Fairfax 2024

[gary17]

3 hours ago, MMM20 said:

I understand the logic but I’m 1) really not a fan of management selling shares to the company and 2) still hugely overweight FFH - and so I’m taking this as a cue to sell a chunk of my own shares too over the next couple months. 

 

 

there's a big tax change coming in Canada. what he is saying - estate planning - makes sense.

 

same reason Warren sold some apples.

[Hoodlum]

Someone didn’t like this share purchase. 
 

 

Edited May 13 by Hoodlum

[Crip1]

4 hours ago, MMM20 said:

 

I wonder if others with big positions since 2020-21 are looking at this similarly. I don’t think it’s fair to completely dismiss the fact that he’s selling, even if it’s a relatively small sale and for a logical reason. Sure it’s for liquidity and tax planning - I get that - but would he be selling if the stock still traded at 0.7x p/b? I personally have a really hard time believing that. 

 

Fairfax is about 33% of my "investable" holdings, closer to 25% of total holdings (the difference being that company-sponsored accounts are not self-directed), so if I qualify as "others with big positions", here goes.

 

I was tempted to sell but didn't for a couple of reasons:

• I really don't have any ideas that I know as well and feel as comfortable with.
• Buffet once quoted Mae West "Too much of a good thing can be wonderful". In the past my brain has short circuited when positions have increased...I was anchored to the past stock price and would sell a large portion of my position figuring it would be available 20-30% lower and I could buy back then. It's worked at times, but hasn't at others. Bottom line is that if a holding is not grossly overvalued, the risk-reward of that strategy doesn't make sense.

 

-Crip

[dartmonkey]

3 hours ago, juniorr said:

If $BB can run back above $10 USD will like to see FFH off load it lol

Why wait? Here's hoping RoaringKitty was just waiting for Prem to get off the Blackberry board to give Fairfax one last chance to unload this, and maybe reap some tax losses to book against the Pet Insurance business.

 

 

 

[hardcorevalue]

I’d really love to hear if anybody has a better idea than Fairfax at this price. 1x book value and 7x earnings in a market that is 27x, that’s hard to beat. The other aspect that I like is their portfolio is positioned for adverse case scenarios due to their high quality bonds. Yield spreads are the tightest in history so if there was some market dislocation, black swan, they could redeploy into higher yielding securities. Anyways, I’m all ears but so many pitches are 20x earnings for some great compounder or 7x earnings for some economically sensitive stock. 

I too see the chart and want to sell but the numbers on FFH are just so attractive. It feels like this could be a berkshire type situation where the hard part was just holding on. 

Edited May 13 by hardcorevalue

[Luca]

14 minutes ago, hardcorevalue said:

I’d really love to hear if anybody has a better idea than Fairfax at this price. 1x book value and 7x earnings in a market that is 27x, that’s hard to beat. The other aspect that I like is their portfolio is positioned for adverse case scenarios due to their high quality bonds. Yield spreads are the tightest in history so if there was some market dislocation, black swan, they could redeploy into higher yielding securities. Anyways, I’m all ears but so many pitches are 20x earnings or 7x earnings with an assumed economic dependence. 

I too see the chart and want to sell but the numbers on FFH are just so attractive. It feels like this could be a berkshire type situation where the hard part was just holding on. 

Exactly, next to China (in which I am very overweight), I can only find tempting value in coal/oil stocks. FFH is a huge part of my portfolio too and I am absolutely not selling anything as long as the idea universe is that small and very expensive. 

[ander]

Fairfax 6-K

 

"“As previously announced in 2020, I purchased in the market an additional 482,600 subordinate voting shares of Fairfax at a price of US$308 per share, or approximately US$150 million in total. At the time, I believed, and I said publicly, that the trading price for Fairfax shares was ridiculously cheap and very significantly below intrinsic value, and I was acquiring these shares as an investment. Even though I believe our shares continue to trade well below intrinsic value, I decided to sell a portion of the shares I acquired in 2020, representing only a small portion of my total holdings of Fairfax, for estate planning reasons. As a controlling shareholder, my salary has been fixed at C$600,000, and I have never had a cash bonus nor received any shares as compensation for decades. I continue to control the 1,548,000 outstanding multiple voting shares and 519,828 subordinate voting shares of Fairfax, representing greater than 90% of my net worth, and I am not contemplating further sales. As I have said many times, Fairfax is not for sale, and I am confident that our future is very bright. As always, the best is yet to come,” said Prem Watsa, Chairman and Chief Executive Officer of Fairfax."

