Fairfax 2021

[bearprowler6]

2 hours ago, Xerxes said:

But then they held on the other old-economy names ...

 

I think that is one of the reason why institutional investors stay away from FFH, unless there is a huge margin of safety (i.e. mean reversion).

 

Not because they don't believe Prem Watsa's ability but just that they cannot wrap their heads around what framework Prem Watsa is using to decide when to sell or buy. Think of endless discussion in this very forum about BB and resolute.

 

Institutional investors dont have that problem with say Brookfield. The BAM folks are showing themselves savvy investors using clear framework and speaking clear language that the investor base understand. That framework allows institutional investors to feel comfortable with BAM or BX and the like. Even if it is all optics or smoke and mirror. The investor base feel comfortable that at least they know where they stand (even if they are not in the stock).

 

With Berkshire and Fairfax, the investor would be literally outsourcing all that to the founder-CEO-operator and taking a leap of faith.

+1 ...well said Xerxes! Sure die hard deep value guys/gals can outsource the decision making to someone like Prem but no one else would or should. It has been discussed on here before, Prem is not a great communicator and Fairfax is in desperate need of a proper functioning Investor Relations department. Taking a play book from BAM....perhaps an annual investor day where Fairfax's 5 year strategy for its insurance and investment operations are clearly outlined and put on the record for everyone to see. Argue all you want with this view but the results (and I mean here the share price) speaks for themselves. Of course those that disagree with this view will reference Berkshire and Buffett. Well first point on this, Prem ain't Buffett. Second point, it is highly unlikely that Buffett would be allowed to operate like that with the investment community if he was starting out today. 

[Viking]

3 hours ago, Xerxes said:

But then they held on the other old-economy names ...

 

I think that is one of the reason why institutional investors stay away from FFH, unless there is a huge margin of safety (i.e. mean reversion).

 

Not because they don't believe Prem Watsa's ability but just that they cannot wrap their heads around what framework Prem Watsa is using to decide when to sell or buy. Think of endless discussion in this very forum about BB and resolute.

 

Institutional investors dont have that problem with say Brookfield. The BAM folks are showing themselves savvy investors using clear framework and speaking clear language that the investor base understand. That framework allows institutional investors to feel comfortable with BAM or BX and the like. Even if it is all optics or smoke and mirror. The investor base feel comfortable that at least they know where they stand (even if they are not in the stock).

 

With Berkshire and Fairfax, the investor would be literally outsourcing all that to the founder-CEO-operator and taking a leap of faith.

Xerxes, i think the core problem with Fairfax has been the extremely poor performance over the past 7-8 years. That then puts the spotlight on management. And rightly so. And all the warts get magnified.
 

Brookfield owned a significant % of Norbord (OSB) shares since 2004. That holding period is a lot of lumber cycles. Yes, the West Fraser acquisition of Norbord this year gave them the opportunity/liquidity to unload their whole position. But how many previous ‘peaks’ in OSB pricing to unload their shares did they miss over the past 15 years?

 

Was Brookfield Property Partners not a brutal investment for investors for many years? With Brookfield buying them back recently on very favourable terms for the parent? 
 

Is Brookfield not a wickedly complex organization? Are its financials not considered to be a black box. Is it not very promotional with its presentations? 
 

Yes, the shares of BAM are doing very well. And the narrative today surrounding Brookfield is also very positive. When your share price is rocking and you are not doing dumb things investors give you the benefit of the doubt. 
 

Does Fairfax need to improve its communication with investors? Yes. But they also need to get earnings, BV and the stock price growing again. 
 

PS: i like BAM  

Edited October 7, 2021 by Viking

[Viking]

46 minutes ago, bearprowler6 said:

+1 ...well said Xerxes! Sure die hard deep value guys/gals can outsource the decision making to someone like Prem but no one else would or should. It has been discussed on here before, Prem is not a great communicator and Fairfax is in desperate need of a proper functioning Investor Relations department. Taking a play book from BAM....perhaps an annual investor day where Fairfax's 5 year strategy for its insurance and investment operations are clearly outlined and put on the record for everyone to see. Argue all you want with this view but the results (and I mean here the share price) speaks for themselves. Of course those that disagree with this view will reference Berkshire and Buffett. Well first point on this, Prem ain't Buffett. Second point, it is highly unlikely that Buffett would be allowed to operate like that with the investment community if he was starting out today. 

