Fairfax 2025

[SafetyinNumbers]

5 hours ago, petec said:

Has anyone attempted to reverse-engineer the terms of the Brit minority stake sale that has now been closed? Sorry if I missed it.

 
National Bank assessed the purchase price. I think it was a 6% preferred return from issue.

 

 

[petec]

33 minutes ago, SafetyinNumbers said:

 
National Bank assessed the purchase price. I think it was a 6% preferred return from issue.

 

 

 

If it is 6% that would be astonishing!

[dartmonkey]

When is the annual report released?

 

I see that last year, they published 2023 Q4 results on Feb 15, and there is also the letter that accompanied the annual report, with the letter dated March 8 but with no mention in the press releases of when it was actually released. This year, we got Q4 results on Feb 13, and there is also no announcement about when the letter might come out, unless I'm looking in the wrong place. Has the company ever announced when the annual report will be released?

[SafetyinNumbers]

22 minutes ago, dartmonkey said:

When is the annual report released?

 

I see that last year, they published 2023 Q4 results on Feb 15, and there is also the letter that accompanied the annual report, with the letter dated March 8 but with no mention in the press releases of when it was actually released. This year, we got Q4 results on Feb 13, and there is also no announcement about when the letter might come out, unless I'm looking in the wrong place. Has the company ever announced when the annual report will be released?

They said on the call it will be filed on March 7. 

[SafetyinNumbers]

3 hours ago, petec said:

 

If it is 6% that would be astonishing!

I’m just doing simple math based on the filings. We know they put in ($375m), we know the dividends they got paid (~$60.3m) and what they sold for ($383m). Might actually be closer to 5.5% but I don’t think it matters much to be exactly accurate. The 5 year yield at the time OMERS entered into the deal was 80bps so they earned a big premium for arguably very little risk. 
 

 

[Hoodlum]

35 minutes ago, SafetyinNumbers said:

I’m just doing simple math based on the filings. We know they put in ($375m), we know the dividends they got paid (~$60.3m) and what they sold for ($383m). Might actually be closer to 5.5% but I don’t think it matters much to be exactly accurate. The 5 year yield at the time OMERS entered into the deal was 80bps so they earned a big premium for arguably very little risk. 
 

 

I agree that it was the timing during Covid that makes this look so amazing in hindsight.  We will likely see a similar situation with the Odyssey Re deal with OMERS.  
 

I suspect Fairfax is also paying relatively little to hold the TRS on their shares, as that was also done during the same period. 
 

it is quite amazing how Fairfax took advantage of the short low interest period during Covid, but also recognized that interest were going to jump and prepared for that as well. Not only in relation to their long bonds but also likely realizing how inflation and higher interest rates was going to drive growth quickly. 
 

A mini book could be created from these short years, once all is said and done. 
 

Edited Monday at 06:35 PM by Hoodlum

[Cigarbutt]

1 hour ago, SafetyinNumbers said:

I’m just doing simple math based on the filings. We know they put in ($375m), we know the dividends they got paid (~$60.3m) and what they sold for ($383m). Might actually be closer to 5.5% but I don’t think it matters much to be exactly accurate. The 5 year yield at the time OMERS entered into the deal was 80bps so they earned a big premium for arguably very little risk. 

It's too early to tell the % dividend on preferred equity issued. On the initial capital (375M received), already the following dividends have been paid: 18.7M in 2022, 40.6M in 2023 and 12.9M in 1st 6 months of 2024 to which one may need to add a dividend paid to Class A shares (Omers) during the fall of 2024 and another 8M (?) upon repurchase (383M) of the minority interest last December. We'll know more with Brit's 2024 annual filings.

At any rate, this was a good deal (for both FFH and Omers) even if dividends paid have a relative tax disadvantage versus straight debt.

[SafetyinNumbers]

49 minutes ago, Cigarbutt said:

It's too early to tell the % dividend on preferred equity issued. On the initial capital (375M received), already the following dividends have been paid: 18.7M in 2022, 40.6M in 2023 and 12.9M in 1st 6 months of 2024 to which one may need to add a dividend paid to Class A shares (Omers) during the fall of 2024 and another 8M (?) upon repurchase (383M) of the minority interest last December. We'll know more with Brit's 2024 annual filings.

At any rate, this was a good deal (for both FFH and Omers) even if dividends paid have a relative tax disadvantage versus straight debt.

We know it’s not that different since they paid a class B dividend in March as well so at most there was 9 months of accrued dividends. They can’t pay Class B dividends until the Class A are fully caught up, correct?

[Cigarbutt]

52 minutes ago, SafetyinNumbers said:

We know it’s not that different since they paid a class B dividend in March as well so at most there was 9 months of accrued dividends. They can’t pay Class B dividends until the Class A are fully caught up, correct?

yes

[nwoodman]

2 hours ago, Hoodlum said:

I suspect Fairfax is also paying relatively little to hold the TRS on their shares, as that was also done during the same period. 

While that would be awesome, surely this is at the prevailing rate, SOFR + spread.  Cheap compared to IV growth, but unlikely to be locked in. I am tipping 4.75%+2%=6.75%.  

[Santayana]

5 hours ago, Hoodlum said:

I agree that it was the timing during Covid that makes this look so amazing in hindsight.  We will likely see a similar situation with the Odyssey Re deal with OMERS.  
 

I suspect Fairfax is also paying relatively little to hold the TRS on their shares, as that was also done during the same period. 
 

it is quite amazing how Fairfax took advantage of the short low interest period during Covid, but also recognized that interest were going to jump and prepared for that as well. Not only in relation to their long bonds but also likely realizing how inflation and higher interest rates was going to drive growth quickly. 
 

