Fairfax 2024

[dealraker]

4 hours ago, Gregmal said:

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.

And as is the norm Greg simplifies it correctly.  I know people like me being sort of the right-brained summary type, the long holding older people that often get ignored (getting older is accepting that you are invisible...count on it coming to you if you live long)... but given I've been here a while...

 

But this isn't Fairfax's first challenge, it isn't the last, and the very idea that this business can be investigaged and obsessed about such that all of it is understood by outsiders is illogical.  But from my place what is logical is believing that management is far better than average and that you as an investor will do well with Fairfax.   The road is bumpy and not linear.

 

Ain't it awful?   At some point recently I think Viking wrote about position sizing and that's important with all things.  It is you looking at yourself in the mirror asking, "Can I handle this?"  

[MMM20]

1 hour ago, SongDonkey.AI said:

If it affects 18% or 50% of book value - doesn’t matter.

So when you do the analysis yourself to come up with an economic fair value, not accounting book value, what do you come up with? And how much did it change after MW’s report? Please let us know. 
 

Edited February 10 by MMM20

[StubbleJumper]

10 hours ago, gfp said:

 

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)

 

Yes, you are right.  The Watsa family does not control roughly half the shares, but rather roughly half of the voting rights in a dual share-class structure.  It's an important distinction because the Watsa family's economic interest is nowhere near half.

 

 

SJ

[Hektor]

10 hours ago, Haryana said:

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

[Hektor]

10 hours 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.

 

Whatever the merit of the recent short thesis, I guess it jolted many investors who knew the company’s business well to examine if there is any holes in their understanding.

[Hektor]

5 hours ago, Gregmal said:

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.

What do you all think about any after effects? e.g. some regulatory body starting a review, diverting FFH time and money.

[UK]

12 hours ago, Luca said:

IB reacting to the volatility of FFH:

 

Second bullet: "The aggregate projected loss of the top three concentrated stocks (and their derivatives) will be compared to what would otherwise be the aggregate portfolio margin requirement, and the greater of the two will be the margin requirement for the portfolio."

 

Does this mean that for an account, with a large position in FFH, margin requirement will be calculated as if it's top 3 positions were zero: at the extreme no margin, if an account has less than 3 positions, or a big reduction of it, by zeroing top 3 positions? Is this normal/common practice by IB?

 

Edited February 10 by UK

[coc]

18 hours ago, UnfairFacts said:

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.

 

Fairfax wasn't convicted of fraud but the substance of much of the accusation was true and solid. Fairfax has a history of being very aggressive. Had their CDS positions not worked out so well in 2008 this whole conversation could have been very different. And just because they were clear in 2005 doesn't mean they are clear now - this shouldn't have to be said. For the record, MW is only accusing Fairfax of being aggressive and that the stock is overvalued - I can't see why he's not allowed to make that accusation when bulls will make the mirror image case all day long, happy to push the stock up. 

 

But again, I repeat, short sellers are there as an alarm system to flag issues - holding them to the standard of "There are examples where they were incomplete or wrong and therefore they shouldn't exist and/or are a corrupt institution" is unbelievably false. That's Soviet style condemnation - find a few salient examples and condemn the entire system.

[Ghost]

16 hours 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

 

I hate ask again...what options market for FFH?  Last time I checked no public options exist.  Buy the stock or short the stock...only "options" I see.  .

[rohitc99]

I have held thomas cook and Quess for a long time in india and followed both companies. At a minimum, the argument against Quess is weak to begin with. Quess invested in monster.com and has been incurring losses in this segment for more than a year. this has suppressed their operating margin which should improve by the end of the year as the new segment breaks even. Quess is growing its topline and its operating profit is up 15%+ for the year. The value of Quess is increasing, not reducing

 

Fairfax invested in thomas cook in the depths of 2020 Covid crisis and the risks were far higher. The stock is up 3X since then and the company is firing on all cylinders in India

 

The whole report appears like a multiple choice exam where the examiner deducts points for mistakes, decides to ignore all the questions the student got right. totals up the negative points and then fails the student.

 

If you are going to call out what is carried in excess of market value, then the same needs to be done for all investments where the carrying value is less than market value

[vakilkp]

6 hours ago, dealraker said:

And as is the norm Greg simplifies it correctly.  I know people like me being sort of the right-brained summary type, the long holding older people that often get ignored (getting older is accepting that you are invisible...count on it coming to you if you live long)... but given I've been here a while...

 

But this isn't Fairfax's first challenge, it isn't the last, and the very idea that this business can be investigaged and obsessed about such that all of it is understood by outsiders is illogical.  But from my place what is logical is believing that management is far better than average and that you as an investor will do well with Fairfax.   The road is bumpy and not linear.

