Historic Milestone

[Haryana]

On 6/7/2023 at 3:54 PM, Haryana said:

 

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

 

 

https://arstechnica.com/tech-policy/2020/09/revisiting-the-spectacular-failure-that-was-the-bill-gates-deposition/

 

During three days of intense questioning, Gates often feigned ignorance of his own company’s policies and actions. He parsed everyday words or phrases such as “concern,” “support,” and “piss on.” Gates seemed to use the strategy to evade tough questions about whether his company abused its entrenched Windows franchise to kill off emerging competitors, such as Navigator and Java. To the surprise of him and his many attorneys and image handlers, Gates came off as argumentative, petty, and someone badly losing ground to a more formidable rival.

 

[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

[steph]

I am not sure we have to see this as a +5 billion loss.  If they couldn't take the hedges and shorts they would have sold their entire equity positions because they were so bearish at the time.   In my eyes the real loss is the difference between the performance of their equity positions and the shorts & hedges.   And as such one could argue that it is the huge underperformance of their equities relative to the market that cost a lot of money. 

 

I take the opportunity to thank you Viking for all the amazing work you to here. 

 

16 hours ago, Viking said:

“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 billion 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. Fairfax lost a total of $5.4 billion over 11 years. An average loss of $494 million per year.

 

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).

 

 

[Viking]

1 hour ago, steph said:

I am not sure we have to see this as a +5 billion loss.  If they couldn't take the hedges and shorts they would have sold their entire equity positions because they were so bearish at the time.   In my eyes the real loss is the difference between the performance of their equity positions and the shorts & hedges.   And as such one could argue that it is the huge underperformance of their equities relative to the market that cost a lot of money. 

 

I take the opportunity to thank you Viking for all the amazing work you to here. 

@steph you nailed what is missing in my post - the ‘equity hedge/short’ trade was just one piece in the bigger picture of what Fairfax was doing at the time. Fairfax’s decisions are not made in a vacuum. That is perhaps the biggest flaw with my long form posts… they usually do not include an overlay of other important ‘big picture’ pieces. Readers need to keep this in mind. 

Edited June 11, 2023 by Viking

[SafetyinNumbers]

4 hours ago, Viking said:

@steph you nailed what is missing in my post - the ‘equity hedge/short’ trade was just one piece in the bigger picture of what Fairfax was doing at the time. Fairfax’s decisions are not made in a vacuum. That is perhaps the biggest flaw with my long form posts… they usually do not include an overlay of other important ‘big picture’ pieces. Readers need to keep this in mind. 

The other part of context that is missing is that shareholders really bought into this narrative. The company issued 1m shares at C$735 (~US$550) in March 2016 or ~1.35x book. They bought Allied World in Dec 2016 and issued shares at about the same multiple. Were the hedges bad. Yes. Are the people who use it as a reason not to buy the stock now exactly the same people that bid the stock up in 2016. Also yes. 

 

Prem gets criticized on the investment side but as Viking has pointed out in previous posts, the return on Allied World has been phenomenal. Just because it was an insurance acquisition doesn’t mean it shouldn’t count as brilliant asset allocation. Just like Digit or GIG, etc…

 

Another piece of context is that if negative rates are a real possibility then float becomes really expensive and capital would around quickly. In that sense deflation hedges and shorts make sense. Especially if the risk is existential. If the trade off is to hedge or stop growing float, I can understand the decision.

Fairfax arguably got positive Social Value for shorting the market because investors who shared the view bought the stock. It’s not that different from Bitcoin enthusiasts buying Microstrategy because it’s a Bitcoin proxy. Thankfully Prem was able to use that to issue equity and buy a world class insurance business. Maybe the hedges served their purpose after all but it still wasn’t the right thing to do. In context, it seems like the criticism is mainly resulting.

 

 

[Haryana]

Warren Buffett seem to get an easy pass on his mistakes while we scrutinize Prem Watsa too much.

 

Warren wailed and railed on how bad the airlines have been for investors and capitalism for ever.

"Buffett's first investment foray into airlines began with USAir preferred stock in 1989. While Berkshire made money on the dividends, Buffett himself would lament the decision for decades, casting aspersions on the low-profit, expensive nature of the industry."
https://finance.yahoo.com/news/how-warren-buffetts-airline-stocks-have-performed-since-berkshire-hathaway-sold-them-134849843.html

 

Suddenly one day, we learn that Warren Buffett is putting billions into a bunch of airlines and just as suddenly airlines become a great investment because Warren Buffett is investing in them.

