Fairfax 2024

[UK]

14 hours ago, gfp said:

I thought this article on Verisk's recent modeling was interesting.  I don't think it has a paywall.  Not sure where to post it so seems like Fairfax is as good as any.  

 

https://www.theinsurer.com/reinsurancemonth/industry-should-now-expect-average-annual-cat-losses-of-151bn-verisk/

 

So does this suggest, that insurance is quite a growth industry with a continuously expanding TAM:)?

[gfp]

15 minutes ago, UK said:

 

So does this suggest, that insurance is quite a growth industry with a continuously expanding TAM:)?

You could kind of see Ajit and Warren let out a little gleeful grin when Ajit pointed out that inflation isn’t necessarily bad for the insurance business. 

[UK]

35 minutes ago, gfp said:

You could kind of see Ajit and Warren let out a little gleeful grin when Ajit pointed out that inflation isn’t necessarily bad for the insurance business. 

 

Sorry, my bad. Inflation resistant growth industry with ever growing TAM:))

[dartmonkey]

8 hours ago, gfp said:

Ajit pointed out that inflation isn’t necessarily bad for the insurance business. 

How does this work? I would not have expected that inflation would be necessarily bad for most insurance, since rates are readjusted every year, but maybe long-tailed insurance (asbestos for instance) might be hurt by unexpectedly high inflation. Did Jain explain his thinking?

[gfp]

43 minutes ago, dartmonkey said:

How does this work? I would not have expected that inflation would be necessarily bad for most insurance, since rates are readjusted every year, but maybe long-tailed insurance (asbestos for instance) might be hurt by unexpectedly high inflation. Did Jain explain his thinking?

 

That's right - it's not great for long tail and retroactive business.  And Berkshire certainly has some of that business. But most insurance is repriced each year and auto policies are generally repriced twice a year.  As the linked article does a good job of illustrating - the value of everything needing to be insured continues to march upward.  Inflation is only part of that.  Fairfax should do well with their global insurers just from the development of those economies and the current low penetration of insurance coverage in many of those places.

 

This chart is average annual losses, not size of market - but this illustrates the growth, and it is over a relatively short time.  Even better for an AJG or BRO.

[Cigarbutt]

^Just to add, increasing expected costs are based on past historical experience and of course the future could vary (outliers, changing trends).

From the report above and other references, the underlying drivers of previous trends have been:

-cost inflation

-climate volatility (...)

-and (often underrecognized?) the growing concentration of 'inflated' asset values in at-risk areas (urban and wildland-urban interface)

[gfp]

With everything going on with US Steel, Cliffs and the rest of the steel and iron ore stocks - you really have to appreciate how well played the Stelco situation was for Kestenbaum and Fairfax.  This one is looking pretty smart.

 

[UK]

I just hope FFH will have opportunity to participate in the next Kestenbaum's venture:)

 

Edited September 8 by UK

[dartmonkey]

11 hours ago, gfp said:

you really have to appreciate how well played the Stelco situation was for Kestenbaum and Fairfax.  This one is looking pretty smart.

 

 

 

Just to flesh this out, Stelco accepted a buyout bid from Cleveland-Cliffs in July, at $70 a share (a 87% premium to the previous price of Stelco shares, $37.36). Payment is to be $60 in cash, $10 in CLF shares. Those CLF shares have lost almost 30% of their value in the 2 months since then, so when the deal closes, Stelco may get shares that are worth about $7, if CLF shares are still around $11.50 when the deal closes (expected in Q4). Competitor US Steel, not involved in the deal, is down 21% in the interim; I might add that SLX, a steel ETF, is down too, about 11%.

 

I love it when Fairfax opportunistically accepts a nosebleed offer, like the pet insurance bid by JAB Holdings a couple of years ago or this Stelco bid. When I heard they were shopping Bauer/Maverik/Peak, which seems to have been a modestly successful investment (about 10% CAGR I think), I wondered why they don't just hold onto it, hoping someone develops an irresistible craving for a hockey/lacrosse equipment company. What's the hurry?

 

Anyways, this Stelco sale is just one more happy ending in what seems like a charmed period for Fairfax. Presuming it works out, of course; the breakup fee is only 3% of the value of the transaction.

[Viking]

My next long-form post on Fairfax will be a 4 year anniversary post -  lessons learned. To set the table, here is a post I just put up on Twitter.

 

There is a narrative that to be successful, an investor HAS TO own big tech. Because over time, big tech outperforms everything else. Maybe not. Our mystery stock has trounced big tech over the last 4 years. Who is it? I’ll give you a hint... $FFH.TO $FRFHF $GOOG $MSFT $AAPL $META $AMZN

 

Edited September 6 by Viking

[SafetyinNumbers]

4 hours ago, dartmonkey said:

 

 

When I heard they were shopping Bauer/Maverik/Peak, which seems to have been a modestly successful investment (about 10% CAGR I think), I wondered why they don't just hold onto it, hoping someone develops an irresistible craving for a hockey/lacrosse equipment company. What's the hurry?

