dartmonkey Posted December 2 Posted December 2 37 minutes ago, Viking said: There is speculation that Fairfax will be added to the big index in Canada - the S&P/TSX 60. Perhaps as soon as December 6, 2024. Quibble: the announcement would come that day, but the addition of FFH, if it happens, would only come 2 weeks later. As for the impact on FFH's share price, it is likely to increase the price immediately following the announcement, although market participants are probably including some oor all of this increase in the price - it is far from a secret. This study showed that stocks added to the S&P 500 used to have a big rise, around 8% between announcement and inclusion, but only a trivial rise in the last 10 years: https://finance.yahoo.com/news/history-says-being-added-p-083500408.html. I don't know whether we have any such data for S&P TSX 60 stocks. But if we hear on Friday that FFH will be included, my bet would be there is less than a 5% move upwards in the following 2 weeks. And if FFH is not included, I bet we get a drop of at least 5%. That might be a good chance to buy before the next announcement.
Viking Posted December 2 Posted December 2 7 minutes ago, dartmonkey said: Quibble: the announcement would come that day, but the addition of FFH, if it happens, would only come 2 weeks later. As for the impact on FFH's share price, it is likely to increase the price immediately following the announcement, although market participants are probably including some oor all of this increase in the price - it is far from a secret. This study showed that stocks added to the S&P 500 used to have a big rise, around 8% between announcement and inclusion, but only a trivial rise in the last 10 years: https://finance.yahoo.com/news/history-says-being-added-p-083500408.html. I don't know whether we have any such data for S&P TSX 60 stocks. But if we hear on Friday that FFH will be included, my bet would be there is less than a 5% move upwards in the following 2 weeks. And if FFH is not included, I bet we get a drop of at least 5%. That might be a good chance to buy before the next announcement. @dartmonkey , thanks for the 'quibble'. I have edited my post to make it more accurate. Much appreciated. I did spend some time reading about how index investing is impacting financial markets. I did not find anything that that really scratched my itch. So I will keep looking. I am wondering if index investing, as it grows in popularity, does not cause some structural changes. Being in an index just seems like such an advantage for large companies - especially those that are growing earnings and where the fundamentals are improving. It results in a virtuous circle - resulting in multiple expansion. And high multiple = high quality.
73 Reds Posted December 2 Posted December 2 7 minutes ago, Viking said: @dartmonkey , thanks for the 'quibble'. I have edited my post to make it more accurate. Much appreciated. I did spend some time reading about how index investing is impacting financial markets. I did not find anything that that really scratched my itch. So I will keep looking. I am wondering if index investing, as it grows in popularity, does not cause some structural changes. Being in an index just seems like such an advantage for large companies - especially those that are growing earnings and where the fundamentals are improving. It results in a virtuous circle - resulting in multiple expansion. And high multiple = high quality. Seems to me that being in an index would help the laggard (worst) stocks of the index the most from forced buying of shares by the index as it [the index] appreciates in price.
dartmonkey Posted December 2 Posted December 2 19 minutes ago, Viking said: I did not find anything that that really scratched my itch. No, neither did I, although the study I linked to showed not much effect for the S&P. I once had a link to the S&P website that listed the most recent inclusions into the TSX60, so it would be interesting to see what happened to, say, the last 10 additions, but I can't find that link for the moment. I can't even find the thread where we discussed all this about a year ago, maybe it will ring a bell and someone else can point it out.
Viking Posted December 2 Posted December 2 (edited) 1 hour ago, 73 Reds said: Seems to me that being in an index would help the laggard (worst) stocks of the index the most from forced buying of shares by the index as it [the index] appreciates in price. @73 Reds , to me the big winners are the large components of the index that are growing the quickest (in terms of market cap). They get two benefits: 1.) The new money coming into indexing. Significant. 2.) The reallocation within the index. From those who are shrinking to those who are increasing in weighting. The laggards that are in the index will see new money. But if their weighting within the index is shrinking this will be a headwind. I wonder if this does not result in structurally higher multiples for the largest good performing companies. And a structurally higher multiples = ‘high quality’. Edited December 2 by Viking
Viking Posted December 2 Posted December 2 (edited) 2 hours ago, dartmonkey said: No, neither did I, although the study I linked to showed not much effect for the S&P. I once had a link to the S&P website that listed the most recent inclusions into the TSX60, so it would be interesting to see what happened to, say, the last 10 additions, but I can't find that link for the moment. I can't even find the thread where we discussed all this about a year ago, maybe it will ring a bell and someone else can point it out. @dartmonkey , what i find so fascinating about index investing is how it works. It throws sand in the gears of how everyone thinks financial markets work. The ‘clearing mechanism’ for indexes is market cap. The ‘clearing mechanism’ for financial markets is price. As indexing continues to grow in size does this mean market cap will start to distort the market? Is it already happening? Lots of smart people think indexing is the devil. The fact that people who know nothing about investing or financial markets can now outperform 80% of professional advisors is nuts. Is it ‘too good to be true?’ ————— Lots of very wealthy, smart people have enormous amounts of money invested with financial advisors - and not in index funds. And their portfolio is underperforming the broad based indexes. Year after year after year… That makes no sense to me. The current industry model looks broken to me. What is the solution? Ban broad based index investing (or something similar). Or take Vanguard out (so fees to ‘manage’ index funds can increase). Just trying to be open minded… Edited December 3 by Viking
Buckeye Posted December 2 Posted December 2 (edited) 1 hour ago, dartmonkey said: No, neither did I, although the study I linked to showed not much effect for the S&P. I once had a link to the S&P website that listed the most recent inclusions into the TSX60, so it would be interesting to see what happened to, say, the last 10 additions, but I can't find that link for the moment. I can't even find the thread where we discussed all this about a year ago, maybe it will ring a bell and someone else can point it out. Hey Dart, Is this the link you were looking for? It shows all of the recent news releases by the S&P TSX, including additions and deletions. https://www.spglobal.com/spdji/en/indices/equity/sp-tsx-60-index/#news-research https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20240906-1474139/1474139_2024-09-06compositereview-pr.pdf Edited December 2 by Buckeye
dartmonkey Posted December 3 Posted December 3 1 hour ago, Buckeye said: Hey Dart, Is this the link you were looking for? It shows all of the recent news releases by the S&P TSX, including additions and deletions. https://www.spglobal.com/spdji/en/indices/equity/sp-tsx-60-index/#news-research https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20240906-1474139/1474139_2024-09-06compositereview-pr.pdf Ok, I used their press release to find the last 4 additions to the TSX60: I did this quickly, but it seems to show that the short-term movement has not been dramatic, in the first 2 weeks, and the one-year average movement has not been exceptional either, in the context of a bull market, probably beneath the average market performance over the same time period. Of course, that may be because the market had been pricing in the price change already. Based on this, we shouldn't expect any dramatic movements next Monday, if they decide to add FFH to the index.
