Fairfax 2021

[Xerxes]

On 7/11/2021 at 12:49 PM, Viking said:

But given the lag between written and earned we should see some pretty good results from insurance companies over the next year or two (assuming a normal cat loss years). 

 

This is key here. After all, the whole point of the 'hard market' was for them to invest their capital, for a future return, which we have not see (mostly?) yet flow through P&L as earned.

 

Incidentally, further growth potential (or lack thereof) in the insurance side of the business will impact intrinsic value and not current book value. So BV can be continued to be used as the proxy for the floor for here and now.

[Viking]

Well the next couple of weeks are shaping up to be pretty important for insurers in general and Fairfax in particular. Insurance stocks have been week the past quarter; Fairfax closed at US $428 today which puts it about 10% below its recent 52 week high of $480. The stock is trading today where it was trading in late March.

 

My guess is the weakness we are seeing in Fairfax’s stock price is negative sentiment regarding P&C insurance companies. The primary driver is likely the fall in 10 year treasury yields to 1.35%. Perhaps the market is also starting to price in the end of the hard market. An additional factor perhaps weighing on Fairfax specifically is their high equity weighting (skewed to small cap value); the Russel 2000 has been weak the past 12 weeks. FFH stock is trading at US $428; including Digit announcement my guess is BV is about $580; this puts P/BV = 0.74. 
 

So how has Fairfax been doing since the end of March? Well, Q1 earnings, released the end of April, were well above expectations coming in at US$29/share; underwriting exceeded expectations on both top and bottom lines as did investment results. My guess is Q2 will come in around $20/share with more of the same (exceed expectations). And, of course, just got the news on the Digit capital raise that will result in a monster $60 gain to BV in Q3/Q4. So since the end of March we should see close to $50/share in earnings and another $60 gain in BV coming from Digit. Bottom line is Fairfax is delivering the goods on both insurance and investments; actually, i would say Fairfax is over delivering right now. The fact the share price is not reflecting all the good news is called opportunity for patient investors. 
 

So what will be the near term catalysts that will get the share price going in the right direction?

1.) confirmation on Q2 earnings calls the hard market is not dead and still alive and well (although aging). WR Berkley Reports July 22....

2.) Fairfax likely reports the end of July and they need to deliver another good quarter.

3.) Fairfax also has a number of pending transactions. Perhaps if a few of these actually close in the next month that will help:

- big one: deleveraging: sale of remainder of Riverstone to CVC; sale of 14% of Brit to OMERS. Not sure what the hold up to this transaction is. This will provide $1 billion for Fairfax; not a small sum
- smaller one: purchase of OMERS stake in Eurolife; perhaps this transaction is also tied to the one above

4.) unexpected events

- Fairfax had an opportunity to monetize all/part of its Blackberry position in Q2. While unlikely it would be celebrated by shareholders if they did.
- the share price has got to be driving FFH management a little batty especially with what has happened to since the Digit press release. If the hard market in insurance pricing looks to be slowing perhaps Fairfax management shifts and communicates share buybacks will be the near term priority. Perhaps similar to what Fairfax India is doing (taking out 5% of share outstanding via Dutch auction). 
 

i am also looking forward to Atlas Q2 earnings. This is such a big holding for Fairfax. Atlas and their growth prospects seems a little mis-understood by Mr Market right now. An increase in Atlas’ stock price would be another catalyst for Fairfax.

 

Perhaps the best news for current shareholders is Fairfax management has been doing a much better job (in aggregate) the past few years. This makes it much easier to be patient and wait for Mr Market to finally show up at the party  

Edited July 15, 2021 by Viking

[glider3834]

1 hour ago, Viking said:

Well the next couple of weeks are shaping up to be pretty important for insurers in general and Fairfax in particular. Insurance stocks have been week the past quarter; Fairfax closed at US $428 today which puts it about 10% below its recent 52 week high of $480. The stock is trading today where it was trading in late March.

 

My guess is the weakness we are seeing in Fairfax’s stock price is negative sentiment regarding P&C insurance companies. The primary driver is likely the fall in 10 year treasury yields to 1.35%. Perhaps the market is also starting to price in the end of the hard market. An additional factor perhaps weighing on Fairfax specifically is their high equity weighting (skewed to small cap value); the Russel 2000 has been weak the past 12 weeks. FFH stock is trading at US $428; including Digit announcement my guess is BV is about $580; this puts P/BV = 0.74. 
 

So how has Fairfax been doing since the end of March? Well, Q1 earnings, released the end of April, were well above expectations coming in at US$29/share; underwriting exceeded expectations on both top and bottom lines as did investment results. My guess is Q2 will come in around $20/share with more of the same (exceed expectations). And, of course, just got the news on the Digit capital raise that will result in a monster $60 gain to BV in Q3/Q4. So since the end of March we should see close to $50/share in earnings and another $60 gain in BV coming from Digit. Bottom line is Fairfax is delivering the goods on both insurance and investments; actually, i would say Fairfax is over delivering right now. The fact the share price is not reflecting all the good news is called opportunity for patient investors. 
 

So what will be the near term catalysts that will get the share price going in the right direction?

1.) confirmation on Q2 earnings calls the hard market is not dead and still alive and well (although aging). WR Berkley Reports July 22....

2.) Fairfax likely reports the end of July and they need to deliver another good quarter.

