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

[SafetyinNumbers]

1 hour ago, dartmonkey said:

I think both views expressed above can be reconciled by differentiating between the short term and the long term.

 

In the short term, the market is a voting machine, and that vote is expressed by supply and demand, with a new demand (like indexers buying 4% of outstanding shares) likely to push the price up. This could be an important consideration for someone who wants to buy new shares or trade around a position.

 

In the long term, the market is a weighing machine, and what counts is primarily sustainable earnings, and secondarily, asset values anchoring the value. If Fairfax continues earning 15% on equity for another 10 years, its price will be about 4 times today's price, and whether or not FFH is in the TSX 60 will be completely irrelevant to that. The focus of long term investors should be on earnings, on new investments and how likely they are to produce future earnings. 

 

For a long-term investor, inclusion in the TSX 60 and a subsequent share price increase also has 2 furthert small advantages, IMO:

(i) it makes liquidity less of an issue, since FFH adds the option of issuing shares, for instance if they wanted to buy a big Indian bank or reaquire assets from OMERS;

(ii) it reinforces Fairfax's visibility and credibility, in Canada and overseas, when it wants to do a big transaction. Admittedly, the lack of inclusion does not seem to be hampering Fairfax at the moment, but index inclusion would just be one more sign that the dark ages of the tech shorts, the Blackberry position, the macro bet on deflation, etc. are behind us and that the new Fairfax is concentrated on insurance and solid investments of the insurance float in sensible businesses.

I like Fairfax because it’s cheap and growing fast. The multiple expansion is a right tail that can dramatically increase returns. I know most value investors ignore it and it’s why most of the professional ones are out of business or have become quality investors. The only types of buyers that don’t care about the value factor are passive, quality/quant/heuristic and yield buyers.
 

I think when a big buyer that doesn’t care about price is going to buy we could have price discovery as the rest of the shareholders who care about the value factor have a decision to make. That’s why I started this thread in the first place. I want to appreciate how extant shareholders think about selling as it might help me appreciate the clearing price.
 

In the short and long term, it’s still about supply and demand. I’m not sure if we would have had the run we have had without FFH clearing out 7m out of 27m shares (including TRS). I’m also not sure how high the multiple can get if FFH puts up 8 years of 15%+ ROE (halfway through that now) and gets added to the 60. I want that exposure to the upside and it’s hard for me to see a lot of downside.

 

 

[73 Reds]

11 minutes ago, SafetyinNumbers said:

That might be true but a broad market pullback likely lifts forward ROE for FFH if they reallocate from the fixed income portfolio to quality equities. FFH can also be aggressive with buybacks given the low P/B multiple and fast growing BV which will help stem a broader decline and also increase forward ROE. I don’t consider price volatility as risk the way most market practitioners do but everyone is on their own idiosyncratic journey. 

Exactly right.  In fact I subscribe to Buffett's philosophy of evaluating whether an investment makes sense with an assumption that it cannot be traded for years.  Takes self-gratification  of watching a price ticker completely out of the equation and gets you to the heart of investing.

[Parsad]

10 hours ago, SafetyinNumbers said:

The question was meant to ask if you didn’t own it already would you start a position now? Try putting yourself in the shoes of someone who wasn’t as smart or lucky as you who just happened upon FFH today. It doesn’t have to start at a 25% weight. Let’s say 5% for arguments sake.

 

No, I would not be buying FFH at 1.4-1.5 times book...even as a starter position.  The only insurance company that I would pay that for is Berkshire, because book doesn't accurately reflect the intrinsic value of its non-insurance operating businesses. 

 

Fairfax does not have that much allocated to quality non-insurance operating businesses which could justify a price to book similar to Berkshire.  Maybe one day, but it isn't there yet.

 

Cheers!

[Parsad]

10 hours ago, SafetyinNumbers said:

Hard disagree. The index add has the potential to result in long term multiple expansion. The higher the multiple, the more resilient FFH is to shocks. That’s a very good thing for very long term shareholders. If Berkshire wasn’t in the benchmark it would probably have a much lower valuation today, FWIW. 

 

 

That's incorrect, since it would have no bearing whatsoever on intrinsic value.  Multiple expansion is irrelevant to intrinsic value. 

 

Your focus should be on growth in intrinsic value, because the stock price will ultimately follow intrinsic value.  Index inclusion or a lower level of volatility actually gives investors less opportunity to add FFH at discounted prices to intrinsic value.  Cheers!