 

I think probably just like Stelco, their partners including management were ready to sell and so they are moving on instead of buying them out. 

[gfp]

Saw this article on Brit and thought some mind find it interesting here -

https://www.reinsurancene.ws/brit-posts-80-5-undiscounted-cor-in-h124-pre-tax-profit-climbs-to-362-4m/

[SafetyinNumbers]

S&P/TSX 60 decided not to kick out AQN so no change to the index. A reprieve for those still adding including the company. 

[dartmonkey]

1 hour ago, SafetyinNumbers said:

S&P/TSX 60 decided not to kick out AQN so no change to the index. A reprieve for those still adding including the company. 

There's always a silver lining! 

 

But did the S&P make an announcement? No changes to the index at all? I can't see anything on the TSX website.

[SafetyinNumbers]

52 minutes ago, dartmonkey said:

There's always a silver lining! 

 

But did the S&P make an announcement? No changes to the index at all? I can't see anything on the TSX website.

[dartmonkey]

yes, but that is not the S&P TSX 60 (60 large caps), it’s the S&P TSX Composite, with 226 constituents 

[SafetyinNumbers]

35 minutes ago, dartmonkey said:

yes, but that is not the S&P TSX 60 (60 large caps), it’s the S&P TSX Composite, with 226 constituents 

I’m sure you looked at a sample of press releases when they made changes to S&P/TSX 60 after a quarterly index review and noticed they announce the S&P/TSX Composite changes in the same press release.

 

I don’t think I have ever seen them announce that they weren’t going to make any changes. If you have an example, please share.

[dartmonkey]

13 hours ago, SafetyinNumbers said:

I’m sure you looked at a sample of press releases when they made changes to S&P/TSX 60 after a quarterly index review and noticed they announce the S&P/TSX Composite changes in the same press release.

 

Hell no, but I'll take your word for it.

 

Ok, I found their press releases, going back to Sept 2021. But what I get from the extra homework you assigned me is that they typically only make changes when they have to, usually because a big company has split (like Brookfield) or, more often, because a component has been bought out (Kirkland Lake, InterPipeline, Bausch, Shaw). I can only see one change that seems to be motivated by size (adding Intact, deleting Canopy), and the size difference was bigger than the Fairfax/Algonquin swap we fantasized about (Intact was bigger than Fairfax is, and Canopy had become much smaller than Algonquin.)

 

So maybe Fairfax's best chance is when some current component gets merged with another component or bought out by a non-Canadian company. Then Fairfax would probably be the most likely addition, as it is the biggest Canadian company (#27) not already in the TSX 60 which is supposed to be "designed to represent leading companies in leading industries". 

[MMM20]

6 minutes ago, dartmonkey said:

So maybe Fairfax's best chance is when some current component gets merged with another component or bought out by a non-Canadian company.

The Sleep Country thing makes so much sense now!

 

Edited September 7 by MMM20

[dartmonkey]

So maybe Fairfax's best chance is when some current component gets merged with another component or bought out by a non-Canadian company.

The Sleep Country thing makes so much sense now!

 

Yes, if only Sleep Country had been big enough to be in the TSX 60! But at $1.7b, it's only a third the size of Algonquin, the smallest component. We need to think bigger. I propose we buy out Canadian Tire Corp (market cap $9b), #57 in the TSX 60, and then, to be sure to get in, we become Canadian Tires Beds and Restaurants - got to get away from that 'Financials' image...

[Viking]

Fairfax Financial - 8 Lessons Learned Over the Past 4 Years

 

“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.” Jesse Livermore Reminiscences of a Stock Operator

 

What it takes to be a successful investor has not changed very much over the years. That is because capitalism is a wonderful economic system - our standard of living continues to improve. And human nature has not changed - people will continue to act like they always have. Learning from the past is an important way for an investor to get an edge - it can give you a preview of what is likely to happen again in the future.

 

The Fairfax story

 

The last 4 years has been an amazing time to be invested in Fairfax. The company is executing one of the great comebacks in recent Canadian business history - both in terms of business and share price performance. It is both an interesting and instructive story.

 

As investors, what can we learn from Fairfax’s improbable transformation/performance over the past 4 years?

 

That is the question we will explore in this post.

 

But first let’s do a quick review of a very important performance measure.

 

—————

 

How has Fairfax’s stock performed?

 

Fairfax’s stock is up 297% over the past 4 years. That is a CAGR of 41.1%. $1,000 invested in Fairfax 4 years ago would be worth $3,968 today, an increase of $2,968. That is a crazy good.

 

How does Fairfax’s performance compare to the market averages?

• The S&P500 is up a total of 61% over the past 4 years.
• The S&P/TSX is up a total of 42% over the past 4 years.

