Historic Milestone

[Buffett_Groupie]

Making history today

[Buffett_Groupie]

Looking forward to $1,000 for https://finance.yahoo.com/quote/FRFHF next.

[Xerxes]

Only historic if it closes above $1,000

[maplevalue]

Congrats to all, thanks to @Viking for showing us the way

[Santayana]

And on good volume...

[cwericb]

Now that we have hit this new milestone, I wish Prem would do a stock split and lower the per share of Fairfax and make it more attractive to smaller shareholders. There must be a ton of small investors in the market place with smaller portfolios. But for a small investor who would like to add say, $2,500 in FFH shares to his portfolio, what? he needs to buy two and a half shares?

 

With all the complaints about the market not recognizing the true value of Fairfax I think this is one of the reasons why. Lowering the share price to, say $50 or even $100, would not only focus a lot more attention on Fairfax but it would likely soon lead to an escalated share price.

 

Most of the Canadian banks have done this from time to time. What’s so special about Fairfax? Ego? Or am I missing something?

JMHO.

Edited June 7, 2023 by cwericb

[Xerxes]

 

Not going to happen. All that does is to create more business for brokers with trading volume going up. 
 

what goes into the pockets of brokers as commission doesn’t stay in the pocket of investors. 
 

Say no to drugs

say no to stock-split. 

 

keep it pure 

[longlake95]

He's being Buffett like. Trying to attract true-owner mentality types - like this crowd. Can't say I disagree. 

[Viking]

37 minutes ago, cwericb said:

Now that we have hit this new milestone, I wish Prem would do a stock split and lower the per share of Fairfax and make it more attractive to smaller shareholders. There must be a ton of small investors in the market place with smaller portfolios. But for a small investor who would like to add say, $2,500 in FFH shares to his portfolio, what? he needs to buy two and a half shares?

 

With all the complaints about the market not recognizing the true value of Fairfax I think this is one of the reasons why. Lowering the share price to, say $50 or even $100, would not only focus a lot more attention on Fairfax but it would likely soon lead to an escalated share price.

 

Most of the Canadian banks have done this from time to time. What’s so special about Fairfax? Ego? Or am I missing something?

JMHO.

 

I would also like to see a stock split. Perhaps 5 for 1. As you said, this would open Fairfax up to more smaller investors. This would also improve liquidity, especially in the US. I don't see a stock split as likely. 

[Viking]

44 minutes ago, longlake95 said:

He's being Buffett like. Trying to attract true-owner mentality types - like this crowd. Can't say I disagree. 

 

The problem is Fairfax does not run the business to attract a long-term shareholder base. The decisions/results/communication they delivered 2010-2020 are all the proof that is needed on that front. It was terrible (on balance). My guess is many long-term shareholders capitulated and sold in the bloodbath in 2020. Trust in management was lost and at an all time low. 

 

Fairfax is a blank canvas today. They are starting over and building a new relationship with shareholders. If they want long term shareholders they need to play their part. They need to re-establish trust. Communication needs to be stellar.

 

Look at Buffett today. He is running Berkshire like a trust. Capital preservation is paramount; not return. And you see it in Berkshires results... they are not close to what they were. (I am not saying this is how Fairfax should be run.)

 

Will I hold Fairfax long-term? I don't know is the honest answer. We are still too early into the turnaround. I love the set-up for the company right now. Management has delivered for the past 5 years. 

 

At the end of the day... I call it fit. To own a stock long term there has to be a match with how a shareholder is wired and how a company is run.

----------

At the AGM I asked Prem what lessons Fairfax had learned from the lost decade for shareholders (2010-2020). And had any processes changed within Fairfax to make sure the same TYPES of mistakes are not made again. I got a non-answer. Which of course WAS an answer. 

 

Another question at the AGM was if Fairfax carried too much debt (operated with too much leverage). Prem's answer was they could sell Odyssey and be debt free.

 

I found the answers to both questions to be lacking. But I remain open minded.  

