Fairfax 2024

[Viking]

4 hours ago, Spooky said:

 

Buffett bought $1B in Coca-Cola in 1988 so before they were the size Fairfax is currently. They also bought Amex a few years later in the early 90s. They had See's Candy much sooner.

Comparing Berkshire Hathaway with Fairfax Financial - some thoughts.
 

When Buffett first bought AMEX and Coca-Cola were they viewed at the time like they were brilliant investments? No, of course they weren’t. It often takes a decade or longer - after the purchase - to evaluate/appreciate a brilliant capital allocation decision.

 

Example 1

From 2018-2023, Fairfax invested $2 billion and now owns 15.5% of a high quality company. The average price paid that was about 1/3 of its current intrinsic value (conservatively valued). They bought high quality at an exceptionally low price. And they backed up the truck - $2 billion is a lot of money (at the time, common shareholders equity was around $13 billion).
 

But the story gets even better. In late 2020/2021, Fairfax got exposure to another 7.5% of the very same high quality company. This time they paid about 28% of current intrinsic value. 
 

In total, they ‘purchased’ about 23% of this company, paying on average about 30% of current intrinsic value. This investment is poised to compound at mid to high teens in the coming years. 
 

Hello people… have you been paying attention? (Yes, the company they bought is called Fairfax.)

 

Example 2

In Q4 2021, Fairfax sold most of their corporate bonds and dropped the average duration of their fixed income portfolio to 1.2 years. In Q4 2023 they extended the average duration of their fixed income portfolio to +3 years. What they did with their fixed income portfolio saved the company $3 billion? (or more?) in unrealized bond losses. Because duration was so short, the earn through from spiking interest rates was immediate in 2022 and 2023. Today they are earning $2 billion in interest income and it is now largely locked in for the next 4 years. They protected their balance, pivoted and are now earnings record interest and dividend income - the highest quality income stream a P/C insurer can have. 
 

Fairfax’s financial profile (and future) has been permanently changed (improved) as a result of these actions. Ask AM Best if you don’t believe me.
 

The parallels with a much younger Berkshire Hathaway

 

“History does not repeat itself, but it rhymes.” Mark Twain

 

Investors waiting for Fairfax to buy ‘Coke’ or ‘American Express’ in 2024 will likely be sorely disappointed. For two reasons:

1.) Buffett’s brilliance wasn’t buying Coke or American Express. It was exploiting the set of circumstances that existed at the time, which served up Coke in 1988 and AMEX in 1990.

2.) Like Berkshire when it made its many brilliant moves, most investors probably won’t see it when Fairfax actually does it.
 

How do I know this? Because Fairfax has been making exceptional capital allocation decisions for years now. For a couple of these they got out their elephant gun. And they still get no (little) credit. And that is because the company continues to be misunderstood. The moves Fairfax has been making continue to be grossly under appreciated. Just like when Buffett made his great investments, investors need more time to fully appreciate the brilliance of what Fairfax has executed in recent years.
 

If lots of people on this board don’t see it… do you think the rest of the investor community does? That’s why the stock trades at 1.1x book value - crazy cheap. 

 

The key lesson for investors

 

The world is different today - the set of circumstances is ever changing. Importantly, with normalized - higher - interest rates, volatility in financial markets is back. We had bear markets in stocks in 2020 and again in 2022. We had a historic bear market in bonds in 2022. And just look at what Fairfax has been doing. Most investors still can’t see what is right in front of their face. Because they are looking for the wrong thing.
 

Active management can have a huge impact on financial results. Now most P/C insurance companies don’t actively manage their investment portfolio. Fairfax does.

Fairfax today:

1.) They are run by a genius - yes, anyone who can compound book value at 18.4% for 38 years is a genius. What is Prem’s greatest strength? Perhaps his ability to attract and retain talent, beginning with the creation of Hamblin Walsa 38 years ago and continuing with the guys running insurance like Andy Barnard.
2.) They are family controlled - importantly, this allows for long term decision making. Along the same line, this also allows them to take full advantage of volatility, even if it takes some time to work out.

3.) They have Hambin Watsa - handles all capital allocation decisions.

4.) Capital allocation - They use a value investing framework. This appears to be evolving over time. Today, they appear to be placing more of a premium on management. And financial strength/profitability. ‘Quality at a fair price’ versus classic Graham ‘deep value’ type investing.
5.) They are highly levered to float. Its cost is better than free (they are actually getting paid to hold it) and it is growing in size.

6.) Culture - insurance and investments are run on a decentralized model.

7.) They invest a large part of their investment portfolio in equities. Most traditional P/C insurance companies stick to fixed income investments.

8.) They are still a small company - this gives them a very large opportunity set.

9.)  They have their elephant gun out. 
10.) They are able to move with speed.

11.) They have been generating an enormous amount of cash the past couple of years and this is set to continue in the coming years (net earnings of around $4 billion per year?).