Fairfax’s outperformance of the market averages in the US and Canada has been breathtaking.

 

 

How does Fairfax’s performance compare to P/C insurance peers?

 

P/C insurance companies, as a group, have significantly outperformed the broad market averages  over the past 4 years.

 

The big winner of the 6 companies compared below has been Fairfax - their performance has trounced P/C insurance peers over the past 4 years. Fairfax’s CAGR is about 2x that of peers. The big laggard (of the 6 companies compared below) has been Markel.

 

Fairfax’s performance over the past 4 years - in absolute and relative terms - has been epic.

 

 

—————-

 

"What we learn from history is that people don't learn from history." Warren Buffett

 

With that warning from Buffett, let’s get back to our original question. Let’s try and be inquisitive and open minded…

 

As investors, what can we learn from Fairfax’s improbable transformation/performance over the past 4 years?

 

Below are 10 lessons that come to mind for me.

 

What do other posters think? Am I way off base? I do like to stir the pot. Do you see anything missing? Please chime in.

 

—————

 

Lesson 1: Investors need to be rational at all times with their investments

 

Investing (buying stocks) is not like getting married. Or like joining a club/clique (sorry Tom Gaynor).

 

Ideally, we are able to buy stocks and hold them forever. But that is just not realistic for most stocks. And that is because shit happens. Facts change. Fundamentals / earnings change. Sometimes management teams lose their way. A great investment can become a terrible investment. But unlike marriage, exiting a broken stock is an easy thing for an investor to do.

 

When should an investor sell an investment?

 

According to Peter Lynch, a pretty smart guy, an investor should sell an investment when the story / fundamentals take a turn for the worse. Pretty simple.

 

The Fairfax ‘story’

 

Over its long history, a person usually invested in Fairfax because of their investing skills - not because of the quality of their P/C insurance business. (Yes, that has changed today.)

 

But something important happened at Fairfax from 2010 to 2020. Fairfax lost its way with its investing framework:

• The ‘equity hedge/short’ strategy was a disaster, costing the company an average of $494 million/year from 2010 to 2020. The issue with this ‘position’ was its size (massive) and duration (largely in place for 11 years).
• The equity purchases made from 2014 to 2017 were also largely a disaster.

This caused earnings at the company to stagnate. And the stock went sideways from 2010 to 2020. During this time, the S&P500 went up 200%. Measured in terms of opportunity cost, Fairfax investors ‘lost’ a significant amount of money from 2010 to 2020.

 

This, of course, violated Warren Buffett’s rule #1 (when investing) which is ‘don’t lose money.’

 

What was the learning - looking back, what should a rational investor have done?

 

By about 2012/2013 it was clear that  Fairfax had lost its way on the investing side of the business. As a result, the Fairfax ‘story’ had changed significantly - and for the worse.

 

The correct course of action for an investor back in 2012/2013 was to sell their Fairfax stock - and move on.

 

This course of action would have saved many investors years of anguish and massive underperformance.

 

This does not mean that an investor could never again invest in Fairfax. Like any other opportunity, what an investor did in the future would depend on their assessment of the opportunity (fundamentals, management, prospects, valuation etc). Again, an investor needs to be as rational as possible at all times.

 

Now i am looking at things from the perspective of a small investor. If i do a good job with my investments my family eats. If i do a shitty job my family doesn’t eat. As a result, i need to be very rational at all times with my investment decisions.

 

The silver lining

 

"The most important thing to do if you find yourself in a hole is to stop digging." Warren Buffett

 

Fairfax’s problems were self inflicted. Therefore, the ‘fix’ was also in their control. So the situation was not hopeless. It deserved to be monitored. If Fairfax was able to fix its investing framework then it might make sense for an investor to buy shares. Logic, not hope, should drive the investment decision.

 

But given the stocks exceptional run the past 4 years, doesn’t this mean buy and hold was - with hindsight - the correct course of action to have taken with Fairfax?

 

No. Selling back in 2012/2013 was still the correct course of action. And that is because back then Fairfax had lost its way with its investing framework.

 

And back in 2012/2013 (and over the next couple of years that followed) it was clear that Fairfax did not yet recognize that they even had a problem.

 

Fairfax did not start righting their investing framework until late 2016 when they finally exited the equity hedges. By 2018 they were making much better decisions with new equity purchases. The final ‘fix’ was made at the end of 2020, when they exited the last of their short positions. It still took another couple of years for Fairfax to clean up the many problem children that were still residing in their equity portfolio. As a result, it was only around 2021 that investors started to trust that Fairfax had indeed righted the ship and fixed their investing framework. That was a full 7 years after it was pretty clear that Fairfax had a problem.

 

And back in 2012/2013 it was not a given that Fairfax would actually fix anything. This could have easily gone the other way - with their investments, Fairfax could have continued to go down their old disastrous path.

 

Long term shareholders have been very lucky with how their investment in Fairfax has played out over the past 4 years - not smart. Yes, Fairfax was able to execute a successful turnaround. But that is not what usually happens.