Edited June 7, 2023 by Viking

[maxthetrade]

2 minutes ago, Viking said:

At the AGM I asked Prem what lessons Fairfax had learned from the lost decade for shareholders (2010-2020). And had any processes changed within Fairfax to make sure the same TYPES of mistakes are not made again. I got a non-answer. Which of course WAS an answer.

 

I remember that one, was very disapointed by the answer too!

[longlake95]

Viking - you're right that investors don't have the same relationship with Prem/FFH, due to some of the blighted history. This will take time to heal/prove. I'm just not sure that a split, why improving liquidity, changes much in how the stock tracks intrinsic value over time. It may add more volatility - as the renters busily buy and sell FFH - with every new twitter post. 

 

BTW, agreed on the Prem's answer on debt...i'd like to see lower leverage. FFH can/will do fine if they take a page out Omaha.

[Crip1]

34 minutes ago, Viking said:

 

The problem is Fairfax does not run the business to attract a long-term shareholder base. The decisions/results/communication they delivered 2010-2020 are all the proof that is needed on that front. It was terrible (on balance). My guess is many long-term shareholders capitulated and sold in the bloodbath in 2020. Trust in management was lost and at an all time low. 

 

Fairfax is a blank canvas today. They are starting over and building a new relationship with shareholders. If they want long term shareholders they need to play their part. They need to re-establish trust. Communication needs to be stellar.

 

Look at Buffett today. He is running Berkshire like a trust. Capital preservation is paramount; not return. And you see it in Berkshires results... they are not close to what they were. (I am not saying this is how Fairfax should be run.)

 

Will I hold Fairfax long-term? I don't know is the honest answer. We are still too early into the turnaround. I love the set-up for the company right now. Management has delivered for the past 5 years. 

----------

At the AGM I asked Prem what lessons Fairfax had learned from the lost decade for shareholders (2010-2020). And had any processes changed within Fairfax to make sure the same TYPES of mistakes are not made again. I got a non-answer. Which of course WAS an answer. 

 

Another question at the AGM was if Fairfax carried too much debt (operated with too much leverage). Prem's answer was they could sell Odyssey and be debt free.

 

I found the answers to both questions to be lacking. But I remain open minded.  

Dude, you are speaking my language.

 

Considering FFH is my largest holding, by far, I clearly like the company and the story. But, there is one aspect of Fairfax that is highly problematic, IMHO, and that’s Prem’s reluctance to candidly admit errors. Buffett has always been extraordinarily good at this and I think it’s healthy for any individual, especially one in a leadership position.

 

It is almost impossible to change unless there is valid reason, and the valid reason needs to be admitting errors or, at minimum, admitting that things could have been done better. Prem is reluctant to do this. He was looked at very favorably during the financial crisis based on how well he navigated Fairfax through that. The ensuing 8-10 years were substantially less successful. Will we see a repeat now? I don’t think so, but I am not as sure with Prem because of the lack of candidly admitting errors.

 

-Crip

[maxthetrade]

32 minutes ago, longlake95 said:

I'm just not sure that a split, why improving liquidity, changes much in how the stock tracks intrinsic value over time.

 

With improved liquidity options should get available. Imagine what a homerun the last two years would have been with some calls thrown in! Could have been a replay of 2008 when many here bought calls. 

[cwericb]

1 hour ago, longlake95 said:

He's being Buffett like. Trying to attract true-owner mentality types - like this crowd. Can't say I disagree. 

But Berkshire does have A and B shares.

[dartmonkey]

33 minutes ago, Crip1 said:

Dude, you are speaking my language.

 

Considering FFH is my largest holding, by far, I clearly like the company and the story. But, there is one aspect of Fairfax that is highly problematic, IMHO, and that’s Prem’s reluctance to candidly admit errors. Buffett has always been extraordinarily good at this and I think it’s healthy for any individual, especially one in a leadership position.

 

It is almost impossible to change unless there is valid reason, and the valid reason needs to be admitting errors or, at minimum, admitting that things could have been done better. Prem is reluctant to do this. He was looked at very favorably during the financial crisis based on how well he navigated Fairfax through that. The ensuing 8-10 years were substantially less successful. Will we see a repeat now? I don’t think so, but I am not as sure with Prem because of the lack of candidly admitting errors.

