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.

 

[TB]

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?

Edited July 30 by TB

[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

[TB]

7 hours ago, glider3834 said:

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

 

 

[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