 

There is also an important lesson here for Fairfax

 

Fairfax wants to attract long term shareholders - that was pretty apparent during the Q&A sessions at the AGM this year. If this is the case, then Fairfax needs to hold up its end of the bargain - they need to run the business in a way that attracts/aligns with long term shareholders. When it comes to the type of shareholder base they have, companies generally get what they deserve.

 

—————

 

Lesson 2: Financial markets sometimes get it completely wrong - for years

 

"The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd." Warren Buffett

 

Pretty much everyone got Fairfax wrong 4 years ago.

 

Who got Fairfax the most wrong? The haters. Their hate stopped them from being rational. It stopped them from looking at the company objectively. As a result, they likely did not invest in Fairfax at all. So they missed out on one of the great investments of the past 4 years.

 

The haters are a pretty quiet bunch these days. But they were out in full force in 2020.

 

But even many of those who were positive on Fairfax 4 years ago were also very wrong. They grossly underestimated the opportunity. As a result they likely did not size their position properly. And many likely sold their position much too soon.

 

Who got Fairfax the most right 4 years ago? Some lucky guy named Prem Watsa who invested $150 million in Fairfax at US$308/share in June of 2020 at pretty much the bottom. If only he had not kept his investment (and his rationale) secret… we all could have learned and benefitted from what he knew!

 

Of course, Prem did tell investors what he was doing and why. Prem nailed it. And we all completely ignored him. (I guess this also explains why he is a billionaire and we are not!)

 

From Fairfax’s press release on June 15, 2020:

 

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.”

 

—————

 

Be careful who you listen to

 

Who and what you let into your brain is super important. It is crazy how easily an investor can get messed up by their ‘information’ sources. Bad analysis and faulty logic can pollute rational thought / actions - once it gets into your head/thought process it can be very difficult to remove.

 

Ignore the haters

 

As we learned in lesson #1, successful investing is centred on being rational. Haters don’t care about fundamentals/earnings, management, prospects or valuation. Haters are blinded by the facts, especially at inflection points. The problem is the haters usually say things with a lot of conviction - and the old (wrong) narrative makes so much sense. This makes their views sound very persuasive at the time.

 

Back in 2020, the haters were out in full force. What were they saying? ‘Prem is an idiot.’ Or something similar. Their ‘analysis’ was exclusively rear-view mirror in nature. The positive changes happening at the company didn’t matter. The improving fundamentals / earnings didn’t matter.

 

This leads into our next lesson.

 

—————

 

3.) The Corner of Berkshire & Fairfax is an amazing resource for investors.

 

"You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital." Warren Buffett

 

Having the opportunity to hang out with, learn from and debate with many other successful investors from all walks of life and all over the world is amazing. Being able to do so for 20 years is priceless.

 

The Corner of Berkshire and Fairfax (CofBF) has been sprinkling pixie dust on its members for more than 20 years. Thank you Sanjeev for running this wonderful investment forum.

 

And when it comes to Fairfax, there is no better resource for investors out there. The analysis provided by board members over the years (20 and counting) has been simply outstanding. And for the past 4 years, members of CofBF have had a front row seat to Fairfax’s amazing turnaround.

 

Out of favour = under-followed

 

The fact that sentiment in Fairfax got so bad back in 2020 was actually a big help in this regard.

 

Pretty much no one was following the company back then. At the same time, the old narrative surrounding the company was completely wrong. That is a wonderful set up for an independently thinking, open-minded investor.

 

When it came to Fairfax as investment, this gave CofBF board members a massive information advantage over the entire investment community. This advantage has persisted for years.

 

But seeing an opportunity is not enough.

 

—————

 

4.) Knowledge without action often results in the biggest mistakes for investors.

 

“The most extreme mistakes in Berkshire's history have been mistakes of omission. We saw it, but didn't act on it. They're huge mistakes — we've lost billions. And we keep doing it. We're getting better at it. We never get over it.” There are two types of mistakes: 1) doing nothing; what Warren calls “sucking my thumb” and 2) buying with an eyedropper things we should be buying a lot of.” Charlie Munger

 

To make money an investor can’t just read/study and sit in cash. At some point in time they have to act on what they have learned and buy something. And they need to size their position properly (more on this later in the post).

 

Sanjeev (and others) were pounding the table very loudly on Fairfax during the entire summer of 2020. At the time, they provided lots of great analysis in support of their views. The opportunity in Fairfax was gift wrapped for the members of the Corner of Berkshire and Fairfax.

 

For a trip down memory lane, below are links to a couple of threads from 2020 with Sanjeev (and a few others) pointing out how cheap Fairfax had gotten - with pushback from lots of others. In the second link, Sanjeev suggests Fairfax could return 300% over a 5-7 year time frame. It got there in 4 years.

