Fairfax 2024

[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 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 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 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 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

[Maverick47]

I have appreciated a rational capital allocator being in charge of companies like Berkshire and Fairfax.  When they are engaged in buying back their own stock, it serves me as a small individual investor, because I interpret it as meaning that the stock is at least fairly, and in some cases, favorably, priced relative to intrinsic value.  So during my capital accumulation phase, it gives me a level of comfort in continuing to add to a position, even though the market price per share continues to rise over time.

 

I have a human tendency to anchor myself to valuations at which I first purchased a stock.  Although one might occasionally be fortunate enough to see those prices again (see Fairfax a few years ago), a more typical situation is when the valuation continues to rise steadily over time.  Stock buybacks at such times give me some comfort that I am not dramatically overpaying for my  later purchases…

[Mystery Guest]

2 hours ago, Maverick47 said:

I have appreciated a rational capital allocator being in charge of companies like Berkshire and Fairfax.  When they are engaged in buying back their own stock, it serves me as a small individual investor, because I interpret it as meaning that the stock is at least fairly, and in some cases, favorably, priced relative to intrinsic value.  So during my capital accumulation phase, it gives me a level of comfort in continuing to add to a position, even though the market price per share continues to rise over time.

 

I have a human tendency to anchor myself to valuations at which I first purchased a stock.  Although one might occasionally be fortunate enough to see those prices again (see Fairfax a few years ago), a more typical situation is when the valuation continues to rise steadily over time.  Stock buybacks at such times give me some comfort that I am not dramatically overpaying for my  later purchases…

With the stock over $1600 Canadian again it is worth reminding ourselves of a couple of things: 

 

its not the share price that counts as much as the look through earnings and long term capital allocation. 

I have held my shares for many years and added when the pricing seemed crazy low, and I had funds available.

I have no plans to sell any shares, at times holding on has been somewhat painful! 

 

I too have been wondering about the Sleep Country Purchase ...

Having Just Read The Outsiders   (thorndike)

If you have not read it, I think it sheds lots of Light on the hidden Fairfax master plan ...

Most of these CEOs were frugal and financially oriented enough to be able to pivot to an opportunity 

no one else saw but in hindsight was brilliant.  

 

I will share some thoughts 

 

I would rather see buy backs... 

my .02 we are not seeing the full Sleep picture 

I would speculate that they are working Recipe MK2....

They are looking to acquire brilliant operational talent in scalable businesses and build that way. 

Look at the Talent Pool Now Running the subs and operations.   

They will assemble a portfolio of Home oriented businesses.  

We would like to see them hold a Brilliant business forever but if the assembled package can be used as currency down the Road ... then they spin off...

 

 They will be accused of having NO MOAT, are  under appreciated, and underpriced  

and we will all get a chance to absorb more shares. 

 

I do not think I have attended an AGM where Prem has not mentioned Henry Singleton.  

 

 

 

 

[mananainvesting]

Hey all, My first post in this forum, although I been a lurker for a few years now. Many thanks to the kind and thoughtful posters here who have helped me better understand $FFH.TO. 

 

I have been wondering lately why $FFH.TO doesn't make a bid to buy all of $FIH.U? It is such good value, clearly the market isn't valuing it over the long run (trading less then book since 2018). Could it be because of regulations in India?

I own both $FFH and $FIH. 

 

Thank you and I am grateful to this community for the knowledge over the years! Cheers

[SafetyinNumbers]

5 hours ago, Viking said:

@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.

I think it’s the combination of discriminate sellers and indiscriminate buyers that decide the multiple.
 

Sellers are usually value and price sensitive. They sell because the multiple has reached a certain level and because they don’t want to experiment a drawdown. Most of the institutional trading is based on a percentage of volume and because institutions are way underweight FFH, I think those flows favour FFH. However, because they are on a % of volume they are price takers. The sellers set the price.

 

Indiscriminate buyers are quants and passive. They don’t care about value or price but instead factors and weighting. They will buy on upticks. Going into the S&P/TSX 60 will likely help our multiple even if it’s short lived b/c active investors tend to sell on a scale and it’s hard to come up with enough supply otherwise.

IFC has expanded its multiple by 0.6x+ since it went into the 60 in March 2022 and that’s without the earnings momentum that FFH has as IFC has only grown its book value single digits since then.

[dartmonkey]

3 hours ago, Viking said:

@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. 
 

...

 

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.

