Junior R Posted February 17 Posted February 17 1 minute ago, UK said: More HALO assets...whats not to like:)? this again why FFH has a better opportunity vs brk given its size...
UK Posted February 17 Posted February 17 2 minutes ago, Junior R said: this again why FFH has a better opportunity vs brk given its size... Like 25x better:)
Hoodlum Posted February 17 Posted February 17 (edited) So they increased the initial offer of $10.25 to $10.90. Edited February 17 by Hoodlum
Junior R Posted February 17 Posted February 17 5 minutes ago, Hoodlum said: So they increase the initial offer of $10.25 to $10.90. plus couple divs
Hamburg Investor Posted February 17 Posted February 17 18 hours ago, Viking said: Two questions for board members: What do board members think of my suggestion in my post above that Fairfax could remain perpetually undervalued as a company? Would perpetual undervaluation be a good or a bad thing for long term investors if that happened? At very high level, it makes capital allocation exceptionally easy - buying back stock will provide the company with a high return/high certainty floor option. Alternative investments will need to meet a very high threshold. The downside is the company will not be able to use overpriced shares as a source of capital (i.e. for a big future acquisition). Thank you again, @Viking. I really like the relative valuation approach! At the same time, I think it makes sense to compare any investment to the market as a whole. In other words, FFH and insurers as a sector compared to the market. As is so often the case, the most complete picture emerges when you consider multiple perspectives. It's not about right or wrong. Each approach has its own value, and only when you take everything together do you achieve a deeper understanding. What would be the point if insurers were trading at a P/E ratio of 30, and FFH would bei cheap with P/E 20, while the market was at a P/E ratio of 10, and the markets expected forward ROE would be higher than the insurers? Market comparison: insurers and Berkalikes vs. S&P500 There are good reasons not to use the S&P500 as a benchmark in its entirety. Not least the imbalance caused by the Mag7. And there are good reasons not to lump FFH, MKL and BRK together (size, different float levers, different strategies). But still the concept is similar (float investing, value investing approach, investing a relatively high percentage of assets into equity, investing into wholly owned businesses, decentralized structure, ...). Anyway: Which Yardstick could be claimed "perfect" on its own? Having said that, I would just like to point out that insurers – and in particular Berkshire and the Berkalikes, i.e. those companies that have relatively high "hidden value" – are very cheaply valued: FFH, MKL and BRK all have P/B ratios of 1.4 to 1.5 and P/E ratios of 9 to 16 (from you, see above) S&P500: P/B ratio 5.4 https://www.multpl.com/s-p-500-price-to-book, P/E ratio 29.3 https://www.multpl.com/s-p-500-pe-ratio). Okay, so compared to FFH, BRK and MKL as a group, the market is therefore somewhere in the range of factor 2 to factor 4 in terms of valuation. Historically, the three have achieved CAGR returns of 15% to just under 20% over 40 to 60 years and are among the top 1% (or top 10 among thousands of stocks) in their markets; looking ahead, one can perhaps expect 12% (BRK) to 15% (MKL) and above (FFH) as ROE over many years and the returns of reinvested capital should lie in that range too. So the reinvestment returns clearly lie above that of the market (over 100 years I think 11% has been the average return, right?). So in a nutshell, the average S&P500 company is valued around three times higher than FFH, MKL and BRK, while it will in no way be able to bring similar ROEs. Back to your question: Perpetual undervaluation would help FFH immensely. FFH is increasingly becoming a cash machine. A thought experiment: Fairfax's share price remains where it is – for all eternity. Fairfax buys back shares for $3 billion every year. Fairfax's market value is $38 billion. You own a single Fairfax share. Then, after just under 13 years, Fairfax would belong to you, even though you didn't even pay $2,000 for the share. The $5 billion+ (and it would probably be much more, but never mind) that Fairfax would henceforth generate annually as pre-tax profit would belong to you. Will it happen that way? Of course not! Someone would get there first and buy up shares en masse. The price would therefore rise. And yet this extreme example shows how lucrative buybacks are at today's cheap prices. It's like a rubber band: the tighter you pull it, the further it flies when you let go. The more undervalued a share is and the more aggressive the buybacks, the more the price will eventually skyrocket. The disadvantage of a high price is that you can issue shares and reinvest the proceeds. But the company is growing faster. What do we gain if FFH becomes as big as BRK? In any case, less than if FFH remains small and correspondingly smaller reinvestments still move the needle.