• https://thecobf.com/forum/topic/18079-remember-this-quote/#comment-411701
• https://thecobf.com/forum/topic/17401-fairfax-2020/page/12/#comment-401311

What is interesting is how fast the general stock market bounced back in 2020 - by August the S&P500 took out its pre-Covid high (reached in February) and was back at all-time highs.

 

In February of 2020, Fairfax was trading at $475/share. From March 17 to November 13, 2020, Fairfax traded below $320/share. Investors had about 8 months to do their research, get comfortable with the story and still buy Fairfax at a historically cheap valuation.

 

Fairfax did not take out its pre-Covid (February) high until December of 2021. It stayed cheap for years.

 

But how many board members actually invested in Fairfax in 2020? Or 2021? Or 2022? Or 2023?

 

Not acting on what you know - Buffett calls that ‘thumb sucking.’ My guess is when it comes to Fairfax, there has been a lot of thumb sucking going on the past 4 years.

 

What about me? What was I doing?

 

All through the summer I was listening to Sanjeev and others on the board - I just wasn’t doing anything about it (that ‘thumb sucking’ thing). That changed in late October 2020, when I re-established a position in the stock.  I got very lucky with my timing. Not surprisingly, that is also when my posting on Fairfax started to increase.

• https://thecobf.com/forum/topic/17401-fairfax-2020/page/26/#comment-422165

—————-

 

To be continued: The final 4 lessons will come in my next long-form post which should be completed in the next week. 

Edited September 10 by Viking

[73 Reds]

16 minutes ago, Viking said:

Fairfax Financial - 10 Lessons Learned Over the Past 4 Years

 

“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.” Jesse Livermore Reminiscences of a Stock Operator

 

What it takes to be a successful investor has not changed very much over the years. That is because capitalism is a wonderful economic system - our standard of living continues to improve. And human nature has not changed - people will continue to act like they always have. Learning from the past is an important way for an investor to get an edge - it can give you a preview of what is likely to happen in the future.

 

The Fairfax story

 

The last 4 years has been an amazing time to be invested in Fairfax. The company is executing one of the great comebacks in recent Canadian business history - both in terms of business and share price performance. It is both an interesting and instructive story.

 

As investors, what can we learn from Fairfax’s improbable transformation/performance over the past 4 years?

 

That is the question we will explore in this post.

 

But first let’s do a quick review of a very important performance measure.

 

—————

 

How has Fairfax’s stock performed?

 

Fairfax’s stock is up 297% over the past 4 years. That is a CAGR of 41.1%. $1,000 invested in Fairfax 4 years ago would be worth $3,968 today, an increase of $2,968. That is a crazy good.

 

How does Fairfax’s performance compare to the market averages?

• The S&P500 is up a total of 61% over the past 4 years.
• The S&P/TSX is up a total of 42% over the past 4 years.

Fairfax’s outperformance of the market averages in the US and Canada has been breathtaking.

 

 

How does Fairfax’s performance compare to P/C insurance peers?

 

P/C insurance companies, as a group, have significantly outperformed the broad market averages  over the past 4 years.

 

The big winner of the 6 companies compared below has been Fairfax - their performance has trounced P/C insurance peers over the past 4 years. Fairfax’s CAGR is about 2x that of peers. The big laggard (of the 6 companies compared below) has been Markel.

 

Fairfax’s performance over the past 4 years - in absolute and relative terms - has been epic.

 

 

—————-

 

"What we learn from history is that people don't learn from history." Warren Buffett

 

With that warning from Buffett, let’s get back to our original question. Let’s try and be inquisitive and open minded…

 

As investors, what can we learn from Fairfax’s improbable transformation/performance over the past 4 years?

 

Below are 10 lessons that come to mind for me.

 

What do other posters think? Am I way off base? I do like to stir the pot. Do you see anything missing? Please chime in.

 

—————

 

Lesson 1: Investors need to be rational at all times with their investments

 

Investing (buying stocks) is not like getting married. Or like joining a club/clique (sorry Tom Gaynor).

 

Ideally, we are able to buy stocks and hold them forever. But that is just not realistic for most stocks. And that is because shit happens. Facts change. Fundamentals / earnings change. Sometimes management teams lose their way. A great investment can become a terrible investment. But unlike marriage, exiting a broken stock is an easy thing for an investor to do.

 

When should an investor sell an investment?

 

According to Peter Lynch, a pretty smart guy, an investor should sell an investment when the story / fundamentals take a turn for the worse. Pretty simple.

 

The Fairfax ‘story’

 

Over its long history, a person usually invested in Fairfax because of their investing skills - not because of the quality of their P/C insurance business. (Yes, that has changed today.)

 

But something important happened at Fairfax from 2010 to 2020. Fairfax lost its way with its investing framework:

• The ‘equity hedge/short’ strategy was a disaster, costing the company an average of $494 million/year from 2010 to 2020. The issue with this ‘position’ was its size (massive) and duration (largely in place for 11 years).
• The equity purchases made from 2014 to 2017 were also largely a disaster.