 

Following the Henry Singleton example, periods of overvaluation can help, too. Singleton issued stock when valuations were high, and repurchased stock when they were low. He is known for the period when he retired almost 90% of outstanding shares at low multiples, sometimes <10 times earnings. But he also succeeded by raising capital at much higher multiples, typically 40-70 times, in an earlier period. The ideal would be to have both kinds of periods.

 

By the way, here is what Watsa had to say about Singleton and buybacks, in the 1997 annual letter (my emphasis):

 

While we have had very minimal stock buybacks in the past few years, we should remind our newer shareholders that we have bought back significant amounts of our shares in the past (i.e. 1.6 million shares or 25% in 1990). By the way, you may not know, but the Michael Jordan of stock buybacks was Henry Singleton at Teledyne. Henry began Teledyne in 1961 with approximately seven million shares outstanding and grew the company through acquisitions while shares outstanding peaked in 1972 at 88 million. From 1972 to 1987, long before stock buybacks became popular, Henry reduced the shares outstanding by 87% to 12 million. Book value per share and stock prices compounded in excess of 22% per year during Henry’s 27 year watch at Teledyne– one of the best track records in the business. We will always consider investing in our stock first (i.e. stock buyback) before making any acquisitions.

[Gamma78]

6 hours ago, dartmonkey said:

 

Following the Henry Singleton example, periods of overvaluation can help, too. Singleton issued stock when valuations were high, and repurchased stock when they were low. He is known for the period when he retired almost 90% of outstanding shares at low multiples, sometimes <10 times earnings. But he also succeeded by raising capital at much higher multiples, typically 40-70 times, in an earlier period. The ideal would be to have both kinds of periods.

 

By the way, here is what Watsa had to say about Singleton and buybacks, in the 1997 annual letter (my emphasis):

 

While we have had very minimal stock buybacks in the past few years, we should remind our newer shareholders that we have bought back significant amounts of our shares in the past (i.e. 1.6 million shares or 25% in 1990). By the way, you may not know, but the Michael Jordan of stock buybacks was Henry Singleton at Teledyne. Henry began Teledyne in 1961 with approximately seven million shares outstanding and grew the company through acquisitions while shares outstanding peaked in 1972 at 88 million. From 1972 to 1987, long before stock buybacks became popular, Henry reduced the shares outstanding by 87% to 12 million. Book value per share and stock prices compounded in excess of 22% per year during Henry’s 27 year watch at Teledyne– one of the best track records in the business. We will always consider investing in our stock first (i.e. stock buyback) before making any acquisitions.

 

 

Would love to see more stock repurchases. Loved it when they repurchased 10% of the outstanding a couple of years ago below book value. Even at these valuations today it should be a no-brainer. There is a lot of talk about Singleton and Teledyne - I certainly hope they go this route with the valuation where it is currently. I'm not quite seeing them move exactly that way just yet though. After all, they just made a big capital allocation decision on Country Sleep. I'm fully prepared to give them benefit of doubt given the moves they have made recently. I would be lying if I said I understood that as a better deal than buying back their own shares. 

 

 

 

[petec]

On 7/29/2024 at 8:06 PM, Gamma78 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

 

There are certainly a lot of barriers to entry, although the incumbents also have the disadvantage of legacy IT systems and new virtual entrants have made surprising progress in some markets.

 

But barriers to entry are not economic moats. I think of a moat as something that protects an above-average ROIC over time. Legacy banks have to be 10-1 leveraged to reach mid teens ROEs. There's no moat. What you're going to get is commodity ROIC for a very long time so long as the leverage doesn't trip them up.

 

I'm not saying that's a bad thing btw.

[UK]

1 hour ago, Gamma78 said:

 

 

Would love to see more stock repurchases. Loved it when they repurchased 10% of the outstanding a couple of years ago below book value. Even at these valuations today it should be a no-brainer. There is a lot of talk about Singleton and Teledyne - I certainly hope they go this route with the valuation where it is currently. I'm not quite seeing them move exactly that way just yet though. After all, they just made a big capital allocation decision on Country Sleep. I'm fully prepared to give them benefit of doubt given the moves they have made recently. I would be lying if I said I understood that as a better deal than buying back their own shares. 

 

 

 

 

When FFH was issuing its shares at a 1.3 BV to make large insurance acquisitions in 2015-2016 I also have a lot of doubts regarding Singleton talk and felt this way (despite of them being right at the end), but after this period and since pandemic, I think they really have showed it is not only a talk for them. And they are only at some 30 B CAP currently, so still lots of other opportunities to alocate capital. I still do not think the acquisition of Sleep Country at less than 1 B USD (or 3-4 per cent of their CAP) is something to worry much about. It migh not be obvious, why they are doing it, but it does not seem obviously bad either, at least for me personally. And even if it turns out a not very good or bad one, to expect every single investment to work for FFH, I think would be a mistake and a bit to demanding:)

 

Edited July 31 by UK

[Hoodlum]

There was no change in Eurobank ownership of Hellenic after public offer expired.  It is still at 56%.

