Fairfax 2024

[RockNation]

During the “old” days, the knights that protected the economic moat of the castle via capital allocation could lead to unpredictable outcomes, to say the least.  You can bet that any company with unpredictable operating income - the market has a hard job to value it. Especially when sometimes the management takes part in some interesting capital allocation choices. 

Markets like and crave certainty. It was difficult during that time for Fairfax to be valued in the market as a GARP style stock. The market more so tagged it as a “value trap”. As capital allocation throughout the business and culture is ultimately what will drive long term returns. Especially in P/C, of course. With confidence not able to be built during that time, any outside investor would most certainly be at a disadvantage in trying to build enough confidence to put a large amount of their net worth in Fairfax. Culture inside the moat after all does have the potential to narrow it instead of widen it.

I remember reading in one of the more recent annual letters, Prem wrote: “mistakes that will never happen again”. You could begin to put together the honest reflection and outlook to allocating capital for a future when the current knights were no longer around to widen and protect the moat. You can tell Fairfax has a culture that understands its economic moat and what it needs to do. It continues to prove this to market and its shareholders. 

Decisions being made now are certainly with a steady hand, paired with what they did build over those years. 

[Viking]

5 hours ago, Hamburg Investor said:

@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!

@Hamburg Investor , you ask some really good questions. In terms of what investors have been doing, I only have two strong opinions:

• 2020 was the year we got capitulation and many long term shareholders sold their shares. The share price was exceptionally weak from March to October. Even though the overall market rebounded by mid year.
• What you did - held your shares through much of the lost decade and then added in 2020 - is very uncommon. Well done!

I do like to do lots of speculating when i write - it is simply my reading of the ‘animal entrails’ at a point in time. Sometimes I am probably talking to myself. Usually my comments aren’t directed at board members. At the end of day, I hope people on this board have made an absolute killing with their Fairfax investment.

Edited December 7 by Viking

[Hamburg Investor]

7 hours ago, Viking said:

2020 was the year we got capitulation and many long term shareholders sold their shares. The share price was exceptionally weak from March to October. Even though the overall market rebounded by mid year

I agree about the sellers being longterm shareholders. But who were the buyers? Maybe also longterm shareholders? Both could be right. 

[Hamburg Investor]

7 hours ago, Viking said:

What you did - held your shares through much of the lost decade and then added in 2020 - is very uncommon. Well done

It wasn‘t like that; I had to sell a lot of my portfolio (a quarter or so) in 2020, as I bought a house. But I sold other stocks and sticked to FFH. In 2022 and 2023 I got new funds and shifted others from to FFH. I should have shifted earlier (2020) from e.g. BRK to FFH.

[Castanza]

2 minutes ago, Hamburg Investor said:

I agree about the sellers being longterm shareholders. But who were the buyers? Maybe also longterm shareholders? Both could be right. 

I’m in my early 30’s, been on this board since 2019. Continued to read up on and follow the discussions had here on FFH. Had a small position in 2021 but never owned it in size until 2022.  Im just now hearing FFH mentioned by my peers who ascribe to “value investing”. BRK was always a topic of conversation along with the classic investors like Lynch. But Prem is now being mentioned more and more. I have heard FFH discussed on more value oriented podcasts over the last two years as well. Perhaps a new generation of value investors is slowly discovering this gem north of the border? Overall mentions seem to be going up. Especially after the MW short report. 

[SafetyinNumbers]

4 hours ago, Castanza said:

I’m in my early 30’s, been on this board since 2019. Continued to read up on and follow the discussions had here on FFH. Had a small position in 2021 but never owned it in size until 2022.  Im just now hearing FFH mentioned by my peers who ascribe to “value investing”. BRK was always a topic of conversation along with the classic investors like Lynch. But Prem is now being mentioned more and more. I have heard FFH discussed on more value oriented podcasts over the last two years as well. Perhaps a new generation of value investors is slowly discovering this gem north of the border? Overall mentions seem to be going up. Especially after the MW short report. 

 

Which podcasts are you referring to? I would like to listen if I haven't come across them already. I'm in the FFH echo chamber so I don't think I have a good gauge of where Fairfax sits in the zeitgeist. Most investors I bring it up with bring up Blackberry pretty quickly.

[backtothebeach]

Google trends for "Fairfax Financial". Looks like MW broke the downtrend in interest in the company.

[Castanza]

30 minutes ago, SafetyinNumbers said:

 

Which podcasts are you referring to? I would like to listen if I haven't come across them already. I'm in the FFH echo chamber so I don't think I have a good gauge of where Fairfax sits in the zeitgeist. Most investors I bring it up with bring up Blackberry pretty quickly.

None that discussed the company in depth (as you did), just casual mentions by hosts when discussing WB etc. I believe Chit Chat Stocks was one and The Acquirers Podcast. I’ve seen it pop up on Reddit from time to time. Maybe the same members as on COBF though. 

[SafetyinNumbers]

28 minutes ago, Castanza said:

None that discussed the company in depth (as you did), just casual mentions by hosts when discussing WB etc. I believe Chit Chat Stocks was one and The Acquirers Podcast. I’ve seen it pop up on Reddit from time to time. Maybe the same members as on COBF though. 

Thanks. I have heard Jake Taylor mention it a couple of times on Value After Hours in passing. I started posting on Reddit about it as BrownMarubozu as well so that might be me.

[villainx]

56 minutes ago, SafetyinNumbers said:

Thanks. I have heard Jake Taylor mention it a couple of times on Value After Hours in passing. I started posting on Reddit about it as BrownMarubozu as well so that might be me.