[Parsad]

10 hours ago, Jaygo said:

@Parsad @73 Reds 

 

Just food for thought, I think you are both likely correct but you may not be looking at it from other peoples perspective. You both are older and very likely far richer than myself so do not fully understand my motivation.

 

I trade trade around positions I like in an attempt to boost performance and allow for higher risk securities as well. Admittedly it doesn't always work but usually it does. 

 

I have a core holding in Fairfax that I hold similar to your beliefs, long term without much handwringing. It is also the around the maximum percentage I am willing to hold in any one security. 

 

But I also took on some debt and bought a good bit more expecting the index inclusion as outlined by @SafetyinNumbers. His reasoning was very sound and I like the company. I sold yesterday as the index inclusion did not happen, and paid off the portion of margin. I made $ 14,000 USD on the trade. It could have been better but at my stage in life 14k is important, I'm not retired, I work and have a family of 4 to support so this was a great result all based off what I felt was a very very good probability of index inclusion and the run up into it.

 

I would imagine some on the forum say 14k, lol this guys doing all that for 14k. Just buy and hold you fool!

Well yes I am because in my life 14k is about a month of hard work.

 

If i'm still doing this in my 50's and 60's I may have screwed up but for now this is how I "beat the market" 

 

Everyone is at a different stage in life. I'm in the maximization stage and even a few % per year make a huge difference.

 

Sure, that's completely fine.  But there is a difference between speculation (trading) and actual investing.  

 

Trading would include buying and selling assets to make short-term gains solely on events, catalysts, momentum or news.

 

Investing would be buying an asset below intrinsic value and selling near or above intrinsic value...timeframe or events aren't important.  

 

Cheers!

[SafetyinNumbers]

2 hours ago, Parsad said:

 

That's incorrect, since it would have no bearing whatsoever on intrinsic value.  Multiple expansion is irrelevant to intrinsic value. 

 

Your focus should be on growth in intrinsic value, because the stock price will ultimately follow intrinsic value.  Index inclusion or a lower level of volatility actually gives investors less opportunity to add FFH at discounted prices to intrinsic value.  Cheers!

 

Intrinsic value is some multiple of book value to say that multiple expansion is irrelevant doesn't make sense to me. I think FFH is trading well below intrinsic value. It's fine if you think we are there or above it already, that's what makes a market.

[SafetyinNumbers]

2 hours ago, Parsad said:

 

No, I would not be buying FFH at 1.4-1.5 times book...even as a starter position.  The only insurance company that I would pay that for is Berkshire, because book doesn't accurately reflect the intrinsic value of its non-insurance operating businesses. 

 

Fairfax does not have that much allocated to quality non-insurance operating businesses which could justify a price to book similar to Berkshire.  Maybe one day, but it isn't there yet.

 

Cheers!

 

You have high return expectations than most. I think FFH goes up 2-5x in 5 years which is well above my hurdle rate of 10%. If we get multiple contraction then I may be wrong. 

[Munger_Disciple]

5 hours ago, Parsad said:

 

That's incorrect, since it would have no bearing whatsoever on intrinsic value.  Multiple expansion is irrelevant to intrinsic value. 

 

 

Not only that, multiple expansion reduces the margin of safety as the gap between price and intrinsic value narrows or even disappears. 

[Parsad]

4 hours ago, SafetyinNumbers said:

 

Intrinsic value is some multiple of book value to say that multiple expansion is irrelevant doesn't make sense to me. I think FFH is trading well below intrinsic value. It's fine if you think we are there or above it already, that's what makes a market.

 

In 1998, FFH traded at 4 times book value...I'm guessing that's multiple expansion...it took 15 years for anyone who bought to get their money back.

 

Intrinsic value isn't some static multiple of book.  Intrinsic value is the total lifetime cash that can be taken out of a business discounted to the present.  It is at once a finite number that may continue to grow or increase over time or it may collapse...depending on the business.  

 

Cheers!

[Parsad]

4 hours ago, SafetyinNumbers said:

 

You have high return expectations than most. I think FFH goes up 2-5x in 5 years which is well above my hurdle rate of 10%. If we get multiple contraction then I may be wrong. 

