Fairfax2019

[Dazel]

 

This year’s catalysts

 

-Fairfax followers are as bearish as I have seen since 2003.

 

-I expect the best bond manager (Brian Bradstreet) in the world to have filled Fairfax Xmas stockings with corporate and other bonds that got trounced in December. We have seen him move very quickly in the past... 2008 he bought $7b in tax free muni’s yielding 7% in less than a month and sold almost the entire US treasury holding that was larger than that at a massive profit during the same time. In the first half of the 2000’s he did very well in corporate bonds where he needed to be nimble before 2007. I am betting on a much higher yield on Fairfax large portfolio which will take operating earnings higher. This and a likely higher shift into higher yielding short term treasuries in the fall will show more of the earnings power of Fairfax as opposed to holding 50% cash holdings.

 

-India’s growth remains the highest in the world and Fairfax is a way to play that

 

-share buyback will accelerate at these levels albeit not as big as I would like!

 

- insurance companies will continue to improve

 

-equity positions are at rock bottom with little downside risk

 

-as previously discussed I am unhappy with share based awards...these will be disclosed in detail by Prem.

 

Most importantly this is a solid business with loads of potential that is selling dirt cheap for all of the reasons discussed here. Is it a redemption year for Prem and his team at Fairfax? We will see.

 

-

[Dazel]

 

Disclosure: I have put my money where my mouth is and been buying FFH

[StubbleJumper]

 

Disclosure: I have put my money where my mouth is and been buying FFH

 

 

Were you able to buy some for less than US$450?  Seems like a no-brainer at that price.

 

 

SJ

[petec]

Dazel, how do you value Fairfax?

[Cardboard]

"-Fairfax followers are as bearish as I have seen since 2003."

 

Seriously?

 

Back then it traded well well below book value and it is not the case these days. Now they need to generate earnings at a reasonable ROE to justify trading above book and to move up.

 

Cardboard

[Dazel]

 

 

Petec,

 

They are under earning...50% cash and very poor equity performance....I expect that to change. I expect Hamblin Watsa too come through mostly Bradstreet and the bond side and higher yields. Insurance companies are world class and the other income line has quietly risen materially.

 

Cardboard,

You sound negative....lol. You and everyone else are entitled to your opinion. I have given you mine...

 

I am not saying I am right I am telling you what I think....and definitely will not be arguing and debating it until the earnings present themselves....which will prove me right or wrong.

 

2019 is all about earnings....good or bad. It is time for Fairfax to perform...if they do not I will accept it and move on. If it sounds like a broken record I appreciate the skepticism from all “You have not been wrong”!!!

 

Prem needs to once again prove himself through his team or the market is right.

 

 

[shalab]

Dazel, hope FRFHF works out for you.

 

US is a 20.5 trillion economy. India is at 2.7 trillion. Canada is at 1.7 trillion or so. FRFHF market cap is 13 billion. There are many opportunities in the market some of which will undoubtedly be better than FRFHF.

 

One can simply buy ThomasCook India and bypass the overhead of owning FRFHF. Even better, one can buy businesses with better prospects in India. Note that ThomasCook India has been flat since 2015 in Rupee terms and doesnt pay much of a dividend. The indian rupee has declined against USD at the same time.

 

 

"-Fairfax followers are as bearish as I have seen since 2003."

 

Seriously?

 

Back then it traded well well below book value and it is not the case these days. Now they need to generate earnings at a reasonable ROE to justify trading above book and to move up.

 

Cardboard

[Dazel]

Shalab,

 

Totally agree....Fairfax India and others  are a better bet for sure if you are India focused. $20trillion @2% vs $2.7t that will double likely every 6 or 7 years....is the place to be. Many better opportunities in India and those with feet on the ground would blow away Fairfax or any other investment vehicle.

 

Fairfax gives you exposure to India and particular in the private market they are integrated in the financial system there and will get a lot more opportunities than others because of the trust they have earned there. But as you say being able to play in all of the other world economies is very important ...No one else really gives you that optionality that I see with direct exposure to India of “some” scale. If there is someone I would be very interested in them as an investment.