"All in all, the four largest airlines in the US, which also happen to be four largest in the world, are in a good place. Which is why all four warrant the investment from the Oracle of Omaha."
https://finance.yahoo.com/news/warren-buffetts-10-billion-airline-174600273.html

 

He liked Delta so much that even his own 10% limit rule got broken and then communicated like this:
"What I didn't realize was that that purchase had taken us over 10%. I was already in territory I didn't plan to get, so I just decided to buy a whole lot more stock."
https://www.gurufocus.com/news/898907/warren-buffett-on-his-10-rule

 

Then, just as suddenly, in the depths of the pandemic, AGM 2020, we learn that Warren Buffett sold all the airlines near their bottom which made those airlines stocks crash even further right after.

A year later we learn that the sale of airlines was for the good of airlines themselves, a form of charity for airlines at the expense of shareholder value. A fine moment of Buffett communication?

 

I wonder how much of our Warren Buffett mesmerizing is attributable to make-up team of Betty Quick.

Not hating Buffett at all. He is a great teacher by the way, I learnt from him and still learning.

 

However, I would be on guard being brainwashed about anyone or calling them a Prophet or an Oracle!

 

[LC]

While nobody is above constructive criticism, I've certainly bought into companies with volatile economics (such as airlines) and sold out when I should've been buying more. To me, this is an understandable error on Buffett's part. 

 

However, never in my life have I thought about going short 100+% of my entire investment portfolio based on a macro outlook and a political/election driven opinion (of which everyone and their uncle has got, and is worth about as much).

 

To me that is loopy, which is why I think Prem deserves the increased scrutiny. 

 

All that said, I am more than doubly invested in FFH compared to Berkshire  (~27% vs. 11% of my investment portfolio) as I think the upside is greater at Fairfax. But I also keep a closer eye on Prem and Co's decision. 

 

 

[Munger_Disciple]

42 minutes ago, LC said:

While nobody is above constructive criticism, I've certainly bought into companies with volatile economics (such as airlines) and sold out when I should've been buying more. To me, this is an understandable error on Buffett's part. 

 

However, never in my life have I thought about going short 100+% of my entire investment portfolio based on a macro outlook and a political/election driven opinion (of which everyone and their uncle has got, and is worth about as much).

 

To me that is loopy, which is why I think Prem deserves the increased scrutiny. 

 

All that said, I am more than doubly invested in FFH compared to Berkshire  (~27% vs. 11% of my investment portfolio) as I think the upside is greater at Fairfax. But I also keep a closer eye on Prem and Co's decision. 

 

 

 

+1

 

Ironically I think it is easier to have a bigger allocation to BRK than FFH. In my mind, % concentration in a single stock/business should be more a function of how much downside risk there is, not so much how much upside potential it has. The lower the downside risk, the larger the allocation can be assuming the expected returns are acceptable. 

 

Edited June 12, 2023 by Munger_Disciple

[Viking]

4 hours ago, Munger_Disciple said:

+1

 

Ironically I think it is easier to have a bigger allocation to BRK than FFH. In my mind, % concentration in a single stock/business should be more a function of how much downside risk there is, not so much how much upside potential it has. The lower the downside risk, the larger the allocation can be assuming the expected returns are acceptable. 

The key to position size for me is how asymmetric the opportunity is. Very high return / low risk = back up the truck. That is my assessment of Fairfax today. Moderate return / yes, lower risk = Berkshire today.

 

My guess is Fairfax will generate total investor returns of around 25% each year over the next couple of years. Berkshire will probably generate high single digit returns. In terms of risk, the chances of Fairfax blowing up are very small, absent a once in a 100 year catastrophe (probability is likely less than 1% or 2%). And other than a sudden catastrophe, i think i will be given some notice so that i will have time to re-size my position (like what happened with covid in Feb 2020, when investors were given a couple of weeks notice). Yes, the chances of Berkshire blowing up is even less. 
 

Also, i do not keep my concentrated positions in place for long periods of time. Usually, the mis-pricing in the shares is corrected over a couple of years. 