Is the first 15/25 year book available for sale somewhere? It was mentioned in the pod you were a guest on, but haven’t found it anywhere. 

[TwoCitiesCapital]

7 hours ago, Hamburg Investor said:

I agree about the sellers being longterm shareholders. But who were the buyers? Maybe also longterm shareholders? Both could be right. 

 

I was buying. 

 

Some selected quotes I made in the Fairfax 2020 and the Q1 2020 threads at the time:

On 5/1/2020 at 9:15 PM, TwoCitiesCapital said:

...at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

 

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impairment or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

 

On 5/2/2020 at 5:51 PM, TwoCitiesCapital said:

Fairfax has $1500-1600/share in float/equity/debt.

 

A net 2.5% return in those figures is $37.50/share at the low end. On a $260/share price, that's 14.4% annualized.

 

I'm not talking about portfolio returns, just that they need to net only 2.5% on the total of float/equity/debt after expenses. It doesn't seem like that should be a high bar, particularly if insurance (what the equity/debt supports) is performing well.

 

If people don't seem convinced of 2.5% net on those various forms of funding, then who the hell was buying this at $500-$600/share when the various forms of funding were the same, but the bar for acceptable performance was far higher?

 

On 12/23/2020 at 4:21 PM, TwoCitiesCapital said:

While I agree  that low interest rates are an impediment to earnings - this isn't any different than in 2016-2018 and Fairfax traded much higher. The primary difference is just expectations.

 

In 2017/2018, the outlook for Fairfax is as described below

1) Insurance was doing reasonably well - but not booming,

2) float growth was doing reasonably well, but not  accelerating

3) people thought interest rates were going sustainably higher, but ended up being wrong

4) equity performance expectations were a toss up.

 

With all of that, Fairfax traded at $400-600 USD over that time.

 

Now insurance IS booming, float growth IS accelerating, interest rates are still 0%, and equity performance is still a toss up - but could be better with valuations on many holdings being lower today than back in 2017.

 

I'm supposed to believe Fairfax deserves to trade 15-20% below the low-end of its range from 2016-2018 while being significantly better positioned?

 

Edited December 7 by TwoCitiesCapital

[SafetyinNumbers]

4 hours ago, villainx said:

Is the first 15/25 year book available for sale somewhere? It was mentioned in the pod you were a guest on, but haven’t found it anywhere. 

They had some available at the AGM last year. I wish there was a PDF copy. I think it would be popular.

[gfp]

5 hours ago, villainx said:

Is the first 15/25 year book available for sale somewhere? It was mentioned in the pod you were a guest on, but haven’t found it anywhere. 

 

If you email the company they will probably send you one for free.  They used to send out paperback versions but the last version they mailed me was hardcover.  

 

Try this email if you don't have a better contact over there -> [email protected]

[villainx]

On 12/7/2024 at 9:20 PM, gfp said:

Try this email if you don't have a better contact over there -> [email protected]

 

Thank you!  Tom replied as you said, delivery pending Canadian mail strike delays.  

[Viking]

The Davis Double Play - Learning from one of the GOAT’s

 

“History never repeats itself, but it does often rhyme.” Mark Twain

 

Is it possible to learn from history to become a better investor?

 

Yes. One of the reasons is because human nature/investor psychology does not change. But there are other reasons too. By studying the great investors of the past we can learn what they did to be successful. In turn, this can help us to better understand what is going on in financial markets today. And this can sometimes provide an important edge for an inquisitive and open minded investor.

 

—————-

 

Shelley Cullom Davis (1909 - 1994)

 

Shelby Cullom Davis was one of the most successful investors of his generation. John Rothchild captured his accomplishments (and those of his son, Shelby M. C. Davis and grandsons, Chris and Andrew Davis) in “The Davis Dynasty: Fifty Years of Sucessful Investing on Wall Street”.

 

In this post we are only going to profile the father, and we will refer to him as Shelby Davis. Of interest, his grandson - Chris Davis - sits on the board of Berkshire Hathaway today. The book is a great read for investors who like financial history and are also interested in the P/C insurance industry.

 

What did Shelby Davis accomplish?

 

Starting out in 1947 (at age 38), Davis turned $50,000 into $900 million by 1994 (when he died, at age 85). Over 47 years he achieved a CAGR of 23% per year. The annual rate of return is exceptional. The timeframe he achieved that rate of return  is otherworldly. Yes, that performance makes Shelby Davis one of the GOAT’s.

 

Adjusted for inflation, $900 million in 1994 is equal to $1.9 billion today.

 

Ok, he got really rich.

 

So what?

 

Three things really stand out with how Davis built his fortune:

1. Investing in stocks - Davis is one of the rare individuals who built great wealth solely from investing in stocks.
2. Throughout his lifetime, he invested primarily in one sector - insurance stocks (P/C and life).
3. Leverage - Davis was a heavy user of leverage. Often 100%. Interesting that it never blew him up (especially in the 1969-1973 bear market).

This guy got filthy rich investing in insurance stocks? Ok. This guy is starting to sound interesting.

 

Investing framework

 

Before we start exploring the insurance angle it should be noted that Davis was a disciple of Ben Graham:

 

“In 1947 Davis was elected president of Graham’s stock analysts’ organization.” TDD - Page 81.

 

Circle of competence

 

Prior to becoming a full time investor, Davis was deputy superintendent of the New York state insurance department. Even though it was a relatively small industry, when he became a full time investor in 1947, Davis decided to focus on insurance. Over the years he became an expert in both life and P/C insurance companies.

