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Wither FFH in the near term?????


Daphne
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With a good year now behind us what does the future look like? 

- Stock issues (twice in past several months) has led to some dilution of value.

- Shares languishing downwards on relatively low volume with no corporate capacity for buy-backs in fore-seeble future

- Continued soft pricing in insurance market

- Fading new opportunities for strong capital gains growth.

 

Call it the February blahs but I don't see much to cheer about for the next year or two.  What are the board's thoughts in near term action.

 

D

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Stock issues (twice in past several months) has led to some dilution of value.

 

Agree, but that's not as much significant as some people seem to think.

 

Shares languishing downwards on relatively low volume with no corporate capacity for buy-backs in fore-seeble future

 

Voting machine stuff. Not significant unless you or Fairfax want to buy or sell some FFH stocks.

 

Continued soft pricing in insurance market

 

Yes, but that can't last forever. It's a cyclical industry that is difficult to predict. We're not in a good cycle indeed, but that will ultimately create some opportunities for patient and strong capital.

 

Fading new opportunities for strong capital gains growth.

 

Well, there is plenty of very decent quality insurers and reinsurers that are cheap out there. Opportunities arise for those who search. You don't find gold by saying that there is no gold out there. You find gold by digging.

 

 

 

 

 

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With a good year now behind us what does the future look like? 

- Stock issues (twice in past several months) has led to some dilution of value.

- Shares languishing downwards on relatively low volume with no corporate capacity for buy-backs in fore-seeble future

- Continued soft pricing in insurance market

- Fading new opportunities for strong capital gains growth.

 

I like Partner's answer already, but here are a couple of thoughts fwiw:

1. dilution... how about a 35% increase in BV?  I'd have signed up eagerly a year ago at that prospect (I did actually, like many here)

2. shares languishing...  make me more excited.  Actually, I'd like the stock to be even more volatile than it already is: buy in late spring or summer, and sell in late fall or winter; rinse & repeatr

3. lots of liquidity, partly induced by GVT's actions... this too shall pass, though I agree it is annoying.  We are also due for a tough hurricane season one of these years

4. fading new opportunities... well, the #1 reason why I like this stock is because of HW's investing prowess; I trust them to find opportunities where few of us do.

 

 

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Call it the February blahs but I don't see much to cheer about for the next year or two.  What are the board's thoughts in near term action.

 

Hi Daphne,

 

It all depends on what you are looking for.  If you're looking for the mind-blowing return in share price we've enjoyed for four years, you won't get that.  If you are looking for Prem to hit his targets of 15% ROE over the long-term, we should be able to get that.  They'll also be able to buy back shares regularly from the increased dividend capacity from the recent acquisitions of Odyssey and Zenith.  

 

Valuations for insurance companies are low right now because we continue to see a soft market in premium pricing.  Combined with a low-interest rate environment, investors seem to feel that insurers will have a hard time generating income from both the underwriting side and the investment side.

 

That isn't the case for Fairfax.  Prem was smart enough to buy those terrific municipal and corporate bonds, as well as some quality high-yield dividend paying blue-chip stocks.  They also added all those high-yield preferreds when the market was desperate.  Fairfax's dividend and interest income stream may be one of the highest yields in the property-casualty industry when examining the return versus risk profile of the holdings.  A few years ago, interest income at Fairfax was limited because they were cautious about credit markets and had invested most of their capital into treasuries.  We are in the opposite position today, in a very low-interest rate environment.  Their spread on cost of capital and income yield is probably the best it's been.

 

Eventually, the underwriting market will harden, and when you combine that with their investment portfolio income, you will see the return on equity rise significantly.  The hard part as you know after all these years is the waiting.  You are in good hands...Fairfax is exactly how I envisioned it five-six years ago.  In fact, they've made it far better than I even imagined.  Today, you have one of the premier global property casualty companies...with a rock-solid balance sheet...a young AIG in it's prime!  Cheers!

 

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I have had results I don't think are a result of personal skill the past 8 years.  More lucky I think.  I've bet huge on the right things is all.

 

Going forward, 12%-15% ROE (tax deferred compounding at that rate) is still better than I think I could do on my own over the long term in my taxable account, so I will just keep holding them.  I think they are a very low risk company.

