Fairfax stock positions

[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!

[petec]

5 minutes ago, Parsad said:

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. 

 

My point is that every decade or two the level of monetary manipulation or the lack of it is extraordinary, and investors seldom fully understand the distortions at the time.

 

Nations going back onto the gold standard after WW1 and then failing to adjust the amount of money in the system after the crash had a huge impact in the 1930s.

 

Rebuilding the global monetary system (Bretton Woods) had a huge impact postwar.

 

Taking the dollar off the gold standard had a huge impact from 1971 onwards.

 

Volker had a huge impact in the early 1980s.

 

No-one had experienced those things before, either. Everything changes and everything stays the same. 

[Viking]

Thanks for taking the time to debate a super important aspect of Fairfax. Let me try and make my point another way… Let’s pretend Fairfax is a batter in baseball. From 2013-2017 its batting average was probably about .500 or lower (i.e. it ‘hit’ on less than 50% of its new equity investments over this time period). From 2018 to present its batting average is likely over .900 (hitting on over 90% of its equity investments). 
 

Forget the exact percentages. It looks to me like Fairfax’s ‘success rate’ when making new equity purchases (2018-present) is much, much higher - close to double - what it was (2013-2017).

The list of bad investments made from 2013 to 2017 is long.

- 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)

 

What are the terrible equity investments made 2018 to present?

- ?

 

There is no comparison. Fairfax is buying better situations/companies. Why is this? I don’t think it is luck. I think they are using a different, improved methodology. Yes, they continue to be deep value investors. They have just been much better at it in recent years.

Edited February 25, 2022 by Viking

[Viking]

10 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).

Eurobank is a great example. The decision to purchase Eurobank when they did was, in hindsight, a terrible decision. The failure of that investment decision when made had absolutely nothing to do with the Fed or global monetary policy in place at the time. Fairfax completely misread the situation in Greece. The Greek economy was in much worse shape than they realized at the time. The political situation was worse than they realized. This economic/political situation made the turnaround at the bank pretty much impossible to execute at the time (regardless of how good management was). In short, it was a terrible risk/reward decision. And Fairfax paid the price as a very large investment way underperformed for many years. 

 

Eurobank also demonstrates one of the strengths of Fairfax: when they mess up with an investment they do their best to fix it. Over many years, if necessary. And they are willing to spend money and be highly creative to get the company positioned properly to be able to succeed. 

 

So do i like Eurobank today? Yes. A lot. Due to 6 years of hard work and merging with Grivalia, Eurobank is largely ‘fixed’. The political situation in Greece is ‘fixed’ (for now) with a pro business government. And the Greek economy has turned the corner and is poised very well heading into 2022. 
—————

All the poor equity purchases made from 2013-2017 had nothing to do with monetary policy at the time.

 

Now the disastrous shorting policy… i am just happy that sad story is over. I agree monetary policy at the time was a factor in that failed strategy… but the bigger issue was the poor risk/reward decision making at Fairfax. 

Edited February 25, 2022 by Viking

[petec]

I’m not denying that Fairfax’s investments have worked better recently than they did before. But if you think that’s because Fairfax has dramatically changed how it invests you’re not looking at the evidence right in my view. What changed was the cyclical environment for these companies. 
 

Eurobank is a great example. Its initial failure had EVERYTHING to do with monetary policy as dictated by the EU and ECB. Greece experienced a depression - one of the closest corollaries of the Great Depression that I know of. Monetary policy could have changed it in a heartbeat (at a cost).
 

Tight monetary policy is why it took Eurobank ten years to work through its NPLs. Loose monetary policy (during covid) is part of why the Greek economy has started reflating. Fairfax owned the company in both periods. Their investment policy did not change - circumstances did. 

[petec]

And by the way, the merger with Grivalia did not fix Eurobank. The massive issue of equity (to buy Grivalia) did. 

[Viking]

45 minutes ago, petec said:

I’m not denying that Fairfax’s investments have worked better recently than they did before. But if you think that’s because Fairfax has dramatically changed how it invests you’re not looking at the evidence right in my view. What changed was the cyclical environment for these companies. 
 

Eurobank is a great example. Its initial failure had EVERYTHING to do with monetary policy as dictated by the EU and ECB. Greece experienced a depression - one of the closest corollaries of the Great Depression that I know of. Monetary policy could have changed it in a heartbeat (at a cost).
 