 

“Davis was already famous in the life and casualty circles. Insiders began calling him ‘the dean of American insurance,’ though he’d never worked for an insurer.” TDD - Page 99

 

Over the years, Davis built up an incredible edge over other investors with his deep understanding of the insurance industry.

 

Expanding the circle of competence

 

Along with John Templeton and a few others, in the 1960’s Davis was a pioneer in investing in Japan and other international markets. Unsurprisingly, his focus when investing internationally was insurance companies (life and P/C).

 

Davis expanded his circle of competence not by looking to invest in other industries. Instead he expanded his circle of competence by looking to invest internationally, primarily in Japan. This is what led him to many outstanding investments, including AIG.

 

What did Davis like so much about P/C insurance stocks?

 

In his book, Rothchild explained why Davis was so attracted to insurance stocks as investments:

 

“Insurance companies enjoyed some terrific advantages as compared to manufacturers.

• Insurers offered a product that never went out of style.
• They profited from investing their customers’ money.
• They didn’t require expensive factories or research labs.
• They didn’t pollute.
• They were recession-resistant.
• During hard times consumers delayed expensive purchases (houses, cars, appliances, and so on), but they couldn’t afford to let their home, auto and life insurance policies lapse.
• Because interest rates tend to fall in hard times insurance companies bond portfolios became more valuable.”

“These factors liberated insurance earnings from the normal business cycle, and made them generally recession-proof. Meanwhile, the income from bond-heavy portfolios, continued to rise.” TDD - Page 96

 

Davis especially liked the float - a liability that was really an asset - that was hidden on the balance sheet of insurance companies. He believed a growing float combined with the power of compounding would eventually make the company a big winner for long term investors.

 

And guess what?

 

Nothing has changed. All the factors that Davis saw and liked about insurance stocks 75 years ago still apply just as much today.

 

How did Davis decide which insurance stocks to own?

 

Davis used three criteria to evaluate insurance companies:

1. Was company profitable/earning money?
   • Was the company a good underwriter?
2. How was the investment portfolio invested?
   • Was the investment portfolio invested in a rational manner?
3. How good was management?
   • The management piece was especially important for Davis.
   • “You can always learn accounting on the side,” he told his son, “but you’ve got to study history. History gives you a broad perspective and teaches that exceptional people can make a difference.” TDD - Page 99
   • Davis made it a priority to meet with management - something that was unusual at the time. His objective was to separate the ‘bluffers’ from the ‘doers’.

Using these three criteria - earnings, fundamentals, management - provided him with a solid understanding of the companies he invested in.

 

Guess what?

 

Nothing has changed. The basic methodology Davis used to evaluate insurance stocks 75 years ago still applies just as much today.

 

Picking the right industry was important. And picking the right company was also important. But Davis did one more thing. And this ‘thing’ is what allowed him to deliver such spectacular returns.

 

Patience

 

Davis never sold his winners. He let them compound undisturbed for decades. As a result, he was rewarded handsomely for his patience - his winners became massive winners.

 

What allowed him to ride out all the volatility?

 

It was what we reviewed earlier - he deeply understood the companies he was invested in. This knowledge allowed him to ride out volatility that naturally came with owning equities. It allowed him to think like and be a long term investor.

 

“The Davis double play”

 

When looking at individual companies, Davis was looking for a particular set-up. Because it could be especially lucrative for an investor.

1. Own the best insurance companies - that should result in modest (or better) growth in the business over time.
2. Buy them when they trade at a low multiple (P/BV, PE).

This is a great set-up for an investor, because it usually results in two things happening over time:

• Growth in earnings.
• Followed by multiple expansion - when Mr. Market starts to look more favourably on a company.

And as any investor knows, this combination can yield spectacular results. Especially if it is allowed to play out undisturbed for decades.

 

“As the company’s earnings advanced, giving the stock an initial boost, investors put a higher price tag on the earnings, giving the stock a second boost.” TDD - Page 95/96

 

When this played out with an investment, Shelby called it ‘the Davis double play.’

 

Summary

 

Exploiting this set-up over decades with investments in companies like AIG, Berkshire Hathaway and Japanese insurance stocks, is what enabled Davis to achieve such spectacular returns over his career as an investor.

 

Let’s bring this post from the past and into the present.

 

Is P/C insurance still a good sector to invest in today?

 

Warren Buffett has been selling some of his stock holdings in recent years, like Bank of America and more recently Apple.

 

Has he been buying anything?

 

Yes, Buffett has been buying P/C insurance companies. In 2022, he bought Alleghany. And in 2024, he made Chubb a top 10 equity holding for Berkshire Hathaway.

 

Buffett bought his first P/C insurance stock, National Indemnity, in 1967. Fifty-seven years later he is still buying P/C insurance companies/stocks. Obviously, he continues to like the current set-up - the valuation and long-term prospects of the well managed P/C insurance stocks.

 

Fairfax Financial

 

Fairfax is in the process of delivering ‘the Davis double play’ for its investors. The stock has been on a tear over the past 4 years. However, much of the increase in the stock price so far has been driven by spiking earnings. The multiple part of ‘the Davis double play’ has just started happening for Fairfax. As earnings continues to grow, Mr Market will look at the company even more favourably. As investor expectations/sentiment towards the company continues to improve we should see multiple expansion in the coming years.

 

Today, Fairfax trades at a low valuation. Especially when you consider the quality of its management team (best in class).