 

https://www.ekathimerini.com/economy/1245192/eurobanks-hellenic-bank-stake-at-56/

[Viking]

Fairfax  - The Influence of Henry Singleton

 

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

 

In my last post I did a short review of Henry Singleton. He has been an important influence/mentor to Fairfax. Today we are going to try to connect some of the dots. We are going to focus on capital allocation and one tool in the capital allocation toolbox - shareholders’ equity. And how, when it is used properly, it can build significant long term per share value for shareholders.

 

But remember… when comparing the present with the past we will never find an exact ‘repeat.’ That is not the point/objective of doing this exercise. However, if we look closely, we can find important examples of where the present does indeed ‘rhyme’ with the past. And that, in turn, can help improve our understanding of Fairfax - what they are doing and what they might do in the future.

---------

Link to my previous post on Henry Singleton

• https://thecobf.com/forum/topic/20517-fairfax-2024/page/65/#comment-572533

----------

Let’s start with the big picture

 

A CEO has two basic responsibilities:

• Operations (run the business)
• Allocate capital

When allocating capital, the basic choices available to the management team at Fairfax have been captured in the table below. In this post, we are going to focus on one tool in the capital allocation toolbox - shareholders’ equity - both as a source of capital (issuing stock) and as a use of capital (repurchasing stock).

 

 

 

Shareholders’ equity

 

The playbook of how a management team can use shareholders’ equity to drive long term per share value for shareholders is pretty simple:

• Issue stock when it is overvalued - and buy assets that are undervalued.
• Buy back stock when it is undervalued.
• Be aggressive at extremes (overvaluation and undervaluation).
• Keep doing both as long as conditions remain favourable.

There are two key reasons this strategy works so well:

• Mr. Market’s behaviour can very irrational at times - and it can persist for years.
• The management team knows what the intrinsic value of the company is - it has a big information advantage over Mr. Market.

The proper execution of this strategy over time can lead to extraordinary results for long term shareholders. Henry Singleton taught us this when he ran Teledyne.

—————

Fairfax Financial - Shareholders’ Equity - A 38-Year Journey

 

Let’s review how Fairfax Financial has used shareholders’ equity over their 38 year history to see what we can learn.

 

We will break our analysis into two time-frames:

• Phase 1 - 1985 to 2017 - Building out the P/C Insurance Platform
• Phase 2 - 2018 to today - Optimize the Operating Businesses and Aggressively Shrink the Share Count

Phase 1 - 1985 to 2017 - Building Out the P/C Insurance Platform

 

In 1985, the year it was founded, Fairfax began its journey with 5 million shares outstanding.

 

From 1985 to 2017, Fairfax:

• Issued 29.5 million shares
• Repurchased 6.7 million shares

As a results, effective shares outstanding at the end of 2017 were 27.8 million (5 + 29.5 - 6.7) - they increased by a total of 22.8 million over the previous 32 years.

 

Over the first 32 years of their existence (from 1985 to 2017), share issuance was used aggressively as a source of cash - and this cash was used to grow Fairfax’s global P/C insurance platform. From 1985 to 2017, Fairfax issued a total of 29.5 million shares. Shares were generally issued at a premium to book value (sometimes a significant premium). Proceeds were used to buy other P/C insurance companies trading at a much lower valuation. Bottom line, looking at share issuance in aggregate, Fairfax got good value.

 

Share buybacks have also been a meaningful use of cash for Fairfax. From 1985 to 2017, Fairfax repurchased a total of 6.7 million shares. Repurchases were 22% of issuance - over the years, for every 5 shares that were issued, Fairfax repurchased 1 share back. Share were generally repurchased when Fairfax’s stock was trading at a discount/on sale.  Like with share issuance, Fairfax got good value when they repurchased shares.

 

So in general, Fairfax issued stock when its shares were trading at a high valuation and used the cash to buy P/C insurance companies that were trading at a much lower valuation. Fairfax also bought back modest amounts of stock at times when its shares were trading at a low valuation.

 

This looks like it was textbook application of the principals of what a management team should do.

 

Is there a way we can actually measure how successful this strategy has been?

 

Yes. We can look at the change in long term per share book value (BVPS).