Bearprowler, i fully agree that Fairfax needs to find a replacement for Prem for the conference calls. That is simply not one of his strengths. 
 

i love the idea of an investor day. Fairfax is complex and this would help greatly. Andy can talk insurance (with managers from operating subs). Someone other than Prem can talk investing: stocks and fixed income. Prem of course would get the first 15 minutes  And they can walk everyone through the ‘new Fairfax’. 

[glider3834]

1 hour ago, Viking said:

Bearprowler, i fully agree that Fairfax needs to find a replacement for Prem for the conference calls. That is simply not one of his strengths. 
 

i love the idea of an investor day. Fairfax is complex and this would help greatly. Andy can talk insurance (with managers from operating subs). Someone other than Prem can talk investing: stocks and fixed income. Prem of course would get the first 15 minutes  And they can walk everyone through the ‘new Fairfax’. 

I think Fairfax see their AGM as their investor day - format was different this year with Covid - I went along time ago so not sure what the last 'in person' meeting was like.

 

Yes agree would be great to hear their 5 year future plans for both insurance & investments also to hear from Wade Burton & other members of investment team. I agree that the website needs improvement (needs to be optimised for mobile so its easier for investors to use) & an IR email contact would be great. 

 

I did appreciate Prem answering 3 of my questions I submitted to this years AGM on Digit, the swaps & Blackberry - I am going to acknowledge that its not always easy for an individual investor to have your questions answered by the CEO directly. 

 

 

Edited October 7, 2021 by glider3834

[Xerxes]

On 10/7/2021 at 2:32 AM, Viking said:

Brookfield owned a significant % of Norbord (OSB) shares since 2004. That holding period is a lot of lumber cycles. Yes, the West Fraser acquisition of Norbord this year gave them the opportunity/liquidity to unload their whole position. But how many previous ‘peaks’ in OSB pricing to unload their shares did they miss over the past 15 years?

 

I was not even aware of BAM's legacy investment in the lumber until earlier this year. But it didn't matter, as it was layered under a growing and a very successful asset management business. Agreed that the Resolute is irrelevant in a grand scheme of things. But irritates the hell out of me.

 

 

On 10/7/2021 at 2:32 AM, Viking said:

Was Brookfield Property Partners not a brutal investment for investors for many years? With Brookfield buying them back recently on very favourable terms for the parent? 
 

Is Brookfield not a wickedly complex organization? Are its financials not considered to be a black box. Is it not very promotional with its presentations? 

 

The point i was trying to convey is that, if you are an institutional investment manager who is recommending BAM or its subs as investment to your boss or some sort of committee, you have a framework to work with. Something to latch on or chew on. You can try to sell that internally. It may or may not pass, but you can try.

 

With FFH or BRK*, you have no such framework, because everything is based on Tesla-like leap of faith. How can you sell that to your boss. Unless its market value drops by a huge margin of safety below BV, than that becomes a story to sell to your boss as a reversion to the mean trade. But that is it. It ends there.

 

Of course, for retail investors that opaqueness is the opportunity. But one that needs to be hedged by a fair amount of Amazon and Google (in my case).

 

 

* i am adding BRK so that i am being fair; when you buy BRK as a professional investment manager, basically what you are saying is that, i have outsourced to Omaha 

 

 

 

Edited October 8, 2021 by Xerxes

[glider3834]

Fairfax appears mentioned but I don't have a sub 

 

https://www.theglobeandmail.com/investing/markets/inside-the-market/article-three-stock-picks-from-matco-financials-anil-tahiliani/

[nwoodman]

1 hour ago, glider3834 said:

Fairfax appears mentioned but I don't have a sub 

 

https://www.theglobeandmail.com/investing/markets/inside-the-market/article-three-stock-picks-from-matco-financials-anil-tahiliani/

 

Three stock picks from Matco Financial’s Anil Tahiliani

 

"The markets have been extra volatile in recent weeks, but Matco Financial portfolio manager Anil Tahiliani isn’t shoring up extra cash for his clients, waiting for the skies to clear. Instead, his firm continues to invest in what it views as “solid, good companies” poised to grow over the long term. “Typically, we do well for clients at the early part of the economic cycle,” says Mr. Tahiliani, which he believes is where we’re at today, after the COVID-19 pandemic ravaged the global economy for most of 2020. While earnings growth won’t be as impressive in the coming quarters as it has been so far in 2021, when compared with a year earlier, Mr. Tahiliani expects it to remain strong as the global economy continues to recover.