• P/BV = 1.3. Exceptionally low for a company that is delivering a consistent ROE of > 15%.
• PE = 8.8. Exceptionally low. Fairfax is not over-earning.

To quote Peter Lynch, Fairfax is priced for ‘mediocrity’. 

 

None of this includes excess of FV over CV for Fairfax’s associate and consolidated equity holdings. This was $1.9 billion at Sept 30, 2023, or $86/share (pre-tax). This means Fairfax is even cheaper than it looks.

 

 

Exceptional people can make a difference

 

This might be my key learning from reading The Davis Dynasty: invest alongside outstanding people and then be patient - and you can reap amazing rewards, sometimes lasting for decades.

 

“You can always learn accounting on the side,” he (Shelby Davis) told his son, “but you’ve got to study history. History gives you a broad perspective and teaches that exceptional people can make a difference.” TDD - Page 99

 

The big disconnect today with the broader investment community and their ‘understanding’ of Fairfax is likely perceptions regarding of the quality of the management team - it is much better than most investors think. Fairfax is loaded with high-quality people:

• Prem Watsa is an exceptional CEO.
• Lead by Peter Clark and Jen Allen, the senior team at Fairfax is very good.
• Lead by Andy Barnard, Fairfax has built one of the best P/C insurance platforms/businesses in the world.
• Lead by Wade Burton, Fairfax has built one of the great investment management platforms/businesses in the P/C insurance industry.
• Fairfax has been slowly building out a collection of high quality equity holdings that are lead/managed by very good CEO’s/management teams. To name just a few:
  • Fokion Karavias at Eurobank. David Sokol/Bing Chen at Poseidon. Hari Marar at Bangalore International Airport. Kamesh Goyal, founder of Digit Insurance.

Fairfax’s current set-up: Growing top line/earnings + Low multiple + Exceptional management/people.

 

The exceptional management/people ‘reason’ is by far the most important of  the three listed above. But it gets the least attention from the investment community.

 

With Fairfax today, an investor is able to buy a best-in-class management team at the lowest valuation (compared to peers). This provides a large margin of safety. And solid upside, just from earnings. And significant upside if we see multiple expansion.

 

Even with the spike in the share price over the past 4 years, Fairfax still looks like a compelling opportunity for patient, long term investors. I think Shelby Davis would  agree.

 

—————

 

What did Peter Lynch have to say?

 

Peter Lynch wrote the foreword for The Davis Dynasty. Below is a quote from him that is chocked full of wisdom:

1. Slow-growth industries can produce great growth companies.
2. Exceptional leaders can deliver outstanding results for investors - sometimes lasting for decades.

“I differed from the Davises, but in one important area we had something in common. Some of my most rewarding investments came from slow-growth industries where expectations were low and profits lackluster. By looking for the most inspired competitors in uninspiring lines of work, I often found great growth companies (Toys “R” Us, La Quinta Motor Inns, and Taco Bell, for example) priced for mediocrity.”

 

“Similarly, in the insurance arena and later in the banking arena, Davis and his son bought shares in the best and brightest competitors for much less than they’d pay, say, for the best and the brightest in the hottest high-tech industries, which are always highly competitive and subject to sudden reversal of fortune.”

 

“You don’t hear too many college kids say it’s their dream to enter the property-casualty business, but while insurance may be unappealing to most, it has attracted a few outstanding operators like Hank Greenberg, who turned American International Group into an on-going bonanza for shareholders since the 1970s. Davis’ positions in AIG, and a dozen other companies with exceptional leaders, accounted for the bulk of his gains.”

Edited December 11 by Viking

[73 Reds]

4 minutes ago, Viking said:

The Davis Double Play - Learning from one of the GOAT’s

 

“History never repeats itself, but it does often rhyme.” Mark Twain

 

Is it possible to learn from history to become a better investor?

 

Yes. One of the reasons is because human nature/investor psychology does not change. But there are other reasons too. By studying the great investors of the past we can learn what they did to be successful. In turn, this can help us to better understand what is going on in financial markets today. And this can sometimes provide an important edge for an inquisitive and open minded investor.

 

—————-

 

Shelley Cullom Davis (1909 - 1994)

 

Shelby Cullom Davis was one of the most successful investors of his generation. John Rothchild captured his accomplishments (and those of his son, Shelby M. C. Davis and grandsons, Chris and Andrew Davis) in “The Davis Dynasty: Fifty Years of Sucessful Investing on Wall Street”.

 

In this post we are only going to profile the father, and we will refer to him as Shelby Davis. Of interest, his grandson - Chris Davis - sits on the board of Berkshire Hathaway today. The book is a great read for investors who like financial history and are also interested in the P/C insurance industry.

 

What did Shelby Davis accomplish?

 

Starting out in 1947 (at age 38), Davis turned $50,000 into $900 million by 1994 (when he died, at age 85). Over 47 years he achieved a CAGR of 23% per year. The annual rate of return is exceptional. The timeframe he achieved that rate of return  is otherworldly. Yes, that performance makes Shelby Davis one of the GOAT’s.

 

Adjusted for inflation, $900 million in 1994 is equal to $1.9 billion today.

 

Ok, he got really rich.

 

So what?

 

Three things really stand out with how Davis built his fortune:

1. Investing in stocks - Davis is one of the rare individuals who built great wealth solely from investing in stocks.
2. Throughout his lifetime, he invested primarily in one sector - insurance stocks (P/C and life).
3. Leverage - Davis was a heavy user of leverage. Often 100%. Interesting that it never blew him up (especially in the 1969-1973 bear market).