Tight monetary policy is why it took Eurobank ten years to work through its NPLs. Loose monetary policy (during covid) is part of why the Greek economy has started reflating. Fairfax owned the company in both periods. Their investment policy did not change - circumstances did. 

If i have used ‘dramatically’ when describing the changes i think have happened at Fairfax then, yes, that is too strong. The old guard at Fairfax are deep value investors at heart.

 

The issues with Greece, its political system and its economy, were very well known at the time. Yes, the ECB was a wild card. Value investing is defined as ‘safety of principal and adequate return’. There was no ‘safety of principal’ putting money in Eurobank at the time (their initial purchase). It was a straight up high stakes gamble. It was a speculation not an investment, as defined by Graham. I just see way less ‘speculation’ with investments made in recent years (2018 to present) than in prior years. Lots of success stories. And i don’t think its luck.

 

Grivalia is an example of where Fairfax made a very successful investment. (They did hit on a number of their investments pre-2018.) Same country; same monetary policy; same ECB. Folding Grivalia into the much larger Eurobank accelerate the improvements at Eurobank and made the new entity much stronger (1+1=2.5). Of course the actions of all governments worldwide (fiscal and monetary) during covid have been very beneficial. 

Edited February 25, 2022 by Viking

[maxthetrade]

Great discussion. I very much agree with petec, it's not that Fairfax changed their investing style, they are simply now at the sweet spot of a commodity cycle. I hope they don't screw it by overstaying. 

[Viking]

2 hours ago, Parsad said:

 

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!

i think Francis Chou has spoken pretty openly about the mistakes he made when investing in Abitibi/Resolute. I am pretty sure he fessed up it was, plain and simple, a bad purchase. And it took him years to learn why. My guess is the same light bulb went on at Fairfax. 
 

Now it may be that 30 years ago that exact same purchase (Abitibi) may have turned into a great investment. 
 

Bottom line, it looks to me like some important lessons have been learned. And as a Fairfax shareholder this gives me a greater confidence level that future equity purchases will be solid investments. But i will remain open minded.

Edited February 25, 2022 by Viking

[nwoodman]

There were a few questions from analysts on the recent Kennedy Wilson conference call regarding the investment by Fairfax.  Always interesting to see the deal from the investees perspective.

 

Operator

The next question comes from Jamie Feldman with Bank of America. Please go ahead.

Jamie Feldman

Great. Thank you. I just want to go back to Matt's comment that, the Fairfax warrant and preferred deal was one of several investments you considered. Can you talk more about what else you did -- if I am assuming, I heard you right, can you talk more about what else you did consider, why you felt like you even needed to do a deal like this right now? And then, how should we think about the pricing on the warrant versus your view of NAV?

Matt Windisch

Yeah. So we -- like I said, we did look at a number of options. So perpetual preferred would have come in 300 basis points or more higher above the dividend rate that we're paying. So that was an option we looked at a straight equity, transaction comes in obviously the discounts to the stock price anywhere from 4% to 6%, 7% discount to the stock price where in this case the warrants were struck at a premium to the current stock price and a 23% premium to where we've been buying back the stock.

So for us, I mean, we're really looking at this over the long run, how do we, grow the NAV per share. And by having this accretive capital we can deploy it into our various platforms where we're earning 15% to 20% returns on capital. And at the rate we've been growing the business we just feel this is prudent to be putting more permanent capital into the company to allow us to grow the business in a prudent way.

Mary Ricks

In addition to the $3 billion of fresh powder for the debt platform …

Jamie Feldman

Yeah.

Mary Ricks

… which we obviously will earn fees on.

Edited February 27, 2022 by nwoodman

[glider3834]

Just following on from interesting discussion on Fairfax's capital allocation/equity investment strategy and whether they have pivoted in any way. I think they have pivoted around focusing more on internal rather than external opportunities which also provides lower risk IMHO.

 

I think if we were looking for a common thread - Fairfax has been very focused on their existing holdings/subs - no major new acquisitions from 13Fs in last year or so - but more focus on optimising/maximising value from existing investments both in insurance and non-insurance . To use a cricket analogy - not trying to swing for the fence (hit a 6) on every ball, but just take lots of easier 1s & 2s.

 

Their largest cash outlays have been on their own undervalued stock - equity swaps & $1 bil share repurchase. A lower risk approach.

 

They won't short any more - again a lower risk approach.