 

It’s why he’s sticking to his portfolio mix of about 95 per cent equities and 5 per cent cash.

“To us, you should still be invested in equities,” he says. “You’re getting high dividend yields and stronger economic growth in Canada, the U.S. and globally.”  Many investors also have little choice. “Equities are still the only game in town in order to meet inflation-adjusted returns and compared to bonds and other fixed-income products,” says Mr. Tahiliani, who oversees the Matco Canadian Equity Income Fund.

 

Some of the fund’s top holdings today include Constellation Software Inc., National Bank of Canada, Bank of Montreal, Canadian National Railway Co. and Dollarama Inc. The fund’s one-year return, after fees of 1 per cent, is 23.8 per cent as of Sept. 30."

 

His three picks were:

1. TFII-T

2. MG-T

3. FFH-T

 

FFT-T:

 

"Mr. Tahiliani describes Fairfax as “a unique play” – the company is a property and casualty insurer and a value investor. “What you’re getting with Fairfax is an insurance company, plus a diversified investment portfolio that consists of public and private investments,” he says. His firm purchased Fairfax shares in September, in part because of the company’s attractive valuation compared with its peers. Fairfax is “capital disciplined,” Mr. Tahiliani says. “It doesn’t pay up for assets, whether it’s buying other insurance companies or making public or private investments. [The company] is more looking for either distressed assets or turnaround assets that are selling at a discount, and that they can come in and buy below intrinsic value.” 

 

Fairfax is currently trading around $515 a share on the TSX, which is up about 25 per cent over the past year. It reached a 52-week high of $581 in May."

Edited October 13, 2021 by nwoodman

[glider3834]

28 minutes ago, nwoodman said:

 

Three stock picks from Matco Financial’s Anil Tahiliani

 

"The markets have been extra volatile in recent weeks, but Matco Financial portfolio manager Anil Tahiliani isn’t shoring up extra cash for his clients, waiting for the skies to clear. Instead, his firm continues to invest in what it views as “solid, good companies” poised to grow over the long term. “Typically, we do well for clients at the early part of the economic cycle,” says Mr. Tahiliani, which he believes is where we’re at today, after the COVID-19 pandemic ravaged the global economy for most of 2020. While earnings growth won’t be as impressive in the coming quarters as it has been so far in 2021, when compared with a year earlier, Mr. Tahiliani expects it to remain strong as the global economy continues to recover.

 

It’s why he’s sticking to his portfolio mix of about 95 per cent equities and 5 per cent cash.

“To us, you should still be invested in equities,” he says. “You’re getting high dividend yields and stronger economic growth in Canada, the U.S. and globally.”  Many investors also have little choice. “Equities are still the only game in town in order to meet inflation-adjusted returns and compared to bonds and other fixed-income products,” says Mr. Tahiliani, who oversees the Matco Canadian Equity Income Fund.

 

Some of the fund’s top holdings today include Constellation Software Inc., National Bank of Canada, Bank of Montreal, Canadian National Railway Co. and Dollarama Inc. The fund’s one-year return, after fees of 1 per cent, is 23.8 per cent as of Sept. 30."

 

His three picks were:

1. TFII-T

2. MG-T

3. FFH-T

 

FFT-T:

 

"Mr. Tahiliani describes Fairfax as “a unique play” – the company is a property and casualty insurer and a value investor. “What you’re getting with Fairfax is an insurance company, plus a diversified investment portfolio that consists of public and private investments,” he says. His firm purchased Fairfax shares in September, in part because of the company’s attractive valuation compared with its peers. Fairfax is “capital disciplined,” Mr. Tahiliani says. “It doesn’t pay up for assets, whether it’s buying other insurance companies or making public or private investments. [The company] is more looking for either distressed assets or turnaround assets that are selling at a discount, and that they can come in and buy below intrinsic value.” 

