Fairfax 2024

[villainx]

On 1/22/2024 at 7:45 PM, Thrifty3000 said:

my number one priority is the quality and growth potential of MY earnings.

 

I'm definitely been working on this.  Thanks though.  The way you put it is eloquent and actionable.

 

It's hard to break bad habits.  

[Haryana]

An unusually rare article on The Fool that is actually readable:

https://www.fool.com/investing/general/2024/01/22/is-fairfax-financial-stock-a-buy/

"

Not all of Fairfax's portfolio is publicly traded. Watsa regularly dedicates billions of dollars to private deals, capitalizing on opportunities not available to the public. These investments, though generally successful over the long run, can take years to fully play out. Last year, for example, the firm increased its stake in Bangalore International Airport, one of the fastest-growing travel hubs in the world. It was an off-market deal with limited competition. Fairfax secured a great deal, but there's almost no liquidity. It may be a decade or more until shareholders realize anything other than paper profits.

Occasionally, the market isn't willing to wait for these bets to pay off. This is the biggest catch with Fairfax stock. While its long-term track record is tremendous on an annualized basis, most of its returns have come over small periods of time. From 2003 through 2007, for example, shares traded sideways only for the stock to double in value the following year. From 2015 through 2021, Fairfax stock traded sideways again only to double over the past 24 months. Lumpy returns have been a consistent trend since 1985.

"

 

[Haryana]

1 hour ago, Hoodlum said:

This may explain some of the rise this week in share price.  I expect we will see increases in target price from others over the next month.

 

https://www.marketbeat.com/instant-alerts/tse-ffh-analyst-earnings-estimates-2024-01-24/

 

Of course these are in Cdn dollars.

 

 

 

Gotta respect our beloved Brett Horn for standing pat on his ground. He keeps us down from dangers of exuberance.

"We will maintain our CAD 970 fair value estimate for the no-moat company and see shares as a bit overvalued at the moment."

https://www.morningstar.com/stocks/fairfax-earnings-positive-momentum-continues

 

[SafetyinNumbers]

1 hour ago, Haryana said:

 

Gotta respect our beloved Brett Horn for standing pat on his ground. He keeps us down from dangers of exuberance.

"We will maintain our CAD 970 fair value estimate for the no-moat company and see shares as a bit overvalued at the moment."

https://www.morningstar.com/stocks/fairfax-earnings-positive-momentum-continues

 

Pretty much the only reason, I think FFH has stayed cheap is because of quants. Volatile earnings streams are by definition not quality. Earnings growth modeled by analysts is also a necessity for most quants to get involved. This rules based approach has worked on a portfolio basis so they won’t make exceptions to over rule the model. 
 

Will analysts finally start modeling in earnings growth as the multiple expands, we’ll have to wait and see. Even Cormark with their US$66/sh estimate for Q423, still has them earning only US$140 in 2024.

 

There is no point being a hero when the stock trades at ~ 7x conservative estimates.

 

 

[Thrifty3000]

On 1/23/2024 at 11:55 AM, Crip1 said:

So, a few questions (and I truly appreciate your intellectual generosity):

 

• Is the file as simple as Company A earned x per share so my portion of the earnings is x times the share amount owned? (Column A is Company, Column B is EPS, Column C is Shares owned, Column D is Column B times Column C) If it's more complicated, what else to do capture?
• I assume that you do not look at dividends except to add them to share count if you reinvest...is that right?
• Do you adjust for one-time charges?
• Do you attempt to convert this to Cash-Flow by adding Depreciation/Amortization and deducting Cap Ex?
• Do you update this quarterly or annually?

-Crip

So, for this simple look through earnings spreadsheet the most important fields I track are:

 

• Ticker
• # of Shares I Own
• Per Share Cost Basis
• Normalized Earnings Estimate Per Share
• Normalized Dividend Per Share
• Total Cost Basis (Cost Basis Per Share X # of Shares Owned)
• Total Normalized Earnings (Normalized EPS X # of Shares Owned
• Total Normalized Dividend
• Current Share Price
• Current Value of Investment (Current Share Price X # Shares Owned)
• Normalized Earnings Yield
• Normalized Dividend Yield
• Price to Normalized Earnings Multiple
• 10 Yr Estimated Growth Rate
• Year 10 Normalized Earnings Forecast (Based on current normalized earnings and my estimated growth rate)
• % of Portfolio Allocation
• Unrealized Gains
• % Unrealized Gains