 

Gold bug type investors who felt safe with the CDS and S&P hedges might have decided to sell some, especially after the Zenith purchase which was a committment to further USD denominated investments. -- those people are very afraid of USD, and I imagine it would erode their confidence.  I imagine they also are quite concerned about the 30 yr "build America" bonds that were purchased and the 10 yr duration munis... with the rampant inflation and huge spike in bond yields due any time now, that should surely keep them away.  Prem stated "we do not invest in gold", so they will move their money to someone like Sprott probably.

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This might be slightly off topic, but I see something else in the value of Fairfax that is not necessarily reflected in the short term share price. Contrary to most public corporations, for a long time Prem Watsa has paid himself an exceptionally modest salary - $600k - (not that I would turn it down mind you).

 

His wage depends on dividends and his wealth on the value of the company. This gives shareholders confidence and trust that Mr. Watsa’s goals are the same as those of us who wish to own part of this company. This is the way it should be.

 

How many public companies are run in such an honest and fair manner?

 

I too get frustrated with the fluctuations in the share price, but the bottom line is that I have confidence that management’s goals are essentially the same as mine. He and the rest of us are all shareholders. That makes it a lot easier to sleep at night and handle the ups and downs.

 

Not only do I not have this same faith in many other companies but I personally believe that the ludicrous incentive plans that were given to many CEO’s led to the rape of their companies and in turn was the leading cause of the recent meltdown. While company officials prospered, shareholders lost their shirts. When Mr. Watsa does well so will I.

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Most of the intrinsic value lies with management, the fair value of the assets at Fairfax  may be about 1.3 book, but then you have to account for the incremental return on invested capital that we get from Hamblin Watsa.  An extra 5% on 22 billion is 1.1 billion dollars, considering that over time this is growing I'd assign a 12x multiple or 13.2 billion in value.  So yea, all in all I think we're getting a pretty good deal for management and the current price/value is highly favorable!

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I have had results I don't think are a result of personal skill the past 8 years.  More lucky I think.  I've bet huge on the right things is all.

That's BS Eric.

 

Part of the luck is having developed the skill to recognize when good opportunities exist.  My luck seemed to have gotten dramatically better as I have learned more and more, and learned from my mistakes as well.

 

I just listened to the presentation by William Berkley from WRB posted here.  He contends that the hard market is coming and presents stats to that effect.  He says that insurers are looking well capitalized but aren't really because they have been releasing reserves and many are now under reserved.  You need to give it a listen.

 

I am with Oldye on the real value of this company.  It's at the absolute bottom of the P/BV cycle right now.  So is WRB come to that.  The moment you here that the cycle may be turning look for the share price to double very, very quickly.  

 

Daphne, as another long term shareholder I hear your frustration....

 

 

 

 

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I have had results I don't think are a result of personal skill the past 8 years.  More lucky I think.  I've bet huge on the right things is all.

That's BS Eric.

 

Part of the luck is having developed the skill to recognize when good opportunities exist.  

 

Perhaps this isn't quite luck, but what I've done is not terribly skillful either.  I have a "what seems reasonable to me" mental filter that I consult when I listen to the various narratives out there.  I don't really do much more than superficial analysis of the financials.  The narratives I listen to (superinvestors who speak about their holdings, articles in the press, posters on this board) are weighted based upon what I know of the characters involved, and I apply them to the world as I understand it.

 

This is different from some of you who try to predict future cashflows a lot.  I've tried to do that kind of thing but I find it is too prone to narrative fallacy when I try it.  So for example, rather than predicting what the IV of Fairfax is I'm just assuming that if they keep making 15+% a year then people will eventually catch on to the stock and bid up the P/B multiple really high.  That's why I don't own many stocks and Fairfax is 50% of my holdings... it's because I don't have much faith in my own cashflow forecasting.  I would probably wind up loading up on something like Lear a few years ago before it's decimation.  I do have C, BAC calls, WFC, and FUR now to round out my holdings.  I have some SFK that I got for 20 cents but even after the run it's still only 1.5% of my portfolio... see, could have done very well if I knew the business.

 

So 12-18% compounding tax deferred from FFH is fine... anywhere in there will make me very happy vs striking out on my own too much.

 

Some of you are staying away from C because you don't understand what is still in CitiHoldings.  I'm looking at it much like the runoff situation at Fairfax a few years ago... the remaining operating businesses in CitiCorp is very good and that's the future as they are already far along the path of following the Volcker plan.  It's 20% of my portfolio so if it goes to hell, there I will be with a big loss for investing based on my internal filter of reason vs strictly a more hardcore approach.

