Fairfax 2020

[Xerxes]

Every dollar on the Blackberry share price above $6 is worth $100m to Fairfax, before tax.

 

Fairfax’s market cap is $10bn.

 

How much do you think the Fairfax share price *should* have moved, out of interest?

 

There are 55 million convertible shares and 41 million common shares with an aggregate number 96 million (if fully converted).

 

The 41.7 million based on end of Q3 pricing till today in USD terms comes to $123 million gain, after a per share increase of $2.95. Convertibles have a per share gain of $1.45 from a $6 base, which brings it to a $79 million. All USD.

 

For a total mark to market gain of $202 million divided by 27 million shares comes to $7.51. That is how much will flow through the income statement to hit the book value.

 

Assume 1-1 perfect correlation (all else being equal) between what gets injected into BV and market price reaction to it. That is worth $7 per share on a US quoted share price of $346 USD. So i don't expect the FFH share price to react much to BB. If it was a strategic exit at $20, then that would move the needle and free up investment dollars.

 

BB was never a big thing for FFH, it was just a position that had brand recognition because of its history and the likes of BNN kept reporting on it. When was the last time when BNN or Globe & Mail did a good coverage of Atlas/Seaspan, except for that day when FFH invested in some years ago.

 

 

 

 

 

 

 

 

[Viking]

Sold all my shares yesterday as it refused to break-up and thought it could pause after a nice quick gain, pretty much right from low.

 

Then this news today and thought: lucky me...

 

However, it is slightly down now with market unimpressed.

 

Looking at press release I can see partially why as company is not too transparent: Is it good or bad? What is use for proceeds? A gain or a loss?

 

It is a large company now and PR folks should know better by now.

 

Cardboard

 

Cardboard, my experience with Fairfax is it usually trades with lags on ‘news’ and sometimes considerable lags. And its moves (up and down) are often violent and can happen in weeks or a couple of months. This makes timing this stock week to week or month to month very difficult.

 

My view continues to be that the shares are very undervalued. In the near term, Q4 is shaping up very well with equity portfolio performing very well and sale of Riverstone possibly bringing in almost $1 billion.

 

If the vaccine news continues to be positive then my guess is Fairfax could grow BV nicely over the next 12 months (that 15% goal should be attainable) which would put BV over US $500. As BV grows this should also help sentiment and it is not crazy to think shares could trade at BV = close to 50% gain from here.

 

My strategy is to sit and be patient especially when ‘the story’ is getting better... eventually Mr Market figures it out and Fairfax pops.

 

PS: I remember back in the Great Financial Crisis when we all knew Fairfax was sitting on massive credit default swap gains and the shares were doing nothing... Mr Market eventually figured it out and when it did shares went up fast.

[Xerxes]

Every dollar on the Blackberry share price above $6 is worth $100m to Fairfax, before tax.

 

Fairfax’s market cap is $10bn.

 

How much do you think the Fairfax share price *should* have moved, out of interest?

 

There are 55 million convertible shares and 41 million common shares with an aggregate number 96 million (if fully converted).

 

The 41.7 million based on end of Q3 pricing till today in USD terms comes to $123 million gain, after a per share increase of $2.95. Convertibles have a per share gain of $1.45 from a $6 base, which brings it to a $79 million. All USD.

 

For a total mark to market gain of $202 million divided by 27 million shares comes to $7.51. That is how much will flow through the income statement to hit the book value.

 

Assume 1-1 perfect correlation (all else being equal) between what gets injected into BV and market price reaction to it. That is worth $7 per share on a US quoted share price of $346 USD. So i don't expect the FFH share price to react much to BB. If it was a strategic exit at $20, then that would move the needle and free up investment dollars.

 

BB was never a big thing for FFH, it was just a position that had brand recognition because of its history and the likes of BNN kept reporting on it. When was the last time when BNN or Globe & Mail did a good coverage of Atlas/Seaspan, except for that day when FFH invested in some years ago.

