Fairfax 2024

[Viking]

1 hour ago, Haryana said:

Not undervalued enough, still, to double or touch US2000 in four years?

 

@Haryana If Fairfax's stock went up 20% each of the next 4 years then we would see a price of US$2,000. 

 

Three things drive a stock price:

1.) earnings

2.) multiple

3.) shares outstanding

 

My view is much of the increase we have seen in Fairfax over the past three years is being driven by much higher earnings and much lower share count. 

 

The P/BV multiple has not expanded much from its historical range - one could argue the multiple is actually below its historical average.

 

If we get multiple expansion in the coming years then I think investors will be very happy.

 

Solid earnings + lower share count + multiple expansion = very happy shareholders.

[Thrifty3000]

6 hours ago, villainx said:

 

I'm so unsophisticated an investor.  

 

Price stays low, great for buybacks, but I get impatient, should I just sell to move to something with more upside.

 

Price goes up, what are they doing buying back shares?!?! maybe I should buy more if it keeps going up.

Selling an asset to buy a cheaper asset is a perfectly logical thing to do (assuming you’ve rationally factored in taxes and relative risks).

 

It sounds like you’re overly influenced by price, which will make investing very uncomfortable at times. I recommend focusing more attention on learning how to appraise the value of a business. The more confidently you can estimate how much a business is worth to a rational buyer the less emotionally-attached to prices you’ll become.

 

A trick that has been incredibly helpful for me… I created a spreadsheet where I track MY portion of the look through earnings from my equity investments. So, for example, If I have 100 shares of Fairfax and I estimate the normal earnings to be $150 per share then in my spreadsheet I would show MY total Fairfax earnings as $15,000. If I have 1,000 shares of BRK and assume $25 per share of look through earnings then I would add $25,000 to my spreadsheet. With Fairfax and BRK combined I would have $40,000 of earnings. (I look at those earnings almost like my salary. I want my “salary” to be big, steady and growing over time.) Notice I haven’t mentioned stock price, because my number one priority is the quality and growth potential of MY earnings. With that mentality, if I can at anytime sell all my Fairfax and BRK shares to buy assets producing significantly more than that $40,000 of look through earnings then I am happy to do it. I treat that like getting a pay raise - which is fun and motivating. This approach helps ensure that the only way I can confidently sell one asset for another is if I’m confident in my analysis and able to transact at attractive prices.

[Crip1]

2 hours ago, Thrifty3000 said:

 

A trick that has been incredibly helpful for me… I created a spreadsheet where I track MY portion of the look through earnings from my equity investments. So, for example, If I have 100 shares of Fairfax and I estimate the normal earnings to be $150 per share then in my spreadsheet I would show MY total Fairfax earnings as $15,000. If I have 1,000 shares of BRK and assume $25 per share of look through earnings then I would add $25,000 to my spreadsheet. With Fairfax and BRK combined I would have $40,000 of earnings. (I look at those earnings almost like my salary. I want my “salary” to be big, steady and growing over time.) Notice I haven’t mentioned stock price, because my number one priority is the quality and growth potential of MY earnings. With that mentality, if I can at anytime sell all my Fairfax and BRK shares to buy assets producing significantly more than that $40,000 of look through earnings then I am happy to do it. I treat that like getting a pay raise - which is fun and motivating. This approach helps ensure that the only way I can confidently sell one asset for another is if I’m confident in my analysis and able to transact at attractive prices.

In the past I have thought about doing that, but never took the time to do so. To what extent do you feel this exercise impacts your buying and selling?

 

-Crip

[Thrifty3000]

10 minutes ago, Crip1 said:

In the past I have thought about doing that, but never took the time to do so. To what extent do you feel this exercise impacts your buying and selling?

 

-Crip

I almost never buy or sell. I have a handful of core investments that I’ve owned and followed for years. I have about 3% of my portfolio in some tracking positions that I’ve held for over 2 years while getting to know them better. I have a watchlist of companies I’m either trying to learn more about or waiting for the right price to buy. I find it very hard to find companies that I like better than my core holdings. Though it does happen. I’ve exited 7 or 8 positions in the last 5 years. Half were core holdings and half were trackers.
 

Looking at equity earnings like a salary makes me think much more like a business owner when I’m buying parts of the businesses that are paying my “salary.”