 

[Hektor]

8 minutes ago, ander said:

Fairfax 6-K

 

"“As previously announced in 2020, I purchased in the market an additional 482,600 subordinate voting shares of Fairfax at a price of US$308 per share, or approximately US$150 million in total. At the time, I believed, and I said publicly, that the trading price for Fairfax shares was ridiculously cheap and very significantly below intrinsic value, and I was acquiring these shares as an investment. Even though I believe our shares continue to trade well below intrinsic value, I decided to sell a portion of the shares I acquired in 2020, representing only a small portion of my total holdings of Fairfax, for estate planning reasons. As a controlling shareholder, my salary has been fixed at C$600,000, and I have never had a cash bonus nor received any shares as compensation for decades. I continue to control the 1,548,000 outstanding multiple voting shares and 519,828 subordinate voting shares of Fairfax, representing greater than 90% of my net worth, and I am not contemplating further sales. As I have said many times, Fairfax is not for sale, and I am confident that our future is very bright. As always, the best is yet to come,” said Prem Watsa, Chairman and Chief Executive Officer of Fairfax."

 Thanks @ander

[Luca]

15 minutes ago, ander said:

Fairfax 6-K

 

"“As previously announced in 2020, I purchased in the market an additional 482,600 subordinate voting shares of Fairfax at a price of US$308 per share, or approximately US$150 million in total. At the time, I believed, and I said publicly, that the trading price for Fairfax shares was ridiculously cheap and very significantly below intrinsic value, and I was acquiring these shares as an investment. Even though I believe our shares continue to trade well below intrinsic value, I decided to sell a portion of the shares I acquired in 2020, representing only a small portion of my total holdings of Fairfax, for estate planning reasons. As a controlling shareholder, my salary has been fixed at C$600,000, and I have never had a cash bonus nor received any shares as compensation for decades. I continue to control the 1,548,000 outstanding multiple voting shares and 519,828 subordinate voting shares of Fairfax, representing greater than 90% of my net worth, and I am not contemplating further sales. As I have said many times, Fairfax is not for sale, and I am confident that our future is very bright. As always, the best is yet to come,” said Prem Watsa, Chairman and Chief Executive Officer of Fairfax."

 

Not great, not terrible. He doesn't see the shares as materially undervalued as in 2020, understandable. Still, cashing out now after this run...has a certain smell of less upside downside

Edited May 13 by Luca

[Parsad]

3 hours ago, Hoodlum said:

Someone didn’t like this share purchase. 
 

 

 

What a twat!  Complete moron as well. 

 

The new capital gains tax on personal corporations and individuals above $250K in capital gains is what led Prem to sell.  He's also always stated that 90% of his net worth would be in Fairfax. 

 

When he bought that $150M tranche, I'm pretty sure that was almost all of the liquidity he personally had or the majority of it.  This just restores the net worth balance of him having 90% in Fairfax and 10% outside of Fairfax, while saving millions in capital gains tax that he would have to pay after June.

 

Cheers!

[dartmonkey]

1 hour ago, Luca said:

Exactly, next to China (in which I am very overweight), I can only find tempting value in coal/oil stocks. FFH is a huge part of my portfolio too and I am absolutely not selling anything as long as the idea universe is that small and very expensive. 

I have the same problem, 50% in Fairfax after the big share price increase in the last few years, but nowhere too tempting to go if I sell my stake down to a more reasonable size. And 10% in coal/gas/oil which seem like the best alternative for the moment - Yancoal, Suncor, CNQ, Petrobras... 