 

Pete

i re-read and understood your comment. I am a bit slow these days.

My comments was really general about the all the different news that came out about FFH monetization in the past few weeks (even if i commented specific to BB) as we are still far away from BV.

[Cardboard]

Hey Viking, I actually bought back in this afternoon due to FOMO.

 

Actually, I was looking at my WFC having this same flattening pattern, then it resumed its upward march. Hopefully a good sign of anti-Covid trade.

 

Then I thought about potential dividend coming up or Prem's "bread line", stock still quite a bit below book vs peers so, overall risk/reward still looking good. Plus some cash coming from two profitable sales reducing my overall portfolio risk.

 

Cardboard

 

 

[Parsad]

Sold all my shares yesterday as it refused to break-up and thought it could pause after a nice quick gain, pretty much right from low.

 

Then this news today and thought: lucky me...

 

However, it is slightly down now with market unimpressed.

 

Looking at press release I can see partially why as company is not too transparent: Is it good or bad? What is use for proceeds? A gain or a loss?

 

It is a large company now and PR folks should know better by now.

 

Cardboard

 

Hey Viking, I actually bought back in this afternoon due to FOMO.

 

Actually, I was looking at my WFC having this same flattening pattern, then it resumed its upward march. Hopefully a good sign of anti-Covid trade.

 

Then I thought about potential dividend coming up or Prem's "bread line", stock still quite a bit below book vs peers so, overall risk/reward still looking good. Plus some cash coming from two profitable sales reducing my overall portfolio risk.

 

Cardboard

 

 

 

You're kidding me right?  You were being sarcastic...did you actually sell a day before and bought back today?  Cheers!

[Cardboard]

No sarcasm. I did.

 

Sometimes I change my mind, sometimes I find better opportunities and sometimes I have to rebalance portfolio.

 

Cardboard

[Gregmal]

Its really not that outrageous, is it? Information changes, you reassess. Its also how you avoid sitting on a turd like this for 10 years hoping and praying while everyone else in the market feasts...

[Parsad]

Its really not that outrageous, is it? Information changes, you reassess. Its also how you avoid sitting on a turd like this for 10 years hoping and praying while everyone else in the market feasts...

 

I've never changed my mind about a stock purchase or sale in a day, and then executed on it.  That being said, other than non-taxable family accounts, I don't sit on a stock forever...even if it's Berkshire.  I buy below intrinsic value and I sell above intrinsic value. 

 

You should also think twice about what you call a "turd"...the differentiation between a success and failure is not as black and white as you may believe.  See the attached pictures showing Fairfax vs the S&P500 over 10-12-14 years.  That dramatic shift between "turd" and "blossom" would only take a reasonable drop in the S&P500 and Fairfax returning to book value...which is pretty likely to occur!

 

Cheers!

[Viking]

Yes, Fairfax has been a terrible investment for long term shareholders over the past 10 years. Yes, it HAS been a turd.

 

However, what i really care about with an investment is where it is going in the future. Starting from today, the future looks very promising for Fairfax shareholders. You have the 3 key factors all coming together at the same time:

1.) insurance hard market: these happen very infrequently and are usually very profitable developments; Fairfax is taking advantage as their insurance businesses are solid.

2.) investments: bond portfolio is positioned ok; equity holdings are on fire (up about US $1.5 billion since Sept 30) and should do well in recovery trade expected over next year (their equity portfolio is loaded with cyclicals and emerging market companies)

3.) valuation: shares are trading a close to low historic valuation (Price to BV < 0.75)

 

We are at the start of what should be a period of good to very good growth in BV for Fairfax. Increasing earnings + higher multiple = much higher share price.

 

Druckenmiller says two key traits he looks for in new hires is being inquisitive and being open minded.

 

Today Fairfax does not look like a turd to me.