 

-Crip

How about this:

 

2019: In the past, to protect our equity exposures in uncertain times, we shorted indices (mainly the S&P500 and Russell 2000) and a few common stocks. After much thought and discussion, it became clear to me that shorting is dangerous, very short term in nature and anathema to long term value investing. As I mentioned to you in last year’s annual report, shorting has cost us, cumulatively, net of our gains on common stock, approximately $2 billion! This will not be repeated! In the future, we may use options with a potential finite loss to hedge our equity exposure, but we will never again indulge anew in shorting with uncapped exposure. Your Chairman continues to learn–slowly!!

 

2020:  I said in our 2019 annual report that we would not short stock market indices (like the S&P500) or common stocks of individual companies ever again, and our last remaining short position was closed out in 2020 (not soon enough, as it cost us $529 million in 2020).

[longlake95]

10 minutes ago, cwericb said:

But Berkshire does have A and B shares.

yes, without dissecting this 10 ways to Sunday , WEB would have likely preferred not to have the B's, but was forced to jump onboard having 2 share classes - when some people were trying to flog a security/fund/LP etc, made up of just BRK sliced into smaller pieces. Then he split the B's to accommodate the small BNSF shareholders.  I'd maintain $1000 is a small "price" to pay for entry into a diversified well run....we expect going forward, business. That's just one iPhone that lots of people carry around.

 

but i'm probably wrong. 

[Viking]

1 hour ago, dartmonkey said:

How about this:

 

2019: In the past, to protect our equity exposures in uncertain times, we shorted indices (mainly the S&P500 and Russell 2000) and a few common stocks. After much thought and discussion, it became clear to me that shorting is dangerous, very short term in nature and anathema to long term value investing. As I mentioned to you in last year’s annual report, shorting has cost us, cumulatively, net of our gains on common stock, approximately $2 billion! This will not be repeated! In the future, we may use options with a potential finite loss to hedge our equity exposure, but we will never again indulge anew in shorting with uncapped exposure. Your Chairman continues to learn–slowly!!

 

2020:  I said in our 2019 annual report that we would not short stock market indices (like the S&P500) or common stocks of individual companies ever again, and our last remaining short position was closed out in 2020 (not soon enough, as it cost us $529 million in 2020).

 

So in the 2019AR Prem said “After much thought and discussion, it became clear to me that shorting is dangerous, very short term in nature and anathema to long term value investing.”

 

And what did we learn in the 2020AR? When Prem said what he said above they STILL HAD a massive short position on. And they kept it in place for another year. That cost Fairfax shareholders another $529 million. 
 

That stream of communication was not one of Prem’s finer moments. When questioned about the miscommunication i am pretty sure he said… well in 2019 i said i would not put on a NEW position. The loss was not a new position… so my previous communication was accurate. Technically correct, but…
 

This was an example of terrible communication by a CEO. 
 

Fairfax is no longer a small family owned Canadian business. They are now a Goliath… a top 20 global insurer. Simply an amazing story. Put simply, Fairfax has entered the big leagues. Prem is now going to be held to a new standard in terms of communication. And rightly so. So many Canadian companies have failed to make this transition (Saputo being the best immediate example i can think of). If Prem wants to be viewed as a best-in-class global company he needs to improve on the communication (especially to shareholders). Or not. And suffer the consequences. His choice. 
—————

Just to be clear, i am not a Prem hater. I am a hard marker (ask my kids). Call a spade a spade. 
 

Prem has many strengths. He has been able to attract and retain outstanding people. People at Fairfax appear to really like him and enjoy working for the company. He/Fairfax has built a huge collection of amazing relationships in the business/political world. He is strategic. And focussed on the long term. I have no doubt that he is a first-class human being. He has Fairfax poised to do exceptionally well over the next few years. And like all of us, yes, he also has flaws. Am i happy he is CEO of Fairfax? Of course. 