[Luca]

6 minutes ago, dartmonkey said:

I have the same problem, 50% in Fairfax after the big share price increase in the last few years, but nowhere too tempting to go if I sell my stake down to a more reasonable size. And 10% in coal/gas/oil which seem like the best alternative for the moment - Yancoal, Suncor, CNQ, Petrobras... 

Yes, same situation. I still see a ton of potential upside in Fairfax and love the defensiveness of it in the current macro and pricey market...its also not a stock where I would feel uncomfortable being overweight considering the quality of management etc...I like where I am, still a continuos buyer in China and maybe we get nicer prices in met coal coming months as q1-q2 seems to be weak regularly...i think I can settle with the thought that prem really was just overweight and wants to have some eggs at the side lines which is fair. 

[dartmonkey]

 think I can settle with the thought that prem really was just overweight and wants to have some eggs at the side lines which is fair. 

 

 

Yes, according to his statement, he bought "482,600 subordinate voting shares of Fairfax at a price of US$308 per share, or approximately US$150 million in total."

 

Now he has sold 275,000 of these shares to the company (so they can be retired), at $US1,106.48. He continues to control 1,548,000 outstanding multiple voting shares and 519,828 subordinate voting shares of Fairfax, for a total of 2,067,828 shares, meaning that he had 2,342,828 shares before the sale, and has sold 11.7% of these. If the new stake is worth 90% of his net worth, that would mean that he previously had 101.9% of his net worth in Fairfax; if his current stake is higher than 90%, then his previous stake was even higher than 101.9%. That probably means he took out a loan to make the purchase back in 2020, when short term interest rates were still less than 1%.

 

So there's overweight and then there's really spectacularly overweight. We think we are overweight at 50%, but he was at over 100%. Taking that down to 90% can not reasonably be taken as evidence that he think the shares are fully valued, it's just elementary prudence. If he had reduced from a smaller percentage, like going from 10% to 9%, that would have been a different story. And the increased capital gains tax in July, while not mentioned, just adds another reason why it makes sense to pay off the loan now, even if he still think Fairfax's prospects are great.

[Munger_Disciple]

It seems to me that Prem is selling enough shares to take out the cost basis of 2020 purchase plus an additional $100mm (USD) post-tax. It makes sense for him to repay the loan at this point if he had indeed used a line of credit (I don't know if he did that or not) to purchase the 2020 shares worth $150mm.

Of course it would have been better if he didn't sell such a large block. However he still has > 90% of his net worth in Fairfax so that should make shareholders feel better. 

[Munger_Disciple]

19 minutes ago, dartmonkey said:

 Now he has sold 275,000 of these shares to the company (so they can be retired), at $US1,106.48. He continues to control 1,548,000 outstanding multiple voting shares and 519,828 subordinate voting shares of Fairfax, for a total of 2,067,828 shares, meaning that he had 2,342,828 shares before the sale, and has sold 11.7% of these. If the new stake is worth 90% of his net worth, that would mean that he previously had 101.9% of his net worth in Fairfax; if his current stake is higher than 90%, then his previous stake was even higher than 101.9%. That probably means he took out a loan to make the purchase back in 2020, when short term interest rates were still less than 1%.

 

 

IIRC Prem controls the voting of 1,548,000 multiple voting shares but he has an economic interest in only 1/2 of those, i.e., 774,000. So he had economic interest in a total of 1,569,000 FFH shares (multiple voting+subordinated) prior to the sale of 275,000. So he sold 17.5% of his economic interest in FFH, a reasonably significant portion. 

[Viking]

On 5/13/2024 at 6:19 AM, StubbleJumper said:

The valuation gap as defined by P/BV or pretty much any other widely used valuation measure has definitely narrowed over the past year, and as you suggested, it might be that certain insiders finally have a reasonable opportunity to trim their position.  I'm not sure that this is the case for Prem.  Back when he bought the US$150m of shares two years ago, I posed the question on this forum of where he sourced the cash to do so?  Did he have US$150m just sitting in his savings account, did he dig it out of the cushions of his chesterfield, or did he borrow the lion's share of that cash?  Based on this sale, my guess is that he probably borrowed the cash to buy those shares and the carry on that borrowing has caught up a little bit with the share price growth expectation (ie, if he borrowed that money, has the interest rate that he's paying grown to 7% or 7.5% ?).

