Fairfax 2021

[petec]

Good topic.

 

I will be disappointed.

 

If it were just about Blackberry, I could handle it if Prem said: we think the future is bright and Blackberry's prospects will multiple many times over the next decade, so we have not sold.

 

But it is also about Fairfax and its need for capital. The value that could be created by locking in these gains and writing hard market premia against that capital is significant. That value evaporates if Blackberry goes back to $6 for a year or two, even if it then goes to $100 in 2030.

 

I don't know how strongly I feel about selling at $15. But from my point of view, Blackberry at $20 is a sell and Blackberry at $25 is a "chuck it out the door as fast as you can" for FFH.

 

I might feel differently if the cause was not Reddit, but a really tangible change in fundamentals (e.g. lots of customers signing up to IVY or clear progress on a subscription model for QNX). But since the cause seems to be Reddit, the spike is quite likely to be temporary.

 

I am not sure if I will sell if Fairfax has sat pat. The value is still there and the catalyst (hard market). But if they have not sold Blackberry then I will likely sell earlier in the rally that I hope to see.

[A_Hamilton]

I would to understand what investors on this board are thinking in the event that we find out that Fairfax has not done anything to monetize the recent increase in value in Blackberry.

 

I have been very critical of Prem and the overall management of Fairfax for the last several years. My concerns have been expressed on here numerous times. I have been a long term shareholder of Fairfax having bought my initial position in Nov/1999. In the last several years I have gradually reduced my position and then significantly cut it at the outset of the pandemic. I continue to hold a small weight in the shares. Although I understand the excitement around the hard market and rebound in the values of their equity holdings I have resisted adding back the shares I sold because of concerns I still hold about the way that Fairfax is managed overall.

 

I view the recent run-up in the value of Blackberry as literally a gift from the investing Gods. A gift that I believe Prem and his team would be foolish not to capitalize on. So as a result if Fairfax has taken no action to realize the sudden (unwarranted) spike in Blackberry's stock price I have decided that I will sell off my remaining position in Fairfax and never re-enter the shares again as long as Prem is involved as such inaction will have confirmed my greatest concerns about Fairfax once and for all.

 

I would like to have a serious discussion here about what others are thinking on this point. Thanks

 

I don't think it would be the wrong response to exit if Prem didn't sell unless there were some kind of blackout period having prevented FFH from trading.

 

I agree too with Petec's point that a lot of this is about the fact that the company could use some higher capital levels to take advantage of the hard market. They are somewhat fortunate so far that the hard market is stronger outside of catastrophe reinsurance because their just isn't the balance sheet to write that substantially right now and end up with 140% combineds for a few quarters if you get a bad hurricane season.

[StevieV]

I agree that the circumstances make a difference.  Fairfax could use the cash AND the move in BB's share price isn't based on a huge change in the prospects for the business OR a sober re-assessment by the market.

 

Even if you Prem/Fairfax think BB's future is very bright, there's no reason they couldn't trim their holdings and keep some for this bright future.  They could also have sold and buy back shares back later if and when the frenzy is over.

 

I don't own BB directly and don't have an independent view of what price it should trade at.

[TwoCitiesCapital]

Them not selling BB wouldn't force me to sell the shares in FFH since that wasn't my thesis for acquiring most of them to begin. Fairfax is unequivocally cheap and BB just made it even more so.

 

But if they don't sell, it certainly will make me call into question how much credit I'm willing to give them in the future. Once it stops being cheap on an asset basis, the quality of management and their decisions becomes the primary driver and this would be a strike against that outlook and expected value for the shares.

[StubbleJumper]

I would to understand what investors on this board are thinking in the event that we find out that Fairfax has not done anything to monetize the recent increase in value in Blackberry.

 

I have been very critical of Prem and the overall management of Fairfax for the last several years. My concerns have been expressed on here numerous times. I have been a long term shareholder of Fairfax having bought my initial position in Nov/1999. In the last several years I have gradually reduced my position and then significantly cut it at the outset of the pandemic. I continue to hold a small weight in the shares. Although I understand the excitement around the hard market and rebound in the values of their equity holdings I have resisted adding back the shares I sold because of concerns I still hold about the way that Fairfax is managed overall.