SafetyinNumbers Posted December 3 Author Posted December 3 1 hour ago, dartmonkey said: Ok, I used their press release to find the last 4 additions to the TSX60: I did this quickly, but it seems to show that the short-term movement has not been dramatic, in the first 2 weeks, and the one-year average movement has not been exceptional either, in the context of a bull market, probably beneath the average market performance over the same time period. Of course, that may be because the market had been pricing in the price change already. Based on this, we shouldn't expect any dramatic movements next Monday, if they decide to add FFH to the index. Each situation is idiosyncratic so I wouldn’t trade off of that conclusion but I’m sure some will. That being said, IFC was at ~1.8x P/B when it went in 2.75 years ago and it’s at ~3x now. If FFH can add 1.2x multiple points in 2.75 years, that would be very welcome. Ultimately however it’s up to shareholders just like us to decide when to provide supply.
MarioP Posted December 3 Posted December 3 (edited) 13 hours ago, Viking said: Fairfax Financial and Index Investors Hat tip: this post was inspired by @SafetyinNumbers many posts on this topic over the past year. Financial markets are constantly evolving. One of the big changes over the past 30 years has been the wide adoption of index investing. How exactly is index investing changing how the stock market works? This is where things get really interesting. The short answer is we don’t really know what impact index investing is having on the stock market or individual stocks. It’s like we are in the middle of a big science experiment and we aren’t sure yet exactly what is going on - how index investing is affecting the stock prices and valuations of individual companies. We likely will have much better answers in another decade or two. But that doesn’t really help us today. What does indexing have to do with Fairfax? There is speculation that Fairfax may be added soon to the big Canadian index, the S&P/TSX 60. With the announcement coming perhaps as soon as December 6, 2024 (with the official add to the index coming 2 weeks later). If Fairfax is added to the S&P/TSX 60 index, will it impact the company’s stock price? And/or its valuation? That is the question we will explore today. What is the best way to look at index investing and understand its impact on a stock’s price? Let’s get out of our comfort zone a little. We are not going to focus on earnings or the fundamentals of a company. Today, we are going to go in a very different direction - we are going to look at the stock price of a company through the lens of supply and demand for its shares. Supply and demand We were all taught in Econ 101 about the law of supply and demand: Supply is the amount of something that is available for sale. Demand is the amount something that people want to buy. The clearing mechanism (how much is actually bought and sold at a point in time) is price. If demand is higher than supply, prices should rise (and vice versa). If supply is higher than demand, prices should fall (and vice versa). The critical assumption built into all of this - is the belief that markets work (and are relatively efficient). The law of supply and demand can be explained simply with a graph, with price on the X-axis and supply on the Y-axis. Where the demand and supply curves intersect on the graph determines the quantity supplied and the price paid. Supply and demand - and shares outstanding We can use supply and demand for shares to explain the stock price of a company at a point in time: a stock price is simply an equilibrium point where both the buyers and sellers of a stock are in agreement. If demand for shares is higher than supply, the stock price should rise (and vice versa). If supply of shares is higher than demand, the stock price should fall (and vice versa). How does index investing impact a stock’s price? There are two basic ways index investing can impact a stock’s price. When a stock is in an index. Ongoing impact. When a stock is added (or removed) from an index. One time impact. Let’s now look at each of these. 1.) What happens to a stock that is in a popular index? Growing demand for shares ETF/index investing has been growing in popularity for the past 30 years and it has now become mainstream, especially in the US. This growth looks structural. As a result, this asset class is poised to continue its torrid growth in the coming years. The growth of this asset class will provide a steady source of new demand for shares of the companies that are in the main indexes like the S&P500 and the S&P/TSX 60. Decline in supply of shares (float) The big broad based ETF/index funds are not market timers. They are largely ‘buy and hold’ investors. As long as the company remains in the index and its weighting remains roughly the same (the business is performing well). As a result, the shares they own are essentially removed from the market. This shrinks the share float for a company - it reduces the supply of shares that are available for sale to the rest of the market. Price agnostic When indexes buy shares they are largely price agnostic - the valuation of the stock doesn’t matter to these buyers. What matters to them is getting their weighting right. This is important. Price is supposed to be the clearing mechanism. But that is not the case for this large and growing group of investors. Let’s now look at the second way index investing can impact a stock’s price. 