 

Ironically, Thomas Cook India has been a home run that Hamblin Watsa do not get much credit for...in the equities poor performance hit they are taking publically. What have you done for me lately prevails and that is fair after some of the big stumbles.

 

Ie Apple and Amazon are growing massively in India but will not even move the needle to their world incomes.

 

 

 

[Dazel]

 

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfax’s advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

 

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

 

Fairfax got a fast ball right down the middle of the plate ....

 

Did they hit that fast ball? Only they know that right now...but I don’t have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.

 

 

 

[shalab]

Dazel - my estimate is that FRFHF has ~10% exposure to India. It is definitely huge compared to FAANGM's exposure to India. However, even old economy companies like BTI, CL, PG, UN have more exposure to India than FAANGM.

 

One can open a brokerage account in India (it is quite a hassle, time consuming but can be done), it will allow one to buy public companies in India. I expect Indian economy to grow to 5.5 trillion USD by 2030. At the same time US economy should be around 30-35 trillion USD. Canada would probably be at 2.5 trillion While India will do very well, the USA will also do well.

 

Shalab,

 

Totally agree....Fairfax India and others  are a better bet for sure if you are India focused. $20trillion @2% vs $2.7t that will double likely every 6 or 7 years....is the place to be. Many better opportunities in India and those with feet on the ground would blow away Fairfax or any other investment vehicle.

 

Fairfax gives you exposure to India and particular in the private market they are integrated in the financial system there and will get a lot more opportunities than others because of the trust they have earned there. But as you say being able to play in all of the other world economies is very important ...No one else really gives you that optionality that I see with direct exposure to India of “some” scale. If there is someone I would be very interested in them as an investment.

 

Ironically, Thomas Cook India has been a home run that Hamblin Watsa do not get much credit for...in the equities poor performance hit they are taking publically. What have you done for me lately prevails and that is fair after some of the big stumbles.

 

Ie Apple and Amazon are growing massively in India but will not even move the needle to their world incomes.

[petec]

 

 

Petec,

 

They are under earning...50% cash and very poor equity performance....I expect that to change. I expect Hamblin Watsa too come through mostly Bradstreet and the bond side and higher yields. Insurance companies are world class and the other income line has quietly risen materially.

 

 

Yes, I’m aware of this but what I meant was how do you value it? P/earnings power? P/BV? P/TBV? I’m interested in how you think about this.

 

Also, you say Thomas Cook was a home run. Was it? Or was it just Quess?

[Dazel]

Shalab,

 

It is higher % of Fairfax common stock portfolio.

 

 

 

So Petec....I am buying for the upside of earnings power or PE. I believe that Fairfax is worth more dead than alive and that is my margin of safety.

 

So let’s invert.

 

If I took all of Fairfax assets and had them run the same...but hypothetically Markel Gayner asset management ran the $40b investment portfolio starting September 30. What do you think the perception would be of earnings going forward?

Most of Markel’s annual reports start with it was an excellent investment year....they are consistent and they are good. They command an above 20 PE and with an investment portfolio half the size of Fairfax and only 10% cash have earned such a great reputation that the stock trades for $2b more than Fairfax in the market.

The investment community would tabulate how much more money Fairfax could make if Markel Gayner were running investments if things were the same with $40b as opposed to $20b!!!! They would double their investment returns and wow there would be sooo much money made over the next 10 years they would be catching Berkshire...okay maybe that is a bit much but you get the point. The earnings power of the investment portfolio is there. The market puts a 0 value on it because it has lost faith in Prem and his team. The value at Markel would be significant.

 

HW needs to perform for the earnings power to show up....I am betting they will.

 

P.S I used September 30 because Markel only had $2b cash going into mini fall crash they would not have been able to do much...what do you think they would have done if they had $20b cash equivalents to go on a buying spree?

 

 

 

 

[Dazel]

 

Petec,

 

You are correct Quess was the home run.

[TwoCitiesCapital]

 

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfax’s advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

 

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

 

Fairfax got a fast ball right down the middle of the plate ....

 

Did they hit that fast ball? Only they know that right now...but I don’t have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.

 

I'm not convinced they did. I would love it if Fairfax had locked in Treasury yields at 3.2% or rolled into credit in December, but neither seems REALLY compelling if you're waiting for a fat pitch.