 

Without a doubt, there are many FFH shareholders who would pay the higher capital gains rate if they liquidate their position next year.  But, I can tell you that I wouldn't let the tail wag the dog in this particular case.  The higher inclusion rate gives the appearance of an enormous tax hike, but keep it in context.  The highest marginal tax rate in Ontario is 53.5%.  With a 50% inclusion rate, you pay 26.75% tax on your capital gains, and now with the 67% inclusion you'd pay 35.7% tax on your capital gains.  So, the difference in tax paid on gains in the highest marginal bracket is like ~9%.  It's considerable, but if you believe that FFH is still a shade undervalued and that its underwriting growth still has legs, you would look forward 1, 2, or 3 years and conclude that share price will likely be strong enough to make it irrational to let the tax tail wag the dog.  

 

The value of my personal shares is independent of the size of the float.  My portion of FFH's future cash flows is X/total shares outstanding.  So, when 250k shares are retired, my portion of FFH's future cash flows goes up.   That part is not optics.  The part that might make it mostly optics is the price paid.  Continuing shareholders are only better off after a repurchase if the shares were repurchased at a price that is less than intrinsic value.  When FFH conducted the SIB a couple of years ago and bought back a boat-load at US$500, it was quite obviously the case that those repurchases were undertaken at a price lower than IV.  But, a repurchase price of US$1,100 is probably much closer to IV and the benefit to continuing shareholders is much more limited.  As an example if IV is actually US$1300 or $1400, we continuing shareholders collectively benefit benefit by 275k*US$200 or 300...less than five bucks a share?).  It's not nothing, but it doesn't move the needle all that much.

 

SJ

 

@StubbleJumper Your post has a bunch of really interesting angles to it. Below are some thoughts. As per usual, I like to stir the pot a little to hopefully generate some good discussion. And estimating 'intrinsic value' at a point in time is a really important topic. 

 

Below I bolded the part in your earlier comment that got my attention.

 

@StubbleJumper “The value of my personal shares is independent of the size of the float.  My portion of FFH's future cash flows is X/total shares outstanding.  So, when 250k shares are retired, my portion of FFH's future cash flows goes up.   That part is not optics.  The part that might make it mostly optics is the price paid.  Continuing shareholders are only better off after a repurchase if the shares were repurchased at a price that is less than intrinsic value.  When FFH conducted the SIB a couple of years ago and bought back a boat-load at US$500, it was quite obviously the case that those repurchases were undertaken at a price lower than IV.  But, a repurchase price of US$1,100 is probably much closer to IV and the benefit to continuing shareholders is much more limited.  As an example if IV is actually US$1300 or $1400, we continuing shareholders collectively benefit by 275k*US$200 or 300...less than five bucks a share?).  It's not nothing, but it doesn't move the needle all that much.”

 

Intrinsic value is a tough thing to estimate. When Fairfax did its SIB in late 2021 did investors at the time think Fairfax was buying shares below intrinsic value? I am not so sure. It is clear today that Fairfax got a steal of a deal.

 

With the buybacks so far in 2024, is Fairfax buying shares below intrinsic value?

 

It appears investors think Fairfax is buying back shares today at a price that is close to intrinsic value. Just like 2021, I am not so sure that investors are getting it right.

 

Why? Fairfax is a completely different company today than it was in late 2021 - especially when you focus on earnings. And future earnings is the critical input when calculating intrinsic value.

 

Here is what Prem had to say at the Fairfax AGM. He said this at the very beginning of his slide presentation.

