Fairfax 2020

[Parsad]

Prem is all about establishing and growing relationships.  This sometimes goes against immediate optimization of every deal.

 

This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.

 

It is a matter of judgment.  It is not a simple screw everyone and take as much profit as you can.

 

Stop defending him....this one is not even close....

 

The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold.

 

You're asking some shareholders to stop defending him, but have you or anyone asked Prem why he is supporting the Bitove/Rivett deal?  You guys always talk about self-dealing at Fairfax...show me some frickin' examples.  The only things you guys point to is Resolute and now this.  Resolute was to the benefit of Fairfax shareholders.

 

If the Bitove/Rivett deal wins, do you think there might be some long-term opportunity for Fairfax?  And why are you pissed off at the investor and not Torstar management...they are the ones who should be explaining why they are supporting a specific deal to all shareholders.  Cheers!

[bearprowler6]

Prem is all about establishing and growing relationships.  This sometimes goes against immediate optimization of every deal.

 

This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.

 

It is a matter of judgment.  It is not a simple screw everyone and take as much profit as you can.

 

Stop defending him....this one is not even close....

 

The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold.

 

You're asking some shareholders to stop defending him, but have you or anyone asked Prem why he is supporting the Bitove/Rivett deal?  You guys always talk about self-dealing at Fairfax...show me some frickin' examples.  The only things you guys point to is Resolute and now this.  Resolute was to the benefit of Fairfax shareholders.

 

If the Bitove/Rivett deal wins, do you think there might be some long-term opportunity for Fairfax?  And why are you pissed off at the investor and not Torstar management...they are the ones who should be explaining why they are supporting a specific deal to all shareholders.  Cheers!

 

Here we go again....the old "long term"response! I have written on here before....without a specific timeline the phrase long term is meaningless!

 

As far as I can see Fairfax has been silent on its motives for accepting a lower price for its Torstar shares (than offered by the competing group)...so in the absence of a description of any future beenfit that may accrue to Fairfax shareholders I assume none exists.

 

furthermore, Stubble Jumper outlined it very well when he raised concerns with the actions of both Torstar's board/management and Fairfax!

 

Have to leave the board for a few minutes since Greg Sorbora (part of the group completing against Bitove/Rivett) is about to be interviewed on BNNBloomberg.

 

 

 

 

[bizaro86]

Prem is all about establishing and growing relationships.  This sometimes goes against immediate optimization of every deal.

 

This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.

 

It is a matter of judgment.  It is not a simple screw everyone and take as much profit as you can.

 

Stop defending him....this one is not even close....

 

The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold.

 

You're asking some shareholders to stop defending him, but have you or anyone asked Prem why he is supporting the Bitove/Rivett deal?  You guys always talk about self-dealing at Fairfax...show me some frickin' examples.  The only things you guys point to is Resolute and now this.  Resolute was to the benefit of Fairfax shareholders.

 

If the Bitove/Rivett deal wins, do you think there might be some long-term opportunity for Fairfax?  And why are you pissed off at the investor and not Torstar management...they are the ones who should be explaining why they are supporting a specific deal to all shareholders.  Cheers!

 

Do we get to count the time where they sold a piece of FIH's best asset in a way that guarantees OMERS (the buyer) a profit and allowed them to book huge management fees? Seems like the only loser there is FIH shareholders.

 

How about the time FAH shareholders sold one of their best assets to the mothership for way lower than a recent outside bid as part of a low-disclosure  deal?

 

Just two more examples from this year, to go along with Resolute, Torstar and the multi-voting shares.

[StubbleJumper]

Prem is all about establishing and growing relationships.  This sometimes goes against immediate optimization of every deal.

 

This is pocket change for Fairfax and the benefit from supporting allies is much greater for their reputation.

 

It is a matter of judgment.  It is not a simple screw everyone and take as much profit as you can.

 

Stop defending him....this one is not even close....

 

The revised Rivett/Bitove bid works out for something like $60 million in total to acquire a company that has $70 million CASH on its books and NO DEBT and no unfunded pension liability plus it has various minority investments that conservatively will raise a further $100 million when they are sold.

 

You're asking some shareholders to stop defending him, but have you or anyone asked Prem why he is supporting the Bitove/Rivett deal?  You guys always talk about self-dealing at Fairfax...show me some frickin' examples.  The only things you guys point to is Resolute and now this.  Resolute was to the benefit of Fairfax shareholders.