 

I view the recent run-up in the value of Blackberry as literally a gift from the investing Gods. A gift that I believe Prem and his team would be foolish not to capitalize on. So as a result if Fairfax has taken no action to realize the sudden (unwarranted) spike in Blackberry's stock price I have decided that I will sell off my remaining position in Fairfax and never re-enter the shares again as long as Prem is involved as such inaction will have confirmed my greatest concerns about Fairfax once and for all.

 

I would like to have a serious discussion here about what others are thinking on this point. Thanks

 

 

First off, I hope that FFH dumped a large slug of its BB shares when they rose into the US$20 zone.  But, frankly, it's not too late to dump them, as even today they are bounding around US$16.  That is still a very good price and I still hold the view that converting the 47m common shares into ~US$800 cash would be a rational move.  But assuming that FFH has not dumped shares, one should question why that might be.  Here are a few possibilities to ponder:

 

1) Is Prem (and Bradstreet) stupid?

 

The answer to this question is clearly, "No, Watsa and Bradstreet are anything but stupid."  They are not sitting in their offices drinking beer and snorting coke, completely oblivious to BB's rocketing share price.  They are obviously not dumber than the three other insiders who dumped their shares a week ago.  They are not so dumb as to delude themselves into thinking that BB can generate enough income any time soon to justify a market-cap of US$7B, $10B, or $15B (corresponding to share prices of ~US$12, $16, and, gasp, $25).  The guys at FFH are completely numerate and will have done the same exercise that Pete and others have been cobbling together in recent weeks, which shows that any price over US$8 is probably bat-shit crazy. No, Prem is definitely NOT stupid.

 

2) Does FFH have a legal agreement or a gentlemen's agreement to not sell the shares?

 

This is an interesting question.  We saw the existence of a stand-still agreement arising from the reissuing of the convertible debentures.  Usually those are intended to forestall a takeover offer by preventing parties from acquiring more shares.  But, is it possible that there is some legal agreement preventing the liquidation of shares?  Further, if there is no legal agreement, is it possible that Prem entered into a "Gentlemen's Agreement" with John Chen or some other party to not liquidate FFH's shares unless certain conditions are met (a date limit, a share price, something else).  If such a gentlemen's agreement exists, it would be a tremendous disappointment because it reflects a way of conducting business that lacks transparency.  Respecting such an agreement would be a positive reflection of Prem's integrity (be a man of his word), but making such agreements on a material investment without disclosure might constitute yet another governance abuse, in a long string of past governance abuses.

 

This one is a real possibility.

 

3) Has FFH lent its shares to the shorts?

 

Is it possible that Prem has taken a page out of Mason Hawkin's book, and has lent out FFH's large block of shares.  Prem preaches against reaching for yield, but it interest rates so pathetic these days, is it possible that some outfit approached FFH and offered a decent borrow-rate on the 47m shares?  If FFH has lent its shares to a short, is it ethical/legal to subsequently convert the debs and dump them on the market (thereby assisting the short)?  If, in November, somebody offered a 6% or 7% borrow rate on 47m x US$6, would that have been a bad offer at the time it was made (and possibly accepted)?

 

This is a real possibility, and it's the sort of thing that could be tough to unwind in the short-term, and depending on how it's structured, it could actually result in a loss of capital if the counter-party isn't strong (ie, see the failed hedge funds from last week).

 

4) Is there some regulatory constraint that we don't understand?

 

I don't think this is there is a regulatory constraint, but there are tomes of rules out there, so it's not inconceivable.

 

 

I'm not sure that we'll ever get disclosure about why shares have not been sold.  The gentlemen's agreement under #2 would piss me off the most, but I don't have such a problem with #3 or #4.  I think #1 is outrageous as an explanation.

