Fairfax 2023

[Munger_Disciple]

26 minutes ago, Crip1 said:

 

This may be a matter of semantics but, while I agree that culture and structure can be a moat in commodity-like businesses, I’d also argue that it is not a durable moat the way that Coke or Mickey Mouse would be. As well, culture/structure moats are not as durable as the tower of financial strength moat that Berkshire has (in addition to Berkshire's own culture and structure). Culture and structure most definitely can and will cause companies to over-perform or under-perform, no question...but it’s far more fragile.

 

As to whether FFH has a culture moat, I lack sufficient knowledge to say but if they do.

 

-Crip

 

+1

Even Buffett misjudged the deterioration of culture at Gen Re. It is not easy to maintain the culture especially after the founder departs. So I would call this much a lower quality fragile moat than say Hershey bars or See's Candies. 

[UK]

Just for fun...seems good enough to me:)

 

[Munger_Disciple]

11 minutes ago, UK said:

Just for fun...seems good enough to me:)

 

 

I think you missed the whole point of the moat discussion.

[dealraker]

The moats of these things vary as much as the businesses themselves, but aren't necessarily correlated the same manner.  I own a boat load of Mondelez, a business that's done well because of its relatively terrific brands and because of decent management.  I never think about Mondelez although it one of my top 8 holdings that make up 90-some percent.

 

But FFH is too one of the top 8 and I never think about it either.  I'm not in love with insurance underwriting but I know what I got with Fairfax and think no more deeply about it because thinking will do nothing for me here.  Investment decisions?  Yea, I know the story and the method with management, I'm ok there.  Underwriting?  OK on this part too.  Structure/culture, well I like this part the best.  Men with obsessions who bond as brothers in battle...if they are reasonable men they tend do better than those who come and go depending on pay package.

 

Some of my top 8, now 7, holdings bug the crap out of me, some don't.  Norfolk as I've written ad nauseum for one...to stop all things that work while borrowing to buyback to make the CEO's pre-resignation quarter bonus seems just a tad destructive to me.   Brookfield?  Good riddance and gone!  Lowe's...fine, cyclical growth that needs a down cycle - not the end of the world.  Markel?  Just get frustrated at both the lover-cult that's off the charts irrational and the over-the-top haters.  AJ Gallagher...lord, no frustration-  I stumbled on the most fabulous business in world history for the small investor, one that still gets zero attention except here at COBF!  Berkshire?  Pefectly obvious you get what you see and expect the same or a tad less.  Just don't go over to the Bloomstran "I make a market using Berk and let me suck you right in with my 5,000 page e-u-p-h-o-r-i-c analysis" rookie investor cult (that will make you as much of a desperate posting idiot as he is and Tilson was).  

 

But Fairfax?  Ain't it awful to have a buying price on a business you like?  Damn, all I can do not to complain about it I guess. 

[UK]

31 minutes ago, Munger_Disciple said:

 

I think you missed the whole point of the moat discussion.

 

I do not think so at all:). I wrote about the same above. Just was interesting to check prices of companies mentioned and found it funny. No need to look at everything very seriously. And btw, for the next 1-3 years (and maybe longer, we will see) my bet is again on FFH vs any of these companies despite their stronger, non owner/culture part of the moat. The ultimate goal is to make money, not just to own moat?

 

Edited November 21, 2023 by UK

[Parsad]

1 hour ago, Crip1 said:

 

This may be a matter of semantics but, while I agree that culture and structure can be a moat in commodity-like businesses, I’d also argue that it is not a durable moat the way that Coke or Mickey Mouse would be. As well, culture/structure moats are not as durable as the tower of financial strength moat that Berkshire has (in addition to Berkshire's own culture and structure). Culture and structure most definitely can and will cause companies to over-perform or under-perform, no question...but it’s far more fragile.

 

As to whether FFH has a culture moat, I lack sufficient knowledge to say but if they do.

 

-Crip

 

Berkshire's financial strength moat was built over time.  There is no reason to believe that Fairfax could not achieve the same thing if they reduced leverage, acquired quality positive cash flowing companies and held more cash at the holding company level.  They underwrite as well, and I don't see investment management at BRK being any better than FFH when Buffett & Munger are gone.  Question is, will FFH do these things?  Cheers!

[Parsad]

47 minutes ago, Munger_Disciple said:

 

+1

Even Buffett misjudged the deterioration of culture at Gen Re. It is not easy to maintain the culture especially after the founder departs. So I would call this much a lower quality fragile moat than say Hershey bars or See's Candies. 