[Gregmal]

Ive never reversed course in the same day either, but if your info processing/realization of the situation happens to change I see nothing wrong with adjusting. Generally speaking I try not to have any attachment to any company, period. Which does not mean you cant have long term holds, I have plenty of them...but the only objective is to make money. I can look at GOOG or BRK or many in between a see how they do well. With managers, there's too many layers of hard to account for variables. If you're bearish and you assume FRFH is a good way to play that but he still got it wrong, well that sucks and thats an added layer of risk. If I 'm bearish I rather leave the ball in my own hands with investments/instruments that assure if I am right, that I am rewarded. FRFH has dropped the ball there a few too many times for my liking.

[Viking]

Fairfax definitely has its flaws. The 800lb gorilla is the last short position they had at end of Q3 where they took a big hit. Q4? Who knows.

 

So Fairfax for me is not a ‘hold forever; highly concentrated’ type of investment. However, there are many times when Fairfax has rewarded shareholders very well. Hopefully this develops into another good stretch for investors :-)

[Parsad]

Fairfax definitely has its flaws. The 800lb gorilla is the last short position they had at end of Q3 where they took a big hit. Q4? Who knows.

 

So Fairfax for me is not a ‘hold forever; highly concentrated’ type of investment. However, there are many times when Fairfax has rewarded shareholders very well. Hopefully this develops into another good stretch for investors :-)

 

Stock market capitalization is closing in on 185% of GDP...long-term interest rates are near zero...you have bubbles in other assets classes...tech stocks are frothing at the mouth with Tesla leading the way at a 1,000+ P/E...government debt as a percent of GDP is hovering over 100%+ for most developed countries...consumers while paying down debt in 2020, still live hand to mouth for the most part...what happens when stimulus stops...I'd say the short position this time may have some legs going forward compared to after the tech wreck when they didn't invest heavily and held short positions.  Cheers!

[Viking]

Fairfax definitely has its flaws. The 800lb gorilla is the last short position they had at end of Q3 where they took a big hit. Q4? Who knows.

 

So Fairfax for me is not a ‘hold forever; highly concentrated’ type of investment. However, there are many times when Fairfax has rewarded shareholders very well. Hopefully this develops into another good stretch for investors :-)

 

Stock market capitalization is closing in on 185% of GDP...long-term interest rates are near zero...you have bubbles in other assets classes...tech stocks are frothing at the mouth with Tesla leading the way at a 1,000+ P/E...government debt as a percent of GDP is hovering over 100%+ for most developed countries...consumers while paying down debt in 2020, still live hand to mouth for the most part...what happens when stimulus stops...I'd say the short position this time may have some legs going forward compared to after the tech wreck when they didn't invest heavily and held short positions.  Cheers!

 

After posting my last comment and thought about it a little more I also wondered if shorting Tesla right now actually makes some sense (not that we know that is the name FFH was short at end of Q3). So, yes, I agree with you :-)

[Parsad]

Fairfax definitely has its flaws. The 800lb gorilla is the last short position they had at end of Q3 where they took a big hit. Q4? Who knows.

 

So Fairfax for me is not a ‘hold forever; highly concentrated’ type of investment. However, there are many times when Fairfax has rewarded shareholders very well. Hopefully this develops into another good stretch for investors :-)

 

Stock market capitalization is closing in on 185% of GDP...long-term interest rates are near zero...you have bubbles in other assets classes...tech stocks are frothing at the mouth with Tesla leading the way at a 1,000+ P/E...government debt as a percent of GDP is hovering over 100%+ for most developed countries...consumers while paying down debt in 2020, still live hand to mouth for the most part...what happens when stimulus stops...I'd say the short position this time may have some legs going forward compared to after the tech wreck when they didn't invest heavily and held short positions.  Cheers!

 

After posting my last comment and thought about it a little more I also wondered if shorting Tesla right now actually makes some sense (not that we know that is the name FFH was short at end of Q3). So, yes, I agree with you :-)

 

I’m not a fan of shorting...but if I had to pick one, even though I really like the company and Musk...that would be the one.  Extremely overvalued...one miss and boom!  Cheers!

