Analyzing Brett Horn

[Xerxes]

4 hours ago, maplevalue said:

 

Reminds me of part of the reason Philip Morris performed so well (best performing stock 1926-2021) was federal + state lawsuits -> stock to be depressed for a decade despite it still "churn[ed] out cash and pa[id] dividends". Meant the returns from reinvesting the dividends became very large.

 

Stocks for the Long Run 6th Edition (pg 163)

 

I always have a problem with books and analysts talking about long term return with dividends re-invested. 
 

If the discussion is about company point of view, the return should always be measured without dividend re-invested. 
 

Why ? For the simple fact that the corporation CHOSE to give out cash dividend in place of share repurchase. So the return has to be measured with that capital allocation decision in mind. 
 

Wether the investor chooses to DRIP or not (it does not and should not taint nor improve corporation’ long term return)

 

when was the last time one heard about analysts talking about a bad performing stock’ long term return WITH its cash dividend re-invested back into that sub-performing company. They always say “at least there was the cash dividends”, while everyone takes is for granted that the cash-dividends were not DRIPed. 
 

 

 

 

Edited Thursday at 03:59 AM by Xerxes

[Munger_Disciple]

16 minutes ago, Xerxes said:

 

I always have a problem with books and analysts talking about long term return with dividends re-invested. 
 

If the discussion is about company point of view, the return should always be measured without dividend re-invested. 
 

Why ? For the simple fact that the corporation CHOSE to give out cash dividend in place of share repurchase. So the return has to be measured with that capital allocation decision in mind. 
 

Wether the investor chooses to DRIP or not (it does not and should not taint nor improve corporation’ long term return)

 

when was the last time one heard about analysts talking about a bad performing stock’ long term return WITH its cash dividend re-invested back into that sub-performing company. They always say “at least there was the cash dividends”, while everyone takes is for granted that the cash-dividends were not DRIPed. 
 

 

 

 

 

The main problem with showing returns with dividend reinvestment is that most such calculations don't take into account the tax leakage from dividends. Most people incur taxes in the range of 20%-35% with federal and state taxes in the US. So the after-tax returns tend to be lower. 

For this reason, stock buybacks tend to be far superior but a large part of the investor base for tobacco companies want dividends so it shall be primarily dividends with a smaller buyback thrown in.  

Edited Thursday at 04:15 AM by Munger_Disciple

[Crip1]

7 hours ago, Munger_Disciple said:

 

The main problem with showing returns with dividend reinvestment is that most such calculations don't take into account the tax leakage from dividends. Most people incur taxes in the range of 20%-35% with federal and state taxes in the US. So the after-tax returns tend to be lower. 

For this reason, stock buybacks tend to be far superior but a large part of the investor base for tobacco companies want dividends so it shall be primarily dividends with a smaller buyback thrown in.  

Well, I respectfully disagree about excluding dividends. Let's look at this example: Two companies were both priced $100 a share 4 years ago, and both are currently priced at $200 a share. Company A paid a 2.5% dividend while company B did not pay any dividend. Clearly company A had a better return than company B. Because of this, it does make sense to incorporate dividends into investment returns.

 

That said, not only is the point regarding taxation spot on, it makes return nearly impossible to calculate due everyone's unique tax situation. Candidly, I don't have a holistic calculation in mind, but assuming dividends are reinvested and conservatively assuming a 35% tax rate on those dividends would give a reasonable ballpark figure. 

 

Folks posting here tend to have longer time horizons than most, and those longer time horizons make reinvested dividends substantially more valuable than it does for short-term traders.

 

-Crip

[Xerxes]

I hold FFH (as an example) in my registered account I don’t pay tax on capital gain or dividends. But nothing is free and eventually I will pay tax when I withdraw. 
 

my tax situation is unique to me, the investor. Whether, inside tax registered account or not. Whether DRIP or not. 
 

So tax’s on dividends should not be included when looking at a specific’ company’ ROI, nor the fact that I will eventually pay 50% tax on the whole. 
 