2.) What happens when a stock gets added to a popular index? The big indexes usually make changes (additions/deletions) each quarter. The winners get added. And the losers get removed. Getting added to an index results in a one-time spike in demand for shares from index funds as they add the stock to get it to the designated weighting. Summary Index investing impacts a stock in many important ways. Short term - When a stock is added to index. One-time increase in demand of shares - price insensitive. Reduction in float (supply of shares available to other investors). Long term - For stocks in an index. Steady demand of shares - price insensitive. Reduction in float (supply of shares available to other investors). The growth outlook for index funds is outstanding. As its popularity grows its impact on financial markets (and individual stocks) will only increase. All things being equal, what do you think this should do to the price of a stock over time? For stocks that are in the big indexes, this set-up looks like a tailwind. How big? Of course, that is the million dollar question. We don’t know. But my guess is the impact is likely greater than most investors realize today. —————- Let’s now expand our analysis a little to include a couple of other factors. Share buybacks Guess what happens if the company is also aggressively buying back its stock? Aggressively reducing the supply of shares (float) at the same time demand is increasing? All things being equal, yes, that should result in a higher price. Quantitative analysis / momentum investing In addition to index investing, one of the other big changes in financial markets over the past 30 years has been the explosion of quantitive analysis / momentum investing. This crowd loves stocks that go up. And that keep going up for years. Guess what stocks get added to an index? Yes, stocks that have already been going up for years (and growing in market cap). People describe index investing as passive investing. It’s not. In how it impacts financial markets, index investing looks an awful lot like another form of momentum investing. And that is because winners are added and losers are subtracted. And within the index, new cash flows disproportionately to best ‘performing’ stocks (with performance measured by market cap). Guess what happens when both the index crowd and the momentum crowd start buying a stock at the same time? And the company is buying back large amounts of stock? The law of supply and demand suggests we should see the stock price increase. This is when we see multiple expansion. Importantly, this process can play out for years. Especially if the company is performing well (is growing earnings and has improving fundamentals). Let’s add one last wrinkle. From value play to quality play What happens when a stock shifts from being a value play to being a quality play? This happens when Mr. Market falls in love with a stock. This results in another new source of demand for stock. Let’s try and bring this long post to a close. What is the perfect set up for a stock? High and growing demand for shares. With buyers willing to pay up (largely price agnostic). With, at the same time, the supply of shares (float) shrinking. With demand coming from the following sources: Value investors Index investors Momentum investors Quality investors Shrinking supply (float): Index investors. Company is buying back stock. This will push the stock price higher. In turn, this will result in an increase in the market cap of the company. This will result in increased demand for its shares. It becomes a virtuous circle. And it can take years to fully play out. —————- What does all of this to do with Fairfax? There is speculation that Fairfax may be added soon to the big Canadian index, the S&P/TSX 60. With the announcement coming perhaps as soon as December 6, 2024 (with the official add to the index coming 2 weeks later). Fairfax is not in the index today. It is currently the 26th largest publicly traded company in Canada based on market cap. https://companiesmarketcap.com/cad/canada/largest-companies-in-canada-by-market-cap/ If Fairfax is added to the S&P/TSX 60 index it will increase demand for shares. And it will reduce the supply of stock (float) available to other investors. This will be another (of many) tailwind for the stock - and one that should last for years. On October 1, 2024, here is what CIBC had to say in a research note: “After attending the annual advisory panel meeting last week, our internal view is that the likelihood of Fairfax being included in the S&P/TSX 60 has increased significantly. The company’s size now outweighs any obstacles or impediments related to sector balance in S&P’s index methodology. An our view, the prospect of FFH’s inclusion has become a matter of when, not if, and we believe the event could bring close to 1MM shares of demand into the stock (representing 15x its 30-day average daily volume).” On December 1, 2024, the following was reported by the Globe and Mail: “Insurance company Fairfax Financial Holdings Ltd. is likely to replace Algonquin Power in the S&P/TSX 60 Index, as it’s the largest S&P/TSX Composite name not in the 60, Mr. Gauthier said (analyst with Scotia). However, he said the index committee might opt to pick trucking company TFI International Inc. over Fairfax, as it comes from a logistics sector that is under-represented in the large-cap index, which is already heavily weighted toward the financial services industry.” “Adding Fairfax would mean demand for 600,000 shares, or 9.5 days of trading.” https://www.theglobeandmail.com/business/article-tmx-expected-to-add-aecon-drop-algonquin-power-in-index-update/ —————- S&P/TSX 60 Index The S&P/TSX 60 is designed to measure the large-cap segment of the Canadian equity market and is structured to reflect the sector weights of the S&P/TSX Composite. The Toronto Stock Exchange (TSX) serves as the distributor of both real-time and historical data for this