 

3.2% was the highest rates in 7 years, BUT Fairfax believes we're in a period of unprecedented economic growth and rising rates...which makes 3.2% less compelling especially when compared to historical Treasuries. Did credit spreads widen in December? Yes. But they're still mostly tight by historical standards.

 

I think they'd have waited for higher rates and spreads before making a move given their outlook on valuations and rates.

[StubbleJumper]

 

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfax’s advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

 

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

 

Fairfax got a fast ball right down the middle of the plate ....

 

Did they hit that fast ball? Only they know that right now...but I don’t have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.

 

I'm not convinced they did. I would love it if Fairfax had locked in Treasury yields at 3.2% or rolled into credit in December, but neither seems REALLY compelling if you're waiting for a fat pitch.

 

3.2% was the highest rates in 7 years, BUT Fairfax believes we're in a period of unprecedented economic growth and rising rates...which makes 3.2% less compelling especially when compared to historical Treasuries. Did credit spreads widen in December? Yes. But they're still mostly tight by historical standards.

 

I think they'd have waited for higher rates and spreads before making a move given their outlook on valuations and rates.

 

 

Well, locking in at 3.2% might have been the thing to do in retrospect, but in the short term it probably doesn't make that much difference.  My guess is that half the $27B of cash/bonds were rolled during 2018 and if they were rolled into 2-year treasuries, what would be the weighted average rate?  Would it have been around 2.7% over the year?  So the "penalty" for not having perfectly managed the bond port might be ~50 bps on $27B? 

 

It would clearly have been better to have nailed it perfectly, but I don't mind the small-ish penalty that they've taken on the theory that rates are headed north over the next five-ish years.

 

 

SJ

[Spekulatius]

Dazel - my estimate is that FRFHF has ~10% exposure to India. It is definitely huge compared to FAANGM's exposure to India. However, even old economy companies like BTI, CL, PG, UN have more exposure to India than FAANGM.

 

One can open a brokerage account in India (it is quite a hassle, time consuming but can be done), it will allow one to buy public companies in India. I expect Indian economy to grow to 5.5 trillion USD by 2030. At the same time US economy should be around 30-35 trillion USD. Canada would probably be at 2.5 trillion While India will do very well, the USA will also do well.

 

 

High GNP growth does not necessarily mean a strong stock performance. China for example still has high GNP growth, but a very poor stock performance for many years now. There are numerous other examples. I believe stock market performance depends much more on how this GNP growth is achieved and profitability metrics than the actual GNP growth

[shalab]

What you are saying is absolutely right - I like USA the best when it comes to the stock market - the managements are generally shareholder friendly and very efficient. It doesn't hurt that USA has some of the best companies on the planet. E.g:, Japan has several successful companies but several investors have written about their experiences there - stakeholders other than shareholders are given priority.

 

India's commercial and court system are borrowed from Britain. So they are similar to the US in many respects. People should see better returns in India compared to some of the other "emerging" markets. E.g:, there is a reason why many RE companies in Hong Kong trade for low valuations - fraud is rampant. This problem of dishonest promoters also exists in India, out of the 6000 companies listed in the exchange, only about a 1000 or so are investable.

 

Here is the story from one of the super investors for reference:

 

https://economictimes.indiatimes.com/markets/stocks/news/picking-leel-electricals-was-a-mistake-admits-porinju/articleshow/67519758.cms

 

 

Dazel - my estimate is that FRFHF has ~10% exposure to India. It is definitely huge compared to FAANGM's exposure to India. However, even old economy companies like BTI, CL, PG, UN have more exposure to India than FAANGM.

 

One can open a brokerage account in India (it is quite a hassle, time consuming but can be done), it will allow one to buy public companies in India. I expect Indian economy to grow to 5.5 trillion USD by 2030. At the same time US economy should be around 30-35 trillion USD. Canada would probably be at 2.5 trillion While India will do very well, the USA will also do well.

 

 

High GMp growth does not necessarily mean a strong stock performance. China for example still has high GNP growth, but a very poor stock performance for many years now. There are numerous other examples. I believe stock market performance depends much more on how this GNP growth is achieved and profitability metrics than the actual GNP growth

[Dazel]

Shalab,

 

First of all I have benefitted from your work here....thank you. I believe you discovered the share awards which I have a big problem with.