A mini book could be created from these short years, once all is said and done. 
 

It could be called "Hiding in Plain Sight" or something like that.

 

[SafetyinNumbers]

2 hours ago, nwoodman said:

While that would be awesome, surely this is at the prevailing rate, SOFR + spread.  Cheap compared to IV growth, but unlikely to be locked in. I am tipping 4.75%+2%=6.75%.  

They were probably smart enough to do it in CAD. Is there a way to check?

[nwoodman]

1 hour ago, SafetyinNumbers said:

They were probably smart enough to do it in CAD. Is there a way to check?

Not sure, other than their debt raises, there aren’t too many details available on their instruments of choice, but interesting point about the FX implication.  CAD would definitely help the cause .
 

I thought you might have had a handle on who the Total Return Payer was, pretty sure you figured it was one of the Canadian Banks so I think there is a high probability it is in CAD.  

 

Anyway some notes attached, it’s definitely floating rather fixed as they have discussed a “ higher TRS expense” previously that coincided with rising rates.

Fairfax Financial’s Total Return Swaps on Its Own Shares.pdf

[Viking]

45 minutes ago, nwoodman said:

Not sure, other than their debt raises, there aren’t too many details available on their instruments of choice, but interesting point about the FX implication.  CAD would definitely help the cause .
 

I thought you might have had a handle on who the Total Return Payer was, pretty sure you figured it was one of the Canadian Banks so I think there is a high probability it is in CAD.  

 

Anyway some notes attached, it’s definitely floating rather fixed as they have discussed a “ higher TRS expense” previously that coincided with rising rates.

Fairfax Financial’s Total Return Swaps on Its Own Shares.pdf 58.32 kB · 4 downloads

@nwoodman, I love these summaries of yours. They are a great read and very informative. 
 

A couple of things that really jump out at me with the FFH-TRS position:

1.) How opportunistic Fairfax was to put these on in late 2020/early 2021.

2.) The massive size of the position - how concentrated the investment was.

3.) The large amount of leverage involved - the cash outlay from Fairfax was very small given the size of the exposure.

 

Late 2020/early 2021 must  have been very dark days at Fairfax’s head office (in terms of where investor sentiment and the stock price was). It says something about their character/investment process that they had the wherewithal to put this position on.

 

4.) Unwinding the position is an elegant way for them to buy back stock in large blocks without overpaying - if what they did in Q4 is indicative of what they plan on doing with the remaining 1.7 million shares. 

And it also looks like they also had an exit strategy in mind that they are now implementing…

 

With earnings so high, Fairfax should be able to continue to buy back large chunks of the TRS moving forward - and still do lots of other things from a capital allocation perspective. In other words, they can have their cake and eat it too.
 

As an investor, I would love it if Fairfax is able to reduce effective shares outstanding by another 1.7 million shares over the next couple of years

Edited Tuesday at 02:04 AM by Viking

[nwoodman]

2 hours ago, Viking said:

@nwoodman, I love these summaries of yours. They are a great read and very informative. 
 

A couple of things that really jump out at me with the FFH-TRS position:

1.) How opportunistic Fairfax was to put these on in late 2020/early 2021.

2.) The massive size of the position - how concentrated the investment was.

3.) The large amount of leverage involved - the cash outlay from Fairfax was very small given the size of the exposure.

 

Late 2020/early 2021 must  have been very dark days at Fairfax’s head office (in terms of where investor sentiment and the stock price was). It says something about their character/investment process that they had the wherewithal to put this position on.

 

4.) Unwinding the position is an elegant way for them to buy back stock in large blocks without overpaying - if what they did in Q4 is indicative of what they plan on doing with the remaining 1.7 million shares. 

And it also looks like they also had an exit strategy in mind that they are now implementing…

 

With earnings so high, Fairfax should be able to continue to buy back large chunks of the TRS moving forward - and still do lots of other things from a capital allocation perspective. In other words, they can have their cake and eat it too.
 

As an investor, I would love it if Fairfax is able to reduce effective shares outstanding by another 1.7 million shares over the next couple of years

Thanks @Viking. Agree with all your points.  There is a degree of sophistication to the way Fairfax is going about things that I wish I had appreciated more.  There is also a frankness in the CC’s that is quite refreshing

 

“Peter Clarke

Right. Yes, no, that's -- the TRS on Fairfax, that's strictly an investment for us. We put it back on in 2021 or thereabouts and it's performed extremely well and we think it will continue to perform very well. As we said, we can see strong underwriting results going forward. Our interest in dividend income is strong, our associate income is strong. But we feel we'll be able to continue to compound book value at a very high rate or acceptable rate, and our share price will follow. You know, we're not trading at a high multiple if you look at our peers and so for us, it's still an investment, we very much like.”

 

The thing that make’s my head spin a little is their short and medium term opportunity set.  $835m of timeshare financing at an aggregate >10% was not on my bingo card for January.
 

For a while I have felt they have/perceive more opportunities than they have available cash.  Just hope they don’t get over their skis but so far, so good.

 

 

[Txvestor]

1 hour ago, nwoodman said:

Thanks @Viking. Agree with all your points.  There is a degree of sophistication to the way Fairfax is going about things that I wish I had appreciated more.  There is also a frankness in the CC’s that is quite refreshing

 

“Peter Clarke

Right. Yes, no, that's -- the TRS on Fairfax, that's strictly an investment for us. We put it back on in 2021 or thereabouts and it's performed extremely well and we think it will continue to perform very well. As we said, we can see strong underwriting results going forward. Our interest in dividend income is strong, our associate income is strong. But we feel we'll be able to continue to compound book value at a very high rate or acceptable rate, and our share price will follow. You know, we're not trading at a high multiple if you look at our peers and so for us, it's still an investment, we very much like.”