DRIP should also not be included , because the choice is mine as well. 
 

The gauge to measure the company should be solely based on things they control and decided at corporate level. 
 

they decided to pay some cash dividend in place of share buyback, therefore DRIP should not be considered in the ROI metric. 

[dartmonkey]

5 hours ago, Xerxes said:

I hold FFH (as an example) in my registered account I don’t pay tax on capital gain or dividends. But nothing is free and eventually I will pay tax when I withdraw. 
 

my tax situation is unique to me, the investor. Whether, inside tax registered account or not. Whether DRIP or not. 
 

So tax’s on dividends should not be included when looking at a specific’ company’ ROI, nor the fact that I will eventually pay 50% tax on the whole. 
 

DRIP should also not be included , because the choice is mine as well. 
 

The gauge to measure the company should be solely based on things they control and decided at corporate level. 
 

they decided to pay some cash dividend in place of share buyback, therefore DRIP should not be considered in the ROI metric. 

 Funny thing is, although I agree with almost everything you say, I come to the opposite conclusion.

 

As you say, everyone's tax situation is different, and most people will pay tax on a company's earnings, whether it is i the year they sell or in the year they remove funds from their tax sheltered account, and whether it is from dividends or from capital gains.

 

A company that pays out dividends has provided a return to the investor, however much of that return the investor will be allowed to keep. A company that reinvests those earnings, instead of paying them out in dividends, will also end up increasing the investor's taxes at some point. 

 

So the only reasonable way to compare 2 investments is to assign some value to the dividend. Doing that calculation by assuming the dividend is reinvested will not correspond to everyone's choice, but it's a way of approximating the value that an investor has obtained. If you prefer a more complicated formula, where you calculate the net present value of all the income stream (the initial investment at time 0, and then the subsequent dividend payouts over the course of the investment holding, and then the terminal value as of the day of the evaluation, then this is even better. But the dividends should not be ignored.

[Xerxes]

1 hour ago, dartmonkey said:

So the only reasonable way to compare 2 investments is to assign some value to the dividend. Doing that calculation by assuming the dividend is reinvested will not correspond to everyone's choice, but it's a way of approximating the value that an investor has obtained. 

I would just assume it as nominal dollar and un-invested if it 5-10 years. but over multi-decades that assumption gets stressed. 
 

I just don’t think the corporation should get credit for that. as they already made their capital allocation choice. 
 

but you are right. No perfect answer. 
 

 

[Haryana]

~ Who Let the Brett Out?
(Horn, Horn, Horn, Horn)

 

https://www.morningstar.com/company-reports/1249476-fairfax-earnings-investment-gains-drive-strong-profitability

 

"Fairfax’s third-quarter results were positively impacted by a $1.3 billion gain on investments, which drove net income of $1.0 billion for the quarter. But even putting this aside, results looked strong. Fairfax, like its peers, is currently enjoying tailwinds on both sides of the business as underwriting conditions remain favorable and higher interest rates boost investment income. Adjusted for dividends, book value per share has increased 12% since the end of 2023. We will maintain our fair value estimate for the no-moat company and see the shares as materially overvalued. We believe the market is overly focused on near-term results, and we expect returns to normalize over time." 

[gfp]

Endlessly entertaining. Explaining away the quarterly profit as being driven by investment gains, which were primarily on bonds, which were almost entirely offset by IFRS discount rate charges. But yeah, the TRS did kick in some profit so…. 
 

he is consistent!

[Santayana]

To the uninformed he makes it sound like they lost $300 million from operations turning a $1.3 billion investment gain into only $1 billion of net earnings.

[Parsad]

"We maintain our fair value estimate"...which has gone up consistently for the last 2 years..."for the no moat company"...Cheers!

[Hoodlum]

Does he still have his " CAD 1,180 fair value estimate" from May?  LOL

[TwoCitiesCapital]

What a joke - the mental acrobats to avoid admitting he was wrong is insane. 