Edited June 7, 2023 by Viking

[Haryana]

43 minutes ago, Viking said:

 

So in the 2019AR Prem said “After much thought and discussion, it became clear to me that shorting is dangerous, very short term in nature and anathema to long term value investing.”

 

And what did we learn in the 2020AR? When Prem said what he said above they STILL HAD a massive short position on. And they kept it in place for another year. That cost Fairfax shareholders another $529 million. 
 

That stream of communication was not one of Prem’s finer moments. When questioned about the miscommunication i am pretty sure he said… well in 2019 i said i would not put on a NEW position. The loss was not a new position… so my previous communication was accurate. Technically correct, but…
 

This was an example of terrible communication by a CEO. 
 

 

Just like beauty is in the eye of the beholder, communication could be in the ear of the listener.

From my point of sound, that is what I expected him to say in full humble disclosure which I find impressive and inspirational.

 

I speculate what happened is that they had closed most of the positions but the loss on one position might be so big that they would think of recovering that next year.

However, they displayed great discipline by finally closing that as well next year even at a massive loss.

I understand his explanation about the position being from the previously existing ones, instead of a new one.

 

Maybe his communication is bit too nerdy for people. He was an engineer first, after all.

Unlike, Buffett who was into businesses and stocks from the very beginning.

Even Bill Gates had a hard time communicating when accused of anti-competition practices and he was world #1, instead of world #10.

 

Personally, I find the communication of Buffett to be terrible. He makes too many loops and detours of thoughts with volatile word speed, I cannot make out anything.

 

[Thrifty3000]

To Prem’s credit he did repeatedly lay out their thesis for their caution and short positions (see every Hoisington quarterly letter ever written for a technical explanation of Prem’s thesis).

 

He also qualifies EVERY decision with a statement along the lines of “this bet may or may not work, but we expect it to work.” He knows every capital allocation decision is nothing more than a bet where he expects the odds to be in his favor. That’s capital allocation for you.

 

Any investor had every right to disagree with Prem. However, I don’t recall much public dispute with Prem’s logic given the extreme debt to gdp ratios globally, and the deflationary experiences of post-great-depression USA and post-early-90s-Japan.

 

Prem just happened to pick a fight with maybe the most extreme financial experiment in the history of human civilization - a global central bank ZIRP bandwagon! (See every Grant’s Interest Rate Observer during that period.)

 

Prem has a billion dollar brain and a multi-decade track record. His net worth will be higher a decade from now than it is today. He’s wired for that. A snowball, if you will. He ain’t dumb.

Edited June 8, 2023 by Thrifty3000

[Parsad]

4 hours ago, Thrifty3000 said:

To Prem’s credit he did repeatedly lay out their thesis for their caution and short positions (see every Hoisington quarterly letter ever written for a technical explanation of Prem’s thesis).

 

He also qualifies EVERY decision with a statement along the lines of “this bet may or may not work, but we expect it to work.” He knows every capital allocation decision is nothing more than a bet where he expects the odds to be in his favor. That’s capital allocation for you.

 

Any investor had every right to disagree with Prem. However, I don’t recall much public dispute with Prem’s logic given the extreme debt to gdp ratios globally, and the deflationary experiences of post-great-depression USA and post-early-90s-Japan.

 

Prem just happened to pick a fight with maybe the most extreme financial experiment in the history of human civilization - a global central bank ZIRP bandwagon! (See every Grant’s Interest Rate Observer during that period.)

 

Prem has a billion dollar brain and a multi-decade track record. His net worth will be higher a decade from now than it is today. He’s wired for that. A snowball, if you will. He ain’t dumb.

 

100% correct!  In the depths of the GFC, nobody questioned Prem and many also thought that it could be a 2nd Great Depression.  Fairfax not only invested in CDS but made sure that their counterparties could pay out and wouldn't fail.  At that time, that was pretty hard to do when Bear Sterns went down, then Lehman and there was a very good possibility that Goldman and some major banks could fail as well.  Cheers!