Edited June 13, 2023 by Viking

[Munger_Disciple]

5 minutes ago, Viking said:

The key to position size for me is how asymmetric the opportunity is. Very high return / low risk = back up the truck. That is my assessment of Fairfax today. Moderate return / yes, lower risk = Berkshire today.

 

My guess is Fairfax will generate total investor returns of around 25% each year over the next couple of years. Berkshire will probably generate high single digit returns. In terms of risk, the chances of Fairfax blowing up are very small, absent a once in a 100 year catastrophe (probability is likely less than 1% or 2%). And other than a sudden catastrophe, i think i will be given some notice so that i will have time to re-size my position (like what happened with covid in Feb 2020, when investors were given a couple of weeks notice). Yes, the chances of Berkshire blowing up is even less. 
 

Also, i do not keep my concentrated positions in place for long periods of time. Usually, the mis-pricing in the shares is corrected over a couple of years. 

 

@Viking In my mind, the key for concentration is that there must be almost 0 chance of ruin. I don't disagree that FFH has higher potential upside compared to BRK but it also has a much higher probability of downside. Prem can wake up one day and put in a crazy macro bet and stick with it for 10+ years despite huge losses for instance ...... Plus it is impossible to ignore risk caused by FFH's much higher leverage, both operational and financial. 

 

I suppose the risk is a bit reduced in your case because you don't plan to keep FFH forever unlike a lot of BRK shareholders do with their holding. 

[Viking]

1 hour ago, Munger_Disciple said:

 

@Viking In my mind, the key for concentration is that there must be almost 0 chance of ruin. I don't disagree that FFH has higher potential upside compared to BRK but it also has a much higher probability of downside. Prem can wake up one day and put in a crazy macro bet and stick with it for 10+ years despite huge losses for instance ...... Plus it is impossible to ignore risk caused by FFH's much higher leverage, both operational and financial. 

 

I suppose the risk is a bit reduced in your case because you don't plan to keep FFH forever unlike a lot of BRK shareholders do with their holding. 

@Munger_Disciple We all have our own investment tolerances. Fit is important. Clearly, Fairfax is not a fit for you, which is ok. There are thousands of different opportunities out there. For me, i am more than ok with the risks owning Fairfax. Their capital allocation decisions the past 5 years have been outstanding. They are absolutely schooling their other insurance peers in this regard. I think it is highly unlikely Fairfax puts on another ‘equity hedge’ type hedge/trade anytime soon. If they do something that i really don’t like, i will simply reduce my position. 
 

Yes, Fairfax does run with more leverage than most peers. With record operating income (the more predictable kind of earnings) coming each of the next 3 years i am not concerned. But yes, something to monitor.

 

in terms of investments, their fixed income portfolio skewed highly to government bonds is best in class in terms of risk, with the exception of Berkshire. And their equity portfolio is perhaps the highest quality today (in terms of its holdings) it has been in a long, long time. 
 

When i put it all together i continue to see Fairfax as a great investment opportunity. Stock is trading at 5 x 2023 earnings; 0.9 x BV; ROE of 18%. Despite the spike in the stock price, it is still wicked cheap. 
 

And that is what makes a market  Best of luck with Berkshire - it is a great set-and-forget investment.

Edited June 13, 2023 by Viking

[SafetyinNumbers]

16 minutes ago, Viking said:

@Munger_Disciple We all have our own investment tolerances. Fit is important. Clearly, Fairfax is not a fit for you, which is ok. There are thousands of different opportunities out there. For me, i am more than ok with the risks owning Fairfax. Their capital allocation decisions the past 5 years have been outstanding. They are absolutely schooling their other insurance peers in this regard. I think it is highly unlikely Fairfax puts on another ‘equity hedge’ type hedge/trade anytime soon. If they do something that i really don’t like, i will simply reduce my position. 
 

Yes, Fairfax does run with more leverage than most peers. With record operating income (the more predictable kind of earnings) coming each of the next 3 years i am not concerned. But yes, something to monitor.

 

in terms of investments, their fixed income portfolio skewed highly to government bonds is best in class in terms of risk, with the exception of Berkshire. And their equity portfolio is perhaps the highest quality today (in terms of its holdings) it has been in a long, long time. 
 

When i put it all together i continue to see Fairfax as a great investment opportunity. Stock is trading at 5 x 2023 earnings; 0.9 x BV; ROE of 18%. Despite the spike in the stock price, it is still wicked cheap. 
 

