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Berkshire vs Brookfield vs Fairfax


All 3 appear to be cheap. Which is the best performer for the next decade?  

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  1. 1. All 3 appear to be cheap. Which is the best performer for the next decade?

    • Berkshire
    • Brookfield
    • Fairfax


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My vote:

 

1.) Fairfax

2.) BAM

3.) BRK

 

I picked Fairfax because it looks the most undervalued and it is in a hard insurance market. RBC has forecast $35 in operating earnings in 2021. Shares are trading at $263. When equity earnings turn positive (they will :-) the stock should be an easy double. The risk for Fairfax is theirvcurrent leverage profile and if we get another 30 or 40% decline in the stock market in the next 12 - 18 months.

 

BAM looks undervalued. But it is such a big pig i really have no idea how undervalued. It is the classic example of ‘trust management’. How much it goes up will depend on 2 variables:

1.) if interest rates stay low for long

2.) the PE multiple Mr Market gives the company over time

 

BRK will likely deliver 1 or 2% under the S&P 500 over the next decade. Solid.

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My vote:

 

1.) Fairfax

2.) BAM

3.) BRK

 

I picked Fairfax because it looks the most undervalued and it is in a hard insurance market. RBC has forecast $35 in operating earnings in 2021. Shares are trading at $263. When equity earnings turn positive (they will :-) the stock should be an easy double. The risk for Fairfax is theirvcurrent leverage profile and if we get another 30 or 40% decline in the stock market in the next 12 - 18 months.

 

BAM looks undervalued. But it is such a big pig i really have no idea how undervalued. It is the classic example of ‘trust management’. How much it goes up will depend on 2 variables:

1.) if interest rates stay low for long

2.) the PE multiple Mr Market gives the company over time

 

BRK will likely deliver 1 or 2% under the S&P 500 over the next decade. Solid.

 

I would largely agree with this.

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My vote:

 

1.) Fairfax

2.) BAM

3.) BRK

 

I picked Fairfax because it looks the most undervalued and it is in a hard insurance market. RBC has forecast $35 in operating earnings in 2021. Shares are trading at $263. When equity earnings turn positive (they will :-) the stock should be an easy double. The risk for Fairfax is theirvcurrent leverage profile and if we get another 30 or 40% decline in the stock market in the next 12 - 18 months.

 

BAM looks undervalued. But it is such a big pig i really have no idea how undervalued. It is the classic example of ‘trust management’. How much it goes up will depend on 2 variables:

1.) if interest rates stay low for long

2.) the PE multiple Mr Market gives the company over time

 

BRK will likely deliver 1 or 2% under the S&P 500 over the next decade. Solid.

 

I would largely agree with this.

 

I would consider that as the most uncertain to least uncertain returns.  I am the least certain about Fairfax given their recent investing history.  Most certain about BRK.

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Perhaps Im just being obtuse again, but despite the fanfare for these I think its a do you like cheeseburgers, filet mignon or otoro sushi type of question.

 

These each have vastly different profiles. Berkshire is clearly the filet. Its good, everyone likes it, and you cant really go wrong. I think it will perform accordingly. BAM is much more exotic and probably not for everyone, but IMO would do best of the bunch. Fairfax I think is the cheeseburger; likable and affordable, but the verdict is out on whether its from the dollar menu or Bobby Flay's...

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I'm not sure if I'm being more or less obtuse but isn't it more whether you like/trust/admire the leaders of the respective companies? 

 

I tried to believe in Prem, but he hasn't done enough.  Maybe that's because a couple of mistakes or bad timing had dull my receptiveness to his past success, but I've been primarily adding to BRK and BAM because for the top folks in charge that I think had and has done better.

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I'm not sure if I'm being more or less obtuse but isn't it more whether you like/trust/admire the leaders of the respective companies? 

 

I tried to believe in Prem, but he hasn't done enough.  Maybe that's because a couple of mistakes or bad timing had dull my receptiveness to his past success, but I've been primarily adding to BRK and BAM because for the top folks in charge that I think had and has done better.

 

Here is how i would vote based on Trust:

1.) BRK

2.) BAM

3.) FFH

 

Here is how i would vote if i had to buy and hold for the next 10 years:

1.) BAM - Flatt is young and in his prime

2.) BRK - Buffett is very old

3.) FFH - Prem’s best years, i think, are in the rear view mirror

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  I see Berkshire as a pretty safe bet. Its stock price performance will mostly be driven by business results and you'd expect it to do around 7-10% ROE and shareholder returns should quite closely match that. That could end up being a lot better than the S&P 500.