3.) Fairfax also has a number of pending transactions. Perhaps if a few of these actually close in the next month that will help:

- big one: deleveraging: sale of remainder of Riverstone to CVC; sale of 14% of Brit to OMERS. Not sure what the hold up to this transaction is. This will provide $1 billion for Fairfax; not a small sum
- smaller one: purchase of OMERS stake in Eurolife; perhaps this transaction is also tied to the one above

4.) unexpected events

- Fairfax had an opportunity to monetize all/part of its Blackberry position in Q2. While unlikely it would be celebrated by shareholders if they did.
- the share price has got to be driving FFH management a little batty especially with what has happened to since the Digit press release. If the hard market in insurance pricing looks to be slowing perhaps Fairfax management shifts and communicates share buybacks will be the near term priority. Perhaps similar to what Fairfax India is doing (taking out 5% of share outstanding via Dutch auction). 
 

i am also looking forward to Atlas Q2 earnings. This is such a big holding for Fairfax. Atlas and their growth prospects seems a little mis-understood by Mr Market right now. An increase in Atlas’ stock price would be another catalyst for Fairfax.

 

Perhaps the best news for current shareholders is Fairfax management has been doing a much better job (in aggregate) the past few years. This makes it much easier to be patient and wait for Mr Market to finally show up at the party  

Excellent summary Viking

 

 

 

[Parsad]

2 hours ago, Viking said:

Well the next couple of weeks are shaping up to be pretty important for insurers in general and Fairfax in particular. Insurance stocks have been week the past quarter; Fairfax closed at US $428 today which puts it about 10% below its recent 52 week high of $480. The stock is trading today where it was trading in late March.

 

My guess is the weakness we are seeing in Fairfax’s stock price is negative sentiment regarding P&C insurance companies. The primary driver is likely the fall in 10 year treasury yields to 1.35%. Perhaps the market is also starting to price in the end of the hard market. An additional factor perhaps weighing on Fairfax specifically is their high equity weighting (skewed to small cap value); the Russel 2000 has been weak the past 12 weeks. FFH stock is trading at US $428; including Digit announcement my guess is BV is about $580; this puts P/BV = 0.74. 
 

So how has Fairfax been doing since the end of March? Well, Q1 earnings, released the end of April, were well above expectations coming in at US$29/share; underwriting exceeded expectations on both top and bottom lines as did investment results. My guess is Q2 will come in around $20/share with more of the same (exceed expectations). And, of course, just got the news on the Digit capital raise that will result in a monster $60 gain to BV in Q3/Q4. So since the end of March we should see close to $50/share in earnings and another $60 gain in BV coming from Digit. Bottom line is Fairfax is delivering the goods on both insurance and investments; actually, i would say Fairfax is over delivering right now. The fact the share price is not reflecting all the good news is called opportunity for patient investors. 
 

So what will be the near term catalysts that will get the share price going in the right direction?

1.) confirmation on Q2 earnings calls the hard market is not dead and still alive and well (although aging). WR Berkley Reports July 22....

2.) Fairfax likely reports the end of July and they need to deliver another good quarter.

3.) Fairfax also has a number of pending transactions. Perhaps if a few of these actually close in the next month that will help:

- big one: deleveraging: sale of remainder of Riverstone to CVC; sale of 14% of Brit to OMERS. Not sure what the hold up to this transaction is. This will provide $1 billion for Fairfax; not a small sum
- smaller one: purchase of OMERS stake in Eurolife; perhaps this transaction is also tied to the one above

4.) unexpected events

- Fairfax had an opportunity to monetize all/part of its Blackberry position in Q2. While unlikely it would be celebrated by shareholders if they did.
- the share price has got to be driving FFH management a little batty especially with what has happened to since the Digit press release. If the hard market in insurance pricing looks to be slowing perhaps Fairfax management shifts and communicates share buybacks will be the near term priority. Perhaps similar to what Fairfax India is doing (taking out 5% of share outstanding via Dutch auction). 
 

i am also looking forward to Atlas Q2 earnings. This is such a big holding for Fairfax. Atlas and their growth prospects seems a little mis-understood by Mr Market right now. An increase in Atlas’ stock price would be another catalyst for Fairfax.

 

Perhaps the best news for current shareholders is Fairfax management has been doing a much better job (in aggregate) the past few years. This makes it much easier to be patient and wait for Mr Market to finally show up at the party  

 

What will it take for it to be priced appropriately?  Time.  

 

Be patient...it's coming, and this time not for a couple of years, but they are finally in a position to take advantage of a good economy, bad economy and even a drastic market correction.  

 

Prem finally has his groove back!    If he bet $150M, he expects that to double based on what FFH can do.  

 

That being said, yeah I would love to see someone take out Blackberry at $10B US!  But if Prem thinks BB will be the engine for all future auto security including autonomous vehicles and will be worth $50-60B one day...I'm ok for him to be patient.  Cheers!

[Viking]

Parsad, i still expect Fairfax to get punished if we get a big sell off in the stock market. That is my one big worry/watchout with Fairfax (i have a concentrated position). We look like we are in a rolling correction right now. Since the pandemic hit last year the market moves seems to be hyper accelerated... my guess is we may see a big correction as soon as Sept/Oct.

 

We just had a big correction in financial markets last year. How many new significant equity positions did Fairfax take on? Yes, they did make some very good moves but these were largely masked unfortunately by the remaining short losses. Their big move was the TRSwap on FFH and they had to resort to derivatives because they had no cash. Fairfax was very cash poor going into the pandemic and had to resort to taking on a significant amount of debt to get through. 
 

The big reason i like the Riverstone / Brit deals is they will provide Fairfax with $1 billion to move debt back to prepandemic levels. I would love to see a Blackberry sale primarily for the cash it would provide; dry powder that could be used opportunistically moving forward. Bottom line is Fairfax is still cash poor, especially if we get another big correction in financial markets (it it takes the economy down with it which i think is likely this time).
 

If we get another big sell off in financial markets in the next 6 months where will the cash come from for Fairfax to take advantage? I don’t see the cash right now. One possibility is improved underwriting results. A second is we may see some actual monetizations (in addition to Riverstone/Brit). A third is we may see the consolidated equity holdings actually start to earn some money (in aggregate) and some should find its way into Fairfax’s hands. 
 