73 Reds Posted February 17 Posted February 17 3 minutes ago, Hamburg Investor said: Thank you again, @Viking. I really like the relative valuation approach! At the same time, I think it makes sense to compare any investment to the market as a whole. In other words, FFH and insurers as a sector compared to the market. As is so often the case, the most complete picture emerges when you consider multiple perspectives. It's not about right or wrong. Each approach has its own value, and only when you take everything together do you achieve a deeper understanding. What would be the point if insurers were trading at a P/E ratio of 30, and FFH would bei cheap with P/E 20, while the market was at a P/E ratio of 10, and the markets expected forward ROE would be higher than the insurers? Market comparison: insurers and Berkalikes vs. S&P500 There are good reasons not to use the S&P500 as a benchmark in its entirety. Not least the imbalance caused by the Mag7. And there are good reasons not to lump FFH, MKL and BRK together (size, different float levers, different strategies). But still the concept is similar (float investing, value investing approach, investing a relatively high percentage of assets into equity, investing into wholly owned businesses, decentralized structure, ...). Anyway: Which Yardstick could be claimed "perfect" on its own? Having said that, I would just like to point out that insurers – and in particular Berkshire and the Berkalikes, i.e. those companies that have relatively high "hidden value" – are very cheaply valued: FFH, MKL and BRK all have P/B ratios of 1.4 to 1.5 and P/E ratios of 9 to 16 (from you, see above) S&P500: P/B ratio 5.4 https://www.multpl.com/s-p-500-price-to-book, P/E ratio 29.3 https://www.multpl.com/s-p-500-pe-ratio). Okay, so compared to FFH, BRK and MKL as a group, the market is therefore somewhere in the range of factor 2 to factor 4 in terms of valuation. Historically, the three have achieved CAGR returns of 15% to just under 20% over 40 to 60 years and are among the top 1% (or top 10 among thousands of stocks) in their markets; looking ahead, one can perhaps expect 12% (BRK) to 15% (MKL) and above (FFH) as ROE over many years and the returns of reinvested capital should lie in that range too. So the reinvestment returns clearly lie above that of the market (over 100 years I think 11% has been the average return, right?). So in a nutshell, the average S&P500 company is valued around three times higher than FFH, MKL and BRK, while it will in no way be able to bring similar ROEs. Back to your question: Perpetual undervaluation would help FFH immensely. FFH is increasingly becoming a cash machine. A thought experiment: Fairfax's share price remains where it is – for all eternity. Fairfax buys back shares for $3 billion every year. Fairfax's market value is $38 billion. You own a single Fairfax share. Then, after just under 13 years, Fairfax would belong to you, even though you didn't even pay $2,000 for the share. The $5 billion+ (and it would probably be much more, but never mind) that Fairfax would henceforth generate annually as pre-tax profit would belong to you. Will it happen that way? Of course not! Someone would get there first and buy up shares en masse. The price would therefore rise. And yet this extreme example shows how lucrative buybacks are at today's cheap prices. It's like a rubber band: the tighter you pull it, the further it flies when you let go. The more undervalued a share is and the more aggressive the buybacks, the more the price will eventually skyrocket. The disadvantage of a high price is that you can issue shares and reinvest the proceeds. But the company is growing faster. What do we gain if FFH becomes as big as BRK? In any case, less than if FFH remains small and correspondingly smaller reinvestments still move the needle. The one disadvantage to share buybacks is that during a company's growth stage, we really don't want the balance sheet to shrink. All else being equal, share buybacks should be the very last option for cash allocation.
Txvestor Posted February 17 Posted February 17 3 hours ago, 73 Reds said: The one disadvantage to share buybacks is that during a company's growth stage, we really don't want the balance sheet to shrink. All else being equal, share buybacks should be the very last option for cash allocation. Why not as long as the value per share of BV, float, earnings per share are higher? Isn't that what's most important for owners? In other words why is owning a larger share of a smaller enterprise worse than owning a smaller share of a larger enterprise? As long as their core business interests are protected from a capital adequacy standpoint, and their balance sheet is solid, I think it's fine. Empire building mindset CEOs tend not to deliver the exceptional long term returns we want.