 

Also, once you give yourself enough “raises” - via more and better investments - you’ll be able to replace your actual salary with your equity “salary.”

[frommi]

Thats a very good idea, i track my dividend income in a similar sheet since 5 or 6 years and it is a great motivation.  Tracking earnings is probably even better  , i think i will add that to my sheet. Thanks!

[Luke]

10 hours ago, Thrifty3000 said:

Selling an asset to buy a cheaper asset is a perfectly logical thing to do (assuming you’ve rationally factored in taxes and relative risks).

 

It sounds like you’re overly influenced by price, which will make investing very uncomfortable at times. I recommend focusing more attention on learning how to appraise the value of a business. The more confidently you can estimate how much a business is worth to a rational buyer the less emotionally-attached to prices you’ll become.

 

A trick that has been incredibly helpful for me… I created a spreadsheet where I track MY portion of the look through earnings from my equity investments. So, for example, If I have 100 shares of Fairfax and I estimate the normal earnings to be $150 per share then in my spreadsheet I would show MY total Fairfax earnings as $15,000. If I have 1,000 shares of BRK and assume $25 per share of look through earnings then I would add $25,000 to my spreadsheet. With Fairfax and BRK combined I would have $40,000 of earnings. (I look at those earnings almost like my salary. I want my “salary” to be big, steady and growing over time.) Notice I haven’t mentioned stock price, because my number one priority is the quality and growth potential of MY earnings. With that mentality, if I can at anytime sell all my Fairfax and BRK shares to buy assets producing significantly more than that $40,000 of look through earnings then I am happy to do it. I treat that like getting a pay raise - which is fun and motivating. This approach helps ensure that the only way I can confidently sell one asset for another is if I’m confident in my analysis and able to transact at attractive prices.

Yes very good way to think about ones portfolio! My current portfolio has more than 2x the earnings per $ compared to the SP 500, has higher ROIC than the SP 500 and higher sales growth than the SP 500...good life

[MMM20]

15 hours ago, Thrifty3000 said:

A trick that has been incredibly helpful for me… I created a spreadsheet where I track MY portion of the look through earnings from my equity investments. So, for example, If I have 100 shares of Fairfax and I estimate the normal earnings to be $150 per share then in my spreadsheet I would show MY total Fairfax earnings as $15,000. If I have 1,000 shares of BRK and assume $25 per share of look through earnings then I would add $25,000 to my spreadsheet. With Fairfax and BRK combined I would have $40,000 of earnings. (I look at those earnings almost like my salary. I want my “salary” to be big, steady and growing over time.) Notice I haven’t mentioned stock price, because my number one priority is the quality and growth potential of MY earnings. With that mentality, if I can at anytime sell all my Fairfax and BRK shares to buy assets producing significantly more than that $40,000 of look through earnings then I am happy to do it. I treat that like getting a pay raise - which is fun and motivating. This approach helps ensure that the only way I can confidently sell one asset for another is if I’m confident in my analysis and able to transact at attractive prices.

 

This is great advice when paired with a focus on business quality. The mistake people can make is ending up with a bunch of melting ice cubes or highly levered and fragile high current yields. Fairfax seems like a great example of both a high earnings yield (seemingly now structurally robust, if volatile) and high future eps growth - possibly for a pretty damn long time. Hey, maybe the market will eventually catch on.

 

Edited January 23, 2024 by MMM20

[vinod1]

14 hours ago, Thrifty3000 said:

A trick that has been incredibly helpful for me… I created a spreadsheet where I track MY portion of the look through earnings from my equity investments. So, for example, If I have 100 shares of Fairfax and I estimate the normal earnings to be $150 per share then in my spreadsheet I would show MY total Fairfax earnings as $15,000. If I have 1,000 shares of BRK and assume $25 per share of look through earnings then I would add $25,000 to my spreadsheet. With Fairfax and BRK combined I would have $40,000 of earnings. (I look at those earnings almost like my salary. I want my “salary” to be big, steady and growing over time.) Notice I haven’t mentioned stock price, because my number one priority is the quality and growth potential of MY earnings. With that mentality, if I can at anytime sell all my Fairfax and BRK shares to buy assets producing significantly more than that $40,000 of look through earnings then I am happy to do it. I treat that like getting a pay raise - which is fun and motivating. This approach helps ensure that the only way I can confidently sell one asset for another is if I’m confident in my analysis and able to transact at attractive prices.

