Fairfax 2026

[Viking]

12 minutes ago, Txvestor said:

I don't know if it's intentional or not, or perhaps related to their bigger size allowing it, but I do see them doing more private equity type investments, a lot more control investments, or atleast having significantly more board representation rather than minority public market positions.
An obvious exception to this being their recent position in UnderArmour. 
The lost decade errors not withstanding, I see them as vastly superior capital allocators than pretty much any of their investee management, who tend to be more operators.
So their closer involvement is a good idea in this sphere. AGT foods recent balance sheet restructuring is a good example. 

I think Wade Burton talked about public versus private on the most recent conference call (strengths and weaknesses of each). I think he said they are agnostic - they want the best investment. The more I hear Wade talk the more I like him. Very logical and rational. 

[Parsad]

Not sure how many people know this, but Francis would have been the first and probably only mutual fund manager to have bought CDS for his funds, if the regulators had been a tiny bit faster in approving his request. 

 

Francis had made a request to regulators to allow him to buy CDS in the Chou Funds, but by the time regulators approved the request, the CDS prices had started to move.

 

He was also instrumental in Brian and Fairfax looking at the CDS in the first place and buying more as things started to look worse.  Cheers!

[Maverick47]

1 hour ago, Parsad said:

Not sure how many people know this, but Francis would have been the first and probably only mutual fund manager to have bought CDS for his funds, if the regulators had been a tiny bit faster in approving his request. 

 

Francis had made a request to regulators to allow him to buy CDS in the Chou Funds, but by the time regulators approved the request, the CDS prices had started to move.

 

He was also instrumental in Brian and Fairfax looking at the CDS in the first place and buying more as things started to look worse.  Cheers!

I didn’t have a clue what a CDS was at the time, but had a coworker who was involved, not with buying them, but creating and selling them to other companies on behalf of the property casualty company I worked for.  
 

We used to have quarterly q and a sessions with employees being allowed to ask senior management about the quarterly results.  A few quarters in a row we recorded some losses from the part of the company that he was working in, which involved investing in and selling derivatives such as CDS’s.  I was sort of the lone employee gadfly who was willing to ask questions about negative items to management, and I believe I’d been influenced by Buffett’s comment that derivatives were financial instruments of mass destruction, so a few quarters in a row I asked the leadership why we were involved in creating and selling financial instruments that we were losing money on, in an area we had no specific expertise in.  
 

Sometime later, but before the GFC in 2008, the company announced that they were shutting down that department and my coworker had to find a job elsewhere.

All by way of noting how unusual it was at the time for someone like Francis Chou to be working with an insurance company, understanding what a credit default swap was, how valuable they would be in certain economic environments,  and encouraging Fairfax to purchase substantial amounts of them.  

 

I was happy the company I worked for simply avoided a major problem and a near death experience such as AIG with their Financial Products division experienced by not selling credit default swaps to other parties.  But I’m not aware of any insurance company other than Fairfax that took the right side of that trade….
 

Kudos to Francis!

 

 

[SafetyinNumbers]

8 hours ago, Txvestor said:

They lagged the benchmarks significantly to the extent that a colleague of mine said they look more like gamblers than investors. 

The expected value investing style can look like gambling which is why most BRK and MKL investors who use a deterministic style of investing avoid Fairfax. They don’t like the portfolio. The goal of expected value investing is absolute returns not relative returns with the expectation of being wrong a third of the time. Post GFC, quality was repriced significantly higher and stocks that don’t screen well were repriced lower which hurt returns along with the accounting impact as ownership in more investments >20% increased.

[steph]

What I probably miss in the analysis of past FFH actions is the simple fact that sometimes a bad decision can lead to a good outcome and/or a good decision can lead to a bad outcome. Investing is about probabilities and you have to accept that. 

 After the CDS trade they were geniuses and after the deflation and equity hedges they were idiots...and that is still the way most of us see it up to today. 

To me all those investments were bad decisions. 

The CDS trade was not better than the other ones.  Those are all trades were timing is important.  They were all done with the idea that you put very little upfront with huge payback if successful.  

But it misses the simple fact that FFH should be there for the long run and should simply let their businessmodel do the magic of compounding over many years and decades.  Why try to do a quick shot? 

Don't get me wrong...I am a big fan of Prem and FFH.  I am a shareholder since 2005 and never thought about selling, on the contrary.  But I never liked those investments.  

But as Viking stated above, I just love the bussinessmodel and am amazed how well it has done even with decades of poor underwriting and some big investment mistakes.  It says a lot about the long term potential. 

[SafetyinNumbers]

1 hour ago, steph said:

What I probably miss in the analysis of past FFH actions is the simple fact that sometimes a bad decision can lead to a good outcome and/or a good decision can lead to a bad outcome. Investing is about probabilities and you have to accept that. 