73 Reds Posted February 17 Posted February 17 15 minutes ago, Txvestor said: Why not as long as the value per share of BV, float, earnings per share are higher? Isn't that what's most important for owners? In other words why is owning a larger share of a smaller enterprise worse than owning a smaller share of a larger enterprise? As long as their core business interests are protected from a capital adequacy standpoint, and their balance sheet is solid, I think it's fine. Empire building mindset CEOs tend not to deliver the exceptional long term returns we want. Reminds me of when Buffett was shunning stock repurchases decades ago when many (myself included) were wondering why. His excuse was that share buybacks took advantage of shareholders. Made no sense to me until I finally figured out that he was really only being polite, while also being selfish for the benefit of shareholders. The truth was, he couldn't wait to get his hands on more capital to allocate to other investments because he had not run out of good ideas.
Viking Posted February 17 Posted February 17 9 minutes ago, 73 Reds said: Reminds me of when Buffett was shunning stock repurchases decades ago when many (myself included) were wondering why. His excuse was that share buybacks took advantage of shareholders. Made no sense to me until I finally figured out that he was really only being polite, while also being selfish for the benefit of shareholders. The truth was, he couldn't wait to get his hands on more capital to allocate to other investments because he had not run out of good ideas. +1 He was the GOAT.
73 Reds Posted February 17 Posted February 17 (edited) 7 minutes ago, Viking said: +1 He was the GOAT. He was also Berkshire's largest shareholder and understood there is a time and place for share buybacks. When/if the share price is cheap enough it is OK to repurchase some shares but it should not be a strategic objective IMO. Edited February 17 by 73 Reds missed line
Tommm50 Posted February 17 Posted February 17 As we talk about the gradual (or rapid) increase of share price, does Fairfax consider stock splits to allow small investors to buy shares or do they go the way of Berkshire and let the price rise to the stratosphere?
mananainvesting Posted February 17 Posted February 17 17 minutes ago, Tommm50 said: As we talk about the gradual (or rapid) increase of share price, does Fairfax consider stock splits to allow small investors to buy shares or do they go the way of Berkshire and let the price rise to the stratosphere? No splits, been asked many times in Annual Meetings.
Hamburg Investor Posted February 17 Posted February 17 1 hour ago, Txvestor said: Why not as long as the value per share of BV, float, earnings per share are higher? Isn't that what's most important for owners? In other words why is owning a larger share of a smaller enterprise worse than owning a smaller share of a larger enterprise? As long as their core business interests are protected from a capital adequacy standpoint, and their balance sheet is solid, I think it's fine. Empire building mindset CEOs tend not to deliver the exceptional long term returns we want. 5 hours ago, 73 Reds said: The one disadvantage to share buybacks is that during a company's growth stage, we really don't want the balance sheet to shrink. All else being equal, share buybacks should be the very last option for cash allocation. If FFHs stock price is down, it just gives Prem & Co an additional investment opportunity, that they wouldn’t have, if FFH would be priced above intrinsic value. How can any additional opportunity be a bad thing? One of the big advantages for BRK, FFH and MKL is, that by design they can invest into stocks, bonds, they can buy complete businesses, they can invest worldwide, or invest into float growth or they can buy out minority shareholders, TRS, … and - if they are lucky and the share price is below intrinsic value - they also have the opportunity to repurchase shares. All else equal a lower FFH share price gives a higher return to repurchases, right? There’s no guarantee in returns and you, Prem or anyone can be right or wrong with any investment. But it’s intuitive, that Prem doesn’t know any other equity investment better than FFH itself and he and his team understands the dynamics better than any other investor. So if there’s one stock he really has an Information edge, than it’s his own. So even though there clearly is no guaranteed return for any investment FFH does; FFH itself comes closest to that north star of a „guaranteed return“ for Prem. So the lower FFHs share price, the higher the „guaranteed“ repurchase return. And of course any other investment opportunity has to get over that guaranteed hurdle rate. Why shouldn’t we as shareholders be happy, if that hurdle rate stands at e. g. 22% instead of 15%?