 

I'm not sure these moats are as strong as they once were.  Look at Disney, Coke, See's, etc.  There was a time when people would pay the difference readily for specific products.  I think that moat has deteriorated significantly due to competition and third-party products like Kirkland Brand, President's Choice, etc or mismanagement in Disney's case.   

 

Do any of us think that the culture at BRK will remain after one or two generations of CEO's?  And no controlling shareholder as the Gates Foundation sells their shares.  I would imagine the institutional imperative will tear into BRK at some point in the future as well.  

 

Berkshire's greatest moat was Buffett!  Cheers!

[Parsad]

17 minutes ago, UK said:

 

I do not think so at all:). I wrote about the same above. Just was interesting to check prices of companies mentioned and found it funny. No need too look at everything very seriously. And btw, for the next 1-3 years (and maybe longer, we will see) my bet is again on FFH vs any of these companies despite their stronger, non owner/culture part of the moat. The ultimate goal is to make money, not just to own moat?

 

Fully agree!  Don't fall in love with any stock.  Buy cheap, sell dear!  Simple.  

 

Buffett was one of a kind...Prem may be too...but most companies will never be run like them.  And if they are, it won't be forever and they're too few and far between!

 

Buy investments with a margin of safety.  That's it!  Cheers!  

[Munger_Disciple]

12 minutes ago, Parsad said:

 

I'm not sure these moats are as strong as they once were.  Look at Disney, Coke, See's, etc.  There was a time when people would pay the difference readily for specific products.  I think that moat has deteriorated significantly due to competition and third-party products like Kirkland Brand, President's Choice, etc or mismanagement in Disney's case.   

 

Do any of us think that the culture at BRK will remain after one or two generations of CEO's?  And no controlling shareholder as the Gates Foundation sells their shares.  I would imagine the institutional imperative will tear into BRK at some point in the future as well.  

 

Berkshire's greatest moat was Buffett!  Cheers!

 

I think we mostly agree. IMO the culture component at Berkshire or Fairfax will get progressively harder to maintain in the future. That's what I was saying in my earlier post. I think Disney's moat is very weak (and getting weaker by the day) and it doesn't belong with the other consumer staples in the discussion. I think Hershey & See's have pretty good moats . Their volumes won't grow much but the pricing power is still there. Their moats far better than "culture" type moats. 

[Parsad]

14 minutes ago, Munger_Disciple said:

 

I think we mostly agree. IMO the culture component at Berkshire or Fairfax will get progressively harder to maintain in the future. That's what I was saying in my earlier post. I think Disney's moat is very weak (and getting weaker by the day) and it doesn't belong with the other consumer staples in the discussion. I think Hershey & See's have pretty good moats . Their volumes won't grow much but the pricing power is still there. Their moats far better than "culture" type moats. 

 

Yes, I think we agree for the most part.  I'm just of the opinion that investing in companies with moats may be a fool's game long-term as we witness the massive disruption from technology, competition and just plain changes in taste. 

 

At one time, Sears moat was unassailable...same with The Washington Post...even our love for See's may not be generational going forward.  I don't know too many kids who are any more crazy about See's than say Skittles.  While I love my Coca-cola, I'm perfectly happy with a Pepsi, Dr. Pepper or A&W Rootbeer these days! 

 

I think there are certain businesses where the moat may last longer...BNSF (railroads), Costco, Disney's IP/Parks, etc...but there aren't as many as before or as durable.  Cheers!  

[Munger_Disciple]

28 minutes ago, Parsad said:

 

Yes, I think we agree for the most part.  I'm just of the opinion that investing in companies with moats may be a fool's game long-term as we witness the massive disruption from technology, competition and just plain changes in taste. 

 

At one time, Sears moat was unassailable...same with The Washington Post...even our love for See's may not be generational going forward.  I don't know too many kids who are any more crazy about See's than say Skittles.  While I love my Coca-cola, I'm perfectly happy with a Pepsi, Dr. Pepper or A&W Rootbeer these days! 

 

I think there are certain businesses where the moat may last longer...BNSF (railroads), Costco, Disney's IP/Parks, etc...but there aren't as many as before or as durable.  Cheers!  

 

Generally agree. Many of the old moats these days are getting filled with rocks & sand due to increasing change brought by technology among other things. 

 

I think Disney is toast FWIW. I also think Berkshire has a much bigger moat than Fairfax today because they have been transformed into a diversified energy, industrial, consumer and insurance company as opposed to Fairfax which is mostly just an insurer. It is hard for me to see how BHE & BNSF can get disrupted; I think they will good businesses 100 years form now (barring some exogenous horrible event like nuclear war or something). 