 

The thing that make’s my head spin a little is their short and medium term opportunity set.  $835m of timeshare financing at an aggregate >10% was not on my bingo card for January.
 

For a while I have felt they have/perceive more opportunities than they have available cash.  Just hope they don’t get over their skis but so far, so good.

 

 

I think the plan all along was to get the share count back down to ~20M where it was before the Allied world acquisition which led to them issuing a lot of shares. I vaguely remember Prem saying in on of the Q calls that it was the plan but over time. I guess it took 7-8yrs but here we are if they unwind the TDS with buybacks we would be right about at that level. Of course that would also increase the gap between IV and BV as the shares now trade modestly above BV. 
looking at those Brit numbers, most of the Fairfax insurance subs are of the quality that they probably deserve to be trading at 2x BV. And many P&C insurers are trading for those levels and more. 
 

Vacatia was def a surprise, and the way the deal was structured was even more so. Firstly the owner operator selected with a substantially experienced and strong track record with significant skin in the game was very important. Then the financial hurdle with the higher interest rates means there's some confidence this post covid travel wave will have legs. This of frankly the type of asset light investment where $25M could turn into $400M in a few years if all goes well. Bear in mind with Thomas cook India, Grivalia etc. They're not new to these lines of business. 

[This2ShallPass]

1 hour ago, Txvestor said:

I guess it took 7-8yrs but here we are if they unwind the TDS with buybacks we would be right about at that level. Of course that would also increase the gap between IV and BV as the shares now trade modestly above BV. 

I did a quick math, if they unwound TRS at today's prices then BV/sh will go down from $1060 to $1026 and Fairfax would have paid $2.5B. Since insurance companies are valued at P/B multiple primarily, is buying back shares the right use of cash? It intuitively feels right to me but the math gets harder when you buy at 1.4x BV.

 

Berkshire had a stated policy of not buying at >1.2V BV until 2018 (when their market cap was ~$400B, 10x size of Fairfax today). I think their switch made sense since their operating businesses were much bigger.

 

[SafetyinNumbers]

5 hours ago, This2ShallPass said:

I did a quick math, if they unwound TRS at today's prices then BV/sh will go down from $1060 to $1026 and Fairfax would have paid $2.5B. Since insurance companies are valued at P/B multiple primarily, is buying back shares the right use of cash? It intuitively feels right to me but the math gets harder when you buy at 1.4x BV.

 

Berkshire had a stated policy of not buying at >1.2V BV until 2018 (when their market cap was ~$400B, 10x size of Fairfax today). I think their switch made sense since their operating businesses were much bigger.

 

I think of it as them buying back shares when they entered the TRS on a deferred payment plan. That  is, the TRS, was just financing. 

[petec]

21 hours ago, SafetyinNumbers said:

I’m just doing simple math based on the filings. We know they put in ($375m), we know the dividends they got paid (~$60.3m) and what they sold for ($383m). Might actually be closer to 5.5% but I don’t think it matters much to be exactly accurate. The 5 year yield at the time OMERS entered into the deal was 80bps so they earned a big premium for arguably very little risk. 
 

 

 

Far point about the 5y. I was forgetting that little period of insanity.

[petec]

13 hours ago, Viking said:

Late 2020/early 2021 must  have been very dark days at Fairfax’s head office (in terms of where investor sentiment and the stock price was). It says something about their character/investment process that they had the wherewithal to put this position on.

 

My boss in about 2005, in my first investing job, had once asked Stephen Markel (I think) what he thought of Prem. The answer was: he's got balls of steel.

 

I've never forgotten that!

[petec]

9 hours ago, Txvestor said:

Vacatia was def a surprise, and the way the deal was structured was even more so. Firstly the owner operator selected with a substantially experienced and strong track record with significant skin in the game was very important. Then the financial hurdle with the higher interest rates means there's some confidence this post covid travel wave will have legs. This of frankly the type of asset light investment where $25M could turn into $400M in a few years if all goes well. Bear in mind with Thomas cook India, Grivalia etc. They're not new to these lines of business. 

 

Not sure I agree. The operator has huge upside but not much downside - not really what I would call skin in the game. And it's anything but asset light. It just doesn't have any equity because it is levered to the hilt!

[Txvestor]

8 minutes ago, petec said:

 

Not sure I agree. The operator has huge upside but not much downside - not really what I would call skin in the game. And it's anything but asset light. It just doesn't have any equity because it is levered to the hilt!

That assumes you know the net worth of the operator.  

$25M is not chump change to a lot of operators. Yea it's a rounding error to Fairfax, but to someone with execution capability and specialized skills it's an opportunity they probably wouldn't have without the likes of Fairfax at their side. 
Although there is limited details about this deal, my understanding is that they are leasing time shares/vacation rentals long term, and subletting them short term.

I don't think they will be actually owning those assets. 
Yes the financing rate is high, and that is where the asymmetric risk/reward comes in. 

as long as Fairfax is not on the hook for those loans(which is what I suspect since anything they back wouldn't be at those rates) then I think the onus is on the operator to make it work. And those margins in that industry can be spectacular. We will know in a few years but it could be a home run. 
 

[Viking]

Is Fairfax the big fish that got away? Musings on mistakes that investors keep making.

 

Introduction

 

Investors have lots of regrets. Missed opportunities. Not buying a stock that afterwards turns into a big winner. Or selling a winning position way too early. ‘The big fish that got away’ kind of story.