index. https://www.spglobal.com/spdji/en/indices/equity/sp-tsx-60-index/#overview Criteria for index inclusion The S&P/TSX 60 advisory panel recently met with analysts to review the criteria they use when making changes to the index. It appears the key factor used is size (market cap). Sector weighting is less important as a factor. S&P/TSX Canadian Indices Methodology https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-tsx-canadian-indices.pdf ----------- Buy on the rumour and sell on the news Fairfax shares are up more than 10% since the S&P/TSX 60 advisory panel met with analysts (and CIBC released its report). So perhaps Mr. Market is buying shares in anticipation of Fairfax being added and that is what has been driving the stock price higher over the past month. Perhaps we see Fairfax sell off in the immediate aftermath of what happens on December 6th? Regardless of what we see in the short term, getting added to the S&P/TSX 60 index should be a tailwind for Fairfax's share price in the coming years. The growth of indexing introduces a rare phenomena in the market. As the price of a stock in the index grows faster than the index it will increase it weight in the index based on market cap. So indexer will buy more if the price go up. So will the momentum investor. The demand will go up if the price raise. In economics the branch that study this is the elasticity of price. https://en.m.wikipedia.org/wiki/Price_elasticity_of_demand And in the theory it’s mentioned as a rare phenomena that for some good demand can go up as price go up. https://en.m.wikipedia.org/wiki/Giffen_good or à Veblen good https://en.m.wikipedia.org/wiki/Veblen_good My last economy course was in 1981 so I need to study this a bit but perhaps we will find some theorical basis to study the growing impact of indexing on the stock market. RIP Charlie Munger. Thanks for the lattice work thinking model. Edited December 3 by MarioP Addition of Veblen good
Luke Posted December 3 Posted December 3 2 minutes ago, MarioP said: The growth of indexing introduces a rare phenomena in the market. As the price of a stock in the index grows faster than the index it will increase it weight in the index based on market cap. So indexer will buy more if the price go up. So will the momentum investor. The demand will go up if the price raise. In economics the branch that study this is the elasticity of price. https://en.m.wikipedia.org/wiki/Price_elasticity_of_demand And in the theory it’s mentioned as a rare phenomena that for some good demand can go up as price go up. https://en.m.wikipedia.org/wiki/Giffen_good My last economy course was in 1981 so I need to study this a bit but perhaps we will find some theorical basis to study the growing impact of indexing on the stock market. RIP Charlie Munger. Thanks for the lattice work thinking model. Yeah, a lot of interesting things playing out with index inclusions and I am looking forward to another fairfax bullrun next year haha....
SafetyinNumbers Posted December 3 Author Posted December 3 3 hours ago, MarioP said: The growth of indexing introduces a rare phenomena in the market. As the price of a stock in the index grows faster than the index it will increase it weight in the index based on market cap. So indexer will buy more if the price go up. So will the momentum investor. The demand will go up if the price raise. In economics the branch that study this is the elasticity of price. https://en.m.wikipedia.org/wiki/Price_elasticity_of_demand The index buys a fixed percentage of the float for all companies in the benchmark so I don’t think it’s technically true that they buy more as the weight goes up. It’s certainly worth more but they only buy more shares if money is flowing into the benchmarks (which it usually is). Fairfax does benefit from having a lower than average dividend yield especially if it gets in the 60. XIC yields 2.5% and XIU yields 2.8% and FFH only yields 1%. When dividends are paid out, the buying is spread out over the entire benchmark proportionately favouring below average yields. Another source of buying that does in theory increase as the weight goes up is from active managers trying to compete with the benchmark. I don’t have good data on this but I think FFH is still under owned by significant pension funds, brokers (RBC, BMO etc..) and the large bank-owned money managers. After 4 years of crushing the XIC, if FFH gets added to their actual benchmark XIU, they might finally decide to get to market weight to avoid underperforming.
73 Reds Posted December 3 Posted December 3 14 hours ago, Viking said: @73 Reds , to me the big winners are the large components of the index that are growing the quickest (in terms of market cap). They get two benefits: 1.) The new money coming into indexing. Significant. 2.) The reallocation within the index. From those who are shrinking to those who are increasing in weighting. The laggards that are in the index will see new money. But if their weighting within the index is shrinking this will be a headwind. I wonder if this does not result in structurally higher multiples for the largest good performing companies. And a structurally higher multiples = ‘high quality’. @Viking, not to belabor the point but ANY new money flowing into laggards is a plus so IMO the weakest stocks in an index are the greatest beneficiaries of the strongest (highest quality) stocks. Conceptually not so different than a weak position player on a championship sports team - every player gets the same ring and the position player derives the most benefit from being on the team.
Hoodlum Posted December 3 Posted December 3 We may finally see analyst coverage from TD. They are the only major Canadian bank/brokerage that is not covering Fairfax today.