Edited November 21, 2023 by Munger_Disciple

[Viking]

5 hours ago, ander said:

 

@Viking Appreciate your analyses. Any guesses what Fairfax (i.e., Prem) may view as fair value today? or what do you think is fair value today?

@ander What is fair value for Fairfax today?  Great question. I am not sure what Fairfax’s answer would be. My guess is we will get an update from Fairfax in the 2023AR when it is released in early 2024. 
 

What do i think? The key for me is earnings. I view Fairfax as a turnaround that grossly under earned for years. Those low earnings got anchored in investors psyche (messed them up) and this likely remains to this day.

We have been learning the past couple of years what the true earnings power of Fairfax and its collection of assets really is. What complicates things is:

1.) we have seen crazy volatility in financial markets the past 5 years - with 3 different bear markets in stocks and an epic bear market in bonds.

2.) the management team at Fairfax has been executing exceptionally well. How much of this is one-time in nature and how much is sustainable moving forward?

3.) the spike in bond yields and Fairfax extending duration is a big deal.

As i have posted many times, i think ‘normalized’ earnings for Fairfax today is about $150/share. With the stock trading at $900 this gives a PE of 6. That tells me shares are exceptionally cheap. 
 

EPS of $150 delivers an ROE in the high teens. P/BV is about 1. Yes, this is IFRS BV, which is higher than GAAP BV. But regardless the multiple is low. Looking at ROE and P/BV it looks to me like Fairfax is cheap. How cheap? Hard to say… because i think BV is messed up and likely understated…

 

Of the two ways to look at Fairfax, today i trust EPS the most. Given the size of earnings, capital allocation will be very important the next couple of years. The risk / reward today looks pretty compelling to me. But we all need to do our own analysis (to own it or not) and find the right fit (position size). 

Edited November 21, 2023 by Viking

[Viking]

I think the discussion of ‘moat’ for Fairfax also needs to include the flip side: ‘what are the big risks of investing in Fairfax.’ I am talking about stuff that is largely in management’s control. 

My number 1 risk is trust in the senior management team. Will they make another big macro bet that sets the company back 5 or more years?

 

The phenomenal success Fairfax experienced with CDS/equity hedge bets from 2005-2009 likely set stage for the terrible equity hedge/short strategy from 2010-2016. Hubris set in and Fairfax was punished by the investing gods. 
 

Given the success Fairfax has been having the past couple of years, do we see a repeat at Hamblin Watsa? Does hubris set in again?

 

This highlights what i think might be a fundamental flaw in Fairfax’s business model: too much macro thinking. When it works, it is a beautiful thing. When it doesn’t work, especially given the size of the company today, it will be ugly. 
 

Given its massive size today, do we see Fairfax fine-tune its business model to rely less on big macro bets?

 

Edited November 21, 2023 by Viking

[sleepydragon]

2 hours ago, dealraker said:

The moats of these things vary as much as the businesses themselves, but aren't necessarily correlated the same manner.  I own a boat load of Mondelez, a business that's done well because of its relatively terrific brands and because of decent management.  I never think about Mondelez although it one of my top 8 holdings that make up 90-some percent.

 

But FFH is too one of the top 8 and I never think about it either.  I'm not in love with insurance underwriting but I know what I got with Fairfax and think no more deeply about it because thinking will do nothing for me here.  Investment decisions?  Yea, I know the story and the method with management, I'm ok there.  Underwriting?  OK on this part too.  Structure/culture, well I like this part the best.  Men with obsessions who bond as brothers in battle...if they are reasonable men they tend do better than those who come and go depending on pay package.

 

Some of my top 8, now 7, holdings bug the crap out of me, some don't.  Norfolk as I've written ad nauseum for one...to stop all things that work while borrowing to buyback to make the CEO's pre-resignation quarter bonus seems just a tad destructive to me.   Brookfield?  Good riddance and gone!  Lowe's...fine, cyclical growth that needs a down cycle - not the end of the world.  Markel?  Just get frustrated at both the lover-cult that's off the charts irrational and the over-the-top haters.  AJ Gallagher...lord, no frustration-  I stumbled on the most fabulous business in world history for the small investor, one that still gets zero attention except here at COBF!  Berkshire?  Pefectly obvious you get what you see and expect the same or a tad less.  Just don't go over to the Bloomstran "I make a market using Berk and let me suck you right in with my 5,000 page e-u-p-h-o-r-i-c analysis" rookie investor cult (that will make you as much of a desperate posting idiot as he is and Tilson was).  