 

“Fairfax -- and I've said it in our annual report, said it last year. I'll say it again. Fairfax has been transformed since 2017. Even we couldn't see it. If you had asked me 3 years ago, 4 years ago, I couldn't see that. Our premiums have gone up… The float has gone up, the investment portfolio, common shareholders' equity. Underwriting profit, because of this expansion in a hard market… interest and dividends… it's running at about $2 billion. … operating income of $4 billion that we can see for the next 4 years. The company has been transformed. And …because of this transformation, the intrinsic value of the company has gone up significantly.”

 

Let me try and explain my thinking in a little more detail.

 

Part 1

 

I think it is useful to dial back to November 2021. At that time, what were the facts?

 

On December 17, 2021, Fairfax announced the SIB: to repurchase 2 million shares at $500/share, with the offer expiring on Dec 23, 2021. Of interest, at Sept 30, 2021, book value was $562. Fairfax’s SIB was made at about 0.9 x BV.

https://www.fairfax.ca/press-releases/fairfax-announces-us1-0-billion-substantial-issuer-bid-and-sale-of-9-99-minority-stake-in-odyssey-group-2021-11-17/

 

On Nov, 16, 2021, the day before they announced the SIB, Fairfax shares closed at US$432.49. For the next month (mid Nov to mid Dec), Fairfax shares traded in a band between $440 and $460/share, well below the $500/share SIB price. Fairfax shares traded below $500/share for much of Q1, 2022.

 

This tells me that most investors likely felt Fairfax was buying back shares in Dec 2021 at a small premium to IV. In fact, a year later, in October of 2022, Fairfax share traded briefly below $450 - a price significantly below the SIB from the previous year.

 

Today - 30 months later - it is now obvious to investors that Fairfax’s SIB was executed at a price that was well below intrinsic value.

 

The key take-away is this - when the SIB was executed in 2021 most investors got it completely wrong.

 

My guess is most investors  - at a point in time - have no idea what Fairfax’s actual intrinsic value is. Yes, those are fighting words.

 

Why do I think that?

 

Intrinsic value is a theoretical concept and a wickedly difficult thing to estimate (just ask Buffett). Especially for a company like Fairfax where so much important stuff is going on under the hood. Instead, most investors simply focus on Fairfax’s current stock price and go from there (and make the buy, sell or hold decision based on what the animal entrails tell them at a given point in time).

 

Look at the commentary on this board when it comes to Fairfax… how much of the commentary is based primarily on a valuation framework and how much of the commentary is primarily based on where the stock price is trading?

 

To be fair, Fairfax’s stock price has been a rocket ship to the moon the past 4 years. But intrinsic value has also been on a rocket ship to the moon. Which has gone up more? Now that is a great question. So let’s explore that a little bit next. 

 

 

Part 2

 

Fairfax is not the same company today that it was in December 2021. Its insurance business is much larger and is more profitable. Its fixed income portfolio is much larger and earning a much higher average yield. Its equity holdings are much higher quality and performing much better. Fairfax has also been best-in-class with its capital allocation decisions the past 30 months (compared to there P/C insurance companies).

 

The magnitude of the change has even caught Fairfax by surprise. This is what Prem told us loud and clear at the AGM this year (see quote above).

 

As a result, operating earnings have spiked higher over the past 30 months. From 2016-2020, operating earnings at Fairfax averaged $1 billion per year. Importantly, this was the reference point for investors in Fairfax in November 2021. This is likely what they were using as their core input when calculating intrinsic value.

 

Today, operating earnings are in the $4.5 billion range. This is a 350% increase from the 2016-2020 average.

 

This level of operating earnings is sustainable moving forward - in fact, it should actually grow nicely over time (as record earnings get re-invested by the top-notch capital allocation team at Hamblin Watsa, creating larger/new income streams).

 

Of interest, book value has increased from $562 at Sept 30, 2021, to $940 today (March 31, 2024). Book value has increased 67% over the past 30 months. And operating earnings have increased 350%.

 

Back in Dec 2021, Fairfax paid 0.9 x BV ($500/$562) to repurchase 2 million shares.