 

So I don't think Fairfax are changing the types of equity investments they are making or we might expect them to make in the future & which has driven most of their book value growth per share over time  - they are value investors - but if they are going to make new acquisitions, they appear to be looking to internal opportunities (existing positions/investees) first - Kennedy Wilson investment recently is a good recent example or recent purchase of Fairfax India shares. And also on the insurance side, the focus is on growing premium organically - again lower risk.

 

FFH have also been increasing in FFH ownership (incl Riverstone) in non-insurance investees (post buybacks)

 

Fairfax India  41.8% (current) , 34.5% (Dec-20) 

Eurobank 32.2% (Sep-21) , 30.5% (Dec-20)

Stelco 17.8% (Feb-22) , 15% (Dec-20)

 

Worth noting too 

 

Resolute has new share repurchase plan up to 10 mil shares, which could increase FFH's ownership from 38.6% to 43.4% approx.

 

And there is another Sunday ramble from me

 

Looking forward to Prem's shareholder letter next week too!

 

 

 

[Viking]

On 2/27/2022 at 12:20 AM, glider3834 said:

Just following on from interesting discussion on Fairfax's capital allocation/equity investment strategy and whether they have pivoted in any way. I think they have pivoted around focusing more on internal rather than external opportunities which also provides lower risk IMHO.

 

I think if we were looking for a common thread - Fairfax has been very focused on their existing holdings/subs - no major new acquisitions from 13Fs in last year or so - but more focus on optimising/maximising value from existing investments both in insurance and non-insurance . To use a cricket analogy - not trying to swing for the fence (hit a 6) on every ball, but just take lots of easier 1s & 2s.

 

Their largest cash outlays have been on their own undervalued stock - equity swaps & $1 bil share repurchase. A lower risk approach.

 

They won't short any more - again a lower risk approach.

 

So I don't think Fairfax are changing the types of equity investments they are making or we might expect them to make in the future & which has driven most of their book value growth per share over time  - they are value investors - but if they are going to make new acquisitions, they appear to be looking to internal opportunities (existing positions/investees) first - Kennedy Wilson investment recently is a good recent example or recent purchase of Fairfax India shares. And also on the insurance side, the focus is on growing premium organically - again lower risk.

 

FFH have also been increasing in FFH ownership (incl Riverstone) in non-insurance investees (post buybacks)

 

Fairfax India  41.8% (current) , 34.5% (Dec-20) 

Eurobank 32.2% (Sep-21) , 30.5% (Dec-20)

Stelco 17.8% (Feb-22) , 15% (Dec-20)

 

Worth noting too 

 

Resolute has new share repurchase plan up to 10 mil shares, which could increase FFH's ownership from 38.6% to 43.4% approx.

 

And there is another Sunday ramble from me

 

Looking forward to Prem's shareholder letter next week too!

@glider3834 I agree: Fairfax is investing much more ‘internally’ than in past years. 

1.) Fairfax directly via significant buybacks (+2 million last year)

2.) Fairfax via TRS: giving them exposure to another 1.96 million shares of Fairfax

3.) Fairfax subs directly: Fairfax India

4.) expanding partnerships with existing long term partners: Kennedy Wilson

 

And i also think this is indicative of a change in the filters that Fairfax is using in how it allocates capital. Simpler approach. More concentrated. To your point, low risk. Solid return. Kind of like shooting fish in barrel for them.

 

So i am going to stick with my thesis that things have changed - in a good way.

Edited March 2, 2022 by Viking

[Viking]

Fairfax performed terribly for the decade 2011-2020. Book value increased from US$364.55 to $478.33 = +31% (yes, they did pay a $10 dividend).   Closing share price was US$437.01 Dec 31, 2011 and $433.85 on Dec 31, 2020. (Today the share price is $467.)
 

Why? The insurance business performed ok over this decade. And the bond portfolio performed ok too. So what was the problem? The equity/derivative investments was the big problem. 
————-

The reason i keep coming back to this topic is because understanding why Fairfax performed so poorly in the past is an important input to understanding Fairfax today and how it might perform in future years. If nothing has changed at Fairfax (in terms of levers management has control over) why would we expect future results to change?

————-

So what exactly was the problem with the equity derivative bucket from 2011-2020? I think there were 2 problems: one big and one smaller, but still important.
 

1.) shorting/CPI derivative bet: the shorting strategy cost the company US$450 million per year over 10 years from 2011-2020 (not 7 years as i previously stated). The deflation bet cost close to another $50 million per year on average over the same 10 years. So by discontinuing both of those strategies Fairfax has in essence removed a $500 million annual expenses. We saw the benefit of this in 2021 results. 