[KFS]

Fairfax definitely has its flaws. The 800lb gorilla is the last short position they had at end of Q3 where they took a big hit. Q4? Who knows.

 

So Fairfax for me is not a ‘hold forever; highly concentrated’ type of investment. However, there are many times when Fairfax has rewarded shareholders very well. Hopefully this develops into another good stretch for investors :-)

 

Stock market capitalization is closing in on 185% of GDP...long-term interest rates are near zero...you have bubbles in other assets classes...tech stocks are frothing at the mouth with Tesla leading the way at a 1,000+ P/E...government debt as a percent of GDP is hovering over 100%+ for most developed countries...consumers while paying down debt in 2020, still live hand to mouth for the most part...what happens when stimulus stops...I'd say the short position this time may have some legs going forward compared to after the tech wreck when they didn't invest heavily and held short positions.  Cheers!

 

After posting my last comment and thought about it a little more I also wondered if shorting Tesla right now actually makes some sense (not that we know that is the name FFH was short at end of Q3). So, yes, I agree with you :-)

 

I’m not a fan of shorting...but if I had to pick one, even though I really like the company and Musk...that would be the one.  Extremely overvalued...one miss and boom!  Cheers!

 

I am thrilled if FFH is short Tesla (seems very likely at this point).  It would easily explain the heavy short losses and would rule out something much worse, i.e. Amazon, etc, IMO.  I've been searching for a cost-effective way to insulate myself from the inevitable collapse of certain ridiculous tech prices, with Tesla at or near the top of the list.  As it turns out, this may already be partly built-into my FFH investment.  We are speculating, but I hope this is correct. 

[StevieV]

Fairfax definitely has its flaws. The 800lb gorilla is the last short position they had at end of Q3 where they took a big hit. Q4? Who knows.

 

So Fairfax for me is not a ‘hold forever; highly concentrated’ type of investment. However, there are many times when Fairfax has rewarded shareholders very well. Hopefully this develops into another good stretch for investors :-)

 

Stock market capitalization is closing in on 185% of GDP...long-term interest rates are near zero...you have bubbles in other assets classes...tech stocks are frothing at the mouth with Tesla leading the way at a 1,000+ P/E...government debt as a percent of GDP is hovering over 100%+ for most developed countries...consumers while paying down debt in 2020, still live hand to mouth for the most part...what happens when stimulus stops...I'd say the short position this time may have some legs going forward compared to after the tech wreck when they didn't invest heavily and held short positions.  Cheers!

 

After posting my last comment and thought about it a little more I also wondered if shorting Tesla right now actually makes some sense (not that we know that is the name FFH was short at end of Q3). So, yes, I agree with you :-)

 

I’m not a fan of shorting...but if I had to pick one, even though I really like the company and Musk...that would be the one.  Extremely overvalued...one miss and boom!  Cheers!

 

I am thrilled if FFH is short Tesla (seems very likely at this point).  It would easily explain the heavy short losses and would rule out something much worse, i.e. Amazon, etc, IMO.  I've been searching for a cost-effective way to insulate myself from the inevitable collapse of certain ridiculous tech prices, with Tesla at or near the top of the list.  As it turns out, this may already be partly built-into my FFH investment.  We are speculating, but I hope this is correct.

 

TSLA is up 40% since the end of Q3.  That strikes me as less than thrilling.

 

Sure, TSLA looks overvalued.  Looked overvalued at half the price.  At a quarter of the price.

 

If the short is TSLA and FFH has held, they need a big move down just to counter the move of the last 2 months.

[Gregmal]

Haha yea. I mean if thats the thought process just short 4-5 shares of TSLA for every 100 shares of BRK/b you buy on your own and not deal with Prem's antics.

[KFS]

Fairfax definitely has its flaws. The 800lb gorilla is the last short position they had at end of Q3 where they took a big hit. Q4? Who knows.