 

Fast forward to today. So far in 2024, Fairfax has reduced effective shares outstanding by 605,000 or 2.6%. The total cost was $688 million or $1,090/share. Book value is $940/share so shares were purchased at a slight premium to BV of 1.15 x.

 

Compared to the SIB in 2021, does this mean Fairfax is now buying back shares at less of a discount to intrinsic value? Or at a price that is closer to intrinsic value?

 

Of course, the answer is - it depends. It depends on whether or not Fairfax is the same company that it was in late 2021. We know that Fairfax is not the same company. It has been transformed in recent years.

 

Operating earnings have increased 350%. Fairfax’s earnings have improved dramatically in size and quality. Higher quality means the company should now trade at a higher multiple than it did in December 2021.

 

Is 1.15 x BV the right multiple? No, of course not. It is much too low for a company of Fairfax’s quality. But investors won’t see it today.

 

But guess what? It will likely be obvious to investors 30 months from now.

 

Over the next three years, my guess is Fairfax will earn a total of somewhere between $450 to $500/share ($150 x 3 plus some growth). At the end of 2026, this would put book value at around $1,400/share. Let’s assume Fairfax should be valued at a P/BV multiple of 1.3 x. This is a low multiple for a company of Fairfax’s quality. This would put the share price at about $1,800 in 3 years time (early 2027). I view this estimate as a a reasonable baseline - could be a little higher or it could be a little lower. 

 

If this is how things play out, buying back shares today around $1,100/share will look like a steal in 3 years time (if the shares are trading at that time at around $1,800). 

 

In three years time, when investors look back to evaluate Fairfax’s repurchase of shares in 2024, my guess is they are going to conclude that Fairfax was able to buy them back at a price that was well below intrinsic value. Just like their evaluation today of the repurchase that Fairfax did in December 2021. With hindsight it will be obvious to everyone.

 

But today? Few can see it. And that is what I love about investing.

----------

PS: what is the appropriate P/BV multiple for Fairfax? What if it is 1.5 x ? It would be great to come back to this discussion in three years time...

 

Fairfax are value investors - and they are very good. They are aggressively buying back Fairfax stock today. That tells you loud and clear what they think about Fairfax's current valuation. And they understand the company - and its future prospects - very well.

Edited May 14 by Viking

[gfp]

After a brief technical delay, the NAIC website is functioning again and the Q1 reports are trickling out.  So far, for Odyssey Re, it looks like they sold $60m worth of Micron stock on 3/26 and purchased a Digit 10 year bond yielding 9.75% and an IIFL Finance 3 year bond yielding 9.5%, among other trades like Orla that we knew about.  This is not for consolidated Fairfax like a 13F, this is just for the Odyssey Re entity

 

Not sure if these will be legible so I am attaching the whole document.  Trades are at the end.

 

Purchases

 

 

Sales

 

23680.2024.P.Q1.P.O.1.4769174.pdf

[StubbleJumper]

2 hours ago, Viking said:

As per usual, I like to stir the pot a little to hopefully generate some good discussion. And estimating 'intrinsic value' at a point in time is a really important topic. 

 

Yeah, you'll get any number of estimates of IV for FFH.  A good, basic approach might be 1.2x or 1.3x adjusted BV.  That valuation is conservative enough that you aren't reliant on FFH actually routinely achieving its 15% BV growth target.  If they actually do routinely achieve that target, you will in retrospect evaluate that you were too conservative when you bought, but those are the good sorts of outcomes.

 

As you noted, when that SIB was conducted, it was priced slightly lower than book (ie, 0.9x).  At that point in time, the market was effectively saying that FFH was worth more dead than alive!  In theory, shareholders could have gotten roughly book if management had just thrown in the towel, run-off the business, sold the assets and written a cheque to shareholders!  Mr. Market can sometimes be a little too pessimistic, and when the price suggests that FFH shareholders would have been better off if the company weren't a going-concern, that's pretty negative.