73 Reds Posted February 17 Posted February 17 31 minutes ago, Hamburg Investor said: If FFHs stock price is down, it just gives Prem & Co an additional investment opportunity, that they wouldn’t have, if FFH would be priced above intrinsic value. How can any additional opportunity be a bad thing? One of the big advantages for BRK, FFH and MKL is, that by design they can invest into stocks, bonds, they can buy complete businesses, they can invest worldwide, or invest into float growth or they can buy out minority shareholders, TRS, … and - if they are lucky and the share price is below intrinsic value - they also have the opportunity to repurchase shares. All else equal a lower FFH share price gives a higher return to repurchases, right? There’s no guarantee in returns and you, Prem or anyone can be right or wrong with any investment. But it’s intuitive, that Prem doesn’t know any other equity investment better than FFH itself and he and his team understands the dynamics better than any other investor. So if there’s one stock he really has an Information edge, than it’s his own. So even though there clearly is no guaranteed return for any investment FFH does; FFH itself comes closest to that north star of a „guaranteed return“ for Prem. So the lower FFHs share price, the higher the „guaranteed“ repurchase return. And of course any other investment opportunity has to get over that guaranteed hurdle rate. Why shouldn’t we as shareholders be happy, if that hurdle rate stands at e. g. 22% instead of 15%? I think that is somewhat of a circular argument. Prem may "know" Fairfax better than outside investments but that doesn't necessarily make Fairfax a better investment than outside investments. The difference between asset allocators (i.e., Fairfax and Berkshire) and most other companies is that other companies operating in specific sectors or industries often reach a plateau, whether temporary or permanent, outside of which growth becomes limited or even non-existent. Sure they can try to operate more efficiently and sometimes even initiate entire new divisions or make strategic acquisitions, but this often requires a great deal of diverse technology, innovation, brainpower, etc... (As an aside, those are characteristics of any large public equity investment I make). So when even the strongest companies face such limitations, one of the best ways to increase shareholder value is repurchasing shares at favorable prices. Asset allocators have no such limitations. When a company like Fairfax repurchases a lot of stock, it makes me wonder why they can't - or don't find any better investments than their own shares for the same money. Again, this is not to suggest that share repurchases should never be made but they should be weighed against everything else out there, which is an enormous investment universe for a relatively small and growing company like Fairfax.
Phoenix01 Posted February 17 Posted February 17 I think it is all about the opportunity. As Mr. Market bounces the prices of investment up and down, different opportunities surface. FFH collects the best opportunities and they have proven that they are very good at it. The FFH price will fluctuate, and at some point in time, the shares will be fairly valued and eventually over valued (the market is a short term voting machine). This will make it harder to keep the shares if there are other glaring opportunities available at that time. For now I am grateful for the lower price that juices the buybacks and improves the investment thesis.
dartmonkey Posted February 17 Posted February 17 2 hours ago, 73 Reds said: 2 hours ago, Viking said: +1 He was the GOAT. He was also Berkshire's largest shareholder and understood there is a time and place for share buybacks. When/if the share price is cheap enough it is OK to repurchase some shares but it should not be a strategic objective IMO. I think this is probably a fair description of Buffett's thinking - he has never embraced the idea of repurchasing Berkshire shares in size. Watsa comes closer, with a significant reduction in the diluted share count from about 28 million to 21.5 million, and more like 20 million if you include the TRS. As others have pointed out, this share count reduction has just brought Fairfax back to the number of shares it had before it issued shares to buy Brit and Allied World. But both Watsa and Buffett have expressed the view that this is not just something that it is OK to do when shares are very cheap, but a real strategic objective. Buffett: "Henry Singleton of Teledyne has the best operating and capital deployment record in American business." and: "When available funds exceed needs of those kinds, a company with a growth-oriented shareholder population can buy new businesses or repurchase shares. If a company’s stock is selling well below intrinsic value, repurchases usually make the most sense. In the mid-1970s, the wisdom of making these was virtually screaming at managements, but few responded. In most cases, those that did made their owners much wealthier than if alternative courses of action had been 16pursued. Indeed, during the 1970s (and, spasmodically, for some years thereafter) we searched for companies that were large repurchasers of their shares. This often was a tipoff that the company was both undervalued and run by a shareholder-oriented management." (AR, 1999) Watsa: "By the way, you may not know, but the Michael Jordan of stock buybacks was Henry Singleton at Teledyne. Henry began Teledyne in 1961 with approximately seven million shares outstanding and grew the company through acquisitions while shares outstanding peaked in 1972 at 88 million. From 1972 to 1987, long before stock buybacks became popular, Henry reduced the shares outstanding by 87% to 12 million. Book value per share and stock prices compounded in excess of 22% per year during Henry’s 27 