Fairfax 2024

[Hoodlum]

Q2 results will be announced on the 1st. 
 

https://www.fairfax.ca/press-releases/fairfax-announces-conference-call-2024-07-26/

[Viking]

Who is Henry Singleton? And why should a Fairfax shareholder care?
 

“The failure of business schools to study men like (Henry) Singleton is a crime." Warren Buffett (quote from John Train’s book The Money Masters)

 

Fairfax’s business model has been inspired by many great businesspeople/investors over the years. Who are some that immediately come to mind? Here is my top 3 list:

1. Ben Graham - Value investing framework.
2. Warren Buffett - P/C insurance model (float); operating structure.
3. John Templeton - Go international; buy at the point of maximum pessimism.

Did I get the top 3 right? Let me know what you think. 

 

Who should be #4 on the list? 

 

I think it might be Henry Singleton. 

 

What did Fairfax learn from Henry Singleton? 

 

How to think about - and do - capital allocation. The big picture part of capital allocation. Use all the available tools (both ‘sources of cash’ and ‘uses of cash’) and use them at the right time. And go big when appropriate.

 

(Another more recent thing is optimizing the cash that is being earned by the operating businesses.)

 

Who is Henry Singleton? 

 

Henry Singleton is an individual who is not well followed. That is interesting given his amazing accomplishments over his lifetime.  

 

Below is a short biography from Wikipedia:

• “Henry Earl Singleton (November 27, 1916 – August 31, 1999) was an American electrical engineer, business executive, and rancher/land owner. Singleton made significant contributions to aircraft inertial guidance and was elected to the National Academy of Engineering. He co-founded Teledyne, Inc., one of America's most successful conglomerates, and was its chief executive officer for three decades. Late in life, Singleton became one of the largest holders of ranchland in the United States.”
• https://en.wikipedia.org/wiki/Henry_Earl_Singleton

What was Henry Singleton’s track record? 

 

Here is how William Thorndike, author of The Outsiders, sums up Henry Singleton’s track record:

• “Singleton left behind an extraordinary record, dwarfing both his peers and the market. From 1963 (the first year for which we have reliable stock data) to 1990, when he stepped down as chairman, Singleton delivered a remarkable 20.4 percent compound annual return to his shareholders (including spin-offs), compared to an 8.0 percent return for the S&P 500 over the same period and an 11.6 percent return for the other major conglomerate stocks. 
• “A dollar invested with Henry Singleton in 1963 would have been worth $180.94 by 1990, an almost ninefold outperformance versus his peers and a more than twelvefold outperformance versus the S&P 500…” William Thorndike - The Outsiders

Here is what Warren Buffett, a pretty hard marker, had to say about Henry Singleton:

• "Henry Singleton of Teledyne has the single best operating and capital deployment record in American business." Warren Buffett

Bottom line, when it comes to building long term per share value for shareholders, Henry Singleton is one of the all-time greats. 

 

What were Henry Singleton’s greatest strengths?

 

Singleton was exceptional at both core jobs of a CEO:

• Operating the business
• Capital allocation

Singleton’s overarching objective was to maximizing long term per share value for shareholders. 

 

Corporate structure

 

A key part of Singleton’s success was the corporate structure / operating model he set up at Teledyne:

• Operating businesses
  • Decentralized
  • Entrepreneurial
• Capital allocation
  • Centralized
  • Small head office

Does this structure look familiar? The inspiration for Berkshire Hathaway’s corporate structure likely came from Henry Singleton and Teledyne. Fairfax also employs this same structure. 

 

Operating businesses

 

Singleton was very good at operating businesses - putting in place the right structure, incentives and people. 

 

And the focus of the operating businesses was on cash generation, especially when the company completed the acquisition phase of its growth in the late 1960’s. This last point is critically important because optimizing cash feeds the ‘sources of cash’ part of capital allocation. 

 

Capital allocation

 

In the rest of this post we are going to focus on the greatest strength of Singleton - capital allocation - because it is not well understood. And because it  perhaps offers great insight into how Fairfax operates today.

 

Singleton’s Capital allocation framework

 

Singleton was a trailblazer when it came to capital allocation. What made Singleton stand out from peers at the time?

