Fairfax 2024

[Parsad]

6 minutes ago, MMM20 said:

 

I’ve been arguing for years that FFH investors were being overly backward looking and book value accounting focused, missing the firehose of cold hard cash about to start spraying them in the face.
 

 

Hi MMM20, I received a complaint that this sounded overtly sexual in nature.  Please refrain from spraying anyone's face with cold hard cash!

 

Cheers!

[SongDonkey.AI]

2 minutes ago, Parsad said:

 

Who is he stealing from?  He's the largest shareholder.  His family owns shares.  His staff owns shares.  His foundation owns shares.  

 

How is he benefiting from his theft?  Either he's the smartest thief in the world or the dumbest!  

 

Explain how he's solely, or in coordination with others, benefiting from any inflation of book value.  Cheers!

There is an answer in your post - if doesn’t go up 
- everything doesn’t work - nobody is motivated.

[Hektor]

11 minutes ago, LC said:

you also have to credit them for delaying unrealized markups of other assets. It has to cut both ways. 

He does say they marked up, but that too is a problem in his view. 

 

See "TRSes & Digit — Overview".

 

"We feel it is incontrovertible that Digit is worth far less today than where Fairfax ultimately marked it in 2021, which is why we adjust Fairfax's book value down by $1.1 billion, as of December 2022,for Digit. While the ultimate valuation at which Fairfax marked Digit in 2021 may have been justified at the time (discussed infra), Fairfax, in our view improperly, recognized these gains in a manner inconsistent with valuation changes in Digit by first ignoring a gain that should have been taken before the TRSes were in place, and then spreading a one-time gain out over three quarters.. We believe the inconsistent recognition, rather, was designed to provide more fuel for Fairfax's share price, which as a result of the TRSes, was now feeding directly into Fairfax's net income. Through the TRSes, this fuel had a recursive effect on Fairfax's financials by inflating income as the stock went up, leading to more share price gains and more income."

[Parsad]

1 minute ago, SongDonkey.AI said:

There is an answer in your post - if doesn’t go up 
- everything doesn’t work - nobody is motivated.

 

So when book value was stagnant from 2009 to 2016 at roughly $370 USD, are you and MW's suggesting Prem just wasn't smart enough then to finagle the books to keep book value rising?  But somehow he's become exceedingly clever in the last 4 years and is pulling the wool over everyone's eyes?

 

Cheers!

[Hektor]

1 minute ago, Parsad said:

So when book value was stagnant from 2009 to 2016 at roughly $370 USD, are you and MW's suggesting Prem just wasn't smart enough then to finagle the books to keep book value rising?  But somehow he's become exceedingly clever in the last 4 years and is pulling the wool over everyone's eyes?

 

Cheers!

+1

[UnfairFacts]

2 hours ago, coc said:

Practically every fraud is first caught by short sellers. This argument holds no weight. The SEC and Deloitte are sure as hell not out there calling out the Wirecards, Enrons, Valeants, Sino-Forests of the world. 

There’s a key difference here:  in the case of Enron et. al, accusations (from short sellers) flew, alarms sounded, regulators stepped in, and *fraud was confirmed*.  In the case of  Fairfax in 2005– the subject of your response here— accusations flew, employees were threatened (!), alarms sounded, regulators took a look, and…. nothing happened.  There was no fraud.

[UnfairFacts]

MW is speaking to a particular audience here— those who hold a position but do not follow the company closely.   I’m thinking of quants, new investors, certain widely diversified, generalist funds, short-term traders, and certain private investors that don’t dive into the details.   The example of Burford Capital, targeted by MW a couple of years ago, demonstrates the playbook:  1) choose a company with a complicated business structure & accounting; 2) choose a company that’s financial in nature, increasing the trust factor with respect to marks, reserves, etc.;  3) Call that trust into question with cherry-picked examples; 4) Ignore counter-examples & disconfirming evidence; 5) make the accusation following a run-up in price, when the stock is perhaps beginning to attract a broader following (better yet, in a quiet period…); 6) carefully deal in innuendo and insinuation rather than in outright accusations of fraud.   The calculus becomes “how can we craft an argument that’s plausible enough to scare someone away that doesn’t understand the company well, while avoiding a lawsuit?”  

[SharperDingaan]

2 hours ago, Viking said:

@SharperDingaan I am not sure what the actual problem is for Fairfax. Pain in the ass? Yes. Problem? No.