 

If the Bitove/Rivett deal wins, do you think there might be some long-term opportunity for Fairfax?  And why are you pissed off at the investor and not Torstar management...they are the ones who should be explaining why they are supporting a specific deal to all shareholders.  Cheers!

 

Do we get to count the time where they sold a piece of FIH's best asset in a way that guarantees OMERS (the buyer) a profit and allowed them to book huge management fees? Seems like the only loser there is FIH shareholders.

 

How about the time FAH shareholders sold one of their best assets to the mothership for way lower than a recent outside bid as part of a low-disclosure  deal?

 

Just two more examples from this year, to go along with Resolute, Torstar and the multi-voting shares.

 

 

 

Actually, the one that I liked best was when FFH proposed to buy out the minority shareholders of ORH for US$60/share back in September 2009.  Presumably FFH made that offer with the intimate knowledge of ORH's financial situation. When ORH eventually filed it's 10Q for September 2009, you know what it's book value was?  Yep, it BV at the end of Q3 2009 was a shade under $62/share.  That's right, FFH proposed to buy out its partners for less than book.  Eventually they bumped up their offer to $65/share, which was a princely multiple of 1.05x book, for a highly profitable reinsurer that had grown its book value by 25% during the year. 

 

Fair and friendly?  Not so much.

 

 

SJ

[Phoenix01]

Yet the deals keep headed towards Fairfax....

[bearprowler6]

Yet the deals keep headed towards Fairfax....

 

A few comments/questions:

 

1) Perhaps most importantly, in my view Fairfax's behavior on the Torstar acquisition (and during the several examples cited earlier in this thread) cannot be justified by the "deal flow" sent its way.

 

2) What about the deals Fairfax did not get a chance to look at because of how it behaved on previous deals? There is no way of knowing this however it is a possibility. Are you sure the company's reputation is as strong as it ever was?

 

3) Finally, what deals that headed toward Fairfax are you specifically referring to? And are you sure the terms of those deals did not adversely impact Fairfax due to the company's previous behavior?

[KFS]

Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

 

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will. 

 

 

[StubbleJumper]

Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

 

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will.

 

 

Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice. 

 

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

 

This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa.  What is FFH paying Ben's firm to manage that $50m?  Is it 200 bps per year?  More?  Less?  Nobody on the outside knows.  But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k.  Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that.

 

Is it the same type of situation with TS?  As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations.  Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars.  But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends?  Who really knows at this point.  I would hope that Prem provides an explanation at the next quarterly call.

 

The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions.  The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars.  We like to believe that all of these donations are made with the most altruistic and best intentions.  But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders.

 

 

SJ

[bearprowler6]

Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

 

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will.

 

 

Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice. 

 

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

 

This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa.  What is FFH paying Ben's firm to manage that $50m?  Is it 200 bps per year?  More?  Less?  Nobody on the outside knows.  But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k.  Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that.

 

Is it the same type of situation with TS?  As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations.  Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars.  But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends?  Who really knows at this point.  I would hope that Prem provides an explanation at the next quarterly call.

 

The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions.  The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars.  We like to believe that all of these donations are made with the most altruistic and best intentions.  But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders.

 

 

SJ

 

The "market" has responded to all of Prem's actions in the way that matters most; Fairfax's share price has gone no where. In fact, it is currently back to where it was at the end of 2013.

 

Closing Price in CAD:

 

Dec 31/13: $424.21

 

Dec 31/14: $608.78

.

.

.

.

Dec 31/19: $609.74

 

July 16/20: $424.41

 

It will take performance of 15% per year for the next 3 years to get us slightly above the price at the end of Dec 31/14! So this will be a 9 year period where the share price will have done absolutely nothing.

 

There are many reasons for the under performance of the share price however I can't help but think that Prem's pattern of personal conduct has played at least a small part.

 

 

 

[Xerxes]

Just a quick comment since it was not mentioned.

On BNN it was alluded that the families prefer the Rivett bid because it was seen as more aligned with the political view that the newspaper has. Something along those lines.

 

In the grand scheme of things, peanuts for FFH but if there is a pattern than that is more problematic.

I suspect this wouldn’t be a huge issue if FFH overall return would have been spectacular in the past 10 years. Which says something about us as well. When the tide is high, we tend to look past these  things. Well I should speak for myself I guess.