 

But, what's it truly worth?  Well, if you believe it's worth 1.2x or 1.3x adjusted BV, then the valuation gap has closed significantly, but perhaps there's a bit more room to go.  The real question is what to do if Mr. Market pushes it to 1.4 or (gasp!) 1.5x.  That will be the point where shareholders will really need to think hard about what it's truly worth.  In the mean time, as long as the bottom doesn't suddenly fall out of the insurance market, we can sit back and watch the earnings flow in for the next few years.

 

 

SJ

[nwoodman]

1 hour ago, StubbleJumper said:

But, what's it truly worth?  Well, if you believe it's worth 1.2x or 1.3x adjusted BV, then the valuation gap has closed significantly, but perhaps there's a bit more room to go.  The real question is what to do if Mr. Market pushes it to 1.4 or (gasp!) 1.5x.  That will be the point where shareholders will really need to think hard about what it's truly worth.  In the mean time, as long as the bottom doesn't suddenly fall out of the insurance market, we can sit back and watch the earnings flow in for the next few years.

 

 

SJ

This sounds about right to me. Thinking about it over the last day I concluded that Prem left enough on the table to ensure that the optics of a direct buyback by the company will look good in a years time.  

[Viking]

Here is another way to look at the multiple Fairfax has been buying back shares for. 

 

In 2021, with the SIB, they paid a multiple of 0.9 x BV.

Today they are paying a multiple of 1.15. 

 

The multiple on the stock has increase 0.25 x. 

 

Fairfax is a very different company today than it was in 2021. Most importantly, operating earnings have increased from $1 billion (average from 2016-2020) to $4.5 billion today. The size and quality of Fairfax's income streams has increased dramatically. Clearly, the company deserves to trade at a much higher P/BV multiple today compared to 2021.

 

Perhaps the increase in multiple it deserves to trade at is 0.25 x. If so, then Fairfax today is buying back stock at the same (low) valuation that it was back in 2021. Anyways, I don't mean to beat this topic to death... just trying to think about it in different ways... 

Edited May 14 by Viking

[Viking]

21 minutes ago, nwoodman said:

This sounds about right to me. Thinking about it over the last day I concluded that Prem left enough on the table to ensure that the optics of a direct buyback by the company will look good in a years time.  

 

I like how Peter Lynch looked at insider buying/selling. "insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise."

 

He viewed the buying as a useful input when valuing a company. Usually, insiders only buy for one reason: they think their stock offers very good value. 

 

On the other hand, insiders sell for many reasons. As a result, insiders selling tends not to be a useful input when valuing a company. 

 

The fact that Fairfax has been able to buy back a significant number of shares the past 4.5 months and has not had to pay a big premium is a big win for shareholders. Thank you Prem  

Edited May 14 by Viking

[Hamburg Investor]

9 hours ago, StubbleJumper said:

 

Yeah, you'll get any number of estimates of IV for FFH.  A good, basic approach might be 1.2x or 1.3x adjusted BV.  That valuation is conservative enough that you aren't reliant on FFH actually routinely achieving its 15% BV growth target.  If they actually do routinely achieve that target, you will in retrospect evaluate that you were too conservative when you bought, but those are the good sorts of outcomes.

 

As you noted, when that SIB was conducted, it was priced slightly lower than book (ie, 0.9x).  At that point in time, the market was effectively saying that FFH was worth more dead than alive!  In theory, shareholders could have gotten roughly book if management had just thrown in the towel, run-off the business, sold the assets and written a cheque to shareholders!  Mr. Market can sometimes be a little too pessimistic, and when the price suggests that FFH shareholders would have been better off if the company weren't a going-concern, that's pretty negative.

 

But, what's it truly worth?  Well, if you believe it's worth 1.2x or 1.3x adjusted BV, then the valuation gap has closed significantly, but perhaps there's a bit more room to go.  The real question is what to do if Mr. Market pushes it to 1.4 or (gasp!) 1.5x.  That will be the point where shareholders will really need to think hard about what it's truly worth.  In the mean time, as long as the bottom doesn't suddenly fall out of the insurance market, we can sit back and watch the earnings flow in for the next few years.

