Fairfax 2020

[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

 

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!

 

 

When Howie was appointed to the BoD back in what, 92 or 93, what was WEB's economic interest in percentage terms in BRK?  After donating shitloads of his shares, what is WEB's economic interest in 2020?  It's not even close to comparable.

 

 

SJ

[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.

 

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.

 

Really good observation. Nobody "has" or "doesn't have" integrity. And it's taught through making distinctions. The distinction integrity is what creates the performance increases. The explaining of it does not and just makes for interesting dialogue at best.

 

Distinctions are made from abstractions. Principles get derived from distinction. Most people if they're lucky start with principles and most people don't even go that deep.

 

Integrity is often thought of conceptually as moral uprightness and steadfastness, or as you would say "having it"—making the “good” choices, doing the “right thing.” In fact, it is far more than that. Integrity is actually a experiential phenomenon in and of itself. It has to do with authenticity—being true to ourselves—and it is the foundation for power and effectiveness. It is a home, an anchor, a continuing commitment—a way of being and acting that shapes who we are.

 

When one distiguishes integrity as distinction, it opens up a completely new world. Kind of like if you've ever seen the movie "The Gods Must Be Crazy"...when the coke bottle drops from the sky...there is no distinction coke bottle for them so they interact with it differently. On the contrary, you and I have no access to the distinction called "not a coke bottle" so we actually are unable to have access to THEIR experience of the coke bottle. Same thing with trying to explain the color purple to a blind man..they have no distinction called purple or color. Also, if you show someone from an uncontested tribe a photograph, they will see a blob. They don't actually experience a picture.

 

So distinction is the access to the breakthrough performance.....and the business world is still in the stone ages by teaching these as concepts, it's actually pretty amateur hour...say unlike management techniques which business school has gotten masterful over the past 50 years. Probably because they are taught as techniques and you don't have to distuigish much..just teach someone a tool.

 

However, the natural space people get to through discovering this experience is integrity resides in the ability to constitute yourself as your word, to be true to your principles, and ultimately, be true to yourself. Seeing authenticity as the access to being authentic around where one is being inauthentic as nobody "is" authentic.

 

Integrity is not constrained by, nor does it reside in, rules, prescriptions, or imposed demands. Integrity creates an environment of freedom, power, and joy.

 

Of course the constraint here is that you can't explain a distinction just like I can't explain purple to a blind man. So explaining the distinction integrity will just land as a concept at best.

 

Cheers!

[bizaro86]

The idea that being true to oneself could be the highest value in a belief system makes me sad.

 

Can I suggest the golden rule as a proxy for integrity - "Do unto others as you would have them do unto you."

 

 

[Cigarbutt]

The idea that being true to oneself could be the highest value in a belief system makes me sad.

Can I suggest the golden rule as a proxy for integrity - "Do unto others as you would have them do unto you."

How you balance oneself with others is a personal matter inasmuch the opinion is not shared in social media. :)

The submitted paper has this section on page 52:

"In a critical sense, who I am for another is my word,39 i.e., my expression of my self. For a relationship to have integrity (to be whole and complete), one’s word must be whole and complete. As Shakespeare said, “This above all: to thine own self be true, it must follow, as the night the day, Thou cans’t not be false to any man.”40 When one is true to one’s word (which is being true to one’s self), one cannot be but true to any man."

Interestingly and as usual with this type of brain-washing activity, circular arguments and quotes taken outside of their context are used. The Shakespeare quote comes through one of his characters: Polonius, who is known for his bad judgement and hypocrisy. Also, assuming the quote has substantive value, in a Freudian slip type of way, the explanation of the quote does not correspond to the quote: cans't not be false to any man ---) cannot be true to any man!

While it's possible to go through the entire paper and references, the following personal growth parody related to the main author may be sufficient:

---o---o---

To link with the FFH 2020 thread, over the last few years, i've come to conclude to an integrity drift and the last outcome from the Fibrek saga did not help:

https://financialpost.com/news/fp-street/watsas-mindboggling-reasoning-in-takeover-prompts-court-award

[SharperDingaan]

"Not sure how that is teachable"

 

Friends in low places advise that it's very simple - in their world; the first one or two to forget sleep with the fishes, following which everyone remembers. In our world, it's the metaphorical heads on sticks - same message, but less clean up, and no flies to deal with.

African thing  ;)

 

SD

 

[cwericb]

“Integrity”?   Here are some quotes about Prem Watsa from the article about the Fibrek court case :

 

“Canadian investor Prem Watsa was “purposely forgetful” and offered a “mindboggling” explanation in court testimony explaining why he backed a low-ball bid for a pulp mill in a sale to Resolute Forest Products Inc., a Montreal judge concluded in the seven-year-old case.”