 

These stories resonate so much because big fish are very hard to catch. When you have one nibbling at the end of your fishing line you need to make sure you hook it and reel it in. It might be a long time before another one comes along.

 

In 2021, Fairfax’s shares delivered a return of 44%. After such a big run in the share price over such a short period of time (one year), an investor looking at Fairfax in early 2022 (who did not own shares) might have reasonably concluded ‘Dang, missed that one!’ and not invested. ‘I’ll just wait for a sell off in the shares and buy them then.’ At the time, this logic and approach probably made perfect sense! It was Fairfax after all… a perennial underachiever. Of course the shares would sell off at some point (like they always had over the previous decade).

 

In 2022, Fairfax’s shares delivered a return of 21%. Most stocks got crushed in the bear market of 2022, so Fairfax’s performance compared to the market averages was exceptional (+40% compared to the S&P500). That same investor, looking at Fairfax in early 2023, might have come to the same conclusion: ‘Dang, missed that one! For the second year in a row!’ and again decided to not invest in Fairfax. The fish story just got a little bigger.

 

In 2023, Fairfax’s shares delivered a return of 55%. What? A third year in a row of significant outperformance compared to the market averages? Surely that meant that Fairfax’s shares were now way overvalued - that’s the only thing that explains Fairfax’s improbable run over the previous 3 years. So, should a rational investor buy shares in Fairfax in early 2024? Are you kidding? No. Obviously the easy money has been made with this investment. Only a sucker would buy shares after the run they have had the past three years. Our fish story is turning in to a whopper of a tale.

 

What happened in 2024? After three great years, Fairfax must (finally) have had a terrible year in 2024… right? Nope. In 2024, Fairfax’s shares delivered a gain of 51%. Over the past 4 years, Fairfax’s shares have returned 308% (plus another $45/share in dividends), making it a ‘3 bagger’ in Peter Lynch parlance.

 

Investors who did not buy shares (or those who sold their position way too early) are now left asking themselves what happened? How did they miss out on one of the great investments of the past four years? How did they let such a big fish keep slipping through their fingers - year after year? After all, it was right there - staring them right in the face! Our fish story just keeps getting bigger and bigger.

 

So here we are at the beginning of 2025… and investors who don’t own the stock (or those who sold their position way too early) are once again asking themselves ‘What do I do now?’

 

Fairfax, the ‘big fish,’ continues to taunt investors.

 

 

—————

 

What is one of the keys to being a successful investor?

 

In other posts we focus on what investors need to do to be successful. In this post we are going to flip the script and focus on mistakes investors have been making with Fairfax over the past 4 years. Avoiding common mistakes is a great way to improve returns.

 

Charlie Munger passed away a little over a year ago. In this post we honour Charlie, who was the master of inverting.

 

Avoid doing stupid things

 

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” Charlie Munger

 

Truth be told, many of the people who did well with Fairfax as an investment over the past 4 years likely didn’t do well because they were smarter than most other investors. Rather, many did well simply because they avoided making big mistakes. Some of which are reviewed below.

 

In the remainder of this post, we are going to review 5 mistakes that some (many?) investors have made when analyzing Fairfax over the past 4 years:

1. Using a faulty investment framework.
2. Getting badly burned by a stock.
3. ‘Past performance is the best predictor of future performance’
4. Missing out on a big winner (that you knew about).
5. Watching a stock you sold spike higher in price.

—————

 

Brains/intellect mistake

 

The first mistake we are going to review is one of logic.

 

1.) Using a faulty investment framework.

 

Price (by itself) is a terrible investment framework to use to value a stock. Of course, what matters to value a stock is your estimate of the intrinsic value of the company and how it compares to its current share price.

 

Building a good investing framework

 

One of my all-time favourite books on investing is ‘One up on Wall Street’ by Peter Lynch. It was published way back in 1989. And it is full of investing wisdom - it has many useful mental models to help investors build out their investing framework. And because mental models don’t have a shelf life - they are still very useful for investors today.

 

‘Ive Got It, I’ve Got It. What Is It?’ - One Up on Wall Street by Peter Lynch

 

As outlined in Chapter 7 of his book, before trying to value a stock, Lynch would first drop it in to one of 6 categories:

• Slow growers - ‘Large and aging companies that are expected to grow slightly faster than the GNP.’ P100
• Stalwarts -‘ These multibillion-dollar hulks are not exactly agile climbers, but they’re faster than the slow growers.’ P104
• Fast growers - ‘These are among my favourite investments: small, aggressive new enterprises that grow 20 to 25 percent a year. If you chose wisely, this is the land of the 10- to 40- baggers.’ P108
• Cyclicals - ‘A cyclical is a company whose sales and profits rise and fall in regular if not completely predictable fashion.’ P109
• Turnarounds - ’Turnaround candidates have been battered, depressed, and often can barely drag themselves into chapter 11.’ P113
• Asset plays - ‘An asset play is any company that’s sitting on something valuable that you know about, but that the Wall Street crowd has overlooked.’ P115

Why did Lynch categorize stock opportunities?

 

Classifying stocks properly at the beginning of the process is critical. Because the classification determines the proper method to use to analyze and then to value the stock.

 

‘Putting stocks in categories is the first step in developing the story. Now at least you know what kind of story it’s supposed to be. The next step is filling in the details that will help you guess how the story is going to turn out.’ P120

 

Categorize =>  Develop the story => Analysis/forecasts and valuation => Buy (or not) decision

 

An important point is your goal as an investor is not to try and clone other great investors, like Lynch. That is impossible. The key is to copy the parts that resonate and fit with your intellect/psychological wiring. I like the idea of categorizing stocks - but I don’t try and shoehorn all stock opportunities into one of Lynch’s 6 categories listed above. I am a flexible.