 

With FUR I simply reasoned that they didn't have much more to lose (I invested at $9.10) based on the equity in most of their operating properties being marked down to zero.  So if they can stay leased I can earn great returns if they also get their cash invested.  It's not exactly rocket science level reasoning, but it may just work.

 

 

 

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I think betting on the right things is a skill. You're taking the bet that gives you favourable odds.

 

The more I learn about the investing game, I realize that you need some luck too.

 

Eric, I share some of your reasoning on C (I also own it). Sounds very similar to what I've read about Berkowitz' reasons for buying it.

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Thank you all for your thoughts.  Here's hoping that access to ORH and Zenith "vaults" will give ffh more buy-back opportunities.  Am I correct in sensing that the insurance market is showing signs of hardening too?

 

D 8)

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Guest kawikaho

What happened to Berkshire?  I thought you just bought them around $100k / share.

 

I have had results I don't think are a result of personal skill the past 8 years.  More lucky I think.  I've bet huge on the right things is all.

That's BS Eric.

 

Part of the luck is having developed the skill to recognize when good opportunities exist.  

 

Perhaps this isn't quite luck, but what I've done is not terribly skillful either.  I have a "what seems reasonable to me" mental filter that I consult when I listen to the various narratives out there.  I don't really do much more than superficial analysis of the financials.  The narratives I listen to (superinvestors who speak about their holdings, articles in the press, posters on this board) are weighted based upon what I know of the characters involved, and I apply them to the world as I understand it.

 

This is different from some of you who try to predict future cashflows a lot.  I've tried to do that kind of thing but I find it is too prone to narrative fallacy when I try it.  So for example, rather than predicting what the IV of Fairfax is I'm just assuming that if they keep making 15+% a year then people will eventually catch on to the stock and bid up the P/B multiple really high.  That's why I don't own many stocks and Fairfax is 50% of my holdings... it's because I don't have much faith in my own cashflow forecasting.  I would probably wind up loading up on something like Lear a few years ago before it's decimation.  I do have C, BAC calls, WFC, and FUR now to round out my holdings.  I have some SFK that I got for 20 cents but even after the run it's still only 1.5% of my portfolio... see, could have done very well if I knew the business.

 

So 12-18% compounding tax deferred from FFH is fine... anywhere in there will make me very happy vs striking out on my own too much.

 

Some of you are staying away from C because you don't understand what is still in CitiHoldings.  I'm looking at it much like the runoff situation at Fairfax a few years ago... the remaining operating businesses in CitiCorp is very good and that's the future as they are already far along the path of following the Volcker plan.  It's 20% of my portfolio so if it goes to hell, there I will be with a big loss for investing based on my internal filter of reason vs strictly a more hardcore approach.

 

With FUR I simply reasoned that they didn't have much more to lose (I invested at $9.10) based on the equity in most of their operating properties being marked down to zero.  So if they can stay leased I can earn great returns if they also get their cash invested.  It's not exactly rocket science level reasoning, but it may just work.

 

 

 

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What happened to Berkshire?  I thought you just bought them around $100k / share.

 

I have had results I don't think are a result of personal skill the past 8 years.  More lucky I think.  I've bet huge on the right things is all.

That's BS Eric.

 

Part of the luck is having developed the skill to recognize when good opportunities exist.  

 

Perhaps this isn't quite luck, but what I've done is not terribly skillful either.  I have a "what seems reasonable to me" mental filter that I consult when I listen to the various narratives out there.  I don't really do much more than superficial analysis of the financials.  The narratives I listen to (superinvestors who speak about their holdings, articles in the press, posters on this board) are weighted based upon what I know of the characters involved, and I apply them to the world as I understand it.

 

This is different from some of you who try to predict future cashflows a lot.  I've tried to do that kind of thing but I find it is too prone to narrative fallacy when I try it.  So for example, rather than predicting what the IV of Fairfax is I'm just assuming that if they keep making 15+% a year then people will eventually catch on to the stock and bid up the P/B multiple really high.  That's why I don't own many stocks and Fairfax is 50% of my holdings... it's because I don't have much faith in my own cashflow forecasting.  I would probably wind up loading up on something like Lear a few years ago before it's decimation.  I do have C, BAC calls, WFC, and FUR now to round out my holdings.  I have some SFK that I got for 20 cents but even after the run it's still only 1.5% of my portfolio... see, could have done very well if I knew the business.