 

The short campaigns from 2003-2005 were successful because of Fairfax’s financial condition, especially in 2003, and also because of the NYSE listing. IMHO, there is almost zero comparison to the situation today. Fairfax was also caught flat-footed.
 

Fairfax is in better than rock solid shape. They have top tier insurance operations. Their fixed income portfolio is likely positioned well (details to come next week). Their equity portfolio has never looked better (in terms of quality and prospects). They have record free cash flow locked in for years. And they have a great deal of experience with how to deal with short campaigns. 

If the stock falls much below book value Fairfax will vacuum up shares. 
 

Look at the last 4 years. When adversity hits, this team doesn’t ‘survive’ they thrive. I suspect it will be the same this time around.

It’s like the shorts thought they were picking a fight in the schoolyard with that scrawny new kid from 20 years ago. But that scrawny kid has grown up - older, bigger, stronger, wiser. And he has a bunch of buddies who love to brawl. And how do you deal with a bully? You punch them right in the face. Next week will be interesting.

 

PS: and as an aside, as a Fairfax shareholder, this will also perhaps be a timely lesson for the Fairfax team to not get too high on their horse in the coming years. They have the table set to do something truly special.

 

Only things I would add:

 

FFH does a lot of everyday sophisticated transactions, it does them within the complicated insurance wrapper, and it records all this using IFRS accounting. No big deal to understand for the CPA's, CFA's of the world with deep knowledge in both capital markets and insurance; but not so much for the lay person, or those new to 'investing'. When it seems like a black box, and most shareholders don't fully understand it, they are inherently vulnerable to negative 'manipulation'. 

 

Quite agree; FFH is a power house today, and they've been to more than a few short selling rodeos. However it's also hard to imagine that MW wasn't aware that this would be a harder nut to crack; yet they still choose to try it? If they have miscalculated, all they can do is bluff through successive rounds; the only question is how much juice can be squeezed out of MW before they fold.

 

Always hopeful!

 

SD  

[nwoodman]

It's always possible that MW is on a fishing expedition, and this was the initial burley to see if they can land something more substantial via a whistleblower.  I put this at 1%.  After listening to both interviews, Block's knowledge of the company seemed cursory.  In all honesty, it was almost like he scrolled through some of the conversations here from a few years ago, and that was where he stopped.  Later discussions are obviously not overly accretive to his thesis.  Looking forward to the results next week....oh, and Carson's detailed questions at the Q&A 

Edited February 10 by nwoodman

[SharperDingaan]

7 hours ago, coc said:

 

It's a conspiratorial post about Muddy Waters supposedly manipulating FFH's stock so he can buy call options and make money on the bounce. Written by James Joyce.

 

Sadly, I'm nowhere near as eloquent as James Joyce!

 

Just to throw some random numbers out ...

Start at 1400 pre-announcement. Short 1,000  shares, long 10 out-of-the-money puts at 1300, publish report, media tour

Drive the price < 1300 by expiry date. Have the 1,000 shares assigned, off exchange. Long 20 calls between 1300 and 1400.

AR is announced, squeeze the shorty! Price moves to 1500, sell the 20 calls at 1500, return the 1,000 shares to the lender.

 

Buy today at 1260. Sell at 1500 post AR (240 profit), buy back at 1260 on MW round-2 (240 profit). MW eventually walks away, shares sold for 1500 (240 profit). Total gain of 720 on a 1260 investment is 57%. If you only capture 2/3 of this ... about a 38% return.

 

Just one of many possibilities .....

 

SD

 

Edited February 10 by SharperDingaan

[Hektor]

1 hour ago, SharperDingaan said:

most shareholders don't fully understand i

My suggestion is for FFH to license some of @Viking’s writing and put it on their website for unsophisticated investors 

[gfp]

38 minutes ago, SharperDingaan said:

 

Sadly, I'm nowhere near as eloquent as James Joyce!

 

Just to throw some random numbers out ...

Start at 1400 pre-announcement. Short 1,000  shares, long 10 out-of-the-money puts at 1300, publish report, media tour

Drive the price < 1300 by expiry date. Have the 1,000 shares assigned, off exchange. Long 20 calls between 1300 and 1400.

AR is announced, squeeze the shorty! Price moves to 1500, sell the 20 calls at 1500, return the 1,000 shares to the lender.

 

Buy today at 1260. Sell at 1500 post AR (240 profit), buy back at 1260 on MW round-2 (240 profit). MW eventually walks away, shares sold for 1500 (240 profit). Total gain of 720 on a 1260 investment is 57%. If you only capture 2/3 of this ... about a 38% return.

