Fairfax 2023

[UK]

2 hours ago, dartmonkey said:

So folks are bashing/discussing FFH for buying  more BB, yet nobody cares if it is actually true:)?

 

 

So it seems. There's been no announcement of a purchase, and dataroma indicates the same ownership as before (46,724,700 shares.) Blackberry's Nov 13 filing states that Watsa has shared voting power on 46,853,700 shares, 46,724,700 of these through Fairfax. Here is the nonsense that Yahoo Finance attributes to GuruFocus:

 

"On November 13, 2023, Prem Watsa (Trades, Portfolio), through Fairfax Financial Holdings, made a notable addition to its investment in BlackBerry Ltd (NYSE:BB). The transaction involved the acquisition of 129,000 shares at a price of $3.52 per share, increasing the total holdings to 46,853,700 shares. This move had a 0.03% impact on the portfolio, adjusting the position to 10.77% and marking a significant vote of confidence in the company's prospects."

 

So I would speculate that there has been no additional purchase, but perhaps Watsa owns a few shares outside of Fairfax and that has caused GuruFocus to be confused. That $0.5m "significant vote of confidence" looks like it never happened. 

 

Back to complaining about the $4m privatization of Farmer's Edge...

 

Thank you very much! 

 

So it seems there is more than enough skepticism and pent up anxiousness regarding FFH if we jump to the conclusion of 'same old...nothing has changed' just because of some fake headline and some tiny housekeeping deal done:). After share price up almost 50 per cent YTD, maybe some of this is understandable, but also to expect that nothing wrong will ever happen with FFH or some of its investments...would be just crazy:)? And just to remind, even after 50 per cent up this year it still trades at just 1 BV:). Far from priced to be perfect I guess? Given all positive fundamental developments and especially changes in bond portfolio, i would argue that FFH at current price is almost as exciting as a year ago. 

 

Edited November 19, 2023 by UK

[StubbleJumper]

1 hour ago, UK said:

 

Thank you very much! 

 

So it seems there is more than enough skepticism and pent up anxiousness regarding FFH if we jump to the conclusion of 'same old...nothing has changed' just because of some fake headline and some tiny housekeeping deal done:). After share price up almost 50 per cent YTD, maybe some of this is understandable, but also to expect that nothing wrong will ever happen with FFH or some of its investments...would be just crazy:)? And just to remind, even after 50 per cent up this year it still trades at just 1 BV:). Far from priced to be perfect I guess? Given all positive fundamental developments and especially changes in bond portfolio, i would argue that FFH at current price is almost as exiting as the year ago. 

 

 

I think you are being a little too generous with FFH management on this.  The accumulation of BB shares was an error of commission.  Folks on this board noted it, time after time, as management took the active decision to invest increasing amounts in a company that had limited prospects.  The failure to reduce the BB position during 2021 was an error of omission, and that was noted vociferously by folks on this board.  In short, there has been a long and unhappy history of management making poor decisions about BB.

 

Now, making poor decisions is something we all do.  Sometimes we make a series of poor decisions, which has been the case with FFH's series of decisions to allocate increasing amounts of capital to BB and to not reduce that capital allocation when the opportunity presented itself.  During this month, we have seen yet another strange decision by FFH to lend money to BB at a 1.75% interest rate for either 3 months or 6 months.  On the face of it, that is yet another poor decision in a long series of decisions about BB which have not been optimal for shareholder value.  The fake headline giving the appearance of yet another poor decision was merely icing on the cake for something which has been a source of frustration for shareholders for more than a decade now.

 

I will be the first to acknowledge that FFH has made a pile of money from 2021-23 and will probably make a big pile in 2024 and, with a bit of luck, a decent pile in 2025.  That is all good and fine, but it still doesn't really excuse management's seeming inability to make rational decisions about BB.  When the remaining BB position is ultimately closed (hopefully in 2024 after the company splits) somebody can do the counterfactual study about how much this unfortunate series of decisions has cost shareholders.  How much capital will we recover from the total amount invested, and how much should FFH have obtained from that amount of capital invested over the past 10+ years?  Will the cost (including opportunity cost) of those decisions be $75/sh?  Maybe more?

 

Let's hope that we will see better decisions about BB on a going forward basis.