 

Fairfax is currently trading around $515 a share on the TSX, which is up about 25 per cent over the past year. It reached a 52-week high of $581 in May."

cheers nwoodman

[glider3834]

3 hours ago, nwoodman said:

His firm purchased Fairfax shares in September, in part because of the company’s attractive valuation compared with its peers.

following on from this comment I have put together a few charts using data I sourced from seeking alpha - again I have tried to be careful with data but if any mistakes I apologise - as always please do your own due diligence Cheers!

 

So I am comparing Fairfax to 15 of their insurance peers using data from 13/10/21.

 

Just looking at valuation from a couple of different angles 

EV to net earned premium

EV to revenues

Price to Book

 

Not considering other valuation measures such as combined ratios, premium growth, business mix, bvps growth rate expected etc but these are all relevant to valuation - we have talked about these on this forum.

 

First chart -  enterprise value to net premiums earned (side note on FFH - this reflects net earned premium that is consolidated & doesn't include their non-consolidated subs including Digit, Gulf Insurance etc)

 

 

 

 

Now comparing enterprise value to last 12 mths of revenues (incl investment income & gains etc)

 

Next Price to Book (TTM)

 

 

 

Next Price to Book (Forward)

 

Edited October 14, 2021 by glider3834

[Viking]

2 hours ago, glider3834 said:

following on from this comment I have put together a few charts using data I sourced from seeking alpha - again I have tried to be careful with data but if any mistakes I apologise - as always please do your own due diligence Cheers!

 

So I am comparing Fairfax to 15 of their insurance peers using data from 13/10/21.

 

Just looking at valuation from a couple of different angles 

EV to net earned premium

EV to revenues

Price to Book

 

Not considering other valuation measures such as combined ratios, premium growth, business mix, bvps growth rate expected etc but these are all relevant to valuation - we have talked about these on this forum.

 

First chart -  enterprise value to net premiums earned (side note on FFH - this reflects net earned premium that is consolidated & doesn't include their non-consolidated subs including Digit, Gulf Insurance etc)

 

 

 

 

Now comparing enterprise value to last 12 mths of revenues (incl investment income & gains etc)

 

Next Price to Book (TTM)

 

 

 

Next Price to Book (Forward)

 

 

Glider, great charts. Yes, the stock is wicked cheap at US$400  The set-up for Fairfax is the best I have ever seen (other than when they were sitting on the big CDS gains back in 2007-08). The difference is Fairfax is positioned exceptionally well right now (lots of tailwinds to both insurance and investing sides of the business) and this should continue to drive solid top line and earnings growth for the next couple of years. The key will be patience.

[glider3834]

no worries Viking -  I agree the set-up looks excellent for Fairfax. Mr Market just doesn't agree with us at the moment  but agree its just being patient.

 

I was actually thinking about this for the last few days I knew I wanted to do a peer comparison & share it with everyone here, but I wasn't sure how to get the data easily. I would have probably preferred to use NPW but NPE data was bit easier to get my hands on. I wanted to show visually how cheap I felt Fairfax was versus its peers (not just in terms of P/B) but in terms of the size of the insurance business relative to Fairfax's current market valuation. 

 

I just worked out yesterday that Fairfax's net earned premium in the first 6 mths of 2021 was 23% the size of Berkshire's - so its getting pretty big! And thats just their consolidated net earned premium so excludes non-consolidated investees like Digit.

 

Also when you look at above charts, first chart showing EV/Net Premiums Earned - two insurers that have 1.2x versus Fairfax at 1.3x - namely Everest Re & Axis Capital both have been running combined ratios over 100% - so their insurance businesses are not as profitable as Fairfax - so when you start to weigh up these qualitative factors it gives even more colour to Fairfax's relative valuation advantage over peers IMO.

 

Yep I think the catalysts are now there in terms of insurance & investment performance & they need to show consistency to earn that multiple re-rating. Unless we get a pretty big market correction or major shock to the economy & we need to re-set our expectations, I agree the set up looks great for Fairfax.