 

From 1985 to 2017, Fairfax increased:

• the share count at a CAGR of 5.5%.
• common shareholders equity at a CAGR of 25.8%.
• BVPS at a CAGR of 19.5%.

Using its stock to drive the growth of its P/C insurance platform resulted in enormous long term per share value creation for shareholders.

 

 

From Fairfax’s 2017AR:

 

—————

 

An important strategic change in 2017

 

With the purchase of Allied World in 2017, Fairfax officially completed the aggressive 32-year build out of their global P/C insurance platform. Moving forward, Fairfax would be focused on two things:

• Continue to do smaller bolt-on P/C insurance acquisitions.
• Optimize its existing insurance operations and investment portfolio.

Truth be told, Fairfax got to work optimizing its insurance operations back in 2011, when Andy Barnard was appointed President and COO to manage Fairfax’s total insurance business. When it comes to investments, fixed income has always been a strength of Fairfax. The issue at Fairfax in 2017 was its equity portfolio - it was stuffed full of underperforming companies, many of which were significant cash drags (they were not delivering cash to Fairfax - they needed cash from Fairfax).

 

By optimizing the insurance operations and investment portfolio Fairfax would be able to improve the ‘cash flow from operations,’ the most important source of cash.

 

What was the company planning on doing with the future free cash flow?

 

In the 2017AR, Prem told investors what was to come - Fairfax intended to get much more aggressive with share buybacks.

 

“Henry Singleton, at Teledyne, reversed this trend (of growing share count), as you know, and over the next ten years we expect to do the same - use our free cash flow to buy back our shares!”

 

At the time, Prem was laughed at (pretty loudly) for what he said.

 

Let’s look at what has happened at Fairfax since then.

 

Phase 2 - 2018 to Today - Optimize the Operating Businesses and Aggressively Shrink the Share Count

 

What did Fairfax do?

 

2018-2023: Aggressively reduce the share count

 

Effective shares outstanding at Fairfax peaked at 27.75 million in 2017. Over the past 6 years (to December 31, 2023), Fairfax reduced effective shares outstanding by 4.75 million, or 17.1%,  at an average cost of $484/share.

 

From 2018 to 2023, Fairfax was able to repurchase a significant amount of shares at a very low valuation. This is a great example of exceptional value creation by the management team at Fairfax.

 

 

What does this do to the important per share metrics?

 

Here is Prem’s slide from Fairfax’s AGM in April 2024.

 

 

Before moving on, we are going to take a minute to review a couple of things Fairfax did in 2020 and 2021. Because they provide some great insight into how Fairfax thinks about and executes capital allocation.

—————

Classic Fairfax - Turning Lemons into Lemonade

 

Fairfax’s share price got historically cheap in 2020/2021. I won’t get into the reasons as to why that happened (I have covered that topic in detail in many past posts).

 

2020 and 2021 was a great time for Fairfax to buy back a meaningful amount of its stock. The problem Fairfax had at the time was they were cash poor.

 

What to do? Classic Fairfax - get creative.

 

Fairfax made two brilliant moves in late 2020 and 2021.

 

1.) Fairfax Total Return Swap

 

In late 2020/early 2021, Fairfax established a position in a total return swap giving it exposure to 1.96 million Fairfax shares at an average price of $373/share. Although not technically a buyback, establishing this position serves as the next best thing. This position gave Fairfax exposure to 7.5% of its effective shares outstanding (26.2 million at Dec 31, 2020). That is a massive position.

 

2.) Dutch Auction

 

In late 2021, Fairfax executed a dutch auction and repurchased 2 million Fairfax shares at $500/share. To fund the repurchase, Fairfax sold a 9.99% equity stake in their largest P/C insurance company Odyssey Group to CPPIB and OMERS for proceeds of $900 million. This was a wicked smart way to quickly source a significant amount of cash from trusted, external sources. In turn, this allowed Fairfax to capitalize on a short term opportunity (share price trading at crazy low price).

• https://www.fairfax.ca/press-releases/fairfax-announces-us1-0-billion-substantial-issuer-bid-and-sale-of-9-99-minority-stake-in-odyssey-group-2021-11-17/

How have these two moves worked out?

 

1.) The FFH-TRS position is up $1.5 billion over the past 3.6 years (before carrying costs). This has turned into one of Fairfax’s best ever investments.

 

 

2.) Fairfax’s book value is $945 at March 31, 2024. Buying back 2 million shares at $500/share only 2.5 years ago was a steal of a deal for Fairfax and its shareholders.

