Berkshire vs Brookfield vs Fairfax

[CanadianMunger]

All three look pretty cheap, as discussed in the various threads. 

 

Currently Berkshire.B trades at $202.33US, Brookfield $39.59CAD, and Fairfax at $350.24CAD.

 

Who performs the best over the next decade?

[Viking]

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.

[Broeb22]

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.

[StevieV]

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.

[Gregmal]

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...

[villainx]

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.

[Viking]

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

[mattee2264]

 

  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".

[Cardboard]

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.

 

 

Cardboard

[Spekulatius]

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.

[petec]

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.

 

[CanadianMunger]

 

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?

[mattee2264]

 

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.

[Cigarbutt]

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.

[CanadianMunger]

Second anniversary of this post.  November 1, 2020 to November 1, 2022:

 

Berkshire: $202.33 --> $294.13  45%

Brookfield: $39.59CAD --> $54.55CAD  38%

Fairfax: $350.24CAD --> $670CAD   91%

 

The BAM and FFH numbers don't include dividends and not sure if BAM had any spinoffs during this time.  Would be lovely if someone can post a total return graph including S&P500, or direct me to a site where I can obtain and post.  Thanks.

 

Fairfax clearly in the lead two years into the hypothetical ten year holding period.  Will be interesting to see how this plays out in the coming years.

 

[crs223]

On 11/3/2020 at 12:02 AM, Viking said:

Here is how i would vote based on Trust:

1.) BRK

2.) BAM

3.) FFH

 

I “trust” BRK also.  The 13F is like Christmas morning for me… “what have these trustworthy guys bought me?!!”

 

Is there any chance BRK will buy shares of BAM or FFH?  If no… why not?

[UK]

I understand, that BRK and FFH would benefit, at least as a bussineses (if not on valuation side) if interest rates will be higher in the future. Is it the same with BAM? Or are they on the oposite side? There are a lot of discussions recently about bussines models build on low interest rates and leverage, such as CRE, which just does not work so well if rates are going much higher. How one should look at BAM in this light, would higher rates benefit or hurt their perspectives?

 

 

Edited November 2, 2022 by UK

[Spekulatius]

6 hours ago, UK said:

I understand, that BRK and FFH would benefit, at least as a bussineses (if not on valuation side) if interest rates will be higher in the future. Is it the same with BAM? Or are they on the oposite side? There are a lot of discussions recently about bussines models build on low interest rates and leverage, such as CRE, which just does not work so well if rates are going much higher. How one should look at BAM in this light, would higher rates benefit or hurt their perspectives?

 

 

I am fairly confident that higher interest rates hurt the private equity model, which is what the likes of BX, KKR, BAM etc are perusing. the private equity model needs high asset prices and cheap money to prosper. Sure they can benefit from credit crunches and take advantage of dislocations in equity prices if they are short term, but if they persist longer, which would be likely with higher interest rates, then I think these type if business models will suffer.

[Spooky]

I own both BRK and BAM and think of them as somewhat similar but opposite sides of a coin - BRK should do well in an environment like today whereas BAM will do well in the low interest rate environment we experienced in the last decade (and BAM is my proxy for alternative investments such as PE, infrastructure, private credit, etc.). BAM really benefited from pension funds / LPs searching for yield in a low interest rate world. However, they have set themselves up in an anti-fragile way so that they can be counter-cyclical and take advantage of market dislocations. They seem to be pretty good at this and were selling / realizing a lot of their PE backed businesses during the frothy market at the tail end of 2021. If interest rates on government debt climb too high it also might be good for them since nations will need to sell infrastructure type assets to raise funds to cover higher interest expense. They have recently raised and closed some very sizable infrastructure funds.  

[Red Lion]

5 hours ago, Spekulatius said:

I am fairly confident that higher interest rates hurt the private equity model, which is what the likes of BX, KKR, BAM etc are perusing. the private equity model needs high asset prices and cheap money to prosper. Sure they can benefit from credit crunches and take advantage of dislocations in equity prices if they are short term, but if they persist longer, which would be likely with higher interest rates, then I think these type if business models will suffer.

 

Everyone says this, and I can tell that you're an intelligent investor with more experience than me, so maybe you can answer this question...