 

Earnings will normalize. There will be lower rates in the future and more catastrophes. And FFH will have fewer shares, more retained earnings, and additional growth through its associates to make up for it. Not to mention today's value is still probably fair in that environment even if it doesn't happen like that. 

 

If this man actually put a pen to paper, he could work this out for himself.

[UK]

Gee, when FFH will get BRK like famous one day, the guy will get infamous to the same degree, if he stays so stubborn:))

[Viking]

On 11/1/2024 at 4:56 PM, TwoCitiesCapital said:

What a joke - the mental acrobats to avoid admitting he was wrong is insane. 

 

Earnings will normalize. There will be lower rates in the future and more catastrophes. And FFH will have fewer shares, more retained earnings, and additional growth through its associates to make up for it. Not to mention today's value is still probably fair in that environment even if it doesn't happen like that. 

 

If this man actually put a pen to paper, he could work this out for himself.

"To someone with a hammer, every problem looks like a nail" is a phrase often attributed to Charlie Munger.

“The quote refers to the idea that people tend to use the tools they're most familiar with, even when better options are available. This can lead to approaching problems in ways that are not helpful or even destructive.”

 

—————

The fundamental problem with Brett Horn’s ‘analysis’ is he appears to be using a standardized model to analyze P&C insurance companies. The model also looks like it is primarily built on long term historical results - it is largely weighted to what happened 5 to 15 years ago. And he already knows what his conclusions are for Fairfax (the same conclusions he had 5 years ago, and likely the same conclusions he had 10 years ago and even 15 years ago).
 

Fairfax is not a traditional P/C insurance company. So Horn’s ‘model’ is not a good fit. And over the past 4 years, Fairfax has just completed a remarkable turnaround in its earnings. So Fairfax’s numbers from 5 to 15 years ago have little relevance today. As a result, Horn’s model/framework appears broken when it comes to understanding and valuing Fairfax today. When it comes to Fairfax, Horn’s model actually forces/requires him to ignore the facts (because they don’t fit into his model/framework). 
 

The bottom line, and as one would expect, Brett Horn’s ‘analysis’ of Fairfax has been epically bad for the past 5 years. His analysis of Fairfax over the past 5 years (the body of work) has to be some of the worst ‘research’ that Morningstar has ever produced on a single company. That is sad. Because it has likely cost many investors an enormous amount of money. 
 

What is the problem? Probably hubris. Horn appears to lack the ability to admit he has been completely wrong with his understanding and analysis of Fairfax in recent years. As a result, he is now stuck. In an ironic twist, Horn now appears to be afflicted with the same disease that afflicted Fairfax from 2010 to 2016. 
 

PS: how does a ‘no moat’ company compound book value at close to 20% per year for 38 straight years? 

Edited Saturday at 10:50 PM by Viking

[SafetyinNumbers]

2 hours ago, Viking said:

"To someone with a hammer, every problem looks like a nail" is a phrase often attributed to Charlie Munger.

“The quote refers to the idea that people tend to use the tools they're most familiar with, even when better options are available. This can lead to approaching problems in ways that are not helpful or even destructive.”

 

—————

The fundamental problem with Brett Horn’s ‘analysis’ is he appears to be using a standardized model to analyze P&C insurance companies. The model also looks like it is primarily built on long term historical results - it is largely weighted to what happened 5 to 15 years ago. And he already knows what his conclusions are for Fairfax (the same conclusions he had 5 years ago, and likely the same conclusions he had 10 years ago and even 15 years ago).
 

Fairfax is not a traditional P/C insurance company. So Horn’s ‘model’ is not a good fit. And over the past 4 years, Fairfax has just completed a remarkable turnaround in its earnings. So Fairfax’s numbers from 5 to 15 years ago have little relevance today. As a result, Horn’s model/framework appears broken when it comes to understanding and valuing Fairfax today. When it comes to Fairfax, Horn’s model actually forces/requires him to ignore the facts (because they don’t fit into his model/framework). 
 