• Open minded/range - he was open to using all tools in the capital allocation toolbox (for both ‘sources of cash ‘ and ‘uses of cash’).
• Flexible - he was open minded / he adapted to changing circumstances.
• Rational/analytical - he used the right tool for the right job at the right time.
• Opportunistic/conviction - big opportunities were exploited very aggressively (he had a temperament that allowed him to do this).
• Independent thinker/contrarian - he often did the opposite of what conventional wisdom suggested was the right thing to do at the time.
• Unconventional - it did not matter to him that Wall Street did not/frowned on some of his methods / the use of certain tools.

Control: it is important to note that Singleton was firmly in control of Teledyne. This control gave him the freedom to execute his unconventional approach to running Teledyne.

 

Shareholders’ Equity - the genius of Henry Singleton

 

We are going to focus on what Henry Singleton is known for most - his aggressive/prolific management of the company’s stock - both in issuing stock and buying it back.

 

Singleton followed a pretty simple playbook:

• When stock is overvalued - aggressively issue stock and use it as currency to grow the business (buying other companies when they are available at much lower valuations).
• When stock is undervalued - use much higher cash flow from the business to aggressively buy back shares.

Singleton had two distinct phases:

 

1.) Aggressively issue Teledyne stock (1960 to 1968) - executed at an average PE of 25x

• Allowed Teledyne to get much more back (value of companies being purchased) than what he was giving up (value of Teledyne’s stock).
• Singleton bought 128 companies using Teledyne’s stock; he massively expanded the size and scale of the company. 

2.) Aggressively buy back Teledyne stock (1971 to 1984) - executed at an average PE of 8x

• Allowed Teledyne to get much more back (value of Teledyne’s stock) than what he was giving up (using cash in some other way).
• He bought back stock using tender offers (not open market purchases).
• Reduced shares outstanding at Teledyne by 90% by the time he was done.

Unlike today, in the 1970’s buying back stock was viewed very negatively by Wall Street - it was viewed as a sign of weak/poor business prospects/management. 

 

What really stands out with Singleton is:

• The scale in which he operated when executing a winning strategy - both the massive number of shares he issued and the massive number of shares he then repurchased. Each phase lasted/was executed over a full decade. 
• The discipline he demonstrated: shares were only issued at a premium valuation and repurchased at a low valuation.

Singleton had an unfair advantage

 

‘Good artists borrow. Great artists steal.’ Picasso/Steve Jobs

 

What company did Singleton understand better than any other? Teledyne - his own company. He also understood the company much better than Mr. Market and Wall Street.

 

Singleton took Benjamin Graham’s insight on Mr. Market and the stock market in general and applied a unique twist - he applied it to Teledyne’s stock.

 

The end result was amazing per share value creation for long term shareholders. 

 

Was Singleton taking advantage of Teledyne’s shareholders?

 

Warren Buffett often talks about buybacks along moral lines - at least when it comes to Berkshire Hathaway and how the company thinks about its own shareholders. My view is this is more good marketing from Buffett than anything else. 

 

Buffett loves it when companies he owns buy back a bunch of their own stock - Apple is a great current example. And we know he thinks very highly of Henry Singleton. In recent years, Buffett has relented and has started buying back Berkshire Hathaway stock in meaningful quantities. 

 

The truth is long term shareholders of Teledyne made out exceptionally well - they made a fortune holding Teledyne stock over the decades. 

 

Bottom line, shareholders’ equity is an exceptionally important tool in the capital allocation toolbox that management teams can use to grow per share value for shareholders.

 

If it is such a good idea why is it not used more?

 

The interesting thing is most management teams are terrible in their execution of this strategy: they tend to issue their own stock at low valuations and buy back their stock at high valuations. These activities destroy long term per share value for shareholders.

 

Most companies don’t utilize this strategy more aggressively because they are terrible at it. 

 

What does all this have to with Fairfax?

 

Not all companies are terrible at executing this strategy. That is what we will explore in our next post. 

—————-

Twenty Punch Investments

• https://www.twentypunchinvestments.com/p/henry-singleton-and-teledyne

—————-

A Case Study in Financial Brilliance - Teledyne by Leon Coopermam

• https://fundamentalfinanceplaybook.com/wp-content/uploads/2019/02/leon-cooperman-case-study-henry-singleton-teledyne.pdf

—————-

Henry Singleton: A Capital Allocation Masterclass in Three Acts by Kingswell

• https://www.kingswell.io/p/henry-singleton-a-capital-allocation

—————-

The Outsiders | William Thorndike | Talks at Google

 

 

Edited July 29, 2024 by Viking

[ValueMaven]

Great post @Viking - thank you.  Personally, I think Prem & Team will be buying back a lot of stock similar to Teledyne 2.0 ... Leon Cooperman once wrote an article on Teledyne and I believe was on the board of directors.  There was once a negative piece written on Teledyne in Barrons and Cooperman wrote a wonder reply to the editors which was published.  Let me see if I can find it.

