what the fixed income team at Fairfax has accomplished over the past 3 years. 

 

————

From Fairfax’s 2021 Annual Report:

 

“During 2021, we sold $5.2 billion in corporate bonds, mainly acquired in March/April of 2020, at a yield of approximately 1%, for a gain of $253 million. At the end of 2021, our fixed income portfolio, inclusive of cash and short term treasuries, which effectively comprised 72% of our investment portfolio, had a very short duration of approximately 1.2 years and an average rating of AA-.” Fairfax 2021AR

 

Edited July 18 by Viking

[Viking]

BlackBerry Debenture – 2020 to 2024 – Exiting a Big Mistake

 

Blackberry has been one of Fairfax’s great investing mistakes (that is putting it politely).

 

Fairfax began investing in BlackBerry in 2010 (it was called RIMM back then). By early 2014, Fairfax had invested a total of $1.287 billion.

 

As of July 2024, Fairfax has received proceeds of about $700 million (interest and exit of debenture position). The value of the common stock position in BlackBerry, which Fairfax continues to hold, is $113 million.

 

Bottom line, over the past 10 years Fairfax’s investment in BlackBerry has fallen in value by $474 million. Of course the financial cost to Fairfax and its shareholders has been much higher - when you factor in opportunity cost.

 

Let’s assume in early 2014 that instead of investing in BlackBerry, Fairfax instead invested $1.287 billion in another company. Let’s assume that investment earned 8.5% per year (a modest hurdle rate). Today, that investment would be worth $2.9 billion.  The ‘swing’ in value - what the BlackBerry investment is worth today ($813 million) versus what an alternative investment could have been worth ($2.9 billion) is $2.1 billion. That is a very rough approximation of how terrible the investment in BlackBerry has been for Fairfax.

 

But the cost to Fairfax of its investment in BlackBerry goes well beyond financial.

 

When you own such a large position is such a terrible investment the cost to the organization - in terms of resources and time - is likely enormous.

 

On February 15, Prem announced his resignation from the Board of BlackBerry after serving since November 2013. Prem is a busy man (as are other people at Fairfax). The time spend on BlackBerry over the years added no value for Fairfax and its shareholders (in aggregate) - actually it appears to have subtracted significant value.

 

Blackberry has also done significant repetitional damage to Fairfax - it was a high profile 10-year slow moving train wreck.

 

Bottom line, the cost to Fairfax - financial, time, reputation - has been significant.

 

 

Exiting a big mistake

 

The fact that Fairfax has been materially reducing its exposure to BlackBerry over the past 4 years is a big deal. And great news for shareholders.

 

In 3 separate transactions Fairfax has completely exited its $500 million debenture investment.

 

 

Fairfax continues to hold its common share position, which today has a market value of $113 million. This holding is a market to market holding for Fairfax (so the significant losses have already been reflected in the financial statements over the years).

 

Today, BlackBerry is Fairfax’s #24 largest equity holding at 0.6% of the equity portfolio (of $20 billion). BlackBerry is now a tiny investment for Fairfax.

 

Fairfax shareholders can now put the BlackBerry investment behind them.

 

Mistakes

 

Mistakes are a fact of life when it comes to investing.

 

What to do when you recognize you made one?

 

Made sure you learn the lesson - so you do not repeat the mistake. And you probably exit the position and move on.

 

What was Fairfax’s mistake with BlackBerry?

 

When Fairfax made their initial investment in BlackBerry way back in 2010, they completely misjudged:

• The quality of the management team in place.
• The prospects for the company.

Like with AbitibiBowater, when things got worse they then:

• Significantly increased the size of their investment.
• Thought they were a turnaround shop - and could ‘fix’ BlackBerry.

I call this investing framework ’old Fairfax.’

 

Turning a lemon into lemonade

 

Value investing framework: Right around 2018, it looks to me like Fairfax made important changes to their value investing framework. I have recently written about this so I won’t repeat myself. Bottom line, since 2018 Fairfax has been allocating capital exceptionally well.

 

Shifting capital from poor investments to better opportunities: Exiting the BlackBerry debenture investment has freed up $500 million in capital that has been re-invested into better opportunities where Fairfax should be able to earn a much higher rate of return. When Fairfax does this it is like they are creating a new, growing income stream.