 

 

SJ

[bearprowler6]

More on Farmers Edge:

 

https://farmersedge.ca/farmers-edge-announces-c75-million-loan-from-fairfax-financial-holdings-limited/

 

https://farmersedge.ca/farmers-edge-announces-increase-in-credit-facility/

 

Not sure about you but I would not have increased the credit line to Farmers Edge; instead I would have looked at all the possible ways of reducing it.

 

 

[dartmonkey]

Sometimes we make a series of poor decisions, which has been the case with FFH's series of decisions to allocate increasing amounts of capital to BB and to not reduce that capital allocation when the opportunity presented itself.  During this month, we have seen yet another strange decision by FFH to lend money to BB at a 1.75% interest rate for either 3 months or 6 months.  On the face of it, that is yet another poor decision in a long series of decisions about BB which have not been optimal for shareholder value.  The fake headline giving the appearance of yet another poor decision was merely icing on the cake for something which has been a source of frustration for shareholders for more than a decade now.

 

 

I completely agree about BB, no question, and that was a serious amount of money wasted on what I think most of us were pretty confident would be a bad investment. I regret not shorting out the BB part in my own account, which I almost did when it became a meme stock, although I think the borrow was quite expensive. I could have at least sold some calls, though - please, Reddit, give me one more chance?

 

So, yes, any significant further investment in BB would be worrisome. I don't really think 3 months sub-market interest on a small loan qualifies, and there may be some mitigating circumstances we are not aware of, but I would be pretty upset if there was anything more substantial. If the company wants to play around with tiny amounts of money in something like the Farmer's Edge privatization, fine, but no more $500m investments in failing businesses, please.

[MMM20]

Has anyone here made a big investment that didn’t work out? And have you still made good returns on your overall portfolio? I’ll be the first to raise my hand. I’ve owned an EM value fund for the last ~15 years and still compounded at mid-high teens. Do I get no credit for the overall result because I got one big decision wrong? For that matter I also missed the easy money in big tech. Should that define me as an investor?
 

This is what I think about whenever anyone writes more than one sentence about BB nowadays. I get the baggage and it’s painful to think about the opportunity cost of owning Brazilian crap for the last ~15 years too. But doesn’t that clearly miss the forest for one single tree? It is almost like writing a 10 page report about how Berkshire is uninvestable because of Precision Castparts or, like, Snowflake, I don’t know. I’m sure there’s a better comparison, but why not focus on Fairfax’s insurance acquisitions that were brilliantly timed in retrospect, or any of the investments that actually move the needle for Fairfax today?
 

I’m not sure I’ve seen a bigger disconnect between spilled ink and what actually matters to a company now and looking forward. It is a bit exasperating.

 

Edited November 19, 2023 by MMM20

[StubbleJumper]

1 hour ago, bearprowler6 said:

Not sure about you but I would not have increased the credit line to Farmers Edge; instead I would have looked at all the possible ways of reducing it.

 

 

I probably wouldn't increase a credit line to Farmers' Edge, but if I did choose to do so, I sure as hell wouldn't lend them short-term money at 6% when I can lend the Government of the United States money at 5.4% for 90 or 180 days.

 

SMH.

 

 

SJ

[Xerxes]

It would be fascinating to know what equities Prem holds in his PA outside FFH (which constituted +90% of his wealth)

 

I think Atlas was in his PA, and now it seems BB as well. Stelco ?

[Hamburg Investor]

I really, really appreciate Vikings in depth analysis with all the details. 

 

On the other hand it may be an idea to just step back and try to understand the bigger picture. 

 

We can look at the numbers and make an educated guess about the next 3 years or so and it’s eye-opening, what Viking and everybody is doing here, it’s incredible. But as a longterm investor I personally like to find the businesses that might compound at above average market rates over decades; and clearly there‘s no use of interpolating the detailed numbers of Viking over 10 or 20 years; there‘s just too much variables. Looking back we just find so many things happening all the time, that all were hard to anticipate 5 years before (some even days or weeks before) happening. E. g. Interest rates have been so low for so long and nobody anticipated that in - say - 2007. But if you wouldn’t have anticipated that back than, you were totally wrong with the numbers. The world has seen so many things within the last 15 years. One of the worst bear markets within the last 100 years, a worldwide lockdown for a virus, wars, fraud, political instabilities, financial crisis with nearly melting the financial system, new technologies changing whole sectors… 

 

To me that seems just too much to get the numbers only even „approximately right“ with that concept (this is not saying Viking or anybody thought this would be possible; just saying). Trying to pinpoint the exact compounding rate until 2038 I personally would definetely end in being precisely wrong.