 After the CDS trade they were geniuses and after the deflation and equity hedges they were idiots...and that is still the way most of us see it up to today. 

To me all those investments were bad decisions. 

The CDS trade was not better than the other ones.  Those are all trades were timing is important.  They were all done with the idea that you put very little upfront with huge payback if successful.  

But it misses the simple fact that FFH should be there for the long run and should simply let their businessmodel do the magic of compounding over many years and decades.  Why try to do a quick shot? 

Don't get me wrong...I am a big fan of Prem and FFH.  I am a shareholder since 2005 and never thought about selling, on the contrary.  But I never liked those investments.  

But as Viking stated above, I just love the bussinessmodel and am amazed how well it has done even with decades of poor underwriting and some big investment mistakes.  It says a lot about the long term potential. 

I have a lot more empathy for these decisions. The risk generated by the GFC and a subsequent deflation were potentially existential. I don’t like participating in resulting. 

[Maverick47]

1 hour ago, SafetyinNumbers said:

I have a lot more empathy for these decisions. The risk generated by the GFC and a subsequent deflation were potentially existential. I don’t like participating in resulting. 

I agree.  I think the company was just trying to ensure it didn’t die, so that it would be able to keep a string of annual results moving forward in the future.

 

In a series of annual performance figures, the only thing worse than a number of subpar or negative years would be a zero, meaning the company had died.

I can think of a number of value investing phrases that are apropos in this regard, such as “to finish first, one must first finish.”

 

A company is an artificial person, with one significant advantage over the human beings who manage it:  it can be immortal as long as its managers don’t allow it to be killed.   
 

Charlie Munger was known to share the thought that “All I want to know is where I’m going to die, so I’ll never go there”.

 

I appreciate the fact that the human beings who manage Fairfax think about how and where their company might die, and try to manage its affairs so that it doesn’t go there.  In doing so, they increase the likelihood that it will survive and continue to compound value for its shareholders well beyond their own lifespans.

 

Sometimes they purchase insurance against catastrophes that happen, such as buying CDS’s in advance of the GFC, or keeping bond durations low in periods of historically low interest rates so that mark to market losses won’t  hinder the company’s financial strength and solvency when rates began to rise again.

 

Other times they purchase insurance against catastrophes that didn’t occur, such as global deflation after the GFC.

These were all decisions to purchase insurance against events that could kill or severely injure the company.  Since the company is still alive and thriving, I consider them all to be successful, whether the feared for events occurred or not.

[Buffett_Groupie]

Risk management means paying a premium to buy insurance to limit the risk and if the risk doesn't materialize, you'll lose the premium only and not the exposure to unlimited losses like a direct short, right? 

[Parsad]

3 hours ago, Maverick47 said:

I agree.  I think the company was just trying to ensure it didn’t die, so that it would be able to keep a string of annual results moving forward in the future.

 

In a series of annual performance figures, the only thing worse than a number of subpar or negative years would be a zero, meaning the company had died.

I can think of a number of value investing phrases that are apropos in this regard, such as “to finish first, one must first finish.”

 

A company is an artificial person, with one significant advantage over the human beings who manage it:  it can be immortal as long as its managers don’t allow it to be killed.   
 

Charlie Munger was known to share the thought that “All I want to know is where I’m going to die, so I’ll never go there”.

 

I appreciate the fact that the human beings who manage Fairfax think about how and where their company might die, and try to manage its affairs so that it doesn’t go there.  In doing so, they increase the likelihood that it will survive and continue to compound value for its shareholders well beyond their own lifespans.

 

Sometimes they purchase insurance against catastrophes that happen, such as buying CDS’s in advance of the GFC, or keeping bond durations low in periods of historically low interest rates so that mark to market losses won’t  hinder the company’s financial strength and solvency when rates began to rise again.

 

Other times they purchase insurance against catastrophes that didn’t occur, such as global deflation after the GFC.

These were all decisions to purchase insurance against events that could kill or severely injure the company.  Since the company is still alive and thriving, I consider them all to be successful, whether the feared for events occurred or not.

 

As Buffett said, there was the possibility that the GFC would have taken down everything, including Berkshire...even though it would have been the last to fall.  It's why only government intervention could backstop the problem!  

 

I suspect the CDS wasn't made to simply get a grand-slam homerun, but to make sure FFH was still standing when the shit really hit the fan!  

 

The equity hedges were done for a similar reason...they were just wrong on how government intervention globally would ignite a massive market run...not dissimilar to what we are witnessing today.  The underlying, correlated risks won't become evident until the music stops!

 

Cheers!

[Buffett_Groupie]

26 minutes ago, Parsad said:

 

As Buffett said, there was the possibility that the GFC would have taken down everything, including Berkshire...even though it would have been the last to fall.  It's why only government intervention could backstop the problem!  

 

I suspect the CDS wasn't made to simply get a grand-slam homerun, but to make sure FFH was still standing when the shit really hit the fan!  