 

“Watsa’s testimony was so vague and filled with so many uncertainties, unlikelihood, unsubstantiated denials and contradictions that it is very difficult for the court to give credence to the affirmations and explanations of the witness whose memory appeared to be failing on the most crucial aspects of his testimony,”

 

“ Fairfax “was in a blatant conflict of interest situation,” the Quebec judge said”

 

“Fairfax agreed to sell its 33 million shares to Resolute for $1 apiece — locking in a price that dissenting shareholders considered too low. The judge considered the fair value of Fibrek shares to be $1.99, and found Watsa’s explanation for accepting less “mindboggling.”

 

Now that’s not a couple of cents per share in the difference. Nor is it a debatable difference. At the time I said on this board that the deal was dead wrong and that it made a joke of the Fairfax motto of  “Fair and Friendly” acquisitions.

 

Meanwhile, his defenders here tried to justify the buyout as “Watsa was simply acting in the best interests of Fairfax”. Or, I suppose you could put it another way since Watsa owns a sizable portion of Fairfax, “Watsa was simply looking after Watsa’s best interests”.

 

Rather putting Prem Watsa on a pedestal, perhaps consider that he simply stole $33,000,000 from Fibrek shareholders (myself included) and then got caught with his pants down.

 

So when you consider the present Rivett and Torstar situation ... well, there just seems to be an odd smell coming from the company.

 

 

[Jurgis]

Is it me or did a bunch of posts from last night disappear (in various topics)?

[cwericb]

Thanks for that. I thought I was going nuts. I posted last night and this morning it was gone. So I essentially reposted.

[SharperDingaan]

Keeps circling back to the trust, vision, and reporting thing. Everyone makes mistakes ... but when they keep coming up, and more frequently, it's a pattern. Fair and Friendly might have been the original vision, but it has devolved quite a bit since then.

 

Make your own assessments, but there are plenty of other fish.

 

SD

 

[AZ_Value]

When someone shows you who they are, believe them.

 

IMO the right time to move on from FFH was many years ago and many instances of them talking from both sides of their mouths ago.

 

AZ

[Bryggen]

Now, as everyone talks about integrity and suspicious deals, what are your thoughts on that one with BB - just out today:

 

https://seekingalpha.com/news/3593625-blackberry-redeeming-convertibles-in-debt-restructuring?utm_medium=email&utm_source=seeking_alpha&mail_subject=frfhf-blackberry-redeeming-convertibles-in-debt-restructuring&utm_campaign=rta-stock-news&utm_content=link-3

 

[SharperDingaan]

No dog in this, but it's not a bad deal for the work-out.

Very telling that the principal o/s is being reduced by 80 M - depending on how one calculates.

Risk management.

 

Ultimately, the business expectation is that BB is eventually merged into someone bigger, for a smaller slice of a bigger/better pie. But were they not already trapped in BB, there are other/better IT investments. The ongoing opportunity cost is the premium on the call option, at the current yield curve - pretty cheap. Can't really fault the business decision.

 

SD

 

 

[Thrifty3000]

When someone shows you who they are, believe them.

 

IMO the right time to move on from FFH was many years ago and many instances of them talking from both sides of their mouths ago.

 

AZ

 

I've read Prem's letters and listened to him speak for years. I think he's a good man. I think he's a great promoter. I never feel like he's trying to mislead me. I always feel like he's trying to sell me, on Fairfax. Good for him. That's what I want from a CEO.

 

Prem is a human billionaire. He will have good days and bad days. In the public eye he will have good performances and bad performances. He will experience a range of good and bad fortune. You can easily selectively build a case for or against a man like Prem.

 

It's why we have to look at the data over time - at the per share earnings potential against the price per share.

 

If you think Prem belongs anywhere near the same camp as someone like Biglari then by all means exit and don't look back - at least until he's no longer in control.

 

As investors it's our job to evaluate the prospects of the business. A decade ago Prem was regarded as super-human, and the company was selling for something like 30 times its near-term earnings potential. That's Mr. Market's fault, not Prem's. (It was probably a good time to trim one's position and become an observer. I think plenty of investors did.)

 

No matter how you slice it the earnings power of the business grew over the last 10 years. Now the company is a going concern selling for what could easily be less than 10 times its near-term earnings potential.

 

So, the value has increased while the price has plummeted. I'm not sure that's the kind of scenario I'd advise others to "move on" from.

[StubbleJumper]

Now, as everyone talks about integrity and suspicious deals, what are your thoughts on that one with BB - just out today:

 

https://seekingalpha.com/news/3593625-blackberry-redeeming-convertibles-in-debt-restructuring?utm_medium=email&utm_source=seeking_alpha&mail_subject=frfhf-blackberry-redeeming-convertibles-in-debt-restructuring&utm_campaign=rta-stock-news&utm_content=link-3

 

 

Yep, the BB shareholders are up in arms.  I guess their underlying assumption was that either BB doesn't need the liquidity or that there is a long line-up of potential lenders who would be prepared to lend a half-billion at 3.75% with no conversion privilege.  I am from the school of thought that FFH's last note flotation was at 4 5/8%, so if that's what FFH pays for debt, what should a riskier outfit like BB pay?  Maybe 7%?  Seriously, a 15 minute walk through their financials for the past 3 or 4 years is enough to make a guy want to puke. 