 

Freeing up management’s time: The senior team at Fairfax has also exited a big headache. They can now spend their time on much more productive endevours. That is also a big win for shareholders.

 

This move improves the overall quality and earnings power of the equity holdings. Over time this will result in more value creation for shareholders.

 

Fairfax detractors

 

They can’t let go. Yes, Fairfax has made some big mistakes. BlackBerry was a big one.

 

But guess what... Fairfax has made many, many more great investments. And they appear to have stopped making big mistakes back in 2018. For the past 6.5 years, the team at Fairfax has been hitting the ball out of the park. At the same time they have been fixing ALL of the mistakes made in the past. Exiting the BlackBerry debenture is just one of many examples.

 

As a result of this (and other developments), Fairfax has been transformed as a company. But some investors still refuse to see it - their dislike of the company is still too intense. Crazy but true.

————— 

Comments from Prem from Fairfax’s 2023AR:

 

"That brings me to a major mea culpa! We began investing in Blackberry in 2010 and helped John Chen become CEO in November 2013 by investing $500 million in a convertible debenture at the same time. Blackberry had come down from $148 per share (down 95%) and had $10 billion in sales. I joined the Board in 2013. Our total investment in BlackBerry early in 2014 was $1.375 billion ($500 million in the convertible and $787 million in common shares).

 

"When John joined the company, BlackBerry reported a loss of $1.0 billion – in one quarter and most analysts were predicting bankruptcy! BlackBerry was indeed in difficulty! John saved the company by quickly bringing it to breakeven on a cash basis and then on a net income basis. No CEO worked harder but, unfortunately, John could not make it grow! Revenues for the year ending February 2023 were $656 million. John retired from the company at the end of his contract on November 14, 2023 and I retired from the Board on February 15, 2024. We got our money back on our convertible ($167 million in 2020, $183 million in 2023 and $150 million in 2024) plus cumulative interest income of approximately $200 million. Our common stock position as of 2023 ($162 million or 8% of the company) which was acquired at a cost of $17.16 per share was valued on our balance sheet at $3.54 per share. Another horrendous investment by your Chairman. To make matters worse, imagine if we had invested it in the FAANG stocks! The opportunity cost to you our shareholder was huge! Please don’t do the calculation! No technology investment for me!"

 

Edited July 19 by Viking

[73 Reds]

1 hour ago, Viking said:

BlackBerry Debenture – 2020 to 2024 – Exiting a Big Mistake

 

Blackberry has been one of Fairfax’s great investing mistakes (that is putting it politely).

 

Fairfax began investing in BlackBerry in 2010 (it was called RIMM back then). By early 2014, Fairfax had invested a total of $1.287 billion.

 

As of July 2024, Fairfax has received proceeds of about $700 million (interest and exit of debenture position). The value of the common stock position in BlackBerry, which Fairfax continues to hold, is $113 million.

 

Bottom line, over the past 10 years Fairfax’s investment in BlackBerry has fallen in value by $474 million. Of course the financial cost to Fairfax and its shareholders has been much higher - when you factor in opportunity cost.

 

Let’s assume in early 2014 that instead of investing in BlackBerry, Fairfax instead invested $1.287 billion in another company. Let’s assume that investment earned 8.5% per year (a modest hurdle rate). Today, that investment would be worth $2.9 billion.  The ‘swing’ in value - what the BlackBerry investment is worth today ($813 million) versus what an alternative investment could have been worth ($2.9 billion) is $2.1 billion. That is a very rough approximation of how terrible the investment in BlackBerry has been for Fairfax.

 

But the cost to Fairfax of its investment in BlackBerry goes well beyond financial.

 

When you own such a large position is such a terrible investment the cost to the organization - in terms of resources and time - is likely enormous.

 

On February 15, Prem announced his resignation from the Board of BlackBerry after serving since November 2013. Prem is a busy man (as are other people at Fairfax). The time spend on BlackBerry over the years added no value for Fairfax and its shareholders (in aggregate) - actually it appears to have subtracted significant value.

 

Blackberry has also done significant repetitional damage to Fairfax - it was a high profile 10-year slow moving train wreck.