 

Every time I see someone say that Private Equity needs high prices and low rates to work, I wonder, how did all these companies start out in the 80s and 90s (Blackstone and Apollo) or the very late 70s (KKR) and just knock it out of the park? They had very high interest rates, lower asset prices, lower fund sizes. So why can't they do it again?

 

I personally think that the good PE managers know how to play several playbooks. I think you're going to see more convertible debt investments, takeovers and restructuring in BK court, portfolio companies buying back debt at a huge discount. Keep in mind the big players, especially BX, BAM, and KKR have a TON of capital to deploy into these lower asset prices. Just those three alone have around 300-350 billion of uncalled fund commitments and they are all still increasing their AUM in the face of rapidly rising interest rates. 

 

[Munger_Disciple]

23 minutes ago, RedLion said:

 

Everyone says this, and I can tell that you're an intelligent investor with more experience than me, so maybe you can answer this question...

 

Every time I see someone say that Private Equity needs high prices and low rates to work, I wonder, how did all these companies start out in the 80s and 90s (Blackstone and Apollo) or the very late 70s (KKR) and just knock it out of the park? They had very high interest rates, lower asset prices, lower fund sizes. So why can't they do it again?

 

I personally think that the good PE managers know how to play several playbooks. I think you're going to see more convertible debt investments, takeovers and restructuring in BK court, portfolio companies buying back debt at a huge discount. Keep in mind the big players, especially BX, BAM, and KKR have a TON of capital to deploy into these lower asset prices. Just those three alone have around 300-350 billion of uncalled fund commitments and they are all still increasing their AUM in the face of rapidly rising interest rates. 

 

 

Unlike @Spekulatius I am not necessarily a more intelligent investor . With that caveat, PE was very different in the 80s. First of the all, the public equities were trading at one of the lowest valuations ever, as the multi decade bull market was just about to begin. And the interest rates were at an all time high in 1982, and about to go on an epic downward trend over the coming decades  to nearly 0% in 2020. PE industry barely existed in the early 80s, with most dealing in small caps. The total size of LBO funds was tiny. Almost everything is opposite of 80s today: the total size of PE industry is in trillions of dollars, interest rates heading higher, and market valuation elevated even after the drawdown this year. IMO PE is unlikely to do well over the next decade.

 

I too would pick BRK, FFH over BAM for next 10 years. 

Edited November 2, 2022 by Munger_Disciple

[Red Lion]

On 11/2/2022 at 11:09 AM, Munger_Disciple said:

 

Unlike @Spekulatius I am not necessarily a more intelligent investor . With that caveat, PE was very different in the 80s. First of the all, the public equities were trading at one of the lowest valuations ever, as the multi decade bull market was just about to begin. And the interest rates were at an all time high in 1982, and about to go on an epic downward trend over the coming decades  to nearly 0% in 2020. PE industry barely existed in the early 80s, with most dealing in small caps. The total size of LBO funds was tiny. Almost everything is opposite of 80s today: the total size of PE industry is in trillions of dollars, interest rates heading higher, and market valuation elevated even after the drawdown this year. IMO PE is unlikely to do well over the next decade.

 

I too would pick BRK, FFH over BAM for next 10 years. 

 

I appreciate the back and forth, because at this point the alternative asset managers are my biggest position in my equity portfolio, and I find myself trying to talk myself off the ledge of being a true believer, and making sure that I have a solid understanding of the business here. 

 

I should say, I do agree, massively negative real interest rates are probably the utmost ideal business climate for the alternative asset managers. This helps tremendously with raising fee paying AUM which is the key driver of fundamental value in these names I believe. Also it is no doubt beneficial to to do deals with cheap credit and loose terms. 

 

In my opinion, I think these companies can do just fine with low asset values, high yield spreads, etc. because they are all able to invest into special situations including credit or simply less leveraged and lower valued buyouts. Credit seems like a huge opportunity here though, even in the buyout/PE funds, because they can and will and have bought out distressed credit and either taken quit profits or taken companies private through bankruptcy, etc. e.g. BREIT is talking about making credit investments where they can earn solid returns with much lower risk. 

 

The bigger question is whether they can continue to increase fee paying AUM and keep the relatively high management fees associated with their private funds. My guess is they probably can, especially with the shift towards high net worth private funds. 

