Fairfax stock positions

[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?

[Viking]

3 hours ago, 73 Reds said:

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

Prem just resigned from the board in Feb so it likely was not an option to sell before then. Moving forward my guess is Fairfax will treat BlackBerry like any other equity investment - hold it if they see it delivering on their (15%?) hurdle rate for equity investments. BlackBerry does play in some very interesting verticals.

 

What i like is the remaining position is so small that even of it went to zero it wouldn’t matter to Fairfax.

 

I would love to see them sell it. Just to get it off the books - like Resolute Forest Products. Just so we can stop being reminded about it every time we look at Fairfax’s collection of equity holdings. But that is based on emotion. 
 

The big learning for me in reviewing Fairfax’s investment exits/sales over the past 7 years is just how much they have improved their underlying business/profitability:

- late 2016 - exited equity hedges - this was the big one

- 2019 - APR sold to Altas/Poseidon

- late 2020 - exited last short position

- late 2020 - exit Fairfax Africa

- 2022 - sold Resolute Forest Products

- 2024 - exited BlackBerry debenture ($500 million)

 

This was an amazing pivot - in both size and philosophy. Its a little crazy, but Fairfax exiting the equity hedges in late 2016 was the belling ringing moment for shareholders that results/performance had bottomed. The equity hedge (we probably should include the short positions as well) was the root cause of Fairfax’s decade of underperformance. Value in the business has been growing since they exited those 2 positions, and significantly in recent years.

 

Since late 2018 it looks like Fairfax has been on mission to optimize its equity holdings.  Stop the hemorrhaging of cash. Get rid of the dogs. Reallocate the cash to better opportunities. 
 

The job looks pretty much done to me. What now? Watch the cash roll in. And the intrinsic value build. 
 

My guess is we start to see more sales like Stelco - perhaps one per year - where Fairfax surfaces significant value. Great time to be a shareholder. 

Edited July 19 by Viking

[SafetyinNumbers]

32 minutes ago, Viking said:

Prem just resigned from the board in Feb so it likely was not an option to sell before then. Moving forward my guess is Fairfax will treat BlackBerry like any other equity investment - hold it if they see it delivering on their (15%?) hurdle rate for equity investments. BlackBerry does play in some very interesting verticals.

 

What i like is the remaining position is so small that even of it went to zero it wouldn’t matter to Fairfax.

 

I would love to see them sell it. Just to get it off the books - like Resolute Forest Products. Just so we can stop being reminded about it every time we look at Fairfax’s collection of equity holdings. But that is based on emotion. 
 

The big learning for me in reviewing Fairfax’s investment exits/sales over the past 7 years is just how much they have improved their underlying business/profitability:

- late 2016 - exited equity hedges - this was the big one

- 2019 - APR sold to Altas/Poseidon

- late 2020 - exited last short position

- late 2020 - exit Fairfax Africa

- 2022 - sold Resolute Forest Products

- 2024 - exited BlackBerry debenture ($500 million)

 

This was an amazing pivot - in both size and philosophy. Its a little crazy, but Fairfax exiting the equity hedges in late 2016 was the belling ringing moment for shareholders that results/performance had bottomed. The equity hedge (we probably should include the short positions as well) was the root cause of Fairfax’s decade of underperformance. Value in the business has been growing since they exited those 2 positions, and significantly in recent years.

 

Since late 2018 it looks like Fairfax has been on mission to optimize its equity holdings.  Stop the hemorrhaging of cash. Get rid of the dogs. Reallocate the cash to better opportunities. 
 

The job looks pretty much done to me. What now? Watch the cash roll in. And the intrinsic value build. 
 

My guess is we start to see more sales like Stelco - perhaps one per year - where Fairfax surfaces significant value. Great time to be a shareholder. 

The sales are great because they boost book value which is what investors focus in but I’m really excited about what they buy and how much it can boost returns. 

