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

[Munger_Disciple]

1 hour ago, 73 Reds said:

High P/B provides an opportunity to use shares as currency for future acquisitions. 

 

Why would a rational seller accept totally overpriced shares for their company? Only a fool or a BS artist would, and I am not sure that's the type of company FFH would want to buy.

Edited December 11 by Munger_Disciple

[dartmonkey]

5 hours ago, Viking said:

Examples? 
1.) Pivot in P/C insurance in India. Monetizing ICICI Lombard and seeding Digit when it was a startup. We know Digit went to Berkshire Hathaway first , and BRK said no. 

 

I didn't know this. How would we know, has Watsa ever mentioned that?

 

Watsa would certainly seem to have a big advantage on Buffett, when it comes to feeling comfortable with an insurance business in India and its management. 

[73 Reds]

1 minute ago, Munger_Disciple said:

 

Why would a rational seller accept totally overpriced shares for their company? Only a fool or a BS artist would, and I am not sure that's the type of company FFH would want to buy.

Not sure I understand the question.  Motivated sellers will accept a viable offer.  If there are competing offers and a stock alternative is higher than any cash offers, why would a seller necessarily reject it?  After all, once the transaction is completed, the seller can always sell any or all of the shares.  And as has been discussed here, the quality and future of the acquiring company has a lot to do with "valuation".

[Munger_Disciple]

3 minutes ago, 73 Reds said:

Not sure I understand the question.  Motivated sellers will accept a viable offer.  If there are competing offers and a stock alternative is higher than any cash offers, why would a seller necessarily reject it?  After all, once the transaction is completed, the seller can always sell any or all of the shares.  And as has been discussed here, the quality and future of the acquiring company has a lot to do with "valuation".

 

Because there is inherent risk in an (overvalued) stock deal between the time deal is struck and the time deal closes. If I were seller to a company with overvalued stock, I would insist on cash payment or a stock deal with a put option. 

[73 Reds]

2 minutes ago, Munger_Disciple said:

 

Because there is inherent risk in an (overvalued) stock deal between the time deal is struck and the time deal closes. If I were seller to a company with overvalued stock, I would insist on cash payment or a stock deal with a put option. 

That's fine but your COBF namesake implies that you recall Berkshire's acquisition of General RE with overvalued stock.  Worked out well for all parties involved.  The definition of what is "overvalued" may be far different even for the same party depending on the circumstances.

[Munger_Disciple]

1 minute ago, 73 Reds said:

That's fine but your COBF namesake implies that you recall Berkshire's acquisition of General RE with overvalued stock.  Worked out well for all parties involved.  The definition of what is "overvalued" may be far different even for the same party depending on the circumstances.

 

Not for a long time. It wasn't a great deal for Berkshire (despite the fact that they were using overvalued stock) and Buffett even wrote about it in later annual reports. Berkshire inherited a lot of GenRe problems and had to replace management to fix it. GenRe would have blown up w/o Berkshire deal from 9/11 exposure and derivative bets. 

[dartmonkey]

20 minutes ago, Munger_Disciple said:

1 hour ago, 73 Reds said:

High P/B provides an opportunity to use shares as currency for future acquisitions. 

 

Why would a rational seller accept totally overpriced shares for their company? Only a fool or a BS artist would, and I am not sure that's the type of company FFH would want to buy.

It doesn't have to be shares for shares. FFH could perfectly well issue shares and use the cash for an acquisition. If the timing makes it awkward to issue shares, they could even sell swaps, or sell the ones they already have. The point is that they would have access to more liquidity. 

[Munger_Disciple]

6 minutes ago, dartmonkey said:

It doesn't have to be shares for shares. FFH could perfectly well issue shares and use the cash for an acquisition. If the timing makes it awkward to issue shares, they could even sell swaps, or sell the ones they already have. The point is that they would have access to more liquidity. 

 

They have to stick the overvalued stock to someone, whether it is the company they want to acquire or their own public stockholders. All this crazy stuff is based on greater fool theory. That's why Buffett repeatedly said he would rather see BRK stock price trade within shouting distance of intrinsic value, not at an overvalued price. I would rather FFH create intrinsic value growth thru' operational excellence. 