 

 

SJ

 

[petec]

Them not selling BB wouldn't force me to sell the shares in FFH since that wasn't my thesis for acquiring most of them to begin. Fairfax is unequivocally cheap and BB just made it even more so.

 

But if they don't sell, it certainly will make me call into question how much credit I'm willing to give them in the future. Once it stops being cheap on an asset basis, the quality of management and their decisions becomes the primary driver and this would be a strike against that outlook and expected value for the shares.

 

This is what I was trying to say in my last para. Well put.

[petec]

@SJ, since you referenced me, I don’t think anything over $8 is batshit crazy - especially on a relative basis.

 

It requires a lot to go right, but that’s not out of the question, and a lot of valuations require a lot to go right today.

 

By the time you get to $25 it’s closer to batshit!

[gary17]

they are cheap because the market is not convinced they can make sound investment decisions - so  the market is pricing in future decline of current asset value - hence it's below book value....  if they don't sell BB shares, i think that just gives the market the confirmation they are not good investors and confirm Mr. Market's thesis of value destruction will continue... and hence cheaper prices for FFH shares.  my 2 cents.

[StubbleJumper]

@SJ, since you referenced me, I don’t think anything over $8 is batshit crazy - especially on a relative basis.

 

It requires a lot to go right, but that’s not out of the question, and a lot of valuations require a lot to go right today.

 

By the time you get to $25 it’s closer to batshit!

 

Fair enough.  There are definitely valuations out there that are bat-shit crazier than BB at US$8.  IMO, those valuation portend an unacceptable return for the person who will eventually receive the totality of the cashflows to shareholders that those outfits will emit.  So, the question of $8 for BB basically boils down to, "Can BB take its current $3 B in assets and convert them into a stream of cashflows to shareholders which have a present value that exceeds $5B?"  Never say never, but the math doesn't at all look compelling to me!

 

 

SJ

[doc75]

I know these things are hard to quantify, but what do you think the odds are that Fairfax monetized a significant portion of their stake?

 

I personally think it's less than 50%, meaning I'd be unsurprised if they didn't and pleasantly surprised if they did.  The entire BB investment thesis wasn't rational to begin with (IMO) so I don't put high hopes on a rational exit outside of an outright sale of the company. 

 

 

[bizaro86]

I know these things are hard to quantify, but what do you think the odds are that Fairfax monetized a significant portion of their stake?

 

I personally think it's less than 50%, meaning I'd be unsurprised if they didn't and pleasantly surprised if they did.  The entire BB investment thesis wasn't rational to begin with (IMO) so I don't put high hopes on a rational exit outside of an outright sale of the company.

 

+1 

 

I hope if they don't sell they have a better answer than "we believe in the future of the company"

[Jurgis]

I know these things are hard to quantify, but what do you think the odds are that Fairfax monetized a significant portion of their stake?

 

I personally think it's less than 50%, meaning I'd be unsurprised if they didn't and pleasantly surprised if they did.  The entire BB investment thesis wasn't rational to begin with (IMO) so I don't put high hopes on a rational exit outside of an outright sale of the company.

 

+1 

 

I hope if they don't sell they have a better answer than "we believe in the future of the company"

 

But what if BB really gets installed in every car and stonk goes TSLA sometime late 2021 or 2022?  ::)  8)  :o

[Santayana]

Maybe Prem is using Robinhood and was blocked from trading BB.

[Santayana]

Seriously though, now that the feeding frenzy has spread to so many different heavily shorted names, I'm a bit nervous not knowing what the exposure is.  It's not out of the realm of possibility that Fairfax is short one of these names that's exploded over the last week.

[wisowis]

Seriously though, now that the feeding frenzy has spread to so many different heavily shorted names, I'm a bit nervous not knowing what the exposure is.  It's not out of the realm of possibility that Fairfax is short one of these names that's exploded over the last week.

 

Below is from the last conference call in October. If FFH has short exposure after saying this...

 

Michael Beall

 

Prem, could you give us a little more color on this short equity exposure? Exactly what are we short and the notional or size relative to our portfolio?