 

But Fairfax?  Ain't it awful to have a buying price on a business you like?  Damn, all I can do not to complain about it I guess. 

dealraker, AJG is trading like the Hermes stock, similar PE and no drawdowns. Is it too late to buy? Seems very very expensive?

 

 

[dealraker]

6 minutes ago, sleepydragon said:

dealraker, AJG is trading like the Hermes stock, similar PE and no drawdowns. Is it too late to buy? Seems very very expensive?

 

 

Yes relative to the norm it is expensive and not a buy.  But not nearly as expensive as it first appears.  Check the cash flow statement.

[TwoCitiesCapital]

22 hours ago, SafetyinNumbers said:

They would have more liquidity by adding the to the TRS vs share buybacks all else being equal.

 

They would have more cash on hand upfront, but WAY less visibility into future cash needs and liquidity and would paying ~6% for the financing costs (Labor + spread). 

 

The cash share repurchases require a finite amount of cash upfront and no future uncertainty to cash flows/needs or paying 6-7% for financing 

[SafetyinNumbers]

3 hours ago, TwoCitiesCapital said:

 

They would have more cash on hand upfront, but WAY less visibility into future cash needs and liquidity and would paying ~6% for the financing costs (Labor + spread). 

 

The cash share repurchases require a finite amount of cash upfront and no future uncertainty to cash flows/needs or paying 6-7% for financing 

I’m just referring to liquidity. Cash is better than no cash even if there is a liability of the same amount. I appreciate your perspective.

[Phoenix01]

On 11/20/2023 at 6:36 PM, Viking said:

If Fairfax reduced its TRS position (simple exit of the position with no explanation) at around current prices it would make me question how cheap the shares really are. 
 

If Fairfax thought the shares were very cheap today would they exit the TRS position? No, i don’t think so. 
 

I could see Fairfax exiting the TRS position when they feel shares are close to fair value (by close i mean within 10%). 

—————

From a capital allocation standpoint my big surprise this year is the minimal buybacks we are seeing from Fairfax. At least compared to the past 5 years. 
 

Clearly, Fairfax is seeing better opportunities doing other things. I am not complaining. 
 

Fairfax shares are up significantly over the past 2 years. 
————-

If we saw Fairfax exit the TRS position and stop buying back stock it would likely tell me they no longer see their shares as being very cheap (perhaps just cheap). 
————

And if we saw Fairfax make a big acquisition by issuing new shares at current prices… Well, that would tell me Fairfax saw their shares as being fully valued, and perhaps even over valued. 
 

 

It can also be risk mitigation.  A major disaster could cost FFH double since its price would likely drop as well and they would get hit with the TRS payment during the major event.

[TwoCitiesCapital]

52 minutes ago, Phoenix01 said:

It can also be risk mitigation.  A major disaster could cost FFH double since its price would likely drop as well and they would get hit with the TRS payment during the major event.

 

That's my perspective as well

 

It's not just about the share price - it's about the liquidity management risk and financing costs that come along with it - that only make sense over cash repurchases if 1) you have confidence the stock will exceed the financing costs AND 2) short-term downdrafts in share price are easily covered with existing liquidity. 

 

A major catastrophe has very large potential to upset both and is, by definition, unknowable which is why I'm ok with them reducing it and leaving cash on the table.

 

But it's not a table pounding conviction I have - just wouldn't blame them or be upset if they did. 

 

[glider3834]

Just on this subject of competitive advantages I would say their dealmaking in their core insurance business has resulted in a lot of shareholder value since they started. - they will trade in & out of insurance businesses & have generated billions in capital gains from ICICI Lombard, First Capital, Eurolife FFH, C&F Pet, Ambridge, Digit etc. 

[UK]

9 hours ago, Viking said:

I think the discussion of ‘moat’ for Fairfax also needs to include the flip side: ‘what are the big risks of investing in Fairfax.’ I am talking about stuff that is largely in management’s control. 

My number 1 risk is trust in the senior management team. Will they make another big macro bet that sets the company back 5 or more years?

 

The phenomenal success Fairfax experienced with CDS/equity hedge bets from 2005-2009 likely set stage for the terrible equity hedge/short strategy from 2010-2016. Hubris set in and Fairfax was punished by the investing gods. 
 

Given the success Fairfax has been having the past couple of years, do we see a repeat at Hamblin Watsa? Does hubris set in again?