This guy got filthy rich investing in insurance stocks? Ok. This guy is starting to sound interesting.

 

Investing framework

 

Before we start exploring the insurance angle it should be noted that Davis was a disciple of Ben Graham:

 

“In 1947 Davis was elected president of Graham’s stock analysts’ organization.” TDD - Page 81.

 

Circle of competence

 

Prior to becoming a full time investor, Davis was deputy superintendent of the New York state insurance department. Even though it was a relatively small industry, when he became a full time investor in 1947, Davis decided to focus on insurance. Over the years he became an expert in both life and P/C insurance companies.

 

“Davis was already famous in the life and casualty circles. Insiders began calling him ‘the dean of American insurance,’ though he’d never worked for an insurer.” TDD - Page 99

 

Over the years, Davis built up an incredible edge over other investors with his deep understanding of the insurance industry.

 

Expanding the circle of competence

 

Along with John Templeton and a few others, in the 1960’s Davis was a pioneer in investing in Japan and other international markets. Unsurprisingly, his focus when investing internationally was insurance companies (life and P/C).

 

Davis expanded his circle of competence not by looking to invest in other industries. Instead he expanded his circle of competence by looking to invest internationally, primarily in Japan. This is what led him to many outstanding investments, including AIG.

 

What did Davis like so much about P/C insurance stocks?

 

In his book, Rothchild explained why Davis was so attracted to insurance stocks as investments:

 

“Insurance companies enjoyed some terrific advantages as compared to manufacturers.

• Insurers offered a product that never went out of style.
• They profited from investing their customers’ money.
• They didn’t require expensive factories or research labs.
• They didn’t pollute.
• They were recession-resistant.
• During hard times consumers delayed expensive purchases (houses, cars, appliances, and so on), but they couldn’t afford to let their home, auto and life insurance policies lapse.
• Because interest rates tend to fall in hard times insurance companies bond portfolios became more valuable.”

“These factors liberated insurance earnings from the normal business cycle, and made them generally recession-proof. Meanwhile, the income from bond-heavy portfolios, continued to rise.” TDD - Page 96

 

Davis especially liked the float - a liability that was really an asset - that was hidden on the balance sheet of insurance companies. He believed a growing float combined with the power of compounding would eventually make the company a big winner for long term investors.

 

And guess what?

 

Nothing has changed. All the factors that Davis saw and liked about insurance stocks 75 years ago still apply just as much today.

 

How did Davis decide which insurance stocks to own?

 

Davis used three criteria to evaluate insurance companies:

1. Was company profitable/earning money?
   • Was the company a good underwriter?
2. How was the investment portfolio invested?
   • Was the investment portfolio invested in a rational manner?
3. How good was management?
   • The management piece was especially important for Davis.
   • “You can always learn accounting on the side,” he told his son, “but you’ve got to study history. History gives you a broad perspective and teaches that exceptional people can make a difference.” TDD - Page 99
   • Davis made it a priority to meet with management - something that was unusual at the time. His objective was to separate the ‘bluffers’ from the ‘doers’.

Using these three criteria - earnings, fundamentals, management - provided him with a solid understanding of the companies he invested in.

 

Guess what?

 

Nothing has changed. The basic methodology Davis used to evaluate insurance stocks 75 years ago still applies just as much today.

 

Picking the right industry was important. And picking the right company was also important. But Davis did one more thing. And this ‘thing’ is what allowed him to deliver such spectacular returns.

 

Patience

 

Davis never sold his winners. He let them compound undisturbed for decades. As a result, he was rewarded handsomely for his patience - his winners became massive winners.

 

What allowed him to ride out all the volatility?

 

It was what we reviewed earlier - he deeply understood the companies he was invested in. This knowledge allowed him to ride out volatility that naturally came with owning equities. It allowed him to think like and be a long term investor.

 

“The Davis double play”

 

When looking at individual companies, Davis was looking for a particular set-up. Because it could be especially lucrative for an investor.

1. Own the best insurance companies - that should result in modest (or better) growth in the business over time.
2. Buy them when they trade at a low multiple (P/BV, PE).

This is a great set-up for an investor, because it usually results in two things happening over time:

• Growth in earnings.
• Followed by multiple expansion - when Mr. Market starts to look more favourably on a company.

And as any investor knows, this combination can yield spectacular results. Especially if it is allowed to play out undisturbed for decades.

 

“As the company’s earnings advanced, giving the stock an initial boost, investors put a higher price tag on the earnings, giving the stock a second boost.” TDD - Page 95/96

 

When this played out with an investment, Shelby called it ‘the Davis double play.’

 

Summary

 

Exploiting this set-up over decades with investments in companies like AIG, Berkshire Hathaway and Japanese insurance stocks, is what enabled Davis to achieve such spectacular returns over his career as an investor.

 

Let’s bring this post from the past and into the present.

 

Is P/C insurance still a good sector to invest in today?

 

Warren Buffett has been selling some of his stock holdings in recent years, like Bank of America and more recently Apple.

 

Has he been buying anything?

 

Yes, Buffett has been buying P/C insurance companies. In 2022, he bought Alleghany. And in 2024, he made Chubb a top 10 equity holding for Berkshire Hathaway.

 

Buffett bought his first P/C insurance stock, National Indemnity, in 1967. Fifty-seven years later he is still buying P/C insurance companies/stocks. Obviously, he continues to like the current set-up - the valuation and long-term prospects of the well managed P/C insurance stocks.