12.) They are on a hot streak - when it comes to capital allocation.
13.) And volatility - more normal financial markets - is back. So lots of opportunities will be coming in the future.

14.) Compounding - as always - sits ready to work its magic.

This set-up looks an awful lot like a much younger Berkshire Hathaway. 
 

But what Fairfax does/how they execute will likely not look anything like what Berkshire Hathaway did back in the 1980’s. And that is because history does not repeat exactly. But it sometimes rhymes. And I think this might be one of those times.

 

Today, Berkshire Hathaway is like an aging elephant. And Fairfax is like a lion in its prime. And the drought (zero interest rates) has ended - and the savannah is once again teeming with game. 

Edited May 2, 2024 by Viking

[gfp]

On 5/1/2024 at 10:56 AM, Viking said:

Fairfax has some pretty big cash outlays in Q1:

• Dividend ($15/share) = $375 million
• Stock buybacks = $125 million? 125,000 shares @ $1,000/share?

 

Seems like FFH share repurchases should come in around $195 million in the quarter but I may be double counting some shares.  We'll see how far off I am later.

https://ceo.ca/api/sedi/?symbol=ffh&amount=&transaction=&insider=Fairfax

[SafetyinNumbers]

5 hours ago, Spooky said:

I like Fairfax's setup here and have added some more to my position recently. But aren't we all jumping the gun comparing it to Berkshire and their position in 1995? To match Berkshire's track record going forward, Fairfax is going to need to significantly shift its asset allocation from 75% bonds to predominantly equities. As a Canadian company, will Fairfax be allowed to do this by insurance regulators (I'm ignorant on the rules here but there must be differences between the US and Canada)? Also, this shift presumes that there will be good opportunities to buy wonderful companies at fair prices that Fairfax can easily shift capital into. Is the investing environment going forward going to be conducive to doing this? Buffett himself has written that the investment arena is much more competitive now and there aren't as many easy opportunities as there were in the past. There are also many people out there now trying to implement the Munger playbook. Lastly, have we seen that Fairfax is able to identify and buy these compounders / wonderful companies? Where are the Coca-Cola's, Amex's, See's Candies, Apples in their portfolio today? Which companies in their portfolio have high returns on assets, are growing and have durable moats?

BRK has returned a little over 12% CAGR since the late 90s and has had some multiple contraction. I find it difficult for FFH BV to not double or more in the next 5 years which is a nice start. If FFH can do that I think we will almost surely see multiple expansion over that period which makes it an even better start. How the compounding story goes after that is harder to predict but I think they are going to be disciplined which doesn’t mean they won’t make mistakes but as it stands now they are painting a masterpiece. 

[Xerxes]

3 hours ago, Viking said:

Berkshire Hathaway is like an aging elephant. And Fairfax is like a lion in its prime. 

Berkshire Hathaway 25 years from now. … with Wall Street watching.  
 

 

[Viking]

12 minutes ago, Xerxes said:

Berkshire Hathaway 25 years from now. … with Wall Street watching.  
 

 

@Xerxes you have a wicked sense of humour. I laughed out loud when i read your post and saw the picture. 

[thowed]

Thanks, @gfp.  Sorry to ask a stupid question, but I'm confused as to why some of the shares purchases are at a much lower price e.g. 11-19 March.  Are they occasionally buying the US$ OTC FRFHF??  These are much lower amounts.

[Spooky]

5 hours ago, Viking said:

Comparing Berkshire Hathaway with Fairfax Financial - some thoughts.
 

When Buffett first bought AMEX and Coca-Cola were they viewed at the time like they were brilliant investments? No, of course they weren’t. It often takes a decade or longer - after the purchase - to evaluate/appreciate a brilliant capital allocation decision.

 

Example 1

From 2018-2023, Fairfax invested $2 billion and now owns 15.5% of a high quality company. The average price paid that was about 1/3 of its current intrinsic value (conservatively valued). They bought high quality at an exceptionally low price. And they backed up the truck - $2 billion is a lot of money (at the time, common shareholders equity was around $13 billion).
 

But the story gets even better. In late 2020/2021, Fairfax got exposure to another 7.5% of the very same high quality company. This time they paid about 28% of current intrinsic value. 
 

In total, they ‘purchased’ about 23% of this company, paying on average about 30% of current intrinsic value. This investment is poised to compound at mid to high teens in the coming years. 
 

Hello people… have you been paying attention? (Yes, the company they bought is called Fairfax.)

 

Example 2

In Q4 2021, Fairfax sold most of their corporate bonds and dropped the average duration of their fixed income portfolio to 1.2 years. In Q4 2023 they extended the average duration of their fixed income portfolio to +3 years. What they did with their fixed income portfolio saved the company $3 billion? (or more?) in unrealized bond losses. Because duration was so short, the earn through from spiking interest rates was immediate in 2022 and 2023. Today they are earning $2 billion in interest income and it is now largely locked in for the next 4 years. They protected their balance, pivoted and are now earnings record interest and dividend income - the highest quality income stream a P/C insurer can have. 
 