 

This highlights what i think might be a fundamental flaw in Fairfax’s business model: too much macro thinking. When it works, it is a beautiful thing. When it doesn’t work, especially given the size of the company today, it will be ugly. 
 

Given its massive size today, do we see Fairfax fine-tune its business model to rely less on big macro bets?

 

 

But except for not reaching for the yield, when interest rates were very low (and I think we all agree this was genius and do not call it macro thinking, but more like sound investing thinking?) is there any evidence of FFH relying on too much macro thinking in the last 5 years and not actually going to the opposite direction? Like not even talking or writing much about it anymore?

 

I will repeat myself, but it feels to me, that the biggest risk for FFH future success is actually outside of managements control and it is possibility of zero interest rates for an extended period again in the future. This might not be necessarily lethal for them, but with majority of float in the fixed income, perhaps it would be hard to avoid or mitigate this somehow completely, leading to an under earning and lower float value to a some degree again, like we have seen already. This would be is my biggest worry with FFH, especially when/if they will be better priced by the market (still not today at 1 BV).

 

Edited November 22, 2023 by UK

[UK]

3 hours ago, TwoCitiesCapital said:

 

That's my perspective as well

 

It's not just about the share price - it's about the liquidity management risk and financing costs that come along with it - that only make sense over cash repurchases if 1) you have confidence the stock will exceed the financing costs AND 2) short-term downdrafts in share price are easily covered with existing liquidity. 

 

A major catastrophe has very large potential to upset both and is, by definition, unknowable which is why I'm ok with them reducing it and leaving cash on the table.

 

But it's not a table pounding conviction I have - just wouldn't blame them or be upset if they did. 

 

I agree with this, more so, if PBV would become more than some 1.2. Also, despite most of us see this decision by them as very smart (which it was) there is some strange alternative perceptions between some market participants, e.g. one big and serious money manager called Prem 'a bit of a cowboy', also because of these TRS. Not sure I would agree:), but maybe understandable to a degree (just because OMG derivatives), because even Buffett was criticized for his index puts?

 

Edited November 22, 2023 by UK

[dealraker]

Ole dealraker has, to say the least, teriffically enjoyed the enthusiasm here towards Fairfax.  Somehow even while being very right-brained I did get an accounting degree and I have in the past done some extensive financial investigations.  Having messed with Fairfax for a long-long time sometimes it becomes depressing to be so isolated in thought, not one single person to share your thinking with.  The posts here are delightful for me, all of them...and I mean all!

 

But...over time these extensive endeavors proved as often as not to cost me money rather than make money.  Yep, I got so down in the dirt I missed the incredible growth sprouting up all around.  And I did it for some time.

 

Investing is a grind.  The price of a stock, particularly its price direction and momentum, can have such overwhelming influence on normally rational people's thinking that it makes people raving crazy.  And here with Fairfax you can see that ever evolving, a continuous pendulum of emotions, just raw emotions.

 

As was the case with Meta and Facebook, I find it a very productive thing to voice emotions all while acting rationally.  I simply could not get enough of Parsad's rational posts on Zuck....all while I blasted my emotions as to his off-the-charts crazy metaverse spending.  Given I'm 69.5 years old though, I knew precisely what to do.  When most frustrated, when most in doubt, particularly if it is a grand business run by an obsessed and focused winner type....well, just buy the stock.

 

I have hundreds of thousands of profits in Meta from doing that, the anti-emotion pro-rational act.  The same is going to be true over time with Fairfax and it is perfectly clear when to buy and when to hold...and maybe even when to sell (no time soon!) as to the stock/known info cycle as it relates to the stock price.  

 

There is always the chance something could change with Fairfax.  But my view is this possibility is so low that I'll never allow myself to think about it.  And for me?  That's been three decades of the same thinking.  I like being connected to this business and people.  

[Xerxes]

4 minutes ago, dealraker said:

I have hundreds of thousands of profits in Meta from doing that, the anti-emotion pro-rational act.  The same is going to be true over time with Fairfax and it is perfectly clear when to buy and when to hold...and maybe even when to sell (no time soon!) as to the stock/known info cycle as it relates to the stock price.  

the most important part of this post. That means we got more upside. Or mid-innings 

[dealraker]

2 minutes ago, Xerxes said:

the most important part of this post. That means we got more upside. Or mid-innings 

Hang around long enough, 1.2 times book is 95% probable in a not too long a time period.  But even then I'd take a nap rather than act.