 

Fairfax Financial

 

Fairfax is in the process of delivering ‘the Davis double play’ for its investors. The stock has been on a tear over the past 4 years. However, much of the increase in the stock price so far has been driven by spiking earnings. The multiple part of ‘the Davis double play’ has just started happening for Fairfax. As earnings continues to grow, Mr Market will look at the company even more favourably. As investor expectations/sentiment towards the company continues to improve we should see multiple expansion in the coming years.

 

Today, Fairfax trades at a a low valuation. Especially when you consider the quality of its management team (best in class).

• P/BV = 1.3. Exceptionally low for a company that is delivering a consistent ROE of > 15%.
• PE = 8.8. Exceptionally low. Fairfax is not over-earning.

None of this includes excess of FV over CV for Fairfax’s associate and consolidated equity holdings. $900 million at Sept 30, 2023, or $87/share pre-tax. This means Fairfax is even cheaper than it looks.

 

 

Exceptional people can make a difference

 

This might be my key learning from reading The Davis Dynasty: invest alongside outstanding people and then be patient - and you can reap amazing rewards, sometimes lasting for decades.

 

“You can always learn accounting on the side,” he (Shelby Davis) told his son, “but you’ve got to study history. History gives you a broad perspective and teaches that exceptional people can make a difference.” TDD - Page 99

 

The big disconnect today with the broader investment community and their ‘understanding’ of Fairfax is likely perceptions regarding of the quality of the management team - it is much better than most investors think. Fairfax is loaded with high-quality people:

• Prem Watsa is an exceptional CEO.
• Lead by Peter Clark and Jen Allen, the senior team at Fairfax is very good.
• Lead by Andy Barnard, Fairfax has built one of the best P/C insurance platforms/businesses in the world.
• Lead by Wade Burton, Fairfax has built one of the great investment management platforms/businesses in the P/C insurance industry.
• Fairfax has been slowly building out a collection of high quality equity holdings that are lead/managed by very good CEO’s/management teams. To name just a few:
  • Fokion Karavias at Eurobank. David Sokol/Bing Chen at Poseidon. Hari Marar at Bangalore International Airport. Kamesh Goyal, founder of Digit Insurance.

Fairfax’s current set-up: Growing top line/earnings + Low multiple + Exceptional management/people.

 

The exceptional management/people ‘reason’ is by far the most important of  the three listed above. But it gets the least attention from the investment community.

 

Able to buy best-in-class management team at lowest valuation (compared to peers). Provides solid margin of safety. Solid upside, just from earnings. Significant upside if we see multiple expansion.

 

Even with the spike in the share price over the past 4 years, Fairfax still looks like a compelling opportunity for patient, long term investors. I think Shelby Davis would  agree.

 

—————

 

What did Peter Lynch have to say?

 

Peter Lynch wrote the foreword for The Davis Dynasty. Below is a quote from him that is chocked full of wisdom:

1. Slow-growth industries can produce great growth companies.
2. Exceptional leaders can deliver outstanding results for investors - sometimes lasting for decades.

“I differed from the Davises, but in one important area we had something in common. Some of my most rewarding investments came from slow-growth industries where expectations were low and profits lackluster. By looking for the most inspired competitors in uninspiring lines of work, I often found great growth companies (Toys “R” Us, La Quinta Motor Inns, and Taco Bell, for example) priced for mediocrity.”

 

“Similarly, in the insurance arena and later in the banking arena, Davis and his son bought shares in the best and brightest competitors for much less than they’d pay, say, for the best and the brightest in the hottest high-tech industries, which are always highly competitive and subject to sudden reversal of fortune.”

 

“You don’t hear too many college kids say it’s their dream to enter the property-casualty business, but while insurance may be unappealing to most, it has attracted a few outstanding operators like Hank Greenberg, who turned American International Group into an on-going bonanza for shareholders since the 1970s. Davis’ positions in AIG, and a dozen other companies with exceptional leaders, accounted for the bulk of his gains.”

@Viking, fascinating story - never heard of him before.  Thanks for sharing.   The lesson I take from your post is to invest in what you know.  If you have a background in a certain field or area, seek out potential investments that others without your knowledge and interests might miss.   

[UK]

43 minutes ago, 73 Reds said:

@Viking, fascinating story - never heard of him before.  Thanks for sharing.   The lesson I take from your post is to invest in what you know.  If you have a background in a certain field or area, seek out potential investments that others without your knowledge and interests might miss.   

+1

[Viking]

1 hour ago, 73 Reds said:

@Viking, fascinating story - never heard of him before.  Thanks for sharing.   The lesson I take from your post is to invest in what you know.  If you have a background in a certain field or area, seek out potential investments that others without your knowledge and interests might miss.   

@73 Reds , I agree. But I think you need to back it up one step. You need to start with the right industry. How many industries today are as good as a long term investment as they were 75 years ago? Very few. P/C insurance is likely one of a short list. 
 

Another key learning is the importance of monitoring an investment. Sometimes companies mess up - AIG is the poster child for this. It delivered exceptional returns for investors for decades - until it blew up in the Great Financial Crisis in 2007/08.
 

So the lessons for me from the book were:

1.) P/C continues to be a great place for a long term investor to focus on (that circle of competence thing).

2.) Buy the best managed operators, ideally at a low (or even fair) price. 
3.) Sit tight as long as management continues to execute well. Because exceptional management teams usually deliver exceptional returns. But to do this (sit tight for a decade or longer) requires a huge amount of trust - because you won’t know in advance exactly what management is going to do. You will only know this after the fact. 
 

