CIBC says Fairfax is likely to be added to the S&P/TSX 60 in December 2024 - sell decisions

[SafetyinNumbers]

Fairfax is likely to be added to the S&P//TSX Composite in December 2024 according to CIBC. They estimate 900k shares of index demand. Since stock prices are just supply and demand, it's possible Fairfax has a big price movement around this event either up or down depending on the flows. 

 

I expect the price movement will be upward but it's possible many investors are using the index add to lighten up their positions because it was a catalyst they were waiting for and they don't see another catalyst so the risk is multiple contraction and a drawdown. If there are enough of those shareholders the stock could whipsaw lower. 

 

In the case where the index buyers overwhelm short term oriented shareholders it will be up to value-oriented shareholders to provide supply. Given this board's collective holdings of Fairfax probably rank it a top 10 shareholder it's a pretty amazing resource that we can tap into.

 

Please share how you think about the sell decision. Is it all at once? Is it based on price or value? What's the rationale behind either decision? I want to avoid a sell decisions based on concentration as I think sizing is unique to every individual.

 

I want to make it clear, I don't  analyze all of my sell decisions like this but I think Fairfax is a generational opportunity so I don't want to make a mistake. My current plan is to sell when I expect forward ROE drop below 10% because that's my hurdle rate. I chose it because it's long term equity returns and it's what I needed to make to be comfortable when I was made redundant in 2012. It's designed to keep me invested as Fairfax has a lot of right tails and I want to be exposed to them as long as possible.

 

I think consistent double digit ROEs will lead to multiple expansion. Right now the streak is at 4 which includes 2024 because it will be hard to lose money in Q4. I think the streak can run to 8 years at least given the current outlook. The outlook will change but I think its a small leap that ROE averages double digits for 8 years or more.  If so the remaining shareholders might want to stay where they are being treated well. That could lead to untold multiple expansion. The beauty is its a free option because the base return is so high.

 

If anyone feels comfortable sharing their own sell plan, please do. At the very least I think it is worth thinking about. I think mine is going to be hard to stick to. Hopefully because the multiple is so high but growth is still good and not because I see something I think is better and I'm wrong about.

[Haryana]

Not much change in value by T60 add. Not a reason to sell.

 

I like your idea of 10% hurdle. 

 

[wisowis]

I don't think an index add will provide the huge opportunity to sell that you think it will, my 2 cents at least.

 

Personally, it will be difficult to sell because all my shares are in a taxable account with a low-cost basis, and I am in my prime earning years. It would have to be some combination of serious multiple expansion, a return to the dark ages of Fairfax that were checkered by poor capital allocation decisions, and/or a generational buying opportunity in...something else.

 

Biggest benefit from a December 2024 index add would be that the Fairfax 2025 thread won't be filled with posts speculating about index inclusion. 

[nwoodman]

I will accept low double digit returns, given tax considerations may even accept a little lower.  I figured we were at the 11%-12% CAGR point at the start of the year in terms of book and price appreciation so good thing I was content with that as an outcome.

I have been willing to hold Berkshire on this basis for 15ys+ and personally think the forward prospects for Fairfax are better given exposure to .  It’s got to be trading north of 1.5x’s adjusted book to even bother with a calculator these days
 

The index add is more about answering a couple of my own thesis, so more of a curiosity than a line in the sand.

[UK]

2 hours ago, SafetyinNumbers said:

Fairfax is likely to be added to the S&P//TSX Composite in December 2024 according to CIBC. They estimate 900k shares of index demand. Since stock prices are just supply and demand, it's possible Fairfax has a big price movement around this event either up or down depending on the flows. 

 

I expect the price movement will be upward but it's possible many investors are using the index add to lighten up their positions because it was a catalyst they were waiting for and they don't see another catalyst so the risk is multiple contraction and a drawdown. If there are enough of those shareholders the stock could whipsaw lower. 

 

In the case where the index buyers overwhelm short term oriented shareholders it will be up to value-oriented shareholders to provide supply. Given this board's collective holdings of Fairfax probably rank it a top 10 shareholder it's a pretty amazing resource that we can tap into.

 

Please share how you think about the sell decision. Is it all at once? Is it based on price or value? What's the rationale behind either decision? I want to avoid a sell decisions based on concentration as I think sizing is unique to every individual.

 

I want to make it clear, I don't  analyze all of my sell decisions like this but I think Fairfax is a generational opportunity so I don't want to make a mistake. My current plan is to sell when I expect forward ROE drop below 10% because that's my hurdle rate. I chose it because it's long term equity returns and it's what I needed to make to be comfortable when I was made redundant in 2012. It's designed to keep me invested as Fairfax has a lot of right tails and I want to be exposed to them as long as possible.