 

2.) bad equity purchases: another very large annual ‘expense’ that Fairfax has had is write downs to bad equity purchases. I am being liberal with my definition of ‘write downs’ to include actions taken by Fairfax over the years that essentially destroyed shareholder value. I really need to calculate the actual numbers. My guess is this expense ran into the hundreds of millions many years (perhaps $150 - $200 million every year on average?). But unlike the ‘short’ and ‘CPI’ expenses i don’t think the ‘bad equity’ expense will be eliminated; but i do think it will be reduced dramatically moving forward. Why? Two reasons:

1.) Fairfax is making better decisions on new purchases beginning in 2018: the amount of new money Fairfax will have to spend to fix one or more of these companies (or light on fire in the case of a severe markdown in value) should be much less. 

2.) most of the problem equities purchased prior to 2018 have largely been fixed (sold, merged, taken private, recapitalized). The financial hit to Fairfax earnings and its book value from these older holdings has largely happened.

Why do we care? Another ‘expense’ running perhaps $150-$200 million per year has been greatly reduced. Given how Fairfax invests (deep value) there is always going to be some cost here; however, i do expect the cost to be smaller on average in future years. Fairfax has communicated they will no longer short stocks.
 

Combining the two items, my guess is Fairfax has cut their ‘expenses’ by US+$600 million per year. This is $25 per share. This is money Fairfax will be able to now spend/invest on other things… things that will drive shareholder value. Every year. That compounding thing... except working for shareholders and not against them like it had been from 2011-2020. 2021 was a good start... look at all the good investments Fairfax made last year. It will be more of the same in 2022. Having another $600 million every year really helps...

Edited March 2, 2022 by Viking

[modiva]

1 hour ago, Viking said:

Fairfax performed terribly for the decade 2011-2020. Book value increased from US$364.55 to $478.33 = +31% (yes, they did pay a $10 dividend).   Closing share price was US$437.01 Dec 31, 2011 and $433.85 on Dec 31, 2020. (Today the share price is $467.)
 

Why? The insurance business performed ok over this decade. And the bond portfolio performed ok too. So what was the problem? The equity/derivative investments was the big problem. 
————-

The reason i keep coming back to this topic is because understanding why Fairfax performed so poorly in the past is an important input to understanding Fairfax today and how it might perform in future years. If nothing has changed at Fairfax (in terms of levers management has control over) why would we expect future results to change?

————-

So what exactly was the problem with the equity derivative bucket from 2011-2020? I think there were 2 problems: one big and one smaller, but still important.
 

1.) shorting/CPI derivative bet: the shorting strategy cost the company US$450 million per year over 10 years from 2011-2020 (not 7 years as i previously stated). The deflation bet cost close to another $50 million per year on average over the same 10 years. So by discontinuing both of those strategies Fairfax has in essence removed a $500 million annual expenses. We saw the benefit of this in 2021 results. 

 

2.) bad equity purchases: another very large annual ‘expense’ that Fairfax has had is write downs to bad equity purchases. I am being liberal with my definition of ‘write downs’ to include actions taken by Fairfax over the years that essentially destroyed shareholder value. I really need to calculate the actual numbers. My guess is this expense ran into the hundreds of millions many years (perhaps $150 - $200 million every year on average?). But unlike the ‘short’ and ‘CPI’ expenses i don’t think the ‘bad equity’ expense will be eliminated; but i do think it will be reduced dramatically moving forward. Why? Two reasons:

1.) Fairfax is making better decisions on new purchases beginning in 2018: the amount of new money Fairfax will have to spend to fix one of these companies (or light on fire in the case of a severe markdown in value) should be much less. 

2.) most of the problem equities purchased prior to 2018 have largely been fixed (sold, merged, taken private, recapitalized). The financial hit to Fairfax earnings and its book value has largely happened.

Why do we care? Another ‘expense’ running perhaps $150-$200 million per year has been greatly reduced. Given how Fairfax invests (deep value) there is always going to be some cost here; however, i do expect the cost to be smaller on average in future years. Fairfax has communicated they will no longer short stocks.
 

Combining the two items, my guess is Fairfax has cut their ‘expenses’ by US+$600 million per year. This is $25 per share. This is money Fairfax will be able to now spend on other things… things that will drive shareholder value. Every year.

Thanks @Viking very insightful post. 

