Fairfax 2024

[Gmthebeau]

I don’t own Fairfax, and have never studied it, but Muddy Waters is not a fly by night smash and grab operation.  They have a very long history of under-covering companies that are complete frauds, although typically these are Chinese companies.  Looks like his says this was overstated by 18%, and it dropped 12% today.  Worst case scenario is another 6% if he is right and quick upside back where it was otherwise.  I might initiate a position tomorrow if it flushes more.

[treasurehunt]

3 hours ago, Phoenix01 said:

Here is a good review of the MW report.

https://youtube.com/watch?v=nsxGizwLTd8&si=KJEEabBKv7v5b70z

Very good reponse. Thanks for posting the link.

[nwoodman]

20 minutes ago, StubbleJumper said:

Let's just throw a pile of shit at the wall and see what sticks.

This!  I have been pondering the “research” over multiple coffees and came to the conclusion this board pulled together a better short thesis in 2021.  The very same board then blew it up as the facts changed dramatically.  Muddy Waters has brought a lemon to a knife fight but is 3-4 years late.  
 

When I saw that a short report was out and the market reaction, I figured we were having an “asbestos  moment’ in the insurance subs.  It turned out to be nickel and diming some selective marks while totally ignoring others to suit the narrative.  The nonsense about the 15% aspirational target, well that is getting solved as we speak.
 

Talk about a storm in a teacup.

[Viking]

35 minutes ago, Crip1 said:

 

If Peter Eavis made an appearance, that would feel like deja vu. Although, as a long-time shareholder, it would be great to see BSilly or Cardboard back commenting.

 

-Crip

@Crip1 BSilly is on my investing wall of fame for his posts on Fairfax, especially 2003 to 2005. So rational, educational and even keeled. 

[Crip1]

4 minutes ago, Viking said:

@Crip1 BSilly is on my investing wall of fame for his posts on Fairfax, especially 2003 to 2005. So rational, educational and even keeled. 

Concur 100%

[glider3834]

https://www.godigit.com/digest/stories/digit-funding-press-release

 

The key word is IFRS - Fairfax reports Digit results under IFRS but Digit reports under Indian GAAP. As per below, there are 'significant differences'.

 

Below Digit indicate that they cannot by law include IFRS Financials in their IPO Prospectus (excerpt below), but they plan to make IFRS financial data available after IPO for ease of comparison with other global companies in the same industry.

 

 

 

 

 

 

 

 

Edited February 9 by glider3834

[Gmthebeau]

I just watched his CNBC interview and skimmed his report.  Reasonable people can disagree on the value of assets.  He seems to state some of the assets in question and there is a lot of asset shuffling going on.  Reminded me a bit of a John Malone type situation.  He made a good point how a former audit exec from the auditor is on their board.  This would seem like a conflict.  I also understand short sellers attacked them previously and they did an accounting adjustment to restate financials after that  ~ I guess saying it was unrelated.  Uh huh.  Hard pass for me.  

[SafetyinNumbers]

I appreciate all of the good analysis on the board today. Thank you. 
 

I spent time with a few PMs today that were buying positions for the first time so they certainly saw it as an opportunity.

 

I tweeted about the MW IFRS 17 proposed haircut and the work is incredibly sloppy. If you disagree, please let me know.

 

 

Edited February 9 by SafetyinNumbers

[Parsad]

7 minutes ago, Gmthebeau said:

I just watched his CNBC interview and skimmed his report.  Reasonable people can disagree on the value of assets.  He seems to state some of the assets in question and there is a lot of asset shuffling going on.  Reminded me a bit of a John Malone type situation.  He made a good point how a former audit exec from the auditor is on their board.  This would seem like a conflict.  I also understand short sellers attacked them previously and they did an accounting adjustment to restate financials after that  ~ I guess saying it was unrelated.  Uh huh.  Hard pass for me.  

 

What?  Have you actually read the report?