 

 

 

Okay, so how do we get it  „approximately right“? I don‘t know of any other concept than looking for an endurable moat in any company. If you find that endurable moat it‘s hard to get a really bad outcome over 15 years. Even if you pay a bit too much.

 

Here and elsewhere have been some discussions, if Fairfax has a moat or not. „Is it again the old Fairfax?“ is a question that arises here again and again and my reading is, that this in larts refers to the moat wuestion too. Getting that answer wrong one looses a lot of money, either by investing too much or too less or by selling too early etc. 

 

If Fairfax had an endurable moat

and looking at the valuation, than - from my perspective - this is one of the five or ten best investment opportunities in a lifetime. 

 

So I thought it might be an idea to discuss that point here more broadly and to begin with here‘s a list of points why I think Fairfax has a moat. I‘d really appreciate others sharing why they (don‘t) feel there‘s a moat, as it helps increasing (at least my) learning curve:

• longterm outperformance - 19% per year over 37 years in book value growth. That‘s a bold indicator. The outperformance is just too big and lasts too long for being just luck. 
• Prem is from Graham and Doddsville - Buffett laid out, that value investors outperform the market. Prem is clearly a value investor. He‘s more old style than others including Gayner and Buffett. 
• Integrity of management. Prem has a lot of „skin in the game“. He‘s clearly not a phony. He has his own ideas and goes his way, even if nobody applauses him. As far as I know, he likes what he does more than living an easy life. I trust him.
• The business itself: Fairfax clearly is in the footsteps of Berkshire. Yes, Prem has a different style. But still Fairfax is build on the idea of compounding through float investing in combination with equity invested in businesses (stock market, wholly owned, …). This general concept as a basis to me seems totally reasonable to lead to outperformance. Buy an etf with your equity on the s&p500 and invest the float in bonds… Have a combined ratio below 100… and there you have the outperformance. Okay, Prem has been really different with combined ratios of 115 in the early years, and the macro bets… Okay, okay. Still: The general concept was being a value investor (in comparison to growth, momentum or other styles) and invest a bigger portion of the equity in equity and not into bonds. (And btw: What does it tell us about Prems future performance, when he just outperformed the market that much in the early years, even though the float was so expensive and has gotten so much better / higher quality since then?)
• Fairfax has changed to the better and has gotten even more Buffettesque:
• „No more shorts“
• Combined Ratio: in the first 20 years, Prem outperformed the market the most, allthewhile the CR was bad (and sometimes really bad!). Now Fairfaxs insurance businesses are profitable and most of the time really good and better than the sector, for over 15 years. 
• The Fairfax insurance business has widened its footprint to other continents and will widen even more. US, Western and Eastern Europe, India, Asia, Africa, South America, … So even though the insurance abroad is really small, there’s a worldwide diversification of risk at the horizon. Even though really small, they are growing stronger than the North American and wordide insurers alltogether and he‘s buying more (like GIG)

 

Okay, let‘s play the advocati diavoli: „Prem has lost it. Look at the last 10+ years. No outperformance to speak of.“ 

 

The answer is easy: Interest rates were low. That hit Fairfax in two ways: First, no income to speak of from bonds. And indirect the low interest beared the hefty outperformance of growth versus value; that was clearly a bigger headwind for Prem as for Buffett or Gayner (both more on the GARP and/or quality investing site), as Prem is clearly more like a classic value investor (buying the ugly - in greece when everybody was fleeing, Blackberry… so low pb and pe ratios, not exactly cigar but investing, but „buying cheap“ is more important to Prem than to Warren or Tom m). 

 

So some may find it being just an excuse, but in my analysis I think Prem has been in the worst environment ever for over a decade. You might say, talking about „the circumstances“ is a typical excuse of someone underperforming. „It‘s always the circumstances.“ I know I know. 