 

I see you on the Berkshire thread which is excellent discussing the value of the holdings and $100b cash....Berkshire holdings were decimated in the fourth quarter. Mr. Buffett has a$20b limit for holding cash.

 

So Buffett has $80b cash on a $500b market cap...and many are excited about his buys despite Apples massive losses as well as others.

 

My questions to you are

 

1. Are Prem and HW actually that bad that with $20b+ in cash on a $12b market cap and minimal losses in the fourth quarter in comparison to Berkshire....that you doubt they benefit from the opportunity more than Berkshire did?

 

2. What is Fairfax worth if Mr. Buffett is running the investment portfolio?

[shalab]

I am a Prem and FRFHF fan. I made money in FRFHF and ORH (when it went private).  I bought Thomas Cook India at 196 INR last year. I follow all their investments India, Canada and the US. 

 

However, I liquidated my FRFHF positions recently and went into Berkshire.

 

The reasons are as follows:

 

1. FRFHF transparency (or lack thereof) - in BRK case, we clearly know how much is needed for insurance ops and how much isn't. We also know headquarters gets 400 MM of cash per week to invest in anyway they like. This translates to 21B per year. Apple drop is likely temporary and BRK will make 750MM per year from dividends increasing every year with their Q3 position. I even bought apple when it dropped to 140s.

 

  In FRFHF case, I don't believe their insurance operations are as sound - this is likely one of the reasons for hedges. Parsad suggested this a while back. So it is not clear how much cash is available to invest freely.

 

2. Berkshire investing FRFHF cash:

  It is not clear how much cash is available to invest - they have issued shares to raise money for acquisition(s). Parsad suggested in one of the threads on FRFHF to reduce leverage. They haven't done that. They also run hedge funds in India and Africa and pocket fees.  Where are the best ideas - is it in FRFHF or in the hedge fund? One of the suggestions by SD (which made the most sense) was that they are getting the next generation setup in the family business. Many people go to FRFHF annual meeting spending a bunch of money. Nothing of substance comes out either about the company or about its direction.

 

I believe there are better options available right now than FRFHF.

 

Shalab,

 

First of all I have benefitted from your work here....thank you. I believe you discovered the share awards which I have a big problem with.

 

I see you on the Berkshire thread which is excellent discussing the value of the holdings and $100b cash....Berkshire holdings were decimated in the fourth quarter. Mr. Buffett has a$20b limit for holding cash.

 

So Buffett has $80b cash on a $500b market cap...and many are excited about his buys despite Apples massive losses as well as others.

 

My questions to you are

 

1. Are Prem and HW actually that bad that with $20b+ in cash on a $12b market cap and minimal losses in the fourth quarter in comparison to Berkshire....that you doubt they benefit from the opportunity less than Berkshire did?

 

2. What is Fairfax worth if Mr. Buffett is running the investment portfolio?

[Dazel]

 

Thanks.

 

I don’t have anything to add....the past is the past.

 

Fairfax needs to perform that simple.

[TwoCitiesCapital]

 

Just a follow up....there is lots of opportunity out there Shalab I agree...Fairfax’s advantage is they went into this sell off period with $28 billion of bonds and cash....of  note is that interest rates dropped substantially creating appreciation in their large treasury portion of those holdings and allowing them the opportunity to buy into a frozen bond market. In the past this has been their strength.

 

There was a window that if Fairfax acted that they would have seized large near term and long term profits in the investment portfolio....which has been the drag on Fairfax. So when you say there are many opportunities now which there are....many have had to wait for their holdings to appreciate to buy other things because they had little dry powder to buy into the worst December in almost 90 years.

 

Fairfax got a fast ball right down the middle of the plate ....

 

Did they hit that fast ball? Only they know that right now...but I don’t have to pay for that probability right now because the stock is cheap enough that they will do fine if they did not hit that fast ball out of the park.

 

I'm not convinced they did. I would love it if Fairfax had locked in Treasury yields at 3.2% or rolled into credit in December, but neither seems REALLY compelling if you're waiting for a fat pitch.