year watch at Teledyne– one of the best track records in the business. We will always consider investing in our stock first (i.e. stock buyback) before making any acquisitions." (AR, 1997) and: "As far as investing goes, Berkshire was always the biggest influence. With Teledyne, it was Singleton’s talent for allocation in acquisitions but especially with share buybacks.” Teledyne and Berkshire were rarefied company to aspire to join." (The Fairfax Way) and: "Watsa started talking more about Henry Singleton, the legendary CEO of Teledyne who orchestrated the most aggressive and successful buyback strategy in corporate history. Watsa called him “the Michael Jordan of buybacks,” and Fairfax was going to lace up its Air Watsas and play some serious buyback ball now that it was taking a break from buying companies: “Our long-term focus was clear. We had a much higher quality bar on acquisitions going forward and, as long as cash wasn’t needed to shore up financial stability, the first investment we would consider was buying our own stock.” (The Fairfax Way) In Buffett's case, while he has applauded share repurchases at companies he has invested in, he has only repurchased Berkshire shares reluctantly, since 2011, sometimes absurdly claiming that this might be to the detriment of exiting shareholders. I think he just ended up having to logically concede that repurchases made more sense than buying the kind of businesses that were available at that time, and so he started doing, in a small way, what he had always said would make sense for others to do. In Watsa's case, there seems to be a fair bit more conviction, and in the past 5 years, he has done us proud. Viva! And may he continue!
Viking Posted February 17 Posted February 17 40 minutes ago, 73 Reds said: I think that is somewhat of a circular argument. Prem may "know" Fairfax better than outside investments but that doesn't necessarily make Fairfax a better investment than outside investments. The difference between asset allocators (i.e., Fairfax and Berkshire) and most other companies is that other companies operating in specific sectors or industries often reach a plateau, whether temporary or permanent, outside of which growth becomes limited or even non-existent. Sure they can try to operate more efficiently and sometimes even initiate entire new divisions or make strategic acquisitions, but this often requires a great deal of diverse technology, innovation, brainpower, etc... (As an aside, those are characteristics of any large public equity investment I make). So when even the strongest companies face such limitations, one of the best ways to increase shareholder value is repurchasing shares at favorable prices. Asset allocators have no such limitations. When a company like Fairfax repurchases a lot of stock, it makes me wonder why they can't - or don't find any better investments than their own shares for the same money. Again, this is not to suggest that share repurchases should never be made but they should be weighed against everything else out there, which is an enormous investment universe for a relatively small and growing company like Fairfax. If you include hidden value, Fairfax is trading today at a price to 2026YE BV of around 1 x. For a company compounding at +15% per year that is crazy cheap. The kicker: this is a high certainty investment for Fairfax. I hope they keep taking out 3 to 4% of shares each year. That still leaves them lots of $ to reinvest in other high return / strategic opportunities (grow the top line / strengthen the company).
73 Reds Posted February 17 Posted February 17 12 minutes ago, Phoenix01 said: I think it is all about the opportunity. As Mr. Market bounces the prices of investment up and down, different opportunities surface. FFH collects the best opportunities and they have proven that they are very good at it. The FFH price will fluctuate, and at some point in time, the shares will be fairly valued and eventually over valued (the market is a short term voting machine). This will make it harder to keep the shares if there are other glaring opportunities available at that time. For now I am grateful for the lower price that juices the buybacks and improves the investment thesis. Your point and other similar points make sense, but my fear is the company may miss out on certain opportunities that otherwise might have been available with more deployable capital. Times of really cheap stocks and low hanging fruit everywhere only happen every so often. Such a time is likely sooner than many would like to think. Berkshire, for one is well-prepared.
SafetyinNumbers Posted February 17 Posted February 17 4 minutes ago, 73 Reds said: Your point and other similar points make sense, but my fear is the company may miss out on certain opportunities that otherwise might have been available with more deployable capital. Times of really cheap stocks and low hanging fruit everywhere only happen every so often. Such a time is likely sooner than many would like to think. Berkshire, for one is well-prepared. I think this comes back to the difference between the holding company and the insurance subsidiaries. It seems like the holdco owns insurance companies and the TRS. The holdco doesn’t have much excess capital as it uses it for buybacks. We know where a lot of the future capital will be spent at the holdco: buying back stock at good prices, buying in the minority interests at fixed prices and buying in the TRS wherever they trade and presumably when the stock is more expensive. The insurance subsidiaries seem to have a lot of excess capital to do deals. I’m not sure why they need to own more fixed income than the float. There is probably $6b available to switch from fixed income into equities if the right opportunities came along. Maybe that’s KW and IDBI in the near term but they are always generating more capital.