Normalized earnings is the field I focus most on getting right. I don't have a one size fits all approach for this one, though. I'm mostly focused on understanding what free cash flow will look like through a full economic cycle. I also try to understand and adjust for key risks - like super cats. For some investments I have to adjust for things like big, temporary, expenses - like major litigation costs/settlements that will take a few years to burn through (think post-GFC Bank of America). With some investments that have highly reputable managements I've learned that management forecasts are plenty reliable. So, if I'm really comfortable with a manager, I'll start with their forecast, try to poke holes in it, and adjust accordingly if I come up with anything.

 

As far as making adjustments, I review my estimates annually at a minimum. However, anytime I learn about a material change, or think of a material risk, whether from company updates, CoBF, or otherwise, I immediately update my estimate. I probably make a handful of small adjustments to the model every quarter. I rarely have to make major adjustments at this point. I may make 1 or 2 major adjustments to the model each year. Usually, I get to just bump up the earnings estimate for the next year, which is fun.

 

Since I started maintaining this spreadsheet in 2019 I've been able to increase my total normalized look through earnings by six figures every year just by replacing lower yielding investments with higher yielding ones whenever clear opportunities arise.

 

 

 

 

 

 

 

 

Edited January 24 by Thrifty3000

[Viking]

WR Berkley just released results. I like listening to their conference call to get an update on where the US P/C insurance market is at. WRB is a traditional insurer focussed on the US market. 
 

Here are my key take-aways:

1.) the hard market continues with no signs of ending any time soon. 
2.) P/C insurer returns - for some companies like WRB - are very good. ‘Record setting financial results.”
3.) The outlook is even better. 
 

Sceptics continue to question how this can be possible. The simple answer is lots of insurers are not experiencing ‘record setting financial results’. Some lines, like auto, were beyond terrible for years. 
 

Investments

 

- the current book yield on fixed maturity holdings is about 4.7%. 
- new money yield is over 5%

- average duration is 2.4 years, about the same as last quarter. WRB would like to extend duration

 

WRB missed out on extending duration when rates peaked out in October of 2023. It is exceptionally difficult to time the market.
 

This just further highlights the exceptional job the team at Fairfax has done with their fixed income portfolio over the past 2.5 years - extending the average duration from 1.6 years to 3.1 years in 2023 is a big, big deal. We will get clarity on all the puts and takes when Fairfax reports Q4 results (and more when they release the AR). It looks to me like WRB got caught ‘thumb sucking’ in Q4 when rates spiked.

Returning money to shareholders

 

WRB returned more than $1 billion to shareholders in 2023: dividends, special dividend and buybacks. Well done.

 

Importantly, this is capital that is leaving the P/C insurance industry.

 

Other

 

- Rate increase in Q4 = 8% and still exceeding loss cost trend. Q4 of 2022, rate increase was 6.9%. Yes, rate was up modestly YOY.
- Top-line growth of 12% in Q4: seeing nothing today to suggest growth rate is slowing in Q1.

- Interest rate outlook: stay the same or maybe higher. See pressure on inflation in coming years driven by high government spending (supported by both Biden and Trump) and limited ability to raise taxes.

- ‘Alternative investments’ opportunities not compelling today given what is available in fixed income today (on a risk adjusted basis).

Edited January 24 by Viking

[Parsad]

6 hours ago, Haryana said:

 

Gotta respect our beloved Brett Horn for standing pat on his ground. He keeps us down from dangers of exuberance.

"We will maintain our CAD 970 fair value estimate for the no-moat company and see shares as a bit overvalued at the moment."

https://www.morningstar.com/stocks/fairfax-earnings-positive-momentum-continues

 

 

Interestingly enough, his fair value estimate after Q1 2023 was $730 CDN.  For a no moat company that is a bit overvalued, his target price has risen 33% in less than one year.  

 

This is just another example of what is so wrong with how institutional capital is allocated and how misguided the industry is.  Cheers!

[MMM20]

1 hour ago, Viking said:

the hard market continues with no signs of ending any time soon

 

 

I'm one of those guys who draws on charts now.