 

Still to me it seems reasonable in this case. Look at insurance as a sector, look at Buffett or Gayner. They all left the S&P 500 in the dust in the (70ies), (half of) the 80ies, 90ies and to a lesser degree until 2007/2009. And since than, they are all about the same, a bit below the S&P500 or a bit above. But none of the three compounded with a cagr of - say - 5%, 10% or even more above the market over 10 years. Looking at the insurance business and it‘s logic what else should one expect within a timeframe of interest rates at 0%? I wasn‘t aware 0% would be coming and staying for so long. But in my eyes to everybody understanding the Berkshire concept it should be clear that higher interest rates are better than lower and well, cheap money helps growth investors, not value investors. What else?

 

Okay, let‘s put that alltogether. In my eyes Fairfax has a moat. I think, Prem will be able to beat the market with his equity investments (so no change to history). I find it reasonable, that the CR will be better than the average insurance company. Below 100 if interest will be way above 4% for longer… ? Maybe, maybe not. Still I’d bet Fairfaxs float being cheaper than risk free treasuries. I have no idea where interest rates are standing in three years or five, 10, … 

 

Still I‘d say: Let‘s assume Prem just does as good as the S&P500 and compounds equity (stocks, dividends, wholly owned businesses) itself with a cagr of 10% over 10, 20, 30 years. That‘s below the historical average of 11.8% of the S&P500. And than let‘s say, he reaches a CR of 100 and earns 3% on bonds. Than Fairfax would compound at a rate of around 15%/year. To me that sounds like a reasonable, conservative base case.

 

If the S&P500 will be flat over the next 20 years, than Fairfax probably won‘t reach that 15%, but I guess would have a good chance of outperforming the market. Or if Growth again outperforms Value by such a margin over such a long or even longer time. Or if the CR goes way more up or if the new normal for interest rates is near zero. So if you believe, interest will be lower again for a decade, you clearly will come to other conclusions and worse outcome. 

 

Still to me a base case should build on historical averagesand than you put in a margin of safety.

 

Anyway: If Fairfax should have an enduring moat and if it would compound equity with a cagr of 15%, than you could buy Fairfax at a PE ratio of 7 today. I wouldn‘t mind buying a business, that doubles its equity every 5 years, for a PE Ratio of 14 or even maybe 21. In fact the market is way higher (like PE of 24 for the S&P500) and the average company won‘t reach an roe of 15%. 20 years from now, equity 16-folds at a 15% cagr. If Fairfaxs price tag would go up by 150 per cent tomorrow and I should bet who compounds stronger over the next two decades, I won’t bet on the S&P500. 

[Thrifty3000]

Let me know when they make a billion dollar decision. Anything under $100 mil is noise. 

[Viking]

4 hours ago, Hamburg Investor said:

I really, really appreciate Vikings in depth analysis with all the details. 

 

On the other hand it may be an idea to just step back and try to understand the bigger picture. 

 

We can look at the numbers and make an educated guess about the next 3 years or so and it’s eye-opening, what Viking and everybody is doing here, it’s incredible. But as a longterm investor I personally like to find the businesses that might compound at above average market rates over decades; and clearly there‘s no use of interpolating the detailed numbers of Viking over 10 or 20 years; there‘s just too much variables. Looking back we just find so many things happening all the time, that all were hard to anticipate 5 years before (some even days or weeks before) happening. E. g. Interest rates have been so low for so long and nobody anticipated that in - say - 2007. But if you wouldn’t have anticipated that back than, you were totally wrong with the numbers. The world has seen so many things within the last 15 years. One of the worst bear markets within the last 100 years, a worldwide lockdown for a virus, wars, fraud, political instabilities, financial crisis with nearly melting the financial system, new technologies changing whole sectors… 

 

To me that seems just too much to get the numbers only even „approximately right“ with that concept (this is not saying Viking or anybody thought this would be possible; just saying). Trying to pinpoint the exact compounding rate until 2038 I personally would definetely end in being precisely wrong.

 

Okay, so how do we get it  „approximately right“? I don‘t know of any other concept than looking for an endurable moat in any company. If you find that endurable moat it‘s hard to get a really bad outcome over 15 years. Even if you pay a bit too much.

 

Here and elsewhere have been some discussions, if Fairfax has a moat or not. „Is it again the old Fairfax?“ is a question that arises here again and again and my reading is, that this in larts refers to the moat wuestion too. Getting that answer wrong one looses a lot of money, either by investing too much or too less or by selling too early etc. 