For Davis, management was the key. Today with Fairfax, there is very little discussion of management and how good they are (or not). Even on this board. And i love it.

 

Based on what I have seen over the past 4 years, I think the management team at Fairfax is best in class in the P/C insurance industry. People call me a ‘Fairfax bull’. It cracks me up. I think I am just following the facts. 
 

The quality of Fairfax’s management team is not reflected in Fairfax’s valuation today. So I am getting something - the most important thing when investing - for free. It is like getting a free call option on something that is exceptionally valuable - management. 
 

What is the right multiple to attach to Fairfax if I am right?
 

My guess is that is something that is not on most investors radar today. Should it be? 

Edited December 11 by Viking

[Hoodlum]

It looks like Fairfax is part of group in the process of finalizing acquisition of French insurer Algingia. 

 

https://www.bnnbloomberg.ca/business/company-news/2024/12/11/hermes-family-in-talks-to-invest-in-french-insurer-albingia/

 

Krefeld Invest, the family office of heirs to the luxury goods fortune, is part of an investor group that’s in exclusive talks to buy the insurer from asset manager Eurazeo, according to a statement on Wednesday. The consortium is being led by existing shareholder the Chamoin family and also includes Canadian insurer Fairfax Financial Holdings.

 

Eurazeo SE said it expects to sell its entire 70% financial stake in Albingia, bringing around €289 million ($303 million) of sale revenue to its balance sheet.

 

Albingia is an independent player in the French commercial insurance lines market, which collected about €334 million in insurance premiums last year. Eurazeo bought a stake in the business six years ago, based on an enterprise value of around €508 million.

 

The deal is subject to approval of various relevant authorities and is set to close in spring 2025.

[73 Reds]

50 minutes ago, Viking said:

@73 Reds , I agree. But I think you need to back it up one step. You need to start with the right industry. How many industries today are as good as a long term investment as they were 75 years ago? Very few. P/C insurance is likely one of a short list. 
 

Another key learning is the importance of monitoring an investment. Sometimes companies mess up - AIG is the poster child for this. It delivered exceptional returns for investors for decades - until it blew up in the Great Financial Crisis in 2007/08.
 

So the lessons for me from the book were:

1.) P/C continues to be a great place for a long term investor to focus on (that circle of competence thing).

2.) Buy the best managed operators, ideally at a low (or even fair) price. 
3.) Sit tight as long as management continues to execute well. Because exceptional management teams usually deliver exceptional returns. But to do this (sit tight for a decade or longer) requires a huge amount of trust - because you won’t know in advance exactly what management is going to do. You will only know this after the fact. 
 

For Davis, management was the key. Today with Fairfax, there is very little discussion of management and how good they are (or not). Even on this board. And i love it.

 

Based on what I have seen over the past 4 years, I think the management team at Fairfax is best in class in the P/C insurance industry. People call me a ‘Fairfax bull’. It cracks me up. I think I am just following the facts. 
 

The quality of Fairfax’s management team is not reflected in Fairfax’s valuation today. So I am getting something - the most important thing when investing - for free. It is like getting a free call option on something that is exceptionally valuable - management. 
 

What is the right multiple to attach to Fairfax if I am right?
 

My guess is that is something that is not on most investors radar today. Should it be? 

We agree that management is highly important.  In fact it is the most important factor to me in any public equity I would own.  Great management neutralizes the notion that "overvalued" stocks must be sold.  

[Viking]

51 minutes ago, Hoodlum said:

It looks like Fairfax is part of group in the process of finalizing acquisition of French insurer Algingia. 

 

https://www.bnnbloomberg.ca/business/company-news/2024/12/11/hermes-family-in-talks-to-invest-in-french-insurer-albingia/

 

Krefeld Invest, the family office of heirs to the luxury goods fortune, is part of an investor group that’s in exclusive talks to buy the insurer from asset manager Eurazeo, according to a statement on Wednesday. The consortium is being led by existing shareholder the Chamoin family and also includes Canadian insurer Fairfax Financial Holdings.

 

Eurazeo SE said it expects to sell its entire 70% financial stake in Albingia, bringing around €289 million ($303 million) of sale revenue to its balance sheet.

 

 

Albingia is an independent player in the French commercial insurance lines market, which collected about €334 million in insurance premiums last year. Eurazeo bought a stake in the business six years ago, based on an enterprise value of around €508 million.

 

The deal is subject to approval of various relevant authorities and is set to close in spring 2025.

@Hoodlum , thanks for posting. Over the past 10 years, Fairfax’s insurance business has been growing like a fast grower. Fairfax did this by being very flexible and opportunistic - taking what was being offered to them at the time. Today, expectations are that the growth of Fairfax’s insurance business is coming to a hard stop. The hard market is coming to a hard stop so the top line growth at Fairfax has to also stop. Right? This is likely what is built into investor expectations today - and therefore the stock price. 
 

My guess is that in the coming years Fairfax will continue to grow its insurance business at a rate better than the industry average. What will they do? It will depend on what is available to them at the time. They will be open minded and flexible.
 

Expectations of investors is very low today - in terms of top line growth of the insurance business. For the management team at Fairfax this will be like jumping over a one foot hurdle. I love it.

Edited December 11 by Viking

[Masterofnone]

In December of 2007 Berkshire was trading at 2 times book. I didn't sell any shares. Had I done so with conviction, I would be considerably richer today. (As it was, when prices got halved, I turned over every rock for capital to buy more.)