[giulio]

We should try to see the shorts in the context of WHEN they were made. Judging ONLY the outcome is somehow unfair to me. 

To be clear: they should not short!  

Can you blame them for shorting Tesla? I guess so, just remember that Tesla was almost bankrupt and (later on) its valuation did not make any sense considering the auto industry dynamics. How many predicted $1 trillion mkt cap? how could you have predicted something like 2020 and the subsequent investors' (mis)behavior?

 

Agree with @Thrifty3000 on deflation swaps. My guess is Watsa saw them as protection for FFH capital, rather than a lottery ticket (an example of the latter = Ackman shorting the HKD).

 

As Howard Marks puts it: "Only the things that happened happened. But that definiteness doesn’t mean the process that creates outcomes is clear-cut and dependable. Many things could have happened in each case in the past, and the fact that only one did happen understates the potential for variability that existed... the history that took place is only one version of what it could have been".

 

Also, expecting management to apologize at every annual meeting/shareholders letter...isn't this a bit too much? They made a mistake, recognized it, apologized, said they are not going to do it again, learned their lessons and moved on...shareholders should too! They don't have a better process to explain because they won't short again! I like this simplicity 

 

Ps. @Viking I really struggle to understand this "Capital preservation is paramount; not return. And you see it in Berkshires results... they are not close to what they were". Downside protection has always been paramount at BRK but to say they are not interested in return would be paradoxical! Returns are a product of your opportunity set...I am glad they have been "inactive" in the recent past, but you can rest assured Buffett will swing BIG if the opportunity knocks!

 

[Viking]

19 hours ago, giulio said:

Ps. @Viking I really struggle to understand this "Capital preservation is paramount; not return. And you see it in Berkshires results... they are not close to what they were". Downside protection has always been paramount at BRK but to say they are not interested in return would be paradoxical! Returns are a product of your opportunity set...I am glad they have been "inactive" in the recent past, but you can rest assured Buffett will swing BIG if the opportunity knocks!

 

 

@giulio  Sorry if my wording is not clear. My view is Buffett today has capital preservation as his single most important objective. It hit me like a bag of bricks when I watched him a couple of years ago when he had the online only annual meeting Q&A. He said that many long term shareholders had a majority of their wealth (and their families wealth) in Berkshire and he felt a massive responsibility to ensure that this wealth would be protected so it could be passed to future generations.

 

Now don't get me wrong... Yes, Buffett also wants to make a decent return for shareholders. Now it is possible that Buffett has had the exact same mindset over the decades since he started. And Berkshires size is primarily what is causing returns to fall dramatically (from those earned in the past).    

[Haryana]

On 6/7/2023 at 12:30 PM, Viking said:

 

At the AGM I asked Prem what lessons Fairfax had learned from the lost decade for shareholders (2010-2020). And had any processes changed within Fairfax to make sure the same TYPES of mistakes are not made again. I got a non-answer. Which of course WAS an answer. 

 

Buffett has disclosed multiple times that he is without any defined processes or checklists for his investment decisions. Prem might be the same to some extent. When a person is working directly from the private confines of their brain and you ask them if any of those processes had changed, that might sound insulting to the person because you are actually talking about their brain. In other words, it could be asking if someone had their head fixed after losing big on the previous bets.

 

In terms of real changes at the corporate office after lackluster stock performance, there actually was delegation of some investment power to other executives.

 

With regards to your question going unanswered, that is nothing to be taken personally because this appears to happen with every other question. Some people insist and stick to their question and rephrase it or emphasize what their question was. Certainly, I would also dislike if that happens to my question. In comparison, Buffett also does that and in this year meeting Charlie at one point had pointed out how Buffett had likely evaded a question.

[Viking]

“Those who cannot remember the past are condemned to repeat it." (George Santayana)

 

Given it has come up in discussion on this thread, I thought this would be useful to review what has to be Fairfax’s biggest ever investment mistake: the equity hedges.