 

If Fairfax had an endurable moat

and looking at the valuation, than - from my perspective - this is one of the five or ten best investment opportunities in a lifetime. 

 

So I thought it might be an idea to discuss that point here more broadly and to begin with here‘s a list of points why I think Fairfax has a moat. I‘d really appreciate others sharing why they (don‘t) feel there‘s a moat, as it helps increasing (at least my) learning curve:

• longterm outperformance - 19% per year over 37 years in book value growth. That‘s a bold indicator. The outperformance is just too big and lasts too long for being just luck. 
• Prem is from Graham and Doddsville - Buffett laid out, that value investors outperform the market. Prem is clearly a value investor. He‘s more old style than others including Gayner and Buffett. 
• Integrity of management. Prem has a lot of „skin in the game“. He‘s clearly not a phony. He has his own ideas and goes his way, even if nobody applauses him. As far as I know, he likes what he does more than living an easy life. I trust him.
• The business itself: Fairfax clearly is in the footsteps of Berkshire. Yes, Prem has a different style. But still Fairfax is build on the idea of compounding through float investing in combination with equity invested in businesses (stock market, wholly owned, …). This general concept as a basis to me seems totally reasonable to lead to outperformance. Buy an etf with your equity on the s&p500 and invest the float in bonds… Have a combined ratio below 100… and there you have the outperformance. Okay, Prem has been really different with combined ratios of 115 in the early years, and the macro bets… Okay, okay. Still: The general concept was being a value investor (in comparison to growth, momentum or other styles) and invest a bigger portion of the equity in equity and not into bonds. (And btw: What does it tell us about Prems future performance, when he just outperformed the market that much in the early years, even though the float was so expensive and has gotten so much better / higher quality since then?)
• Fairfax has changed to the better and has gotten even more Buffettesque:
• „No more shorts“
• Combined Ratio: in the first 20 years, Prem outperformed the market the most, allthewhile the CR was bad (and sometimes really bad!). Now Fairfaxs insurance businesses are profitable and most of the time really good and better than the sector, for over 15 years. 
• The Fairfax insurance business has widened its footprint to other continents and will widen even more. US, Western and Eastern Europe, India, Asia, Africa, South America, … So even though the insurance abroad is really small, there’s a worldwide diversification of risk at the horizon. Even though really small, they are growing stronger than the North American and wordide insurers alltogether and he‘s buying more (like GIG)

 

Okay, let‘s play the advocati diavoli: „Prem has lost it. Look at the last 10+ years. No outperformance to speak of.“ 

 

The answer is easy: Interest rates were low. That hit Fairfax in two ways: First, no income to speak of from bonds. And indirect the low interest beared the hefty outperformance of growth versus value; that was clearly a bigger headwind for Prem as for Buffett or Gayner (both more on the GARP and/or quality investing site), as Prem is clearly more like a classic value investor (buying the ugly - in greece when everybody was fleeing, Blackberry… so low pb and pe ratios, not exactly cigar but investing, but „buying cheap“ is more important to Prem than to Warren or Tom m). 

 

So some may find it being just an excuse, but in my analysis I think Prem has been in the worst environment ever for over a decade. You might say, talking about „the circumstances“ is a typical excuse of someone underperforming. „It‘s always the circumstances.“ I know I know. 

 

Still to me it seems reasonable in this case. Look at insurance as a sector, look at Buffett or Gayner. They all left the S&P 500 in the dust in the (70ies), (half of) the 80ies, 90ies and to a lesser degree until 2007/2009. And since than, they are all about the same, a bit below the S&P500 or a bit above. But none of the three compounded with a cagr of - say - 5%, 10% or even more above the market over 10 years. Looking at the insurance business and it‘s logic what else should one expect within a timeframe of interest rates at 0%? I wasn‘t aware 0% would be coming and staying for so long. But in my eyes to everybody understanding the Berkshire concept it should be clear that higher interest rates are better than lower and well, cheap money helps growth investors, not value investors. What else?