Edited December 11 by Munger_Disciple

[73 Reds]

1 minute ago, Munger_Disciple said:

 

Not for a long time. It wasn't a great deal for Berkshire (despite the fact that they were using overvalued stock) and Buffett even wrote about it in later annual reports. Berkshire inherited a lot of GenRe problems and had to replace management to fix it. GenRe would have blown up w/o Berkshire deal from 9/11 exposure and derivative bets. 

Both parties made out well.  The issue is really not debatable.  I've been doing private deals for decades and there are always issues that arise after a transaction has been closed but as a buyer you anticipate and discount your purchase offer for any such issues.  Buffett would have liked a cleaner General RE but he fixed the issues.  That's life.

[Munger_Disciple]

1 minute ago, 73 Reds said:

Both parties made out well.  The issue is really not debatable.  I've been doing private deals for decades and there are always issues that arise after a transaction has been closed but as a buyer you anticipate and discount your purchase offer for any such issues.  Buffett would have liked a cleaner General RE but he fixed the issues.  That's life.

 

Well, I think you are wrong. BRK made lemonade out of a lemon. It's not a great deal. Just go and look at the GenRe results post acquisition for the following 5 years or so. 

[73 Reds]

Just now, Munger_Disciple said:

 

Well, I think you are wrong. BRK made lemonade out of a lemon. It's not a great deal. Just go and look at the GenRe results post acquisition for the following 5 years or so. 

Buffett didn't buy the company for a 5 year hold.  And he used overvalued shares to do it.  You can cherry pick a time period to be right about just about anything but the bigger picture doesn't distort the ultimate outcome.

[Munger_Disciple]

Just now, 73 Reds said:

Buffett didn't buy the company for a 5 year hold.  And he used overvalued shares to do it.  You can cherry pick a time period to be right about just about anything but the bigger picture doesn't distort the ultimate outcome.

 

As I said, you are welcome to think what you want but I remain unconvinced. 

[73 Reds]

6 minutes ago, Munger_Disciple said:

 

As I said, you are welcome to think what you want but I remain unconvinced. 

Not trying to convince you or anyone but the larger issue of using overvalued shares to make acquisitions does not imply that the seller is an idiot.  In fact, your opinion of the Gen Re deal kind of proves my point.  

Edited December 11 by 73 Reds
spelling

[Viking]

7 minutes ago, Munger_Disciple said:

 

They have to stick the overvalued stock to someone, whether it is the company they want to acquire or their own public stockholders. All this crazy stuff is based on greater fool theory. That's why Buffett repeatedly said he would rather see BRK stock price trade within shouting distance of intrinsic value, not at an overvalued price. I would rather FFH create intrinsic value growth thru' operational excellence. 

Beauty is in the eye of the beholder. We are all adults… my assumption is those who do these large deals are also adults - with their eyes wide open. 
 

Ben Graham, Warren Buffett’s teacher, says Mr Market is a manic depressive and is there to serve an investor; not to inform them. Graham also said buy low. And sell high. 
 

Management teams are supposed to ignore Mr Market?

[Munger_Disciple]

29 minutes ago, Viking said:

Beauty is in the eye of the beholder. We are all adults… my assumption is those who do these large deals are also adults - with their eyes wide open. 
 

Ben Graham, Warren Buffett’s teacher, says Mr Market is a manic depressive and is there to serve an investor; not to inform them. Graham also said buy low. And sell high. 
 

Management teams are supposed to ignore Mr Market?

 

At this point stock trading at 4x BV is purely hypothetical. We are discussing such a what if scenario only because @SafetyinNumbers brought it up. I think it is crazy to root for a highly overvalued stock (I think he even brought up 6x BV) especially if you are a long term shareholder still in accumulation mode. 

Having said that, I won't be unhappy if FFH trades at 4x or 6x BV. I would definitely cash out 100% of my shares at those prices. I prefer though for it to trade in a reasonable range relative to its BV, with the growth in share price mainly resulting from organic growth in BV, especially now that the stock trades at close to 1.4x BV. 

Edited December 11 by Munger_Disciple

[SafetyinNumbers]

8 minutes ago, Viking said:

Beauty is in the eye of the beholder. We are all adults… my assumption is those who do these large deals are also adults - with their eyes wide open. 
 

Ben Graham, Warren Buffett’s teacher, says Mr Market is a manic depressive and is there to serve an investor; not to inform them. Graham also said buy low. And sell high. 
 

Management teams are supposed to ignore Mr Market?

All good points.