 

There is a second important insight

 

Over time, some companies move from one category to another.

 

‘Companies don’t stay in the same category forever. Over my years of watching stocks I’ve seen hundreds of them start out fitting one description and end up fitting another.’ P118

 

This highlights the importance of monitoring what is happening at a company (management, fundamentals, business results, prospects). It its critically important to be open minded, flexible and to be rational with what you learn. Because this will help ensure you continue to categorize the company properly. Especially those companies that have lots of things going on. You need to be able to recognize when a change in classification is appropriate.

 

What does this have to do with Fairfax?

 

Over the past decade, it looks to me like Fairfax has changed ‘categories’ 3 times. This is very unusual - most companies don’t change categories once. This is likely an important reason why many investors have missed the opportunity - they had the stock categorized improperly.

 

Below is a highly simplified summary of how I have categorized Fairfax over the past decade:

 

1.) Pre-2019: ‘old Fairfax’

• Ok P/C insurance business. Below average investment management business.

2.) 2019-2021: Turnaround

• Fixing the investment management business (hedges/shorts/investment framework).

3.) 2022-2023: ‘new Fairfax’ - an improved version of ‘old Fairfax’

• Ok P/C insurance business. Ok investment management business.

4.) 2024 to today: new Fairfax - a high quality company

• Above average P/C insurance business. Above average investment management business. Best in class management team.

Information advantage

 

In 2020, no one - investors or analysts - were following Fairfax. It was a hated company. So the few investors who were following the company also had a big information advantage.

 

They were able to recognize the many positive changes that were happening under the hood at Fairfax - a year or so before they actually showed up in the financials. It was like having a crystal ball. All an investor had to do was buy the stock, get their position size right and then be patient.

 

As we begin 2025, the information advantage has shrunk. But my guess is lots of investors/analysts today are categorizing Fairfax the wrong way - they are stuck in ‘Ok P/C insurance business. Ok investment management business.’ And this will likely cause them to use the wrong method to analyze and value the stock.

 

My guess is Fairfax’s P/C insurance business, investment management business and senior management team are all better than most think. As a result, like the past 4 years, I expect Fairfax to continue to outperform the expectations of investors/analysts (in terms of growth in intrinsic business value). This usually is a pretty good set up for a stock (it usually means it is being undervalued).

 

—————

 

Psychological traps

 

The remaining mistakes we will review are the result of using faulty mental models. They get into the behavioural part of investing, that Munger so often talked about.

 

2.) Getting badly burned by a stock

 

Hand on the stove problem: Getting badly burned by a stock is usually a really hard thing to overcome. The mental and financial scars are real. Once that happens, it is really hard to look at the company and be objective. This is probably a much bigger problem for institutional investors (because of the hit to their reputation from putting clients in a chronically poorly performing stock) than individual investors.

 

Fairfax’s stock delivered a lost decade for shareholders (2010 to 2020). It was not a fun time to be a shareholder. Facts are facts.

 

What is the solution? Time. It can take years to work up the courage to go back into the water.

 

3.) Past performance is the best predictor of future performance

 

Investors use lots of rules of thumb when they analyze stocks (called heuristics). This is one of them.

 

How an investment has performed in the past (accounting results, management and share price) is important to understand. But they are not all an investor needs to look at.

 

For example, accounting results tell you what has happened in the past. They don’t tell you what is going to happen in the future. And they certainly don’t tell you what a company is worth or how it should be valued.

 

This is especially true for a turnaround play - like Fairfax was back from 2019 to 2021.

 

For a turnaround that has successfully turned around, focussing on past performance will usually not help much. Actually it is worse than that. Focussing on past results/management decisions will likely lead an investor to materially underestimate the fundamentals of the company and its future earnings. This will lead them to materially undervalue the stock. And this will often cause them to not invest - or to sell a winning position way too early. Exactly what we saw play out with Fairfax year after year.

 

What is the solution? Be inquisitive. And be open minded with what you learn.

 

4.) Missing out on a big winner (that you knew about).

 

It is really hard to buy a stock that is rising in price. Especially if you researched it early on and didn’t pull the trigger (buy any shares). This is also a big problem for many value investors - because buying a stock that is rising in price just doesn’t rhyme with ‘buy low’.

 

And watching the stock just keep powering higher (that you didn’t buy) is about as much fun as repeatedly getting punched in the nose - it just doesn’t feel very good.

 

So what do investors do?

 

For starters they probably take the stock off their watch list - out of sight / out of mind. That makes them feel better. And they say things like ‘I’m not going to chase it’ - because it sounds smart to them at the time. Bottom line, they avoid the stock.

 

Of course, if the stock is a big winner (like Fairfax has been), well this strategy is really dumb. Ignoring the big winners is a really hard way to outperform the market averages, let alone make the big money. Especially if you understand the company/industry (i.e it is in your circle of competence to begin with).

 

What is the solution? Be rational - your brain (investment framework) needs to over-rule your gut (emotions).

 

5.) Watching a stock you sold spike higher in price.

 

How many times have you sold a winning stock way, way too early? Only to regret it year after year after year… as it keeps powering higher. And you think of what could have been… (This was Berkshire Hathaway for me back in the 1990’s and 2000’s.)

 

It is really hard for most investors to buy back a stock that they sold when it is now trading at a much higher price. This mistake is the sister of the one we just discussed.