 

 

SJ

I don‘t think, that 1.5 times book value is a high valuation. Of course it‘s not at a roe of 15% (so at 1.5 pb ratio, at a pe ratio of 10 than); but I even don’t find a lot of companies with a roe of 13% at a pe ratio below 11 or 12 these days (than again you come to 1.5 pb ratio). Do you? Okay, at 10% roe, a pe ratio of 15 - that‘s not interesting. But how likely is that? 

 

 

FFH realized a cagr of book value of 18% over 38 years. That 18% is the average after the worst decade in its history; before that bad years kicked in, the cagr was of course higher. That was a cagr of 26% from 1985 to 2009. 26% over a quarter century. Being in the top 1% (0.1%?) over a quarter century - was that luck or skill? If you think (like me), 26% over 24 years (and 18% over 38 years) has to be skill - how likely is it, that a value investor after that totally looses his skills?
 

Those following bad years in my view had at least something to do with the low bond yields; you could say the reason for the bad decade was only one factor (Prem doing bad). Than it would just be a coincidence, that a lot of other insurers did bad (although not that bad) in those years too, like MKL or BRK. But than: What’s your reasoning about those managers, as they at least haven’t outperformed the S&P500 over that decade too: Have Buffett and Gayner lost it too? 

 

Anyway its reasonable to assume the roe was around that 18% over that 38 years too, and 26% over the forst 24 years, or?
 

Looking at the change within Fairfax beginning in 2017 and assuming at least another 3 or 4 years being safe to go with 15+ % roe (so that’s 6 years in a row with a roe of 15+%), my question would be:

 

What’s your scenario for a hefty and longlasting downturn at FFHs roe after - looking from the standpoint in 3 or 4 years - 41 years with a cagr of around 18% roe? What makes you think, that the roe would go down to - say - 10% after 41 years with 18% on average? Low bond yields over the next 20 years? If that happens - okay, I go with you. It should get lower a bit, as FFH grows and gets bigger. Okay. But apart from external and from size factors, what should happen? Prem getting irrational? Loosing his skills after 41 years (again, if you’d see the last decade as a result of only one factor - Prem - and you think, that he‘s not anymore able of learning from mistakes - than that makes sense somehow; bit is that likely?!)? How reasonable is that - a value investor, who understood the power of float and having Bernard on his site - loosing all his skills after 4 decades of outperformance? 
 

I know, I know: Nothing is for sure. But that’s true for all stocks, so we should dig for reasonable risks, but I don’t see longterm risks other than Prem and Bernard getting hit by a bus, bonds going back to zero for 1 or 2 decades (but nobody knows… could go up to 8% with the same risk), a once in a century insurance risk materializing, galopping hyperinflation or deflation etc.; but most of that risks are just normal risks you have with any investment. 

 

Edited May 15 by Hamburg Investor

[nwoodman]

4 minutes ago, Viking said:

On the other hand, insiders sell for many reasons. As a result, insiders selling tends not to be a useful input when valuing a company. 

True, but we are not talking a paltry amount.  I think this is a 80-90c on the dollar repurchase that has been well considered.  

[Maxwave28]

Not to be too bullish, but would an ancillary benefit of share repurchases be that it extends the runway of potential compounding at FFH. By returning capital to shareholders it limits the size of the company’s capital base and allows FFH to continue to invest in smaller and perhaps higher returning opportunities and therefore delay the drag a larger capital base has on its investment universe as Buffett has warned about for years? 

[SafetyinNumbers]

25 minutes ago, Maxwave28 said:

Not to be too bullish, but would an ancillary benefit of share repurchases be that it extends the runway of potential compounding at FFH. By returning capital to shareholders it limits the size of the company’s capital base and allows FFH to continue to invest in smaller and perhaps higher returning opportunities and therefore delay the drag a larger capital base has on its investment universe as Buffett has warned about for years? 

I think they are trying to get the buybacks in before FFH goes in the 60. It would be surprising if that didn’t bring along some multiple expansion especially when FFH passes IFC in benchmark weight.