 

 

 

 

 

 

 

 

-

[Xerxes]

Recorded only 1 week ago, with half of it on a children book.

The other half, the analyst backward circa 2016-17-18 opinion on FFH. Talking about the usual market timing and comparing the Buffett of the north with Buffett.

 

The only right statement is that FFH is a blackbox and that you never know.

This guy needs to do some homework. 

 

John O'Connell discusses Fairfax Financial - Video - BNN (bnnbloomberg.ca)

[Viking]

3 hours ago, Xerxes said:

Recorded only 1 week ago, with half of it on a children book.

The other half, the analyst backward circa 2016-17-18 opinion on FFH. Talking about the usual market timing and comparing the Buffett of the north with Buffett.

 

The only right statement is that FFH is a blackbox and that you never know.

This guy needs to do some homework. 

 

John O'Connell discusses Fairfax Financial - Video - BNN (bnnbloomberg.ca)

Xerxes, the investment advisor talking in the video explained pretty clearly why Fairfax stock is trading so low today:

- Fairfax’s stock price has been a dog forever so it will continue to be a dog forever.
- Analysis? ‘Black box’ and ‘Prem is a market timer’.

- With the stock trading at US$400, investors should SELL this dog. Everybody listening should say ‘woof’.

 

Who can argue with logic like that? And it was delivered with such conviction. I loved it. I think we are at the capitulation stage

 

Not a word about

- Fairfax’s actual business today

- what it will likely earn this year and in 2022

- how its insurance business is positioned

- how its investments are positioned

- mention of Digit might even be warranted

 

ALL that matters is the past. So why learn/discuss stuff that happened in the recent past? And certainly don’t discuss today - because it doesn’t matter! 

 

So we are at that really interesting stage with Fairfax. Issues driving poor past performance have largely been fixed. Business results are smoking. BV is spiking. Future prospects are very good (with both insurance and investments). Stock trading at US$400 (cheapest valuation, or close to cheapest, it has ever traded)  

Edited October 14, 2021 by Viking

[glider3834]

3 hours ago, Xerxes said:

Recorded only 1 week ago, with half of it on a children book.

The other half, the analyst backward circa 2016-17-18 opinion on FFH. Talking about the usual market timing and comparing the Buffett of the north with Buffett.

 

The only right statement is that FFH is a blackbox and that you never know.

This guy needs to do some homework. 

 

John O'Connell discusses Fairfax Financial - Video - BNN (bnnbloomberg.ca)

 

40 minutes ago, Viking said:

Xerxes, the investment advisor talking in the video explained pretty clearly why Fairfax stock is trading so low today:

- Fairfax’s stock price has been a dog forever so it will continue to be a dog forever.
- Analysis? ‘Black box’ and ‘Prem is a market timer’.

- With the stock trading at US$400, investors should SELL this dog. Everybody listening should say ‘woof’.

 

Who can argue with logic like that? And it was delivered with such conviction. I loved it. I think we are at the capitulation stage

 

Not a word about

- Fairfax’s actual business today

- what it will likely earn this year and in 2022

- how its insurance business is positioned

- how its investments are positioned

- mention of Digit might even be warranted

 

ALL that matters is the past. So why learn/discuss stuff that happened in the recent past? And certainly don’t discuss today - because it doesn’t matter! 

 

So we are at that really interesting stage with Fairfax. Issues driving poor past performance have largely been fixed. Business results are smoking. BV is spiking. Future prospects are very good (with both insurance and investments). Stock trading at US$400 (cheapest valuation, or close to cheapest, it has ever traded)  

Agree Viking

 

I just watched the interview - interesting to hear from investor psychology perspective that there are shareholders out there who  'bought in the 600s'' and who now might be just looking to cut their losses  - that negative sentiment is obviously going to affect the share price which creates opportunity for others.

 

I think maybe it does further highlight maybe the need to Fairfax to better articulate their value proposition and their approach to capital allocation/investment framework to fund managers who maybe have limited time to get their 'sound bites' from companies they are interested in investing in.

 

 

 

[StubbleJumper]

What is required at this point is a modicum of patience.  The dividend easily covers the carry at the current price and will likely do so for a couple of years (unless we see the unlikely case that rates go bonkers).  A two or three year time horizon will likely provide impressive returns to a buyer today.