 

Key takeaways:

• Fairfax is GE, not Berkshire Hathaway
• MW believes that there should $4.5B in adjustments to assets on the balance sheet
• Fairfax is pulling financial levers to improve results and book value since 2018
• Fairfax has missed their ROE target of 15% for several years

Ok, the 4th one is pretty much a joke.  Buffett and Munger have talked for decades about lumpy 15% versus an even 12% return every year.  Fairfax is an insurance company that invests its float for income, so there will be volatility in annual returns.  With that, you can get rid of the 1st one as well, since GE was engineering earnings to get a consistent annual return, not accepting volatile annual returns.  I'm glad Block really studied GE!

 

Slide #4 of MW's report shows how Allied put pressure on Fairfax and they wrote a 107% CR in the year acquired.  Then I guess somehow, Fairfax finagled a 97.3% CR since.  Last I checked, writing below 100% was the target for insurance companies, not what they necessarily wrote historically.  Again, not sure why he brings up Allied, since CR's are well under 100% for the last 5 years.

 

For mispriced assets:

 

Recipe

• They talk about the $15.30 takeover price for Recipe being artificial...well they have to talk to the PCAOB about that, because under IFRS fair value tests, the last market price or takeover price is what they have to use.
• They say that PWC restated goodwill and intangibles in 2021 compared to Recipe's previous auditor KPMG.  Although, they don't note that PWC also restated the 2020 goodwill and intangibles for Recipe.  So there was no real net tangible gain after acquiring Recipe if you simply look at Section 12 in the 2021 FFH AR showing total goodwill and intangibles for Recipe in 2020 and 2021 since the increase would have also been reflected in the restated 2020 financials for FFH in the 2021 report.

Quess

• They argue that Quess was deconsolidated to create an artificial accounting gain.  You can look at that whatever way you want.  It was treated fairly under IFRS.  Again, if there are issues, it's a PCAOB issue.
• Also, they don't account for the fact that Indian companies have not transitioned yet to IFRS and there might be adjustments in valuation between Indian Accounting Standards and IFRS.

EXCO

• They say it is overstated by $220M or so on the books.  I'll leave it to someone else with more understanding of the long history of EXCO to comment.

Grivalia/Eurobank

• Essentially saying that Eurobank overstated goodwill by $62M...you can quibble this whatever way you want, but $62M is barely material here relative to Eurobank's equity and assets.

Riverstone

• Suggested that the sale to OMERS and then subsequent sale from OMERS to CVC Capital was financial engineering to hide losses at Riverstone and show a profit at FFH.  Yes, OMERS took the risk of buying Riverstone simply to help out FFH.  Not that anything like that could risk OMERS entire being as a public pension plan, cause sanctions and fines against the investment team at OMERS, bar those managers from working in the industry, and possibly lose their CFA/Advisory designations.  Sure, let's help a friend out with some financial chicanery and risk everything, including our reputation.
• As an aside, they mention that CVC Capital acquired Riverstone from OMERS with asset note guarantees by Fairfax for 4 years...they also suggest that the associate shares Fairfax put up as collateral were simply stuffed into Riverstone to hide paper losses on those associate shares.  The funny thing is, most of those shares have recovered significantly since the pandemic and Fairfax would have been able to book tons of paper gains if they held those shares.  No comment on that of course!
• Also no breakdown by MW's if any losses have been paid on the 4 year guarantee!

Fairfax Africa/Helios

• They state that Helios was booked at $5.25 USD while the price on the date of deconsolidation (December 8, 2020) was $4.04 USD.  No mention that the stock traded up to $6 USD on the days after December 8, 2020.  Total gain...$43M...on $21B of shareholder equity.

APR Energy

• They say that Fairfax sold APR to Atlas (a friend) so they wouldn't have to show a loss.  Hmmm, funny how FFH hasn't bought it back, nor the fact that David Sokol and Bing Chen were willing to destroy their reputation solely to help Fairfax out.  

Bizarre Take on Prem's sale of Atlas shares - Prem sold shares of Atlas at the $15.50 tender offer and accepted the same number of shares from Poseidon...simply to align himself with the $1B investment by FFH into Poseidon.  MW's states without any real issue of criticism that they don't understand why Prem would sell ahead of the minority shareholders.  No idea what the argument is here.

 

Eurolife/OMERS transactions - again, I'll leave this one for Fairfax to comment on, because there are a number of transactions that make it more convoluted than I have time to examine it.  Essentially, MW's says that there was a $262M gain that should not be on the books.  Ok, again that is 1% of shareholder equity and one tenth of what they will earn in 2024.

