Fairfax 2023

[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.

[dealraker]

As to moats, to me Coke is the typical story.  The moat evolves, lessens, and I guess the best word is that it changes.  I think Coke has sustained a wide distribution moat while the brand name moat weakened.  The distribution moat value isn't the brand one.  How they compare to me is complex.  But also to me all of it was predictable as to happening over some time period unknown.  My wording is oversimplified of course.

[MMM20]

Are global scale economies not a moat in the insurance business? I think we’ve increasingly seen that in Fairfax’s results. And could a deep pocketed investor replicate Fairfax’s footprint and well managed operation today? How much capital and how many years and missteps would that take? I think that’s real now.
 

Also, what are the best private businesses in Canada? Would those owners see Prem as someone who would take good care of their babies and so consider selling to FFH at lower prices than some random private equity firms? If not, well, that seems like a missed opportunity. I think of that as the secret sauce for BRK, a reputation well and hard earned over many decades of doing what they say as permanent owners. So to the degree Fairfax is moving in that direction, they are gradually widening the moat and incremental returns should remain high (if volatile/chunky) for a long time. 

 

Edited November 22, 2023 by MMM20

[Munger_Disciple]

Perceived moat of FFH by COBF members as a whole is directly proportional to FFH stock price.

[Xerxes]

Speaking of Coca Cola. The podcast argues that unlike Pepsi which has become a snack company, Coke has become a total beverage company. That its key moat is its massive distribution and relationship with bottlers, where it can push out new products (Monster drink being one) at a global scale that its M&A team add in. 

 

Naturally the actual Coke business is not growing that much so other non-Coke drinks and beverages are contributing. 

 

[giulio]

4 hours ago, MMM20 said:

Also, what are the best private businesses in Canada? Would those owners see Prem as someone who would take good care of their babies and so consider selling to FFH at lower prices than some random private equity firms?

I wondered the same when Logistec was up for sale...

I don't see that happening in the near future unfortunately, unless it's an insurance business. 

Other than the restaurant business do we have other examples of something they bought, with a >80% stake and kept holding?

Contrary to Buffett I think Prem would sell anything that gets closer to fair value or overpriced.

 

G

 

[frommi]

In my view a "moat" is something that protects the relationship with your customers. Insurance is a price competitive business and i doubt you can really have a moat here. If someone comes in and insures your belongings for nothing, you would switch in an instant. Of course right now nobody does it, but its just to illustrate that there is no moat.
Coca Cola has the taste and coffein in it as a moat. If you like the taste of coca cola, you will never switch if the taste of the other drink doesn't come very very close to it or you like the other drink more. And the coffein lets you crave it, its an addictive drug.
FFH right now are two businesses, the insurance and the asset manager. The asset manager also can't really have a moat and as they grow bigger they will not get better results than the market. Maybe sometime they will win big (like the duration decision), but sometimes they won't (like the shorting fiasco). I really doubt that they will not make mistakes again in some other form. Especially at their size its already really hard to add alpha forever.
So also no moat here.

BRK trades a higher multiples of book because they have operating businesses like the railroads, that itself have moats. (because rails in the US are limited for example, or the taste of see's candies).

But this is just my opinion.

(if there is a moat in insurance, it most come from lower costs, but why shouldn't this be reconstructable by someone else?)

Edited November 23, 2023 by frommi

[Dazel]

https://markets.businessinsider.com/news/stocks/warren-buffett-most-gruesome-mistake-dexter-shoe-9-billion-error-2020-1-1028827359
 

Even Buffett makes mistakes…with the secured interest payments from BlackBerry over time the investment has become a rounding error. However, BlackBerry itself is one the stock markets great failures. Many followed Fairfax into Blackberry and had a horrible experience. That is why it is discussed it’s emotional.

 

If anything it has been a deterrent on Fairfax stock price…unwarranted. BB is buy here probably…Fairfax needs it off the books.

 

Dazel

[nwoodman]

On 11/22/2023 at 4:18 PM, glider3834 said:

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. 

In general, Deal flow is super important, as well as the ability to say no.  Buffet's Hang, Your Life's work in the Berkshire gallery, hasn't worked well but hasn't held them back in terms of decent returns.  Fairfax seems to create a lot of optionality.  This used to be levered, but these days, it seems to be cleverer and more Berkshire-like in terms of optionality that doesn't bet the farm.  i.e heads, I win tails I don't lose to much.   Not sure I see any massive moat, but the balance sheet has improved significantly, and for decent capital allocators, being the strong hand is good enough for me.