Fairfax has been making lots of good moves the past couple of years. One area that i hope we get further clarity on in the coming months is what the strategy is to monetize the equity positions for cash. And examples like Davos Brands and Easton were so small they do not really count. The last big example of a monetization was ICICI Lombard in 2019 (an insurance company :-). Flipping APR for Atlas shares was brilliant... not sure that it counts as an actual monetization. My guess is Fairfax WANTS to sell some equity positions; Mr Market has not bid up prices to high enough levels yet. I just hope Fairfax does not get too cute and the next correction hits before they pull the trigger(s). We will know more when they report Q2 results the end of July.
 

Build cash (sell positions) when times are good and invest (buy) when blood is running in the streets.

Edited July 16, 2021 by Viking

[glider3834]

2 hours ago, Viking said:

Parsad, i still expect Fairfax to get punished if we get a big sell off in the stock market. That is my one big worry/watchout with Fairfax (i have a concentrated position). We look like we are in a rolling correction right now. Since the pandemic hit last year the market moves seems to be hyper accelerated... my guess is we may see a big correction as soon as Sept/Oct.

 

We just had a big correction in financial markets last year. How many new significant equity positions did Fairfax take on? Yes, they did make some very good moves but these were largely masked unfortunately by the remaining short losses. Their big move was the TRSwap on FFH and they had to resort to derivatives because they had no cash. Fairfax was very cash poor going into the pandemic and had to resort to taking on a significant amount of debt to get through. 
 

The big reason i like the Riverstone / Brit deals is they will provide Fairfax with $1 billion to move debt back to prepandemic levels. I would love to see a Blackberry sale primarily for the cash it would provide; dry powder that could be used opportunistically moving forward. Bottom line is Fairfax is still cash poor, especially if we get another big correction in financial markets (it it takes the economy down with it which i think is likely this time).
 

If we get another big sell off in financial markets in the next 6 months where will the cash come from for Fairfax to take advantage? I don’t see the cash right now. One possibility is improved underwriting results. A second is we may see some actual monetizations (in addition to Riverstone/Brit). A third is we may see the consolidated equity holdings actually start to earn some money (in aggregate) and some should find its way into Fairfax’s hands. 
 

Fairfax has been making lots of good moves the past couple of years. One area that i hope we get further clarity on in the coming months is what the strategy is to monetize the equity positions for cash. And examples like Davos Brands and Easton were so small they do not really count. The last big example of a monetization was ICICI Lombard in 2019 (an insurance company :-). Flipping APR for Atlas shares was brilliant... not sure that it counts as an actual monetization. My guess is Fairfax WANTS to sell some equity positions; Mr Market has not bid up prices to high enough levels yet. I just hope Fairfax does not get too cute and the next correction hits before they pull the trigger(s). We will know more when they report Q2 results the end of July.
 

Build cash (sell positions) when times are good and invest (buy) when blood is running in the streets.

Fairfax have been sitting on their position with BB (no insider sales that I can see as yet)-maybe they want to see how the development & monetisation of Ivy plays out - product is due to ship in Feb-22.

 

Blackberry Ivy is really interesting and could have huge potential but they need to execute -  its too early to say but maybe there will be greater visibility over the next 6 months 

 

 

 

[petec]

6 hours ago, Viking said:

Build cash (sell positions) when times are good and invest (buy) when blood is running in the streets.

Viking for once I disagree. With the exception of BlackBerry, on which I have no informed opinion, none of their holdings seem overvalued to me. Also, there is a mountain of evidence that market timing is hard to do. And finally, if Fairfax proved anything last year it’s that they can find clever ways to benefit from sell-offs even when they don’t have cash. 

[Xerxes]

Viking,

 

The more concentrated one is, the more one is concerned about a crash. But in reality, a crash doesn't discriminant so much between concentrated and diversified positions. 

 

As far as the crash is concerned, it is always six month away, because it helps us anchor our expectation. That being said, I would offer a differentiation between two types of events:

 

A relative correction:  is only six months away IMO 

 

If markets are forward looking mechanisms that saw a massive GDP bounce back a year earlier, one would expect that they would also see the decrease in the rate of change in the economy. For instance, it is expected that US GDP growth will be something like 8% by close of the year, with most of that being due to the arithmetic of starting at a very low base. One could say that the massive market rebound we had thus far, was "seeing" that GDP bounce back.

 

Imagine, in March-April 2020, in the middle of complete chaos, the foundation of the next bull market was being laid, as it was "looking" past the noise and zooming into the recovery. After all, the economy went on pause and was strong going in.

 

Therefore, it stands to reason that if we expect that 8% GDP growth to normalize to something more like normal 3% in 2022, the scent of that decrease in the rate of change would be pickup by the market 6-8 months in advance. But I think that would be a healthy correction. And while the not so nimble Berkshire and Fairfax of the world couldn't take opportunity of a massive drawdown (see below) for different reasons, a healthy relative correction would be ok for these self-proclaimed capital allocators.

 

Mike Wilson from Morgan Stanley (who nailed the recovery) is saying the bull is aging rapidly and already in mid-cycle. The flatting yield curve is supporting that narrative.

 

Market crash on an absolute sense

A massive liquidity drawdown like the one we saw in March 2020 or Oct 1987, cannot be guessed/forecasted in anyway. By definition, if we all expected a crash (and I call this a crash and not a correction), there would be no crash. There is crash, because it is unexpected.

 

Consider this, by Feb 2020, the virus was not an unknown and in fact the economic impact was well known, yet how many people saw the market crashing the way it did. I, for one, was expecting a mild correction. And of the ones that were smart enough to sell/hedge heavily, how many were able to go back in in full force in April. (Ackman ?)