 

Okay, let‘s put that alltogether. In my eyes Fairfax has a moat. I think, Prem will be able to beat the market with his equity investments (so no change to history). I find it reasonable, that the CR will be better than the average insurance company. Below 100 if interest will be way above 4% for longer… ? Maybe, maybe not. Still I’d bet Fairfaxs float being cheaper than risk free treasuries. I have no idea where interest rates are standing in three years or five, 10, … 

 

Still I‘d say: Let‘s assume Prem just does as good as the S&P500 and compounds equity (stocks, dividends, wholly owned businesses) itself with a cagr of 10% over 10, 20, 30 years. That‘s below the historical average of 11.8% of the S&P500. And than let‘s say, he reaches a CR of 100 and earns 3% on bonds. Than Fairfax would compound at a rate of around 15%/year. To me that sounds like a reasonable, conservative base case.

 

If the S&P500 will be flat over the next 20 years, than Fairfax probably won‘t reach that 15%, but I guess would have a good chance of outperforming the market. Or if Growth again outperforms Value by such a margin over such a long or even longer time. Or if the CR goes way more up or if the new normal for interest rates is near zero. So if you believe, interest will be lower again for a decade, you clearly will come to other conclusions and worse outcome. 

 

Still to me a base case should build on historical averagesand than you put in a margin of safety.

 

Anyway: If Fairfax should have an enduring moat and if it would compound equity with a cagr of 15%, than you could buy Fairfax at a PE ratio of 7 today. I wouldn‘t mind buying a business, that doubles its equity every 5 years, for a PE Ratio of 14 or even maybe 21. In fact the market is way higher (like PE of 24 for the S&P500) and the average company won‘t reach an roe of 15%. 20 years from now, equity 16-folds at a 15% cagr. If Fairfaxs price tag would go up by 150 per cent tomorrow and I should bet who compounds stronger over the next two decades, I won’t bet on the S&P500. 

”Does Fairfax have an endurable moat?” This is a great question and one that i have not actually thought much about.  I would love to hear what others think.
 

@Hamburg Investor Here is my question to you: Do you think Fairfax will continue to make big macro bets moving forward?

 

Edited November 20, 2023 by Viking

[Maverick47]

These days I give a decent amount of credit to Prem for his capital allocation decisions and opportunities.  Buying back stock like Singleton of Teledyne, at book value or below, is something that few other CEOs are willing or able to do in a rational, shareholder friendly fashion.  He also has the ability to buy back portions of associates that he has sold off to OMERS to raise the capital needed for previous buybacks (10% of Odyssey).

 

The longer term focus on shareholder value, and maintaining franchise value of the insurance subs by not laying off staff in times of crisis (COVID) is also a differentiator from competitors.  I used to work for a competitor that wasn’t able to maintain capital levels sufficient to support the writings of premium levels when they rose from the inflation shock of the last few years, and their capital levels dropped because they were reaching for yield on their bond portfolio.  I got laid off recently as the staff cuts began, in an effort to return to profitability so that capital levels could be rebuilt.  (I am able to view the early retirement with equanimity because I have over 70% of my retirement assets in Berkshire and Fairfax.)
 

The less experienced staff that has been retained will be cheaper, but most of the value I added over the years was in using my experience to help the company avoid self inflicted wounds through poor business decisions.  Fairfax’s insurers will have a continuing and expanding advantage over the company I used to work for because they have a solid balance sheet, and a growing insurance business, which gives them the best of both worlds — experienced staff and opportunities for professional growth for the newer employees that are added each year.

 

Don’t underestimate the value of the corporate culture that has been created at Fairfax.  That can be part of a company’s enduring moat just as much as more easily understood business model advantages can be….

[UK]

10 hours ago, MMM20 said:

Has anyone here made a big investment that didn’t work out? And have you still made good returns on your overall portfolio? I’ll be the first to raise my hand. I’ve owned an EM value fund for the last ~15 years and still compounded at mid-high teens. Do I get no credit for the overall result because I got one big decision wrong? For that matter I also missed the easy money in big tech. Should that define me as an investor?
 

This is what I think about whenever anyone writes more than one sentence about BB nowadays. I get the baggage and it’s painful to think about the opportunity cost of owning Brazilian crap for the last ~15 years too. But doesn’t that clearly miss the forest for one single tree? It is almost like writing a 10 page report about how Berkshire is uninvestable because of Precision Castparts or, like, Snowflake, I don’t know. I’m sure there’s a better comparison, but why not focus on Fairfax’s insurance acquisitions that were brilliantly timed in retrospect, or any of the investments that actually move the needle for Fairfax today?
 