 

So 12-18% compounding tax deferred from FFH is fine... anywhere in there will make me very happy vs striking out on my own too much.

 

Some of you are staying away from C because you don't understand what is still in CitiHoldings.  I'm looking at it much like the runoff situation at Fairfax a few years ago... the remaining operating businesses in CitiCorp is very good and that's the future as they are already far along the path of following the Volcker plan.  It's 20% of my portfolio so if it goes to hell, there I will be with a big loss for investing based on my internal filter of reason vs strictly a more hardcore approach.

 

With FUR I simply reasoned that they didn't have much more to lose (I invested at $9.10) based on the equity in most of their operating properties being marked down to zero.  So if they can stay leased I can earn great returns if they also get their cash invested.  It's not exactly rocket science level reasoning, but it may just work.

 

 

 

 

 

SOLD.

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I have had results I don't think are a result of personal skill the past 8 years.  More lucky I think.  I've bet huge on the right things is all.

That's BS Eric.

 

Part of the luck is having developed the skill to recognize when good opportunities exist.  

 

Perhaps this isn't quite luck, but what I've done is not terribly skillful either.  I have a "what seems reasonable to me" mental filter that I consult when I listen to the various narratives out there.  I don't really do much more than superficial analysis of the financials.  The narratives I listen to (superinvestors who speak about their holdings, articles in the press, posters on this board) are weighted based upon what I know of the characters involved, and I apply them to the world as I understand it.

 

This is different from some of you who try to predict future cashflows a lot.  I've tried to do that kind of thing but I find it is too prone to narrative fallacy when I try it.  So for example, rather than predicting what the IV of Fairfax is I'm just assuming that if they keep making 15+% a year then people will eventually catch on to the stock and bid up the P/B multiple really high.  That's why I don't own many stocks and Fairfax is 50% of my holdings... it's because I don't have much faith in my own cashflow forecasting.  I would probably wind up loading up on something like Lear a few years ago before it's decimation.  I do have C, BAC calls, WFC, and FUR now to round out my holdings.  I have some SFK that I got for 20 cents but even after the run it's still only 1.5% of my portfolio... see, could have done very well if I knew the business.

 

So 12-18% compounding tax deferred from FFH is fine... anywhere in there will make me very happy vs striking out on my own too much.

 

Some of you are staying away from C because you don't understand what is still in CitiHoldings.  I'm looking at it much like the runoff situation at Fairfax a few years ago... the remaining operating businesses in CitiCorp is very good and that's the future as they are already far along the path of following the Volcker plan.  It's 20% of my portfolio so if it goes to hell, there I will be with a big loss for investing based on my internal filter of reason vs strictly a more hardcore approach.

 

With FUR I simply reasoned that they didn't have much more to lose (I invested at $9.10) based on the equity in most of their operating properties being marked down to zero.  So if they can stay leased I can earn great returns if they also get their cash invested.  It's not exactly rocket science level reasoning, but it may just work.

 

 

 

Eric, years ago an imposter with no formal training passed himself off as a neurologist for more than a year. He didn't examine patients; he simply consulted by phone with doctors and made diagnoses based on tests descriptions etc.  After he was exposed, a concerned physician followed up on the patients he had diagnosed to see how many poor outcomes there were.

 

The results were shocking!

 

His accuracy was better than most neurologists.  In fact, it was better than even what would have been expected from the batting averages of the best neurologists in the US!

 

The doctor interviewed the imposter in jail and asked him how he made such good diagnoses.

His answer: he simply collected all the pertinent information about each patient and then called top neurologists to ask if they would help him because he was having difficulty on that case.  He did this until the correct diagnosis became clear .

 

Think about it.  Isn't that what you and I and others are able to do, using our minds and the collective wisdom of this board!?

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Its usefull to think of it in 2 seperate streams.

 

Long-term its pretty clear that FFH will trade higher & double roughly every 4.5 years (72/16). Better than the index, & denominated in CAD. The broadly comparable US equivalent is WEB.

 

Short-term you may want to look at hedging the multiple into the AGM, & covering over the summer doldrums. Just be sure that you're comfortable with the Zenith exposure.

 

SD

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