 

3.2% was the highest rates in 7 years, BUT Fairfax believes we're in a period of unprecedented economic growth and rising rates...which makes 3.2% less compelling especially when compared to historical Treasuries. Did credit spreads widen in December? Yes. But they're still mostly tight by historical standards.

 

I think they'd have waited for higher rates and spreads before making a move given their outlook on valuations and rates.

 

 

Well, locking in at 3.2% might have been the thing to do in retrospect, but in the short term it probably doesn't make that much difference.  My guess is that half the $27B of cash/bonds were rolled during 2018 and if they were rolled into 2-year treasuries, what would be the weighted average rate?  Would it have been around 2.7% over the year?  So the "penalty" for not having perfectly managed the bond port might be ~50 bps on $27B? 

 

It would clearly have been better to have nailed it perfectly, but I don't mind the small-ish penalty that they've taken on the theory that rates are headed north over the next five-ish years.

 

 

SJ

 

Absolutely agree! That was basically my point - in hindsight, locking in at 3.2% or rolling to credit would have been the right things to do, but wouldn't have made sense if Fairfax is truly waiting for a fat pitch which is what we all believe they're doing. So there was likely 0 benefit to Fairfax from the December tumult or the spike and subsequent fall in rates. If anything, the fall in rates is going to hurt them as they roll the 2-year Treasuries. Was simply rebutting that Fairfax put money to work in December.

[wondering]

I was reading the Chou Funds 2018 annual report, and one of Francis' more recent purchases caught my eye.  Sometime in 2018, in the Chou RRSP Fund, Francis purchased 2,000 shares of Fairfax for a Canadian cost of $1,344,170 (or $672/share if my math is right).

 

Two observations

 

1) Francis is seeing value in Fairfax, even at $672 Cdn/share

2) I am guessing that he never bought Fairfax in the past because of appearance of conflict of interest since he was on the board a number of years ago.  I am guessing that the appropriate "cooling off" period has lapsed?

[investmd]

Thanks for sharing this insight.

It's a strange buy for Chou as in my opinion he usually seeks deeply undervalued/distressed stocks with a 2-10x potential. FFH doesn't fit that bucket. Maybe in the Chou RRSP, he is restricted to buying Canadian equities. I don't think he bought FFH in his flagship Chou Associates fund?

 

[Broeb22]

If Fairfax can return to compounding at 15%, which should be easier when you’re not betting the world will end with expensive puts, the stock could be a 2x from revaluation alone starting at approximately 1x book value, and 5 years of 15% growth on top of the re-rating gets you to a 4x. The classic Davis double.

[TwoCitiesCapital]

If Fairfax can return to compounding at 15%, which should be easier when you’re not betting the world will end with expensive puts, the stock could be a 2x from revaluation alone starting at approximately 1x book value, and 5 years of 15% growth on top of the re-rating gets you to a 4x. The classic Davis double.

 

Yes, but as has been discussed exhaustively, 15% is no easy feat when interest rates are at 2.5% on the 10-year treasury. So either those equities need to do 15-20% per annum to make up for the dead-weight of the fixed income portfolio at 2.5-3% OR they need interest rates to rise to lock in longer term yields that are much higher than 3%.

 

I know the Prem keeps benchmarking himself to that number, but I haven't really heard anyone make a case for why we should expect 15-20% on the equity side. They haven't done that in the past decade even if you exclude the equity hedges and I don't expect them to suddenly start when valuations are very full and the bull market seemingly slowing after a 10-year expansion.

 

Even if there is a pullback, they're already fully invested on the equity side. It's not as if there are billions in cash, or hedges, that could be rolled into equities at more favorable valuations to help achieve that 15% ROE. Further, any sustained pullback is likely to impact Fairfax's stock as well - particularly since they're unhedged at this time.

 

I just don't see much reason to own this today. Maybe if you think that India or Greece or Blackberry is suddenly going to go gangbusters, it could be worthwhile, but then why not just Eurobank, Fairfax India, or Blackberry directly. Personally, I rolled all of my proceeds out of Fairfax and into Fairfax India earlier this year with the expectation that the India vehicle will dramatically outperform the parent in the near-to-mid term.