Fairfax’s financial profile (and future) has been permanently changed (improved) as a result of these actions. Ask AM Best if you don’t believe me.
 

The parallels with a much younger Berkshire Hathaway

 

“History does not repeat itself, but it rhymes.” Mark Twain

 

Investors waiting for Fairfax to buy ‘Coke’ or ‘American Express’ in 2024 will likely be sorely disappointed. For two reasons:

1.) Buffett’s brilliance wasn’t buying Coke or American Express. It was exploiting the set of circumstances that existed at the time, which served up Coke in 1988 and AMEX in 1990.

2.) Like Berkshire when it made its many brilliant moves, most investors probably won’t see it when Fairfax actually does it.
 

How do I know this? Because Fairfax has been making exceptional capital allocation decisions for years now. For a couple of these they got out their elephant gun. And they still get no (little) credit. And that is because the company continues to be misunderstood. The moves Fairfax has been making continue to be grossly under appreciated. Just like when Buffett made his great investments, investors need more time to fully appreciate the brilliance of what Fairfax has executed in recent years.
 

If lots of people on this board don’t see it… do you think the rest of the investor community does? That’s why the stock trades at 1.1x book value - crazy cheap. 

 

The key lesson for investors

 

The world is different today - the set of circumstances is ever changing. Importantly, with normalized - higher - interest rates, volatility in financial markets is back. We had bear markets in stocks in 2020 and again in 2022. We had a historic bear market in bonds in 2022. And just look at what Fairfax has been doing. Most investors still can’t see what is right in front of their face. Because they are looking for the wrong thing.
 

Active management can have a huge impact on financial results. Now most P/C insurance companies don’t actively manage their investment portfolio. Fairfax does.

Fairfax today:

1.) They are run by a genius - yes, anyone who can compound book value at 18.4% for 38 years is a genius. What is Prem’s greatest strength? Perhaps his ability to attract and retain talent, beginning with the creation of Hamblin Walsa 38 years ago and continuing with the guys running insurance like Andy Barnard.
2.) They are family controlled - importantly, this allows for long term decision making. Along the same line, this also allows them to take full advantage of volatility, even if it takes some time to work out.

3.) They have Hambin Watsa - handles all capital allocation decisions.

4.) Capital allocation - They use a value investing framework. This appears to be evolving over time. Today, they appear to be placing more of a premium on management. And financial strength/profitability. ‘Quality at a fair price’ versus classic Graham ‘deep value’ type investing.
5.) They are highly levered to float. Its cost is better than free (they are actually getting paid to hold it) and it is growing in size.

6.) Culture - insurance and investments are run on a decentralized model.

7.) They invest a large part of their investment portfolio in equities. Most traditional P/C insurance companies stick to fixed income investments.

8.) They are still a small company - this gives them a very large opportunity set.

9.)  They have their elephant gun out. 
10.) They are able to move with speed.

11.) They have been generating an enormous amount of cash the past couple of years and this is set to continue in the coming years (net earnings of around $4 billion per year?).

12.) They are on a hot streak - when it comes to capital allocation.
13.) And volatility - more normal financial markets - is back. So lots of opportunities will be coming in the future.

14.) Compounding - as always - sits ready to work its magic.

This set-up looks an awful lot like a much younger Berkshire Hathaway. 
 

But what Fairfax does/how they execute will likely not look anything like what Berkshire Hathaway did back in the 1980’s. And that is because history does not repeat exactly. But it sometimes rhymes. And I think this might be one of those times.

 

Today, Berkshire Hathaway is like an aging elephant. And Fairfax is like a lion in its prime. And the drought (zero interest rates) has ended - and the savannah is once again teeming with game. 

 

What I'm driving at is it is one thing for Fairfax to talk about buying wonderful / good companies and just letting them compound versus actually executing on that plan. I like the idea but right now when I look at Fairfax it looks more like a leveraged bond fund with a side of value investments rather than a Berkshire Hathaway in 1995. Which investments in Fairfax's portfolio today are wonderful companies (i.e. high return on assets and growing) that can just keep compounding at high rates of return for the next 20-30 years? When Berkshire buys back stock, you as a shareholder are getting a higher ownership percentage of the wonderful businesses they own. Certainly Fairfax has set themselves up well going forward, hopefully the investing environment co-operates and throws them some fat pitches. Let's see, I'll be watching with interest.

 

 

 

Edited May 2, 2024 by Spooky

[Hoodlum]

Here is the announcement of the Odyssey Re succession plan completion.