 

Most market participants think markets are efficient. Premium analysis is used by investment banks and their corporate clients to justify the sale of a company well below intrinsic value. Companies also use overvalued paper often to raise cash or to buy companies. AOL/Time Warner is a classic example. 
 

FFH did the same thing Berkshire in the late 90s. They bought struggling insurance companies with high combined ratios and large floats by issuing equity. The shares outstanding went up by more than a third and more than half of book value growth was from issuing shares at a premium to growth. 
 

if we are business owners or if we are investors, why wouldn’t we want that to happen again? 

 

[SafetyinNumbers]

5 minutes ago, Munger_Disciple said:

 

At this point stock trading at 4x BV is completely hypothetical. We are discussing such a what if scenario only because @SafetyinNumbers brought it up. I think it is crazy to root for a highly overvalued stock (I think he even brought up 6x BV) especially if you are a long term shareholder still in accumulation mode. 

Having said that, I won't be unhappy if FFH trades at 4x or 6x BV. I would definitely cash out 100% of my shares at those prices. I prefer though for it to trade in a reasonable range relative to its BV, with the growth in share price resulting from organic growth in BV.

I’m not in accumulation mode. It’s 45% of my portfolio. I don’t want to keep adding but it keeps getting better and giving me chances. I’m also trying to encourage others to take a look and to appreciate the right tails and not assume that the risk/reward is not favourable to consider starting a position at this price. That being said maybe Parsad will be right and the forward return won’t meet their hurdle rate. My hurdle is only 10% so I have more margin of safety.
 

I remembered the high end of the P/B being 6x on this chart but I think I rounded up. I didn’t pick a fantastic number for the sake of it. I based it on history. I’m not saying it’s going to happen again but I am saying it can. Which is why my sell criteria is growth based and not valuation based but I concede it will get difficult to hold on if multiples do start going north of where I’m comfortable adding if I didn’t own any but I’m certainly not going to complain about it.

 

[Parsad]

6 hours ago, Munger_Disciple said:

 

Not just for an investor buying at high multiples; it reduces the margin of safety for all investors going forward including for those who bought previously at much lower multiples. In other words, forward returns for all investors will be reduced, so investors are better off selling at that point and use the proceeds in a more attractive opportunity. 

 

+1!  Cheers!

[Parsad]

5 hours ago, 73 Reds said:

I'm not sure that Berkshire is past its prime.  The reality is the company has dramatically changed from the days Buffett bought and occasionally sold equities.  Companies like BRK and even Fairfax are impossible to value using DCF because there is no way to predict the makeup of each company even several years into the future.  Since you are investing in Management's ability to create shareholder value with new purchases/acquisitions, indeed management is the most important asset for each of these companies.  I believe there are incredible opportunities in health care and energy on the horizon and there is no reason why BRK could not allocate its vast resources in these and any other future investments where having buying power may once again prove to be an advantage.  The main problem for Berkshire is we have long since been living in an era of free or very cheap money, yet even so Buffett has managed to more than hold his own.  Which is why Berkshire is probably the best all weather investment one can own.  

 

+1!  On top of that, Berkshire's capitalization is in that top tier of companies that could be counted on two hands.  It's why it has a AAA rating across the board.  Rock solid with all three stool legs firing and a ton of cash on hand while loads more come in every day.  

 

I would compare these athletes (FFH and BRK) as marathoners, not sprinters.  In that case, Berkshire's best days are not behind it, but continue to be in front.  Yes, it won't compound at the same rate, but it will exist long after every one else has run out of gas! 

 

Fairfax has the opportunity get there and is headed in the right direction, but it is not there yet.  Berkshire is Jordan with six rings and still making a ton of money off of endorsements in retirement.  Fairfax has just won its first championship...hopefully many more to come!  Cheers!

[Parsad]

3 hours ago, SafetyinNumbers said:

That’s fine and maybe we all should even though it might be on its way to 6x BV. As Parsad said, the goal is to grow intrinsic value and it grows faster if issuing equity well above intrinsic value or if doing accretive things with the proceeds. Prem’s not selling and the company will be worth more if they take these actions. I just don’t understand why anyone would be disappointed if the multiple went up a lot from here but you both seem to be. 

 

It's rare for equity to be so overvalued for a long-period of time.  The gravity of market fundamentals usually corrects within a year or two.  FFH took advantage of overvalued stock back in 1998/1999...the purchases didn't turn out so good short-term, as generally other comparable assets for acquisition are also overvalued to a degree.  