 

Just one of many possibilities .....

 

SD 

 

 

 

Hopefully, a good $300+/share on the turn before any option/margin leverage!

 

We would also be very surprised if MW didn't intend to exercise on existing options, as the mechanism by which to raise the shares to repay the short loans; plus accumulate some additional - offered for a buyback. We also expect them to have used the drop to lay in a stack of out-of-the-money calls; FFH buys in the stock at a price well < 1401, MW walks away, the price quickly returns > 1401 & all those calls go deep in the  money.

 

 

 

What options?

[ValueMaven]

FFH is a VERY dangerous stock to short unless you think its a $0

There is a controlling chairman who controls about half of the 25M shares o/s.  There are 2.2B shares outstanding of BRKB btw 

You have a long-term holding base, figure thats several million shares ...  The true float of FFH is very low!!!  This could actually blow-up on MW.  

[This2ShallPass]

4 hours ago, LC said:

Ok so the argument is: if there's 1 cockroach, there's probably 100 more.

Fair enough of an argument. But I think there's a few factors that run contrary:

 

What you have unintentionally done LC (and other regulars) is give some fuel to the troll fire. Someone comes in throwing wild ass ideas and accusations, normal people offer a sane explanation and before you know it's an actual debate and the cockamamie bs they threw out is worthy of a discussion. It happens so often, even in our politics, won't name any names

 

I realized this after engaging in some unproductive discussions and waste of my time, these exchanges fire up some ppl. You send 10 responses they will send 11, you do 100, there will be 101 and will keep going. Only differences is ours is thoughtful, takes energy to post and responses typically are inflammatory 1 liners.

 

Best option is to hit the ignore button (easier said than done) and get the quality of our board back (look at the last 2-3 pages). I know they're really helping us see the error in our ways wrt Fairfax, but we'll just have to do without their magnanimity..

 

 

[Haryana]

Let me throw these two with regards to Book Value vs Earnings:

 

1. For many years, investors were complaining for lack of earnings at Fairfax. The book value was still growing and the stock was undervalued compared to market based on book value but then the investors were taking the excuse of lack of earnings. Now they have put their focus on book value to find a new excuse.

 

2. Mr. Buffett spoke about how he was hesitant to purchase See's Candies at 3 times book value but then Mr. Munger said it was worth that due to being just six times earnings. We understand that Fairfax as an insurance financial is usually valued using book value, how can we completely ignore the earnings power?

 

[Luca]

3 minutes ago, Haryana said:

Let me throw these two with regards to Book Value vs Earnings:

 

1. For many years, investors were complaining for lack of earnings at Fairfax. The book value was still growing and the stock was undervalued compared to market based on book value but then the investors were taking the excuse of lack of earnings. Now they have put their focus on book value to find a new excuse.

 

2. Mr. Buffett spoke about how he was hesitant to purchase See's Candies at 3 times book value but then Mr. Munger said it was worth that due to being just six times earnings. We understand that Fairfax as an insurance financial is usually valued using book value, how can we completely ignore the earnings power?

 

IB reacting to the volatility of FFH:

[LC]

41 minutes ago, This2ShallPass said:

5 hours ago, LC said:

 

What you have unintentionally done LC (and other regulars) is give some fuel to the troll fire.

 

Fair enough, and I can understand the sentiment.

But I absolutely hate an echo chamber- even when the majority are correct. I'll entertain any nay-sayers as long as they have a good point to make. 

 

Same to the point Greg was making about cowardly short sellers who don't have the sack to claim outright fraud. To me - I don't care, say whatever you want. We're all big boys who make our own buy/sell decisions. If you have a good point why a stock is overvalued, I'll hear it.

 

If the best short thesis is immaterial accounting treatment and articles by Brett "CFA" Horn...well, I don't find the short points compelling, and I was a buyer yesterday and today. 

 

Edited February 10 by LC

[gfp]

1 hour ago, ValueMaven said:

FFH is a VERY dangerous stock to short unless you think its a $0

There is a controlling chairman who controls about half of the 25M shares o/s.  There are 2.2B shares outstanding of BRKB btw 

You have a long-term holding base, figure thats several million shares ...  The true float of FFH is very low!!!  This could actually blow-up on MW.  