[Hektor]

5 hours ago, Viking said:

The inspiration for Berkshire Hathaway’s corporate structure likely came from Henry Singleton and Teledyne. Fairfax also employs this same structure. 

I think I read somewhere that Singleton, in his later years, approached Buffett and Munger to sell his firm. The transaction did not proceed due to Singleton needing Berkshire shares and Buffet/Munger preferring to pay in cash.

Edited July 29, 2024 by Hektor

[Hektor]

5 hours ago, Viking said:

Warren Buffett often talks about buybacks along moral lines - at least when it comes to Berkshire Hathaway and how the company thinks about its own shareholders. My view is this is more good marketing from Buffett than anything else. 

 

Buffett loves it when companies he owns buy back a bunch of their own stock - Apple is a great current example. And we know he thinks very highly of Henry Singleton. In recent years, Buffett has relented and has started buying back Berkshire Hathaway stock in meaningful quantities. 

I think Buffett has long advertised his parameters for buying back his own share, and telling (or may be tuning) his share holders to think of such an action to mean that Berkshire is cheap in his view - which is different from other CEOs who may not advertise that their own shares are cheap. 

 

Also, I think Buffett (and Munger, may be) prefers other companies where Berkshire is a share holder (e.g. Apple) buy back their own shares, even when the shares are fairly valued, to avoid the alternative use of that capital (i.e. diworsify). 

 

Note: I have no views on Buffet's buy back approach being marketing or not

 

@Viking, Thanks much for generously sharing your thinking and writing. 

[petec]

On 7/25/2024 at 10:14 PM, TwoCitiesCapital said:

Other than Eurobank with its oligopoly that was bought on its way to bankruptcy - what Fairfax investments have "moats"?

 

I'm not sure Eurobank has a moat - at least not one that protects its economics. Banking is highly commoditised, and net interest margins are dependant on Eurozone interest rates not going back to 0.

[73 Reds]

One common criticism of Buffett is his "management" of the share price.   Were he to allow the stock to be more volatile, he would have more opportunities to both repurchase shares when the price is cheap and use the stock as currency when the price gets expensive.  I would expect future management to avoid addressing the share price.

[Gamma78]

9 hours ago, petec said:

 

I'm not sure Eurobank has a moat - at least not one that protects its economics. Banking is highly commoditised, and net interest margins are dependant on Eurozone interest rates not going back to 0.

 

Distribution would be a moat (so retail footprint) and scale of deposits. Retail deposits are the lowest cost financing a bank can have (though they carry their own risk). Replicating Eurobank's retail footprint and deposit scale for a newer entrant is tougher. Brand I guess would be a third, but I think that is actually very tied to retail footprint. I think that is about the biggest moat a bank can have

[Viking]

48 minutes ago, Gautam Sahgal said:

 

Distribution would be a moat (so retail footprint) and scale of deposits. Retail deposits are the lowest cost financing a bank can have (though they carry their own risk). Replicating Eurobank's retail footprint and deposit scale for a newer entrant is tougher. Brand I guess would be a third, but I think that is actually very tied to retail footprint. I think that is about the biggest moat a bank can have

 

Management is a moat (look at Jamie Dimon) - look at what the management team at Eurobank has done over the past 5 years. Yes, Greece electing a pro-business government has helped. And the end of zero interest rates. 

 

But I think focussing too much on 'moat' can box an investor in (that hammer thing Munger liked to talk about so much). All of Fairfax's equity investments are investments. At the end of the day, what I really care about is what kind of a return the equity investments will generate for Fairfax over the next 3 to 5 years.   

 

What was Stelco's moat? That is debatable (perhaps it was one thing - Kestenbaum). And what a great investment for Fairfax. Overly focussing on moat when looking at Stelco would have probably messed an investor up. Fairfax has lots of investments like Stelco. Trying to evaluate them primarily through the lens of a moat misses the key point - Fairfax's business model is very different than Berkshire Hathaway's (or how Fairfax execute's within the model). Both companies are very good.