 

Buffett always wanted his stock to be fairly valued...which was impossible.  When issuing equity, he wanted it to be fair to both Berkshire shareholders and the selling party.  Otherwise, he preferred to just use cash.  That moral code might not maximize shareholder value, but the maintenance of fair value or close to it, encouraged a long-term base of shareholders for Berkshire.  That's why Berkshire shareholders have the least turnover of any S&P500 company.  I think Prem's sentiment is probably along similar lines.  He wants long-term loyal shareholders...not such volatility that he loses that base.

 

Cheers!

[Parsad]

1 hour ago, 73 Reds said:

That's fine but your COBF namesake implies that you recall Berkshire's acquisition of General RE with overvalued stock.  Worked out well for all parties involved.  The definition of what is "overvalued" may be far different even for the same party depending on the circumstances.

 

GenRe was overvalued as well.  It's rare when one company's stock is overvalued, but target companies in the same industry aren't.  Cheers!

[SafetyinNumbers]

1 minute ago, Parsad said:

 

It's rare for equity to be so overvalued for a long-period of time.  The gravity of market fundamentals usually corrects within a year or two.  FFH took advantage of overvalued stock back in 1998/1999...the purchases didn't turn out so good short-term, as generally other comparable assets for acquisition are also overvalued to a degree.  

 

Buffett always wanted his stock to be fairly valued...which was impossible.  When issuing equity, he wanted it to be fair to both Berkshire shareholders and the selling party.  Otherwise, he preferred to just use cash.  That moral code might not maximize shareholder value, but the maintenance of fair value or close to it, encouraged a long-term base of shareholders for Berkshire.  That's why Berkshire shareholders have the least turnover of any S&P500 company.  I think Prem's sentiment is probably along similar lines.  He wants long-term loyal shareholders...not such volatility that he loses that base.

 

Cheers!

The 20% ROE for four years straight in the late 90s for FFH and BRK’s returns were based on very strong equity markets. That’s not the case for FFH right now. It has much higher earnings consistency now than it ever has because the float to equity ratio is so high and the insurance business so profitable. May/e we can’t achieve multiples like other high return insurance companies like KNSL or RLI because our earnings are too volatile but if the conditions ever existed to do it, it’s over the next 5 years. I’m not sure what the odds are but it’s better than none.

[Parsad]

1 hour ago, 73 Reds said:

Not trying to convince you or anyone but the larger issue of using overvalued shares to make acquisitions does not imply that the seller is an idiot.  In fact, your opinion of the Gen Re deal kind of proves my point.  

 

GenRe was not a great deal...it was ok.  That was the reason Joe Brandon was fired.  Cheers!

[Munger_Disciple]

4 hours ago, Parsad said:

 

GenRe was not a great deal...it was ok.  That was the reason Joe Brandon was fired.  Cheers!

 

  agree that GenRe was not a good deal. Buffett said this in the 2016 Annual Report about the GenRe deal: 

 

Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock – a boatload of stock – to buy General Reinsurance in late 1998. After some early problems, General Re has become a fine insurance operation that we prize. It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. My error caused Berkshire shareholders to give far more than they received (a practice that – despite the Biblical endorsement – is far from blessed when you are buying businesses). 

Edited December 12 by Munger_Disciple

[SafetyinNumbers]

7 hours ago, Munger_Disciple said:

 

  agree that GenRe was not a good deal. Buffett said this in the 2016 Annual Report about the GenRe deal: 

 

Unfortunately, I followed the GEICO purchase by foolishly using Berkshire stock – a boatload of stock – to buy General Reinsurance in late 1998. After some early problems, General Re has become a fine insurance operation that we prize. It was, nevertheless, a terrible mistake on my part to issue 272,200 shares of Berkshire in buying General Re, an act that increased our outstanding shares by a whopping 21.8%. My error caused Berkshire shareholders to give far more than they received (a practice that – despite the Biblical endorsement – is far from blessed when you are buying businesses). 

This is resulting though isn’t it? Buffett issued expensive stock to buy Gen Re and clearly expected a better result than what he got. Execution is the hardest part of probabilistic investing. Everything I buy is clearly cheap if the companies execute as expected but about a third of the time they don’t. Thankfully the winners more than offset the losers over time (at least so far).