Fairfax 2021

[Xerxes]

On 8/3/2021 at 10:43 AM, petec said:

Fairfax has traded around fair value plenty of times in the past, as do other highly complex entities. Also, this board generally obsesses far too much about Blackberry and Resolute in my view. There are many other things that move the needle and as they grow Blackberry and Resolute get less and less relevant. 

 

Agree,

In fact Resolute and BB are more about optics: The legacy of the Lost Decade.  

 

As a reference point, in 2012, the investment portfolio was $25.163 billion 

page2 (q4cdn.com) 

 

And it was $42.108 billion in 2020.

21zai18401 (q4cdn.com)

 

I don't know the exact position sizes then and now, but say both combined were less than $1.5-2 billion and has gone flat for 9-10 years. Their % contribution dropped as the overall pie just got much bigger, and as the two names moved sideways.

 

We collectively maybe attributing too much to those two names, because of what they represent. But that is to our detriment as the canvas has evolved to something else, and we might be missing the bigger picture.

 

I bet Prem Watsa is going to have the last laugh .... but we can laugh with him too.

 

[Xerxes]

Folks, have a look at Blackstone or Microstrategy.

 

Who wanted to own Microstrategy in 2016 ? i am not saying it is gold now, but like it or not its CEO did something revolutionary and outside the box that brought it a whole host of new investors.

 

Who wanted to own Blackstone in 2014 or 2016. Now that has done the hockystick, everyone cannot stop raving about the genius of Steve Schwartzman and Jon Grey. There was a time, where the conventional wisdom was, you do not want to own the private equity business as a public shareholder, but where you wanted to be is to be invested into their funds.

 

The only caveat is, you cannot time it, and the founder/CEO/operator is not going to do it on your timetable. He/she is not there to serve the traders, looking to do a flip. Because they are not there to do a flip in 6 months on their life achievements.

 

 

 

 

 

 

Edited August 5, 2021 by Xerxes

[Gregmal]

Sometimes it's about realizing that the narrative needs changing rather than being a prick and just not caring or insisting you'll do it your way anyway. Bill Ackman didnt need to sell BHC/VRX for $12 per share. On a valuation basis you could even say he wasted money getting out for what was obviously optics reasons rather than let it rebound. But sometimes it's just best to cut bait and move on so that everyone else can too. However when you are an egomaniac(which was surprising because Ackman is) its often hard to take a loss because that crystallizes the fact that you were wrong. In my book, regardless of where BB or RFP are sold, they were losses. Wake up and start changing the narrative. 

[Candyman1]

43 minutes ago, Gregmal said:

Sometimes it's about realizing that the narrative needs changing rather than being a prick and just not caring or insisting you'll do it your way anyway. Bill Ackman didnt need to sell BHC/VRX for $12 per share. On a valuation basis you could even say he wasted money getting out for what was obviously optics reasons rather than let it rebound. But sometimes it's just best to cut bait and move on so that everyone else can too. However when you are an egomaniac(which was surprising because Ackman is) its often hard to take a loss because that crystallizes the fact that you were wrong. In my book, regardless of where BB or RFP are sold, they were losses. Wake up and start changing the narrative. 

 

No need to change the narrative for FFH, the current narrative is doing just fine. What more can we want? Digit, a hard market, fast growing insurance businesses, decently positioned equity book, etc. We are getting a narrative where the BV per share is going to be above 600 USD by year end. If at some point we get an IPO listing for Digit, it might be lights out. As I said before, Prem's reputation is in the dumps. The dumber they think he is on this board, the more bullish I get.

[Crip1]

41 minutes ago, Gregmal said:

Sometimes it's about realizing that the narrative needs changing rather than being a prick and just not caring or insisting you'll do it your way anyway. Bill Ackman didnt need to sell BHC/VRX for $12 per share. On a valuation basis you could even say he wasted money getting out for what was obviously optics reasons rather than let it rebound. But sometimes it's just best to cut bait and move on so that everyone else can too. However when you are an egomaniac(which was surprising because Ackman is) its often hard to take a loss because that crystallizes the fact that you were wrong. In my book, regardless of where BB or RFP are sold, they were losses. Wake up and start changing the narrative. 

To be clear, I don’t think owning either of these is the best use of capital:

·         BB – It will never turn out to be a good investment, but it is possible that this turns into a decent to good return from this point forward. Lots of folks wanted to sell this at US$7, but holding on from that point to now has worked out OK…not great, but OK. I honestly don’t know what it’s worth, but one can see how this could still work out OK from here. Maybe US$25 (a figure that’s part devil’s advocate, part pulling it out of my arse) in a few years? Not bad from the $10 point now.