[glider3834]

7 hours ago, Viking said:

Fairfax performed terribly for the decade 2011-2020. Book value increased from US$364.55 to $478.33 = +31% (yes, they did pay a $10 dividend).   Closing share price was US$437.01 Dec 31, 2011 and $433.85 on Dec 31, 2020. (Today the share price is $467.)
 

Why? The insurance business performed ok over this decade. And the bond portfolio performed ok too. So what was the problem? The equity/derivative investments was the big problem. 
————-

The reason i keep coming back to this topic is because understanding why Fairfax performed so poorly in the past is an important input to understanding Fairfax today and how it might perform in future years. If nothing has changed at Fairfax (in terms of levers management has control over) why would we expect future results to change?

————-

So what exactly was the problem with the equity derivative bucket from 2011-2020? I think there were 2 problems: one big and one smaller, but still important.
 

1.) shorting/CPI derivative bet: the shorting strategy cost the company US$450 million per year over 10 years from 2011-2020 (not 7 years as i previously stated). The deflation bet cost close to another $50 million per year on average over the same 10 years. So by discontinuing both of those strategies Fairfax has in essence removed a $500 million annual expenses. We saw the benefit of this in 2021 results. 

 

2.) bad equity purchases: another very large annual ‘expense’ that Fairfax has had is write downs to bad equity purchases. I am being liberal with my definition of ‘write downs’ to include actions taken by Fairfax over the years that essentially destroyed shareholder value. I really need to calculate the actual numbers. My guess is this expense ran into the hundreds of millions many years (perhaps $150 - $200 million every year on average?). But unlike the ‘short’ and ‘CPI’ expenses i don’t think the ‘bad equity’ expense will be eliminated; but i do think it will be reduced dramatically moving forward. Why? Two reasons:

1.) Fairfax is making better decisions on new purchases beginning in 2018: the amount of new money Fairfax will have to spend to fix one or more of these companies (or light on fire in the case of a severe markdown in value) should be much less. 

2.) most of the problem equities purchased prior to 2018 have largely been fixed (sold, merged, taken private, recapitalized). The financial hit to Fairfax earnings and its book value from these older holdings has largely happened.

Why do we care? Another ‘expense’ running perhaps $150-$200 million per year has been greatly reduced. Given how Fairfax invests (deep value) there is always going to be some cost here; however, i do expect the cost to be smaller on average in future years. Fairfax has communicated they will no longer short stocks.
 

Combining the two items, my guess is Fairfax has cut their ‘expenses’ by US+$600 million per year. This is $25 per share. This is money Fairfax will be able to now spend/invest on other things… things that will drive shareholder value. Every year. That compounding thing... except working for shareholders and not against them like it had been from 2011-2020. 2021 was a good start... look at all the good investments Fairfax made last year. It will be more of the same in 2022. Having another $600 million every year really helps...

Share price close to US$467

BVPS US$630 at 31 Dec-21

Will have a loss on equity positions since 31 Dec (hard to quantify $s still waiting for AR 2022), but I think this can also be offset by Q1 net operating income & Digit revaluation still to come.

So I would estimate P/BV in 0.74 to 0.76 range - so still looks cheap IMHO 

 

 

 

 

 

[Viking]

1 hour ago, glider3834 said:

Share price close to US$467

BVPS US$630 at 31 Dec-21

Will have a loss on equity positions since 31 Dec (hard to quantify $s still waiting for AR 2022), but I think this can also be offset by Q1 net operating income & Digit revaluation still to come.

So I would estimate P/BV in 0.74 to 0.76 range - so still looks cheap IMHO 

Glider, yes, Fairfax is once again crazy cheap trading under US$470. I bought another big slug today so i am once again way overweight. And ok with that positioning as ‘the story’ just keeps getting better.

 

My last post might have come across as being bearish. I am quite the opposite. I think investors are way underestimating the earnings power of the company moving forward. And that is because most investors use past results as the core input to value the company. Which usually is the right thing to do. My view is past results have been polluted primarily by the significant short losses. Past results also understate the benefits of the current hard market in insurance. 
 

Having said that, Fairfax’s performance will be more volatile than most insurers. As you mention, Q1 is shaping up to be a tough quarter for their mark to market stock portfolio. I also wonder if they will need to write down their Ukraine insurance operations. But there will also be good news in Q1 results.  I am really looking forward to seeing what their underwriting results are. Was Q4 at 88 CR an outlier? I am hoping for 95 but i think there is a decent chance we may see a CR below 95. That would generate significant underwriting income and would be very bullish for Fairfax looking forward. 
 

