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Name The Biggest Losing Investments By Fairfax In Their History


Parsad
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Due to all of the comments about how Fairfax invests in nothing but POS businesses, especially BB, let's put together the worst investments ever made by Fairfax without a commensurate return long-term. 

 

We've seen them make these distressed investments in cigar-butt companies before, but somehow they manage to walk away from most relatively unscathed...often selling a chunk or receiving return of capital equal to their investment, while retaining the original investment position...and we are left scratching our head wondering how they managed that. 

 

Also, let's exclude the short positions they've had as they were almost entirely a macro bet.  Cheers!

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I agree. I don’t think you can put together a list of ‘losing investments’ and not at lease mention the losses from the massive short positions from the past 7-8 years. All other losses are dwarfed by this slow motion train wreck. The loss was $2 billion net of gains in common stocks (at Dec 31, 2018) with more losses to come as recently as 2020.
 

The good news for current shareholders is they will not be repeating this mistake as all short positions have been removed and will not be used in the future. And the damage done to the investor community over the past 7-8 years has created a wonderful buying opportunity today in the stock for new investors.
 

Here is what Prem had to say in the 2018 AR letter:

 

“In the past, to protect our equity exposures in uncertain times, we shorted indices (mainly the S&P500 and Russell 2000) and a few common stocks. After much thought and discussion, it became clear to me that shorting is dangerous, very short term in nature and anathema to long term value investing. As I mentioned to you in last year’s annual report, shorting has cost us, cumulatively, net of our gains on common stock, approximately $2 billion! This will not be repeated! In the future, we may use options with a potential finite loss to hedge our equity exposure, but we will never again indulge anew in shorting with uncapped exposure. Your Chairman continues to learn – slowly!!”

Edited by Viking
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Resolute Forest Products jumps out to me as a serious candidate. 
 

However, management at Resolute has done a very good job the past 2 or so years. The pivot to lumber was brilliant. And if new home construction in the US hits +1.6 million starts earnings could surprise to the upside. Bottom line, i actually like this holding at US$12. 
 

Fairfax has an interesting and diverse stable of commodity based holdings: Stelco (steel), Resolute (lumber, pulp, paper, tissue), Altius Minerals (fertilizer, mining royalties), AGT (grains), Astarta (Ukraine sugar, grains), and most recently Foran Mining (exploration, venture).
———————————————-

2018 AR: Resolute. We have invested $791 million in Resolute and received a special dividend of $46 million, for a net investment cost of $745 million. Our initial investment was a convertible bond purchased in 2008 for $347 million. We invested an additional $131 million prior to Resolute entering into creditor protection and most of the remainder during the period from December 2010 to 2013. Subsequent to write-downs and our share of profits and losses over time, at December 31, 2018 we held our 30.4 million Resolute shares in our books at $300 million ($9.87 per share). The current fair market value of these shares is $244 million ($8.03 per share). You can see that Resolute has been a very poor investment to date!

 

2019 AR: Last year I stated that Resolute has been a poor investment to date. I should have said, very poor!! Brad Martin chairs the Board at Resolute and he continues to work with management to find a path to increase shareholder value in a very tough environment for paper, pulp and lumber. Our net investment in Resolute is $745 million while the carrying value of our shares is approximately $200 million.

 

2020 AR: carrying value reduced to $134 million after non cash impairment charge taken of $56 million. 
Resolute Forest Products purchased three sawmills in the southeastern United States in early 2020, which turned out to be very good timing. During the pandemic demand for lumber has been strong, causing the price to spike to historic highs. Resolute’s share price rose from a low of $1.15 in March to recently trading above $9.50. In 2020 Resolute allocated capital to shareholders by repurchasing 6.9 million shares, or 8% of outstanding, at an average price of $4.28 per share. 2021 looks like a promising year for Resolute as lumber prices remain high, pulp prices show signs of strengthening and Resolute’s tissue business continues to develop.

Edited by Viking
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BB - if you knew nothing about software 10 years ago and invested in the top three software companies Microsoft, Oracle and SAP you would have a +500% return.

 

Don’t even bother to compare with AAPL.

Edited by FairFacts
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"After much thought and discussion, it became clear to me that shorting is dangerous, very short term in nature and anathema to long term value investing. "

 

He's been investing professionally since the 1970s.

 

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51 minutes ago, FairFacts said:

BB - if you knew nothing about software 10 years ago and invested in the top three software companies Microsoft, Oracle and SAP you would have a +500% return.

 

Don’t even bother to compare with AAPL.


A crazy part of the Blackberry purchase was through it Fairfax must have learned about the cell phone industry. And where the puck was going. And then Apple got wicked cheap in 2013 (Apple was almost hated as much by investors back then as Fairfax is now - Steve Jobs/innovation was dead; Tim Cook was a logistics guy not a CEO; hardware only company; Samsung was going to eat its lunch). Instead of pivoting into Apple, which had become a great value investment, Fairfax kept doubling down on BB. How did they miss that? Talk about opportunity cost. 