·         RFP – The market gave a golden opportunity, unless there’s something I missed, to cash out of this during Q1-2021. The chances of this trading where it did in Q1-2021 are pretty damned slim. Even now, selling RFP and buying back FFH shares would be a far better use of capital.

-Crip

[StevieV]

"Who wanted to own Blackstone in 2014 or 2016." - Me.

 

I haven't followed or owned BX through it's whole history, but in the mid to late 2010s, the company was delivering pretty good results.  The earnings can be lumpy, especially as they were more incentive fee driven at the time.  However, AUM growth was consistent and quick.

 

The stock price was stuck-in-the mud despite the growth of the business and Steve S complained about it regularly.  The same was true of their alt asset manager competitors - KKR, ARES, APO, CG.

 

Perception has certainly changed for BX and its competitors.  Who knows exactly why, but the two most likely culprits are the change to corporations from partnerships and the focus on FRE (fee related earnings).  Also, the incentive fees were cyclical and many of the alts were cashing in big on investments they made during the GFC in the 2013-2015 timeframe.  They over-earned for a period leading to some headline softness, depending on who you are talking about.

 

Regardless, I am not aware of BX making any particularly major errors or hiccups anytime in the 2010.  Just grinding away really effectively from a business standpoint, even if the market didn't care.  BX didn't need to convince investors it had corrected any mistakes from the past.  What mistake were the correcting?

 

Fairfax has a heavier burden as they clearly made significant mistakes.

[Xerxes]

3 hours ago, Gregmal said:

Sometimes it's about realizing that the narrative needs changing rather than being a prick and just not caring or insisting you'll do it your way anyway. Bill Ackman didnt need to sell BHC/VRX for $12 per share. On a valuation basis you could even say he wasted money getting out for what was obviously optics reasons rather than let it rebound. But sometimes it's just best to cut bait and move on so that everyone else can too. However when you are an egomaniac(which was surprising because Ackman is) its often hard to take a loss because that crystallizes the fact that you were wrong. In my book, regardless of where BB or RFP are sold, they were losses. Wake up and start changing the narrative. 

 

Greg

I give full credit to Ackman for his pivot post-Valeant. Not just cutting a getting-smaller position that was consuming 80% of his time, but also for not doing that again. He became the 'activist' on himself.

 

I am all about dumping BB/RFP (am #1 poster here complaining about it), but at the end i can only complain. The two positions that are getting smaller and smaller.

 

 

[Xerxes]

1 hour ago, StevieV said:

"Who wanted to own Blackstone in 2014 or 2016." - Me.

 

I haven't followed or owned BX through it's whole history, but in the mid to late 2010s, the company was delivering pretty good results.  The earnings can be lumpy, especially as they were more incentive fee driven at the time.  However, AUM growth was consistent and quick.

 

The stock price was stuck-in-the mud despite the growth of the business and Steve S complained about it regularly.  The same was true of their alt asset manager competitors - KKR, ARES, APO, CG.

 

Perception has certainly changed for BX and its competitors.  Who knows exactly why, but the two most likely culprits are the change to corporations from partnerships and the focus on FRE (fee related earnings).  Also, the incentive fees were cyclical and many of the alts were cashing in big on investments they made during the GFC in the 2013-2015 timeframe.  They over-earned for a period leading to some headline softness, depending on who you are talking about.

 

Regardless, I am not aware of BX making any particularly major errors or hiccups anytime in the 2010.  Just grinding away really effectively from a business standpoint, even if the market didn't care.  BX didn't need to convince investors it had corrected any mistakes from the past.  What mistake were the correcting?

 

Fairfax has a heavier burden as they clearly made significant mistakes.

 

There is a possible future out there where the outcome of the Hilton purchase and Sam Zell's REIT would have had a completely different outcome. It did not. Both were spectacular successes and now seared into the Blackstone folklore and investing legend. Investing comes with mistakes and I am sure BX did its share even with its watch-the-downside DNA, it just didn't have a needle moving mistake before reaching critical mass. They are now achieved escaped velocity and can throw their weight around.

 

My point, in my original post, however was not that BX made a mistake and therefore its stock was in doldrum for 10 years. My point was that its business was not recognized or given credit and therefore its stock was in doldrum for 10 years. Rubenstein from Carlyle talked about this as well on a recent podcast, how PEs had to balance public shareholders and fund investors. The former wants recurring earnings, the latter wants the carry to incentives the PE.