 

Those kind of crash, take down anything and everything (including gold). Only USD and US Treasury bond do well as they soak up liquidity on a global scale, for a brief moment, that is.

 

Whatever event will cause the next meltdown, we don't know, but it safe to say that it will not be a pandemic or a variant of the current one. why ? simply because, IMO, market has a probability distribution table built into it. That "table" has now been updated and includes probabilities associated with pandemic and possible outcome. Yes, market can roll over and can correct, but it will not crash the way it did in March 2020, if there is a new variant or a new pandemic. 

 

Crypto and a SPAC

PS:  we already had a crypto and a SPAC correction, as it shows that excess liquidity is being pulled from speculative assets and going into the real economy. I think this is bullish for the real economy, as those sponges (crypto/SPAC etc.) are squeezed of liquidity.  

 

2003-04

I just finished reading this book. 

Bull!: A History of the Boom and Bust, 1982-2004: Mahar, Maggie: 9780060564148: Books - Amazon.ca 

 

Great history book. Interestingly the book finishes around 2003-04, where the market bottomed in hindsight, yet in the book you got Warren Buffett and Jeremy Grantham of the world, calling the market still too expensive in 2003. 

 

Edited July 16, 2021 by Xerxes

[bluedevil]

My biggest concern with Fairfax -- one that has been bugging me a lot -- is whether the investment team has learned the lessons of the past decade and the underperformance. 

 

Clearly, some lessons have been learned -- for example, no more shorting. 

 

But a great degree of the underperformance had to do with fundamentally misevaluating the potential of disruptive companies and the damage they could do to others.  Prem scoffed at Amazon's valuation at $167B (10x since then) and bought Toys R Us, scoffed at Tesla's market cap at $31B (20x times since then) and touted Fiat, and called Facebook's acquisition of WhatsApp at 19B "the poster child for the excesses that prevail in the tech world".  These were MONSTROUSLY wrong calls.  That's fine, Prem's position was a reasoned one.  But what concerns me is that there appears to be little reflection on why the view was wrong and how the investment approach may need to change to adjust for it.

 

His most common refrain is that it has been a tough decade for value investing.  And he was on record at the end of this year as saying Shopify's valuation was insane.  But what he pointed to was only p/e, which is the same lens that missed Amazon and Tesla and WhatsApp.  Even when Fairfax bought Google recently, the rationale was that the P/E got low enough, and then it was sold when the multiple expanded.  Again, seems like a very simple lens that may not work as it has in the past.

 

I am bullish about the prospects of Fairfax going forward, as I think the company has a lot going for it.  But I would love to see evidence of more reflection and adjustment on the individual stock assessment over the past decade.

[TwoCitiesCapital]

20 minutes ago, bluedevil said:

My biggest concern with Fairfax -- one that has been bugging me a lot -- is whether the investment team has learned the lessons of the past decade and the underperformance. 

 

Clearly, some lessons have been learned -- for example, no more shorting. 

 

But a great degree of the underperformance had to do with fundamentally misevaluating the potential of disruptive companies and the damage they could do to others.  Prem scoffed at Amazon's valuation at $167B (10x since then) and bought Toys R Us, scoffed at Tesla's market cap at $31B (20x times since then) and touted Fiat, and called Facebook's acquisition of WhatsApp at 19B "the poster child for the excesses that prevail in the tech world".  These were MONSTROUSLY wrong calls.  That's fine, Prem's position was a reasoned one.  But what concerns me is that there appears to be little reflection on why the view was wrong and how the investment approach may need to change to adjust for it.

 

His most common refrain is that it has been a tough decade for value investing.  And he was on record at the end of this year as saying Shopify's valuation was insane.  But what he pointed to was only p/e, which is the same lens that missed Amazon and Tesla and WhatsApp.  Even when Fairfax bought Google recently, the rationale was that the P/E got low enough, and then it was sold when the multiple expanded.  Again, seems like a very simple lens that may not work as it has in the past.

 

I am bullish about the prospects of Fairfax going forward, as I think the company has a lot going for it.  But I would love to see evidence of more reflection and adjustment on the individual stock assessment over the past decade.

 

To be fair, while he (and I) have clearly been wrong on Amazon, I'm not so sure he will be on Tesla and WhatsApp. Amazon was fortunate to land on Amazon Web Services which is now where the bulk of profits come from. Tesla and WhatsApp haven't done anything close to that. 

 

Even with the benefit of hindsight on Tesla's business performance, I'm still convinced it was overvalued 3 years ago and remains dramatically so today. It's only profits come from regulatory credits which will be wound down over the next few years. It was never able to achieve profitable scale in an environment where it was the only game in town and now that it has competition and is ceding market share its unclear it will ever get there. 

 

And while WhatsApp didn't impair Facebook's value, it's still hard for me to see how and why it was worth $19 billion back then. I don't think it's worth $19 billion today. There is limited, if any, synergies with Facebook business and no real path for monetization that supports anything close to $19 billion valuation even YEARS after the acquisition. 

 

I'd be very concerned if Prem "learned" his lesson and began buying Tesla TBH. 

Edited July 16, 2021 by TwoCitiesCapital

[bluedevil]

Not trying to debate the current valuation of Tesla.  There are very thoughtful analyses that value the company far higher than its current market cap (see Baillie Gifford's writings).  I don't know who is right, and I am not suggesting at all that Fairfax should be chasing these stocks at these prices.  But it seems pretty clear to me that Tesla was--with the benefit of hindsight--dirt cheap at 30 some odd billion.  Maybe the market is wrong today, but you could cut $300 billion in market cap off and it wouldn't change that assessment.  At that time, it was Prem's assessment that it was wildly overvalued, not cheap.  I think understanding why that assessment was wrong (and why Baillie Gifford was very much right) is important.  Same with the other companies, like Amazon (where Baillie was also right).