 

[SafetyinNumbers]

25 minutes ago, Parsad said:

 

Interestingly enough, his fair value estimate after Q1 2023 was $730 CDN.  For a no moat company that is a bit overvalued, his target price has risen 33% in less than one year.  

 

This is just another example of what is so wrong with how institutional capital is allocated and how misguided the industry is.  Cheers!

He provides the earnings estimates and the moat rating. The quant machine spits out the target price. But he’s especially bad at estimating forward earnings. They don’t make any sense. Ironically, his earnings estimates make other quants want to avoid the stock because they show high variability in earnings estimates and show earnings declining. Things that are not generally associated with quality and what quants prefer.
 

 

[Haryana]

2 hours ago, SafetyinNumbers said:

He provides the earnings estimates and the moat rating. The quant machine spits out the target price. But he’s especially bad at estimating forward earnings. They don’t make any sense. Ironically, his earnings estimates make other quants want to avoid the stock because they show high variability in earnings estimates and show earnings declining. Things that are not generally associated with quality and what quants prefer.
 

 

 

The way the estimate value numbers have changed over last year seem like being done manually.

 

As if someone is making the numbers up strategically from their La-Z-Boy recliner to camouflage.

 

First, the number changed from 730 to 790, that is the maximum to go in 700s with just one digit.

 

Then, the number changed from 790 to 970, that is the maximum below 1000 exchanging a digit.

 

[Daphne]

On 1/16/2024 at 6:17 PM, Parsad said:

 

I thought he was already in there!  This is long overdue.  Congratulations Prem!  Cheers!

 

Edited January 25 by Daphne
Old content

[Daphne]

Berkeley year end
 

Fourth Quarter Return on Equity of 23.6% and Operating Return on Equity of 23.2%;

Record Quarterly and Annual Pre-Tax Underwriting Income and Net Investment Income

[gfp]

BMO raises target price to C$1550 from C$1400

[MMM20]

WSJ: Insurers Rake In Profits as Customers Pay Soaring Premiums

 

https://www.wsj.com/finance/insurance-companies-profits-stock-ebae7fd1?

 

[Hoodlum]

National Bank mentioned a few of the driving factors for stock price increase this year.  It looks like analyst are starting to catch on to what has already been mentioned here.

 

https://www.theglobeandmail.com/investing/markets/inside-the-market/article-fridays-analyst-upgrades-and-downgrades-for-jan-26/

 

Quote

National Bank analyst Jaeme Gloyn once again named Fairfax Financial Holdings Ltd. his top pick for 2024 in his Diversified Financials coverage universe.

 

The Toronto-based holding company was also selected a year ago and saw its shares jump 52 per cent in 2023 (versus a gain of 9 per cent for the S&P/TSX Capped Financial Index).

 

In a report released Friday, Mr. Gloyn said he picked Fairfax based on three potential catalysts:

 

1. Operating Income guidance upgrade.

“In the first three quarters of 2023, Fairfax hit their annual operating income expectation of $3.0-billion,” he said. “We expect management will raise the bar on this outlook to upwards of $5-billion.”

 

2. Valuation.

“We believe consistent low to mid-teens operating ROE [return on equity] performance will drive a re-rating of the shares,” he said. “At the current trading valuation of 1.05 times, the market is pricing FFH like a 7-per-cent ROE business. We expect interest and dividend income ALONE to drive 7-percentage-points of ROE. FFH peers such as MKL and BRKa also trade at higher valuations of 1.4 times to 1.5 times P/ B.”

 

3. S&P/TSX 60 Index inclusion:

“FFH is top candidate for inclusion in the S&P/TSX 60 Index, which could drive estimated demand equivalent to 6 days of FFH average daily volume,” he said. “This will turn an under-owned financial into a core holding.”

Mr. Gloyn also sees the property and casualty (P&C) insurance sector remaining “well-positioned for 2024, regardless of a soft landing or changes in interest rates.”

 

“What if interest rates move lower? Lower rates could be neutral/positive for FH,” he said. “First, Fairfax’s extended duration of fixed income assets protects them from a near-term decline in rates. Second, Fairfax has the ability to purchase higher yield corporate debt. Third, lower rates drive gains in fixed income assets, flowing to net income, ROE and book value growth.