 

So Fairfax for me is not a ‘hold forever; highly concentrated’ type of investment. However, there are many times when Fairfax has rewarded shareholders very well. Hopefully this develops into another good stretch for investors :-)

 

Stock market capitalization is closing in on 185% of GDP...long-term interest rates are near zero...you have bubbles in other assets classes...tech stocks are frothing at the mouth with Tesla leading the way at a 1,000+ P/E...government debt as a percent of GDP is hovering over 100%+ for most developed countries...consumers while paying down debt in 2020, still live hand to mouth for the most part...what happens when stimulus stops...I'd say the short position this time may have some legs going forward compared to after the tech wreck when they didn't invest heavily and held short positions.  Cheers!

 

After posting my last comment and thought about it a little more I also wondered if shorting Tesla right now actually makes some sense (not that we know that is the name FFH was short at end of Q3). So, yes, I agree with you :-)

 

I’m not a fan of shorting...but if I had to pick one, even though I really like the company and Musk...that would be the one.  Extremely overvalued...one miss and boom!  Cheers!

 

I am thrilled if FFH is short Tesla (seems very likely at this point).  It would easily explain the heavy short losses and would rule out something much worse, i.e. Amazon, etc, IMO.  I've been searching for a cost-effective way to insulate myself from the inevitable collapse of certain ridiculous tech prices, with Tesla at or near the top of the list.  As it turns out, this may already be partly built-into my FFH investment.  We are speculating, but I hope this is correct.

 

TSLA is up 40% since the end of Q3.  That strikes me as less than thrilling.

 

Sure, TSLA looks overvalued.  Looked overvalued at half the price.  At a quarter of the price.

 

If the short is TSLA and FFH has held, they need a big move down just to counter the move of the last 2 months.

 

Yeah, of course, if the crystal ball had been working right, the short would have been initiated at today's TSLA price instead of months ago.  Mr. Market goes on his wild whiskey binge, and the crystal ball works more like a lead marble.  I will not fault FFH if they shorted TSLA at half or quarter of today's price.  I probably would have shorted it even sooner, personally.  I have no idea when TSLA stock will collapse, but if we agree it is ridiculously overvalued, and it is, time is on our side.  And yes, for now, big losses will show for FFH's shorts in the next report, and those losses will be once again baked into FFH's books, and I'll keep holding my FFH shares that I acquired at below 70% book on the "Prem's antics discount" and will see how this plays out.  When sanity finally returns to the market, it should be an interesting ride. 

[Cardboard]

Having listened to Prem at last conference call I doubt very much this is Tesla.

 

I mean shorting Tesla and covering it is very straight forward and can be entered in and closed on same day.

 

This sounded like a complex trade where time was involved and/or some form of commitment. Why in the world would you need to do this with Tesla?

 

Maybe it is some complex derivative that has to be put on for a fixed duration (which it sounded like) in order to prevent cost of borrowing from spiking/keeping it fixed for duration?

 

Anyhow, would seem awfully complicated and risky to short an individual stock that way.

 

Cardboard

[chrispy]

The main issue is Prem said years ago they were done shorting and they were caught shorting again.

[Cardboard]

Well, that is a big element why the stock trades well below book value vs peers trading at a premium or lack of confidence.

 

So you should assume that it will not trade at similar metrics vs peers for a long while.

 

Despite this, I believe there is a decent return to be made or to catch-up to good news materializing with primarily: hard market for insurance premiums meaning increased profitability, liquidity fears disappearing and increase for investment portfolio value despite offsetting short losses.

 

Cardboard

[TwoCitiesCapital]

Having listened to Prem at last conference call I doubt very much this is Tesla.

 

I mean shorting Tesla and covering it is very straight forward and can be entered in and closed on same day.

 

This sounded like a complex trade where time was involved and/or some form of commitment. Why in the world would you need to do this with Tesla?