 

Don't overthink it.

 

 

SJ

[E. Nashton]

Tidefall Q3 Letter...RE: Fairfax

 

https://tidefall.substack.com/p/q3-2021-letter

[Viking]

5 hours ago, Dean said:

Tidefall Q3 Letter...RE: Fairfax

 

https://tidefall.substack.com/p/q3-2021-letter

@Dean thanks for posting. The Tidefall write up is a very good concise summary of the opportunity Fairfax offers investors today. 
 

The transition of the equity portfolio to higher quality companies is further along than the letter suggests. This has been accomplished in many different ways:

- Fairfax buying better: Atlas, Stelco are two recent examples

- Fairfax selling poor performing holdings: APR

- Fairfax fixing poor performing holdings: Fairfax Africa merger with Helios

- Fairfax improving position of holdings: Grivalia merger with Eurobank,  Dexterra reverse takeover of Horizon, Boat Rocker IPO

- pandemic improving position of holdings: Atlas new build execution last 12 months has been breathtaking; windfall profits at RFP have allowed company to fix balance sheet issues; EXCO/nat gas spike?
 

Fairfax has yet to reap its reward (in the form of higher earnings) for all the hard work done over the past 4-5 years of re-positioning and fixing its equity portfolio of companies. Many pot holes had to be filled in (often coming with a $50 or $100 million dollar cost each time). The pandemic then created a short term delay (given the type of equities Fairfax holds).
 

The past 9 months has seen blowout earnings for Fairfax. It will be fun to see what earnings do over the next 12-18 months. Especially as we get more insight into what ‘normalized’ earnings actually looks like from insurance operations and investments. 
———————-

It would be an interesting exercise to grade each of the equity holdings (A, B, C, D, F) and then to give the overall equity portfolio at Fairfax a grade. Weight the company grades by size (% of overall equity holdings).

And do this for each of the last 5 or 6 years. My guess is we would see a slow and steady improvement each year with 2021 receiving the highest grade.

 

Grade: how has the management team performed the past 2 or 3 years? Is there a plan? Is profitability/free cash flow growing? How has free cash flow been deployed? Most importantly, how is company poised to perform the next 12-24 months? 
 

When i say ‘equity’ i would include everything except cash and bond holdings - so include shorts, deflation hedges and recent TRS position on FFH.

Edited October 18, 2021 by Viking

[glider3834]

1 hour ago, Viking said:

Especially as we get more insight into what ‘normalized’ earnings actually looks like from insurance operations

I think this might be an under-appreciated part of Fairfax - underwriting profit & growth rate - is a function of both the combined ratio & the net earned premium growth rate. I have put some more charts together - 

 

1. combined ratio 

 

I have done two charts, sourcing data from sec.gov comparing Fairfax to 15 insurer peers - making estimates  where insurer is not disclosing the % point impact on combined ratio from Covid. (note below as well that ACGL's combined ratio is skewed lower due to its mortgage insurance business that has a much lower combined ratio than P&C ops)

 

Fairfax's has averaged a combined ratio (excluding covid losses) of 95.7% over last 3 years (2018-2020) which is close to, albeit  slightly above, peer group median of 95% and less than its peer group average of 96.6%. (note this combined ratio is only for Fairfax's consolidated insurance ops which represent around 88% of its GWP)

 

 

 

Next the combined ratio if we include impact of covid losses on combined ratio - Fairfax is sitting at 97.3% which is above Peer median of 95.5% but below the peer average of 97.8%. 

 

Assuming covid losses continue to fall, I would expect Fairfax's combined ratio (excluding covid losses) is probably a better proxy moving forward.

 

 

2. Net earned premium growth

 

Sourcing data from seeking alpha - appears that Fairfax appears to be growing net earned premium faster than majority of its peers on a 5 year CAGR%  (however, note that Fairfax's net earned premium growth includes positive impact from Allied World acquisition in 2017)

 

 

Looking at trailing 12 mths ending 30 June 2021, Fairfax's net earned premium growth looks high again relative to peers 

 

 

From the above, Fairfax's underwriting profit (looking at combined ratio) on each $1 of earned premium appears to be close to peer median, but Fairfax looks to be growing its net earned premium at a faster rate than many of its peers.