Viking Posted February 17 Posted February 17 (edited) My guess is effective shares outstanding will finish 2025 at about 21 million. Fairfax finished 2013 at 21.3 million, so we are into 2012 levels. In 2010, Fairfax had 20.5 million shares outstanding. My guess is Fairfax will be below 2010 levels by the end of 2026. My point is we aren't at 2015-2017 levels for effective shares outstanding. We are quickly approaching 2010 levels. That is a significant development. Net premiums written: 2010: $4.45B 2025E: $26.6B 15-year increase: $22.15B, or 498% CAGR: 12.7% Importantly, this reflects Fairfax's growth in net premiums over the market cycle. Edited February 17 by Viking
ValueMaven Posted February 18 Posted February 18 Is anyone interested in KW as an arb spread? You collect $0.10 plus $0.24 in rather short-order. No position - but worth watching if you get a shot at like $10.70 or so.
Txvestor Posted February 18 Posted February 18 15 hours ago, ValueMaven said: Is anyone interested in KW as an arb spread? You collect $0.10 plus $0.24 in rather short-order. No position - but worth watching if you get a shot at like $10.70 or so. I think that's too small of a return for the risk. Alway some tiny chance of deal falling through and if that happened you'd be back in the 6s/7s.
Viking Posted February 18 Posted February 18 (edited) Getting an Edge with Fairfax - Part 1 Introduction: Why an Edge Matters “An investor needs an edge to outperform the market over time.” — Seth Klarman “Active management requires a reason to believe you have an advantage.” — David Swensen Successful investing begins with a simple premise: You need an edge. Investment edges typically fall into three broad categories: Informational edge – access to better or more complete information. Analytical edge – the ability to interpret available information more effectively. Behavioral edge – the discipline to act rationally when others do not. Having one is good. Having two is better. Having all three is powerful. Fairfax offers the rare possibility of all three. The “Perfect” Set-Up It is very difficult to develop an edge with a large, widely company. Information is abundant, models are standardized, and expectations are calibrated. The ideal setup often looks different: Smaller company – not widely followed Management is not promotional Business model is complex Methods are unorthodox A colorful history that creates lingering scepticism At first glance, that does not sound attractive. But what if that same company: Delivered best-in-class performance over the past five years? Has strong underlying fundamentals? Has a compelling long-term outlook? That combination can create opportunity. Is Fairfax Complex? There is different. And then there is complex. Fairfax is both. Business Model Fairfax operates two very different businesses: P/C insurance and investment management. Most P/C insurers primarily invest in fixed income. Fairfax does far more — equities, private investments, operating companies, and alternatives. This creates additional income streams and provides significant flexibility in capital allocation. Traditional P/C insurers: ~2 core income streams Fairfax: 5 reported income streams + hidden value as a 6th The investment management side is where much of the complexity lies. The breadth of activity is wide, and each type of investment has different accounting treatment. Hidden Value - Accounting Results Understate Economic Results A sizable portion of value creation is not fully reflected in accounting results. Hidden value — particularly in associate and consolidated holdings — represents an important source of future earnings. Fairfax provides disclosures that help quantify the amounts involved. But here is the really interesting part: market participants appear to ignore this value in their analysis and valuation of the company. It is frequently treated as if it does not exist. Time Horizon and Volatility Fairfax runs the business with a long-term focus – the goal is per share value creation. That leads the company to invest in equities, which deliver much better long-term returns than bonds. Many P/C insurance peers, by contrast, are managed with a short-term focus, prioritizing smooth and predictable results. For Fairfax, volatility is opportunity. Exploiting volatility has been one of its super powers and an important driver of long-term results. Market participants, however, often view volatility as kryptonite. Paradoxically, the market penalizes Fairfax for something that is actually one of its strengths. Unconventional Capital Allocators Fairfax’s approach often feels closer to Henry Singleton or John Templeton than Warren Buffett – unconventional, opportunistic and global. And it has worked. The company has delivered a share price CAGR of ~19% over 40 years (US$, with dividends reinvested). Yet despite delivering exceptional long term performance, skepticism remains. Investors frequently react negatively to Fairfax’s equity portfolio without following the underlying companies or considering performance. For example, Fairfax’s 10 