Viking Posted December 4 Posted December 4 (edited) On 12/3/2024 at 1:57 AM, MarioP said: The growth of indexing introduces a rare phenomena in the market. As the price of a stock in the index grows faster than the index it will increase it weight in the index based on market cap. So indexer will buy more if the price go up. So will the momentum investor. The demand will go up if the price raise. In economics the branch that study this is the elasticity of price. https://en.m.wikipedia.org/wiki/Price_elasticity_of_demand And in the theory it’s mentioned as a rare phenomena that for some good demand can go up as price go up. https://en.m.wikipedia.org/wiki/Giffen_good or à Veblen good https://en.m.wikipedia.org/wiki/Veblen_good My last economy course was in 1981 so I need to study this a bit but perhaps we will find some theorical basis to study the growing impact of indexing on the stock market. RIP Charlie Munger. Thanks for the lattice work thinking model. @MarioP, thanks for sharing. Elasticity is key. As @SafetyinNumbers has said many times, who are going to be the marginal sellers of Fairfax moving forward? This will have an important impact on the share price. And the concept of a Giffen good is a real mind bender. Especially when it comes to modern portfolio theory. My read is the big winners of the shift to indexing are the fast growers - but by fast growers, I mean as measured by market cap. These types of stocks have many different tailwinds: Strong earnings and improving fundamentals. Expanding multiple. Demand from momentum investors. Demand from index investors. As this process plays out over years, the company becomes a stock market darling. It gets viewed as being a very high quality company. This is when the multiple expansion story really gets going. And this brings more of the momentum and index investors in, pushing the stock higher yet. Success begets more success. Who are the losers? The ‘value’ investors. Because they sell a winning position way too early. My guess is this is what has happened to a lot of Fairfax investors. In 2022. And 2023. And again 2024. What was the mistake made? They were wedded to a narrow mental model (value investing). And this stopped them from understanding what was happening at Fairfax and the proper way to value the company. Because Fairfax has changed from a turnaround to a value play. And now it is morphing into a quality play. This is where I think it is important to have an open mind. To adopt Munger’s latticework model. This approach has two big advantages for an investor: Position size - it allows you to stay concentrated longer. Holding period - it allows you to hold the position longer. Edited December 4 by Viking
Viking Posted December 4 Posted December 4 (edited) @kodiak , I have brought a part of your post in the Fairfax India thread over here. You mentioned Fairfax is the 7th most profitable publicly traded company in Canada. This doesn’t surprise me. Do you have a source? Not that I don’t trust you, i would like to use this fact in a future post. ————- “On final note, while Fairfax Financial is about the 25th largest company based upon market capitalization and that alone should make us the most likely next company to be added to the TSX 60, we are the 7th most profitable public company in Canada. I learned that fact today and it makes perfect sense. What other big company in Canada is trading for 8 times earnings. I still think Fairfax Financial and Fairfax India represent two of my absolute favorite investments in my portfolio.” ————— If Fairfax is indeed the 7th most profitable publicly traded company in Canada what can deduct from this? My assumption is Fairfax’s earnings today are roughly ‘normal’ - I.E. they are not over-earning today. Certainty of earnings. This is the elephant in the room that I don’t see anyone discussing today. Buffett says this is one of the most important inputs to use when valuing a company. Fairfax has this (certainty of earnings for the foreseeable future) which means it should trade at a premium. The 7th most profitable company trading at the 26th market cap does not sound like it is trading at a premium to me. Let’s overlay a few more things regarding Fairfax today: Quality of earnings? High quality sources. Past performance? (5year change in BV) Best in class. Capital allocation? (Last 5 years) Best in Class, and by a country mile. Future prospects? Very good. Lots of people look at Fairfax through the lens of a value investment. I think that is a big mistake today. I think it is too narrow. I think the better way to look at Fairfax today is with a ‘quality’ framework. This broadens the analysis from primarily looking at earnings and fundamentals and includes multiple (the ‘right’ multiple) as an equally important factor in the valuation process. Multiple expansion is where the big money is made for investors. Importantly, this dynamic can take years to play out. Edited December 4 by Viking
Hoodlum Posted December 4 Posted December 4 (edited) 33 minutes ago, Viking said: @kodiak , I have brought a part of your post in the Fairfax India thread over here. You mentioned Fairfax is the 7th most profitable publicly traded company in Canada. This doesn’t surprise me. Do you have a source? Not that I don’t trust you, i would like to use this fact in a future post. ————- “On final note, while Fairfax Financial is about the 25th largest company based upon market capitalization and that alone should make us the most likely next company to be added to the TSX 60, we are the 7th most profitable public company in Canada. I learned that fact today and it makes perfect sense. What other big company in Canada is trading for 8 times earnings. I still think Fairfax Financial and Fairfax India represent two of my absolute favorite investments in my portfolio.” ————— If Fairfax is indeed the 7th most profitable publicly traded company in Canada what can deduct from this? My assumption is Fairfax’s earnings today are roughly ‘normal’ - I.E. they are not over-earning today. Certainty of earnings. This is the elephant in the room that I don’t see anyone discussing today. Buffett says this is one of the most important inputs to use when valuing a company. Fairfax has this (certainty of earnings for the foreseeable future) which means it should trade at a premium. The 7th most profitable company trading at the 26th market cap does not sound like it is trading at a premium to me. Let’s overlay a few more things regarding Fairfax today: Quality of earnings? High quality sources. Past performance? (5year change in BV) Best in class. Capital allocation? (Last 5 years) Best in Class, and by a country mile. Future prospects? Very good. Lots of people look at Fairfax through the lens of a value investment. I think that is a big mistake today. I think it is too narrow. I think the better way to look at Fairfax today is with a ‘quality’ framework. This broadens the analysis from primarily looking at earnings and fundamentals and includes multiple (the ‘right’ multiple) as an equally important factor in the valuation process. Multiple expansion is where the big money is made for investors. Importantly, this dynamic can take years to play out. @kodiak like got 7th ranking from the following link. But I have seen others sites that had Fairfax with the 11th largest earnings. I see similar difference when comparing market cap size in Canada, with Fairfax ranging between 21-25 position. https://www.tradingview.com/markets/stocks-canada/market-movers-highest-net-income/ Edited December 4 by Hoodlum
MMM20 Posted December 5 Posted December 5 (edited) https://archive.ph/U8qmg The Quiet Rise of Lightly Regulated Home Insurance When major property insurers drop homeowners in Florida, California and Louisiana after hurricanes and fires, another type of company is offering coverage. Any updated thoughts on the hard market? On one hand, it feels peak-ish when these players are popping up. On the other hand, it doesn't exactly sound like capital is flooding in... “In a normal world, you would question whether anyone would actually ever buy insurance from these companies given how thinly capitalized they are.” I'm not sure what to make of it so relying on Fairfax's judgment - why I prefer investing in high quality operators with aligned capital allocators running the show. And Fairfax still isn't priced as such (@Viking). Edited December 5 by MMM20
SafetyinNumbers Posted December 5 Author Posted December 5 14 hours ago, Hoodlum said: @kodiak like got 7th ranking from the following link. But I have seen others sites that had Fairfax with the 11th largest earnings. I see similar difference when comparing market cap size in Canada, with Fairfax ranging between 21-25 position. https://www.tradingview.com/markets/stocks-canada/market-movers-highest-net-income/ I think the only size that matters is the float cap given it drives the index activity. In that case, FFH, is now 22nd biggest weight in XIC.TO.