 

Faithful, like yourself, that stuck with it did really well, when the market give credit for the recurring earning. 

 

 

 

 

 

 

 

 

[FairFacts]

I fail to understand why Fairfax doesn’t seem to perform basic portfolio management practice. With regard to BB why not take some profit, they could easily sell 20% of their total gross position over the coming months without drawing too much negative attention (for BB). 
Prem, on the Q2 call was asked about BB, he replied that Fairfax is an insider and therefore had certain restrictions on the timing of transactions and ‘we support John Chen’. In my view they could still support John Chen and reduce their exposure due to ‘portfolio management’.

my 2 cents….

[petec]

5 hours ago, FairFacts said:

I fail to understand why Fairfax doesn’t seem to perform basic portfolio management practice. With regard to BB why not take some profit, they could easily sell 20% of their total gross position over the coming months without drawing too much negative attention (for BB). 
Prem, on the Q2 call was asked about BB, he replied that Fairfax is an insider and therefore had certain restrictions on the timing of transactions and ‘we support John Chen’. In my view they could still support John Chen and reduce their exposure due to ‘portfolio management’.

my 2 cents….

Agreed. They could definitely take advantage of spikes more.

 

However (responding to another post above) they can’t sell RFP to buy back shares. The portfolio investments are held at the insurance subs and represent insurance sub capital. To be used as a buyback they’d need to be dividended to the holdco, depleting insurance sub capital and therefore underwriting capacity.

[petec]

10 hours ago, Xerxes said:

Resolute and BB are more about optics

I think it’s less about optics and more about clearing the mind. Losers (which these are) take time and attention away from seeking better ideas. 

[Crip1]

9 hours ago, petec said:

Agreed. They could definitely take advantage of spikes more.

 

However (responding to another post above) they can’t sell RFP to buy back shares. The portfolio investments are held at the insurance subs and represent insurance sub capital. To be used as a buyback they’d need to be dividended to the holdco, depleting insurance sub capital and therefore underwriting capacity.

Duly noted. Thanks for the knowledge.

 

-Crip

 

P. S. I'd still love to jettison RFP now, and would have loved to do so more in Q1

 

Edited August 6, 2021 by Crip1

[jfan]

On 8/4/2021 at 1:07 AM, petec said:

Jfan 

 

What would you like to see them spin out?

 

Pete

Pete

 

Hamblin-Watsa along with the holdco investments and debt +/- any non-insurance businesses (like KitchenPlus? William Ashley?) out of Fairfax Financial the insurance business. 

 

It would make FFH a pure insurance platform to which they can access the capital markets with and reduce the complexity of FFH holdco and their investments. Damodaran's price to book value for P&C is currently 1.5. I wonder if this would help the market recognize the value of the insurance business they've built. This would allow the insurance business to expand their surplus since we are in a favorable market at better multiples. 

 

Also, Hamblin-Watsa could become an asset manager (if they desire) or use it as a platform to seed other talented asset management businesses (eg Mosaic, BDT capital partners). Broaden the talent pool and investment abilities, new funnel of investment ideas for the insurance companies to put into the portfolio. With a $40 billion investment portfolio, 1% management fee, 80% earnings margin, 20x multiple, it would be worth $6.4 billion less $4 billion debt = $2.4 billion.

 

This might also give them the capability of discarding their turnarounds which undoubtedly consumes alot of time and energy. Berkshire tried buy operating businesses from family and founder operators that didn't require turnaround activity. They could just seed operators like Mosaic and BDT to do it for them. 

 

disclosure: as my kids often tell me..."Daddy...you don't know anything."

 

 

 

 

 

[Candyman1]

3 hours ago, jfan said:

Damodaran's price to book value for P&C is currently 1.5.

 

Can you link the article where Damodaran mentions this please?

[glider3834]

4 hours ago, jfan said:

Pete

 

Hamblin-Watsa along with the holdco investments and debt +/- any non-insurance businesses (like KitchenPlus? William Ashley?) out of Fairfax Financial the insurance business. 

 

It would make FFH a pure insurance platform to which they can access the capital markets with and reduce the complexity of FFH holdco and their investments. Damodaran's price to book value for P&C is currently 1.5. I wonder if this would help the market recognize the value of the insurance business they've built. This would allow the insurance business to expand their surplus since we are in a favorable market at better multiples. 