 

https://odysseyre.com/news/odyssey-group-announces-leadership-change/

 

Quote

 

Odyssey Reinsurance Company’s global CEO, Carl Overy, will succeed Brian Young as CEO of Odyssey Group effective January 1, 2025. This appointment coincides with Mr. Young’s move to Fairfax, where he will serve as president of Fairfax Insurance Group. Mr. Young will work alongside Andrew Barnard, who will assume the role as chairman of Fairfax Insurance Group, and, together, they will provide management oversight of Fairfax’s expansive global (re)insurance operations.

 

Mr. Overy will be responsible for Odyssey Group’s global operations, overseeing its three underwriting franchises: OdysseyRe, Hudson Insurance Group and Newline Group. Mr. Overy’s tenure at Odyssey Group spans more than 20 years. He was appointed global CEO of OdysseyRe in 2023 and previously served for 15 years as the CEO of Odyssey Group’s London Market Division, which encompasses both the London branch of Odyssey Reinsurance Company and Newline Group, the international insurance arm of Odyssey Group.

 

 

[SafetyinNumbers]

31 minutes ago, Spooky said:

 

What I'm driving at is it is one thing for Fairfax to talk about buying wonderful / good companies and just letting them compound versus actually executing on that plan. I like the idea but right now when I look at Fairfax it looks more like a leveraged bond fund with a side of value investments rather than a Berkshire Hathaway in 1995. Which investments in Fairfax's portfolio today are wonderful companies (i.e. high return on assets and growing) that can just keep compounding at high rates of return for the next 20-30 years? When Berkshire buys back stock, you as a shareholder are getting a higher ownership percentage of the wonderful businesses they own. Certainly Fairfax has set themselves up well going forward, hopefully the investing environment co-operates and throws them some fat pitches. Let's see, I'll be watching with interest.

 

 

 

The only things similar about Berkshire in 1995 and Fairfax is the market cap. The investments/share, float/share, premiums/share, surplus capital and P/B are all quite different. 

[Spooky]

14 minutes ago, SafetyinNumbers said:

The only things similar about Berkshire in 1995 and Fairfax is the market cap. The investments/share, float/share, premiums/share, surplus capital and P/B are all quite different. 

 

Didn't you just write an article alluding FFH is following in the footsteps of BRK which "shot up 27 times after it reached the size Fairfax is now"?

[SafetyinNumbers]

15 minutes ago, Spooky said:

 

Didn't you just write an article alluding FFH is following in the footsteps of BRK which "shot up 27 times after it reached the size Fairfax is now"?

I did. They have the same business model and size but very different set ups. I think Fairfax’s stock is an easier bet now than Berkshire”s stock was then based on the set ups. That’s the point I was trying to make. 

[Spooky]

2 minutes ago, SafetyinNumbers said:

I did. They have the same business model and size but very different set ups. I think Fairfax’s stock is an easier bet now than Berkshire”s stock was then based on the set ups. That’s the point I was trying to make. 

 

I hope you're right. We just need to be careful about believing it because we want to believe it.

[Viking]

2 hours ago, Spooky said:

 

What I'm driving at is it is one thing for Fairfax to talk about buying wonderful / good companies and just letting them compound versus actually executing on that plan. I like the idea but right now when I look at Fairfax it looks more like a leveraged bond fund with a side of value investments rather than a Berkshire Hathaway in 1995. Which investments in Fairfax's portfolio today are wonderful companies (i.e. high return on assets and growing) that can just keep compounding at high rates of return for the next 20-30 years? When Berkshire buys back stock, you as a shareholder are getting a higher ownership percentage of the wonderful businesses they own. Certainly Fairfax has set themselves up well going forward, hopefully the investing environment co-operates and throws them some fat pitches. Let's see, I'll be watching with interest.

@Spooky I think you are missing the point of my post. I don’t say this to be a jerk /confrontational.

 

“Which investments in Fairfax's portfolio today are wonderful companies (i.e. high return on assets and growing) that can just keep compounding at high rates of return for the next 20-30 years?”

 

Here is a re-post of what i said earlier:

 

Investors waiting for Fairfax to buy ‘Coke’ or ‘American Express’ in 2024 will likely be sorely disappointed. For two reasons:

1.) Buffett’s brilliance wasn’t buying Coke or American Express. It was exploiting the set of circumstances that existed at the time, which served up Coke in 1988 and AMEX in 1990.

2.) Like Berkshire when it made its many brilliant moves, most investors probably won’t see it when Fairfax actually does it.

 

Moving forward, i expect Fairfax to use ALL the capital allocation levers at their disposal. You list one above - and i do expect them to do more of that. But i also expect Fairfax to do lots of other things. Some will likely be non-traditional. What they do will largely be driven by volatility and what opportunities get served up. 
 