 

Brit/Odyssey/OMERS transactions - MW's says it boosted book by $421M when portions of those were sold to OMERS because the remaining amounts were now carried at fair value.  They say they were essentially financial transactions to boost book with a call option to buy back.  Not sure how this is any different than any company under IFRS boosting liquidity by a partial sale of a fully consolidated entity.  Berkshire, Markel, etc would all book this the same way.

 

The most hilarious section of the analysis is Fairfax's accounting adjustments for Digit in 2021/2022 and the use of the FFH swaps.  They say Fairfax began booking the gains on valuation of Digit later than they should have by a quarter so that they could juice the results for those quarters.  Yet, the irony is if they had began when MW's suggests, then the gain in book value would have been inflated for 2021, a year which they say Fairfax was inflating gains widely through their transactions.  They also note that they haven't made any adjustments to book based on the value of the swaps!  In terms of a downward valuation of Digit that they suggest...I'm not sure I agree with the number, but Fairfax may have to adjust that based on prices for all fintech companies in India.  Depending on markets, it could just as easily be valued upwards again.  But I'll leave it to the auditors on this...I'm certain Muddy Waters has no clear idea either.  Even MW notes that Sequoia invested $3.5B into Digit and relegates it to Silicon Valley's lack of discipline.

 

Here's another big one that you can argue either way.  They say that under IFRS 17 Fairfax received too much in adjusted gains.  That their adoption gain divided by contract liabilities was about 6%...higher than the industry.  Yet, they don't note that Fairfax also generally books higher redundancies on statutory capital compared to the industry and it is around that 6% mark.  Could FFH book that more conservatively...sure.  Did FFH book that accurately...yes.

 

Farmer's Edge - another one that I'm not 100% up to speed on, but it's a $71M adjustment according to MW's.  That's in the negligible territory when you look at $26B in equity.

 

Lastly, they suggest that the 46% acquisition of Gulf Insurance is the latest piece of financial engineering by Fairfax and they purposely overpaid at 2.4 times book for the new stake.  Yet Gulf made $125M in 2022 and 26% would be about $58M.  The $860M cost amounts to about 15 times earnings.  Which isn't expensive when you are paying up for a leading, quality insurer.  One which also had a closing condition that the $2.00 per share price could not be lower than the 6-month moving average market share price leading up to the closing of the deal.  Thus why the premium offered was 100% to market price rather than 60-70%...to ensure the deal would close and KIPCO couldn't walk away.

 

Anyway, I'll leave it to brighter minds to approve or disapprove of the MW report.  But to lackadaisically say that an ex-partner of the audit firm sits on their BOD's is somehow irregular and that what happened in the past regarding the short seller attack and financial restatements without even glancing over the facts...well that's just bloody lazy analysis! 

 

Not too mention the liability that the auditors could be exposed to, Fairfax could be exposed to, employees jobs, shareholder's account values...does anyone really think that Fairfax and the auditors would risk all of that for plus/minus 2-5% of book value?!

 

Cheers!

 

[petec]

5 hours ago, SafetyinNumbers said:

I appreciate all of the good analysis on the board today. Thank you. 
 

I spent time with a few PMs today that were buying positions for the first time so they certainly saw it as an opportunity.

 

I tweeted about the MW IFRS 17 proposed haircut and the work is incredibly sloppy. If you disagree, please let me know.

 

 

 

This is an excellent catch which would have taken me some time to figure out - thanks.

 

 

[StubbleJumper]

4 hours ago, Parsad said:

Ok, the 4th one is pretty much a joke.  Buffett and Munger have talked for decades about lumpy 15% versus an even 12% return every year.  Fairfax is an insurance company that invests its float for income, so there will be volatility in annual returns.  With that, you can get rid of the 1st one as well, since GE was engineering earnings to get a consistent annual return, not accepting volatile annual returns.  I'm glad Block really studied GE!

 

No, Sanj, that's the one thing that Muddy Waters actually got right.  FFH hasn't had lumpy returns, it has rather had two-stage returns.  The first stage was from 1986 (FFH's inception) to roughly 1999 where BV grew extremely rapidly and far exceeded Prem's bogey of 15% annual growth.  The second stage is from roughly 2000 until now when the 15% bogey has only been achieved in 8-out-of-23 years.