 

You can also debate how much Whatsapp is worth.  But it seems clear to me that an asset with 2 billion users - !!! - it was acquired at a very favorable price; it was not a poster child of excess.  It could be sold today for far, far more.  

 

Looking at P/E ratios in isolation has missed out on the most successful companies of the past decade.  Not just successful stocks, successful companies.  Many things that appeared "expensive" proved with the benefit of hindsight to be dirt cheap.  It seems to me it is important to understand why that was so, rather than pointing to the past decade being a tough one for value investors.

[TwoCitiesCapital]

1 minute ago, bluedevil said:

Not trying to debate the current valuation of Tesla.  There are very thoughtful analyses that value the company far higher than its current market cap (see Baillie Gifford's writings).  I don't know who is right, and I am not suggesting at all that Fairfax should be chasing these stocks at these prices.  But it seems pretty clear to me that Tesla was--with the benefit of hindsight--dirt cheap at 30 some odd billion.  Maybe the market is wrong today, but you could cut $300 billion in market cap off and it wouldn't change that assessment.  At that time, it was Prem's assessment that it was wildly overvalued, not cheap.  I think understanding why that assessment was wrong (and why Baillie Gifford was very much right) is important.  Same with the other companies, like Amazon (where Baillie was also right).

 

You can also debate how much Whatsapp is worth.  But it seems clear to me that an asset with 2 billion users - !!! - it was acquired at a very favorable price; it was not a poster child of excess.  It could be sold today for far, far more.  

 

Looking at P/E ratios in isolation has missed out on the most successful companies of the past decade.  Not just successful stocks, successful companies.  Many things that appeared "expensive" proved with the benefit of hindsight to be dirt cheap.  It seems to me it is important to understand why that was so, rather than pointing to the past decade being a tough one for value investors.

 

The problem with valuing things like this is doesn't work outside of the vacuum of the handful of companies its used to justify valuations for. 

 

For instance, Blackberry's QNX governs critical functionality in nearly 200 million vehicles in a segment that has blown up over the past decade.  Surely this type of relationship is more valuable than the casual user of a messaging service - cars are more valuable, far more sticky, and have many more paths to monetization than messaging does. And we haven't even discussed BB's IP and cyber security businesses. 

 

That being said, I generally agree with BB's valuation over the past few years because monetization is what matters. Not eyeballs. Not users. Not vehicles. Not clicks. Monetization. Both BB and WhatsApp have failed to generate meaningful revenues and profits...but WhatsApp gets taken out at $19 billion because of the number of users it has while we ignore the same metric when valuing Blackberry. Who cares how many users? If you can't monetize them, they're not valuable to the company. 

 

 

[bearprowler6]

bluedevil

 

In my humble view you are quite right to be extremely skeptical whether Prem has learned any lessons over the last 10 years (with the exception to not short). There is some very thoughtful analysis done on Fairfax and of Prem's many stock picks on this site. He continues to have his fans...very loyal fans. I do however wonder whether those who continue to support him are actually looking at the same financial reports that I am? 

 

The push back to the concerns that you raised about his seeming over reliance on P/E ratios is that the analysis done is much more in depth. So in other words the fault is with Prem's communication and not the analysis that the Hamblyn Watsa team has done. I am sure there is some truth to this however the in-depth analysis that was apparently done is therefore in my view quite suspect (e.g., initial research on Blackberry and Eurobank are two examples I would bring up here). And lets not even talk about Resolute Forest!

 

Earlier on this thread I attempted to establish a discussion, without success, concerning Fairfax's investment in two recent IPO's --- Farmers Edge and Boat Rocker. The financials for both these entities are horrible and I  personally was shocked with how much money that Fairfax had tied up into both of these investments prior to their IPOs. Both have sold off dramatically since their IPOs so Fairfax is left with a large sum of money tied up in these two entities both of whom have questionable prospects going forward. 

 

The recent run up in the equity markets  including many of Fairfax's own holdings is a positive but has done nothing to prove to me that Prem and his team has learned the lessons they need to learn. The company remains an over indebted global insurance entity that is struggling with low interest rates and an insurance market that is slowing or atr the very least no longer hard. Yes there has been some progress on the equity investing side (the recent announcement about the value of Digit is truly impressive) but in my view it is simply not enough. 

 

I have communicated directly with many of Prem's most ardent supporters on this board. I have a great deal of respect for these individuals however I can say that my assessment of Fairfax's prospects going forward differs considerably. I guess that's what makes a market. Stay skeptical!

 

BP6

 

 

 

 

Edited July 16, 2021 by bearprowler6

[Parsad]

Prem cannot invest in AMZN, FB, etc.  At least not when fundamentals depend on 20-25% annualized growth rates.  Their mind, the mind of a distressed value investor, just doesn't work that way.  Neither does Buffett's...how many of these technology companies did Buffett invest in?  Just Apple.  When it had become a mature, cash flowing dividend stock!  

 

Munger is about the only distressed value investor, who I've seen that can truly wrap his head around growth and value...I certainly can't!  As much as I would like to have been a holder of AMZN or FB, every time valuations would go over a 30 P/E, I would be selling madly.  And that's if I could ever find them at a 15 P/E to buy in the first place.  Just not something I can do psychologically because distressed value investing with a margin of safety is so ingrained in my head.

 

Fairfax is the same.  Francis Chou is the same.  You will never see these guys buy anything but distressed investments.  That may be perceived as a weakness or downside when you are in the midst of one of the greatest bull markets in history, where growth at a fair price or outrageous price is fair game, but these guys are built for distressed markets.  They make money when others panic, not when sunshine is coming out of every derriere.  