 

It will almost certainly go up 2 times over the next five years if Prem hits his 15% ROE.  5X would be pure speculation unless they hit some major investments out of the park...they would have to compound book at close to 38% per year for the next 5 years!  Possible, but not likely unless you have opportunities like they had during the tech wreck, housing crisis or pandemic.

 

Cheers!

[Parsad]

2 hours ago, Munger_Disciple said:

 

Not only that, multiple expansion reduces the margin of safety as the gap between price and intrinsic value narrows or even disappears. 

 

+1!  Cheers!

[SafetyinNumbers]

4 hours ago, Parsad said:

 

It will almost certainly go up 2 times over the next five years if Prem hits his 15% ROE.  5X would be pure speculation unless they hit some major investments out of the park...they would have to compound book at close to 38% per year for the next 5 years!  Possible, but not likely unless you have opportunities like they had during the tech wreck, housing crisis or pandemic.

 

Cheers!

5x is compounding the book at 20%which is possible given the equity portfolio and optionality on the asset allocation and a doubling of the multiple. 
 

Cheers!

[SafetyinNumbers]

4 hours ago, Parsad said:

 

In 1998, FFH traded at 4 times book value...I'm guessing that's multiple expansion...it took 15 years for anyone who bought to get their money back.

 

Intrinsic value isn't some static multiple of book.  Intrinsic value is the total lifetime cash that can be taken out of a business discounted to the present.  It is at once a finite number that may continue to grow or increase over time or it may collapse...depending on the business.  

 

Cheers!

I consider intrinsic value as the price from which I can earn a 10% return going forward. The discount rate that is used is very important and something you failed to mention. 
 

I’m not buying FFH at 4x BV and I wouldn’t suggest anyone else do it but the stock issued back then by the company to buy insurance businesses is part of the reason we have the opportunity we do now. It was also incredibly accretive to book value. For the shareholders who bought at a much lower multiple, it’s worked out quite well. 

[SafetyinNumbers]

6 hours ago, Munger_Disciple said:

 

Not only that, multiple expansion reduces the margin of safety as the gap between price and intrinsic value narrows or even disappears. 

It reduces margin of safety for an investor buying at a high multiple. For a business owner that bought at a much lower multiple it increases resilience to shocks and increases the odds of accretive acquisitions. I think FFH is a good capital allocator so I want them to have more tools in their tool box in the very long term.

[Maverick47]

58 minutes ago, SafetyinNumbers said:

For a business owner that bought at a much lower multiple it increases resilience to shocks and increases the odds of accretive acquisitions. I think FFH is a good capital allocator so I want them to have more tools in their tool box in the very long term.

@SafetyinNumbers, Are you thinking about the chance that FFH might use their stock more frequently than cash as currency for acquisitions when and if it starts selling in the market for a higher multiple to book than it does now?  That would be consistent with the Henry Singleton/Teledyne example.  It’s a nuance that I have to confess I hadn’t been thinking of…I’d mostly been focused on the opportunity for FFH to reduce share count and hadn’t been thinking that when presented with the right set of circumstances by Mr. Market, a rational capital allocator would serve the owners well by being willing to increase share count from time to time….

[SafetyinNumbers]

2 hours ago, Maverick47 said:

@SafetyinNumbers, Are you thinking about the chance that FFH might use their stock more frequently than cash as currency for acquisitions when and if it starts selling in the market for a higher multiple to book than it does now?  That would be consistent with the Henry Singleton/Teledyne example.  It’s a nuance that I have to confess I hadn’t been thinking of…I’d mostly been focused on the opportunity for FFH to reduce share count and hadn’t been thinking that when presented with the right set of circumstances by Mr. Market, a rational capital allocator would serve the owners well by being willing to increase share count from time to time….

I don’t see why not and it’s what they have done in the past. Hopefully to buy a high quality business at a fair price. If FFH traded at 2x BV when Alleghany was in play, it could have easily outbid Berkshire and it would have been a very accretive deal that also let Y shareholders defer their gains. 

[Viking]

17 hours ago, Parsad said:

 

No, I would not be buying FFH at 1.4-1.5 times book...even as a starter position.  The only insurance company that I would pay that for is Berkshire, because book doesn't accurately reflect the intrinsic value of its non-insurance operating businesses. 

 

Fairfax does not have that much allocated to quality non-insurance operating businesses which could justify a price to book similar to Berkshire.  Maybe one day, but it isn't there yet.

 

Cheers!