 

I should also mention that all of these businesses, at least all of the ones I invest in, e.g. BAM, KKR, APO, BX, and ARES are all managing insurance capital, with an emphasis on pension risk transfer and annuity businesses, so all of these businesses tend to have a tailwind from rising interest rates as well and have historically earned higher returns on equity and had higher inflows of AUM in times of higher interest rates. It's easier to sell a 4% annuity than a 2% annuity regardless of what inflation or other investment opportunities are, and yet these companies are earning higher spreads with higher interest rates. 

 

With everything said, if you wanted to pick BRK and FFH over BAM for the next 5 years based on a theory of rising interest rates, I would completely understand. I still have my money on BAM when it comes to a 10 year horizon, and BX, APO, and KKR in my humble opinion as well, I personally hold them in a basket as large % of my equities portfolio. I also own BRK and FFH, and agree that they look attractive, especially FFH, in a rising interest rate environment. I don't think we are entering into a 10-20 year period of HIGH interest rates. I believe we are headed to 5 or 6% on the federal funds rate for a few years, recession, and then reduced rates. I could certainly be wrong, but that's where a good deal of my money is. About 50% of my equity portfolio is in BAM,APO,KKR, BX,ARES in that order. Most of my net worth is in a closely held business and T-bills, so it's not like I'm all in on stocks or anything, but I'm certainly a true believer in these companies for the long term even with higher interest rates. 

[Spekulatius]

@RedLion I think private  equity will always adapt to higher interest rates, but it will not be a pleasant journey.

 

In the 80‘s private equity deals worked because valuation were much lower. It is one thing to operate at higher interest rates which over time go lower, but another to go from higher valuation/ lower interest rate Regime to one where valuations are lower and interest rates are higher.

 

So my view is that private equity will be more impacted than most other business, since they tend to be more leveraged by design.

 

Just a high level view. I do have a small position in KKR

[Viking]

My guess is FFH will significantly outperform both BAM and BRK over the next 3 years. Why?

1.) valuation. At US$510, Fairfax is crazy cheap. Much cheaper than either BAM or BRK.
2.) growth in profitability: Fairfax will grow profitability much faster than BAM or BRK.

- rising interest rates IS spiking interest income

- 20% top line growth/hard market IS spiking underwriting profit

- realized and unrealized gains in the equity portfolio will continue to be significant - but lumpy.

- bottom line, historical Fairfax profitability is understated. Its future profitability is way underestimated. Profitability at Fairfax is a coiled spring right now.

3.) Fairfax has needle moving investments: pet insurance sale great example. Digit is another. There will be more.

4.) FFH share count will continue to come down significantly; BRK might be close here, BAM will lag significantly

5.) size: Fairfax has a big advantage here, being much smaller; both BAM and especially BRK are elephants. 

If this was a 100 meter race, Fairfax would be starting on the 20 yard line. Fairfax would also be a much faster runner than the other 2 sprinters (BAM and BRK). As long as they do not trip and fall, i think Fairfax will easily win the race. 

Edited November 6, 2022 by Viking

[Spekulatius]

9 hours ago, Viking said:

My guess is FFH will significantly outperform both BAM and BRK over the next 3 years. Why?

1.) valuation. At US$510, Fairfax is crazy cheap. Much cheaper than either BAM or BRK.
2.) growth in profitability: Fairfax will grow profitability much faster than BAM or BRK.

- rising interest rates IS spiking interest income

- 20% top line growth/hard market IS spiking underwriting profit

- realized and unrealized gains in the equity portfolio will continue to be significant - but lumpy.

- bottom line, historical Fairfax profitability is understated. Its future profitability is way underestimated. Profitability at Fairfax is a coiled spring right now.

3.) Fairfax has needle moving investments: pet insurance sale great example. Digit is another. There will be more.

4.) FFH share count will continue to come down significantly; BRK might be close here, BAM will lag significantly

5.) size: Fairfax has a big advantage here, being much smaller; both BAM and especially BRK are elephants. 

If this was a 100 meter race, Fairfax would be starting on the 20 yard line. Fairfax would also be a much faster runner than the other 2 sprinters (BAM and BRK). As long as they do not trip and fall, i think Fairfax will easily win the race. 

I think BAM will outperform both unless interest rates go up from here and stay high. The reason is that BAM‘s business model is able to get higher returns on equity.