 

And like any distressed value investor, I'll sell most of my Fairfax stock when it hits 1.1 times book or better.  But I'm ok with that, because I bought it at 0.6-0.7 times book.  I'm not going to hold on when it hits intrinsic value, and I'll be buying like crazy every time Mr. Market drops it to a distressed price.  That's the only way I know how to invest!  Same with Prem!  Cheers!

[bearprowler6]

Sanjeev with all due respect it is simply not true that Fairfax only buys distressed investments. I would cite Digit, Boat Rocker and Farmers Edge as three very recent examples which disprove that statement. 

[petec]

25 minutes ago, bearprowler6 said:

Sanjeev with all due respect it is simply not true that Fairfax only buys distressed investments. I would cite Digit, Boat Rocker and Farmers Edge as three very recent examples which disprove that statement. 

Quite. Prem is actually remarkably difficult to characterize as an investor. I think he has both succeeded and failed in multiple different types of investing. Years ago he said to a colleague of mine that out of every ten investments, two would fail, six would do ok, and two would be spectacular. That’s the only description of his investment style that I’ve found useful over the years. 

[bluedevil]

21 minutes ago, Parsad said:

Prem cannot invest in AMZN, FB, etc.  At least not when fundamentals depend on 20-25% annualized growth rates.  Their mind, the mind of a distressed value investor, just doesn't work that way.  Neither does Buffett's...how many of these technology companies did Buffett invest in?  Just Apple.  When it had become a mature, cash flowing dividend stock!  

 

Munger is about the only distressed value investor, who I've seen that can truly wrap his head around growth and value...I certainly can't!  As much as I would like to have been a holder of AMZN or FB, every time valuations would go over a 30 P/E, I would be selling madly.  And that's if I could ever find them at a 15 P/E to buy in the first place.  Just not something I can do psychologically because distressed value investing with a margin of safety is so ingrained in my head.

 

Fairfax is the same.  Francis Chou is the same.  You will never see these guys buy anything but distressed investments.  That may be perceived as a weakness or downside when you are in the midst of one of the greatest bull markets in history, where growth at a fair price or outrageous price is fair game, but these guys are built for distressed markets.  They make money when others panic, not when sunshine is coming out of every derriere.  

 

And like any distressed value investor, I'll sell most of my Fairfax stock when it hits 1.1 times book or better.  But I'm ok with that, because I bought it at 0.6-0.7 times book.  I'm not going to hold on when it hits intrinsic value, and I'll be buying like crazy every time Mr. Market drops it to a distressed price.  That's the only way I know how to invest!  Same with Prem!  Cheers!

Thanks for the perspectives Sanjeev and BP.

 

I suppose that is the concern I have -- that they will continue to be distressed value investors without reflecting on where that has gone wrong.  I have grown skeptical that this approach will work the way it has in the past for a very large multi-billion dollar portfolio.

 

There is a school of thought that given increased access to information and disintermediation of many industries the economy will be much more "winner takes most" going forward.  There will be less cycles.  We have seen that in search, in smartphones, in ecommerce, and may see it in many other areas.  Companies that appeared cheap at the time were actually not cheap enough because they are losing to the company that is best of breed and is getting stronger with size, not weaker.  That's I think one of the themes of FFH's investments over the past decade (GM and fiat over Tesla; BB over apple; torstar over Google, Toys R Us over Amazon, and so on.)  There are good arguments that competitive dynamics in an internet connected world have changed, and HWIC doesn't seem to be grappling with that, at least at the surface.

 

I think there are examples of hard-core value investors that have been more open to these ideas and profited from them, such as Tom Gaynor and Chris Davis. 

 

 

The new economic and industrial reality, as we see it, is shaped by winner-take-all dynamics. Informally, we call this the “One Room Hypothesis.” When everyone is connected, there is little reason for 2nd, 3rd or 4th place finishers. There are no intermediaries. Everyone is linked. There are quick responses. Less cycles. And most importantly: winner takes the goods.

We have seen elements of this play out across the Search landscape (i.e. Google) and across the smartphone segment (i.e. Apple).

[matthew2129]

I am also concerned by Prem's relentless criticism of FAANG stocks in the past couple of annual shareholder letters (all while holding super expensive/cash flow negative BB). I can understand criticizing TSLA, Zoom ect. valuations, but FB, AAPL, GOOG and AMZN? I'll take Tom Gaynor over Prem as an analyst any day, but FFH's price to book value right now is too cheap not to own. 

[Parsad]

1 hour ago, bearprowler6 said:

Sanjeev with all due respect it is simply not true that Fairfax only buys distressed investments. I would cite Digit, Boat Rocker and Farmers Edge as three very recent examples which disprove that statement. 

 

Nearly all of these investments (other than Digit) occurred through Fairfax's venture arm.  The venture arm and lab are being eliminated, as Fairfax streamlines their investment and acquisition side...something that many shareholders have wanted to see for a long time, and perhaps is occurring after Paul Rivett's departure.  Paul had significant influence at HW and over Fairfax acquisitions.  See link below that no longer works.

 

https://www.fairventures.ca/

 

A simpler, smoother Fairfax will allow the company to get back to 15% annualized compounding...to what the team knows how to do best...and it allows new leaders to work to their strengths like Wade Burton and Lawrence Chin...Cundill guys that are pure distressed investment managers.  But that comes at a price...these are pure distressed investment managers!    Cheers!

 

 

[Xerxes]

Thanks ^^

Had no idea that existed,

 

Here is a description from Linkedin profile which still works.