 

It's like having two kids as a parent. One kid does something a certain way and is really good at it. And a parent keeps wishing the other kid, who is successful in their own right, would be more like the first kid (at that certain thing). For a parent, this approach is usually not a recipe for success. If both kids are successful - be happy. And appreciate/embrace their differences.

Edited July 29, 2024 by Viking

[Hoodlum]

Sleep Country is currently trading at or slightly over the $35/share offer.   I doubt Fairfax would need to increase their offer.

 

https://www.bnnbloomberg.ca/business/2024/07/29/sleep-country-holders-mull-fairfaxs-offer-as-stock-rises-above-it/

 

Samir Taghiyev, portfolio manager for Canadian small-cap equities at Mawer Investment Management, said the timing is “not the most ideal,” though he sees the price as being close to fair. Mawer is one of the largest Sleep Country shareholders, according to data compiled by Bloomberg, holding about 5% of the shares as of the end of June.

 

“This is a time where the valuations are depressed due to the high interest rates, but also the demand for mattresses and revenues for Sleep Country are depressed and the margins are depressed,” he said. “So over the long term, when those trends revert or normalize, Fairfax should be getting a very good deal.”

 

Stifel analyst Martin Landry said in a note to clients that Fairfax’s offer seems “slightly opportunistic,” with Sleep Country’s earnings not yet running at a normal level. He expects the deal will be approved by shareholders, even though a higher valuation may be warranted.

 

If that happens, Fairfax will reap the benefit. Still, Sleep Country management highlighted the ability for shareholders to lock in returns by accepting the cash offer now. “We are pleased to have reached an agreement that provides certainty of significant and immediate value to shareholders,” Christine Magee, chair and co-founder of Sleep Country, said in the release announcing the deal.

[hasilp89]

6 hours ago, 73 Reds said:

One common criticism of Buffett is his "management" of the share price.   Were he to allow the stock to be more volatile, he would have more opportunities to both repurchase shares when the price is cheap and use the stock as currency when the price gets expensive.  I would expect future management to avoid addressing the share price.

I think that criticism is misplaced and incorrect. It misses the fact that Buffett treats his shareholders like partners. Why would he want the stock to be volatile in order to take advantage of people who invest alongside him as partners?

Also, as a shareholder, I’ve never felt he’s tried to manage the stock price. He’s addressed the reality of the price (IIRC when the issued B shares he explicitly said he wouldn’t buy at this price) but never tried to manage it. In fact he does the opposite by not doing quarterly calls, not providing guidance etc.

 

[Gamma78]

18 minutes ago, Viking said:

 

Management is a moat (look at Jamie Dimon) - look at what the management team at Eurobank has done over the past 5 years. Yes, Greece electing a pro-business government has helped. And the end of zero interest rates. 

 

But I think focussing too much on 'moat' can box an investor in (that hammer thing Munger liked to talk about so much). All of Fairfax's equity investments are investments. At the end of the day, what I really care about is what kind of a return the equity investments will generate for Fairfax over the next 3 to 5 years.   

 

What was Stelco's moat? That is debatable (perhaps it was one thing - Kestenbaum). And what a great investment for Fairfax. Overly focussing on moat when looking at Stelco would have probably messed an investor up. Fairfax has lots of investments like Stelco. Trying to evaluate them primarily through the lens of a moat misses the key point - Fairfax's business model is very different than Berkshire Hathaway's (or how Fairfax execute's within the model). Both companies are very good.

 

It's like having two kids as a parent. One kid does something a certain way and is good at it. And a parent keeps wishing the other kid, who is successful in their own right, would be more like the first kid (at that certain thing). For a parent, this approach is usually not a recipe for success. If both kids are successful - be happy. And appreciate/embrace their differences.

 

Well in Stelco, to your point, management is a moat. In Fairfax's own case, culture (which is a follow-on from entrepreneurial management). I note that a lot of Fairfax deals are really about partnering with a savvy operator/entrepreneur on an opportunity. Stelco was that. I think Sleep Country is too. So is BDT, Poseidon. In many ways Fairfax India is like that too. Fairfax really seems to almost identify the entrepreneurial partner first and the opportunity second. They believe in the management as a moat piece. 

 

Your point of appreciating the differences and embracing them is fine, but I would note that Buffett was not a "buy and hold forever", moat driven investor earlier in his career. He was much more like Fairfax. I think the evolution to "buy quality and compound" comes as a reaction to size. After a certain point of size, finding the marginal transaction becomes hard. And at that point you better have compounders, otherwise buying and selling just won't get you there. Noticeably, after "compounders" he is now going for infrastructure because it is just about the only thing he can chuck money at that moves the needle for him. 