 

Why do you say Prem controls half of the shares?  There are not 25m, there are 23.1 million shares.  (brk.b has 2.166 billion b-share equivalents outstanding)

[nwoodman]

34 minutes ago, Luca said:

IB reacting to the volatility of FFH:

@Luca that's interesting.  Rather than fill up this thread would you mind pm’ing me the full text, I wouldn’t mind reading it in its entirety

[Luca]

22 minutes ago, nwoodman said:

@Luca that's interesting.  Rather than fill up this thread would you mind pm’ing me the full text, I wouldn’t mind reading it in its entirety

Done

[This2ShallPass]

1 hour ago, LC said:

But I absolutely hate an echo chamber- even when the majority are correct. I'll entertain any nay-sayers as long as they have a good point to make. 

Completely agree. By no means I'm suggesting not to hear contrarian opinions, just need to ignore the noise so we can maintain the quality of the discussions we have been having here. 

[RichardGibbons]

3 hours ago, This2ShallPass said:

What you have unintentionally done LC (and other regulars) is give some fuel to the troll fire. Someone comes in throwing wild ass ideas and accusations, normal people offer a sane explanation and before you know it's an actual debate and the cockamamie bs they threw out is worthy of a discussion. It happens so often, even in our politics, won't name any names

 

Yeah, I mean SongDonkey's argument is among the worse I've seen on this board in the decades I've been reading it.

In 1973, Buffett stopped an acquisition of Wesco, only to acquire their own majority stake two years later.  The SEC investigated, and fined Blue Chip $115K to compensate Wesco shareholders for damages.

This is obviously much worse than the alleged "inaccurate valuations" by Fairfax trumpeted by Muddy Waters.

 

So in that case, clearly, if SongDonkey had been around in 1973, the right thing for him to do then would be to dump all Berkshire Hathaway Class A--and maybe even short those shares considering that they were trading at the lofty price of $71. Such horrific actions by Buffett completely invalidate Berkshire as a potential investment for anyone with an ounce of intelligence, because it's clearly run by a bunch of crooks and cockroaches must be everywhere!  Terrible idea to try to profit by buying Berkshire Class A shares for $71 in 1973.

 

---

 

Overall, this whole Muddy Waters thing makes me feel pretty good about Fairfax because it's such a nothingburger. If the best Muddy can come up with is screaming about what are clearly paper monsters, then that actually validates the investment.

 

[Parsad]

1 hour ago, RichardGibbons said:

 

Yeah, I mean SongDonkey's argument is among the worse I've seen on this board in the decades I've been reading it.

In 1973, Buffett stopped an acquisition of Wesco, only to acquire their own majority stake two years later.  The SEC investigated, and fined Blue Chip $115K to compensate Wesco shareholders for damages.

This is obviously much worse than the alleged "inaccurate valuations" by Fairfax trumpeted by Muddy Waters.

 

So in that case, clearly, if SongDonkey had been around in 1973, the right thing for him to do then would be to dump all Berkshire Hathaway Class A--and maybe even short those shares considering that they were trading at the lofty price of $71. Such horrific actions by Buffett completely invalidate Berkshire as a potential investment for anyone with an ounce of intelligence, because it's clearly run by a bunch of crooks and cockroaches must be everywhere!  Terrible idea to try to profit by buying Berkshire Class A shares for $71 in 1973.

 

---

 

Overall, this whole Muddy Waters thing makes me feel pretty good about Fairfax because it's such a nothingburger. If the best Muddy can come up with is screaming about what are clearly paper monsters, then that actually validates the investment.

 

 

+1!  Well said.  Cheers!

[Gregmal]

I still think you guys are giving it too much thought because you are 1) actually familiar with the fundamentals, and 2) assuming a traditional investment approach. It is neither.
 

This gentleman’s goal was NOT to make a fundamental case. His goal wasn’t to do “the best he could do”. His goal was to present something that would move the stock as much as possible in as short a period of time as possible. To inflict the maximum damage to the downside, as possible, on February 8/9….far different than Mr Analyst Brett, who actually does need to know some of the fundamentals in order to write his regular book reports.

[SongDonkey.AI]

6 hours ago, RichardGibbons said:

Yeah, I mean SongDonkey's argument is among the worse I've seen on this board in the decades I've been reading it.

Do not know what you mean by this.

And your analogy with Buffett’s Wesco deal seems out of place because if you assume that even half of what Muddy Waters say is correct then we have big trouble. It is not one of a kind accounting error but systematic practice to distort asset value. If it affects 18% or 50% of book value - doesn’t matter.

I’m neither for Fairfax nor for MW. Just watching from the sidelines with amusement but can’t shakeup feeling that although you, guys, are very intelligent, most of the conversation is based on trying to convince each other more and more that everything is ok.