 

Also, Hamblin-Watsa could become an asset manager (if they desire) or use it as a platform to seed other talented asset management businesses (eg Mosaic, BDT capital partners). Broaden the talent pool and investment abilities, new funnel of investment ideas for the insurance companies to put into the portfolio. With a $40 billion investment portfolio, 1% management fee, 80% earnings margin, 20x multiple, it would be worth $6.4 billion less $4 billion debt = $2.4 billion.

 

This might also give them the capability of discarding their turnarounds which undoubtedly consumes alot of time and energy. Berkshire tried buy operating businesses from family and founder operators that didn't require turnaround activity. They could just seed operators like Mosaic and BDT to do it for them. 

 

disclosure: as my kids often tell me..."Daddy...you don't know anything."

 

 

 

 

 

I agree with your intent - transparency, simplification (as long as its enhances value) will help investors better understand Fairfax & ascribe a higher multiple to the shares.

 

With a very large TRS position, Fairfax (& shareholders) have everything to gain from this outcome!

 

But how to do this?

 

Non-insurance companies provide the insurance business with diversification & this is also helps support Fairfax's capital position (see also Berkshire, Markel who have successfully done this). A pure insurance platform business I believe would theoretically need to hold a greater proportion of its assets in fixed income (when interest rates are extremely low) & that would likely result in lower investment returns.

 

I think IPO'ing these assets to effectively put a market multiple on non-insurance subs whose value might otherwise be hidden is one strategy which they are doing & it also provides those companies with access to the capital markets.

 

Providing better communication around what Fairfax actually owns (see 2020 Shareholder letter & prem's breakdown)

 

Impact of Covid is not be underestimated - it has really had a big impact on Fairfax's non-insurance businesses that are operating in travel, retail, hospitality  - I think as vaccination drive continues, the impact from Covid will start to ease & we will start to really see the earnings potential from these businesses. Does it make sense to monetise investments now that are still enduring the impact of covid? I think thats a case by case decision as the IPO market is excellent at the moment.

 

re Hamblin Watsa - it was brought in house & in the 1992 letter  (quote below) Prem talks about why they did it - point 3. probably relevant here 

 

"Why did HWIC make sense for Fairfax? Mainly, for the following three reasons: 1) It was a very good investment for Fairfax. Under very reasonable assumptions (i.e. no incentive fees or additional funds under management), Fairfax could achieve its 20% return on investment. Also, a multiple of 3.8 times revenue and 8 times pre-tax earnings was reasonable compared to private transactions and public valuations of investment counselling firms. Furthermore, we paid for most of the purchase by issuing shares of Fairfax at a fair price of $28 per share. 2) It brought proven investment management into Fairfax. 3) It removed my perceived conflict of interest and placed all of my interests in one pot."

 

I agree with you having  investments eg in real estate (Kennedy Wilson) or family run businesses (BDT) being managed by investment managers with great track records who are experts in their niche. Fairfax are right pursue this operating model for their non-insurance businesses IMO & avoid picking up turnarounds.

 

I would like to see Fairfax raising cash where-ever possible & buying back shares - if there was one investment they should make now, this is the one of the best ones to help drive BV growth, earnings & higher market multiple..

 

 

 

Edited August 7, 2021 by glider3834

[StevieV]

On 8/5/2021 at 8:21 PM, Xerxes said:

 

There is a possible future out there where the outcome of the Hilton purchase and Sam Zell's REIT would have had a completely different outcome. It did not. Both were spectacular successes and now seared into the Blackstone folklore and investing legend. Investing comes with mistakes and I am sure BX did its share even with its watch-the-downside DNA, it just didn't have a needle moving mistake before reaching critical mass. They are now achieved escaped velocity and can throw their weight around.

 

My point, in my original post, however was not that BX made a mistake and therefore its stock was in doldrum for 10 years. My point was that its business was not recognized or given credit and therefore its stock was in doldrum for 10 years. Rubenstein from Carlyle talked about this as well on a recent podcast, how PEs had to balance public shareholders and fund investors. The former wants recurring earnings, the latter wants the carry to incentives the PE.

 

Faithful, like yourself, that stuck with it did really well, when the market give credit for the recurring earning. 

 

 

 

 

 

 

 

 

 

It is certainly true that sentiment on BX made a huge turn.  Hopefully we'll see the same with Fairfax.  The last couple quarters for Fairfax have been good enough that a sentiment turn seems justified.