 

Yet on an enterprise value to net earned premium multiple - Fairfax looks to be  cheap at 1.3 x its net earned premium, which is a large discount to its peer median of 2.0 x . 

 

I have put this chart up before, but including again to illustrate 

 

 

Further, this net earned premium multiple above is based on consolidated net earned premium & excludes impact of net earned premium from Fairfax's  non-consolidated subs (GIG, Digit).

 

 

 

 

 

Edited October 18, 2021 by glider3834

[kab60]

It seems like there's a good probability that Fairfax might be substantially undervalued. It also seems like the range of outcomes as well as downside is pretty low if they just keep it simple, which is something I look for if taking a big position.

 

Now, for various reasons I much prefer Berkshire as a longterm holding, but this does seem like at least a pretty good trade as just not doing dumb stuff should eventually lead to a change in sentiment.

 

But why aren't these guys monetizing their equity portfolio to buy their own stock hand over fist?

Edited October 19, 2021 by kab60

[TwoCitiesCapital]

53 minutes ago, kab60 said:

It seems like there's a good probability that Fairfax might be substantially undervalued. It also seems like the range of outcomes as well as downside is pretty low if they just keep it simple, which is something I look for if taking a big position.

 

Now, for various reasons I much prefer Berkshire as a longterm holding, but this does seem like at least a pretty good trade as just not doing dumb stuff should eventually lead to a change in sentiment.

 

But why aren't these guys monetizing their equity portfolio to buy their own stock hand over fist?

The equities sit in the subs and are held as capital against the policies written. That being said, with continued appreciation and profitable underwriting the subs should be able to dividend quite a bit back to the parent company for these purposes. 

 

We'll just have to see. I've been disappointed with Prem's Teledyne's comparison myself for the expectations that set versus the reality of what they've repurchased, but there's still time for them to make good on that....and at better prices than when the comparison was first made. 

[kab60]

10 minutes ago, TwoCitiesCapital said:

The equities sit in the subs and are held as capital against the policies written. That being said, with continued appreciation and profitable underwriting the subs should be able to dividend quite a bit back to the parent company for these purposes. 

 

We'll just have to see. I've been disappointed with Prem's Teledyne's comparison myself for the expectations that set versus the reality of what they've repurchased, but there's still time for them to make good on that....and at better prices than when the comparison was first made. 

Yes, I get that there are capital requirements, but as you said, they sit on large (unrealized) gains this year. I had expected them to start monetizing some of their stakes and buying back shares already, not least as they finally hit homerun on some of their commodities plays and perhaps shouldn't risk overstaying.

 

Probably another negative feature of their invesment strategy is taking large positions in somewhat illiquid garbage, so without checking the volume I suppose it's harder for them to blow out of positions without tanking the prices and having to flag it.

[FairFacts]

Another thing that bothers me is their very inflexible dividend policy (its been fixed at $10/share for years). It means its neither a dividend appreciating play nor a steady income play (in real terms).

[cwericb]

I believe the theory behind that was that Prem was on a low (relatively) fixed salary and instituting a dividend would provide him with a substantial income that would ensure his salary was in line with what other shareholders received. However, that doesn't seem to be a reason for not increasing the dividend other than the fact that some might criticize him for increasing his own income.

[TwoCitiesCapital]

43 minutes ago, cwericb said:

I believe the theory behind that was that Prem was on a low (relatively) fixed salary and instituting a dividend would provide him with a substantial income that would ensure his salary was in line with what other shareholders received. However, that doesn't seem to be a reason for not increasing the dividend other than the fact that some might criticize him for increasing his own income.

 

I think the argument was in line with why Berkshire never did. It's more tax efficient to reinvest or repurchase shares with it than distributing excess earnings as a dividend. But a small exception for the compensation reasons listed above. 

 

I don't expect the $10/share to rise because it's only reason for being passed was to compensate Prem fairly and not at the expense of other shareholders.  Not to attract income focused investors or to pay a growing yield. 

[Daphne]

At the time, many had argued that share buybacks was preferable to a dividend.