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Viking. 
 

out of curiosity I recall you had said that in 2013 you made a big bet on Apple (after FFH got into BB) and did really well. 
 

did you ever back-calculated your %, say today, had you held whatever you had in Apple and completely untouched. 

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3 hours ago, Gregmal said:

Come on Sanj, they lost an entire decade of obscenely good market returns because of the short bets. You cant just say, "lets not count those". 

 

Short bets aren't investing...it's speculation.  Missing out on a bull market isn't investing either...they've been sitting on billions and billions of cash and bonds, because they were making a macro bet that a financial crisis was a distinct possibility...be it in NA or China.  But these were poor macro bets.

 

I'm talking about actual investments made and their poor track record.  So far, you guys have BB.  What else?  

 

Are they bad at macro bets...yeah, possibly...hit the lights out with the tech bubble, CDS and housing crisis...but really screwed the pooch with shorts, S&P puts and sitting on too much in cash/bonds.

 

I keep hearing how bad they are at investing...other than BB...what else?  Even frickin' Crum & Forster turned out well!  Torstar would have been a home run too, if they had not sold to Paul and Jordan.  Commodity bets are all turning for them in a big way. 

 

My point is that the Fairfax team aren't bad investors...they are poor market timers!  Cheers!

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11 minutes ago, ValueMaven said:

 

Didnt they have a sizable position in GE in 2014/2015 too??

 

I don't know...you tell me.  That's why I'm asking.  How big was the position...how much did they lose? 

 

So far the critics and even supporters have only come up with BB...and shorts.  Cheers!

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1 hour ago, ERICOPOLY said:

"After much thought and discussion, it became clear to me that shorting is dangerous, very short term in nature and anathema to long term value investing. "

 

He's been investing professionally since the 1970s.

 

This is where I get hung up. There are smarter people than me here who know fairfax and Prem more intimately than I, and I could just be taking it out of context, but this just seems like a baloney thing to say to your partners. At least be honest and say you were trying to be smart like a hedge fund or something and it didn’t work out, I dunno, just doesn’t seem like something Buffet or Gayner would do. 

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1. My vote goes to Recipe (Cara).  The whole consolidating the restaurant thing has been pretty much a donut so far.  Again a bunch of so so business tying up capital, with no real end game in mind.   I reckon 5 years is long enough to say Meh.  Sure Covid hasn't helped but it was hardly shooting the lights out pre-pandemic

 

image.png.995c4b8ff61ba41186b1e3775eb1fa34.png

 

2. Fairfax Africa in general was about as crap as you could get.  I would argue this was just another macro bet and poorly executed, especially betting on Bob Diamond's Atlas Mara.  Not sure who decided that was a good idea, if it was Prem betting on a jockey then it was sloppy thinking at it's worse.

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probably one that is recent & not looking great is Farmers Edge (invested CAD 376, carried at 303 & market value CAD 151) -60% on investment cost - they may not fully impair this one which is consolidated but there might be some impairment needed here. Not every investment Fairfax is going to work out - and thats the same for any investor really.

 

Also we are all talking about Prem but when we look at how investment performance will be managed  for Fairfax going forward- something to consider is the increasing impact other members of investment team will have on Fairfax's investment performance -  some comments on Wade Burton & Lawrence Chin

 

from AR 2020

 

'Wade and Lawrence had an excellent year in 2020 managing $1.5 billion in invested assets. They did so well that we will give them another $1.5 billion to manage in 2021. At that rate, they will soon be managing the whole portfolio! (No clapping please!)'

 

from AR 2019

 

'Wade has achieved outstanding results since he began managing portfolios for us in 2008. Over that period, up to June 2018, Wade had a 19.5% compound return on his stock portfolio. Since June 2018, Wade and Lawrence Chin, who joined us in 2016, have compounded a stock and bond portfolio at 9.8% annually. We are looking forward to Wade’s increasing impact on Fairfax’s investment portfolios over time.'

 

Wade was also smart & opportunistic in selling his Blackberry shares in Jan-21  

 

image.thumb.png.7f15bbb2e6dfe3977c89c5fa832798db.png

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4 hours ago, Xerxes said:

Viking. 
 

out of curiosity I recall you had said that in 2013 you made a big bet on Apple (after FFH got into BB) and did really well. 
 

did you ever back-calculated your %, say today, had you held whatever you had in Apple and completely untouched. 