 

Maybe there is a long line-up of outfits wanting to lend money to companies that have drastically transformed their business and are cashflow negative?  I don't see it, but I've been wrong plenty of times before...

 

 

SJ

[Parsad]

Whenever I see a run of posts like this on Fairfax, the stock usually does well in the ensuing months...keep it up!  Cheers!

[StubbleJumper]

Whenever I see a run of posts like this on Fairfax, the stock usually does well in the ensuing months...keep it up!  Cheers!

 

 

 

What have you been eating recently?  My portfolio needs that you go out for lunch!

 

 

SJ

[Parsad]

Whenever I see a run of posts like this on Fairfax, the stock usually does well in the ensuing months...keep it up!  Cheers!

 

 

 

What have you been eating recently?  My portfolio needs that you go out for lunch!

 

 

SJ

 

Frickin' can't until the restrictions are off.  It's no fun when hot waitresses have masks on all of the time!  Cheers!

[SharperDingaan]

This will help keep the price down.

https://www.theglobeandmail.com/business/article-ontario-court-delays-torstar-takeover-after-rival-bidder-raises/

 

"Torstar lawyer Ryan Morris cast the two objecting parties as “a bitter, failed bidder and a disgruntled former employee who should not be permitted to disrupt a robust process.” He said NordStar increased its offer for Torstar – publisher of the Toronto Star newspaper – twice as the auction played out, securing the support of the five families who control Torstar’s voting stock and of major shareholder Fairfax Financial Holdings Inc."

 

Most would expect that the FFH presence, and prior history with this kind of thing, was a factor in the court decision.

The obvious resolution is another round of bidding, and sale to the highest bidder - if the existing winner is to remain, they pay up for it.  Put up the winning bid, and put the peeving lawyer away.

 

There is nothing wrong with fair bidding for an asset. However, it is theft if the selling company doesn't accept the highest bid.

Like it or not, all the sellers common shareholders own the company equally. 

 

SD

 

 

 

 

 

[bearprowler6]

Q2 Results are out:

 

https://www.fairfax.ca/news/press-releases/press-release-details/2020/Fairfax-Financial-Holdings-Limited-Financial-Results-for-the-Second-Quarter/default.aspx

[Xerxes]

Unless I am reading wrong book value had a paltry 3% bounce up of March 31 lows.

 

The net investment portfolio loss of $1.3 billion at the end of Q1, reverses by half, for the six months period.

[StubbleJumper]

Unless I am reading wrong book value had a paltry 3% bounce up of March 31 lows.

 

The net investment portfolio loss of $1.3 billion at the end of Q1, reverses by half, for the six months period.

 

 

 

Did I read this right?  On page 11 of the Q2, the stock investment portfolio was valued at $3.8 billion, but on page 15 the net gains on common stocks (realised and unrealised combined) was $130m.  Didn't the S&P rise by like 18 or 20% during the quarter?

 

Am I missing something obvious?

 

 

SJ

[Xerxes]

you are exactly right !

 

A paltry bounce back both on the bond and common stock portfolio, purely from a realized/unrealized capital gain/loss point of view.

That explains the mediocre 3% bounce back on the book, in turn.

494 million return on bonds portfolio of ~$17 billion + 130 million returns on the common stock portfolio of 3.8 billion

 

The crown jewels* are, however, grouped under the Associates (~$4.6 billion in value). For, those unless there is an impairment charge, you wont see the their stock movement captured in page 15, I believe. But overtime, one should see FFH's portion of earning to do better if those associate perform better. 

 

I should state however that one-quarter of S&P500 is made of BigTech/FANG, and the aggregate bounce back of the BigTech lifted the S&P500 far better than Blackberry powerhouse bounce back did within the FFH common stock portfolio. If you are competing against S&P500, you need either of the following two things: (1) either you got the genius to do without Big Tech in the portfolio and still do really well or (2) have at least as much Big Tech as the index, and you can get creative on the remaining 3/4 of the portfolio.

 

*crown jewels net of Resolute, as RFP is no jewel let alone a crown jewel

[bizaro86]

I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...

[Bryggen]

I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...

 

That is for the first six months of the year, right?

Making money in 6 months during a pandemic? Really?

I am stealing Parsad's favourite: cheers!

[Xerxes]

I would say its a bit concerning that they managed to lose money (significantly) on both the long and short side. Realized plus unrealized losses of $821.9 MM for the long side, and $222.4 MM for the short side. Should be making money on one side of a long-short book...

 

$821 million is over 6 months.

For Q1 the investment loss was about $1.3 billion, half of which got recouped by this quarter $600 or so investment gain.

So, net, we are at the $821 million mark for the first six months.

 

I don't expect much mark-to-market bounce back on BV from the common stock portfolio. This would have been the peak on mark-to-market bounce back I think.

It will be up to the insurance business, capital gains on the bond portfolio and earning pickups from Associates to build up the BV going forward I think.