And that is what makes a market  Best of luck with Berkshire - it is a great set-and-forget investment.

Another great set-and-forget investment is E-L Financial. Special company and an incredible price.

[Munger_Disciple]

14 hours ago, Viking said:

@Munger_Disciple We all have our own investment tolerances. Fit is important. Clearly, Fairfax is not a fit for you, which is ok. There are thousands of different opportunities out there. For me, i am more than ok with the risks owning Fairfax. Their capital allocation decisions the past 5 years have been outstanding. They are absolutely schooling their other insurance peers in this regard. I think it is highly unlikely Fairfax puts on another ‘equity hedge’ type hedge/trade anytime soon. If they do something that i really don’t like, i will simply reduce my position. 
 

Yes, Fairfax does run with more leverage than most peers. With record operating income (the more predictable kind of earnings) coming each of the next 3 years i am not concerned. But yes, something to monitor.

 

in terms of investments, their fixed income portfolio skewed highly to government bonds is best in class in terms of risk, with the exception of Berkshire. And their equity portfolio is perhaps the highest quality today (in terms of its holdings) it has been in a long, long time. 
 

When i put it all together i continue to see Fairfax as a great investment opportunity. Stock is trading at 5 x 2023 earnings; 0.9 x BV; ROE of 18%. Despite the spike in the stock price, it is still wicked cheap. 
 

And that is what makes a market  Best of luck with Berkshire - it is a great set-and-forget investment.

 

@Viking FWIW I own a tiny bit of FFH (relative to net worth) so I would like to see them do well also . I hope to get more comfortable over time with them. Plus I have to root for a fellow IIT (Indian Institute of Technology, Madras) alumni Prem. I own a lot more BRK though primarily because I can sleep very well with BRK and I owned it for a very long time. 

Edited June 13, 2023 by Munger_Disciple

[Munger_Disciple]

@Viking One thing I would like to know is what % of FFH book value gets impaired in the case of a big (close to a worst case scenario) CAT event. Have you investigated it and do you have a reasonable estimate? As an example, Ajit estimated that BRK would lose a maximum of $15B across all lines of insurance business in the event of a horrible super CAT type situation.

[Parsad]

7 hours ago, Viking said:

The key to position size for me is how asymmetric the opportunity is. Very high return / low risk = back up the truck. That is my assessment of Fairfax today. Moderate return / yes, lower risk = Berkshire today.

 

My guess is Fairfax will generate total investor returns of around 25% each year over the next couple of years. Berkshire will probably generate high single digit returns. In terms of risk, the chances of Fairfax blowing up are very small, absent a once in a 100 year catastrophe (probability is likely less than 1% or 2%). And other than a sudden catastrophe, i think i will be given some notice so that i will have time to re-size my position (like what happened with covid in Feb 2020, when investors were given a couple of weeks notice). Yes, the chances of Berkshire blowing up is even less. 
 

Also, i do not keep my concentrated positions in place for long periods of time. Usually, the mis-pricing in the shares is corrected over a couple of years. 

 

+1!  Yes, never fall in love with a stock.  Fall in love with your portfolio (value) but not any one stock or investment.

 

While there are certain advantages held by people who own/manage holding companies, investors have one advantage they don't.  Investors can take advantage of bizarre market mispricing with relative ease...get in and get out.  

 

While Prem and Warren can do this too, they are also hamstrung by huge insurance and non-insurance businesses that cannot be sold quickly.  If they are not managed properly, or the industry dynamics change, they are stuck with those businesses or sell for far less...such as newspapers, shoe business, etc.

 

They also face all of the inherent obstacles of managing a holding company that an average investor never faces...corporate expenses, HR, audits, tax issues, industry regulations, board of directors, legal expenses, etc.

 

After doing both, I can certainly tell you which one I prefer and which one is easier...the answer is the same for both! 

 

Cheers!

[Viking]

12 hours ago, Munger_Disciple said:

@Viking One thing I would like to know is what % of FFH book value gets impaired in the case of a big (close to a worst case scenario) CAT event. Have you investigated it and do you have a reasonable estimate? As an example, Ajit estimated that BRK would lose a maximum of $15B across all lines of insurance business in the event of a horrible super CAT type situation.