largest public equity holdings were up 47% in 2025. Trust Fairfax messed up from 2010 to 2020. While the turnaround over the past five years has been remarkable, rebuilding trust takes time. Institutional memory — especially in Canada — is long. Confidence is improving, but not fully restored. Accounting Fairfax reports under IFRS. The introduction of IFRS 17 in 2023 significantly changed how Canadian P/C insurers present results. For many investors, this makes the numbers harder to interpret and compare to US GAAP-based peers. Change Most companies change slowly. Fairfax has evolved dramatically in the past five years: 2020: A classic turnaround play 2022: Morphed into a value play 2024: Morphed into a quality play The company continues to evolve. That makes it harder to understand — and harder to value. Final Thoughts: Conditions for Mispricing Fairfax is: Different (business model, long-term orientation) Unconventional (capital allocation) Reported under IFRS 17 (adding complexity) Marked by a colorful past (2010-2020 missteps) Evolving rapidly (income streams and structure) These characteristics create both analytical complexity and psychological barriers for market participants. They also create the conditions for mispricing. The Analyst Challenge: A Square Peg in a Round Hole Most analysts cover Fairfax as a P/C insurance company. They apply a standard model designed for traditional insurers. That model works well for most peers. It does not work particularly well for Fairfax. Why? Because it struggles to incorporate: The investment management business Long-term capital allocation decisions Structural changes within the company So why not build a better model? Fairfax is only one company. Analysts cover many. Building a bespoke framework takes time — and there is little incentive to do so. As a result, much of the research on Fairfax focuses heavily on underwriting and interest income, while overlooking the equity portfolio, capital allocation and total expected investment performance. That said, coverage has improved over the past five years. In 2020, very little information was available. Today, some of the research is quite good — though quality remains uneven. (Buyer beware!) This gap creates opportunity for investors willing to do the work. Edited February 18 by Viking
Viking Posted February 18 Posted February 18 Getting an Edge with Fairfax - Part 2 How to Get an Edge with Fairfax Over time, five practical approaches can help investors develop an edge. 1. Corner of Berkshire and Fairfax (COBF) https://thecobf.com The Corner of Berkshire and Fairfax forum, founded in 2002 by Sanjeev Parsad, has been an exceptional resource for discussion, analysis, and debate for more than two decades. It remains the single best external source of information on Fairfax. 2. Understand Hidden Value A large portion of Fairfax’s value creation is not captured in reported accounting results. As a result, it does not show up in most analyst models. Fairfax does provide disclosure that helps quantify some of this value — but it is often overlooked and ignored. Hidden value builds primarily through associate and consolidated equity holdings. Two Examples: Example 1: Excess of fair value over carrying value (Non-insurance associate and consolidated holdings; disclosed by Fairfax) 2025E: $2.6B, or $114 per diluted share (pre-tax) Increase of $1B, $44 per diluted share in 2025 Example 2: Fairfax India Both the fair value and carrying value appear materially understated Book value is much higher Intrinsic value is likely significantly higher than reported book value Net result: the asset appears significantly undervalued on Fairfax’s balance sheet and even its own estimate of fair value. There are many more examples – Poseidon, Ki, and others. This is value that has already been created. It is large. And it is growing. Over time, it should become an important source of future earnings – effectively a sixth income stream. The timing is uncertain. But the direction is clear. 3. Understand the Equity Portfolio – Build an Equity Tracker Historically, one of most effective ways to understand (and invest in) Fairfax has been to follow the investment portfolio. At times, there has been a lag between good news in the portfolio and its reflection in the share price. The most famous example was the CDS/equity hedge investment from 2006 to 2009. Like the movie Groundhog Day, this pattern continues to repeat. Roughly one-third of Fairfax’s total investment portfolio is in equities. Performance here materially affects both short- and long-term results. What to do? Build a model. An equity tracker spreadsheet can: Capture each equity holding: share count, price and total value Group holdings by accounting treatment: mark-to-market, associate and consolidated Track performance in real time during the quarter Informational sources: Fairfax disclosures and COBF. Example – Q4 2020 Fairfax owned many cyclical companies. When COVID hit, these holdings fell sharply and remained depressed through much of 2020. Then news of a vaccine broke in November. Cyclicals