 

Ain't it awful?   At some point recently I think Viking wrote about position sizing and that's important with all things.  It is you looking at yourself in the mirror asking, "Can I handle this?"  

@dealraker - you are not invisible to some of us.  Your long term perspective is well needed and also appreciated.  Completely agree it is about looking in the mirror and answering the question for oneself.  Doesn't matter what others will state.  There are too many calories being burned on this short report.  The motivations for MW are different than for long term business owners.  Wish the stock had gone lower frankly but oh well. 

[Gregmal]

Honestly if at least one thing I own isnt attracting a hit piece from some attention seeking clown at least once a year, I need to look in the mirror because chances are Im not being unique and independent enough with my work. Last thing you wanna do is be the consensus. The real money is made seeing things others dont. I'd love to make my big 3, the big 4, but I doubt this gets sold off much more than it already has. 

[Hoodlum]

30 minutes ago, rohitc99 said:

I have held thomas cook and Quess for a long time in india and followed both companies. At a minimum, the argument against Quess is weak to begin with. Quess invested in monster.com and has been incurring losses in this segment for more than a year. this has suppressed their operating margin which should improve by the end of the year as the new segment breaks even. Quess is growing its topline and its operating profit is up 15%+ for the year. The value of Quess is increasing, not reducing

 

Fairfax invested in thomas cook in the depths of 2020 Covid crisis and the risks were far higher. The stock is up 3X since then and the company is firing on all cylinders in India

 

The whole report appears like a multiple choice exam where the examiner deducts points for mistakes, decides to ignore all the questions the student got right. totals up the negative points and then fails the student.

 

If you are going to call out what is carried in excess of market value, then the same needs to be done for all investments where the carrying value is less than market value

The report from National Bank yesterday detailed that the 3 largest investments that would show a gain in market value if marked to market, would offset most of the negative book value that MW found.  
 

As long as there is no material variance in overall book value then there is no need to constantly mark to market each individual investments until there is a material change in ownership. The regulatory bodies have agreed with this approach and that is why there have been  no issues with how individual investments are reported by Fairfax or any other insurance business that has similar businesses that are not marked to market. 
 

Unfortunately, many investors don’t understand how the insurance company investment reporting works and MW took advantage of this to try and make a quick profit, although it looks like MW had poor timing and just broke even based on MW shorting on 1/16 and getting out on Thursday. 

[dealraker]

1 hour ago, vakilkp said:

@dealraker - you are not invisible to some of us.  Your long term perspective is well needed and also appreciated.  Completely agree it is about looking in the mirror and answering the question for oneself.  Doesn't matter what others will state.  There are too many calories being burned on this short report.  The motivations for MW are different than for long term business owners.  Wish the stock had gone lower frankly but oh well. 

vakilkp, as usual I didn't pen my post very well.  What I mean to say is that if you are in this for some duration that it will be inevitable that a number of these type "inverventions" come, that even the best company can't avoid them.  And that us long termers who sloff these events off, even if somewhat true, tend to do well.  And the last part of that is that if you do overweight an investment?  Well, you better have some courage to endure what, no matter how much praise the group gives, is going to happen to every business over time.  

 

I'll add to this post that during and shortly after the financial crisis I had knowledge of and understanding of a business called American Financial Group.  I was 100% certain that it would be a near 10 bagger within 10 years.  Yep, 100% certain.

 

I made an anemic investment in AFG initially, then quadrupled it within a very short time.  And yes I've made near 10 times my money.  But I knew myself all too well, that this is precisely the type of business that could offer some exciting (and not in a positive) news and (on top of that) brokerage or short seller ammo for rip-it-up-tear-it-up shock value reports.

 

So even with a huge belief?  I just made the investment I could stomach given the all hell breaking loose of some investment entitiy looking for a bonanza short term outcome.  So was my 100% the 100% I was feeling in the good times while discussing this with my former business partner who was intigating this deal's (investment) energy?   Of course it was more like 99.9%...and yea some wild-ass claims would have the potential to send me to la-la land of panic selling.  I'm natured to detest losing money rather than lust after the big returns, so I do have a potential fragile part of me that can sink the ship.

 

Best know yourself first and foremost.   Still positive on AFG though, not quite the return I expected but close.  

Edited February 10 by dealraker

[Maverick47]

44 minutes ago, dealraker said:

that if you do overweight an investment?  Well, you better have some courage to endure what, no matter how much praise the group gives, is going to happen to every business over time.  

We’ll put @dealraker!  It reminds me of a comment that I believe Charlie Munger made a few years ago at a Daily Journal meeting…

talking about the temperament an investor needs to have in the face of market fluctuations.  I think he was talking about his own stake in Berkshire Hathaway, and in his own inimitable phrasing said something like “you have no business investing in individual stocks if you can’t face the possibility of a 50% decline in market value with equanimity”.  He then went on to elaborate that two times in his personal ownership of Berkshire Hathaway he had faced that sort of situation….