This caused earnings at the company to stagnate. And the stock went sideways from 2010 to 2020. During this time, the S&P500 went up 200%. Measured in terms of opportunity cost, Fairfax investors ‘lost’ a significant amount of money from 2010 to 2020.

 

This, of course, violated Warren Buffett’s rule #1 (when investing) which is ‘don’t lose money.’

 

What was the learning - looking back, what should a rational investor have done?

 

By about 2012/2013 it was clear that  Fairfax had lost its way on the investing side of the business. As a result, the Fairfax ‘story’ had changed significantly - and for the worse.

 

The correct course of action for an investor back in 2012/2013 was to sell their Fairfax stock - and move on.

 

This course of action would have saved many investors years of anguish and massive underperformance.

 

This does not mean that an investor could never again invest in Fairfax. Like any other opportunity, what an investor did in the future would depend on their assessment of the opportunity (fundamentals, management, prospects, valuation etc). Again, an investor needs to be as rational as possible at all times.

 

Now i am looking at things from the perspective of a small investor. If i do a good job with my investments my family eats. If i do a shitty job my family doesn’t eat. As a result, i need to be very rational at all times with my investment decisions.

 

The silver lining

 

"The most important thing to do if you find yourself in a hole is to stop digging." Warren Buffett

 

Fairfax’s problems were self inflicted. Therefore, the ‘fix’ was also in their control. So the situation was not hopeless. It deserved to be monitored. If Fairfax was able to fix its investing framework then it might make sense for an investor to buy shares. Logic, not hope, should drive the investment decision.

 

But given the stocks exceptional run the past 4 years, doesn’t this mean buy and hold was - with hindsight - the correct course of action to have taken with Fairfax?

 

No. Selling back in 2012/2013 was still the correct course of action. And that is because back then Fairfax had lost its way with its investing framework.

 

And back in 2012/2013 (and over the next couple of years that followed) it was clear that Fairfax did not yet recognize that they even had a problem.

 

Fairfax did not start righting their investing framework until late 2016 when they finally exited the equity hedges. By 2018 they were making much better decisions with new equity purchases. The final ‘fix’ was made at the end of 2020, when they exited the last of their short positions. It still took another couple of years for Fairfax to clean up the many problem children that were still residing in their equity portfolio. As a result, it was only around 2021 that investors started to trust that Fairfax had indeed righted the ship and fixed their investing framework. That was a full 7 years after it was pretty clear that Fairfax had a problem.

 

And back in 2012/2013 it was not a given that Fairfax would actually fix anything. This could have easily gone the other way - with their investments, Fairfax could have continued to go down their old disastrous path.

 

Long term shareholders have been very lucky with how their investment in Fairfax has played out over the past 4 years - not smart. Yes, Fairfax was able to execute a successful turnaround. But that is not what usually happens.

 

There is also an important lesson here for Fairfax

 

Fairfax wants to attract long term shareholders - that was pretty apparent during the Q&A sessions at the AGM this year. If this is the case, then Fairfax needs to hold up its end of the bargain - they need to run the business in a way that attracts/aligns with long term shareholders. When it comes to the type of shareholder base they have, companies generally get what they deserve.

 

—————

 

Lesson 2: Financial markets sometimes get it completely wrong - for years

 

"The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd." Warren Buffett

 

Pretty much everyone got Fairfax wrong 4 years ago.

 

Who got Fairfax the most wrong? The haters. Their hate stopped them from being rational. It stopped them from looking at the company objectively. As a result, they likely did not invest in Fairfax at all. So they missed out on one of the great investments of the past 4 years.

 

The haters are a pretty quiet bunch these days. But they were out in full force in 2020.

 

But even many of those who were positive on Fairfax 4 years ago were also very wrong. They grossly underestimated the opportunity. As a result they likely did not size their position properly. And many likely sold their position much too soon.

 

Who got Fairfax the most right 4 years ago? Some lucky guy named Prem Watsa who invested $150 million in Fairfax at US$308/share in June of 2020 at pretty much the bottom. If only he had not kept his investment (and his rationale) secret… we all could have learned and benefitted from what he knew!

 

Of course, Prem did tell investors what he was doing and why. Prem nailed it. And we all completely ignored him. (I guess this also explains why he is a billionaire and we are not!)

 

From Fairfax’s press release on June 15, 2020:

 

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.”

 

—————

 

Be careful who you listen to

 

Who and what you let into your brain is super important. It is crazy how easily an investor can get messed up by their ‘information’ sources. Bad analysis and faulty logic can pollute rational thought / actions - once it gets into your head/thought process it can be very difficult to remove.