FairVentures is the innovation initiative of Fairfax Financial Holdings Ltd., with the mandate to research, develop, partner, and invest in innovative solutions to support the Fairfax family of companies. We recognize that Fairfax companies need to be on the leading edge of emerging technologies, processes, and thoughts as well as their application to their industry in order to stay competitive. The purpose of FairVentures is to evaluate new technologies, opportunities and businesses that are applicable to Fairfax subsidiaries and their customers. 

 

I am counting on these deep-value / distress guys to put money to work, when I am going to be wrong with the overall market (not that I am right), in the meantime, I will take 5-7% BV growth. I do not need 15%.

 

Not talking about investing through flash crash, which they have shown they cannot as they are not nimble enough. But something like 2000-2001 slow 50% lumbering rollover bear market.

 

Remains to be seen, if this massive 12+ months rally we have seen is a cyclical bull embedded in a long-term secular bull market, or just one massive bear market rally, which will loose steam and roll over in the next 15 months, with us standing on the top, and just not knowing it.

 

 

[bearprowler6]

1 hour ago, Parsad said:

 

Nearly all of these investments (other than Digit) occurred through Fairfax's venture arm.  The venture arm and lab are being eliminated, as Fairfax streamlines their investment and acquisition side...something that many shareholders have wanted to see for a long time, and perhaps is occurring after Paul Rivett's departure.  Paul had significant influence at HW and over Fairfax acquisitions.  See link below that no longer works.

 

https://www.fairventures.ca/

 

A simpler, smoother Fairfax will allow the company to get back to 15% annualized compounding...to what the team knows how to do best...and it allows new leaders to work to their strengths like Wade Burton and Lawrence Chin...Cundill guys that are pure distressed investment managers.  But that comes at a price...these are pure distressed investment managers!    Cheers!

 

 

Nice try however simply eliminating the FairVentures initiative does not prove your earlier statement that Fairfax will only buy distressed investments. Your exact quote was: "You will never see these guys buy anything but distressed investments".

 

I offer as proof for my position a link to the Dataroma portfolio summary as at March 31/21:

 

https://www.dataroma.com/m/holdings.php?m=FFH

 

A significant number of their holdings on that date and most of their new purchases or portfolio adds during the quarter ending March 31st could in no way be classified as "distressed investments". Value investments perhaps but not distressed investments and given their size they were most likely initiated by Burton and/or Chin.

 

In addition, if the FairVentures initiative took Fairfax down a path they no longer wish to follow then the team at Fairfax would be well advised to exit the positions that occurred from that initiative in order to free up capital for investments that Burton/Chin prefer. Failure to do so will result in a less than optimum use of capital as defined by the investment team now in place.

[glider3834]

Really good discussion guys.

 

I think I read WB saying something along these lines & it probably describes any personal relationship or marriage too as well but essentially don't expect to find a perfect partner (in Fairfax) you have to accept (& embrace) their imperfections.

 

Fairfax might miss the next Amazon because they are valuation conscious, however, based on their 35 year track record they are also not going to blow up the company  How? because they are constantly worried about the downside risk & having a margin of safety.

 

This is a consistent theme to their investment approach - if you read all of Prem's 35 shareholder letters, the way they structure their investments is intelligent. They generally want to lead with debt, convertibles &/or warrants & then maybe hold a smaller equity component - Why? because they want to limit the downside but still preserve benefit of the upside. They also want to pay no more than 10x free cash flow.

 

If you look at their investment in Blackberry, more than half their investment is sitting in convertible debt - protect the downside!

 

The other point I want to make is that when you have a valuation obsessed focus, sometimes you can absolutely hit the ball out of the park - look at Digit (albeit early days!)

 

It sums up their investment approach

 

1. Bet on management (Kamesh Goyal extremely talented insurance CEO in India with a track record)

2. focus on margin of safety (they spent around 150 mil for a stake now worth close to $2.3 bil)

3. Leveraged their deep understanding of insurance, the Indian market & their understanding of how digitalisation is transforming insurance industry (see also their investment in Ki via Brit).

 

Now the imperfections - I would have liked to see them peel back on some of their more cyclical investments (RFP, Stelco) & I have raised this before - unfortunately lumber prices have fallen (demand destruction!)  considerably since May & RFP share price is down a lot since then.

 

On debt - I agree they need to complete the Riverstone deal which hopefully will happen soon (has been approved by EU so no anti-competition issues here) & improve their capital position. Its also important to understand that the debt for the non-insurance subs is non-recourse to Fairfax.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[petec]

Interesting about Fairfax Ventures. Makes me wonder whether Rivett was pushed, and his departure is part of and key in Fairfax’s investment revival. 
 

[Viking]

The big challenge in evaluating Fairfax’s investment performance the past 7 or 8 years is one decision was massive and catastrophic in its effect: the shorts (index hedges and individual short positions). It cost Fairfax billions and another +$500 million in 2020. If you remove this one decision/strategy their investment results improve dramatically.

 

It also looks to me like Fairfax has been slowly making other important changes to their investment approach the past 4 or 5 years:

1.) understanding that they (Hamblin Watsa) are not turn around experts. This has been a hard lesson to learn and it looks to me like they had to fail multiple times (spending hundreds of millions of dollars over many years) before finally figuring this out. Blackberry. Resolute. Torstar. Exco Resources. AGT. APR. Fairfax Africa. Farmers Edge. When was the last time Fairfax made a big purchase where they had to sink a couple hundred million in to keep the company going? My guess is we will see fewer of these type of investments moving forward. 

2.) doubling down on partnering with strong external management teams. This theme has always been present: BDT Capital Partners/private family businesses and Kennedy Wilson/real estate being two very good long term examples. More recent examples: Digit/Kumar, Atlas/Sokol, Stelco/Kestenbaum. Helios. Mosaic Capital?