 

Why are they Fairfax's biggest investment mistake? The ‘equity hedges’ were in place from 2010 to 2016… and they caused investment losses of $4.4 billion; an average loss of $628 million per year for 7 straight years.

 

Shareholders equity in 2010 was $7.7 billion. So losing $628 million in ONE YEAR was a big deal. And, as a reminder, this happened, on average, for 7 straight years. Book value per share was $376 in 2010 and in 2016 it has fallen to $367. Yes, Fairfax did pay a $10/share dividend every year so shareholders did earn a positive return over these years.

 

 

Why did Fairfax put on the equity hedge trade? They were afraid “the North American economy may experience a time period like the U.S. in the 1930s and Japan since 1990.”

 

From Prem’s letter 2010AR: “2010 was a disappointing year for HWIC’s investment results because of the two factors mentioned earlier. Hedging our common stock investment portfolio cost us $936.6 million or $45.61 per share in 2010. Our hedging program masked the excellent common stock returns we earned in 2010, of which a significant amount was realized ($522.1 million). We began 2010 with about 30% of our common stock hedged. In May and June we decided to increase our hedge to approximately 100%. Our view was twofold: our capital had benefitted greatly from our common stock portfolio and we wanted to protect our gains, and we worried about the unintended consequences of too much debt in the system – worldwide! If the 2008/2009 recession was like any other recession that the U.S. has experienced in the past 50 years, we would not be hedging today. However, we worry, as we have mentioned to you many times in the past, that the North American economy may experience a time period like the U.S. in the 1930s and Japan since 1990, during which nominal GNP remains flat for 10 to 20 years with many bouts of deflation.“

 

Why did Fairfax exit the equity hedge trade? The US presidential election on November 8, 2016.

 

From Prem’s letter 2016AR: “Unfortunately, the presidential election on November 8, 2016 changed the world for us, so we reacted quickly by removing all our index hedges and some of our individual short positions and reducing the duration of our fixed income portfolios to approximately one year – all of which resulted in a $1.2 billion net loss on our investments in 2016 which, in turn, resulted in a loss in 2016 of $512 million or $24.18 per share.”

 

But our sad story does not end here because even though Fairfax exited all of their equity hedge positions late in 2016 they continued with some short positions. From 2017-2019, Fairfax lost another $514 million on short positions.

 

From Prem’s letter 2019AR: “In the past, to protect our equity exposures in uncertain times, we shorted indices (mainly the S&P500 and Russell 2000) and a few common stocks. After much thought and discussion, it became clear to me that shorting is dangerous, very short term in nature and anathema to long term value investing. As I mentioned to you in last year’s annual report, shorting has cost us, cumulatively, net of our gains on common stock, approximately $2 billion! This will not be repeated! In the future, we may use options with a potential finite loss to hedge our equity exposure, but we will never again indulge anew in shorting with uncapped exposure. Your Chairman continues to learn–slowly!!”

 

But even after the mea culpa above in 2019 shareholders learned in 2020 that there was still one last mystery short position on the books. Only after another $529 million in losses in 2020, did Fairfax finally come to the conclusion that shorting was a tricky business. Margin and unlimited losses can be a bitch, especially in a decade long bull market (S&P500 was 1,133 on Jan 1, 2010 and 3,756 on Dec 31, 2020).

 

And there we have it: Fairfax’s lost decade for shareholders from 2010-2020. 

 

From Prem’s letter 2020AR: “I said in our 2019 annual report that we would not short stock market indices (like the S&P500) or common stocks of individual companies ever again, and our last remaining short position was closed out in 2020 (not soon enough, as it cost us $529 million in 2020).”

 

So as they began 2021, Fairfax shareholders were finally able to close the book on the whole ‘equity hedge/short’ trades.

 

What was the cost to Fairfax?

1.) Investment losses of $5.4 billion from 2010-2020, or $494 million per year on average.

2.) Additional significant opportunity cost - easily in the billions.

3.) The massive size of the losses each year likely warped capital allocation decisions, especially 2010-2016 when the losses were larger.

4.) Long lasting harm to Fairfax’s reputation in the investment community.