 

But what do you do when you realize this has happened? Do you buy it back? No, of course not. Because… well, we just reviewed all the reasons in 3.) so we won’t review them again.

 

What to do? Get better with your sell strategy.

 

Most people spend most of their time thinking about what/when to buy a stock. They spend very little time on why/when to sell. So their sell strategy is not very sophisticated - and this leads them open to making behavioural mistakes, like selling a winning position way too early - for not good reasons.   

 

Conclusion

 

‘Investing is simple (not easy).’ Charlie Munger

 

What makes investing so difficult?

 

The biggest mistakes made by investors are often driven by behavioural mistakes.

 

Emotions are an unseen driver of our investment decisions. They can distort/warp a well thought out investment framework. In turn, this can result in poor decisions and sub-optimal returns.

 

It is critical to recognize that emotions (behavioural factors) are a part of the investment process - because we are humans (not robots). But emotional responses can’t be allowed to knock your ship off its intended course.

 

As a result, you must be constantly on your guard. It is important to self-reflect - and to be honest with yourself with what you learn. Make adjustments as needed. It’s important to ensure your emotions aren’t what is sitting in the captain’s chair.

 

Given its incredible run over the past 4 years, is Fairfax’s stock still a buy today?

 

The answer is simple. It will depend on your estimate of what the intrinsic value of the company is today. And how it compares to the price of the stock. And as Munger reminds us, that is also the hard part. (And make sure you don’t fixate on the price move of the stock over the past 4 years  - or that fish story is likely to turn into even more of a whopper of a tale.)

 

—————

 

Narrative

 

Narratives for companies take years to get established. And once established, they are very slow to change (taking years). This works for most companies - where things change slowly.

 

For the past 5 years, it looks to me like the narrative for Fairfax has been continuously running about 12 to 24 months months behind what is actually going on ‘under the hood’ at the company (management, fundamentals/business results, prospects).

 

Interestingly, it looks like the stock price is a leading indicator of the change in narrative. (The narrative only changes after the stock price has gone up.)

 

Change in fundamentals  =>  change in share price  =>  change in narrative

 

PS: This process is really apparent when you read most analyst reports for Fairfax from over the past 4 years.

 

—————

 

To learn more about ‘why we behave as we do’, from the Farnam Street blog:

 

The Psychology of Human Misjudgment, by Charlie Munger

• https://fs.blog/great-talks/psychology-human-misjudgment/

 

 

 

Edited Tuesday at 04:34 PM by Viking

[73 Reds]

1 hour ago, Viking said:

Is Fairfax the big fish that got away? Musings on mistakes that investors keep making.

 

Introduction

 

Investors have lots of regrets. Missed opportunities. Not buying a stock that afterwards turns into a big winner. Or selling a winning position way too early. ‘The big fish that got away’ kind of story.

 

These stories resonate so much because big fish are very hard to catch. When you have one nibbling at the end of your fishing line you need to make sure you hook it and reel it in. It might be a long time before another one comes along.

 

In 2021, Fairfax’s shares delivered a return of 44%. After such a big run in the share price over such a short period of time (one year), an investor looking at Fairfax in early 2022 (who did not own shares) might have reasonably concluded ‘Dang, missed that one!’ and not invested. ‘I’ll just wait for a sell off in the shares and buy them then.’ At the time, this logic and approach probably made perfect sense! It was Fairfax after all… a perennial underachiever. Of course the shares would sell off at some point (like they always had over the previous decade).

 

In 2022, Fairfax’s shares delivered a return of 21%. Most stocks got crushed in the bear market of 2022, so Fairfax’s performance compared to the market averages was exceptional (+40% compared to the S&P500). That same investor, looking at Fairfax in early 2023, might have come to the same conclusion: ‘Dang, missed that one! For the second year in a row!’ and again decided to not invest in Fairfax. The fish story just got a little bigger.

 

In 2023, Fairfax’s shares delivered a return of 55%. What? A third year in a row of significant outperformance compared to the market averages? Surely that meant that Fairfax’s shares were now way overvalued - that’s the only thing that explains Fairfax’s improbable run over the previous 3 years. So, should a rational investor buy shares in Fairfax in early 2024? Are you kidding? No. Obviously the easy money has been made with this investment. Only a sucker would buy shares after the run they have had the past three years. Our fish story is turning in to a whopper of a tale.

 

What happened in 2024? After three great years, Fairfax must (finally) have had a terrible year in 2024… right? Nope. In 2024, Fairfax’s shares delivered a gain of 51%. Over the past 4 years, Fairfax’s shares have returned 308% (plus another $45/share in dividends), making it a ‘3 bagger’ in Peter Lynch parlance.

 

Investors who did not buy shares (or those who sold their position way too early) are now left asking themselves what happened? How did they miss out on one of the great investments of the past four years? How did they let such a big fish keep slipping through their fingers - year after year? After all, it was right there - staring them right in the face! Our fish story just keeps getting bigger and bigger.

 

So here we are at the beginning of 2025… and investors who don’t own the stock (or those who sold their position way too early) are once again asking themselves ‘What do I do now?’

 

Fairfax, the ‘big fish,’ continues to taunt investors.

 

 

—————

 

What is one of the keys to being a successful investor?

 

In other posts we focus on what investors need to do to be successful. In this post we are going to flip the script and focus on mistakes investors have been making with Fairfax over the past 4 years. Avoiding common mistakes is a great way to improve returns.

 

Charlie Munger passed away a little over a year ago. In this post we honour Charlie, who was the master of inverting.