 

From that 2007 peak, shares have gained about 400%,  (CAGR a bit under 10%), while the shares I bought November 2008 have gained 720%. It works out fine to fall in love with a wonderful business and never sell but it might not optimize returns. It certainly is less work, and if it is a truly great company, less actual risk to simply hold, regardless of valuation. You might not be correct determining fair value.

 

I'm now retired and this again changes the calculus for me. I'm more interested in retaining what I have. Berkshire is as close to fairly valued at the moment as it has been since 2007 and I've sold some in retirement accounts. At some time, Fairfax will likely become fully or even over valued. I'll sell when I think so- it has been a hell of a run.

 

If it keeps being run as it is today, never selling a share should also work out fine. It is tricky to maximize returns- things can become dear and stay dear for a long time. You have to be right in your assessment that you will be able to re-enter at a lower level, and that's beyond a lot of peoples pay grade.

[Hoodlum]

49 minutes ago, Viking said:

@Hoodlum , thanks for posting. Over the past 10 years, Fairfax’s insurance business has been growing like a fast grower. Fairfax did this by being very flexible and opportunistic - taking what was being offered to them at the time. Today, expectations are that the growth of Fairfax’s insurance business is coming to a hard stop. The hard market is coming to a hard stop so the top line growth at Fairfax has to also stop. Right? This is likely what is built into investor expectations today - and therefore the stock price. 
 

My guess is that in the coming years Fairfax will continue to grow its insurance business at a rate better than the industry average. What will they do? It will depend on what is available to them at the time. They will be open minded and flexible.
 

Expectations of investors is very low today - in terms of top line growth of the insurance business. For the management team at Fairfax this will be like jumping over a one foot hurdle. I love it.

 

This purchase seems to be a bit different than previous insurance acquisitions ,as some of those involved are looking at this purely as an investment and don't come with an insurance background.  It will be interesting to see how this one is structured.  I presume Fairfax was included for their success from both the insurance and investing side of the business.  This may involve an equity stake, performance fee or some combination of that , with the plan to expand the business quicky with the funds that Krefeld Invest ($171B family business) is able to provide.

We have seen how well the Fairfax subs have performed over the past few year, but there have been a couple of tailwinds from the past year that are clearing up now. 

 

- For the past year Odyssey Re has not been renewing their Quota Share Contract and this has significantly impacted premium growth, by 11.9%! in Q3 alone.  This is expected to be completed in Q4.

 

Odyssey’s gross premiums written were down 4.7% due to the previously disclosed non-renewal of a large quota share in the fourth quarter of 2023. Excluding the quota share contract, Odyssey’s business was up 7.2% in the third quarter, driven by its reinsurance operations.

 

- Brit has also been shedding unprofitable business and we should see this turn around in Q4.

Brit then were down 4% in the third quarter, and I think you’ll see that turn around as well as they’ve been--you know, they’ve been really focusing on the margins in their business and cutting back and reallocating capital to more profitable lines, so I would expect that you’ll see Brit on the positive side of premium growth going forward.

 

- In additional during 2025 we will have a full year of comparison for GIG.  I believe Fairfax will provide guidance in their 2024 Shareholders letter where they will increase their very conservation sustaining operating income from $4B to ~4.5B ($125 --> $140/share) for the next 4 years.  This would certainly be well in line with the ~15% ROE.

[Viking]

6 minutes ago, Hoodlum said:

 

This purchase seems to be a bit different than previous insurance acquisitions ,as some of those involved are looking at this purely as an investment and don't come with an insurance background.  It will be interesting to see how this one is structured.  I presume Fairfax was included for their success from both the insurance and investing side of the business.  This may involve an equity stake, performance fee or some combination of that , with the plan to expand the business quicky with the funds that Krefeld Invest ($171B family business) is able to provide.

We have seen how well the Fairfax subs have performed over the past few year, but there have been a couple of tailwinds from the past year that are clearing up now. 

 

- For the past year Odyssey Re has not been renewing their Quota Share Contract and this has significantly impacted premium growth, by 11.9%! in Q3 alone.  This is expected to be completed in Q4.

 

Odyssey’s gross premiums written were down 4.7% due to the previously disclosed non-renewal of a large quota share in the fourth quarter of 2023. Excluding the quota share contract, Odyssey’s business was up 7.2% in the third quarter, driven by its reinsurance operations.

 

- Brit has also been shedding unprofitable business and we should see this turn around in Q4.

Brit then were down 4% in the third quarter, and I think you’ll see that turn around as well as they’ve been--you know, they’ve been really focusing on the margins in their business and cutting back and reallocating capital to more profitable lines, so I would expect that you’ll see Brit on the positive side of premium growth going forward.

 

- In additional during 2025 we will have a full year of comparison for GIG.  I believe Fairfax will provide guidance in their 2024 Shareholders letter where they will increase their very conservation sustaining operating income from $4B to ~4.5B ($125 --> $140/share) for the next 4 years.  This would certainly be well in line with the ~15% ROE.

@Hoodlum , great points. My view is Fairfax is simply planting another seed with the speculated acquisition of French insurer Algingia. What the seed grows into we will see in the coming years. My guess is relationships and having boots on the ground is an important part of doing business in Europe. 

[Hoodlum]

16 minutes ago, Viking said:

@Hoodlum , great points. My view is Fairfax is simply planting another seed with the speculated acquisition of French insurer Algingia. What the seed grows into we will see in the coming years. My guess is relationships and having boots on the ground is an important part of doing business in Europe. 

 

I agree. The continued growth of their global insurance business will open up new opportunities.