How a long term investor values Fairfax today (buy, hold or sell) will depend primarily on their assessment of how good (or not) the management team is. For P/C insurers, the management team is what determines future ROE (beyond the glide path of the next couple of years). 

 

Based on what they have done the past 4 years, my view is the management team at Fairfax is best in class among P/C insurance companies. 
 

Fairfax’s valuation today is still at the low end (P/BV and PE) when compared to peers (the better managed P/C insurance companies). That suggests to me that the stock continues to be undervalued.

—————

Fairfax is a very different animal than Berkshire. Fairfax builds shareholder value in completely different ways than Berkshire. Valuing Fairfax using a Berkshire Hathaway lens makes no sense to me - square peg, round hole. 
 

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. 
2.) Taking average duration of fixed income portfolio to 1.2 years in Dec 2021. And then pushing it out to about 3.5 years. 

3.) FFH - TRS: this investment has been one of Fairfax’s best ever.

4.) Massive stock buybacks over the past 7 years. 

5.) Selling pet insurance for $1 billion after-tax gain. 
6.) Investment in Stelco. Steel producer? Home run.

 

Buffett would not have done any of these deal/things.

 

I could list another 10 things that Fairfax has done in the recent past that has built significant shareholder value. None of which Buffett would consider. 
 

Comparing Berkshire Hathaway and Fairfax today is like trying to compare great athletes. One is past its prime (Berkshire Hathaway). The other is just entering its prime (Fairfax). Rather than wish/wait for Fairfax to be more like Berkshire Hathaway I am instead just enjoying/appreciating how they play the game. Fairfax is doing things we have never seen before. 

Edited December 11 by Viking

[Munger_Disciple]

4 hours ago, SafetyinNumbers said:

It reduces margin of safety for an investor buying at a high multiple. 

 

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. 

[73 Reds]

40 minutes ago, Viking said:

How a long term investor values Fairfax today (buy, hold or sell) will depend primarily on their assessment of how good (or not) the management team is. For P/C insurers, the management team is what determines future ROE (beyond the glide path of the next couple of years). 

 

Based on what they have done the past 4 years, my view is the management team at Fairfax is best in class among P/C insurance companies. 
 

Fairfax’s valuation today is still at the low end (P/BV and PE) when compared to peers (the better managed P/C insurance companies). That suggests to me that the stock continues to be undervalued.

—————

Fairfax is a very different animal than Berkshire. Fairfax builds shareholder value in completely different ways than Berkshire. Valuing Fairfax using a Berkshire Hathaway lens makes no sense to me - square peg, round hole. 
 

Examples? 
1.) Pivot in P/C insurance in India. Monetizing ICICI Lombard and seeding Digit when it was a startup.
2.) Taking average duration of fixed income portfolio to 1.2 years in Dec 2021. And then pushing it out to about 3.5 years. 

3.) FFH - TRS: this investment has been one of Fairfax’s best ever.

4.) Massive stock buybacks over the past 7 years. 

5.) Selling pet insurance for $1 billion after-tax gain. 
6.) Investment in Stelco. Steel producer? Home run.

 

Buffett would not have done any of these deal/things.

 

I could list another 10 things that Fairfax has done in the recent past that has built significant shareholder value. None of which Buffett would consider. 
 

Comparing Berkshire Hathaway and Fairfax today is like trying to compare great athletes. One is past its prime (Berkshire Hathaway). The other is just entering its prime (Fairfax). Rather than wish/wait for Fairfax to be more like Berkshire Hathaway I am instead just enjoying/appreciating how they play the game. Fairfax is doing things we have never seen before. 

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.  

[SafetyinNumbers]

2 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. 

I think you are confusing margin of safety which refers to each individual investor’s capital at risk with drawdown risk. If one is investing like a business owner the selling shares at 4x BV is going to be incredibly accretive to book value and likely returns assuming whatever is being bought with the proceeds has a reasonable return. If I’m a business owner, why wouldn’t I want that?

[Munger_Disciple]

22 minutes ago, SafetyinNumbers said:

I think you are confusing margin of safety which refers to each individual investor’s capital at risk with drawdown risk. If one is investing like a business owner the selling shares at 4x BV is going to be incredibly accretive to book value and likely returns assuming whatever is being bought with the proceeds has a reasonable return. If I’m a business owner, why wouldn’t I want that?