And i am looking forward to the release of the AR. Looking forward to reading Prem's letter. And working through the whole report.

Edited March 2, 2022 by Viking

[petec]

On 2/25/2022 at 8:21 PM, Viking said:

Grivalia is an example of where Fairfax made a very successful investment. (They did hit on a number of their investments pre-2018.) Same country; same monetary policy; same ECB. Folding Grivalia into the much larger Eurobank accelerate the improvements at Eurobank and made the new entity much stronger (1+1=2.5).

 

Out of interest, why do you think 1+1=2.5 in this case? I don't see that the economics of any of the underlying assets changed as a result of the merger - Grivalia's properties did not rise in value, Eurobanks NPE's did not suddenly spring back to life, and there were no significant cost reductions.

 

What did happen is that Eurobank's capital increased, because it issued equity. But that would have happened if it had issued equity for cash, rather than for Grivalia shares. 

 

Am I wrong?

[petec]

11 hours ago, Viking said:

Fairfax is investing much more ‘internally’ than in past years. 

1.) Fairfax directly via significant buybacks (+2 million last year)

2.) Fairfax via TRS: giving them exposure to another 1.96 million shares of Fairfax

3.) Fairfax subs directly: Fairfax India

4.) expanding partnerships with existing long term partners: Kennedy Wilson

 

Every single one of these has to do with a change in the relationship between the price and the intrinsic value of the security concerned (or, in the case of the KW private credit investment, the alternatives).

 

Not one of these has to do with a change in strategy or approach. 
 

Fairfax goes where they see value. They did not buy back shares in FIH when it traded at or above book. They started to when it traded at two-thirds of book. This was not because they decided to invest internally. 

[petec]

10 hours ago, Viking said:

If nothing has changed at Fairfax (in terms of levers management has control over) why would we expect future results to change?

 

For two reasons:

 

1) Something did change: they stopped shorting. This is clear and has been communicated clearly.

 

2) Their investments are in a much better position because the cycle changed. But what we are seeing now is the fruits of going bargain hunting at the bottom of the cycle. It has taken years, but the fruits are here. We are not seeing the results of a sudden change in management philosophy. If we were, I think they would have told us so.

[petec]

1 hour ago, Viking said:

Fairfax is once again crazy cheap trading under US$470.

 

1 hour ago, Viking said:

I think investors are way underestimating the earnings power of the company moving forward.

 

I agree on both these points. I also wonder if we are approaching the point where the hard market slows, reserves have been rebuilt, and normal course buybacks funded from operating earnings can start in earnest. That would be great with the share price where it is now!

[Thrifty3000]

8 hours ago, petec said:

 

For two reasons:

 

1) Something did change: they stopped shorting. This is clear and has been communicated clearly.

 

2) Their investments are in a much better position because the cycle changed. But what we are seeing now is the fruits of going bargain hunting at the bottom of the cycle. It has taken years, but the fruits are here. We are not seeing the results of a sudden change in management philosophy. If we were, I think they would have told us so.

 

@petec I think there's more to it than that.

 

Prem is a formally trained engineer and systems thinker.

 

He engineered a strong insurance operation by getting talented leadership in the right positions and allocating capital to those who proved best able to deploy the capital profitably.

 

I believe he realized there are a number of people more (even far more) talented than he is at allocating non-insurance capital. He spent the last decade engineering an non-insurance capital allocation engine, consisting of David Sokol, Byron Trott, Kennedy Wilson, and so on...

 

I have a thesis that he doesn't want to make anymore material investment decisions unilaterally (though he would tell you he never did make unilateral decisions - which is horse hockey). I believe he gets just as many deal opportunities as he always has, if not more, but I think he is now funneling every opportunity to his network of non-insurance capital allocators.

 

I think the Prem of today wants his non-insurance allocators taking ownership of all significant capital allocation, since they are all proven investors, and since the result will go on their own scorecard, and impact their ability to earn even more capital from Prem.

 

Today, Prem gets to live the good life of having $100+ million a month flowing in the door, and he has a group of proven insurance managers AND a group of proven non-insurance investors vying for that cash (all more skilled than Prem at allocating capital in their respective domains). They pitch ideas to Prem, their performance scorecards are easy to monitor, and their incentives are well aligned. Prem supplies them capital as long as their scores continue to measure up.