 

  Brookfield I do not really understand. It seems like you are paying quite a large premium to book value and the underlying assets have already enjoyed a nice tailwind from low interest rates and economic expansion. Also with any real estate company leverage can be a double-edged sword. Also the stock price isn't much lower than a year ago before Covid-19 even though the long term fundamentals for CRE have probably changed for the worse.

 

  Fairfax seems like the highest risk-reward. It is difficult to see much downside when you are paying 0.6x book and if it gets its act together you'd expect a peer multiple of around 1.2x book which is an easy double. And that is even before considering book value increases. But that is a big "if".

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Look at the stock market over last few days and I am noticing a big shift from techs to investments.

 

Please note that I am not using terms of growth to value since some decent growth stocks now trade like value and many boring but, perfectly fine businesses have been trashed. It has definitely been a beauty contest where charts have driven everything pushing logic out the window.

 

So I think that Hamblin could excel going forward. As Prem mentioned in call, portfolio returns were only down in 4 years of their existence. Every year afterwards showed a nice return.

 

Buffett is 90 years old and Munger even older so where is the enthusiasm coming from once they are gone or not leading the show? Who is going to make calls on acquiring large companies? Portfolio could be all right but, size is such no one can really add value vs indexes. I would fear a growing discount.

 

BAM has been a favorite.  I don't see the discount vs other investments to attract me even in RE.SPG looks miles better to me and more enterprising investors can look at a JBGS. Renewables investing has been hot while rate of returns on these utilities is poor. Chance for capital mis-allocation is very high. Preferred leverage thar may disappear, etc.

 

Actually it is way worst than EdperBrascan as this one could go BK with a few things going wrong.

 

 

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Return over 10 years

1)BAM

2) BRK

3) FFH

 

I think BAM has the highest risk of blowing up in the face of these three , but it is lower than I thought initially.

BAM benefits from lower interest rates and FFH gets hurt the most amongst those three, do in a way the decision is also a macro call.

 

I do think that FFH has the best snap back potential short term.

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I own all three in (roughly equal) size, for my sins.

 

BAM wins. Tailwinds and cash flows are immense. I don't understand the bankruptcy argument here.

 

FFH likely no2. Combination of hard insurance market and revaluation, probably with some of the investments finally coming good, but low rates a drag, and cash tight.

 

BRK brings up the rear, but with higher certainty of outcome.

 

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BRK will likely deliver 1 or 2% under the S&P 500 over the next decade. Solid.

 

The following is from Buffett's 2015 special letter "Berkshire - Past, Present & Future":

 

"Purchases of Berkshire that investors make at a price modestly above the level at which the company

would repurchase its shares, however, should produce gains within a reasonable period of time. Berkshire’s

directors will only authorize repurchases at a price they believe to be well below intrinsic value. (In our

view, that is an essential criterion for repurchases that is often ignored by other managements.)

 

For those investors who plan to sell within a year or two after their purchase, I can offer no assurances,

whatever the entry price. Movements of the general stock market during such abbreviated periods will

likely be far more important in determining your results than the concomitant change in the intrinsic value

of your Berkshire shares. As Ben Graham said many decades ago: “In the short-term the market is a voting

machine; in the long-run it acts as a weighing machine.” Occasionally, the voting decisions of investors –

amateurs and professionals alike – border on lunacy."

 

Given Buffett's modesty, are we to infer that purchases made around these levels (~1.2 book) will outperform the S&P?

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I think it depends what the S&P 500 is going to do. S&P 500 has a feast or famine dynamic that you don't have to the same extent with Berkshire. I think the days of Berkshire compounding at a double digit rate are long gone. But it is a nice capital preservation vehicle. You can probably count on 7-10% returns which could well be a lot better than the market over the next decade and certainly a lot more attractive than the 1% you get on long term Treasuries.

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I think it depends what the S&P 500 is going to do...

Mr. Damodaran had this graph recently when discussing if one should adapt to value investing or if one should let value investing adjust to one's portfolio. If the choice is between investing in BRK or the S&P500 index, excess or 'alpha' return expectations should be dampened although there may still be periodic opportunities (now?) for potential relative outperformance.

BRKHistory.jpg

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