 

Avoid doing stupid things

 

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” Charlie Munger

 

Truth be told, many of the people who did well with Fairfax as an investment over the past 4 years likely didn’t do well because they were smarter than most other investors. Rather, many did well simply because they avoided making big mistakes. Some of which are reviewed below.

 

In the remainder of this post, we are going to review 5 mistakes that some (many?) investors have made when analyzing Fairfax over the past 4 years:

1. Using a faulty investment framework.
2. Getting badly burned by a stock.
3. ‘Past performance is the best predictor of future performance’
4. Missing out on a big winner (that you knew about).
5. Watching a stock you sold spike higher in price.

—————

 

Brains/intellect mistake

 

The first mistake we are going to review is one of logic.

 

1.) Using a faulty investment framework.

 

Price (by itself) is a terrible investment framework to use to value a stock. Of course, what matters to value a stock is your estimate of the intrinsic value of the company and how it compares to its current share price.

 

Building a good investing framework

 

One of my all-time favourite books on investing is ‘One up on Wall Street’ by Peter Lynch. It was published way back in 1989. And it is full of investing wisdom - it has many useful mental models to help investors build out their investing framework. And because mental models don’t have a shelf life - they are still very useful for investors today.

 

‘Ive Got It, I’ve Got It. What Is It?’ - One Up on Wall Street by Peter Lynch

 

As outlined in Chapter 7 of his book, before trying to value a stock, Lynch would first drop it in to one of 6 categories:

• Slow growers - ‘Large and aging companies that are expected to grow slightly faster than the GNP.’ P100
• Stalwarts -‘ These multibillion-dollar hulks are not exactly agile climbers, but they’re faster than the slow growers.’ P104
• Fast growers - ‘These are among my favourite investments: small, aggressive new enterprises that grow 20 to 25 percent a year. If you chose wisely, this is the land of the 10- to 40- baggers.’ P108
• Cyclicals - ‘A cyclical is a company whose sales and profits rise and fall in regular if not completely predictable fashion.’ P109
• Turnarounds - ’Turnaround candidates have been battered, depressed, and often can barely drag themselves into chapter 11.’ P113
• Asset plays - ‘An asset play is any company that’s sitting on something valuable that you know about, but that the Wall Street crowd has overlooked.’ P115

Why did Lynch categorize stock opportunities?

 

Classifying stocks properly at the beginning of the process is critical. Because the classification determines the proper method to use to analyze and then to value the stock.

 

‘Putting stocks in categories is the first step in developing the story. Now at least you know what kind of story it’s supposed to be. The next step is filling in the details that will help you guess how the story is going to turn out.’ P120

 

Categorize =>  Develop the story => Analysis/forecasts and valuation => Buy (or not) decision

 

An important point is your goal as an investor is not to try and clone other great investors, like Lynch. That is impossible. The key is to copy the parts that resonate and fit with your intellect/psychological wiring. I like the idea of categorizing stocks - but I don’t try and shoehorn all stock opportunities into one of Lynch’s 6 categories listed above. I am a flexible.

 

There is a second important insight

 

Over time, some companies move from one category to another.

 

‘Companies don’t stay in the same category forever. Over my years of watching stocks I’ve seen hundreds of them start out fitting one description and end up fitting another.’ P118

 

This highlights the importance of monitoring what is happening at a company (management, fundamentals, business results, prospects). It its critically important to be open minded, flexible and to be rational with what you learn. Because this will help ensure you continue to categorize the company properly. Especially those companies that have lots of things going on. You need to be able to recognize when a change in classification is appropriate.

 

What does this have to do with Fairfax?

 

Over the past decade, it looks to me like Fairfax has changed ‘categories’ 3 times. This is very unusual - most companies don’t change categories once. This is likely an important reason why many investors have missed the opportunity - they had the stock categorized improperly.

 

Below is a highly simplified summary of how I have categorized Fairfax over the past decade:

 

1.) Pre-2019: ‘old Fairfax’

• Ok P/C insurance business. Below average investment management business.

2.) 2019-2021: Turnaround

• Fixing the investment management business (hedges/shorts/investment framework).

3.) 2022-2023: ‘new Fairfax’ - an improved version of ‘old Fairfax’

• Ok P/C insurance business. Ok investment management business.

4.) 2024 to today: new Fairfax - a high quality company

• Above average P/C insurance business. Above average investment management business. Best in class management team.

Information advantage

 

In 2020, no one - investors or analysts - were following Fairfax. It was a hated company. So the few investors who were following the company also had a big information advantage.

 

They were able to recognize the many positive changes that were happening under the hood at Fairfax - a year or so before they actually showed up in the financials. It was like having a crystal ball. All an investor had to do was buy the stock, get their position size right and then be patient.

 

As we begin 2025, the information advantage has shrunk. But my guess is lots of investors/analysts today are categorizing Fairfax the wrong way - they are stuck in ‘Ok P/C insurance business. Ok investment management business.’ And this will likely cause them to use the wrong method to analyze and value the stock.

 

My guess is Fairfax’s P/C insurance business, investment management business and senior management team are all better than most think. As a result, like the past 4 years, I expect Fairfax to continue to outperform the expectations of investors/analysts (in terms of growth in intrinsic business value). This usually is a pretty good set up for a stock (it usually means it is being undervalued).

 

—————

 

Psychological traps

 

The remaining mistakes we will review are the result of using faulty mental models. They get into the behavioural part of investing, that Munger so often talked about.

 

2.) Getting badly burned by a stock

 

Hand on the stove problem: Getting badly burned by a stock is usually a really hard thing to overcome. The mental and financial scars are real. Once that happens, it is really hard to look at the company and be objective. This is probably a much bigger problem for institutional investors (because of the hit to their reputation from putting clients in a chronically poorly performing stock) than individual investors.