 

The strategy HAS changed.

 

My latest epiphany is:

 

- Prem ain't a great investment analyst - and realizes it. He may be a decent analyst, but he knows others are better.

- Prem is a great business leader and - continuously improving - systems-thinking engineer.

- Prem has brilliantly ENGINEERED a diversified capital allocation engine staffed by talented capital allocators.

 

 

Edited March 2, 2022 by Thrifty3000

[Viking]

12 hours ago, petec said:

 

Out of interest, why do you think 1+1=2.5 in this case? I don't see that the economics of any of the underlying assets changed as a result of the merger - Grivalia's properties did not rise in value, Eurobanks NPE's did not suddenly spring back to life, and there were no significant cost reductions.

 

What did happen is that Eurobank's capital increased, because it issued equity. But that would have happened if it had issued equity for cash, rather than for Grivalia shares. 

 

Am I wrong?

i have no special insight on Grivalia’s merger with Eurobank. My guess is the merger happened because management of the two companies (and Fairfax) felt is was very beneficial for both organizations (and not just a make work project). Perhaps the merger improved the quality of Eurobank’s balance sheet; improved the quantity and quality of their earnings at the time; enhanced Eurobank’s real estate capabilities (important given the need to dramatically reduce non performing loans); accelerated their restructuring. Bottom line, Eurobank today is generally perceived to be the best positioned and best run bank in Greece - this suggests to me the merger with Grivalia was beneficial. But this is just a guess on my part. 

Edited March 2, 2022 by Viking

[MMM20]

7 hours ago, Thrifty3000 said:

 

@petec I think there's more to it than that.

 

Prem is a formally trained engineer and systems thinker.

 

He engineered a strong insurance operation by getting talented leadership in the right positions and allocating capital to those who proved best able to deploy the capital profitably.

 

I believe he realized there are a number of people more (even far more) talented than he is at allocating non-insurance capital. He spent the last decade engineering an non-insurance capital allocation engine, consisting of David Sokol, Byron Trott, Kennedy Wilson, and so on...

 

I have a thesis that he doesn't want to make anymore material investment decisions unilaterally (though he would tell you he never did make unilateral decisions - which is horse hockey). I believe he gets just as many deal opportunities as he always has, if not more, but I think he is now funneling every opportunity to his network of non-insurance capital allocators.

 

I think the Prem of today wants his non-insurance allocators taking ownership of all significant capital allocation, since they are all proven investors, and since the result will go on their own scorecard, and impact their ability to earn even more capital from Prem.

 

Today, Prem gets to live the good life of having $100+ million a month flowing in the door, and he has a group of proven insurance managers AND a group of proven non-insurance investors vying for that cash (all more skilled than Prem at allocating capital in their respective domains). They pitch ideas to Prem, their performance scorecards are easy to monitor, and their incentives are well aligned. Prem supplies them capital as long as their scores continue to measure up.

 

The strategy HAS changed.

 

My latest epiphany is:

 

- Prem ain't a great investment analyst - and realizes it. He may be a decent analyst, but he knows others are better.

- Prem is a great business leader and - continuously improving - systems-thinking engineer.

- Prem has brilliantly ENGINEERED a diversified capital allocation engine staffed by talented capital allocators.

 

 

+1. This + hard market + Teledyne-ing  -> ~1x ~$800/sh BV next year. 

[Viking]

14 hours ago, petec said:

 

For two reasons:

 

1) Something did change: they stopped shorting. This is clear and has been communicated clearly.

 

2) Their investments are in a much better position because the cycle changed. But what we are seeing now is the fruits of going bargain hunting at the bottom of the cycle. It has taken years, but the fruits are here. We are not seeing the results of a sudden change in management philosophy. If we were, I think they would have told us so.

I think it is instructive to look at some of the actual investments from 2013-2017 (see below). There are SO MANY terrible investments in this stretch. Far too many for it just to be bad luck. Many of the businesses performed terribly. And the poor performance had nothing to do with the economic cycle. It was so bad Fairfax had to get actively involved in many of the companies (to help fix financial, strategic or management issues). Prem said recently that Fairfax was NOT a private equity shop - actively involved in running the business. Fairfax had no choice with a bunch of there legacy investments.
 