The minority interests in the insurance subsidiaries seems like a layup. Maybe after hurricane season is over we will get an announcement on something.
 

After that corporates on spreads widening and quality equities including something like IDBI or large liquid stocks if there is an indiscriminate market sell off.
 

There is so much optionality to returns if they are able to buy well. 

[Parsad]

Should be good for FFH's Poseidon investment renewals or new contracts.  Cheers!

[Gamma78]

15 hours ago, Viking said:

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

 

On reflection I think at specific points in the past 10 years Prem and the team have made calls on positions keeping in mind a "political backdrop" as justification for the investment. The "animal spirits" unleashed by Trump. The Modi narrative in India. The "help Canada" position on Blackberry (and some other investments as well).  We even heard it as a reason for investment in Eurobank (Greece political backdrop). I suspect some of this comes from investing in bonds, where macro conditions are taken into account by definition. 

 

I would much much prefer that on the equity component Prem and Fairfax act like Warren B. The "political backdrop" is not the main consideration (or perhaps is even irrelevant). Look at the quality of the company and the compounding it can have over time first and foremost. 

 

The problem is that in some ways we've discussed this on the board before - and the concept of "quality" can get murky. Right now to me it looks like "quality" in the eyes of the team at Fairfax is determining who their entrepreneurial partner is (Sokol, Byron Trott, etc). Though I don't always understand it, I am A-OK with that. 

[Daphne]

Political backdrop is ignored at your peril…its an important component of risk management.

[73 Reds]

13 hours ago, SafetyinNumbers said:

The sales are great because they boost book value which is what investors focus in but I’m really excited about what they buy and how much it can boost returns. 

The minority interests in the insurance subsidiaries seems like a layup. Maybe after hurricane season is over we will get an announcement on something.
 

After that corporates on spreads widening and quality equities including something like IDBI or large liquid stocks if there is an indiscriminate market sell off.
 

There is so much optionality to returns if they are able to buy well. 

I dunno; after quite the mea culpa one might assume that the resulting tax loss and even a 5% return on net sales proceeds, not to mention repurchasing FFX shares with the proceeds would generate a better result than continuing to hold equity in a company he no longer believes in.  I think it it this kind of decision that holds some people back from investing in FFX.

[SafetyinNumbers]

3 hours ago, 73 Reds said:

I dunno; after quite the mea culpa one might assume that the resulting tax loss and even a 5% return on net sales proceeds, not to mention repurchasing FFX shares with the proceeds would generate a better result than continuing to hold equity in a company he no longer believes in.  I think it it this kind of decision that holds some people back from investing in FFX.

 

Is this because you think the forward expected return is less than 5% or you just don't like seeing Blackberry in the portfolio because it's obviously not material to forward returns?

 

[Viking]

8 hours ago, Gautam Sahgal said:

On reflection I think at specific points in the past 10 years Prem and the team have made calls on positions keeping in mind a "political backdrop" as justification for the investment. The "animal spirits" unleashed by Trump. The Modi narrative in India. The "help Canada" position on Blackberry (and some other investments as well).  We even heard it as a reason for investment in Eurobank (Greece political backdrop). I suspect some of this comes from investing in bonds, where macro conditions are taken into account by definition. 

 

I would much much prefer that on the equity component Prem and Fairfax act like Warren B. The "political backdrop" is not the main consideration (or perhaps is even irrelevant). Look at the quality of the company and the compounding it can have over time first and foremost. 

 

The problem is that in some ways we've discussed this on the board before - and the concept of "quality" can get murky. Right now to me it looks like "quality" in the eyes of the team at Fairfax is determining who their entrepreneurial partner is (Sokol, Byron Trott, etc). Though I don't always understand it, I am A-OK with that. 

“I would much much prefer that on the equity component Prem and Fairfax act like Warren B.”

 

@Gautam Sahgal I used to think along the same line as you. But i am not so sure anymore. The more i think about/study Fairfax the more i am coming to understand and appreciate their unique approach/strengths to capital allocation.