Xerxes, i actually followed Fairfax into Blackberry (RIM) when they made their initial purchase. By the third RIM conference call i could tell the two people running RIM were in over their heads. I sold my position at a loss (about 15% if i remember correctly). RIM turned out to be one of my best investment decisions ever 🙂 i mean this seriously). Because it taught me about the cell phone industry. I think it was 12 months later that Apple got dirt cheap and i backed up the truck. Apple became by biggest winner ever with currency tailwinds also helping (Can was mid to low $0.90’s when i bought). From Apple (in terms of concentrated position) i toggled to the big US banks, initially JPM and then BAC. If you read the old BAC threads (2016/17?) i was beating the drum back then for BAC just like i am now for Fairfax today. 
 

To answer your question directly, yes, i would have been much better off holding my Apple position and pulling a Rip Van Winkle 🙂 However, i do not look at things that way. When i make investment decisions i try and learn and flush. And move on. I don’t spend much time thinking about what could have been. When i sell out of positions i tend to move on (can’t remember the last time i posted on BAC). My portfolio has done very well over the years (average return has been about 15%) so my returns after selling my Apple position has still been solid. That is all i care about.
 

The big move in Apple shares the past 2 years is primarily multiple explosion. So when i hear people talk about Fairfax and how its crazy low multiple today is permanent i am not so sure 🙂 Definitely one of a few learnings taken from my experience with Apple shares.

Edited by Viking
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7 hours ago, glider3834 said:

Yep but wasn't this essentially a hedge

It was a hedge, but it was a separate hedge from the short book related to the stock market.

 

Going through FFH’ss annual reports, the disclosure on their investments isn’t all that great actually. They typically explain the entry, but often enough it remains muddy what happens to it after several mergers and reorg. Part of the reason is the complexity of the FFH Holdco.

Another thing I noticed (and others too here), they tend to realize wins early ( and boast about them) and losses late, often doubling down on losers. They basically pull the flowers  and water the weeds.

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10 hours ago, Parsad said:

 

Short bets aren't investing...it's speculation.  Missing out on a bull market isn't investing either...they've been sitting on billions and billions of cash and bonds, because they were making a macro bet that a financial crisis was a distinct possibility...be it in NA or China.  But these were poor macro bets.

 

I'm talking about actual investments made and their poor track record.  So far, you guys have BB.  What else?  

 

Are they bad at macro bets...yeah, possibly...hit the lights out with the tech bubble, CDS and housing crisis...but really screwed the pooch with shorts, S&P puts and sitting on too much in cash/bonds.

 

I keep hearing how bad they are at investing...other than BB...what else?  Even frickin' Crum & Forster turned out well!  Torstar would have been a home run too, if they had not sold to Paul and Jordan.  Commodity bets are all turning for them in a big way. 

 

My point is that the Fairfax team aren't bad investors...they are poor market timers!  Cheers!

 

 

Sanj, stop apologizing for these guys.

 

Torstar was not going to be a home run under any circumstance.  FFH was piling capital into TS in 2006.  We are now in 2021, for Christ's sake, and the S&P has tripled over those 15 years.  You can't put lipstick on that pig.  It's a similar problem with Abitibi and BB.  If all of the moons and stars align, FFH might actually get a return *of* its original capital, but there has been a grossly inadequate return *on* that capital for the past decade.

 

But the bigger problem with your view on this is that you seem as if you are satisfied if FFH is rescued by exceptionally good luck.  Seriously, when FFH piled ungodly amounts of capital into BB nearly a decade ago the investment thesis was NOT that the company might eventually make scads of money on security software for cars.  Their original thesis was clearly ill-conceived, and if by some miracle FFH is able to recuperate its capital from BB that will be mostly the result of good fortune, not good analysis.  Similarly, I would also be particularly disturbed if "commodity bets" were the theses behind Resolute and Stelco.  Can you just imagine Prem saying to Brian, "Hey I have an idea.  Let's buy a commodity producer because once every 25 years or so, the market goes completely nuts and maybe we will have record prices for a few months and will be able to find a great fool to take the position off our hands."  Whatever thesis originally drove the debt issuance to Abitibi was proven ill-conceived a decade ago, irrespective of the possibility that FFH might get lucky enough to at least get its capital back (but again, return *of* capital after a decade is not compelling because we expect a return *on* capital).

 

As for the other fuck-ups, they are much more difficult to track and evaluate because FFH restructures them into oblivion.  The purchase of TIG was clearly a fuck-up, but they broke it into pieces and contributed a chunk to the creation of ORH, moved a couple of chunks into other subs, and ran-off a considerable chunk.  It would take a forensic accountant months to figure out whether shareholders obtained an acceptable return on that purchase of TIG from 20 years ago.  And that strategy of restructuring fuck-ups is still being employed today.  Does anyone really believe that Seaspan management desperately wanted to acquire APR?  It seems to me that Prem basically handed Bing a steaming bag of shit.  It's a similar deal with Helios, and also with Gravalia and Eurobank, where FFH restructured its fuck-ups by dumping the problem on somebody else.