I’m not sure I’ve seen a bigger disconnect between spilled ink and what actually matters to a company now and looking forward. It is a bit exasperating.

 

 

Very well said!

[UK]

5 hours ago, Viking said:

”Does Fairfax have an endurable moat?” This is a great question and one that i have not actually thought much about.  I would love to hear what others think.

 

 

I think they have some moat already but even more importantly are on the way or could have it even bigger in the future, something more BRK like: decentralized unique structure, long term owner operator thinking in insurance and investing and perhaps some larger moaty operating companies and lower non float leverage one day? But this kind moat perhaps will never be as strong or fool proof as moat from some brand, network effect or similar and will always depend much on ownership, management, culture, execution etc. But it seems to me FFH is in possession of all these ingredients today and I do not see anything changing in the foreseeable future.

 

However, as others have pointed above, perhaps we also have to admit, that some of the future success of FFH will clearly depend on external circumstances and most importantly, the level of actual interest rates in the next 5, 10 or 20 years. I have no strong opinion myself on this (one can choose what to believe from Howard Marks and his sea change to Cathy Woods and her deflation thesis:)), but the scenario of some extended period of zero rates again somewhere in the future perhaps is not completely unthinkable? In such case what FFH could earn, what float is worth and how market views insurance business would be impacted. I say it half jokingly, but maybe after all they should do some macro again and hedge somehow from extended period of zero rates, if it is possible to do in a reasonable way:)?

 

Edited November 20, 2023 by UK

[SafetyinNumbers]

If Fairfax added or reduced its TRS position this month what would you think?

 

Keep in mind we wouldn’t find out until February and the news would accompany earnings so if it does happen it will be difficult to tell how the market takes it. 
 

There was a cross of ~216k shares last Tuesday at the close which is why I’m asking. That cross could be related to something entirely different but changes to the TRS are a possibility.

Edited November 20, 2023 by SafetyinNumbers

[TwoCitiesCapital]

25 minutes ago, SafetyinNumbers said:

If Fairfax added or reduced its TRS position this month what would you think?

 

Keep in mind we wouldn’t find out until February and the news would accompany earnings so if it does happen it will be difficult to tell how the market takes it. 
 

There was a cross of ~216k shares last Tuesday at the close which is why I’m asking. That cross could be related to something entirely different but changes to the TRS are a possibility.

 

I would prefer if they didn't add to it. They have the liquidity for additional share repurchases without having to take the leverage/liquidity costs of additional TRS. 

 

I wouldn't be upset if it were reduced or unchanged. 

[glider3834]

35 minutes ago, SafetyinNumbers said:

If Fairfax added or reduced its TRS position this month what would you think?

 

Keep in mind we wouldn’t find out until February and the news would accompany earnings so if it does happen it will be difficult to tell how the market takes it. 
 

There was a cross of ~216k shares last Tuesday at the close which is why I’m asking. 

we have no idea who the parties are to this trade but is it hypothetically possible Fairfax could reduce part of their TRS position & in turn purchase the underlying shares directly from counter-party - could they do this under a block trade exemption to NCIB with security regulator clearance?
 

I am just thinking if the 2% repurchase tax kicks in on 1 Jan then this would be an opportune  time to do it.

Edited November 20, 2023 by glider3834

[Parsad]

14 hours ago, UK said:

 

I think they have some moat already but even more importantly are on the way or could have it even bigger in the future, something more BRK like: decentralized unique structure, long term owner operator thinking in insurance and investing and perhaps some larger moaty operating companies and lower non float leverage one day? But this kind moat perhaps will never be as strong or fool proof as moat from some brand, network effect or similar and will always depend much on ownership, management, culture, execution etc. But it seems to me FFH is in possession of all these ingredients today and I do not see anything changing in the foreseeable future.

 

 

+1!  

 

I think the moat is the actual insurance/decentralized structure...float, leverage and voting control.  This is what Horn and other analysts who suggest there is no moat don't understand.  The business structure is the moat and the way decisions are made. 