 

As Fairfax grows, I think it is an inevitability we will see similar shifts. But we are still in the early innings of Fairfax. 

 

 

 

 

 

[Gamma78]

Just now, Gautam Sahgal said:

 

Well in Stelco, to your point, management is a moat. In Fairfax's own case, culture (which is a follow-on from entrepreneurial management). I note that a lot of Fairfax deals are really about partnering with a savvy operator/entrepreneur on an opportunity. Stelco was that. I think Sleep Country is too. So is BDT, Poseidon. In many ways Fairfax India is like that too. Fairfax really seems to almost identify the entrepreneurial partner first and the opportunity second. They believe in the management as a moat piece. 

 

Your point of appreciating the differences and embracing them is fine, but I would note that Buffett was not a "buy and hold forever", moat driven investor earlier in his career. He was much more like Fairfax. I think the evolution to "buy quality and compound" comes as a reaction to size. After a certain point of size, finding the marginal transaction becomes hard. And at that point you better have compounders, otherwise buying and selling just won't get you there. Noticeably, after "compounders" he is now going for infrastructure because it is just about the only thing he can chuck money at that moves the needle for him. 

 

As Fairfax grows, I think it is an inevitability we will see similar shifts. But we are still in the early innings of Fairfax. 

 

 

 

 

 

What I mean is, you are seeing the Berkshire / Fairfax strategies as trade-offs. 

I see them as being on a continuum, where Berkshire is later stage and Fairfax is earlier. 

[73 Reds]

21 minutes ago, hasilp89 said:

I think that criticism is misplaced and incorrect. It misses the fact that Buffett treats his shareholders like partners. Why would he want the stock to be volatile in order to take advantage of people who invest alongside him as partners?

Also, as a shareholder, I’ve never felt he’s tried to manage the stock price. He’s addressed the reality of the price (IIRC when the issued B shares he explicitly said he wouldn’t buy at this price) but never tried to manage it. In fact he does the opposite by not doing quarterly calls, not providing guidance etc.

 

He has talked down the share price repeatedly throughout his tenure.  I don't look at volatility as a bad thing; it has nothing to do with intrinsic value but it creates opportunities.  He treats partners better with more opportunities to buy lower and sell higher.  He rarely get an opportunity to make acquisitions with stock by advising folks not to buy shares because they are "expensive".  And if he always want the stock to trade near its IV, share buyback opportunities are less frequent and the value of each buyback is also less than it would be at lower prices.  

[Junior R]

Sleep Country holders mull Fairfax’s offer as stock rises above it

 

hopefully fairfax doesn't increase offer even if another bidder comes along

[Viking]

2 hours ago, Gautam Sahgal said:

What I mean is, you are seeing the Berkshire / Fairfax strategies as trade-offs. 

I see them as being on a continuum, where Berkshire is later stage and Fairfax is earlier. 

I think share buybacks are an important input. Fairfax is open/keen to buy back stock - and a significant amount. Especially in their current phase as a company - they are likely done with big P/C acquisitions and they have robust/record free cash flow.

 

Fairfax has reduced effective shares outstanding by about 19% over the past 6.5 years (since share count peaked in 2017). Effectively they are aggressively shrinking the size of the company. 

 

My guess is Fairfax could continue to trade at a discount to peers for years (due to complexity of business, etc). If this happens, Fairfax will have a the opportunity to continue to buy back a meaningful amount of stock over the next couple of years (3% per year). Long term shareholders of Fairfax should be praying that the stock stops going up so much  
 

Over a decade this strategy really starts to add up. One big benefit is it keeps the company small. And that makes it easier to outperform - it keeps the opportunity set large. And the impact from good decisions can be material.
—————

I also don’t think Fairfax wants to become a conglomerate. It wants to have some wholly owned non-insurance businesses. Cash cows. Like Recipe and Sleep Country. This provides a steady income stream for the company that is not tied to the insurance cycle. And it provides assets that could likely be quickly liquidated at a fair price should the need ever arise. 
 

But i don’t think Fairfax wants to aggressively grow the company in the conglomerate direction. 
—————

This all suggests to me that Fairfax will not likely follow in Buffett’s footsteps in terms of capital allocation (in a big way) at least over the next couple of years. I see Fairfax doing more of the same (what we have seen from them since 2018). 