surged. Fairfax’s equity portfolio rose sharply (by roughly $1 billion). But the stock remained depressed. The equity tracker revealed that the company was actually much cheaper than it appeared — making it easier to take a concentrated position. The tool provides a real-time, granular understanding of what is happening with one-third of the investment portfolio — insights few others have. 4. Understand Earnings and Forecasting – Build an Earnings Model Over the past 5 years, Fairfax has evolved significantly. This has materially impacted its five income streams. The shift to IFRS accounting added more complexity. What to do? Build a model to understand what is happening “under the hood.” An earnings model can: Resemble Fairfax’s pre-IFRS income statement Track the company’s five core income streams Develop individual models for each income stream Enables bottom-up forecasting for the next two years Beginning in 2021, the story at Fairfax improved broadly — across insurance, investments, and capital allocation. There is often a lag between improving fundamentals and when they show up in reported results. The model helps bridge that gap. Key developments: Underwriting Profit (2020 to 2025): hard market + improved underwriting Interest and dividend income (2023 to 2025): spike from higher rates + higher balances Share of profit of associates (2021): spike to $1 billion Non-insurance consolidated companies (2025): breakout year NICC is a good example. Fairfax has been building this group of holdings for years (Recipe, Sleep Country, Meadow Foods, Peak Achievement). Reported earnings were flat for a long time. In 2025, they surged. This income stream now looks positioned to grow meaningfully — like a coiled spring being released. The earnings model connects past decisions to future results. It provides a structured, forward-looking view of fundamentals. It’s like having a crystal ball – it provides the ability to see Fairfax’s future results – insights few others have. 5. Understand Capital Allocation – Build a “Swings Tracker” Capital allocation is central to Fairfax’s long-term value creation. To evaluate management, it helps to track what they actually do with capital. A capital allocation tracker can record each meaningful decision: Date Activity: buy (new/add) or sell (all/partial) Description Amount: use or source of capital Separated by business: insurance and non-insurance The data set goes back to 2010 – 15 years of detail. It helps answer two key questions: How good is Fairfax at capital allocation? Is performance driven by skill or luck? Back in 2021, Fairfax was widely viewed as below average. Over time, the tracker told a different story. The conclusion evolved: Below average → above average → best-in-class. And the pattern increasingly looks like skill — meaning repeatable. Writing as an Edge: The Fairfax Book/PDF Writing is another powerful way to develop and sharpen an edge. Informational edge: Writing forces ideas, data, and assumptions into a clear structure. Information becomes understanding. Analytical edge: Putting thoughts on paper sharpens analysis, exposes gaps in reasoning, and helps distinguish signal from noise. It also creates a permanent record of what you believed and why. Behavioral edge: Writing helps reduce biases and supports disciplined decision-making. Continuous improvement: Successful investing is a journey, not a sprint. Many articles have been edited two or more times. Each revision (usually) improves the thinking. In August 2023, a collection of posts was published: 14 chapters, 192 pages. Today, the working document has grown to 21 chapters and more than 850 pages, with updates roughly every two months. The Fairfax book/PDF and companion Excel workbook (with all models) are available for free at COBF: https://thecobf.com/forum/topic/20253-fairfax-vol-2-100-of-the-best-posts-all-in-one-document/#findComment-526661 Summary Developing an edge with Fairfax has been a five-year journey built on: Curiosity Open-mindedness Continuous improvement The edge comes from combining multiple sources of insight: External resource: Corner of Berkshire and Fairfax (COBF) Company disclosures: Excess of fair value over carrying value Associate and consolidated holdings Custom models: Equity tracker Earnings model Swings tracker (capital allocation) Individually, each provides useful information. The real magic is how all the pieces work with each other. Together, they form a more complete picture — supporting better analysis, better decisions, and, over time, better results. They also help avoid psychological landmines — of which there are many with Fairfax. These tools improve forward-looking understanding, clarify what drives long-term value, and increase the probability of better investment outcomes. In short, they provide a meaningful edge. And what has been the result over the past 5 years? Magic for shareholders. Fairfax’s stock has had a spectacular run. Surprisingly, the stock still appears cheap. It may just be getting started.
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