Now compare these older investmentscto the investments made from 2018-2021 there are HARDLY ANY terrible investments. The business performance is good to great. Fairfax’s involvement in running the business is minimal. And the companies have not needed a bunch of additional money from Fairfax to keep the lights on. The businesses are generally performing well and some are performing very well.
—————

Yes, I questioned Fairfax’s investment in Stelco (2018) when I first saw it. And i was COMPLETELY WRONG. Of course, the boom in commodity prices has been the big catalyst for earnings and the share price. But the company had to survive a pandemic driven recession BEFORE it hit the jackpot of US$1,600 steel prices… which it did with flying colours. Because it had no debt. And great management. And an exceptional business plan. Fairfax is a passive partner.

 

Same thing with the Carillion purchase (out of bankruptcy). At the time it screamed ‘old Fairfax’ to me. Looking like i was wrong again. The reverse merger with Horizon North in early 2020 did not look good at the time. Of course i knew little about the actual business. Despite being severely impacted by the pandemic, today the merged company is doing well (although in Q3 results slightly disappointed). Solid management team. Solid business plan. Solid balance sheet. Executing well. My guess is they will hit their $100 million EBITDA target in the next 18-24 months. 
 

Given its large size (Fairfax’s largest investment by far), Atlas/Seaspan is an extremely important example. Completely re-engineering the model for shipping. Delivered great results during the pandemic. More recently successfully executed massive multi-year new-build strategy. Solid balance sheet. Great management. And an exceptional business plan. Fairfax is a passive partner.

 

These sorts of equity holdings have nothing in common with MANY of the equity purchases made pre-2018. This tells me Fairfax is using a different methodology. I am not suggesting it has been a radical change. But it looks to me like they are placing a much higher premium on:

1.) leadership/management

2.) business plan

3.) financial position/balance sheet (will it need more money from Fairfax to stay in business should adversity strike) 

—————

Below are just a few examples of ‘old Fairfax’:

Fairfax Africa (Feb 2017) is a great example. Prem said Paul was the one who came up with the idea (wanted to replicate the successful Fairfax India). And Paul was in charge. And what a mess. The failure of this investment had nothing to with market cycle. Among other things, the stock selection was terrible. If you compare Helios and their approach in Africa with the former Fairfax Africa it is night and day. The failure of this investment resulted in financial and also significant reputational cost for Fairfax. Investors lost lots of money. And the analyst community looked like dummies.

 

APR Energy (2015) was another catastrophe. A troubled, capital intensive business focussed on emerging markets (largest customer used to be Libya) - what could possibly go wrong? Terrible analysis by Fairfax. Bad business AND bad management (look at what Atlas did as soon as they got it). And 2 years later, Atlas is still trying to right the ship. APR’s failings have nothing to do with the economic cycle. 
 

Farmers Edge (Dec 2016) is looking like another good example of terrible investment process (initial decision and subsequent decisions to keep throwing good money after bad). What bailed Fairfax out (for now) was the SPAC bubble in 2021 - so the company was able to get another $140 million. I listened to two Farmers Edge conference calls last year. What a mess. The analyst community was absolutely shell shocked - there was a complete disconnect between what FE management said and what they were subsequently able to deliver 3 months later. Farmers Edge is one of the few problem children (from ‘old’ Fairfax) that i have my doubts about. 

Edited March 3, 2022 by Viking

[glider3834]

1 hour ago, Viking said:

I am not suggesting it has been a radical change. But it looks to me like they are placing a much higher premium on:

1.) leadership/management

2.) business plan

3.) financial position/balance sheet (will it need more money from Fairfax to stay in business should adversity strike) 

viking yes I think this echoes Prem's comments in the 2020 AR 

 

'As you know, we are building Fairfax for the next 100 years (long after I am gone, I think!!). Recently, I came across two books on long lived companies: ‘‘The Living Company, Habits for Survival in a Turbulent Business Environment’’ by Arie de Geus, and ‘‘Lessons from Century Club Companies, Managing for Long Term Success’’ by Vicki Tenhaken. They both make the point that companies that have survived for over 100 years have four characteristics:

1. They are sensitive to the business environment, so that they always provide outstanding customer service.

2. They have a strong culture - a strong sense of identity that encompasses not only the employees but also the community and everyone they deal with. Managers are chosen from the inside and considered stewards of the enterprise. 3. They are decentralized, refraining from centralized control.

4. They are conservatively financed, recognizing the advantage of having spare cash in the kitty. Fairfax has many of these characteristics and we continue to build our company for the future.'

Edited March 3, 2022 by glider3834