 

“What if the insurance cycle softens? We don’t see a softer insurance market as a significant concern because; i) Fairfax has proven its ability to deliver mid-90s combined ratios in soft market conditions, ii) Fairfax has the ability to release recently built up excess capital at subsidiaries, iii) underwriting income represents 20 per cent of our operating income forecast in 2024/2025.”

Maintaining an “outperform” rating for Fairfax shares, he hiked his target to a Street-high $2,000 from $1,800. The current average is $1,648.87.

 

[Masterofnone]

Should Fairfax get included in the index does anyone think they might use this as an opportunity to exit a portion of the TRS? There's a big wad of shares owned by the counter party.

[SafetyinNumbers]

2 hours ago, Hoodlum said:

National Bank mentioned a few of the driving factors for stock price increase this year.  It looks like analyst are starting to catch on to what has already been mentioned here.

 

https://www.theglobeandmail.com/investing/markets/inside-the-market/article-fridays-analyst-upgrades-and-downgrades-for-jan-26/

 

 

It’s a really good note. Hopefully makes it harder for those funds underweight vs the benchmark to ignore! 

[Luke]

On what does FFH inclusion in the TSX 60 depend? 

[Viking]

46 minutes ago, Masterofnone said:

Should Fairfax get included in the index does anyone think they might use this as an opportunity to exit a portion of the TRS? There's a big wad of shares owned by the counter party.

 

Valuation will likely be the driver of what they do with the TRS position.

 

Of all the analyst reports I have read over the past 18 months National Bank has consistently been the best - and by the best I mean they get into the weeds and provide a very thorough and thoughtful build of all of their assumptions. Their estimate 12 months ago was the most accurate. I don't think it was luck.

 

Today? They have updated their models and have upped their price target to C$2,000. This is not a crazy number. It is based on Fairfax trading at a 1.3 multiple which is reasonable. 

 

Fairfax is still cheap. And it would be easy to argue that it is crazy cheap. Why would they exit the TRS when the set-up is so favourable (not just valuation but also the near-term outlook)?

 

Buffett said 12 'truly good decisions' made over 60 years (one every 5 years) is what generated his significant outperformance versus the S&P 500. You make the big money by holding your best ideas for years - decades in Buffett's case. My guess is Fairfax is holding the TRS to make the big money.

 

“They say you never grow poor taking profits. No. you don’t. But neither do you grow rich taking a four point profit in a bull market.” Reminiscences of a Stock Operator

Edited January 26 by Viking

[Masterofnone]

Just thinking that the created demand of 6 days worth of volume plus likely run-up in anticipation of this demand could possibly create that favorable valuation.

[Viking]

36 minutes ago, Masterofnone said:

Just thinking that the created demand of 6 days worth of volume plus likely run-up in anticipation of this demand could possibly create that favorable valuation.

Here is what Prem said in the 2020AR after they put the position on: “We think this will be a great investment for Fairfax, perhaps our best yet!” 
 

My view is the FFH-TRS is a ‘punch-card’ type of investment for Fairfax. A ‘truly good decision.’ Exceedingly rare. One that comes along perhaps once every 5 years or so. And Fairfax knows how to value this investment.

 

Why would you sell something that is likely going to compound at a high rate for the next 5 years? You would be a dummy to sell it even at fair value. And Fairfax is nowhere near fair value today.

 

Cutting your flowers and watering your weeds is never a smart thing to do. Inevitably, the proceeds go into an inferior idea. Most people sell because they think they can find something as good or better. That isn’t what happens when you sell the ‘truly good decisions’. I think it is mental flaw that lots of investors have. And it leads to sub-par returns.

 

i know this because i see a guy in the mirror every day who has repeatedly made this mistake over the years  

Edited January 26 by Viking

[MMM20]

44 minutes ago, Viking said:

Cutting your flowers and watering your weeds is never a smart thing to do.

I think most of us agree, but we also know survivorship bias is real and context matters. Yes, the valuation on normalized earnings hasn’t really changed over the past 3-4 years even as the stock has 3-4x’d, and we know book value understates economic reality. But let’s say someone bought this back then at 0.5-0.6x book and has let it grow to nearly half their retirement portfolio or kids college fund or whatever and now the risk inherent in such concentration is keeping them up at night - let’s say the risk of The Big One, or of Prem keeling over tomorrow, or that Eurobank is a big fat fraud, or some true black swan. Would you blame them for cutting this in half this year if it keeps running up? Investing is never easy, right? Asking for a friend.
 