@Munger_Disciple no, i have not done this type of analysis as i am not an in-the-weeds insurance guy. In the past, others on the board have modelled what % of total catastrophe losses Fairfax has tended to experience (to get a rough approximation of what their share might be to a once in a 100 year cat event). I think Fairfax has stated they are reducing Brit’s total exposure to cat losses (as that is the part of their business that has been underperforming). We also are seeing the mother of all hard markets in cat reinsurance, although it likely will not last long (as new capacity enters to due to the higher returns). 

[Xerxes]

Suppose in an hypothetical world, those deflation hedges (2010-2019) worked and paid in spade, with market falling off the cliff in mid 2010s. followed by massive central banking intervention (2020-21 like magnitude) but unlike 2021 that monetary intervention was not at the same time as massive supply chain disruption (no Covid(. 
 

And then FFH took the view that inflation would become a dominant feature and positioned itself accordingly. But unlike in the current timeline inflation did not take place for another 10-15 years. 
 

In summary, the first deflation macro bet worked while the second inflationary one didn’t worked. 
 

I bet everyone would be singing his praise for making the obvious move of using deflation/short hedges (that was obvious) but then saying he lost his touch when he went all in on his inflation macro bet. He is getting old. Getting long in the tooth. 
 

macro bets are what they are. Bets. 

[SafetyinNumbers]

5 hours ago, Xerxes said:

Suppose in an hypothetical world, those deflation hedges (2010-2019) worked and paid in spade, with market falling off the cliff in mid 2010s. followed by massive central banking intervention (2020-21 like magnitude) but unlike 2021 that monetary intervention was not at the same time as massive supply chain disruption (no Covid(. 
 

And then FFH took the view that inflation would become a dominant feature and positioned itself accordingly. But unlike in the current timeline inflation did not take place for another 10-15 years. 
 

In summary, the first deflation macro bet worked while the second inflationary one didn’t worked. 
 

I bet everyone would be singing his praise for making the obvious move of using deflation/short hedges (that was obvious) but then saying he lost his touch when he went all in on his inflation macro bet. He is getting old. Getting long in the tooth. 
 

macro bets are what they are. Bets. 

Everything is a bet. It’s just the odds that are different. 

[Xerxes]

If i am not mistaken last week, everyday it closed above $1,000 CAD …. And stayed on the other side for a drink over the weekend 
 

 

[nwoodman]

Personally think a market cap of $20bn is a real milestone.  Just a shade off at the moment.  If things keep evolving as they are, then they should crack the top 30 Canadian companies next year

 

 

https://companiesmarketcap.com/canada/largest-companies-in-canada-by-market-cap/

[SafetyinNumbers]

4 hours ago, nwoodman said:

Personally think a market cap of $20bn is a real milestone.  Just a shade off at the moment.  If things keep evolving as they are, then they should crack the top 30 Canadian companies next year

 

 

https://companiesmarketcap.com/canada/largest-companies-in-canada-by-market-cap/

How long before it has the biggest market cap in Canada? I’m thinking in terms of decades. Constant reinvestment instead of dividends like the other high ROE comps makes a big difference.

[dartmonkey]

6 hours ago, SafetyinNumbers said:

How long before it has the biggest market cap in Canada? I’m thinking in terms of decades. Constant reinvestment instead of dividends like the other high ROE comps makes a big difference.

I'd just as soon it doesn't get so big that it can't keep the same high returns on capital, and repurchasing stock (especially over the last few years, but even now) is a good way of doing that. And, together with the dividend, it makes it hard to compare with other Canadian companies that have more or less return of capital to investors.  But more important to me is that MY market cap keeps climbing up, even if Fairfax's stays the same because it is pouring more into my account...

[Buffett_Groupie]

Looking forward to US$1,000 (https://finance.yahoo.com/quote/FRFHF) as the next historic milestone

[nwoodman]

On 8/1/2023 at 6:51 PM, nwoodman said:

Personally think a market cap of $20bn is a real milestone.  Just a shade off at the moment.  If things keep evolving as they are, then they should crack the top 30 Canadian companies next year

 

 

https://companiesmarketcap.com/canada/largest-companies-in-canada-by-market-cap/

Just wasn’t expecting it to happen in January

 

 

[nwoodman]

Not trying to labour this but genuinely interested as to when a company that has a top 30 market cap gets included in a diversified national index comprising 60 companies.