 

I think consistent double digit ROEs will lead to multiple expansion. Right now the streak is at 4 which includes 2024 because it will be hard to lose money in Q4. I think the streak can run to 8 years at least given the current outlook. The outlook will change but I think its a small leap that ROE averages double digits for 8 years or more.  If so the remaining shareholders might want to stay where they are being treated well. That could lead to untold multiple expansion. The beauty is its a free option because the base return is so high.

 

If anyone feels comfortable sharing their own sell plan, please do. At the very least I think it is worth thinking about. I think mine is going to be hard to stick to. Hopefully because the multiple is so high but growth is still good and not because I see something I think is better and I'm wrong about.

 

I think we kind of discussed this already, but I really do not not have a strict sell plan and major drivers for me for any decission to sell, assuming there is nothing new or bad with the business itself, would probably be 1. allocation size, which is very personal thing for everyone, but my criteria is it should not make my sleep bad (I feel this is somewhere in the 30-40 max percent range for me for FFH, but this could change with time) 2. valuation, which is even more vague question, but as of today, I feel that a valuation of more than 1.7-2 BV could also start to hurt my sleep, because above this level I would probably start to fear the downside of reverting valuation, especially for a such concentrated position. So in this case I would probably trim it with the growing valuation and this could be a mistake, but it is high probability I will do it. Again, assuming there is nothing bad with business itself, I think I would keep at least 5-10 percent position regardless the price/valuation. I doubt index entry will triger sell decission making here, so I plan just to cheer it well, maybe even with a bottle of champagne:))

 

Edited November 13 by UK

[villainx]

3 minutes ago, UK said:

 

I think we kind of discussed this already, but I really do not not have a strict sell plan and major drivers for me for any decission to sell, assuming there is nothing new or bad with business itself, would probably be 1. allocation size, which is very personal thing for everyone, but my criteria is it should not make my sleep bad (I feel this is somewhere in the 30-40 max percent range for me for FFH, but this could change with time) 2. valuation, which is even more vague question, but as of today, I feel that a valuation of more than 1.7-2 BV could also start to hurt my sleep, because above this level I would probably start to fear the downside of reverting valuation, especially for a such concentrated position. So in this case I would probably trim it with the growing valuation and this could be a mistake, but it is high probability I will do it. Again, assuming there is nothing bad with business itself, I think I would keep at least 5-10 percent position regardless the price. I doubt index entry will triger sell decission making here, so I plan just to cheer it well:))

 

 

 

 

Sounds like you should add more in anticipation of the 1.7+ BV!

 

Just kidding.  It's a tricky spot to be in.  I've been thinking about this type of situation.  But for myself, it seems hold and worry about it later type of situation.  Kind of with Costco, BRK, and Apple.  

[UK]

3 hours ago, SafetyinNumbers said:

My current plan is to sell when I expect forward ROE drop below 10% because that's my hurdle rate.

 

Btw, would not it be at like 1.5 BV at 15 percent ROE or 2 BV at 20 percent ROE?

[UK]

1 minute ago, villainx said:

 

 

Sounds like you should add more in anticipation of the 1.7+ BV!

 

Just kidding.  It's a tricky spot to be in.  I've been thinking about this type of situation.  But for myself, it seems hold and worry about it later type of situation.  Kind of with Costco, BRK, and Apple.  

 

Oh yea, if not for the first criteria:). Otherwise I still think it is a buy, only do not look to the price chart:))

[Thrifty3000]

Industry average P/E is 12. Prem puts the normal earnings floor around $125 per share. 12 x $125 = $1,500.

 

I definitely wouldn’t sell for less than that.

[Viking]

The challenge with selling Fairfax is we keep discovering ‘there’s more gold in them thar hills.’ Which boosts intrinsic value higher. Which then boosts what you thought was a reasonable selling price.
 

The most recent example is excess of FV over CV for non-insurance associate and consolidated holdings. It has ballooned to $1.9 billion (pre-tax), up a staggering $900 million in 2024. That is a $40/share (pre-tax) increase in intrinsic value just in 9 months of 2024. That is not included in EPS. Or book value. But is real value creation… just ask Buffett. Economic value vs accounting value.

 

Should investors only pay attention to accounting value? What do you think Buffett would say?
 

Excess of FV over CV is up $2.5 billion over the past 4 years (it was in a $600 million deficiency in 2020). The fair value marks for a few large holdings (like Fairfax India) is criminally low. So the actual increase in intrinsic value the past 4 years is even higher than $2.5 billion. More gold - well for investors who are willing to look for it. 
 