But in terms of ‘buying quality at a reasonable price’, on the equity side, I think their investment in BIAL would be a good recent example. Buying Allied World in 2017 for $4.9 billion would be a good recent insurance example. 
 

Fairfax’s equity book as a whole has improved significantly in quality over the past 5 years. The best example is Eurobank. Is it a quality bank today? Yes. Is it cheap? Yes. Is it poised to deliver excellent returns over the next 5 years? Yes, i think so. Is Eurobank like Coca Cola or AMEX back in the late 1980’s? No, of course not. 

You appear to give the two examples i provided (effectively buying back 23% of shares outstanding at 30% of current intrinsic value and a saving/earning billions from active management of their fixed income portfolio) as not really counting. I humbly disagree. Of course, that’s what makes for a great debate.

When I say i think Fairfax resembles a much younger Berkshire Hathaway, it might help if i spell out what that might mean from a return perspective.
 

If my thesis is correct, below is what i think is possible. (Of course, my thesis could be completely wrong - and this would mean my return expectations below would also be completely wrong.)

 

Since inception Berkshire Hathaway has materially outperformed the S&P500 (dividends included). I think Berkshire’s outperformance might be 2x.
 

I think Fairfax is poised to materially outperform the market indices over the next 5 years (I would take an average of the S&P500 and the TSX60). I think Fairfax’s outperformance could come in at 2x better. Similar to Berkshire Hathaway’s long term average level of outperformance.
 

How will Fairfax do it? I think the set-up today for Fairfax looks a lot like a much younger Berkshire Hathaway. In my post above, i highlighted 14 factors that i thought were similar. 
 

For me this is more qualitative/philosophical type thinking than quantitative/precise type thinking. And this makes it very hard to discuss/debate - because everyone comes at it in a very different way.

Edited May 3, 2024 by Viking

[Jaygo]

I lean with Spooky here. Fairfax does not have the quality investments that BRK did at the time. Those with more knowledge could pair them like for like in a balance sheet standoff but a Greek bank will not ever compare to a successful global credit card issuer, Recipe corp is not see's or a dairy queen, Maybe Bauer could be a see's. Coke is a one in a lifetime brand who is sold in every country globally, nowhere in FFH lurks a similar comparison to KO. in 95 they had a few billion in Gillett and Cap cities at the time too. Fairfax does not have the quality global compounders and I know because these (AMEX, KO, ABC, Wells, GILLETTE) were known compounders back then too and they kept on compounding up to today so you can't just say "wait and see" what FFH does.

 

The interesting thing is in the 90's BRK was still buying smallish furniture and jewelry companies that probably never moved the needle. Maybe Fairfax is still there working around the edges with smaller stuff like the sporting life and Recipe instead of Munger like compounders. Now If they spring up and buy a Hershey, Starbucks, or a Visa maybe that could change the tune. (not investment advice lol)

 

FFH is kind of where I am today. I get way more energy and excitement from buying what ifs that could make me rich than Buffett was buying sure things that would make him rich slowly. 

 

Why dont I buy KO today? its too boring. WIll KO be here in 50 years? yep! Will the quirky steel tank company or the ladies fashion retailer be here? maybe, maybe not, but oh man if they are i'm going to be so damn rich!

 

GO LEAFS GO

 

 

[nwoodman]

19 minutes ago, Viking said:

For me this is more qualitative/philosophical type thinking than quantitative/precise type thinking. And this makes it very hard to discuss/debate - because everyone comes at it in a very different way.

Pattern recognition springs to mind

[SafetyinNumbers]

3 hours ago, Jaygo said:

 

 

Why dont I buy KO today? its too boring. WIll KO be here in 50 years? yep! Will the quirky steel tank company or the ladies fashion retailer be here? maybe, maybe not, but oh man if they are i'm going to be so damn rich!

 

 

Does valuation enter into your process or just if it will still be here in 50 years?

[Spooky]

11 hours ago, Viking said:

@Spooky I think you are missing the point of my post. I don’t say this to be a jerk /confrontational.

 

“Which investments in Fairfax's portfolio today are wonderful companies (i.e. high return on assets and growing) that can just keep compounding at high rates of return for the next 20-30 years?”

 

Here is a re-post of what i said earlier:

 

Investors waiting for Fairfax to buy ‘Coke’ or ‘American Express’ in 2024 will likely be sorely disappointed. For two reasons:

1.) Buffett’s brilliance wasn’t buying Coke or American Express. It was exploiting the set of circumstances that existed at the time, which served up Coke in 1988 and AMEX in 1990.

2.) Like Berkshire when it made its many brilliant moves, most investors probably won’t see it when Fairfax actually does it.

 

Moving forward, i expect Fairfax to use ALL the capital allocation levers at their disposal. You list one above - and i do expect them to do more of that. But i also expect Fairfax to do lots of other things. Some will likely be non-traditional. What they do will largely be driven by volatility and what opportunities get served up. 
 