 

On the subs, you cannot blame FFH to prioritize FFH book value above FIH and FAH. We always said there is a permanent discount to BV on them for this very reason. Their discount to BV will widen and shrink but will never close. Even if it widens by huge margin, it is likely that the market is discounting a steep drop that is yet to come on the BV as oppose it to be a great opportunity.

 

At the end of the day, FIH return to its shareholder will be great as long as India massive long term potential holds and exceed despite “structural issues with the vehicle”. But for that you are getting a discount.

 

On OMERS, I like to fly on a wall in their internal meeting to how they really perceive their deals with FFH. Do they keep coming back because it is the devil that they know, or are they somehow perceive that they can get good and fair deals. 

 

[Parsad]

Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

 

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will.

 

 

Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice. 

 

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

 

This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa.  What is FFH paying Ben's firm to manage that $50m?  Is it 200 bps per year?  More?  Less?  Nobody on the outside knows.  But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k.  Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that.

 

Is it the same type of situation with TS?  As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations.  Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars.  But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends?  Who really knows at this point.  I would hope that Prem provides an explanation at the next quarterly call.

 

The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions.  The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars.  We like to believe that all of these donations are made with the most altruistic and best intentions.  But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders.

 

 

SJ

 

The "market" has responded to all of Prem's actions in the way that matters most; Fairfax's share price has gone no where. In fact, it is currently back to where it was at the end of 2013.

 

Closing Price in CAD:

 

Dec 31/13: $424.21

 

Dec 31/14: $608.78

.

.

.

.

Dec 31/19: $609.74

 

July 16/20: $424.41

 

It will take performance of 15% per year for the next 3 years to get us slightly above the price at the end of Dec 31/14! So this will be a 9 year period where the share price will have done absolutely nothing.

 

There are many reasons for the under performance of the share price however I can't help but think that Prem's pattern of personal conduct has played at least a small part.

 

Markel's price hit 2015 prices...WTM hit 2015 prices...Everest Re hit 2014 prices at their lows...this is irrelevant to whether an investment is a good investment or not.  Whether FFH is a good investment now...especially compared to when it was priced higher.  You know better than that!  Cheers!

[Daphne]

The “pattern” I’m seeing here is that this board is filling up with conspiracy theorists.

 

Dr. John Grohol, a psychologist and the founder of Psych Central, says that conspiracy theorists come up with ideas out of thin air to match whatever 'fact' they think is true, and often use paranoia-based beliefs to convince others.

[bizaro86]

The “pattern” I’m seeing here is that this board is filling up with conspiracy theorists.

 

Dr. John Grohol, a psychologist and the founder of Psych Central, says that conspiracy theorists come up with ideas out of thin air to match whatever 'fact' they think is true, and often use paranoia-based beliefs to convince others.

 

Or maybe strongly held beliefs (backed up in many case by previous large Fairfax projects) are being held on to even in the face of disconfirming evidence.

 

“For some of our most important beliefs, we have no evidence at all, except that people we love and trust hold these beliefs. Considering how little we know, the confidence we have in our beliefs is preposterous—and it is also essential.”

 

—2002 Nobel Laureate Daniel Kahneman

 

Moat beliefs aren't necessary to change, which is why people don't change them. However, if a management team begins to take shareholder unfriendly actions, it's usually best to assume those actions will continue and not change back.

 

You can see that on this board on the Biglari thread. Many folks were defending how optically cheap that was long after it became obvious that ~100% of the value was going to Biglari and ~0% to outside shareholders. I don't think Fairfax is at that level, but there are enough examples of shareholder unfriendly actions that a management discount is absolutely appropriate. Maybe that hasn't always been true, but like Munger said:

 

"We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side."

 

Dismissing cogent arguments as paranoia is pretty obviously an ad hominem attack, imo.

[Xerxes]

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

 

 

i disagree with this comment specifically.

I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high.

More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions.

 

Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends.

But that is me.

 

 

[StubbleJumper]

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

 

 

i disagree with this comment specifically.

I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high.

More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions.

 

Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends.

But that is me.

 

 

Yes, the key difference is that the typical CEO with a 1% ownership stake is not entrenched by virtue of multiple-voting shares and is at risk of being turfed if he pursues too many visible pet projects.  That is possibly one reason why you will not see the CEO of Bank of America hive off $50m for his son to manage.  It is probably also the reason why the CEO of BAC will not nominate his son and daughter to sit on the Board.  If you are going to make use of multiple voting shares to retain control with a relatively small economic interest, you need to always be more Catholic than the Pope when it comes to using the firm's funds.