The bottom line, and as one would expect, Brett Horn’s ‘analysis’ of Fairfax has been epically bad for the past 5 years. His analysis of Fairfax over the past 5 years (the body of work) has to be some of the worst ‘research’ that Morningstar has ever produced on a single company. That is sad. Because it has likely cost many investors an enormous amount of money. 
 

What is the problem? Probably hubris. Horn appears to lack the ability to admit he has been completely wrong with his understanding and analysis of Fairfax in recent years. As a result, he is now stuck. In an ironic twist, Horn now appears to be afflicted with the same disease that afflicted Fairfax from 2010 to 2016. 
 

PS: how does a ‘no moat’ company compound book value at close to 20% per year for 38 straight years? 

Just lucky I guess.

 

I think his major issue is he doesn’t speak to any clients so there is no feedback. As you described Viking he’s analyzing insurance like it’s a widget factory where margins mean revert instead of a money making machine levered to interest rates and asset allocation.

[73 Reds]

15 hours ago, Viking said:

"To someone with a hammer, every problem looks like a nail" is a phrase often attributed to Charlie Munger.

“The quote refers to the idea that people tend to use the tools they're most familiar with, even when better options are available. This can lead to approaching problems in ways that are not helpful or even destructive.”

 

—————

The fundamental problem with Brett Horn’s ‘analysis’ is he appears to be using a standardized model to analyze P&C insurance companies. The model also looks like it is primarily built on long term historical results - it is largely weighted to what happened 5 to 15 years ago. And he already knows what his conclusions are for Fairfax (the same conclusions he had 5 years ago, and likely the same conclusions he had 10 years ago and even 15 years ago).
 

Fairfax is not a traditional P/C insurance company. So Horn’s ‘model’ is not a good fit. And over the past 4 years, Fairfax has just completed a remarkable turnaround in its earnings. So Fairfax’s numbers from 5 to 15 years ago have little relevance today. As a result, Horn’s model/framework appears broken when it comes to understanding and valuing Fairfax today. When it comes to Fairfax, Horn’s model actually forces/requires him to ignore the facts (because they don’t fit into his model/framework). 
 

The bottom line, and as one would expect, Brett Horn’s ‘analysis’ of Fairfax has been epically bad for the past 5 years. His analysis of Fairfax over the past 5 years (the body of work) has to be some of the worst ‘research’ that Morningstar has ever produced on a single company. That is sad. Because it has likely cost many investors an enormous amount of money. 
 

What is the problem? Probably hubris. Horn appears to lack the ability to admit he has been completely wrong with his understanding and analysis of Fairfax in recent years. As a result, he is now stuck. In an ironic twist, Horn now appears to be afflicted with the same disease that afflicted Fairfax from 2010 to 2016. 
 

PS: how does a ‘no moat’ company compound book value at close to 20% per year for 38 straight years? 

I suppose that by the same token Berkshire is a "no moat business".  When you professionally analyze companies and give no credit to superior management your analysis is worse than worthless.   Unless an idiot can successfully manage Fairfax, it clearly has a moat.   

[TwoCitiesCapital]

I don't mind them assuming the insurance biz is commoditized. We know it isn't true and that good underwriting is what makes this business model work, but we could give him that since it is for many others. 

 

But not paying any attention to the historical track record of the investment portfolio? Of the earnings it's managed to spit off during the 2-3 years this guy has been critical of them?

 

Fairfax's market cap at the end of 2021 was somewhere in the ballpark of $10-12B. 

 

They've earned nearly $12B in headline earnings (not including balance sheet items and gains) over the last 4 fiscal years and much of that wasn't the insurance biz. 

[TwoCitiesCapital]

How much do we think Muddy Waters is paying him to continue being negative?

[Xerxes]

On 11/2/2024 at 4:48 AM, UK said:

Gee, when FFH will get BRK like famous one day, the guy will get infamous to the same degree, if he stays so stubborn:))

Brent Horn is building up his bearish credentials and aiming for a job at Barron’s and is looking forward to that day when he is going to write :  

 

WHAT’S WRONG PREM 

 

ohhhh how he wants to write that for Barron’.