 

Fairfax’s stock delivered a lost decade for shareholders (2010 to 2020). It was not a fun time to be a shareholder. Facts are facts.

 

What is the solution? Time. It can take years to work up the courage to go back into the water.

 

3.) Past performance is the best predictor of future performance

 

Investors use lots of rules of thumb when they analyze stocks (called heuristics). This is one of them.

 

How an investment has performed in the past (accounting results, management and share price) is important to understand. But they are not all an investor needs to look at.

 

For example, accounting results tell you what has happened in the past. They don’t tell you what is going to happen in the future. And they certainly don’t tell you what a company is worth or how it should be valued.

 

This is especially true for a turnaround play - like Fairfax was back from 2019 to 2021.

 

For a turnaround that has successfully turned around, focussing on past performance will usually not help much. Actually it is worse than that. Focussing on past results/management decisions will likely lead an investor to materially underestimate the fundamentals of the company and its future earnings. This will lead them to materially undervalue the stock. And this will often cause them to not invest - or to sell a winning position way too early. Exactly what we saw play out with Fairfax year after year.

 

What is the solution? Be inquisitive. And be open minded with what you learn.

 

4.) Missing out on a big winner (that you knew about).

 

It is really hard to buy a stock that is rising in price. Especially if you researched it early on and didn’t pull the trigger (buy any shares). This is also a big problem for many value investors - because buying a stock that is rising in price just doesn’t rhyme with ‘buy low’.

 

And watching the stock just keep powering higher (that you didn’t buy) is about as much fun as repeatedly getting punched in the nose - it just doesn’t feel very good.

 

So what do investors do?

 

For starters they probably take the stock off their watch list - out of sight / out of mind. That makes them feel better. And they say things like ‘I’m not going to chase it’ - because it sounds smart to them at the time. Bottom line, they avoid the stock.

 

Of course, if the stock is a big winner (like Fairfax has been), well this strategy is really dumb. Ignoring the big winners is a really hard way to outperform the market averages, let alone make the big money. Especially if you understand the company/industry (i.e it is in your circle of competence to begin with).

 

What is the solution? Be rational - your brain (investment framework) needs to over-rule your gut (emotions).

 

5.) Watching a stock you sold spike higher in price.

 

How many times have you sold a winning stock way, way too early? Only to regret it year after year after year… as it keeps powering higher. And you think of what could have been… (This was Berkshire Hathaway for me back in the 1990’s and 2000’s.)

 

It is really hard for most investors to buy back a stock that they sold when it is now trading at a much higher price. This mistake is the sister of the one we just discussed.

 

But what do you do when you realize this has happened? Do you buy it back? No, of course not. Because… well, we just reviewed all the reasons in 3.) so we won’t review them again.

 

What to do? Get better with your sell strategy.

 

Most people spend most of their time thinking about what/when to buy a stock. They spend very little time on why/when to sell. So their sell strategy is not very sophisticated - and this leads them open to making behavioural mistakes, like selling a winning position way too early - for not good reasons.   

 

Conclusion

 

‘Investing is simple (not easy).’ Charlie Munger

 

What makes investing so difficult?

 

The biggest mistakes made by investors are often driven by behavioural mistakes.

 

Emotions are an unseen driver of our investment decisions. They can distort/warp a well thought out investment framework. In turn, this can result in poor decisions and sub-optimal returns.

 

It is critical to recognize that emotions (behavioural factors) are a part of the investment process - because we are humans (not robots). But emotional responses can’t be allowed to knock your ship off its intended course.

 

As a result, you must be constantly on your guard. It is important to self-reflect - and to be honest with yourself with what you learn. Make adjustments as needed. It’s important to ensure your emotions aren’t what is sitting in the captain’s chair.

 

Given its incredible run over the past 4 years, is Fairfax’s stock still a buy today?

 

The answer is simple. It will depend on your estimate of what the intrinsic value of the company is today. And how it compares to the price of the stock. And as Munger reminds us, that is also the hard part. (And make sure you don’t fixate on the price move of the stock over the past 4 years  - or that fish story is likely to turn into even more of a whopper of a tale.)

 

—————

 

Narrative

 

Narratives for companies take years to get established. And once established, they are very slow to change (taking years). This works for most companies - where things change slowly.

 

For the past 5 years, it looks to me like the narrative for Fairfax has been continuously running about 12 to 24 months months behind what is actually going on ‘under the hood’ at the company (management, fundamentals/business results, prospects).

 

Interestingly, it looks like the stock price is a leading indicator of the change in narrative. (The narrative only changes after the stock price has gone up.)

 

Change in fundamentals  =>  change in share price  =>  change in narrative

 

PS: This process is really apparent when you read most analyst reports for Fairfax from over the past 4 years.

 

—————

 

To learn more about ‘why we behave as we do’, from the Farnam Street blog:

 

The Psychology of Human Misjudgment, by Charlie Munger

• https://fs.blog/great-talks/psychology-human-misjudgment/

 

 

 

@Viking.  Nice post - thanks.  If Fairfax can consistently underwrite at a <100 CR and if the investment side avoids the mistakes of the 2010s, the stock may never be a "sell" unless money is needed.  This is the way I've viewed BRK for 42 years.  In some ways it is great not to be a proficient trader, and as Buffett often says, just treat stocks like you would a business or piece of real estate.   

[Munger_Disciple]

Just now, 73 Reds said:

This is the way I've viewed BRK for 42 years. 

 

Congrats @73 Reds! So you bought BRK in 1983? Tell us more