 

Bottom line, the cost to Fairfax - financial, time, reputation - has been significant.

 

 

Exiting a big mistake

 

The fact that Fairfax has been materially reducing its exposure to BlackBerry over the past 4 years is a big deal. And great news for shareholders.

 

In 3 separate transactions Fairfax has completely exited its $500 million debenture investment.

 

 

Fairfax continues to hold its common share position, which today has a market value of $113 million. This holding is a market to market holding for Fairfax (so the significant losses have already been reflected in the financial statements over the years).

 

Today, BlackBerry is Fairfax’s #24 largest equity holding at 0.6% of the equity portfolio (of $20 billion). BlackBerry is now a tiny investment for Fairfax.

 

Fairfax shareholders can now put the BlackBerry investment behind them.

 

Mistakes

 

Mistakes are a fact of life when it comes to investing.

 

What to do when you recognize you made one?

 

Made sure you learn the lesson - so you do not repeat the mistake. And you probably exit the position and move on.

 

What was Fairfax’s mistake with BlackBerry?

 

When Fairfax made their initial investment in BlackBerry way back in 2010, they completely misjudged:

• The quality of the management team in place.
• The prospects for the company.

Like with AbitibiBowater, when things got worse they then:

• Significantly increased the size of their investment.
• Thought they were a turnaround shop - and could ‘fix’ BlackBerry.

I call this investing framework ’old Fairfax.’

 

Turning a lemon into lemonade

 

Value investing framework: Right around 2018, it looks to me like Fairfax made important changes to their value investing framework. I have recently written about this so I won’t repeat myself. Bottom line, since 2018 Fairfax has been allocating capital exceptionally well.

 

Shifting capital from poor investments to better opportunities: Exiting the BlackBerry debenture investment has freed up $500 million in capital that has been re-invested into better opportunities where Fairfax should be able to earn a much higher rate of return. When Fairfax does this it is like they are creating a new, growing income stream.

 

Freeing up management’s time: The senior team at Fairfax has also exited a big headache. They can now spend their time on much more productive endevours. That is also a big win for shareholders.

 

This move improves the overall quality and earnings power of the equity holdings. Over time this will result in more value creation for shareholders.

 

Fairfax detractors

 

They can’t let go. Yes, Fairfax has made some big mistakes. BlackBerry was a big one.

 

But guess what... Fairfax has made many, many more great investments. And they appear to have stopped making big mistakes back in 2018. For the past 6.5 years, the team at Fairfax has been hitting the ball out of the park. At the same time they have been fixing ALL of the mistakes made in the past. Exiting the BlackBerry debenture is just one of many examples.

 

As a result of this (and other developments), Fairfax has been transformed as a company. But some investors still refuse to see it - their dislike of the company is still too intense. Crazy but true.

————— 

Comments from Prem from Fairfax’s 2023AR:

 

"That brings me to a major mea culpa! We began investing in Blackberry in 2010 and helped John Chen become CEO in November 2013 by investing $500 million in a convertible debenture at the same time. Blackberry had come down from $148 per share (down 95%) and had $10 billion in sales. I joined the Board in 2013. Our total investment in BlackBerry early in 2014 was $1.375 billion ($500 million in the convertible and $787 million in common shares).

 

"When John joined the company, BlackBerry reported a loss of $1.0 billion – in one quarter and most analysts were predicting bankruptcy! BlackBerry was indeed in difficulty! John saved the company by quickly bringing it to breakeven on a cash basis and then on a net income basis. No CEO worked harder but, unfortunately, John could not make it grow! Revenues for the year ending February 2023 were $656 million. John retired from the company at the end of his contract on November 14, 2023 and I retired from the Board on February 15, 2024. We got our money back on our convertible ($167 million in 2020, $183 million in 2023 and $150 million in 2024) plus cumulative interest income of approximately $200 million. Our common stock position as of 2023 ($162 million or 8% of the company) which was acquired at a cost of $17.16 per share was valued on our balance sheet at $3.54 per share. Another horrendous investment by your Chairman. To make matters worse, imagine if we had invested it in the FAANG stocks! The opportunity cost to you our shareholder was huge! Please don’t do the calculation! No technology investment for me!"

 

Why do you think Fairfax continues to hold the remaining shares?