 

Keenly waiting to see if Atlas/Poseidon is an albatross around the neck or not.  So far, it seems to be a non-contributor rather than a cash sucker which is pretty good for an early Fairfax investment.

[Munger_Disciple]

5 hours ago, frommi said:

In my view a "moat" is something that protects the relationship with your customers. Insurance is a price competitive business and i doubt you can really have a moat here. If someone comes in and insures your belongings for nothing, you would switch in an instant. Of course right now nobody does it, but its just to illustrate that there is no moat.
Coca Cola has the taste and coffein in it as a moat. If you like the taste of coca cola, you will never switch if the taste of the other drink doesn't come very very close to it or you like the other drink more. And the coffein lets you crave it, its an addictive drug.
FFH right now are two businesses, the insurance and the asset manager. The asset manager also can't really have a moat and as they grow bigger they will not get better results than the market. Maybe sometime they will win big (like the duration decision), but sometimes they won't (like the shorting fiasco). I really doubt that they will not make mistakes again in some other form. Especially at their size its already really hard to add alpha forever.
So also no moat here.

BRK trades a higher multiples of book because they have operating businesses like the railroads, that itself have moats. (because rails in the US are limited for example, or the taste of see's candies).

But this is just my opinion.

(if there is a moat in insurance, it most come from lower costs, but why shouldn't this be reconstructable by someone else?)

+1

 

In a commodity business like insurance, mining or retail, there is a moat to being the lowest cost provider in the industry. Examples include Costco, Walmart, Geico, etc. I don't think FFH's insurance business has much of a moat. 

 

At a 10,000 ft level, I view Fairfax as a levered bond fund (leverage coming from float and debt) managed by a group of smart bond guys who have consistently delivered. The rest of the investments are hit and miss; sometimes they do ok, sometimes not. As long as they can underwrite below 100 CR and the bond guys keep executing, this will be a decent investment. 

[dartmonkey]

At a 10,000 ft level, I view Fairfax as a levered bond fund (leverage coming from float and debt) managed by a group of smart bond guys who have consistently delivered. The rest of the investments are hit and miss; sometimes they do ok, sometimes not. As long as they can underwrite below 100 CR and the bond guys keep executing, this will be a decent investment. 

 

I love this summary. My attempt, with a little more detail:

 

A levered bond fund with enormous safe leverage provided by a solidly executing insurance base. As for investments, on the bond side, as well as the acquisition of controlling stakes in insurance and non-insurance businesses, there is a history of very successful performance, whereas on the stock investment side, it's a bit more hit and miss (Blackberry and the various shorts being the well-known examples of 'miss'.) Fortunately, out of $62b in investments, the successful side if much bigger: $36.7b in bonds, and $6.3b in associated companies like Poseidon, Eurobank, Stelco, Fairfax India,  and $1.5b in derivative instruments, mostly swaps on Fairfax stock; on the more speculative side there are $6.9b in common stocks. I don't know where to put the $2.4b in preferred stocks, probably on the safe side, and it's small.

 

So for $26b in equity, you get the returns from about $42b in bonds and associated companies, and $7b in more speculative equity investments (Occidental, Micron, Blackberry, Grivalia, Mytilineos, Kennedy Wilson, etc.). And you get some underwriting returns*, as a bonus. 

 

 

*Question for someone like Viking who has probably already done the calculation: what is the average underwriting performance of Fairfax, say since the year 2000, as a percentage of net premiums written for instance? I'll do the calculation at some point, but if someone's done it already, that would be quicker!

[StubbleJumper]

2 minutes ago, dartmonkey said:

*Question for someone like Viking who has probably already done the calculation: what is the average underwriting performance of Fairfax, say since the year 2000, as a percentage of net premiums written for instance? I'll do the calculation at some point, but if someone's done it already, that would be quicker!

 

That appeared in Prem's annual letter last spring.

 

 

SJ

[UK]

5 minutes ago, dartmonkey said:

*Question for someone like Viking who has probably already done the calculation: what is the average underwriting performance of Fairfax, say since the year 2000, as a percentage of net premiums written for instance? I'll do the calculation at some point, but if someone's done it already, that would be quicker!

 

Maybe will be helpful. 

ffh brk float.xlsx

[dartmonkey]

23 minutes ago, StubbleJumper said:

 

That appeared in Prem's annual letter last spring.

 

 

SJ

OK, yes, I see, p. 24, for the last 10 years? 2.5% pre-tax underwriting profit. 

 

Thanks.