Fairfax’s reported EPS in each of the past few years is understated. By quite a bit. As a result, book value is understated. By quite a bit.
 

So the ROE thar people are using from the past few years is understating what Fairfax is actually delivering. This means the P/BV multiple investors are using is also too low. 
 

This ‘problem’ is only going to get worse. Eurobank’s share price is still below TBV. Poseidon looks like it is turning the corner. BIAL is growing like a weed. There are more examples. And Fairfax is growing the size of its non-insurance associate and consolidated holdings, with Sleep Country being the most recent addition. 
 

I love it when i discover these kinds of problems. They just keep popping up with Fairfax…

 

Edited November 13 by Viking

[Haryana]

Muddy: fair value marks are criminally high

 

Viking: fair value marks are criminally low

 

Does it confirm criminality?

[giulio]

Thanks for posting this @SafetyinNumbers. Happy to share my analysis.

I review my ffh valuation annually when they release the annual report. As I stated in the other thread, I like to use look through earnings and at fy23 I had IV at around $1800.

Using Book value I get $1500 but I am aware buybacks are distorting the calculations.

To reach the lower bound of IV the index addition would need to generate a 20% pop in price. 

If it happens, I WILL NOT sell any shares.

The reason being that I would expect ffh to grow IV over time.

Simple as that.

At $1800 I might trim the position a bit as there are a couple of interesting ideas I would like to add to.

 

Best,

G

[SafetyinNumbers]

11 hours ago, wisowis said:

I don't think an index add will provide the huge opportunity to sell that you think it will, my 2 cents at least.

 

I’m not selling but I know of at least one fund that plans to exit on the index add regardless of price because it’s the catalyst they have been waiting for. I think a lot of investors make their decision on price as opposed to value so I expect others will sell as well. Like I stated in the original post, we could also whipsaw downward but that’s not my read. I’m wrong a lot.

 

Where do you think we close on Dec 20? Below where we are now?

[SafetyinNumbers]

8 hours ago, Thrifty3000 said:

Industry average P/E is 12. Prem puts the normal earnings floor around $125 per share. 12 x $125 = $1,500.

 

I definitely wouldn’t sell for less than that.

That earnings floor is dated and doesn’t include much contribution from the equity portfolio. $175 on a given FTM period seems more likely than $125.

[SafetyinNumbers]

8 hours ago, UK said:

 

Btw, would not it be at like 1.5 BV at 15 percent ROE or 2 BV at 20 percent ROE?

No, the relationship between P/B and ROE is exponential because of how much value the compounding at higher rates creates. 

[UK]

12 minutes ago, SafetyinNumbers said:

No, the relationship between P/B and ROE is exponential because of how much value the compounding at higher rates creates. 

 

Thanks, perhaps I have to think more about this.

[backtothebeach]

Maybe look for a precedent of previous index adds and how they behaved intraday on and around the add date.

[giulio]

29 minutes ago, SafetyinNumbers said:

I know of at least one fund that plans to exit on the index add regardless of price because it’s the catalyst they have been waiting for.

Good for long term holders that some "investors" buy or sell without any regards for intrinsic value

[SafetyinNumbers]

20 minutes ago, backtothebeach said:

Maybe look for a precedent of previous index adds and how they behaved intraday on and around the add date.

Anecdotally, I find it to be very idiosyncratic. For Fairfax, I am more optimistic because unlike a lot of adds that are already widely held by the largest active managers, Fairfax is not. What I don’t know is if these funds will finally succumb to the pressure and consider getting to market weight once it’s in the 60 if not sooner. 

[UK]

25 minutes ago, backtothebeach said:

Maybe look for a precedent of previous index adds and how they behaved intraday on and around the add date.

For what it is worth, IIRC FFH went down 7 or so percent when it was droped from MSCI Canada index in 2012. But maybe it was more of a surprise at the time vs expectations now.

[sleepydragon]

12 hours ago, SafetyinNumbers said:

Fairfax is likely to be added to the S&P//TSX Composite in December 2024 according to CIBC. They estimate 900k shares of index demand. Since stock prices are just supply and demand, it's possible Fairfax has a big price movement around this event either up or down depending on the flows. 

 

I expect the price movement will be upward but it's possible many investors are using the index add to lighten up their positions because it was a catalyst they were waiting for and they don't see another catalyst so the risk is multiple contraction and a drawdown. If there are enough of those shareholders the stock could whipsaw lower. 