 

This is exactly what I do. Buffett talked about this several times as well but very few people seem to have paid attention to it.

 

In addition, I have a 10 year expected earnings number as well. While I look at current earnings as my salary, I try to put together a portfolio that gives me the highest 10 year salary possible. If I had only current normalized earnings, there is a psychological pressure to juice it via a tendency to buy cheap stocks with high earnings yield like GM or banks.

 

This forces me 1) to avoid melting ice cubes 2) focus on business quality 3) reduces impact of stock price fluctuations - I worry less about why isnt it going up? As long as earnings keep growing up I am happy.

 

Vinod

 

 

 

 

Edited January 23, 2024 by vinod1

[Thrifty3000]

33 minutes ago, MMM20 said:

 

This is great advice when paired with a focus on business quality. The mistake people can make is ending up with a bunch of melting ice cubes or highly levered and fragile high current yields. Fairfax seems like a great example of both a high current earnings yield (seemingly now structurally robust, if volatile) and high prospective earnings growth - possibly for a pretty damn long time. Hey, maybe the market will eventually catch on.

 

Yes, earnings quality and growth are essential. (Ideally, you have a high quality present value estimate.)

[Crip1]

13 hours ago, Thrifty3000 said:

I almost never buy or sell. I have a handful of core investments that I’ve owned and followed for years. I have about 3% of my portfolio in some tracking positions that I’ve held for over 2 years while getting to know them better. I have a watchlist of companies I’m either trying to learn more about or waiting for the right price to buy. I find it very hard to find companies that I like better than my core holdings. Though it does happen. I’ve exited 7 or 8 positions in the last 5 years. Half were core holdings and half were trackers.
 

Looking at equity earnings like a salary makes me think much more like a business owner when I’m buying parts of the businesses that are paying my “salary.”

 

Also, once you give yourself enough “raises” - via more and better investments - you’ll be able to replace your actual salary with your equity “salary.”

So, a few questions (and I truly appreciate your intellectual generosity):

 

• Is the file as simple as Company A earned x per share so my portion of the earnings is x times the share amount owned? (Column A is Company, Column B is EPS, Column C is Shares owned, Column D is Column B times Column C) If it's more complicated, what else to do capture?
• I assume that you do not look at dividends except to add them to share count if you reinvest...is that right?
• Do you adjust for one-time charges?
• Do you attempt to convert this to Cash-Flow by adding Depreciation/Amortization and deducting Cap Ex?
• Do you update this quarterly or annually?

-Crip

[gfp]

simultaneous all time closing highs in Berkshire & Fairfax - who'd of thought?  The CoBF namesakes are holding up.

[Junior R]

Quote

BlackBerry Announces Proposed Private Offering of $160 Million of Convertible Senior Notes

https://www.prnewswire.com/news-releases/blackberry-announces-proposed-private-offering-of-160-million-of-convertible-senior-notes-302042511.html

 

Maybe Fairfax is pulling out of the debt offering...Better options out there

[StubbleJumper]

3 hours ago, juniorr said:

https://www.prnewswire.com/news-releases/blackberry-announces-proposed-private-offering-of-160-million-of-convertible-senior-notes-302042511.html

 

Maybe Fairfax is pulling out of the debt offering...Better options out there

 

 

Well that promises to be interesting.  I wonder what terms BB will get from a lender other than FFH.  

 

 

SJ

[SafetyinNumbers]

24 minutes ago, StubbleJumper said:

 

 

Well that promises to be interesting.  I wonder what terms BB will get from a lender other than FFH.  

 

 

SJ

I’m guessing the buyer is already short. Coupon probably not too high, relying on the volatility and optionality to pay the majority of the financial cost. I’m not a convert expert but my guess would be a conversion price 30-50% above the recent price and a coupon in line with the reference risk free rate. Maybe 5% dilution and that’s only if the stock goes up a lot which no one seems to believe can happen. It looks optically expensive but it’s a pretty tiny market cap. I’m not sure if there is room for margin improvement and or growth but with a new CEO it might happen and create a lot of Social Value.
 

I don’t own any. If anyone does, please consider sharing your thesis. 