RockNation Posted December 6 Posted December 6 Aside from the continuous and amazing break downs and analysis in Fairfax. One of Vikings most important points to not overlook is the change in investment style of Fairfax from “turn around” to “value” to “quality”, and how investors who identify as pure value really need to pay attention. This is something I have been breaking out of over the years. We have all had investments that have transitioned through the various investment styles over time,. right before your eyes you watch multiples expand and you can’t imagine buying more shares at this new re-rated market quotation. This is what has been happening with Fairfax as Mr. Market gains confidence in the consistency of earnings, begins to have more “proper” historical earnings to go off with each passing successful quarter - and realizes that Fairfax is trading to “cheap”. Fairfax has low institutional ownership compared to companies of its size trading on the market, wether it gets added to the TSX 60 or not (the 60 add another long term tailwind) the consistency, growth and quality in the operating earnings stream will/should continue to generate the type of numbers that will have institutional investors who control many billions look at its previous say 5 year track record, look at its weight in the index, realize they are very underweight this stock, and the “demand” for shares are very likely to increase. These institutions will have to buy from someone to get the exposure. We are in the midst of creating the new “historical” track record institutions will use and build into models, imo. Of course, many people have been hesitant, skeptic, nervous and even extremely pessimistic about Fairfax, and some peoples negative hopes and dreams are finally thrash now as the company continues to execute well and shut the haters out. Without a spotty track record, shares would have spiked much faster. So the net acquires over the years and more so recent years should be thankful really. As the thesis proved correct and you have been able to buy at a still cheap valuation. To me even at this date to establish an “exit price” or “exit multiple” is too simplistic and.. even early. The thing is, we all know once the market gets something into its teeth the re rating of shares can be extremely large. If the market decides to re rate this a bit faster then you’ll never catch the share price… (then you might get the chance to come here and say “okay now its frothy”). It’s been hard enough to keep pace the past couple of years however. With important earnings stream locked in, the near term results and investment thesis is of course an extremely good bet going into 2025/26. No guarantees of course, as everyone has heard - but good enough odds for me. It is not only value that is important - but value/growth/quality all in one package, and it’s a rare combination. 1
Thrifty3000 Posted December 6 Posted December 6 3 hours ago, RockNation said: Aside from the continuous and amazing break downs and analysis in Fairfax. One of Vikings most important points to not overlook is the change in investment style of Fairfax from “turn around” to “value” to “quality”, and how investors who identify as pure value really need to pay attention. This is something I have been breaking out of over the years. We have all had investments that have transitioned through the various investment styles over time,. right before your eyes you watch multiples expand and you can’t imagine buying more shares at this new re-rated market quotation. This is what has been happening with Fairfax as Mr. Market gains confidence in the consistency of earnings, begins to have more “proper” historical earnings to go off with each passing successful quarter - and realizes that Fairfax is trading to “cheap”. Fairfax has low institutional ownership compared to companies of its size trading on the market, wether it gets added to the TSX 60 or not (the 60 add another long term tailwind) the consistency, growth and quality in the operating earnings stream will/should continue to generate the type of numbers that will have institutional investors who control many billions look at its previous say 5 year track record, look at its weight in the index, realize they are very underweight this stock, and the “demand” for shares are very likely to increase. These institutions will have to buy from someone to get the exposure. We are in the midst of creating the new “historical” track record institutions will use and build into models, imo. Of course, many people have been hesitant, skeptic, nervous and even extremely pessimistic about Fairfax, and some peoples negative hopes and dreams are finally thrash now as the company continues to execute well and shut the haters out. Without a spotty track record, shares would have spiked much faster. So the net acquires over the years and more so recent years should be thankful really. As the thesis proved correct and you have been able to buy at a still cheap valuation. To me even at this date to establish an “exit price” or “exit multiple” is too simplistic and.. even early. The thing is, we all know once the market gets something into its teeth the re rating of shares can be extremely large. If the market decides to re rate this a bit faster then you’ll never catch the share price… (then you might get the chance to come here and say “okay now its frothy”). It’s been hard enough to keep pace the past couple of years however. With important earnings stream locked in, the near term results and investment thesis is of course an extremely good bet going into 2025/26. No guarantees of course, as everyone has heard - but good enough odds for me. It is not only value that is important - but value/growth/quality all in one package, and it’s a rare combination. You’re also getting increasing geographic and revenue diversity - expanding that moat.