But in terms of ‘buying quality at a reasonable price’, on the equity side, I think their investment in BIAL would be a good recent example. Buying Allied World in 2017 for $4.9 billion would be a good recent insurance example. 
 

Fairfax’s equity book as a whole has improved significantly in quality over the past 5 years. The best example is Eurobank. Is it a quality bank today? Yes. Is it cheap? Yes. Is it poised to deliver excellent returns over the next 5 years? Yes, i think so. Is Eurobank like Coca Cola or AMEX back in the late 1980’s? No, of course not. 

You appear to give the two examples i provided (effectively buying back 23% of shares outstanding at 30% of current intrinsic value and a saving/earning billions from active management of their fixed income portfolio) as not really counting. I humbly disagree. Of course, that’s what makes for a great debate.

When I say i think Fairfax resembles a much younger Berkshire Hathaway, it might help if i spell out what that might mean from a return perspective.
 

If my thesis is correct, below is what i think is possible. (Of course, my thesis could be completely wrong - and this would mean my return expectations below would also be completely wrong.)

 

Since inception Berkshire Hathaway has materially outperformed the S&P500 (dividends included). I think Berkshire’s outperformance might be 2x.
 

I think Fairfax is poised to materially outperform the market indices over the next 5 years (I would take an average of the S&P500 and the TSX60). I think Fairfax’s outperformance could come in at 2x better. Similar to Berkshire Hathaway’s long term average level of outperformance.
 

How will Fairfax do it? I think the set-up today for Fairfax looks a lot like a much younger Berkshire Hathaway. In my post above, i highlighted 14 factors that i thought were similar. 
 

For me this is more qualitative/philosophical type thinking than quantitative/precise type thinking. And this makes it very hard to discuss/debate - because everyone comes at it in a very different way.

 

Thanks for the response Viking. I agree that Fairfax buying back a significant amount of its shares below intrinsic value is excellent capital allocation. I also like that they are fishing where the fish are in Greece and India etc. There are many different ways to nirvana. Berkshire exploiting the opportunities available to it certainly contributed to their success but it was more a factor of their philosophy and changing their investment approach as they got larger - moving away from Ben Graham style value investing to buying wonderful companies at reasonable prices and recognizing the inherent advantages in just letting their investments compound over long periods of time. Also, some of Buffett's best investments were just sitting in plain sight available to anyone like when he bought Apple. Does Fairfax need to make this switch too? I'm not sure. I would like to see them shift more of their portfolio out of bonds to equities - focusing on cheap, safe, high-quality stocks combined with the consistent use of leverage through float. Hopefully the investment landscape co-operates.

Edited May 3, 2024 by Spooky

[Jaygo]

8 hours ago, SafetyinNumbers said:

Does valuation enter into your process or just if it will still be here in 50 years?

Of course it does but KO is not at a crazy valuation. Also KO is just an example. KO has not done that great for BRK but he has gotten his investment back multiple times just in dividends and likely will another 100x over the next 50 years. 

 

I actually look at company longevity as a really good barometer for valuation. If there was no stock market and we were buying companies to hold would you buy one that is fickle or would you buy one that is going to be passed to your grandchildren. The one that was a proven long term winner would possibly demand a higher valuation. 

 

I remember my uncle telling me if my parents had bought me $1000  worth of Proctor and gamble instead of diapers on my birthday in 1984 I would be getting $3000 a year from it today ( this was 10 years ago). PG has done pretty well but time has been the biggest contributor. I guess that is just burned into my psyche

 

I know it seem unsophisticated but I think it is a big factor in performance. Otherwise we need to trade in and out to get performance. 

[dartmonkey]

On 5/1/2024 at 6:20 PM, SafetyinNumbers said:

Another way to frame it is because of the profitable float leverage, the equity returns don’t have to be high to earn a 15% ROE but they could be and I’m betting they will be without having to pay for it. 

Maybe you get both equity AND fixed income exposure with Fairfax? I posted this to the Berkshire board, confusedly thinkiing I was talking to Fairfax shareholders. I'm copying it below because, while the comparison between Fairfax and Berkshire is only of moderate interest to most Berkshire shareholders, it is of great interest to Fairfax shareholders! 

 

======

Posted to Berkshire board today:

 

"Both Fairfax and Berkshire are constrained by regulators and by common sense in what they can do with their float, equity obviously being preferable if you have enough surplus capital to do it. Undoubtedly, Fairfax is considerably more constrained, but it isn't just a question of surplus capital,, it's also a question of how much float they have, in relation to their equity. And Fairfax has way, way more. Quoting my post here 2 days ago:

 

With Fairfax, you have float of $33b* with $22b of equity (2023 year end numbers), whereas for Berkshire, you have float of $169b with equity of $561b. So $1 of equity is increased to $2.50* of investable assets with Fairfax, whereas with Berkshire, $1 of equity is increased to  $1.23 of investable assets. Fairfax is twice as leveraged by investment float. So if you think the key to success of Berkshire was the float leverage, Fairfax is a much better setup.