 

 

 

Every year Prem publishes this table and it is extremely important.  If you believe that 15% will be routinely achieved, then FFH is easily worth 2x BV.  But then you need to get a notion very clear in your mind why FFH's performance would return to a level closer to it's initial growth phase rather than remain at levels similar to the past 20 years or so, and you need to have a solid hypothesis about why the industry economics that have juiced the returns for the past three years would carry forward for the long-term.  That, or you just understand that FFH likely won't ever be worth more more than 1.5x BV.

 

Of all the bullshit in that report yesterday, the comment about not achieving the BV growth rate was about the most fair and the most accurate.  But then again, last week, FFH was only priced at 1.1x BV so that's probably about right for the results of the past 20 or so years.

 

 

SJ

[sleepydragon]

GE CEO thinking : “MW, you son of b** leave me out of this”

[MMM20]

4 minutes ago, sleepydragon said:

GE CEO thinking : “MW, you son of b** leave me out of this”

 

I'm not so sure... might be a blessing in disguise bringing more attention to both.

21 hours ago, MMM20 said:

The irony is he nailed the GE comparison... in the Danaher / Culp era. Decentralization, quality upgrades, massive turnaround, and now a well-run cash machine. 

 

Edited February 9 by MMM20

[kab60]

38 minutes ago, StubbleJumper said:

 

No, Sanj, that's the one thing that Muddy Waters actually got right.  FFH hasn't had lumpy returns, it has rather had two-stage returns.  The first stage was from 1986 (FFH's inception) to roughly 1999 where BV grew extremely rapidly and far exceeded Prem's bogey of 15% annual growth.  The second stage is from roughly 2000 until now when the 15% bogey has only been achieved in 8-out-of-23 years.

 

 

 

Every year Prem publishes this table and it is extremely important.  If you believe that 15% will be routinely achieved, then FFH is easily worth 2x BV.  But then you need to get a notion very clear in your mind why FFH's performance would return to a level closer to it's initial growth phase rather than remain at levels similar to the past 20 years or so, and you need to have a solid hypothesis about why the industry economics that have juiced the returns for the past three years would carry forward for the long-term.  That, or you just understand that FFH likely won't ever be worth more more than 1.5x BV.

 

Of all the bullshit in that report yesterday, the comment about not achieving the BV growth rate was about the most fair and the most accurate.  But then again, last week, FFH was only priced at 1.1x BV so that's probably about right for the results of the past 20 or so years.

 

 

SJ

Love your takes, @StubbleJumper. You're the only one I've seen point out how Prem was playing with fire leading up to covid, and even though he avoided a catastrophe, it's probably one to keep in the back of your mind.

 

I'm not sure what the right price is for Fairfax, but what's different this time around is you've got a ton of earnings power locked-in over the coming years, and it seems as if there's generally little sign of softening in insurance markets. I imagine large bond losses at peers might result in this market staying hard for longer, but I'm really no expert.

 

There's no doubt that the gravy train will eventually settle down, but when it does, book value/share should be much higher than today just from the locked-in interest, and thus investors might do reasonably well here even without multiple expansion. If we get that on top, that's gravy.

 

I agree with others that the MW report is pretty awful. But I also wouldn't mind if Fairfax simplified a little. Those total return swaps were obviously a nice bet, but I'd prefer if he cashed in over the coming year(s) and locked in his return and switched to buybacks. He should have the money now.

Edited February 9 by kab60

[thowed]

Just want to say again I appreciate everyone on this thread - it was a huge help yesterday in keeping calm.

 

It's also great that the assessment is fair & acknowledges that FFH is not perfect, and could improve, rather than just fanboy-ing.

 

Thank you all.

[Gmthebeau]

6 hours ago, Parsad said:

 

What?  Have you actually read the report?