 

So it's just the strategy in general. That is a pretty big number. And I don't mean to -- Monday morning or Friday morning quarterback because the third quarter was a strong one, but $168 million in losses on short equity exposure, I think, deserves a little more explanation.

 

V. Watsa

 

So Michael, we don't talk about individual names, as you know, until we've either sold them or covered them. And on the shorts, let me assure you that it's over. This is just a remnant and unfortunately, as you pointed out, has gone up. And -- but not too long in the future, we'd be out of it. It's all mark-to-market, of course. So you see it.

 

And we reduced it quite significantly in the third quarter. And relatively soon, I just don't want to fix a time, but relatively soon, that will be gone. And then we've said publicly, we will not short the TSE and not short the indices. Meaning, the S & Poor's or any of them. So we will not do that, and we won't short companies at all, ever. And so rest assured, there'll be no more of those.

 

Michael Beall

 

Okay. So exactly, broadly, where are we short? You just said we don't short individual companies, and we don't short the TSE, or I guess the S&P.

 

So I still don't understand what this hedge is designed -- what it's about?

 

V. Watsa

 

Yes. So Michael, basically what it was, was a position that we've had in the past. So it's not a new short. It's a position -- an individual position that we've had in the past that we've covered, and covered, and covered, and this is the last remnants of it.

[bearprowler6]

Seriously though, now that the feeding frenzy has spread to so many different heavily shorted names, I'm a bit nervous not knowing what the exposure is.  It's not out of the realm of possibility that Fairfax is short one of these names that's exploded over the last week.

 

Below is from the last conference call in October. If FFH has short exposure after saying this...

 

Michael Beall

 

Prem, could you give us a little more color on this short equity exposure? Exactly what are we short and the notional or size relative to our portfolio?

 

So it's just the strategy in general. That is a pretty big number. And I don't mean to -- Monday morning or Friday morning quarterback because the third quarter was a strong one, but $168 million in losses on short equity exposure, I think, deserves a little more explanation.

 

V. Watsa

 

So Michael, we don't talk about individual names, as you know, until we've either sold them or covered them. And on the shorts, let me assure you that it's over. This is just a remnant and unfortunately, as you pointed out, has gone up. And -- but not too long in the future, we'd be out of it. It's all mark-to-market, of course. So you see it.

 

And we reduced it quite significantly in the third quarter. And relatively soon, I just don't want to fix a time, but relatively soon, that will be gone. And then we've said publicly, we will not short the TSE and not short the indices. Meaning, the S & Poor's or any of them. So we will not do that, and we won't short companies at all, ever. And so rest assured, there'll be no more of those.

 

Michael Beall

 

Okay. So exactly, broadly, where are we short? You just said we don't short individual companies, and we don't short the TSE, or I guess the S&P.

 

So I still don't understand what this hedge is designed -- what it's about?

 

V. Watsa

 

Yes. So Michael, basically what it was, was a position that we've had in the past. So it's not a new short. It's a position -- an individual position that we've had in the past that we've covered, and covered, and covered, and this is the last remnants of it.

 

Prem's comment from the last earnings call should not give you any comfort. He left himself enough wiggle room by not specifying a time period by which the last remaining short would be closed off. In his words: "I just don't want to fix a time, but relatively soon." Classic Prem speak if you ask me. Prem speak has been covered on this board numerous times before so no need to elaborate any further now. "Relatively soon" in Prem speak is different from what most of us on this board would suggest is meant by the time frame.

 

I have also also worried about Fairfax's short exposure during the last few weeks. Worse care scenario....the last remaining short is GME and it has not yet been closed out!

[petec]

No. The worst case is that it has recently been closed out. The best case is this spike gave them an oppy to increase their short and bail themselves out.

[bearprowler6]

No. The worst case is that it has recently been closed out. The best case is this spike gave them an oppy to increase their short and bail themselves out.

 

Would increasing the size of a short position go against Prem's "promise" to not short ever again? Or have you found him another loop hole to exploit? Prem speak knows no limits.....