 

Ignore the haters

 

As we learned in lesson #1, successful investing is centred on being rational. Haters don’t care about fundamentals/earnings, management, prospects or valuation. Haters are blinded by the facts, especially at inflection points. The problem is the haters usually say things with a lot of conviction - and the old (wrong) narrative makes so much sense. This makes their views sound very persuasive at the time.

 

Back in 2020, the haters were out in full force. What were they saying? ‘Prem is an idiot.’ Or something similar. Their ‘analysis’ was exclusively rear-view mirror in nature. The positive changes happening at the company didn’t matter. The improving fundamentals / earnings didn’t matter.

 

This leads into our next lesson.

 

—————

 

3.) The Corner of Berkshire & Fairfax is an amazing resource for investors.

 

"You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital." Warren Buffett

 

Having the opportunity to hang out with, learn from and debate with many other successful investors from all walks of life and all over the world is amazing. Being able to do so for 20 years is priceless.

 

The Corner of Berkshire and Fairfax (CofBF) has been sprinkling pixie dust on its members for more than 20 years. Thank you Sanjeev for running this wonderful investment forum.

 

And when it comes to Fairfax, there is no better resource for investors out there. The analysis provided by board members over the years (20 and counting) has been simply outstanding. And for the past 4 years, members of CofBF have had a front row seat to Fairfax’s amazing turnaround.

 

Out of favour = under-followed

 

The fact that sentiment in Fairfax got so bad back in 2020 was actually a big help in this regard.

 

Pretty much no one was following the company back then. At the same time, the old narrative surrounding the company was completely wrong. That is a wonderful set up for an independently thinking, open-minded investor.

 

When it came to Fairfax as investment, this gave CofBF board members a massive information advantage over the entire investment community. This advantage has persisted for years.

 

But seeing an opportunity is not enough.

 

—————

 

4.) Knowledge without action often results in the biggest mistakes for investors.

 

“The most extreme mistakes in Berkshire's history have been mistakes of omission. We saw it, but didn't act on it. They're huge mistakes — we've lost billions. And we keep doing it. We're getting better at it. We never get over it.” There are two types of mistakes: 1) doing nothing; what Warren calls “sucking my thumb” and 2) buying with an eyedropper things we should be buying a lot of.” Charlie Munger

 

To make money an investor can’t just read/study and sit in cash. At some point in time they have to act on what they have learned and buy something. And they need to size their position properly (more on this later in the post).

 

Sanjeev (and others) were pounding the table very loudly on Fairfax during the entire summer of 2020. At the time, they provided lots of great analysis in support of their views. The opportunity in Fairfax was gift wrapped for the members of the Corner of Berkshire and Fairfax.

 

For a trip down memory lane, below are links to a couple of threads from 2020 with Sanjeev (and a few others) pointing out how cheap Fairfax had gotten - with pushback from lots of others. In the second link, Sanjeev suggests Fairfax could return 300% over a 5-7 year time frame. It got there in 4 years.

• https://thecobf.com/forum/topic/18079-remember-this-quote/#comment-411701
• https://thecobf.com/forum/topic/17401-fairfax-2020/page/12/#comment-401311

What is interesting is how fast the general stock market bounced back in 2020 - by August the S&P500 took out its pre-Covid high (reached in February) and was back at all-time highs.

 

In February of 2020, Fairfax was trading at $475/share. From March 17 to November 13, 2020, Fairfax traded below $320/share. Investors had about 8 months to do their research, get comfortable with the story and still buy Fairfax at a historically cheap valuation.

 

Fairfax did not take out its pre-Covid (February) high until December of 2021. It stayed cheap for years.

 

But how many board members actually invested in Fairfax in 2020? Or 2021? Or 2022? Or 2023?

 

Not acting on what you know - Buffett calls that ‘thumb sucking.’ My guess is when it comes to Fairfax, there has been a lot of thumb sucking going on the past 4 years.

 

What about me? What was I doing?

 

All through the summer I was listening to Sanjeev and others on the board - I just wasn’t doing anything about it (that ‘thumb sucking’ thing). That changed in late October 2020, when I re-established a position in the stock.  I got very lucky with my timing. Not surprisingly, that is also when my posting on Fairfax started to increase.

• https://thecobf.com/forum/topic/17401-fairfax-2020/page/26/#comment-422165

—————-

 

Ton be continued: The final 6 lessons will come in my next long-form post which should be completed in the next week. 

@Viking, while I largely agree with you, it is a stretch to suggest that those who did not invest in Fairfax got it wrong.   It was, and frankly still is completely rational to look at management responsible for the company's stagnation in the 2010s and compare them to present management.  Looks like mostly the same folks.  Personally, management is the number one factor in any investment I make.  Without management, i.e., decision-making, companies don't generate anything.  My choice to invest in Fairfax was due solely to how cheap the price had become; I initially invested IN SPITE OF (not because of) management.  Has management done better in the 2020s?  Well yes, for many of the reasons of which you so eloquently write.  But even so, I'd hardly be willing to give the same management a pass for 10 years of poor decision-making and don't blame prior shareholders at all for taking a pass on this stock.  Unlike Berkshire, where for 40+ years I've never questioned management (even while admittedly not understanding many decisions, past and present) Fairfax is, and always will be on a relatively short leash.      

