Fairfax 2023

[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

[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