 

The one caveat is if we get a big stock market sell off - at the same time Fairfax is flush with cash. Back in 2008? I think they loaded up with large cap ‘quality’ US stocks - only to sell a couple of years later (for a very nice gain) because they needed cash to offset the losses from the equity hedge/short position (with hindsight, they sold their positions way too early - they admitted this in one of the later annual reports). 
—————-

i think effective shares outstanding will be less than 22.4 million at Q2, 2024. We will know in a couple of days.
 

Edited July 29, 2024 by Viking

[Viking]

2 hours ago, Gautam Sahgal said:

 

Well in Stelco, to your point, management is a moat. In Fairfax's own case, culture (which is a follow-on from entrepreneurial management). I note that a lot of Fairfax deals are really about partnering with a savvy operator/entrepreneur on an opportunity. Stelco was that. I think Sleep Country is too. So is BDT, Poseidon. In many ways Fairfax India is like that too. Fairfax really seems to almost identify the entrepreneurial partner first and the opportunity second. They believe in the management as a moat piece. 

 

Your point of appreciating the differences and embracing them is fine, but I would note that Buffett was not a "buy and hold forever", moat driven investor earlier in his career. He was much more like Fairfax. I think the evolution to "buy quality and compound" comes as a reaction to size. After a certain point of size, finding the marginal transaction becomes hard. And at that point you better have compounders, otherwise buying and selling just won't get you there. Noticeably, after "compounders" he is now going for infrastructure because it is just about the only thing he can chuck money at that moves the needle for him. 

 

As Fairfax grows, I think it is an inevitability we will see similar shifts. But we are still in the early innings of Fairfax. 

Poseidon is starting to look interesting to me again. The moat for this company is likely its ownership structure (collection of solid owners). Fairfax’s initial investment was likely a bet on the jockey - Sokol. The near term set-up looks interesting:

- monster phase of new-build expansion strategy is almost done.

- shipping rates once again are very high - so renewal rates should be solid. And perhaps this helps lock in longer average duration on leases. 

- interest rates easing - perhaps this helps them get their debt situation/profile optimized for the next 3 to 5 years.
 

It looks like Poseidon’s business has stabilized. Sokol talked a good game at the Fairfax AGM. Perhaps we start to see a small tailwind develop for earnings. I wonder what Sokol has planned next for Poseidon. 

Edited July 29, 2024 by Viking

[TheFranc]

Anyone have any speculations for Q2 earnings?

[glider3834]

I think Fairfax will invest in a moaty business at the right valuation and they have tended to find more opportunities outside US like BIAL or NSE of India(recently sold)

 

If you put businesses in the poor , good and great (ie castle wall like moats - think Facebook or Costco) categories. I think the seachange with Fairfax is they are now being more disciplined  at avoiding the 'poor' business type situations (eg Farmers Edge) & preferring the 'good' category - track record of profitability, competitive strengths and quality mgmt.

 

Investing is ultimately an exchange of cash flows (what you pay now vs what you receive back over time translated into todays dollars) and buying a good business at a fair valuation with potential for earnings &/or multiple expansion may be a better bet than paying 40-50x for a wide moat business where there is significant risk of multiple contraction, even if that business achieves the expected earnings growth rate.

 

[glider3834]

4 hours ago, TB said:

https://en.wikipedia.org/wiki/Kempegowda_International_Airport#Ownership says "The airport is owned and operated by Bengaluru International Airport Limited (BIAL), a public limited company. The Government of India has granted BIAL the right to operate the airport for 30 years, with the option to continue for another 30 years. "

Looks like the airport/land is owned by the government after sixty years?

BIAL hold the leasehold until 2068 - about 5 years prior to expiry they have around 2 yrs to negotiate a mutual agreement with GoI to extend concession beyond that time  https://www.civilaviation.gov.in/sites/default/files/2023-02/moca_000743.pdf

 

 

Edited July 30, 2024 by glider3834

[Gamma78]

9 hours ago, Viking said:

I think share buybacks are an important input. Fairfax is open/keen to buy back stock - and a significant amount. Especially in their current phase as a company - they are likely done with big P/C acquisitions and they have robust/record free cash flow.

 

Fairfax has reduced effective shares outstanding by about 19% over the past 6.5 years (since share count peaked in 2017). Effectively they are aggressively shrinking the size of the company. 