3.) admitting past mistakes and aggressively dealing with them: taking AGT private, flipping APR to Atlas and merging Fairfax Africa with Helios. 

4.) broadening out the money managed by more junior members of investment team: bumping $ managed by Burton/Chin group from $1.5 to $3 billion. Driven by their solid performance with first $1.5 billion. This $ is managed in a more traditional value investing way. Total equity portfolio is about $10 billion so this is significant. 

 

Fairfax has also been very creative and opportunistic; this is not new but it is important to recognize as a skill. Eurobank’s merger with Grivallia. Dexterra reverse take over of Horizon North. Selling Easton to Rawlings for $ and ownership in Rawlings. More recently: Blackberry debentures resetting strike price to US $6. Total Return Swap with exposure to 1.9 million Fairfax shares. Farmers Edge and Boat Rocker IPO's. 

 

In broad brush strokes the focus appears to be getting each of the equity investments positioned to succeed moving forward (the parallel is the work Andy Bernard and team has done with each of the insurance companies over the past 10 years); lead by strong management, earning acceptable returns and able to fund itself (especially important during the pandemic). Lots of good work has been done the past 4-5 years and it looks to me like the portfolio of equity investments is positioned as well as it has been in the last decade to perform well moving forward. We are moving from the 'fix' stage to the 'perform' stage (looking at all the equity holdings together). Covid, of course, threw a wrench into this process. However, as global economies pick up in 2H we should see improving financial results from Fairfax’s collection of equity holdings. 

 

And where we will really start to see the benefit of how many of the equity holdings are currently positioned is the ‘Share of Profit (Loss) of Associates' line when they report quarterly results. We should start to see large positive numbers here moving forward. Growth here should more than offset any decline we will see in the 'Interest and Dividend' line moving forward. 

 

PS: I am not sure how to weave Fairfax India into this post. The group managing Fairfax India are doing an outstanding job. IIFL was separated into 4 companies. Management teams were inserted into BIAL and CSB Bank (once they got control). Privi and Fairchem restructuring has been fantastic for shareholders. Sanmar and Seven Islands IPO's look promising. Anchorage looks promising. $100 million Dutch auction. Lots to like. Eventually Mr. Market will figure it out    

 

Edited July 17, 2021 by Viking

[petec]

4 hours ago, Viking said:

The big challenge in evaluating Fairfax’s investment performance the past 7 or 8 years is one decision was massive and catastrophic in its effect: the shorts (index hedges and individual short positions). It cost Fairfax billions and another +$500 million in 2020. If you remove this one decision/strategy their investment results improve dramatically.

 

It also looks to me like Fairfax has been slowly making other important changes to their investment approach the past 4 or 5 years:

1.) understanding that they (Hamblin Watsa) are not turn around experts. This has been a hard lesson to learn and it looks to me like they had to fail multiple times (spending hundreds of millions of dollars over many years) before finally figuring this out. Blackberry. Resolute. Torstar. Exco Resources. AGT. APR. Fairfax Africa. Farmers Edge. When was the last time Fairfax made a big purchase where they had to sink a couple hundred million in to keep the company going? My guess is we will see fewer of these type of investments moving forward. 

2.) doubling down on partnering with strong external management teams. This theme has always been present: BDT Capital Partners/private family businesses and Kennedy Wilson/real estate being two very good long term examples. More recent examples: Digit/Kumar, Atlas/Sokol, Stelco/Kestenbaum. Helios. Mosaic Capital?

3.) admitting past mistakes and aggressively dealing with them: taking AGT private, flipping APR to Atlas and merging Fairfax Africa with Helios. 

4.) broadening out the money managed by more junior members of investment team: bumping $ managed by Burton/Chin group from $1.5 to $3 billion. Driven by their solid performance with first $1.5 billion. This $ is managed in a more traditional value investing way. Total equity portfolio is about $10 billion so this is significant. 

 

Fairfax has also been very creative and opportunistic; this is not new but it is important to recognize as a skill. Eurobank’s merger with Grivallia. Dexterra reverse take over of Horizon North. Selling Easton to Rawlings for $ and ownership in Rawlings. More recently: Blackberry debentures resetting strike price to US $6. Total Return Swap with exposure to 1.9 million Fairfax shares. Farmers Edge and Boat Rocker IPO's. 

 

In broad brush strokes the focus appears to be getting each of the equity investments positioned to succeed moving forward (the parallel is the work Andy Bernard and team has done with each of the insurance companies over the past 10 years); lead by strong management, earning acceptable returns and able to fund itself (especially important during the pandemic). Lots of good work has been done the past 4-5 years and it looks to me like the portfolio of equity investments is positioned as well as it has been in the last decade to perform well moving forward. We are moving from the 'fix' stage to the 'perform' stage (looking at all the equity holdings together). Covid, of course, threw a wrench into this process. However, as global economies pick up in 2H we should see improving financial results from Fairfax’s collection of equity holdings. 

 

And where we will really start to see the benefit of how many of the equity holdings are currently positioned is the ‘Share of Profit (Loss) of Associates' line when they report quarterly results. We should start to see large positive numbers here moving forward. Growth here should more than offset any decline we will see in the 'Interest and Dividend' line moving forward. 

 

PS: I am not sure how to weave Fairfax India into this post. The group managing Fairfax India are doing an outstanding job. IIFL was separated into 4 companies. Management teams were inserted into BIAL and CSB Bank (once they got control). Privi and Fairchem restructuring has been fantastic for shareholders. Sanmar and Seven Islands IPO's look promising. Anchorage looks promising. $100 million Dutch auction. Lots to like. Eventually Mr. Market will figure it out    

 

Great post and I agree the work on this started years ago, when we all thought Prem didn’t see the issues and was doing nothing.