 

 

SJ

 

[Spekulatius]

The “pattern” I’m seeing here is that this board is filling up with conspiracy theorists.

 

Dr. John Grohol, a psychologist and the founder of Psych Central, says that conspiracy theorists come up with ideas out of thin air to match whatever 'fact' they think is true, and often use paranoia-based beliefs to convince others.

 

Or maybe strongly held beliefs (backed up in many case by previous large Fairfax projects) are being held on to even in the face of disconfirming evidence.

 

“For some of our most important beliefs, we have no evidence at all, except that people we love and trust hold these beliefs. Considering how little we know, the confidence we have in our beliefs is preposterous—and it is also essential.”

 

—2002 Nobel Laureate Daniel Kahneman

 

Moat beliefs aren't necessary to change, which is why people don't change them. However, if a management team begins to take shareholder unfriendly actions, it's usually best to assume those actions will continue and not change back.

 

You can see that on this board on the Biglari thread. Many folks were defending how optically cheap that was long after it became obvious that ~100% of the value was going to Biglari and ~0% to outside shareholders. I don't think Fairfax is at that level, but there are enough examples of shareholder unfriendly actions that a management discount is absolutely appropriate. Maybe that hasn't always been true, but like Munger said:

 

"We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side."

 

Dismissing cogent arguments as paranoia is pretty obviously an ad hominem attack, imo.

 

FFH is run like a Family business and outside shareholders have no recourse and are just along for the ride. This is fine and doesn’t matter much when they are performing but it does matter a lot when they don’t (as is the case here) and warrants a discount. FFH and Biglari are just different shades of grey here’s with BH being extreme and uninvestible.  FFH is just a much milder form of nepotism.

 

That’s the real danger with family run business. If they perform Mr Market Will not care much about the lack of influence for outside shareholder, but if not, Mr Market will discount a steeper and steeper discount to fair value based on perception of management capability (or lack thereof), much more so than with a truly public company, where an activist could jump in and shake things up.

[Phoenix01]

Prem is not lining his pockets.

 

Fairfax Financial Holdings Limited is worth CA$15b, and total annual CEO compensation was reported as US$1.3m for the year to December 2018.

 

Bank of America CEO Brian Moynihan's pay for 2019 stayed flat at $26.5 million, the Charlotte-based bank said Friday. The bank's board gave Moynihan $25 million in restricted stock and a base salary of $1.5 million for his performance, according to a Securities and Exchange Commission filing.Feb 7, 2020.

[Phoenix01]

Prem's son & daughter on the board of directors is a head scratcher for me.

 

Fairfax is definitely Prem's baby & he wants to take good care of it and everyone associated with it.  His multiple voting shares allow him the freedom to do what he thinks is best. So far it has worked out very well, but it has not been a smooth ride.

 

His children will inherit a fortune and perhaps they need to understand what that means and how it will impact all stakeholders.  What better way than to place them on the board of directors?

 

Allowing his son to manage a tiny portfolio may be the cheapest way to groom a future key player.  If he fails, then it would have cost much less than had he been given a big role right from the beginning.  If he succeeds then everyone wins.

 

Nepotism is in the opportunities given to family members. Shareholders are not being ripped off.  Even Buffet has family members on his board of directors....

 

 

[SharperDingaan]

Like it or not, FFH is a family business transitioning succession. An inherently higher risk activity.

Mistakes are inevitable. There is a reason why merit is a criteria, and not nepotism - and the higher the appointment, the more critical that separation is. It is preferable that the screw-ups happen in a row-boat, not the ship carrying the row-boats; there are lots of potential solutions, but it will be a family decision, not the shareholders.

 

Higher risk, gets settled via a higher price discount. Lower multiples, haircuts for opportunity loss, waning 'popularity', etc.

There are plenty of fish in the sea. An investor can toss back an ugly one, and get a replacement, at any time. 

 

We wish them luck, but most investors would be better off elsewhere.

 

SD

 

[Bryggen]

To feed the discussion, an interesting read on integrity and good leadership as per Prem Watsa:

 

https://www.ivey.uwo.ca/news/blogs/2020/july/prem-watsa-explains-integrity-is-the-cornerstone-of-good-leadership/

 

 

[SharperDingaan]

Sadly - good leadership, and a good investment, don't have a high degree of correlation.

Mostly because leadership is long-term orientated whereas investment is short term orientated. A great business requires reputation, growth & predictability, whereas a great investment - just requires volatility.