[doc75]

No. The worst case is that it has recently been closed out. The best case is this spike gave them an oppy to increase their short and bail themselves out.

 

Would increasing the size of a short position go against Prem's "promise" to not short ever again? Or have you found him another loop hole to exploit? Prem speak knows no limits.....

 

Didn't GME and friends start spiking very recently?  Wouldn't this "one name" be more likely some high-flier like TSLA, if they've been covering and covering...?  (Also bad news of course, but no GME.)

 

[Viking]

If Fairfax does not monetize a large chunk of BB i will be disappointed. If they have not and the reason they supply is weak then it will reflect poorly on management. (And there is a very good chance the reason could be infuriatingly weak). And poor management decisions is the key reason the stock is trading so much below peers.

 

In terms of pricing i would be happy with anything over US$12. As has been discussed, they have such good uses right now for the cash. And the pandemic is not over.

 

If they do not do anything there is one other possible reason: economic nationalism. Prem may feel Fairfax needs to nurture Blackberry for another couple of years until it completes its transformation. Few tech companies are based in Canada. Selling might be off the table (for now) because it is not a simple financial transaction (based on BB share prcice). Prem wants wait until Blackberry succeeds (to the benefit of Canada). Fairfax will get its payout perhaps in a few years when Blackberry has completed its transformation. I see a possible similar motive with other investments like AGT, Farmers Edge etc. Fairfax provides the seed money/environment/patience to create world class companies based in Canada. I may be completely off base with this comment. What they do with their BB shares and the reasons they supply will be instructive.

 

Will the BB decision (or non-decision) impact what i do with my FF shares? Of course. If they monetize all or a large chunk of BB i will likely want to buy more (assuming i can get some at a reasonable price). If they do nothing with BB the reason they supply will be important. Fairfax continues to be a ‘trade’ and not a ‘buy and forget’ type stock because of management (and their style).

 

My view is Fairfax has been slowly turning the super tanker the past couple of years (making better management decisions). Do we see more steps forward or a few steps backwards? The two big questions for me going into earnings:

1.) what, if anything, have they done with their BB position

2.) update on the mystery short position - a big deal or a nothing burger

 

 

[Viking]

Seriously though, now that the feeding frenzy has spread to so many different heavily shorted names, I'm a bit nervous not knowing what the exposure is.  It's not out of the realm of possibility that Fairfax is short one of these names that's exploded over the last week.

 

Below is from the last conference call in October. If FFH has short exposure after saying this...

 

Michael Beall

 

Prem, could you give us a little more color on this short equity exposure? Exactly what are we short and the notional or size relative to our portfolio?

 

So it's just the strategy in general. That is a pretty big number. And I don't mean to -- Monday morning or Friday morning quarterback because the third quarter was a strong one, but $168 million in losses on short equity exposure, I think, deserves a little more explanation.

 

V. Watsa

 

So Michael, we don't talk about individual names, as you know, until we've either sold them or covered them. And on the shorts, let me assure you that it's over. This is just a remnant and unfortunately, as you pointed out, has gone up. And -- but not too long in the future, we'd be out of it. It's all mark-to-market, of course. So you see it.

 

And we reduced it quite significantly in the third quarter. And relatively soon, I just don't want to fix a time, but relatively soon, that will be gone. And then we've said publicly, we will not short the TSE and not short the indices. Meaning, the S & Poor's or any of them. So we will not do that, and we won't short companies at all, ever. And so rest assured, there'll be no more of those.

 

Michael Beall

 

Okay. So exactly, broadly, where are we short? You just said we don't short individual companies, and we don't short the TSE, or I guess the S&P.

 

So I still don't understand what this hedge is designed -- what it's about?

 

V. Watsa

 

Yes. So Michael, basically what it was, was a position that we've had in the past. So it's not a new short. It's a position -- an individual position that we've had in the past that we've covered, and covered, and covered, and this is the last remnants of it.

