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Fairfax Annual Letter


Parsad

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Although they haven't achieved it in the recent past, it's a bit of a stretch to say they've never come close to it when they've compounded at close to 18% over the long-term.

 

Nobody who owns Fairfax over any period except since inception has experienced 15% book value growth.

10 yr: 2.4%

20 year: 6.0%

30 year: 12.3%

 

Even starting from the end of their second year in 1986 until present the bvps compounding is (slightly) under 15%. But yes, if you include the tripling in BVPS between 1985 and 1986 then they have been close to 18%.

 

I should have re-worded my post, my apologies.

 

I guess I wonder what is more indicative of future results - a tripling of book value from a distressed beginning in one year in the 80s or the couple of decade long period of recent underperformance. YMMV, obviously.

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I think using their stated plan of 15% compounding for anything is very aggressive. They haven't come close to that in the past, while constantly reiterating it. If you have your own growth forecast worked out that's great, but using that one is awfully trusting where trust hasn't been earned, imo.

 

Agreed. However, there are some years when Fairfax will grow BV by 15%.

 

There are 2 key drivers to Fairfax being able to hit 15%:

1.) insurance underwriting

2.) investment results - especially equities

 

Given the hard market in insurance and how they are positioned today with their equity holdings i think they can hit BV growth of 15% in 2021 :-)

 

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Covid threw a wrench into things for sure, but up until then they had compounded at 12%+ over the prior 3 years including dividends, and that was during a period of time where it seemed they were doing nothing right.  Given the starting point at the beginning of this year and all the tailwinds seemingly in place, doing 15% over the next 3 years as Fairfacts suggested just doesn't seem all that unreasonable.  I agree that expecting it over the long-term is probably wishful thinking.

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Covid threw a wrench into things for sure, but up until then they had compounded at 12%+ over the prior 3 years including dividends, and that was during a period of time where it seemed they were doing nothing right.  Given the starting point at the beginning of this year and all the tailwinds seemingly in place, doing 15% over the next 3 years as Fairfacts suggested just doesn't seem all that unreasonable.  I agree that expecting it over the long-term is probably wishful thinking.

 

I agree they might get 15% on a few year stretch (and maybe this upcoming one if they monetize investments into the bubble and capitalize on the hard market), but think 15% long term (10+ years) even from here is basically a pipe dream.

 

 

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Everyone's opinion does mean something.    If i was good at timing the market, i can get rich at a stock which went from 100 to 0 with 15-20% volatility over a period of time.  but reality is most people are not. Make things simple and assume there is no stock market and you bought ffh  at a reasonable price and left for last 15-20 years .  would you have made acceptable return?  the answer is no. 

 

Now looking forward i would say it is a show me time .  i have reduced my position by 90% in the last 10 years.  Would i buy at current price?  There are better opportunities else where.

 

What expected return over the next 5 or 10 years would make you consider FFH? What are some of these better opportunities and what are their expected returns?

 

At a $455 CDN average cost, I expect Fairfax to return 15-22% annualized over the next 3 years...so it will hit $700-850 CDN conservatively over the next three years.  Holding beyond that isn't a concern...but if markets go sideways, I'm comfortable enough to hang on longer and continue to add if it remains at a significant discount.

 

Personally, in this market, I see fewer and fewer opportunities as good.  If you think you know of some, please share.  Cheers!

 

Parsad, you are too conservative!

 

(all numbers in US$).

 

Fairfax stated objective is to compound bv at 15%.

 

BV at 12/31/20 was $478, if compounded for the next three years it increases as follows: Yr 1 $550, Yr 2 $632, yr 3 $727.

After three years the multiple should revert towards the historical mean ~1.2x bv (if they execute at 15% growth the multiple could well be significantly greater than 1.2).

 

At a multiple of 1.0 and BV of $727 = share price of $727, at a multiple of 1.2 = a share price of $872.

 

If they fail to execute at this level then the long-term investment thesis is gone. I sense that they are better positioned now than in recent history and hopefully have learnt from their mistakes.

 

The bottom line for me is (and always has been) that they have an uncanny knack of staying defensive enough to weather the storm(s). I think this is sometimes overlooked!

 

I think you guys misunderstood my assumptions.  I'm not saying Fairfax will compound book value at 15-22% annually.  The move to book value has nothing to do with any compounded return by Fairfax. 

 

So $478 USD, probably closer to $510 USD after the 1st Quarter, means a CDN price of roughly $653 if the company's stock price reverts to book value. 

 

Add a 8% growth rate in 2021...$653 CDN * 1.08 = $705 CDN...add a 8% growth rate in 2022...$705 CDN * 1.08 = $761CDN...finally add a 8% return for 2024...$761 CDN * 1.08 = about $822 CDN.