 

Both of these moves executed by Fairfax scream Henry Singleton. They were:

• Very creative - establishing TRS and selling 9.99% of Odyssey to external partners.
• Very rational - Fairfax’s stock was trading at a historically low valuation.
• Highly opportunistic - seize the moment.
• Executed in scale. Both of these moves were of a significant size.
• Very unconventional - both were classic Fairfax moves.

 

Most impressively, these two deals were executed at a time when investors in Fairfax were literally ‘freaking out.’ But the management team at Fairfax was not ‘freaking out.’  Instead, the management team at Fairfax saw the opportunity and made two outstanding investments - the temperament the senior management team displayed during these dark times shows, among other things, great character. This should speak volumes to investors about the quality of the management team in place at Fairfax. This bodes well for the future.

 

It should also be noted that before Fairfax made either of these two investments, Prem told Fairfax shareholders very loudly that he thought Fairfax’s shares were dirt cheap. In June of 2020 he purchased $149 million in Fairfax shares at an average price of $309/share.

• https://www.fairfax.ca/press-releases/prem-watsa-acquires-additional-shares-of-fairfax-2020-06-15/

—————

OK, let’s circle around and get back on track.

 

Has Fairfax continued to buy back its shares in 2024?

 

My guess is when Fairfax reports Q2 results later this week, effective shares outstanding will come in at less than 22.4 million at June 30, 2024. Fairfax is on track to reduce effective shares outstanding by 1 million in 2024. This is at a much higher pace than we have seen in recent years.

 

Why is the pace of buybacks picking up in 2024?

 

I can think of two reasons:

 

1.) Low valuation: Fairfax’s stock continues to trade at a cheap valuation - its valuation is well below that of peers.

 

2.) Record free cash flow: Fairfax is now generating a record amount of free cash flow. It is coming from two sources:

• Record cash flow from operations (primarily operating income)
• Significant cash from asset sales

Since 2018, Fairfax has been working hard at optimizing its cash flow from operations. Importantly, the equity portfolio has been fixed. All three of Fairfax’s economic engines are now performing at a high level at the same time - and they have never been positioned better for the future:

• Insurance
• Investments - fixed income
• Investments - equities

Asset sales have historically been an important source of cash for Fairfax (and investment gains). This strength of Fairfax continues. The most recent example was the just-announced sale of Stelco. In 2023, it was the sale of Ambridge. In 2022 it was the sale of pet insurance and Resolute forest Products. All four sales were executed with the buyers all paying a premium price.

 

As a result, Fairfax is generating record free cash flow. And this looks set to continue in the coming years.

 

Summary

 

From 1985 to 2017, Fairfax was focussed on building out its global P/C insurance footprint. To fund this growth, Fairfax used its stock - usually issued when the stock was trading at a premium valuation.

 

In 2017, with the Allied World acquisition, Fairfax was officially done building out its global P/C platform. The focus of the company shifted to optimizing the cash flow from the insurance operations and investment portfolio.

 

From 2018 to today, Fairfax has reduced effective shares outstanding by more than 19%. Fairfax was very opportunistic and shares were repurchased at a very low valuation.

 

Over the past 38 years, Fairfax has put on a clinic on how to use shareholders’ equity to build long term per share value for shareholders. Henry Singleton would be proud of what they have been able to accomplish.

 

But the Fairfax story is still being written. Free cash flow at Fairfax has exploded over the past three years. The size and certainty of future earnings have both markedly improved at Fairfax in recent years. Buffett teaches us that certainty is the key variable to properly value an investment. At the same time, Fairfax’s management team is best in class among P/C insurance companies - measured though the growth in book value per share over the past 5 years.

 

Fairfax continues to trade at a significant discount to P/C insurance peers. Given what we know, this makes no sense. And if we know it, I think it is safe to say that  Fairfax knows it.

 

As a result, like Henry Singleton, it would not surprise me to see Fairfax continue to buy back a meaningful amount of Fairfax’s stock in the coming years. After all, Prem told us what the plan was all the way back in 2017.

 

PS: This post is long. Thanks for hanging in there and making it to the end. As I was writing, it became clear to me that the influence of Henry Singleton on Fairfax goes far beyond just shareholders' equity (issuing stock at a premium valuation and then buying it back at a low valuation). Henry Singleton's influence on Fairfax was likely much bigger - how to structure the company, how to run the operations (focus on cash generation) and how to think about capital allocation (be rational, use all the tools in the toolbox, be creative, go big, don't be afraid to be unconventional etc). And to focus on building long term per share value for shareholders.   

Edited July 31 by Viking