 

Maybe it is some complex derivative that has to be put on for a fixed duration (which it sounded like) in order to prevent cost of borrowing from spiking/keeping it fixed for duration?

 

Anyhow, would seem awfully complicated and risky to short an individual stock that way.

 

Cardboard

 

It could be a Total Return Swap that they're short. Those have a fixed duration/maturity and there can be a fee for exiting the position early if they can't find another buyer since the instruments are bespoke and over the counter.

 

That being said, I'm sure whatever fee would've been owed would've been less than losses on Tesla so far so I dunno.

[bizaro86]

Having listened to Prem at last conference call I doubt very much this is Tesla.

 

I mean shorting Tesla and covering it is very straight forward and can be entered in and closed on same day.

 

This sounded like a complex trade where time was involved and/or some form of commitment. Why in the world would you need to do this with Tesla?

 

Maybe it is some complex derivative that has to be put on for a fixed duration (which it sounded like) in order to prevent cost of borrowing from spiking/keeping it fixed for duration?

 

Anyhow, would seem awfully complicated and risky to short an individual stock that way.

 

Cardboard

 

It could be a Total Return Swap that they're short. Those have a fixed duration/maturity and there can be a fee for exiting the position early if they can't find another buyer since the instruments are bespoke and over the counter.

 

That being said, I'm sure whatever fee would've been owed would've been less than losses on Tesla so far so I dunno.

 

If it is a Tesla TSR, I would imagine every time they considered exiting the fee to exit seemed like it was more than their exposure to future losses. "How much higher can this money losing, capital intensive cyclical business go?!?!"

 

I actually think Tesl might be getting close to a top here. After the S&P inclusion, who is the new marginal buyer?

 

I've never shorted it, because the risk reward has always seemed poor. I might buy a few way out of the money puts now.

[Xerxes]

Dear lord,

Who let the hope-FFH-is-shorting-Tesla crowd get in. Tesla has slayed many short-sellers, some of which are actually in the business of shorting things and have proper track record. With a track record like this, shown below, very much prefer that FFH actually looses money in Q4 in its short so that they can finally "move away" from the casino. Any win, would just encourage them to keep shorting. We already had a lost decade, whose seeds were planted by the wins of 2008-09's big short. The cost of those 2008-09 wins have been enormous. 

 

For the record, $1 billion has already been lost since the pivot-away from shorts in 2016, which was more like 360-degree spin, and in the most recent conference call management still talks about ".... these are remaining position that we are wounding". Thank god we have mark-to-market accounting that allows you to see the un-realized gain/loss progression quarter-by-quarter, so we know what they said on conference call for Q3/2020, was misleading.

 

Any wins in Q4, needs to be more than that  realized losses of $1 billion to offset. Better for FFH to lose, lick it wounds and move away.

 

2011:  zero

2012:  $6.3 million

2013:  ($1.350) billion

2014:  $13 million

2015:  $126 million

2016:  ($2.634) billion

2017:  ($553) million  (almost all of it in Q4 2017!)

2018:  ($248) million

2019:  ($20.7) million

2020 (through Q3): ($327) million

 

Lastly, in my humble non-expert opinion, if one looks at Ackman' shorts in March, putting aside that it worked, you will see that his shorts were an actual hedge against his base-line thinking. His baseline thinking was long-USA, so he hedged that, by going short-USA.

 

In FFH's case it is not a hedge against his baseline thinking, in fact it is complementary and compounding to its baseline thinking. Long-resolute/Stelco/Recipe etc. short [tech name xx]. If FFH had take an actual derivative position that provide short-term relief against his main-deep-value investing style, then we can say it hedged.

[Gregmal]

^ well said. The man keeps playing everyone. Its an ego fest at this point. Its not deliberately a fuck you like at Biglari, but the overall lack of concern for shareholders is very much the same. If Prem Watsa wasnt once regarded as the "Warren Buffett of Canada", no one would give a shit about this name. In fact, thats pretty much the investment case at this point...one day Prem will right the ship....good luck