 

Thinking about this further, the above way of framing the float actually understates the difference. Perhaps a better way of looking at it is that,, for each dollar of equity invested, Berkshire invests another $0.23 of float. For each dollar of equity invested by Fairfax, you get another $1.62* of float invested. It is unsurprising that Berkshire can invest a lot more of its 23c of float in equities, compared to Fairfax. Berkshire has $568b in book value plus $169b in float, and invests $383b in equity securities and equity method investments. Fairfax has $21.615b in book value plus $35.1b* in float, and invests $15.5b in equities (mark to market, equity accounted and consolidated).

 

So one way of looking at it that Fairfax has 15.5/21.615 = 72% of its book in equities and Berkshire has 383/568 = 67%. Yes, Fairfax has a way bigger bond portfolio, in proportion to its float, but this is just because its float is so much bigger. Fairfax actually has MORE of its book invested in equities than Berkshire, with the rest of its enormous float in fixed income because of regulatory requirements. So I am making the case that Fairfax is even more exposed to equities than Berkshire, and also gets the additional leveraged value of the much bigger fixed income portfolio. And as an investor paying 1.1x equity for Fairfax rather than 1.4x for Berkshire, this difference is further magnified.

 

Does this make sense? Thoughts? What would Bloomstram think of this argument?

 

 

*My number in the Wednesday quote was wrong, for some reason I said Fairfax had $33b in float, meaning $1.50 in float for every $1 in equity; the actual number is $35.1b in float, or $1.62 in float for every $1 in equity."

[valueinvesting101]

@dartmonkey In above calculations, for Berkshire, only its equity portfolio has been included but it also has lot of 100% owned subsidiaries which should be included for its equity portfolio. BNSF + BHE could easily add $200 to its equity portfolio. MSR could be another $150 billion equity position.
 

Berkshire equity exposure is still higher than its book value as equity assets are financed with huge deferred taxes liabilities which is guaranteed to be 0% compared to float. Book value also understates economic/market value of its 100% subsidiaries. Book value of NFM or Sees would be much lower than price needed to acquire similar asset today. It is similar to Pet insurance business sold by Fairfax. 

[Gamma78]

I think its singular that Prem actually called out the lesson he says he learned from Munger in the AGM, meaning that finding compounders you don't touch for a very long time is important. 

 

The reality is that as Fairfax grows their capability to turn over their equity portfolio and consistently find new winners will decrease very very very rapidly due to sheer size. And that will mean that finding companies that retain earnings and compound at high rates for long periods of time with no further intervention will be a necessity for sustained growth. That is the genius of the BRK model, beyond the leverage. "never interrupt compounding unnecessarily" was Charlie's rule. 

 

I would certainly accept the point that compounders are somewhat seen retrospectively - with survivorship bias. And in this regard BRK's compounders are obvious today and were less so 20-25-30 years ago. Even Buffett himself says that ultimately his returns are largely dependent on only a handful of investment decisions held for a long time. And holds up Sees Candies as a company that - beyond its current worth in the books - has spun literally bilions in cash used elsewhere. 

 

Some traits though - capital light, significant reinvestment opportunity with high returns on capital -  should be visible immediately. 

 

Where do we see businesses like that in the Fairfax portfolio? Eurobank is a brilliant decision over last 5 years, and banking can be a good business when well run. Poseidon? Does that have high ROC across a cycle for good? CIB? 

 

Doesn't sound the same. 

 

I am intrigued by the expanding investments in India. That sounds a bit more like what in retrospect 30 years from now looks like "long term compounders".  BIAL and India airports in general are a generational opportunity. Prem has clearly said that banking / financial services in India should grow at rates well above GDP growth. That sounds to me like signalling that Fairfax India and indian investments have an outsized role to play. 

 

I know that on a retrospective basis things won't look like KO, AAPL, MCO, AXP. But the question is, what do we think the equivalent will be? To me it looks like Prem believes India is a big contributor to continuous compounding. 

 

 

 

 

[valueinvesting101]

Difference between Berkshire and Fairfax investment style seems to be that Fairfax is more willing to bet on turnaround or new business even at times following old business model such Digit or EuroBank or may be IDBI. 

Berkshire has gone after KO, AXP, WFC, Geico, Sees which were started decades or centuries before Berkshire established position into them. Buffett often mentions stories about KO about something that happened 1920/1940, having that history gives him more evidence of how company/brand/business model navigated threat of competition over that time period. 