 

Okay, well that's life.  Not every investment is going to work out.  Not every thesis will be correct.  So let's not pretend that these guys bat anywhere close to 1.000.  At least in recent years, they've been seemingly trying to move on from the worst of the losers, but the attachment to BB has been baffling and the failure to dump Resolute earlier this year strikes me as a major error of omission.  With FFH, you need to accept that there will be home runs and there will be fuck-ups, but let's not pretend that the fuck-ups are anything other than what they are.

 

 

SJ

 

Edited by StubbleJumper
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10 hours ago, glider3834 said:

they may not fully impair this one which is consolidated but there might be some impairment needed here

They are all to ready to take a +ve mark.  I actually hope they take hits to BV commensurate with the Digit accretion or more.  I think this would speak volumes to the market who are non-believers in the current BV anyway.  An inflated BV impairs their ROE going forward unless everyone is a true believer in their past misallocations. I thought this years reports were the most clear and concise ever. Take the hit and move forward.  If it was a new CEO he would take the hit then turn around and say what a legend he was in a few years anyway.  Don’t live in the past Prem we actually think from this point forward the company is well positioned but take the hit on the legacy crap.

Edited by nwoodman
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3 hours ago, StubbleJumper said:

 

 

Sanj, stop apologizing for these guys.

 

Torstar was not going to be a home run under any circumstance.  FFH was piling capital into TS in 2006.  We are now in 2021, for Christ's sake, and the S&P has tripled over those 15 years.  You can't put lipstick on that pig.  It's a similar problem with Abitibi and BB.  If all of the moons and stars align, FFH might actually get a return *of* its original capital, but there has been a grossly inadequate return *on* that capital for the past decade.

 

But the bigger problem with your view on this is that you seem as if you are satisfied if FFH is rescued by exceptionally good luck.  Seriously, when FFH piled ungodly amounts of capital into BB nearly a decade ago the investment thesis was NOT that the company might eventually make scads of money on security software for cars.  Their original thesis was clearly ill-conceived, and if by some miracle FFH is able to recuperate its capital from BB that will be mostly the result of good fortune, not good analysis.  Similarly, I would also be particularly disturbed if "commodity bets" were the theses behind Resolute and Stelco.  Can you just imagine Prem saying to Brian, "Hey I have an idea.  Let's buy a commodity producer because once every 25 years or so, the market goes completely nuts and maybe we will have record prices for a few months and will be able to find a great fool to take the position off our hands."  Whatever thesis originally drove the debt issuance to Abitibi was proven ill-conceived a decade ago, irrespective of the possibility that FFH might get lucky enough to at least get its capital back (but again, return *of* capital after a decade is not compelling because we expect a return *on* capital).

 

As for the other fuck-ups, they are much more difficult to track and evaluate because FFH restructures them into oblivion.  The purchase of TIG was clearly a fuck-up, but they broke it into pieces and contributed a chunk to the creation of ORH, moved a couple of chunks into other subs, and ran-off a considerable chunk.  It would take a forensic accountant months to figure out whether shareholders obtained an acceptable return on that purchase of TIG from 20 years ago.  And that strategy of restructuring fuck-ups is still being employed today.  Does anyone really believe that Seaspan management desperately wanted to acquire APR?  It seems to me that Prem basically handed Bing a steaming bag of shit.  It's a similar deal with Helios, and also with Gravalia and Eurobank, where FFH restructured its fuck-ups by dumping the problem on somebody else.

 

Okay, well that's life.  Not every investment is going to work out.  Not every thesis will be correct.  So let's not pretend that these guys bat anywhere close to 1.000.  At least in recent years, they've been seemingly trying to move on from the worst of the losers, but the attachment to BB has been baffling and the failure to dump Resolute earlier this year strikes me as a major error of omission.  With FFH, you need to accept that there will be home runs and there will be fuck-ups, but let's not pretend that the fuck-ups are anything other than what they are.

 

 

SJ

 

Very well written SJ!

 

As for a list of Fairfax's biggest loser investments (many have been mentioned already):

 

Still Holding:

 

Blackberry

Resolute Forest Products

Eurobank

Recipe

Farmers Edge

Boat Rocker (Fairfax had to buy more to get the IPO done at a reduced price)

AGT (had to take it private because the market was "unwilling" to see the value)

Deflation hedges

Fairfax Africa

 

Sold/Closed Out but not forgotten:

 

Torstar

Canwest Global

Various short bets

 

How could this happen?

 

My best guess: Poor investment analysis, incorrect position sizing, a CEO with massive ego and an unwillingness/inability to admit mistakes! Or maybe....the Hamblyn Watsa guys are just not very good investors??? 

 

 

 

 

 

 

 

 

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