[Gregmal]

It’s always bewildered me why some folks use volatility as some sort of gotcha. It’s part of the game. If it’s compelling, take advantage and if not who cares?

[value_hunter]

Some interesting questions: If FFH purposely overvalue their asset, will that lead a higher tax or earlier tax payment? If FFH has the motive to consistently inflate their asset value why when some chances came but they chose not to. The bottom line is whether Fairfax is trustful. I found the following comment from Seekingalpha is very interesting.

https://seekingalpha.com/news/4064629-fairfax-financial-drops-amid-muddy-waters-short-report#scroll_comments

Doc Hopey

Yesterday, 4:53 PM

Investing Group

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@zenamaste1995 When FFH sold its Pet insurance business for $1.4 bn in late 2022, FFh had to book a gain of $1.2 bn. Fairfax bought the pet insurance business for $30 mn (or was it $50 mn? From memory) less than two deacades before the sale.

 

Essentially nobody, not even the people following Fairfax over years, were really aware, that Fairfax even owned that business.

 

And here’s the question: Don’t you think that creative accountants would have advertised such an asset way more than FFH did? Why haven‘t they? Were they oversleeping this $1.2 bn opportunity for letting Fairfax shine?

 

Or is it more like, Fairfax tries to grow intrinsic value (not book value), tries to avoid taxes and is advertising way less than others over its whole history?

ReplyLike(1)

 

  

Edited February 10 by value_hunter

[Luke]

7 hours ago, UK said:

 

Second bullet: "The aggregate projected loss of the top three concentrated stocks (and their derivatives) will be compared to what would otherwise be the aggregate portfolio margin requirement, and the greater of the two will be the margin requirement for the portfolio."

 

Does this mean that for an account, with a large position in FFH, margin requirement will be calculated as if it's top 3 positions were zero: at the extreme no margin, if an account has less than 3 positions, or a big reduction of it, by zeroing top 3 positions? Is this normal/common practice by IB?

 

Not 100% sure, i understood it as a -50% loss in the top 3 stocks and not a 100% loss. Otherwise i think its likely that IB will liquidate and cover my positions on margin although i have HUGE excess liquidity which is kind of ridiculous and would be the end of me using Margin. Anybody else here knows more? This is the complete message: 

 

Dear Client,

 

In light of the current trading environment, Interactive Brokers will being phasing in changes to the margin requirement for accounts that hold a concentrated position in FFH:TSE (Fairfax Financial Holdings Ltd).

 

The requirement will work as follows:

An alternative stress test will be considered following the margin calculation currently in place, with the greater of the two becoming the active requirement. FFH:TSE stock and its derivatives will be subject to a stress test that simulates a price change in the underlying stock of -50% and +50%.

The aggregate projected loss of the top three concentrated stocks (and their derivatives) will be compared to what would otherwise be the aggregate portfolio margin requirement, and the greater of the two will be the margin requirement for the portfolio.

The increase will be phased in over a series of daily increments beginning after the New York close on February 9, 2024 and continuing through trade date February 12, 2024.

 

Based upon a recent review of your account, the increase is projected to result in a margin deficiency of . Please take the necessary steps to ensure margin compliance. An account that is margin deficient becomes subject to forced liquidations.

 

Consistent with our stated policy, accounts that are unable to carry a position under this new margin requirement are subject to liquidations to bring the account into margin compliance.

 

Note that the "." At "resulting in a margin deficiency is just an empty point that i interpreted in no margin deficiency in my account. Not sure though.

[gfp]

Kind of funny that they are going to phase the margin increase in "over multiple days" and then say those days are from after the close on Friday to trade date Monday.  That's one day, not phased in.

[valuesource]

On 2/9/2024 at 10:01 AM, sleepydragon said:

Before 11/27, it was less than 60m. After 11/27, it popped to $100-150m. Then back to $50m in 2024 till popping a lot around 1/16

I get the Short Interest spreadsheet from TMX but it's only every 15 days.  Below is what it looks like for Jan 31/24.  It is a subscription service.  I was unaware that it was possible to get it daily or hourly.

 

Going back to mid 2022, there seems to be a consistent short interest of 120,000-160,000 on FFH-T.  20,000-40,000 on FFH.U-T.  Without considering @sleepydragon's input, I might have concluded that someone has had a short position in FFH for a while now.  I'm not so obtuse to think I could be wrong about the short interest being published more frequently.  If @sleepydragon could point me in the right direction, I would be grateful.

 

[Luke]

7 minutes ago, gfp said:

Kind of funny that they are going to phase the margin increase in "over multiple days" and then say those days are from after the close on Friday to trade date Monday.  That's one day, not phased in.