 

Key takeaways:

• Fairfax is GE, not Berkshire Hathaway
• MW believes that there should $4.5B in adjustments to assets on the balance sheet
• Fairfax is pulling financial levers to improve results and book value since 2018
• Fairfax has missed their ROE target of 15% for several years

Ok, the 4th one is pretty much a joke.  Buffett and Munger have talked for decades about lumpy 15% versus an even 12% return every year.  Fairfax is an insurance company that invests its float for income, so there will be volatility in annual returns.  With that, you can get rid of the 1st one as well, since GE was engineering earnings to get a consistent annual return, not accepting volatile annual returns.  I'm glad Block really studied GE!

 

Slide #4 of MW's report shows how Allied put pressure on Fairfax and they wrote a 107% CR in the year acquired.  Then I guess somehow, Fairfax finagled a 97.3% CR since.  Last I checked, writing below 100% was the target for insurance companies, not what they necessarily wrote historically.  Again, not sure why he brings up Allied, since CR's are well under 100% for the last 5 years.

 

For mispriced assets:

 

Recipe

• They talk about the $15.30 takeover price for Recipe being artificial...well they have to talk to the PCAOB about that, because under IFRS fair value tests, the last market price or takeover price is what they have to use.
• They say that PWC restated goodwill and intangibles in 2021 compared to Recipe's previous auditor KPMG.  Although, they don't note that PWC also restated the 2020 goodwill and intangibles for Recipe.  So there was no real net tangible gain after acquiring Recipe if you simply look at Section 12 in the 2021 FFH AR showing total goodwill and intangibles for Recipe in 2020 and 2021 since the increase would have also been reflected in the restated 2020 financials for FFH in the 2021 report.

Quess

• They argue that Quess was deconsolidated to create an artificial accounting gain.  You can look at that whatever way you want.  It was treated fairly under IFRS.  Again, if there are issues, it's a PCAOB issue.
• Also, they don't account for the fact that Indian companies have not transitioned yet to IFRS and there might be adjustments in valuation between Indian Accounting Standards and IFRS.

EXCO

• They say it is overstated by $220M or so on the books.  I'll leave it to someone else with more understanding of the long history of EXCO to comment.

Grivalia/Eurobank

• Essentially saying that Eurobank overstated goodwill by $62M...you can quibble this whatever way you want, but $62M is barely material here relative to Eurobank's equity and assets.

Riverstone

• Suggested that the sale to OMERS and then subsequent sale from OMERS to CVC Capital was financial engineering to hide losses at Riverstone and show a profit at FFH.  Yes, OMERS took the risk of buying Riverstone simply to help out FFH.  Not that anything like that could risk OMERS entire being as a public pension plan, cause sanctions and fines against the investment team at OMERS, bar those managers from working in the industry, and possibly lose their CFA/Advisory designations.  Sure, let's help a friend out with some financial chicanery and risk everything, including our reputation.
• As an aside, they mention that CVC Capital acquired Riverstone from OMERS with asset note guarantees by Fairfax for 4 years...they also suggest that the associate shares Fairfax put up as collateral were simply stuffed into Riverstone to hide paper losses on those associate shares.  The funny thing is, most of those shares have recovered significantly since the pandemic and Fairfax would have been able to book tons of paper gains if they held those shares.  No comment on that of course!
• Also no breakdown by MW's if any losses have been paid on the 4 year guarantee!

Fairfax Africa/Helios

• They state that Helios was booked at $5.25 USD while the price on the date of deconsolidation (December 8, 2020) was $4.04 USD.  No mention that the stock traded up to $6 USD on the days after December 8, 2020.  Total gain...$43M...on $21B of shareholder equity.

APR Energy

• They say that Fairfax sold APR to Atlas (a friend) so they wouldn't have to show a loss.  Hmmm, funny how FFH hasn't bought it back, nor the fact that David Sokol and Bing Chen were willing to destroy their reputation solely to help Fairfax out.  

Bizarre Take on Prem's sale of Atlas shares - Prem sold shares of Atlas at the $15.50 tender offer and accepted the same number of shares from Poseidon...simply to align himself with the $1B investment by FFH into Poseidon.  MW's states without any real issue of criticism that they don't understand why Prem would sell ahead of the minority shareholders.  No idea what the argument is here.

 

Eurolife/OMERS transactions - again, I'll leave this one for Fairfax to comment on, because there are a number of transactions that make it more convoluted than I have time to examine it.  Essentially, MW's says that there was a $262M gain that should not be on the books.  Ok, again that is 1% of shareholder equity and one tenth of what they will earn in 2024.