 

When i was a new sales manager my focus initially was on fixing problems (problem employees or weaknesses of good employees). I learned over time that i had it ass backwards. I shifted and spent most of my time feeding my best employees (stars) and getting my weaker performers to focus on their strengths. 
 

I want to see Fairfax do what they are outstanding at: 

- Flexible

- Creative

- Unconventional

- Conviction

- Long term focus

 

Look at some of Fairfax’s best investment the past 4 years:

- total return swaps: 1.96 million shares at $373/share

- dutch auction taking out 2 million shares at $500/share

- managing average duration of fixed income portfolio

- selling pet insurance for $1 billion gain after tax

- selling RFP at peak pricing.

- the Stelco investment (buy and sell).

- i could go on.

 

Asset sales are a big part of Fairfax capital allocation framework. As is seeding startups like First Capital, ICICI Lombard and now Digit. 

 

Would Warren Buffet have done any of these things? 

Fairfax also appears to have no desire to become a conglomerate. And they appear to be dramatically shrinking the size of the company (with all the buybacks). Not what Warren would do.
 

Fairfax’s capital allocation has been exceptional since 2018. For the past 5 years Fairfax’s management team has been best-in-class among P/C insurers. They are on a hot streak.  Do you tell a star basketball player how to shoot a basketball? (I.E. tell Larry Bird he would be a better basketball player if only he shot the ball like Magic Johnson?)
 

They look singularly focussed on growing long term per share value for shareholders. 
 

I hope they continue to do the things they are really good at. 

Edited July 20 by Viking

[73 Reds]

27 minutes ago, SafetyinNumbers said:

 

Is this because you think the forward expected return is less than 5% or you just don't like seeing Blackberry in the portfolio because it's obviously not material to forward returns?

 

Both, I suppose.  Even if Blackberry shares can earn a >5% annual return is it truly a better idea than any return generated by the tax loss and reallocation of net sales proceeds?  As a steward of capital, isn't that a more logical approach than holding shares in a company that you've called a terrible investment?  Despite its value now being a mere blip on the radar, it is certainly talked about and thought about disproportionate to all the company's success.  Anyone looking at the Fairfax portfolio and considering making an investment sees it for what it is.  

[SafetyinNumbers]

52 minutes ago, 73 Reds said:

Both, I suppose.  Even if Blackberry shares can earn a >5% annual return is it truly a better idea than any return generated by the tax loss and reallocation of net sales proceeds?  As a steward of capital, isn't that a more logical approach than holding shares in a company that you've called a terrible investment?  Despite its value now being a mere blip on the radar, it is certainly talked about and thought about disproportionate to all the company's success.  Anyone looking at the Fairfax portfolio and considering making an investment sees it for what it is.  

I don’t Fairfax is interested in hiding their mistakes like a lot of active

institutional money managers often do.

 

I have mistakes in my portfolio that I don’t sell because the expected return higher or because if I tried to sell, I wouldn’t actually get the price on the screen because I own too much.

 

You are right though that it might hurt the multiple but eventually I assume our shareholder base will be willing to afford the shares a higher multiple.

 

 

[73 Reds]

Yes, hiding a mistake is not appropriate but neither is perpetuating a mistake.  I really do think this gives pause to prospective new investors.  

[UK]

10 hours ago, Gautam Sahgal said:

Right now to me it looks like "quality" in the eyes of the team at Fairfax is determining who their entrepreneurial partner is (Sokol, Byron Trott, etc). Though I don't always understand it, I am A-OK with that. 

 

I do not think Buffett differs that much in this "right people/partner" approach? Personally I find this very important and after all years and some really unpleasant experience with all these "independant" boards or CEOs with a maximum of 3-5 year time frame, I am really hesitant to put much money into anything without right people / alligned owner etc. This is also probably the main reason of FFH succes and to invest in FFH in the first place, at least for me:). Many other cheaper/better/whatever insurance companies without owner operator I can trust? Thanks but no:)

 

Edited July 20 by UK

[SafetyinNumbers]

3 hours ago, 73 Reds said:

Yes, hiding a mistake is not appropriate but neither is perpetuating a mistake.  I really do think this gives pause to prospective new investors.  