Yeah...but do you know what they mean? 100% loss of top 3 positions or -50% loss of top 3 positions, confusing, i have to play with risk navigator later

[nwoodman]

9 minutes ago, Luca said:

Yeah...but do you know what they mean? 100% loss of top 3 positions or -50% loss of top 3 positions, confusing, i have to play with risk navigator later

Typically on large caps the maintenance requirement is 30%, but you would need to confirm.  They are  advising you that for Fairfax they are now only willing to do 50% if it is a “concentrated position”.  The key questions are

 

1. What is the normal margin requirement for IB? Typically this varies by market cap.

2. What constitutes a concentrated position?

 

It is very poorly worded.

[valuesource]

1 minute ago, nwoodman said:

Typically on large caps the maintenance requirement is 30%, but you would need to confirm.  They are  advising you that for Fairfax they are now only willing to do 50% if it is a “concentrated position”.  The key questions are

 

1. What is the normal margin requirement for IB? Typically this varies by market cap.

2. What constitutes a concentrated position?

 

It is very poorly worded.

Possibly poorly worded by design.  I have a small account at IB but it only has 2 positions in it.  One is FIH.U.  I wouldn't get get a notification because I don't borrow money against my stock positions currently.  I like their margin lending rates but I don't like this behaviour.  Unfortunately, brokers have a sordid past of changing the rules and it's always at the worst times.

[Hamburg Investor]

19 minutes ago, value_hunter said:

Some interesting questions: If FFH purposely overvalue their asset, will that lead a higher tax or earlier tax payment? If FFH has the motive to consistently inflate their asset value why when some chances came but they chose not to. The bottom line is whether Fairfax is trustful. I found the following comment from Seekingalpha is very interesting.

https://seekingalpha.com/news/4064629-fairfax-financial-drops-amid-muddy-waters-short-report#scroll_comments

Doc Hopey

Yesterday, 4:53 PM

Investing Group

Comments (571)

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+ Follow

@zenamaste1995 When FFH sold its Pet insurance business for $1.4 bn in late 2022, FFh had to book a gain of $1.2 bn. Fairfax bought the pet insurance business for $30 mn (or was it $50 mn? From memory) less than two deacades before the sale.

 

Essentially nobody, not even the people following Fairfax over years, were really aware, that Fairfax even owned that business.

 

And here’s the question: Don’t you think that creative accountants would have advertised such an asset way more than FFH did? Why haven‘t they? Were they oversleeping this $1.2 bn opportunity for letting Fairfax shine?

 

Or is it more like, Fairfax tries to grow intrinsic value (not book value), tries to avoid taxes and is advertising way less than others over its whole history?

ReplyLike(1)

 

  

What I tried to say - and I may be wrong, I am not an account, just an amateur investor - is, the following:

- the pet insurance business was bought by FFH at a low price (seen from the point of selling; let‘s say $50mn). It was sold 15 to 20 years later for $1.4bn - and the profit was $1.2bn. 
- So the book value of the pet insurance business in FFHs grew from $50mn to $200mn ($1.4bn less $1.2bn).

- Let’s assume $50mn was a fair price, when FFH bought it. Than for nearly two decades the busines value grew anormously to $1.4bn, but that wasn’t represented within the book value of FFH; the book vakue of the pet insurance business just grew by the amount of the reinvested money; but the business seems to not having needed lots of that and still grew stronger and stronger. In the beginning the difference between the paid price and the business value was low and over the years, that difference grew and grew.

- So the real value of the pet insurance business was understated in the books of FFH.

 

What could Prem do to make that hidden value visable? As I said, I am not an accountant, but I think he would e. g. have to sell a part of the business and mark the business to market. There may be other and more technics; but from my understanding, FFH would have to pay taxes (as they sell a part of the business) or/and they would loose the possibility to fully profit from the per business (if you sell e.g. 10 per cent, than you only own 90 per cent…). The point is: Making the value of a wholly owned business visible, you need to mark it to market; but there is no market, if you don‘t sell. But if you sell, you loose intrinsic value. 
 

Is my way of thinking correct or not?

[SharperDingaan]

4 hours ago, Ghost said:

I hate ask again...what options market for FFH?  Last time I checked no public options exist.  Buy the stock or short the stock...only "options" I see.  .

 

Sadly it would seem that exchange traded options on FFH are no longer available; at one time, you could buy/sell them on the Montreal Exchange. The reality of course is that you can still do the same thing; but now its via ISDA agreement/private market, and without the premium and open interest information being visible to the open market.

https://m-x.ca/en/markets/mx-indices/derivatives-indices

 

Should MW go multiple rounds, one has to think it's only a matter of time until it reappears. The higher leverage of options vs the 50% margin maximum, and the greater transparency, reasonably assuring the prospective market maker of sufficient volume to make it worthwhile.

 

SD