Viking Posted December 6 Posted December 6 (edited) 6 hours ago, RockNation said: Aside from the continuous and amazing break downs and analysis in Fairfax. One of Vikings most important points to not overlook is the change in investment style of Fairfax from “turn around” to “value” to “quality”, and how investors who identify as pure value really need to pay attention. This is something I have been breaking out of over the years. We have all had investments that have transitioned through the various investment styles over time,. right before your eyes you watch multiples expand and you can’t imagine buying more shares at this new re-rated market quotation. This is what has been happening with Fairfax as Mr. Market gains confidence in the consistency of earnings, begins to have more “proper” historical earnings to go off with each passing successful quarter - and realizes that Fairfax is trading to “cheap”. Fairfax has low institutional ownership compared to companies of its size trading on the market, wether it gets added to the TSX 60 or not (the 60 add another long term tailwind) the consistency, growth and quality in the operating earnings stream will/should continue to generate the type of numbers that will have institutional investors who control many billions look at its previous say 5 year track record, look at its weight in the index, realize they are very underweight this stock, and the “demand” for shares are very likely to increase. These institutions will have to buy from someone to get the exposure. We are in the midst of creating the new “historical” track record institutions will use and build into models, imo. Of course, many people have been hesitant, skeptic, nervous and even extremely pessimistic about Fairfax, and some peoples negative hopes and dreams are finally thrash now as the company continues to execute well and shut the haters out. Without a spotty track record, shares would have spiked much faster. So the net acquires over the years and more so recent years should be thankful really. As the thesis proved correct and you have been able to buy at a still cheap valuation. To me even at this date to establish an “exit price” or “exit multiple” is too simplistic and.. even early. The thing is, we all know once the market gets something into its teeth the re rating of shares can be extremely large. If the market decides to re rate this a bit faster then you’ll never catch the share price… (then you might get the chance to come here and say “okay now its frothy”). It’s been hard enough to keep pace the past couple of years however. With important earnings stream locked in, the near term results and investment thesis is of course an extremely good bet going into 2025/26. No guarantees of course, as everyone has heard - but good enough odds for me. It is not only value that is important - but value/growth/quality all in one package, and it’s a rare combination. @RockNation, great post / summary. Peter Lynch had 6 ‘buckets’ that he used to value stocks. He said some stocks move from one bucket to another… his point was you need to use the right tool to get the job done properly (to value a stock properly). The key question to value Fairfax today is: how good is their senior management team (corporate / insurance / investments). I think we are learning they are very good. Best in class when it comes to capital allocation. Is that how the stock is valued today? No, i don’t think so. The challenge for investors is Fairfax has a business model today that is unique in the history of P/C insurance. How they do capital allocation is unique. Seeding an insurance start-up in India (Digit)? Selling pet insurance and realizing a $1 billion gain? Buying back 20% of shares outstanding over the past 7 years? And of course, putting on the FFH-TRS position? Crazy town. Selling RFP at the top of the lumber cycle? Selling Stelco at a nosebleed price right before Trump gets elected (tarrifs coming to Canada)? The above list is just a few of the things this management team has done in recent years. There are many more examples. All the while their P/C insurance business has been growing like a weed. Back to my original question… How good is the management team at Fairfax? Better than Mr Market thinks. Probably by a lot. So guess what is likely built into the current price? Average to below average management team. What is the most important input to use when valuing a P/C insurance company? Especially one like Fairfax (with its leverage to investments)? You need to get this answer right: How good is management? Edited December 6 by Viking
RockNation Posted December 6 Posted December 6 @Viking Thank you. Excellent reference to Peter Lynch that is exactly what my thought process involved even though I failed to mention it. Strongly agreed. Management has been on point. Hitting the ball out of field on every inning since Covid. “New” Fairfax as you have called it. Strongly agreed. This is still not reflected in the valuation. Fairfax still trades like it has an issue or that its earnings will be highly inconsistent/volatile.. or that management will drop the ball. The market is not yet used to being able to value the company off an operating earnings stream. This is changing - without recognition to this by the market for managements recent actions, or for recognition of the future cash that Fairfax will be able to produce, and future decisions of management to drive more balls out of the field. It is still valued with hesitancy regarding its future. How so ? The current multiples are one thing. The future multiples are another, getting those right is where the fun begins. The current multiple reflects very low assumed future growth in its cash flow. Even almost a “stagnant” valuation. It doesn’t trade like a “quality” company, yet. I have seen portfolio managers discuss Fairfax as a “stock they missed”. When asked about it now as a buy the rhetoric is “we’ll se what happens”. Many who consider themselves to be “professional analysts” (and decorated as such) also still write about much “caution” again on having “missed Fairfax”. They have been saying this for years. Fairfax is slowly slapping them to a new reality. But… are they not supposed to be experts on valuation ? Whats happening ? 1) to much rear view mirror driving looking at earning streams. 2) not being “business analysts” (as Buffett would teach us one needs to be) number two is where completely missing managements home runs, the business model, and failure to understand the managements ability to take advantage of dislocations and opportunities in the future. As they have proven very well to be able to do. Instead the answer “we’ll see what happens” is a lazy way to ignore all these strengths in the thesis. Time is ticking though, like the ticker has been ticking. For those institutions, ignoring this reality, what are they going to say in 2-3 years ? 7 years ? Are they waiting for ZIRP, an unprofitable soft insurance market, a massive capital allocation mistake all at once? It’s awfully dire. Imo the valuation of Fairfax is only beginning to show hope for more sunshine down the line, this means your downside is still well covered even if the world does not play out even close to perfect from here. The cash produced by this company is likely to be much more years down the road. The margin of safety at current valuations is still very much in tact. Unlike much of the markets “quality” comparables or companies in general. “New” Fairfax, is quality unfolding over time.