 

Prem's comment from the last earnings call should not give you any comfort. He left himself enough wiggle room by not specifying a time period by which the last remaining short would be closed off. In his words: "I just don't want to fix a time, but relatively soon." Classic Prem speak if you ask me. Prem speak has been covered on this board numerous times before so no need to elaborate any further now. "Relatively soon" in Prem speak is different from what most of us on this board would suggest is meant by the time frame.

 

I have also also worried about Fairfax's short exposure during the last few weeks. Worse care scenario....the last remaining short is GME and it has not yet been closed out!

 

Bearprowler, you capture one of the key problems with investing in Fairfax today... What Prem says, what shareholders hear and what Prem thinks he says are sometimes three very different things. I also understand this is not going to change, especially with Prem being the point person on conference calls again. So i factor this ‘risk’ into my investment decision.

[bearprowler6]

No. The worst case is that it has recently been closed out. The best case is this spike gave them an oppy to increase their short and bail themselves out.

 

Would increasing the size of a short position go against Prem's "promise" to not short ever again? Or have you found him another loop hole to exploit? Prem speak knows no limits.....

 

Didn't GME and friends start spiking very recently?  Wouldn't this "one name" be more likely some high-flier like TSLA, if they've been covering and covering...?  (Also bad news of course, but no GME.)

 

Fair point...Tesla is more likely but since its Prem we are dealing with than GME is not out of the question. And yes...if it is Tesla we are in for some additional bad news on the short side!

[tay9]

It amazes me the reputation Prem has built, that given the current BB setup, there is significant doubt on whether he will capitalize on this situation.

 

I haven't been following Fairfax long enough, or know enough about its history, but what would you describe Prem's investment style over the last 5 or 10 years? Is it coherent enough to give confidence at his ability to return reasonable rates of returns in the future, or even in this situation? Are the last couple of years really just bad luck or bad decision after bad decision?  Is he really learning from his mistakes?

 

The market has given him a huge gift, and if he can't even capitalized on this, what assurances do investors have that future decisions won't lead to him to find new ways to lose money or opportunities?

[Viking]

It amazes me the reputation Prem has built, that given the current BB setup, there is significant doubt on whether he will capitalize on this situation.

 

I haven't been following Fairfax long enough, or know enough about its history, but what would you describe Prem's investment style over the last 5 or 10 years? Is it coherent enough to give confidence at his ability to return reasonable rates of returns in the future, or even in this situation? Are the last couple of years really just bad luck or bad decision after bad decision?  Is he really learning from his mistakes?

 

The market has given him a huge gift, and if he can't even capitalized on this, what assurances do investors have that future decisions won't lead to him to find new ways to lose money or opportunities?

 

Has Fairfax had a coherent investment style (for equities/hedging) the past 5 or 10 years? The simple answer is ‘no’.

 

Did they learn from errors made? Some yes. But we need more time to provide a more accurate assessment.

 

Their equity investment portfolio is like a super tanker. It takes years to turn. They are still digging out of some holes, with BB being one of the largest. I am watching where they put new money very closely for signs of what we can expect moving forward.

 

Status of mystery short is one (hopefully they exited in Q4). What they do with BB is another. Position size of Atlas is a watchout. What assets will they be able to monetize and at what prices?

 

Fairfax demonstrating a coherent investing style (equities/derivative positions) is still a work in progress - i would give them an ‘incomplete’ grade if i was a teacher :-)

 

PS: i do think they have been moving in the right direction the past couple of years. We just need to see some large asset sales and what they do with the proceeds to better understand where they are in their transformation to a more coherent (and successful) investing style.

[Dazel]

 

 

Fairfax are short will cover with their shares when appropriate IMHO.

 

Onex had the luxury of waiting...Fairfax is an insurance company they measure capital everyday...it’s a hard market.

 

I think it is the opposite of what’s on the board...they likely started early.

 

Gain $1b from year end.

 

Blackberry did not take Fairfax stock up on its ride...but it sure did bring it down on its drop...

 

So time to move on Farmers Market anyone?