 

My guess is Fairfax could continue to trade at a discount to peers for years (due to complexity of business, etc). If this happens, Fairfax will have a the opportunity to continue to buy back a meaningful amount of stock over the next couple of years (3% per year). Long term shareholders of Fairfax should be praying that the stock stops going up so much  
 

Over a decade this strategy really starts to add up. One big benefit is it keeps the company small. And that makes it easier to outperform - it keeps the opportunity set large. And the impact from good decisions can be material.
—————

I also don’t think Fairfax wants to become a conglomerate. It wants to have some wholly owned non-insurance businesses. Cash cows. Like Recipe and Sleep Country. This provides a steady income stream for the company that is not tied to the insurance cycle. And it provides assets that could likely be quickly liquidated at a fair price should the need ever arise. 
 

But i don’t think Fairfax wants to aggressively grow the company in the conglomerate direction. 
—————

This all suggests to me that Fairfax will not likely follow in Buffett’s footsteps in terms of capital allocation (in a big way) at least over the next couple of years. I see Fairfax doing more of the same (what we have seen from them since 2018). 

 

The one caveat is if we get a big stock market sell off - at the same time Fairfax is flush with cash. Back in 2008? I think they loaded up with large cap ‘quality’ US stocks - only to sell a couple of years later (for a very nice gain) because they needed cash to offset the losses from the equity hedge/short position (with hindsight, they sold their positions way too early - they admitted this in one of the later annual reports). 
—————-

i think effective shares outstanding will be less than 22.4 million at Q2, 2024. We will know in a couple of days.
 

 

Thanks for your response @Viking your points are really improving my understanding of Fairfax and the investment I have in it - which I love! It's deepening understanding like this that makes it considerably easier to be an ultra long term shareholder, which is what I want to be. The more you understand the less short term issues freak you out, and you can let compounding work its magic. 

 

Your point of "shrinking" the organisation via share buybacks, meaning that size doesn't become the same barrier it did with berkshire is an interesting one. And compelling. Basically its like a hedge fund returning capital to investors to be able to continue its strategy. Yes, I can see that working. For a while. 

 

Though I suspect that a continuous repurchase of shares leads itself to valuation gaps closing over time, and hence the size issue coming back to the fore. For that not to happen, Fairfax would have to continuously trade at a discount such that share buybacks are a viable and value enhancing option. But the medicine of buybacks is likely to cure the malady of discount, so that arbitrage will wither away. 

 

As I said though in my previous post, we are in the early innings. There is a long way to go yet before size restricts opportunity. And yes, share buybacks extends that time. 

 

 

[dartmonkey]

14 hours ago, Viking said:

Fairfax has reduced effective shares outstanding by about 19% over the past 6.5 years (since share count peaked in 2017). Effectively they are aggressively shrinking the size of the company. 

 

My guess is Fairfax could continue to trade at a discount to peers for years (due to complexity of business, etc). If this happens, Fairfax will have a the opportunity to continue to buy back a meaningful amount of stock over the next couple of years (3% per year). Long term shareholders of Fairfax should be praying that the stock stops going up so much  
 

Over a decade this strategy really starts to add up. One big benefit is it keeps the company small. And that makes it easier to outperform - it keeps the opportunity set large.

I think this is a very important point. Buffett had to change strategy as the company got bigger and bigger, and smaller workouts and trading anomalies and cigar butts became unavailable at a larger scale. I suspect Buffett really likes the idea of being a huge conglomerate that everyone talks about, and that influences business practices, and so he has been, until recently, remarkably resistant to buybacks that would shrink the canvas. After years of praising share repurchases done by the companies he had invested in, but not himself repurchasing Berkshare shares, Buffett finally started buying back Berkshire shares, in 2011 I believe, and at that time Berkshire had a market cap of about $189b (it is now $945b).

 

Now Fairfax currently has a market cap of about $27b, with earnings of $3-4b in the last 3 years and probably in the next few years, too. If Watsa wants, he can avoid the fate of Berkshire of becoming a trillion dollar company, and keep things small, if he spends most of the $3-4b in earnings on buybacks. At ear end 2017, when there were 27.8m shares outstanding, the company had a market cap of $14.7b (share price of $530); at year end 2023, with 23.0m shares outstanding, the company had a market cap of $21.2b (share price of $921). Assuming they now have about 22.9m shares outstanding (we will know on Friday), and if they repurchased the 1.964m shares they have total return swaps on, the would now have 21.0m shares outstanding and a market cap of $24.1m, still not that much higher than 7 years ago, despite the price increase from $530 at the end of 2017 to $1146 now. 