I think you’re right but you are assuming that they are perpetuating a mistake. I assume they are trying to make the best capital allocation decision given the context (which we don’t fully know as outsiders). 

 

From my experience people who point to BlackBerry as a reason not to invest are just looking for an excuse. They really don’t want to invest ahead of the next mistake which may have already happened but it’s a position that investors generally like.

Kind of like the hedges until 2016. They were loved  (as expressed in the premium P/B multiple) back then but it was clearly a mistake with hindsight or maybe that’s just resulting.

 

[73 Reds]

7 minutes ago, SafetyinNumbers said:

I think you’re right but you are assuming that they are perpetuating a mistake. I assume they are trying to make the best capital allocation decision given the context (which we don’t fully know as outsiders). 

 

From my experience people who point to BlackBerry as a reason not to invest are just looking for an excuse. They really don’t want to invest ahead of the next mistake which may have already happened but it’s a position that investors generally like.

Kind of like the hedges until 2016. They were loved  (as expressed in the premium P/B multiple) back then but it was clearly a mistake with hindsight or maybe that’s just resulting.

 

Well, Prem Watsa acknowledged that Blackberry was a bad investment.  Is an admittted bad investment better than any (every!) other alternative?  Of course I've not always understood Buffett's reasoning either but there is always some inherent logic to what he does.  The only rationale that makes sense to me here is that the company is trying to discourage new buyers in order to keep the stock price down for as long as possible in order to repurchase more cheap shares.  If that is the intended goal, holding all remaining BB shares is a relatively cheap price to pay.

[rkbabang]

On 7/20/2024 at 1:40 PM, 73 Reds said:

Yes, hiding a mistake is not appropriate but neither is perpetuating a mistake.  I really do think this gives pause to prospective new investors.  

 

Exactly. And when it inevitably goes to zero and it will (I believe I said exactly this in 2010 somewhere on this board, I am quite surprised the company still exists to be honest), people will be wondering why they didn’t get over $100M for it when they still could. Sure it’s not a significant portion of their portfolio anymore, but it isn’t nothing. Selling it is a signal to new investors that they understand their mistakes and are unlikely to repeat them.

 

[nwoodman]

Eurobank hung onto its highs and closed as a $3bn+ position for Fairfax for the first time

 

3 coffees in and still can’t get my head  around  the purchase of ZZZ now.  Seems to me this should have been a blood in the streets acquisition if they were going to do it all.  The consolation is they are paying prices last seen 7 years ago. It should work out OK at this price but seems lower quality than what I would have hoped for given the deal size.

[Hoodlum]

44 minutes ago, nwoodman said:

Eurobank hung onto its highs and closed as a $3bn+ position for Fairfax for the first time

 

it looks like Eurobank is moving forward with Hellenic Bank, with or without the remaining shareholders.  The market still looks at this as a positive for Eurobank. 
 

https://knews.kathimerini.com.cy/en/news/fifteen-days-left-to-decide-on-eurobank-s-offer

[nwoodman]

Some more colour on Regulation 379/2014, I think this is what gives Eurobank the edge here as the possibility of delisting is highly likely:
 

Regulation 379/2014 of the Cyprus Securities and Exchange Commission specifies certain minimum share dispersal criteria for companies listed on the main market of the Cyprus Stock Exchange:

- At least 25% of the shares proposed for listing must be held by the wider public (free float requirement)
- The shares must be held by at least 300 natural persons or legal entities 

So this regulation aims to ensure a minimum level of diverse public ownership for companies listed on the CSE main market.
 

The 25% free float requirement prevents a small group of insiders from holding all or most of a publicly listed company's shares.