 

Brit/Odyssey/OMERS transactions - MW's says it boosted book by $421M when portions of those were sold to OMERS because the remaining amounts were now carried at fair value.  They say they were essentially financial transactions to boost book with a call option to buy back.  Not sure how this is any different than any company under IFRS boosting liquidity by a partial sale of a fully consolidated entity.  Berkshire, Markel, etc would all book this the same way.

 

The most hilarious section of the analysis is Fairfax's accounting adjustments for Digit in 2021/2022 and the use of the FFH swaps.  They say Fairfax began booking the gains on valuation of Digit later than they should have by a quarter so that they could juice the results for those quarters.  Yet, the irony is if they had began when MW's suggests, then the gain in book value would have been inflated for 2021, a year which they say Fairfax was inflating gains widely through their transactions.  They also note that they haven't made any adjustments to book based on the value of the swaps!  In terms of a downward valuation of Digit that they suggest...I'm not sure I agree with the number, but Fairfax may have to adjust that based on prices for all fintech companies in India.  Depending on markets, it could just as easily be valued upwards again.  But I'll leave it to the auditors on this...I'm certain Muddy Waters has no clear idea either.  Even MW notes that Sequoia invested $3.5B into Digit and relegates it to Silicon Valley's lack of discipline.

 

Here's another big one that you can argue either way.  They say that under IFRS 17 Fairfax received too much in adjusted gains.  That their adoption gain divided by contract liabilities was about 6%...higher than the industry.  Yet, they don't note that Fairfax also generally books higher redundancies on statutory capital compared to the industry and it is around that 6% mark.  Could FFH book that more conservatively...sure.  Did FFH book that accurately...yes.

 

Farmer's Edge - another one that I'm not 100% up to speed on, but it's a $71M adjustment according to MW's.  That's in the negligible territory when you look at $26B in equity.

 

Lastly, they suggest that the 46% acquisition of Gulf Insurance is the latest piece of financial engineering by Fairfax and they purposely overpaid at 2.4 times book for the new stake.  Yet Gulf made $125M in 2022 and 26% would be about $58M.  The $860M cost amounts to about 15 times earnings.  Which isn't expensive when you are paying up for a leading, quality insurer.  One which also had a closing condition that the $2.00 per share price could not be lower than the 6-month moving average market share price leading up to the closing of the deal.  Thus why the premium offered was 100% to market price rather than 60-70%...to ensure the deal would close and KIPCO couldn't walk away.

 

Anyway, I'll leave it to brighter minds to approve or disapprove of the MW report.  But to lackadaisically say that an ex-partner of the audit firm sits on their BOD's is somehow irregular and that what happened in the past regarding the short seller attack and financial restatements without even glancing over the facts...well that's just bloody lazy analysis! 

 

Not too mention the liability that the auditors could be exposed to, Fairfax could be exposed to, employees jobs, shareholder's account values...does anyone really think that Fairfax and the auditors would risk all of that for plus/minus 2-5% of book value?!

 

Cheers!

 

 

maybe.  I am not familiar with the company.  I am familiar with the idea when people keep coming around saying your accounting practices leave something to be desired there is usually something to it.   

[giulio]

Here are my notes after digesting the news. Sorry for the errors, I just wrote down my thoughts.

****

I don't think the report highlights anything new for members of this board.

• We knew that the transactions with OMERS were essentially debt in nature.
• Grivalia and EB issues? discussed already
• APR, farmersedge and Fairfax africa were dogs and investment mistakes? agree.
• Fairfax cash starved in 2020? sure

I thought the AVLN was similar to guaranteeing the reserves level. It allowed FFH more time to come up with cash needed as well. Is this bad behavior from Prem? 

Also, isn'it a bit stretched to say that EXCO has a market value? Not an expert but this is extremely illiquid and no financials are available.

Gulf Insurance purchase price is spread over 5 years! 200M at closing and 165M over the next 4 years which is close to what the company recently earned. Does not seem an inflated price to me.

 

The only thing that caught my eye was what the Digit former employee had to say about the company. Digit is not lemonade for sure, I think it can stand on its own and knows how to write insurance. I am curious about its tech stack though: is it more like Progressive or GEICO?