 

In other words, they could decide to go the Henry Singleton route instead of the Warren Buffett route. They have started substantial buybacks at a market cap that is $14.7b instead of when Buffett started at a market cap of $189b, more than an order of magnitude sooner.

 

Maybe Watsa should announce that he is increasing his investment in Blackberry by 10%, just to really piss off the shareholders who don't know that this has become an insignifcant holding, and then ramp the repurchases. I'm kidding, I'm kidding, stop throwing tomatoes at your computer screens. But ramping up the repurchases to keep the company reasonably small is still an option for Fairfax, and might be a preferable route for maximising our shareholder returns.

[Crip1]

20 minutes ago, dartmonkey said:

 

 

Maybe Watsa should announce that he is increasing his investment in Blackberry by 10%, just to really piss off the shareholders who don't know that this has become an insignifcant holding, and then ramp the repurchases. I'm kidding, I'm kidding, stop throwing tomatoes at your computer screens. But ramping up the repurchases to keep the company reasonably small is still an option for Fairfax, and might be a preferable route for maximising our shareholder returns.

 

Add to the Blackberry holdings and then buyback depressed shares...BRILLIANT!!!!

 

-Crip

[Viking]

9 hours ago, Gamma78 said:

Though I suspect that a continuous repurchase of shares leads itself to valuation gaps closing over time, and hence the size issue coming back to the fore. For that not to happen, Fairfax would have to continuously trade at a discount such that share buybacks are a viable and value enhancing option. But the medicine of buybacks is likely to cure the malady of discount, so that arbitrage will wither away. 

@Gamma78 I am not sure buying back stock will close the valuation gap. 
 

Look at Henry Singleton… he was able to buy back stock at favourable prices for a decade. Look at Berkshire Hathaway… they could have bought back meaningful amounts of stock many times over the past 50 years at good prices. 
 

There are two questions that need to be answered:

1.) what is causing the valuation gap for Fairfax (versus peers)?

2.) will stock buybacks cause the valuation gap to close?

 

What is causing the valuation gap for Fairfax (versus peers)?
- complexity of business model Fairfax uses. Lots of people don’t understand it.

- non-traditional business model Fairfax uses. Lots of people don’t like it. Just look at the blowback on the board from the Sleep Country acquisition.
- not Berkshire Hathaway. Lots of investors will not be happy with Fairfax until they become a clone of Berkshire Hathaway.
- hangover from past mistakes. Trust, once lost, is slow to rebuild.

 

There are more. What do other people think?

 

Will stock buybacks cause the valuation gap to close?

- buybacks will likely stop the stock from getting crazy cheap.

- i am not convinced buybacks on their own will get Fairfax’s stock to more fair valuation (like 1.5 x BV). 
- investors/analysts are underestimating the size of earnings and the impact of reinvestment and compounding over time - so they are continue to undervalue Fairfax today. It’s like the movie Groundhog Day playing out each year. 
 

As a result, like 2024, i think Fairfax in the coming years will be able to continue to buy back a meaningful amount of stock at a great price. They could reduce effective shares outstanding by 1 million in 2024 at a price of about 1 x year end BV. That is crazy.
 

This is really a best case scenario for long term shareholders of Fairfax. It’s like shooting fish in a barrel. Growing earnings. Materially lower share count. Like a goat going up a mountain, the important per share metrics will keep moving higher. 
 

Could investors fall in love with Fairfax again? Yes. Of course this could happen. But Fairfax will need to continue to execute well. And even then, given their style of investing, it will likely take a couple of years.

Edited July 30, 2024 by Viking

[gfp]

On 7/24/2024 at 3:52 PM, gfp said:

I think it falls under Cyber and not all Cyber policies cover non-malicious attacks.  This is just a fuck-up.  Not all fuck-ups are insured.  That's what lawsuits against the vendor are for!

 

 

edit: and if anything came out of the pandemic era lawsuits it would be tightened-up Business Interruption policy language.  You want coverage for something non-typical BI?  Pay for it a-la-carte.

 

 

Notice how these press stories don't say, "Delta hired David Boies to file an insurance claim.." ?

 

https://www.cnbc.com/2024/07/30/crowdstrike-shares-plunge-11percent-on-report-that-delta-may-seek-damages.html