[Parsad]

5 hours ago, gfp said:

simultaneous all time closing highs in Berkshire & Fairfax - who'd of thought?  The CoBF namesakes are holding up.

 

+1!  Cheers!

[Intelligent_Investor]

Close to $1k USD

[gfp]

Just now, Intelligent_Investor said:

Close to $1k USD

 

according to my quote services, FRFHF did touch $1000 this morning.  

[Hoodlum]

This may explain some of the rise this week in share price.  I expect we will see increases in target price from others over the next month.

 

https://www.marketbeat.com/instant-alerts/tse-ffh-analyst-earnings-estimates-2024-01-24/

 

Of course these are in Cdn dollars.

 

Quote

Equities research analysts at Cormark increased their FY2023 EPS estimates for Fairfax Financial in a report released on Monday, January 22nd. Cormark analyst J. Fenwick now expects that the company will post earnings of $254.77 per share for the year, up from their prior forecast of $227.84. The consensus estimate for Fairfax Financial's current full-year earnings is $186.80 per share. Cormark also issued estimates for Fairfax Financial's Q4 2023 earnings at $89.13 EPS, FY2024 earnings at $189.16 EPS and FY2025 earnings at $211.65 EPS.

 

[villainx]

On 1/22/2024 at 7:45 PM, Thrifty3000 said:

my number one priority is the quality and growth potential of MY earnings.

 

I'm definitely been working on this.  Thanks though.  The way you put it is eloquent and actionable.

 

It's hard to break bad habits.  

[SafetyinNumbers]

1 hour ago, Haryana said:

 

Gotta respect our beloved Brett Horn for standing pat on his ground. He keeps us down from dangers of exuberance.

"We will maintain our CAD 970 fair value estimate for the no-moat company and see shares as a bit overvalued at the moment."

https://www.morningstar.com/stocks/fairfax-earnings-positive-momentum-continues

 

Pretty much the only reason, I think FFH has stayed cheap is because of quants. Volatile earnings streams are by definition not quality. Earnings growth modeled by analysts is also a necessity for most quants to get involved. This rules based approach has worked on a portfolio basis so they won’t make exceptions to over rule the model. 
 

Will analysts finally start modeling in earnings growth as the multiple expands, we’ll have to wait and see. Even Cormark with their US$66/sh estimate for Q423, still has them earning only US$140 in 2024.

 

There is no point being a hero when the stock trades at ~ 7x conservative estimates.

 

 

[Thrifty3000]

On 1/23/2024 at 11:55 AM, Crip1 said:

So, a few questions (and I truly appreciate your intellectual generosity):

 

• Is the file as simple as Company A earned x per share so my portion of the earnings is x times the share amount owned? (Column A is Company, Column B is EPS, Column C is Shares owned, Column D is Column B times Column C) If it's more complicated, what else to do capture?
• I assume that you do not look at dividends except to add them to share count if you reinvest...is that right?
• Do you adjust for one-time charges?
• Do you attempt to convert this to Cash-Flow by adding Depreciation/Amortization and deducting Cap Ex?
• Do you update this quarterly or annually?

-Crip

So, for this simple look through earnings spreadsheet the most important fields I track are:

 

• Ticker
• # of Shares I Own
• Per Share Cost Basis
• Normalized Earnings Estimate Per Share
• Normalized Dividend Per Share
• Total Cost Basis (Cost Basis Per Share X # of Shares Owned)
• Total Normalized Earnings (Normalized EPS X # of Shares Owned
• Total Normalized Dividend
• Current Share Price
• Current Value of Investment (Current Share Price X # Shares Owned)
• Normalized Earnings Yield
• Normalized Dividend Yield
• Price to Normalized Earnings Multiple
• 10 Yr Estimated Growth Rate
• Year 10 Normalized Earnings Forecast (Based on current normalized earnings and my estimated growth rate)
• % of Portfolio Allocation
• Unrealized Gains
• % Unrealized Gains

Normalized earnings is the field I focus most on getting right. I don't have a one size fits all approach for this one, though. I'm mostly focused on understanding what free cash flow will look like through a full economic cycle. I also try to understand and adjust for key risks - like super cats. For some investments I have to adjust for things like big, temporary, expenses - like major litigation costs/settlements that will take a few years to burn through (think post-GFC Bank of America). With some investments that have highly reputable managements I've learned that management forecasts are plenty reliable. So, if I'm really comfortable with a manager, I'll start with their forecast, try to poke holes in it, and adjust accordingly if I come up with anything.