5.) Exit of many long-term shareholders.

 

What went wrong? The size and duration of the position. The losses were massive. And they were allowed to go on (pretty much) for 11 straight years.

 

What explains the mistake? No idea. But my guess is hubris.

 

Hubris Comes From Ancient Greece: “English picked up both the concept of hubris and the term for that particular brand of cockiness from the ancient Greeks, who considered hubris a dangerous character flaw capable of provoking the wrath of the gods. In classical Greek tragedy, hubris was often a fatal shortcoming that brought about the fall of the tragic hero. Typically, overconfidence led the hero to attempt to overstep the boundaries of human limitations and assume a godlike status, and the gods inevitably humbled the offender with a sharp reminder of their mortality.” Merriam-Webster

 

Will Fairfax make the same mistake again? Well this is where things get interesting. Fairfax has stated publicly numerous times that they won’t make that exact same mistake again. To the best of my knowledge, they have never discussed publicly the failures with their internal processes that allowed such flawed investment to be made (in such a large size and for such a long duration). Did they identify the internal failures? Have they made the internal changes necessary to ensure it (a terrible investment decisions that results in another lost decade for shareholders) does not happen again? I’m not sure… I do think something changed at Hamblin Watsa around 2018 - and for the better. Their capital allocation decisions for the past +5 years have been stellar. And that will be the subject of a future long-form post, so stay tuned. 

 

Summary:

As shareholders, I think it is important that we discuss/remember not only Fairfax’s successes but also their failures. I call it 'eyes wide open'. The equity hedges were an unmitigated disaster for Fairfax and its shareholders. There is no way to put lipstick on this pig. 

 

—————

Fairfax's 2016AR:

 

Prem’s Letter: "Unfortunately, the presidential election on November 8, 2016 changed the world for us, so we reacted quickly by removing all our index hedges and some of our individual short positions and reducing the duration of our fixed income portfolios to approximately one year – all of which resulted in a $1.2 billion net loss on our investments in 2016 which, in turn, resulted in a loss in 2016 of $512 million or $24.18 per share."

 

"When we removed our hedges near the end of 2016, we realized a loss of $2.6 billion in 2016, but that included $1.6 billion which had gone through our statements in prior years. As discussed earlier, since 2010 we have had $4.4 billion of cumulative net hedging losses and $0.5 billion of unrealized losses on deflation swaps (which we still hold), offset entirely by net gains on stocks of $2.7 billion and net gains on bonds of $2.2 billion. The volatility of our earnings caused by our hedges and long bond portfolios is over – and as I said earlier, we are focused on once again producing excellent investment returns."

 

Equity contracts

Throughout 2015 and most of 2016, the company had economically hedged its equity and equity-related holdings (comprised of common stocks, convertible preferred stocks, convertible bonds, non-insurance investments in associates and equity-related derivatives) against a potential significant decline in equity markets by way of short positions effected through equity and equity index total return swaps (including short positions in certain equity indexes and individual equities) and equity index put options (S&P 500) as set out in the table below. The company’s equity hedges were structured to provide a return that was inverse to changes in the fair values of the indexes and certain individual equities.

 

As a result of fundamental changes in the U.S. that may bolster economic growth and business development in the future, the company discontinued its economic equity hedging strategy during the fourth quarter of 2016. Accordingly, the company closed out $6,350.6 notional amount of short positions effected through equity index total return swaps (comprised of Russell 2000, S&P 500 and S&P/TSX 60 short equity index total return swaps). The short equity index total return swaps closed out in 2016 produced a realized loss of $2,665.4 (of which $1,710.2 had been recorded as unrealized losses in prior years). The company continues to maintain short equity and equity index total return swaps for investment purposes, and no longer considers them to be hedges of the company’s equity and equity-related holdings. During 2016 the company paid net cash of $915.8 (2015 – received net cash of $303.3) in connection with the closures and reset provisions of its short equity and equity index total return swaps (excluding the impact of collateral requirements).

 

Edited June 16, 2023 by Viking