 

I don't think I am confused; you are not thinking this thru' IMO. If you are selling stock at 4x BV and I am an existing public shareholder who is able to sell my shares at that price, I will sell & get out. If I have a higher margin of safety in an investment, I will get a higher return if it works out compared to an investment with lower margin of safety. 

[SafetyinNumbers]

7 minutes ago, Munger_Disciple said:

 

I don't think I am confused; you are not thinking this thru' IMO. If you are selling stock at 4x BV and I am an existing public shareholder who is able to sell my shares at that price, I will sell & get out. If I have a higher margin of safety in an investment, I will get a higher return if it works out compared to an investment with lower margin of safety. 

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. 

[dartmonkey]

In the hopes of preventing a nasty scuffle breaking out, let me just say that I appreciate both sides of this argument. If FFH were to go to 4x book, I would be selling most of my shares, just because there would be no margin of safety and a high risk of a drawdown. But I would probably still keep some, because I would be quite confident that Fairfax would be able to use those high prices to increase value for ongoing shareholders, by ALSO selling shares but using that cash to invest in assets with a reasonable return. I think having a high P:B ratio would be unarguably good for Fairfax, because of this latter opportunity. It would also be very good for my portfolio, and I would be happy to sell 3/4 of my holdings and lock in that return.

 

The only 2 downsides I can see, is that it would obviously not be good for Fairfax repurchasing shares and keeping the company small - no one should want it to go to $1 trillion like Berkshire. And if Fairfax were to go on to make great returns over the subsequent 10 years, at very high prices, being at 4x would have dumped me out of most of my position, so I wouldn't get all that upside. But if I can get $4000 US per share today, a bird in hand would have compensated me very well for having missed out on x birds in the bush. 

[73 Reds]

7 minutes ago, dartmonkey said:

In the hopes of preventing a nasty scuffle breaking out, let me just say that I appreciate both sides of this argument. If FFH were to go to 4x book, I would be selling most of my shares, just because there would be no margin of safety and a high risk of a drawdown. But I would probably still keep some, because I would be quite confident that Fairfax would be able to use those high prices to increase value for ongoing shareholders, by ALSO selling shares but using that cash to invest in assets with a reasonable return. I think having a high P:B ratio would be unarguably good for Fairfax, because of this latter opportunity. It would also be very good for my portfolio, and I would be happy to sell 3/4 of my holdings and lock in that return.

 

The only 2 downsides I can see, is that it would obviously not be good for Fairfax repurchasing shares and keeping the company small - no one should want it to go to $1 trillion like Berkshire. And if Fairfax were to go on to make great returns over the subsequent 10 years, at very high prices, being at 4x would have dumped me out of most of my position, so I wouldn't get all that upside. But if I can get $4000 US per share today, a bird in hand would have compensated me very well for having missed out on x birds in the bush. 

High P/B provides an opportunity to use shares as currency for future acquisitions.  Companies like BRK and Fairfax can prosper in any environment and if high valuation is the only thing wrong with the stock, I'd never sell in a taxable account unless the proceeds were needed for something entirely non-investment related.  

[Viking]

Three years ago, in Dec 2021, Fairfax sold 10% of Odyssey at a premium to BV and used the proceeds to purchase 2 million Fairfax shares at US$500/share. Instead of using Fairfax shares, which were in the penalty box, they used Odyssey shares. Brilliant. Yes, a non-traditional way for a P/C insurance company to access a large amount of cash.

 

At Sept 30, 2024, Fairfax’s book value was $1,030/share. Its stock price today is $1,416/share.

 

Guess how much Fairfax would have to pay today if it wanted to buy 2 million shares of Fairfax on the open market (like it did in December 2021)? It would cost them much more than $1,416/share.

 

In three short years, this has become one of Fairfax’s great investments - and a home run for shareholders.

 

The icing on the cake is Fairfax has the ability to buy back the 10% stake in Odyssey when they are ready (when it becomes the best use of their free cash flow). I think the re-purchase price was set at the time the deal was struck (but I will admit I am fuzzy on how the mechanics work).

 

When i say the management team at Fairfax has been best in class over the past 4 years this is one example of why (there are many more). Now it really is an unfair fight (comparing Fairfax to peers). Because the Fairfax team does not have the same constraints placed on them that most of the P/C insurance industry has (when it comes to capital allocation and being able to take advantage of market opportunities).

Edited December 11 by Viking