I wish Fairfax would take a look at existing proven compounder in India and elsewhere when they are available at cheaper valuation due to short-term factors while maintaining longer term moats. Similar to salad oil of AXP or mid 2010s competitive threats to Apple. HDFC Bank and Kotak Mahindra Bank come to my mind as proven compounder in India in financial space with proven history of long term compounding but currently available at decadal low valuation instead of or in addition to pursuing turnaround/control play such as IDBI. Even for turnarounds, IDFC First/IDFC were turnaround story in India with decent margin of safety in last 2-3 years. I always felt it was very much in the circle of competence of Fairfax and similar to lot of other investments they have made.  
 

Edited May 3, 2024 by valueinvesting101

[Viking]

2 hours ago, gamma78 said:

I think its singular that Prem actually called out the lesson he says he learned from Munger in the AGM, meaning that finding compounders you don't touch for a very long time is important. 

 

The reality is that as Fairfax grows their capability to turn over their equity portfolio and consistently find new winners will decrease very very very rapidly due to sheer size. And that will mean that finding companies that retain earnings and compound at high rates for long periods of time with no further intervention will be a necessity for sustained growth. That is the genius of the BRK model, beyond the leverage. "never interrupt compounding unnecessarily" was Charlie's rule. 

 

I would certainly accept the point that compounders are somewhat seen retrospectively - with survivorship bias. And in this regard BRK's compounders are obvious today and were less so 20-25-30 years ago. Even Buffett himself says that ultimately his returns are largely dependent on only a handful of investment decisions held for a long time. And holds up Sees Candies as a company that - beyond its current worth in the books - has spun literally bilions in cash used elsewhere. 

 

Some traits though - capital light, significant reinvestment opportunity with high returns on capital -  should be visible immediately. 

 

Where do we see businesses like that in the Fairfax portfolio? Eurobank is a brilliant decision over last 5 years, and banking can be a good business when well run. Poseidon? Does that have high ROC across a cycle for good? CIB? 

 

Doesn't sound the same. 

 

I am intrigued by the expanding investments in India. That sounds a bit more like what in retrospect 30 years from now looks like "long term compounders".  BIAL and India airports in general are a generational opportunity. Prem has clearly said that banking / financial services in India should grow at rates well above GDP growth. That sounds to me like signalling that Fairfax India and indian investments have an outsized role to play. 

 

I know that on a retrospective basis things won't look like KO, AAPL, MCO, AXP. But the question is, what do we think the equivalent will be? To me it looks like Prem believes India is a big contributor to continuous compounding. 

@gamma78 and @valueinvesting101 great comments. Thanks for chiming in. 
 

I do find it interesting how aggressive Fairfax has been since 2018 in buying back Fairfax’s stock. Yes, Fairfax got the stock at a crazy low price. But this also has the effect of shrinking the size of the company. I like this - as we have learned with Berkshire, ever-increasing size eventually becomes a constraint on returns. Keeping Fairfax small (relatively) should help Fairfax deliver above average returns moving forward.

 

Great points on India. Is the set-up today in India like the US back in the 1950’s? Buy a basket of ‘quality at a fair price’ and hang on for decades? Interesting idea.
 

I have been a little bit surprised how quiet Fairfax has been in India the past couple of years. Their playbook there has been monetizing assets, increasing their ownership of BIAL and building cash. Like a spring getting loaded?

Edited May 3, 2024 by Viking

[Junior R]

@gamma78 "I think its singular that Prem actually called out the lesson he says he learned from Munger in the AGM, meaning that finding compounders you don't touch for a very long time is important. " ...This is what makes you want to hold FFH for a long period of time

 

@valueinvesting101 I did by HDFC on the recent dips

 

I think from todays call we can state that Prem is doing the right thing and letting the younger generation handle the calls. The question that always comes up is who runs Fairfax after Prem Retires..but this is getting these folks ready

[Gamma78]

@juniorr "this is what makes you want to hold FFH for a long period of time"

 

yes absolutely, I am in this since 2020 and for the very long haul, and I see a huge opportunity here. My observation (which is not a critique) is that BRK moved over time from cigar-butt investing (similar to turn around) to choosing compounders and letting 'em rip in large part because over time size dictates that methodology. Finding increasingly large and numerous turnarounds won't work. Letting high ROIC investments work for you instead is magic, because stock returns over a long period will be a proxy of ROIC - when held long enough even multiple paid actually makes little difference. 

 

We can and should be interested in FFH being more "levered" via float than BRK - but the rapidly increasing float size means the team needs to find more equity investments. Better have a few large high ROIC companies than a bunch of Poseidons in my opinion. Otherwise we will rapidly find that 15% is unsustainable.  

 

I agree with @Viking that capital allocation has been great at Fairfax in the last years. But that, while not fully recognised by the market - is actually still rear-view mirror (as in it means nothing towards the next marginal investment). I am talking about what has to come next mathematically for their track record in allocation to hold true to recent performance. 

 

India is the third or fourth largest position. I think it might be the one to grow.