 

As far as making adjustments, I review my estimates annually at a minimum. However, anytime I learn about a material change, or think of a material risk, whether from company updates, CoBF, or otherwise, I immediately update my estimate. I probably make a handful of small adjustments to the model every quarter. I rarely have to make major adjustments at this point. I may make 1 or 2 major adjustments to the model each year. Usually, I get to just bump up the earnings estimate for the next year, which is fun.

 

Since I started maintaining this spreadsheet in 2019 I've been able to increase my total normalized look through earnings by six figures every year just by replacing lower yielding investments with higher yielding ones whenever clear opportunities arise.

 

 

 

 

 

 

 

 

Edited January 24, 2024 by Thrifty3000

[Viking]

WR Berkley just released results. I like listening to their conference call to get an update on where the US P/C insurance market is at. WRB is a traditional insurer focussed on the US market. 
 

Here are my key take-aways:

1.) the hard market continues with no signs of ending any time soon. 
2.) P/C insurer returns - for some companies like WRB - are very good. ‘Record setting financial results.”
3.) The outlook is even better. 
 

Sceptics continue to question how this can be possible. The simple answer is lots of insurers are not experiencing ‘record setting financial results’. Some lines, like auto, were beyond terrible for years. 
 

Investments

 

- the current book yield on fixed maturity holdings is about 4.7%. 
- new money yield is over 5%

- average duration is 2.4 years, about the same as last quarter. WRB would like to extend duration

 

WRB missed out on extending duration when rates peaked out in October of 2023. It is exceptionally difficult to time the market.
 

This just further highlights the exceptional job the team at Fairfax has done with their fixed income portfolio over the past 2.5 years - extending the average duration from 1.6 years to 3.1 years in 2023 is a big, big deal. We will get clarity on all the puts and takes when Fairfax reports Q4 results (and more when they release the AR). It looks to me like WRB got caught ‘thumb sucking’ in Q4 when rates spiked.

Returning money to shareholders

 

WRB returned more than $1 billion to shareholders in 2023: dividends, special dividend and buybacks. Well done.

 

Importantly, this is capital that is leaving the P/C insurance industry.

 

Other

 

- Rate increase in Q4 = 8% and still exceeding loss cost trend. Q4 of 2022, rate increase was 6.9%. Yes, rate was up modestly YOY.
- Top-line growth of 12% in Q4: seeing nothing today to suggest growth rate is slowing in Q1.

- Interest rate outlook: stay the same or maybe higher. See pressure on inflation in coming years driven by high government spending (supported by both Biden and Trump) and limited ability to raise taxes.

- ‘Alternative investments’ opportunities not compelling today given what is available in fixed income today (on a risk adjusted basis).

Edited January 24, 2024 by Viking

[Parsad]

6 hours ago, Haryana said:

 

Gotta respect our beloved Brett Horn for standing pat on his ground. He keeps us down from dangers of exuberance.

"We will maintain our CAD 970 fair value estimate for the no-moat company and see shares as a bit overvalued at the moment."

https://www.morningstar.com/stocks/fairfax-earnings-positive-momentum-continues

 

 

Interestingly enough, his fair value estimate after Q1 2023 was $730 CDN.  For a no moat company that is a bit overvalued, his target price has risen 33% in less than one year.  

 

This is just another example of what is so wrong with how institutional capital is allocated and how misguided the industry is.  Cheers!

[MMM20]

1 hour ago, Viking said:

the hard market continues with no signs of ending any time soon

 

 

I'm one of those guys who draws on charts now.

 

[SafetyinNumbers]

25 minutes ago, Parsad said:

 

Interestingly enough, his fair value estimate after Q1 2023 was $730 CDN.  For a no moat company that is a bit overvalued, his target price has risen 33% in less than one year.  

 

This is just another example of what is so wrong with how institutional capital is allocated and how misguided the industry is.  Cheers!

He provides the earnings estimates and the moat rating. The quant machine spits out the target price. But he’s especially bad at estimating forward earnings. They don’t make any sense. Ironically, his earnings estimates make other quants want to avoid the stock because they show high variability in earnings estimates and show earnings declining. Things that are not generally associated with quality and what quants prefer.