Edited January 26 by MMM20

[Luke]

6 minutes ago, MMM20 said:

I think most of us agree, but we also know survivorship bias is real and context matters. Yes, the valuation on normalized earnings hasn’t really changed over the last 3-4 years even as the stock has 3-4x’d, and we know book value understates economic reality. But let’s say someone bought this back then at 0.5-0.6x book and has let it grow to nearly half their retirement portfolio or kids college fund or whatever, and now the risk inherent in such concentration is keeping them up at night - let’s say the risk of The Big One, or of Prem keeling over tomorrow, or that Eurobank is a big fat fraud, or some true black swan. Would you blame them for cutting this in half this year if it keeps running up? Investing is never easy, right? Asking for a friend.
 

In what would that person invest the proceeds, what businesses at this kind of quality and reasonable prices can one find? Everything else is expensive now...

[Viking]

2 hours ago, MMM20 said:

I think most of us agree, but we also know survivorship bias is real and context matters. Yes, the valuation on normalized earnings hasn’t really changed over the past 3-4 years even as the stock has 3-4x’d, and we know book value understates economic reality. But let’s say someone bought this back then at 0.5-0.6x book and has let it grow to nearly half their retirement portfolio or kids college fund or whatever and now the risk inherent in such concentration is keeping them up at night - let’s say the risk of The Big One, or of Prem keeling over tomorrow, or that Eurobank is a big fat fraud, or some true black swan. Would you blame them for cutting this in half this year if it keeps running up? Investing is never easy, right? Asking for a friend.

I would love to hear other board members thoughts: how do you handle position sizing? Especially when the winning/oversized position is likely just getting started?

@MMM20 that is a great question. I also have a friend who is looking for an answer.

 

Position size has two components:

1.) when you buy

2.) what happens over time

 

Position sizing is exceptionally difficult. Probably because it is more art (gut) than science (brains). Unlike the ‘brain’ type, the ‘gut’ type of decisions can’t easily be explained.

 

My comments in earlier posts today were meant to be quite general in nature. As an example, i have owned Berkshire Hathaway stock many times over the years. I always sold it after a decent move higher. With hindsight, i should have simply held my position. And been adding to it on weakness. 
 

Now there is another situation… and i think this is what you are getting at… i am going to make up some number. What if you backed up the truck with Fairfax a year ago and made it 33% of your total portfolio. Concentrated, but not a crazy number. Today, Fairfax might now be 50% of your total portfolio. At what point does it get too big?

 

I’m a big believer in the ‘sleep well at night’ rule of position sizing (that you reference). If your weighting is keeping you up at night, that is telling you something. I suspect there are a few people on this board in this boat. Yes, great problem to have. 
 

Another way to look at it might on a risk / return adjusted basis:

- What do you think Fairfax is going to return over the next couple of years?

- What will the index averages return over the next couple of years?

- What is the chance something is going to happen to materially impact Fairfax’s valuation (a 30% or more permanent drawdown) over the next couple of years? 
 

My view is you only want to be highly concentrated if the opportunity is materially better than putting the money in a broad based market index (you expect 1.5x or better outperformance). But you have to be wired the right way for this to work (to hold a very concentrated position).
 

My guess is quite a few Berkshire Hathaway shareholders have achieved generational wealth holding the stock for decades. What did these shareholders do when confronted with the same question? My guess is the ones who built the greatest fortunes didn’t sell a share. 

Edited January 26 by Viking

[LC]

4 minutes ago, Viking said:

I would love to hear other board members thoughts: how do you handle position sizing? Especially when the winning/oversized position is likely just getting started?

 

I trimmed <3.3% of my FFH a week ago thinking:

OK this is getting a big chunk of the portfolio now,

So let's take some eenie-meenie little profits,

And given FFH's volatility maybe I can buy it back in a few days/week.

 

That was $60 dollars per share ago. I can't help but get in my own way sometimes. That said the position is still close to 40% weighted. 

 

Quote

Everything else is expensive now...

 

Luca, haven't I seen you posting in the "What are you buying" thread on a very regular basis?