 

Most corporations cannot act like BRK or FFH, even insurance companies, because they do not have a major controlling shareholder that can make decisions for the long-term rather than the short-term.  Most other insurance companies are structured so that the CEO is compensated based on the next 3-5 years performance...not over the next 20-30 years of performance.  Their boards are structured to direct those short-term initiatives and goals. 

 

Look at how institutional capital is managed at other companies, pension funds, hedge funds, etc.  It's shocking and many times irrational allocation of capital.  How many insurance companies would have bought BNSF?  Looking out 20-30 years on how the railroad business would evolve and grow?  No one other than institutions managed like BRK, FFH or MKL would even consider it! 

 

So for a supposed "no-moat" company...it's got one hell of a moat!  Cheers!

[SafetyinNumbers]

1 hour ago, glider3834 said:

we have no idea who the parties are to this trade but is it hypothetically possible Fairfax could reduce part of their TRS position & in turn purchase the underlying shares directly from counter-party - could they do this under a block trade exemption to NCIB with security regulator clearance?
 

I am just thinking if the 2% repurchase tax kicks in on 1 Jan then this would be an opportune  time to do it.

If they bought the shares back, we would find out within the first 10 days of December.

[glider3834]

Just now, SafetyinNumbers said:

If they bought the shares back, we would find out within the first 10 days of December.

[SafetyinNumbers]

1 hour ago, TwoCitiesCapital said:

 

I would prefer if they didn't add to it. They have the liquidity for additional share repurchases without having to take the leverage/liquidity costs of additional TRS. 

 

I wouldn't be upset if it were reduced or unchanged. 

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

[Viking]

3 hours ago, SafetyinNumbers said:

If Fairfax added or reduced its TRS position this month what would you think?

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. 
 

 

[StubbleJumper]

41 minutes ago, Viking said:

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. 

 

 

It's most likely a holdco cash issue (see note 5 of the Q3 financials).  FFH holdco actually has very, very little cash and true short term investments available. They had about US$650m of cash and easily liquidated securities at the end of Q3, and $400m+ of "derivatives" which is probably some form of short-hand for the TRS.  To buy back a meaningful number of shares, they would need to either make a much larger series of dividends from the insurance subs, float some new debt, or tap into the revolver.

 

The dividends from the insurance subs have been limited for the past few years because they've been growing their book at an impressive clip.  The growth in premiums reported in Q3 was low compared to the past couple of years, so that's a bit of an alarm that makes me question just how much longer the hard market will endure.  If premium growth continues to be slow for the next few quarters, it will put FFH holdco in a good position to extract larger divvies from the insurance subs.  If those divvies are very large, then you might see some buybacks during 2024.

 

The $2B revolver could be used to buy back shares, but it's not something that I'd like to see.  The revolver is there for emergencies and for seizing highly unusual opportunities.  I wouldn't want to see the revolver routinely tapped.

 

 

SJ

[wondering]

Globe and Mail.  Insider transactions.

 

Fairfax Financial Holdings Ltd. (

FFH-T +2.04%increase

 

)

 

Between Nov. 8-10, vice-president of strategic investments Brad Martin sold a total of 5,000 shares at an average price per share of approximately $1,241.40, after which this particular account held 8,473 shares. Proceeds from the sales exceeded $6.2 million, excluding commission charges.

[ander]

14 hours ago, 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. 
 

 

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

 

@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?

[Crip1]

19 hours ago, Parsad said:

 

+1!  

 

I think the moat is the actual insurance/decentralized structure...float, leverage and voting control.  This is what Horn and other analysts who suggest there is no moat don't understand.  The business structure is the moat and the way decisions are made. 

 

Most corporations cannot act like BRK or FFH, even insurance companies, because they do not have a major controlling shareholder that can make decisions for the long-term rather than the short-term.  Most other insurance companies are structured so that the CEO is compensated based on the next 3-5 years performance...not over the next 20-30 years of performance.  Their boards are structured to direct those short-term initiatives and goals. 

 

Look at how institutional capital is managed at other companies, pension funds, hedge funds, etc.  It's shocking and many times irrational allocation of capital.  How many insurance companies would have bought BNSF?  Looking out 20-30 years on how the railroad business would evolve and grow?  No one other than institutions managed like BRK, FFH or MKL would even consider it! 

 

So for a supposed "no-moat" company...it's got one hell of a moat!  Cheers!

 

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