 

In the case where the index buyers overwhelm short term oriented shareholders it will be up to value-oriented shareholders to provide supply. Given this board's collective holdings of Fairfax probably rank it a top 10 shareholder it's a pretty amazing resource that we can tap into.

 

Please share how you think about the sell decision. Is it all at once? Is it based on price or value? What's the rationale behind either decision? I want to avoid a sell decisions based on concentration as I think sizing is unique to every individual.

 

I want to make it clear, I don't  analyze all of my sell decisions like this but I think Fairfax is a generational opportunity so I don't want to make a mistake. My current plan is to sell when I expect forward ROE drop below 10% because that's my hurdle rate. I chose it because it's long term equity returns and it's what I needed to make to be comfortable when I was made redundant in 2012. It's designed to keep me invested as Fairfax has a lot of right tails and I want to be exposed to them as long as possible.

 

I think consistent double digit ROEs will lead to multiple expansion. Right now the streak is at 4 which includes 2024 because it will be hard to lose money in Q4. I think the streak can run to 8 years at least given the current outlook. The outlook will change but I think its a small leap that ROE averages double digits for 8 years or more.  If so the remaining shareholders might want to stay where they are being treated well. That could lead to untold multiple expansion. The beauty is its a free option because the base return is so high.

 

If anyone feels comfortable sharing their own sell plan, please do. At the very least I think it is worth thinking about. I think mine is going to be hard to stick to. Hopefully because the multiple is so high but growth is still good and not because I see something I think is better and I'm wrong about.

so the $flow demand is about $1B range. It’s really not much, imo. When a 100B mktcap company is added to SP500, there’s a demand of $10B, the shares will move between 5-10%. $1b demand likely just 2%-4% movement 

[Hoodlum]

8 minutes ago, sleepydragon said:

so the $flow demand is about $1B range. It’s really not much, imo. When a 100B mktcap company is added to SP500, there’s a demand of $10B, the shares will move between 5-10%. $1b demand likely just 2%-4% movement 

 

Daily trading for Canada and US stock is ~40k shares.  So around 400k share over the 10 business days given to index funds to buy shares.  If the 900k shares needed for the indexes is accurate then that would be a significant increase in volume, not even accounting for other funds and investor who will buy in as well.  

[sleepydragon]

2 minutes ago, Hoodlum said:

 

Daily trading for Canada and US stock is ~40k shares.  So around 400k share over the 10 business days given to index funds to buy shares.  If the 900k shares needed for the indexes is accurate then that would be a significant increase in volume, not even accounting for other funds and investor who will buy in as well.  

i have done research in the past for US indices. The days of volume is a weak predictor for returns. The total $flow is going to dominate. But that’s for US index.

 

The easiest way to get an estimate is to go to TSX’s index website, and looked at past additions of companies of similar mktcaps, and calculate the average returns between the day before announcement till effective date. 

[SafetyinNumbers]

17 minutes ago, Hoodlum said:

 

Daily trading for Canada and US stock is ~40k shares.  So around 400k share over the 10 business days given to index funds to buy shares.  If the 900k shares needed for the indexes is accurate then that would be a significant increase in volume, not even accounting for other funds and investor who will buy in as well.  

In Canada are you including the ATS volume as well or just the TSX?

 

[Jaygo]

I bought 58 shares the day before earnings in my TFSA. The plan was to sell in December into strength from the index add. I'm pretty sure I will still do that but I do want to see how things go. If we get into the high 1400's i'm almost sure to sell. If it stays flattish Ill likely sell part, if it drops I think ill just hold on.

 

I also hold 100 shares in a taxable account that was entirely bought on my Home Equity line of credit as part of my Smith Maneuver. I plan to hold those shares for a longer time frame and continue to pay the 700 a month interest to offset my damn taxes.

 

With my plans in place. ill give my thoughts.

 

I think the index add will likely add some but not much buying pressure. Canadian index buyers are a funny bunch. Many people look south of the border with awe and jealousy. I think the highest volume of new money goes to that. Lots of old people still hold the garbage funds from the major Canadian banks but those folks are not adding, many are now selling to fund their retirements. 

 

(I must add that I think this is a terrible idea and basically feel Canada and our markets are about as cheap as one could hope for and see a wonderful future ahead once we have our "trump" moment. Canada is becoming Argentina and our markets reflect that, but I believe that is temporary and with better leadership we will be back to being the envy of the world. Everything lines up in Canada's favor, think Peter Zeihan with a touque and a tims cup.)

 

So in January when many people add to their investments I dont think as much goes into the Canadian index as historically has. As active working people send the money into US index funds primarily.

 

All that said i think we will see about a 4-7% slow grind higher of FFH until around January 15th