And the 300 person minimum helps ensure the shares are reasonably widely held rather than just technically meeting the 25% threshold among a very small number of public shareholders.

 

These provisions promote shareholder diversity and broader public participation in the ownership of listed companies on the Cyprus Stock Exchange main market. 
 

Key thresholds: 

Based on Cypriot corporate law, the following shareholder approval percentages are required for various corporate actions:

 

Ordinary Resolution (over 50% approval required):

- Appointment and removal of company directors 

- Alteration of the company's share capital (increase, consolidation, division, sub-division, cancellation, conversion of paid-up shares into stock)

- Appointment and removal of auditors

Special Resolution (at least 75% approval required): 

- Amendment of the memorandum of association

- Amendment of the articles of association 

- Change of company name

Reduction of share capital

- Variation of shareholders' rights (unless a higher threshold is specified in the articles of association)

Extraordinary General Meeting (EGM):

Shareholders holding at least 10% of the paid-up capital with voting rights can requisition the directors to convene an EGM. This right cannot be waived or varied by the articles of association.

So delisting is likely and Eurobank has the right to fire the existing board and put their own directors in.  I can’t find any further minority protections.  I guess they can argue oppression but that is difficult with takeover clearance given and other sophisticated investors already accepting lower bids.  @hoodlum as you say,  the market is giving developments the

 

 

 

[petec]

On 7/20/2024 at 3:35 AM, Parsad said:

Should be good for FFH's Poseidon investment renewals or new contracts.  Cheers!

 

Wow.

 

No direct benefit to Poseidon but their customers will be flush.

 

Might be a direct benefit to Brookfield, after their purchase of Triton - not sure how much of their containers are exposed to spot.

 

 

[Viking]

Stock of Quess, India’s leading business services provider and former high flyer, has recovered over past 2.5 years. Fairfax's stake is worth $435m. MV is once again greater than CV. Like when IIFL did it, Quess’ planned split into 3 companies in 2025 looks like a smart move.

 

Of interest:

• Quess is Fairfax's #12 largest equity holding.
• Quess' stock price was 855 rupee at Dec 31, 2021.

Edited July 26 by Viking

[glider3834]

One of Fairfax's most interesting positions, integrated energy utility and green metallurgy business Metlen (MYTIL.AT) (formerly Mytilineos) results out

 

https://www.ekathimerini.com/economy/1244896/metlen-registers-record-profits-in-january-june/

 

Edison have an analyst report on Metlen & below is a quote from this report with their take on valuation.

 

https://www.edisongroup.com/research/a-new-name-for-its-next-phase/33738/

 

'Valuation: Undervalued for a €1bn+ EBITDA business

Metlen currently trades at P/E multiples of 7.7x in FY24e and 7.2x in FY25e. It trades at EV/EBITDA ratios of 6.0x in FY24e and 5.6x in FY25e (our estimates are broadly in line with consensus), a significant discount to peers. As a comparison, its peer group trades at a range of multiples, from 5.2x for metals to 9.7x for RES, with an FY24 Metlen EBITDA-weighted average of 7.7x, a 38% premium to Metlen’s market multiple. In our view, Metlen’s multiple looks low for a business that has high-quality, low-cost assets in power generation and aluminium production, and very low for a company with a high-growth renewable energy business that accounts for almost one-third of its earnings. We value Metlen at €49/share (up from €45 in our last update). Our DCF valuation has risen to €47/share after incorporating recent results and some minor adjustments to earnings based on commodity, energy and electricity price assumptions, which are broadly in line with forward curves, and we now blend this with a peer multiple valuation of €51/share to reflect the potential of peer re-rating with an additional listing.'

 

 

[Gamma78]

"So much advantage in life comes from being willing to look foolish in the short term". 

 

Was thinking about this sentence tied to a lot of Fairfax's portfolio. 

Also, just a great blog: https://fs.blog/brain-food/august-14-2022/