[glider3834]

recent article mentions Fairfax Financial Cheers

 

https://www.marketwatch.com/story/10-stocks-that-have-what-it-takes-to-be-a-perfect-company-11628125333

[jfan]

On 8/6/2021 at 8:24 PM, Candyman1 said:

 

Can you link the article where Damodaran mentions this please?

It is on his website.

 

https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/pbvdata.html

 

 

[maplevalue]

Putnam Investments acquiring Toys’R’Us Canada from Fairfax: https://www.bnnbloomberg.ca/putnam-investments-acquiring-toys-r-us-canada-from-fairfax-1.1641921

 

Farmers Edge Announces 200k Share Purchase by Fairfax Financial Holdings: https://www.businesswire.com/news/home/20210818005642/en/Farmers-Edge-Announces-200k-Share-Purchase-by-Fairfax-Financial-Holdings

[glider3834]

9 hours ago, maplevalue said:

Putnam Investments acquiring Toys’R’Us Canada from Fairfax: https://www.bnnbloomberg.ca/putnam-investments-acquiring-toys-r-us-canada-from-fairfax-1.1641921

'Financial terms of this latest deal were not disclosed, but Fairfax will retain the real estate acquired in its original purchase, as well as a continuing royalty stream, according to a news release.'

 

Seems to make sense but we don't have financial terms - Putnam appear to have experience in retail turnarounds, Fairfax retaining interest in upside (royalty stream) and keeping the real estate.

 

 

Edited August 20, 2021 by glider3834

[Viking]

2 hours ago, glider3834 said:

'Financial terms of this latest deal were not disclosed, but Fairfax will retain the real estate acquired in its original purchase, as well as a continuing royalty stream, according to a news release.'

 

Seems to make sense but we don't have financial terms - Putnam appear to have experience in retail turnarounds, Fairfax retaining interest in upside (royalty stream) and keeping the real estate.

 

 

This sale  is more good news.
 

A few years ago Fairfax HO seems to have realized that they are not turn around experts. The problem, at that time, was they had a whole bunch of businesses, purchased over the previous 5 years, that needed help of some kind from Fairfax HO (gobs of money, strategy, management); some desperately.
 

Solution? Step 1 was to stop buying these types of businesses. Recent Fairfax purchases, like Atlas and Stelco, have come with strong management teams. Lesson learned.
 

Step 2 was to get each of the struggling businesses into a position where they were able to succeed with minimal financial / management support from Fairfax HO. Sometimes this meant partnering with strong external management teams like Helios (Fairfax Africa) and Atlas (APR). Sometimes it was a complete restructuring of the company, like EXCO Resources. Sometimes it was to bring the company in house, like with AGT. Sometimes it was a merger of Fairfax controlled companies, like Eurobank and Grivalia. Sometimes it was a sale, like Easton baseball (and new ownership stake in Rawlings, the leader in the category). Sometimes it was a reverse takeover, like Dexterra’s takeover of Horizon North. Sometimes it was an IPO, like Farmers Edge and Boat Rocker. 
 

My guess is the recent Mosaic transaction is driven by a desire to get that company into a position where it can better succeed moving forward; we will see.  
 

For the past 2 to 3 years Fairfax has been on a steady path of getting all the companies in its equity portfolio fixed and positioned to be successful moving forward with solid management teams and business strategies in place and strong financial positions. It is rather impressive when you look at all that has been accomplished and how much better positioned each of these companies are today. 
 

Toy’s R Us is just the latest example. Carve out the retail operations, which clearly are not core to Fairfax, and sell to Putnam Investments, a company much better positioned to manage the retail asset moving forward. Any future royalty streams is just a bonus. And what does Fairfax keep? The real estate assets.
 

Smart. Clean. Positions Fairfax very well moving forward. Chug, chug, chug…

Edited August 20, 2021 by Viking

[petec]

Viking, I very largely agree with that analysis. Fairfax is getting simpler to manage and greater access to third party capital to fund growth, and that's good. Whether it is also getting better management for its investee businesses...I guess we will see.

 

The one I don't know much about is Exco. The stock appears to trade but I can't find financials and you need a login to get to the investor relations page. How does that work?

 

 

[petec]

This article has a bit more detail.

 

Putman Investments to buy Toys 'R' Us from Fairfax, brimming with ideas for overhaul | CTV News

[Daphne]

Having been involved in a number of retail turnaround deals in the past, my guess is Putman paid nothing or next to nothing.  The scenario is often “take this dog off our hands and send us some money if/when you’re successful”.

[Daphne]

The upside is that good turnaround guys can and often do find success flogging these often tired dogs.