 

Based on insurance pricing where it is, the investments turning around, and the fact that Fairfax is writing at a 93 CR already...means that they can achieve 8% return on book value without reaching for yield.  Average investment results combined with continued underwriting and existing leverage...8% compounded on book is quite conservative based on their abilities and history. 

 

And my assumptions are that it is only priced at book value...not a premium, nor do they do better than average with investments.  Cheers!

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I think using their stated plan of 15% compounding for anything is very aggressive. They haven't come close to that in the past, while constantly reiterating it. If you have your own growth forecast worked out that's great, but using that one is awfully trusting where trust hasn't been earned, imo.

 

Agreed. However, there are some years when Fairfax will grow BV by 15%.

 

There are 2 key drivers to Fairfax being able to hit 15%:

1.) insurance underwriting

2.) investment results - especially equities

 

Given the hard market in insurance and how they are positioned today with their equity holdings i think they can hit BV growth of 15% in 2021 :-)

 

I'll add a third key

3.) They will not blow a billion on some risky venture

 

That is the main key for me. They showed us that they are able to do this.

 

Sanjeev answer vigorously to my post but he says the same thing than me. I bought at 465 in january and waited the annual report to decide if it was a short term investment or for the longterm. Reading the report where everything positive where explain in great detail but the negative was hard to come by convince me to be a short term holder for this time just like Sanjeev position.

 

By the way I have a very long story with Fairfax. It is probably responsible for half of my net worth. First buy in 1993 and sold at 3x BV for a ten bagger. I was one of the first to discuss about FFH with Sanjeev on MSN. Was lucky enough to buy back in 2003 in the exact day of the bottom at 70 and sold at about 8x that price. I run a concentrate portfolio of 8 to 10 stocks. I had a couple of in and out since that for a wash. Now i'm in for the ride back to BV.

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By the way I have a very long story with Fairfax. It is probably responsible for half of my net worth. First buy in 1993 and sold at 3x BV for a ten bagger. I was one of the first to discuss about FFH with Sanjeev on MSN. Was lucky enough to buy back in 2003 in the exact day of the bottom at 70 and sold at about 8x that price. I run a concentrate portfolio of 8 to 10 stocks. I had a couple of in and out since that for a wash. Now i'm in for the ride back to BV.

 

Superb ! your timing the market definitely beat the timing in the market for the buy-and-hold folks.

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I think using their stated plan of 15% compounding for anything is very aggressive. They haven't come close to that in the past, while constantly reiterating it. If you have your own growth forecast worked out that's great, but using that one is awfully trusting where trust hasn't been earned, imo.

 

Agreed. However, there are some years when Fairfax will grow BV by 15%.

 

There are 2 key drivers to Fairfax being able to hit 15%:

1.) insurance underwriting

2.) investment results - especially equities

 

Given the hard market in insurance and how they are positioned today with their equity holdings i think they can hit BV growth of 15% in 2021 :-)

 

I'll add a third key

3.) They will not blow a billion on some risky venture

 

That is the main key for me. They showed us that they are able to do this.

 

Sanjeev answer vigorously to my post but he says the same thing than me. I bought at 465 in january and waited the annual report to decide if it was a short term investment or for the longterm. Reading the report where everything positive where explain in great detail but the negative was hard to come by convince me to be a short term holder for this time just like Sanjeev position.

 

By the way I have a very long story with Fairfax. It is probably responsible for half of my net worth. First buy in 1993 and sold at 3x BV for a ten bagger. I was one of the first to discuss about FFH with Sanjeev on MSN. Was lucky enough to buy back in 2003 in the exact day of the bottom at 70 and sold at about 8x that price. I run a concentrate portfolio of 8 to 10 stocks. I had a couple of in and out since that for a wash. Now i'm in for the ride back to BV.

 

Awesome! That's the way to do it.

#SellattheRightTime beats #neversell at least in this case.

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By the way I have a very long story with Fairfax. It is probably responsible for half of my net worth. First buy in 1993 and sold at 3x BV for a ten bagger. I was one of the first to discuss about FFH with Sanjeev on MSN. Was lucky enough to buy back in 2003 in the exact day of the bottom at 70 and sold at about 8x that price. I run a concentrate portfolio of 8 to 10 stocks. I had a couple of in and out since that for a wash. Now i'm in for the ride back to BV.

 

Superb ! your timing the market definitely beat the timing in the market for the buy-and-hold folks.

 

I don’t like the term market timing. It’s all about value and luck. Just like buying in january has nothing to do with the market. There is value in the subs not reflected in the price. So it seems a good entry point with little risk.

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