Viking Posted December 6 Posted December 6 (edited) 48 minutes ago, RockNation said: @Viking Thank you. Excellent reference to Peter Lynch that is exactly what my thought process involved even though I failed to mention it. Strongly agreed. Management has been on point. Hitting the ball out of field on every inning since Covid. “New” Fairfax as you have called it. Strongly agreed. This is still not reflected in the valuation. Fairfax still trades like it has an issue or that its earnings will be highly inconsistent/volatile.. or that management will drop the ball. The market is not yet used to being able to value the company off an operating earnings stream. This is changing - without recognition to this by the market for managements recent actions, or for recognition of the future cash that Fairfax will be able to produce, and future decisions of management to drive more balls out of the field. It is still valued with hesitancy regarding its future. How so ? The current multiples are one thing. The future multiples are another, getting those right is where the fun begins. The current multiple reflects very low assumed future growth in its cash flow. Even almost a “stagnant” valuation. It doesn’t trade like a “quality” company, yet. I have seen portfolio managers discuss Fairfax as a “stock they missed”. When asked about it now as a buy the rhetoric is “we’ll se what happens”. Many who consider themselves to be “professional analysts” (and decorated as such) also still write about much “caution” again on having “missed Fairfax”. They have been saying this for years. Fairfax is slowly slapping them to a new reality. But… are they not supposed to be experts on valuation ? Whats happening ? 1) to much rear view mirror driving looking at earning streams. 2) not being “business analysts” (as Buffett would teach us one needs to be) number two is where completely missing managements home runs, the business model, and failure to understand the managements ability to take advantage of dislocations and opportunities in the future. As they have proven very well to be able to do. Instead the answer “we’ll see what happens” is a lazy way to ignore all these strengths in the thesis. Time is ticking though, like the ticker has been ticking. For those institutions, ignoring this reality, what are they going to say in 2-3 years ? 7 years ? Are they waiting for ZIRP, an unprofitable soft insurance market, a massive capital allocation mistake all at once? It’s awfully dire. Imo the valuation of Fairfax is only beginning to show hope for more sunshine down the line, this means your downside is still well covered even if the world does not play out even close to perfect from here. The cash produced by this company is likely to be much more years down the road. The margin of safety at current valuations is still very much in tact. Unlike much of the markets “quality” comparables or companies in general. “New” Fairfax, is quality unfolding over time. My guess is the pain for those who like P/C insurance but have missed out on Fairfax (didn’t buy or sold too early) is only going to get worse. Like missing out on Berkshire Hathaway when Buffett was in his prime. That was me. When it happened we all said… ‘I learned a valuable lesson.’ And ‘won’t let that happen again…’ And then, of course, the same thing usually happens again. Not buying a stock because it has gone up in price - that is likely one of the greatest mistakes that is constantly being made by most investors. It a psychological failing. I think Druckenmiller has discussed this in the past (as one of his failings/watchouts). It is exceptionally difficult to be rational and honest with oneself. Edited December 6 by Viking
Hamburg Investor Posted December 7 Posted December 7 On 12/4/2024 at 8:45 PM, Viking said: Who are the losers? The ‘value’ investors. Because they sell a winning position way too early. My guess is this is what has happened to a lot of Fairfax investors. In 2022. And 2023. And again 2024. @Viking Are you sure, that this happened a lot? Is this something, we could see e. g. here at cobf? I am not so sure. (Btw: We should all give a lot of credit to you and the others posting a lot here, if that hasn‘t happened to the readers here. I learned a lot, thank you!) I bought my first FFH shares over a decade ago and it did it mostly, as I saw a lot of similarities between BRK (which I bought first), MKL (which I bought some years later) and FFH (which I bought last and added a lot, when it became cheap). So I didn’t buy FFH as a value investment, it just became a value investment (and a turnaround investment) as an addition to the GARP idea, when its business underperformed and the prices dropped to the low levels of 2021, 2022 and 2023. But at the core my general thesis always was that of FFH being a GARP quality investment with a longterm roe of 15% or more. Then the bad years came, but I always sticked to it, as I believed in management and thought of the lost decade as a phase. So I sold nothing. And following this board (which is of course not mirroring the average FFH shareholder in many ways - but still) I haven‘t got the impression, that a lot of people look(ed) at FFH as some kind of cigar butt value investment first line. I wouldn‘t be surprised, if a lot of people bought FFH with a similar view, so with the idea, that growth would come back. Then most of the trading we saw over the last 10+ years maybe wouldn‘t be „real people“, but computer, algorithmic, automated driven. Counting the latter out maybe over the years until 2022 or 2023 the „real people“ weren’t largely Value, but GARP oriented (with a longterm view of course) and longterm shareholders. Then those shareholders loaded up just more stocks, when they became cheap. A lot of us seem to have a big part of their portfolio in FFH - maybe no coincidence, cause maybe this is not only a function of stock returns over the last years, but more a combination with „old shareholders“ loading up more in the cheap years. But this doesn‘t make those buyers/holders value investors - they have been growth investors with the luck of buyibg really cheap. For me FFH now is 45% of my portfolio and it would be 55%, if I wouldn‘t have sold a bit a months ago. Had you asked me 5 years ago, with the excetion of BRK I wouldn‘t have thought of me owning any stock as being more than 10%, maybe 15% of my portfolio. And now I have FFH three or four tines that much - and I am not the only obe. It just happened, as FFH developed so good, the stock got that cheap and there weren’t a lot other good investments. So maybe there weren’t so much value investors involved in FFH historically, and since 2022 or so, there maybe are „new real people“, buying stocks from algorithmic driven sellers with a momentum view and some (few), that followed the stock or are understanding insurance stocks and now look at the numbers and understand, that something exceptional is going on. I have no idea, how one could evaluate that topic, if there are/were value investors engaged and who owns FFH today with what view - other than within this board, people sharing their view and the surveys here. Would be interesting to see, what you, @Viking and others think!
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