[SafetyinNumbers]

46 minutes ago, 73 Reds said:

@Viking, while I largely agree with you, it is a stretch to suggest that those who did not invest in Fairfax got it wrong.   It was, and frankly still is completely rational to look at management responsible for the company's stagnation in the 2010s and compare them to present management.  Looks like mostly the same folks.  Personally, management is the number one factor in any investment I make.  Without management, i.e., decision-making, companies don't generate anything.  My choice to invest in Fairfax was due solely to how cheap the price had become; I initially invested IN SPITE OF (not because of) management.  Has management done better in the 2020s?  Well yes, for many of the reasons of which you so eloquently write.  But even so, I'd hardly be willing to give the same management a pass for 10 years of poor decision-making and don't blame prior shareholders at all for taking a pass on this stock.  Unlike Berkshire, where for 40+ years I've never questioned management (even while admittedly not understanding many decisions, past and present) Fairfax is, and always will be on a relatively short leash.      

I think this perspective ignores context and the balance sheet but that’s what makes a market. 

[Viking]

5 hours ago, 73 Reds said:

@Viking, while I largely agree with you, it is a stretch to suggest that those who did not invest in Fairfax got it wrong.   It was, and frankly still is completely rational to look at management responsible for the company's stagnation in the 2010s and compare them to present management.  Looks like mostly the same folks.  Personally, management is the number one factor in any investment I make.  Without management, i.e., decision-making, companies don't generate anything.  My choice to invest in Fairfax was due solely to how cheap the price had become; I initially invested IN SPITE OF (not because of) management.  Has management done better in the 2020s?  Well yes, for many of the reasons of which you so eloquently write.  But even so, I'd hardly be willing to give the same management a pass for 10 years of poor decision-making and don't blame prior shareholders at all for taking a pass on this stock.  Unlike Berkshire, where for 40+ years I've never questioned management (even while admittedly not understanding many decisions, past and present) Fairfax is, and always will be on a relatively short leash.      

@73 Reds  Thanks for the comment - it is great to get the opportunity to discuss/debate.
 

My point was more about the importance of trying to be as rational as possible as an investor at all times - especially during times of great stress. As opposed to letting emotion be the primary driver the investment decision. 

 

As we all know, in practice, that is an exceptionally difficult thing to do. Lots of investors fail. 

 

In 2020 when Fairfax was trading for most of the year at a P/BV of 0.7 (and as low as 0.6x) even after financial markets had rebounded - that had nothing to do with rational, fact based analysis. 

Concerns about management? 

 

Truth be told, Fairfax fixed their biggest issue (dragging down their long term performance) back at the end of 2016 when they removed the equity hedge. That was public knowledge.
 

And it was possible to see the improvements they were making in their investing framework by late 2019. I did a ‘Top 10’ on Fairfax at the end of 2019 and at the time i titled it ‘the supertanker is turning’. 
 

So why did Fairfax get so cheap and stay so cheap for most of 2020? I don’t think there is a reason based in rational analysis. Fear (not greed) was driving most investors investment decisions back then (when it came to Fairfax). This bias against the company persisted into 2023.

 

The time to sell Fairfax was back in 2012/2013. Not 2020 after it had fallen to 0.7x P/BV. That was the time to buy - and hand over fist.

Edited September 8 by Viking

[Viking]

5 hours ago, 73 Reds said:

@Viking, while I largely agree with you, it is a stretch to suggest that those who did not invest in Fairfax got it wrong.   It was, and frankly still is completely rational to look at management responsible for the company's stagnation in the 2010s and compare them to present management.  Looks like mostly the same folks.  Personally, management is the number one factor in any investment I make.  Without management, i.e., decision-making, companies don't generate anything.  My choice to invest in Fairfax was due solely to how cheap the price had become; I initially invested IN SPITE OF (not because of) management.  Has management done better in the 2020s?  Well yes, for many of the reasons of which you so eloquently write.  But even so, I'd hardly be willing to give the same management a pass for 10 years of poor decision-making and don't blame prior shareholders at all for taking a pass on this stock.  Unlike Berkshire, where for 40+ years I've never questioned management (even while admittedly not understanding many decisions, past and present) Fairfax is, and always will be on a relatively short leash.      

@73 Reds Here is perhaps another way to look at it. If an investor buys a stock and then the ‘story’ changes for the worse (for whatever reason) and they choose not to sell that investment. And then it drops precipitously in value 5 or 10 years later.
 

Who is primarily to blame? Is it:

1.) management of the company?

2.) or the investor - for not selling as soon as they knew the story had changed?

 

My view is the blame primarily rests with the investor. 

Edited September 8 by Viking