 

An Enron a Worldcom, a Nortel were all great investments; both on the way up (long), and on the way down (short). Had you 'invested' wisely, you would have made stupid amounts of money. The leadership in those companies? not so hot. There are all kinds of other examples - and we see them every day. Might not be most peoples preference, but it is just another way of turning a profit.

 

The equation changes when you have partners. Shareholders are NOT partners. no matter how much they might think they are.

Partners have unlimited liability exposure to each other, shareholders don't. Different dynamics.

 

SD

 

 

[Parsad]

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

 

 

i disagree with this comment specifically.

I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high.

More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions.

 

Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends.

But that is me.

 

 

Yes, the key difference is that the typical CEO with a 1% ownership stake is not entrenched by virtue of multiple-voting shares and is at risk of being turfed if he pursues too many visible pet projects.  That is possibly one reason why you will not see the CEO of Bank of America hive off $50m for his son to manage.  It is probably also the reason why the CEO of BAC will not nominate his son and daughter to sit on the Board.  If you are going to make use of multiple voting shares to retain control with a relatively small economic interest, you need to always be more Catholic than the Pope when it comes to using the firm's funds.

 

 

SJ

 

I think Berkshire and Fairfax shareholders know the difference between how these two companies are managed and the typical corporate structure of most corporations.  You get what you get with Berkshire and Fairfax...that you will be treated equal to management, and that management has interests that are aligned with shareholders long-term.  That some family influence or atypical culture will exist...be it Howard Buffett on the board of Berkshire or Ben Watsa on the board of Fairfax.  Otherwise investors are welcome to invest in other companies where the culture is more agreeable to them.  Cheers!

[Parsad]

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

 

 

i disagree with this comment specifically.

I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high.

More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions.

 

Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends.

But that is me.

 

+1!  Cheers!

[EricSchleien]

To feed the discussion, an interesting read on integrity and good leadership as per Prem Watsa:

 

https://www.ivey.uwo.ca/news/blogs/2020/july/prem-watsa-explains-integrity-is-the-cornerstone-of-good-leadership/

 

My colleagues and I just had a good laugh at this paper. I'd argue it's worthless and totally predictable based off the current awareness in the business world.

 

This is a nice description of integrity, however, it doesn't really get at the heart of the matter of the power of integrity. When integrity degrades into a morality conversation it loses its power. Also having a set of guiding principles will NOT inherently ground a good culture.

 

The Jensen/Erhard course taught at Harvard as well as 44 other Universities actually gets to the heart of the matter of Integrity. I've done this work and it's nothing that you can get from reading about integrity.

 

They give the program away for free online which you can get here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=920625

 

On a side note, businesses that get integrity as a distinction experience increase of profits of 600% within 1 year. Businesses that get their "guiding principles" actually aligned with their culture, takes about 2 days to do and 6-24 months to be seen into action and you get a result on average of 3-5x.

 

It's my hope that this work gets taught in every business school in the country one day. It's a HUGE missing in our society.

 

 

[rkbabang]

To feed the discussion, an interesting read on integrity and good leadership as per Prem Watsa:

 

https://www.ivey.uwo.ca/news/blogs/2020/july/prem-watsa-explains-integrity-is-the-cornerstone-of-good-leadership/

 

My colleagues and I just had a good laugh at this paper. I'd argue it's worthless and totally predictable based off the current awareness in the business world.

 

This is a nice description of integrity, however, it doesn't really get at the heart of the matter of the power of integrity. When integrity degrades into a morality conversation it loses its power. Also having a set of guiding principles will NOT inherently ground a good culture.

 

The Jensen/Erhard course taught at Harvard as well as 44 other Universities actually gets to the heart of the matter of Integrity. I've done this work and it's nothing that you can get from reading about integrity.

 

They give the program away for free online which you can get here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=920625

 

On a side note, businesses that get integrity as a distinction experience increase of profits of 600% within 1 year. Businesses that get their "guiding principles" actually aligned with their culture, takes about 2 days to do and 6-24 months to be seen into action and you get a result on average of 3-5x.

 

It's my hope that this work gets taught in every business school in the country one day. It's a HUGE missing in our society.

 

Just read that abstract.  It sounds like they are equating "integrity" with keeping your word and owning your shit.  Roughly speaking.  Not sure how that is teachable, I've always thought about integrity as something someone has or doesn't, but I'm interested enough that I think I'm going to read the whole paper.