 

In the end the report revolves around accounting issues and how FFH has chosen to present results.

This is why it is paramount to focus on economic reality rather than just reported numbers.

 

MAYBE the accounting was a bit aggressive and Prem did hide some losses during an extremely difficult Covid period. We need to contrast this with everything we know about the culture of the company and make up our minds.

On my part, I purchased more shares yesterday around $910.

 

[Luke]

9 minutes ago, thowed said:

Just want to say again I appreciate everyone on this thread - it was a huge help yesterday in keeping calm.

 

It's also great that the assessment is fair & acknowledges that FFH is not perfect, and could improve, rather than just fanboy-ing.

 

Thank you all.

+1

[StubbleJumper]

1 minute ago, Gmthebeau said:

 

maybe.  I am not familiar with the company.  I am familiar with the idea when people keep coming around saying your accounting practices leave something to be desired there is usually something to it.   

 

 

Wait a minute.  People "keep coming around?"  When was the last episode of people coming around and making such claims?

 

 

SJ

[Thrifty3000]

Curious if MW will be making anymore media rounds today.

[Gmthebeau]

8 minutes ago, StubbleJumper said:

 

 

Wait a minute.  People "keep coming around?"  When was the last episode of people coming around and making such claims?

 

 

SJ

 

This is the second time (that I am aware of).  Most companies never have a first.

[StubbleJumper]

Just now, Gmthebeau said:

 

This is the second time (that I am aware of).  Most companies never have a first.

 

The first time was 20 years ago, and the people who made such claims were sued back to the stone age.  Muddy Waters has been much more careful about what they've written.  There are no outright mistruths that I can see, just convenient misinterpretation and innuendo.  Anyone with an accounting background will snicker about most of that document.

 

 

SJ

[Gmthebeau]

1 minute ago, StubbleJumper said:

 

The first time was 20 years ago, and the people who made such claims were sued back to the stone age.  Muddy Waters has been much more careful about what they've written.  There are no outright mistruths that I can see, just convenient misinterpretation and innuendo.  Anyone with an accounting background will snicker about most of that document.

 

 

SJ

ok, good luck with your investment.  

[SafetyinNumbers]

1 hour ago, StubbleJumper said:

 

No, Sanj, that's the one thing that Muddy Waters actually got right.  FFH hasn't had lumpy returns, it has rather had two-stage returns.  The first stage was from 1986 (FFH's inception) to roughly 1999 where BV grew extremely rapidly and far exceeded Prem's bogey of 15% annual growth.  The second stage is from roughly 2000 until now when the 15% bogey has only been achieved in 8-out-of-23 years.

 

 

 

Every year Prem publishes this table and it is extremely important.  If you believe that 15% will be routinely achieved, then FFH is easily worth 2x BV.  But then you need to get a notion very clear in your mind why FFH's performance would return to a level closer to it's initial growth phase rather than remain at levels similar to the past 20 years or so, and you need to have a solid hypothesis about why the industry economics that have juiced the returns for the past three years would carry forward for the long-term.  That, or you just understand that FFH likely won't ever be worth more more than 1.5x BV.

 

Of all the bullshit in that report yesterday, the comment about not achieving the BV growth rate was about the most fair and the most accurate.  But then again, last week, FFH was only priced at 1.1x BV so that's probably about right for the results of the past 20 or so years.

 

 

SJ

The last three years, BV has CAGRed more than 15% and the odds are better than 50-50 the next three years BV will also CAGR more than 15%. 
 

The major reasons, interest rates have normalized and the equity portfolio is mostly just as undervalued as FFH. 

[StubbleJumper]

6 minutes ago, SafetyinNumbers said:

The last three years, BV has CAGRed more than 15% and the odds are better than 50-50 the next three years BV will also CAGR more than 15%. 
 

The major reasons, interest rates have normalized and the equity portfolio is mostly just as undervalued as FFH. 

 

Yes, that's true.  FFH has been making a tonne of money over the past couple of years and will probably continue to do so for the next few years.  So, what an investor needs to figure out is whether that is just a cyclical phenomenon, or whether this time it's different.

 

 

SJ