 

The equity hedges were done for a similar reason...they were just wrong on how government intervention globally would ignite a massive market run...not dissimilar to what we are witnessing today.  The underlying, correlated risks won't become evident until the music stops!

 

Cheers!

The gains from CDS aren't unlimited whereas the losses from equity hedges are unlimited, right? 

[Parsad]

1 hour ago, Buffett_Groupie said:

The gains from CDS aren't unlimited whereas the losses from equity hedges are unlimited, right? 

 

Correct.  It's why macro bets, shorting, hedging have their limitations and can actually increase your risk if you are wrong.  Cheers!

[djokovic1]

2 hours ago, Buffett_Groupie said:

The gains from CDS aren't unlimited whereas the losses from equity hedges are unlimited, right? 

This is the crux of it. Shorting equities as a long term strategy can be fatal. And I’m pretty sure it won’t happen again at Fairfax.

[SafetyinNumbers]

1 hour ago, djokovic1 said:

This is the crux of it. Shorting equities as a long term strategy can be fatal. And I’m pretty sure it won’t happen again at Fairfax.

They will likely never be in the position they were then again given the strength of the company now. 

[djokovic1]

14 minutes ago, SafetyinNumbers said:

They will likely never be in the position they were then again given the strength of the company now. 

That's true but I also think there is truth to the fact that the CDS success made them think there is alpha while reducing downside risk in taking big macro positioning bets (I think @Viking's great post about the lost decade alludes to that too). You can find great single stock investments even when the market is overvalued as a whole, as they have done recently. You don't need to short to reduce risk, just focus on finding undervalued securities. 

The painful costly lesson of shorting seems to have made Prem and team come to the right conclusion i.e don't short. It's just a very hard game to play and the odds are against you.

 

[SafetyinNumbers]

2 hours ago, djokovic1 said:

That's true but I also think there is truth to the fact that the CDS success made them think there is alpha while reducing downside risk in taking big macro positioning bets (I think @Viking's great post about the lost decade alludes to that too). You can find great single stock investments even when the market is overvalued as a whole, as they have done recently. You don't need to short to reduce risk, just focus on finding undervalued securities. 

The painful costly lesson of shorting seems to have made Prem and team come to the right conclusion i.e don't short. It's just a very hard game to play and the odds are against you.

 

I don’t think they appreciated how the market structure was changing. Absolute return investors were losing their mandates to relative return and quality (at ant price) investors. Mean reversion used to work because there were enough absolute return investors to make it work but the value factor was losing relevancy. It’s easy to judge in hindsight but contemporaneously investors loved it. Fairfax had a higher multiple at many points throughout that period than it does now. It’s a much better company now with structurally higher ROE but the value factor has never mattered less.

[Txvestor]

4 hours ago, djokovic1 said:

That's true but I also think there is truth to the fact that the CDS success made them think there is alpha while reducing downside risk in taking big macro positioning bets (I think @Viking's great post about the lost decade alludes to that too). You can find great single stock investments even when the market is overvalued as a whole, as they have done recently. You don't need to short to reduce risk, just focus on finding undervalued securities. 

The painful costly lesson of shorting seems to have made Prem and team come to the right conclusion i.e don't short. It's just a very hard game to play and the odds are against you.

 

Not just that but it's an asymmetric bet. Most one can gain is the stock price, the downside unlimited. Also the adage the market can remain irrational longer than you can remain solvent comes into play. Stocks can stay irrationally priced for a very very long time. Especially in these times of inflated markets,

fast moving technologies and central banks debasing currencies and pumping liquidity, it's quite simply a fools errand. 

Edited 12 hours ago by Txvestor

[Viking]

11 hours ago, Buffett_Groupie said:

Risk management means paying a premium to buy insurance to limit the risk and if the risk doesn't materialize, you'll lose the premium only and not the exposure to unlimited losses like a direct short, right? 

 

"The gains from CDS aren't unlimited whereas the losses from equity hedges are unlimited, right?"

 

@Buffett_Groupie, I have added this to my article (to my original, as I can't edit the articles after they are posted to the board - likely because they are so long). I think it explains the assymetic difference in the CDS position and the equity hedge position. Thank you!

Edited 9 hours ago by Viking

[Wanderer]

https://ir.andrewpeller.com/news/news-details/2026/Andrew-Peller-Enters-into-Definitive-Agreement-to-be-Acquired-by-Fairfax/default.aspx

[Parsad]

1 hour ago, Wanderer said:

https://ir.andrewpeller.com/news/news-details/2026/Andrew-Peller-Enters-into-Definitive-Agreement-to-be-Acquired-by-Fairfax/default.aspx

 

Awesome!  My family consumes a lot of their brands.    They own one of my favorite wine brands...Black Hills Estate...their Nota Bene is one of the best wines for the money you will drink.  Also love the new Wayne Gretzky liqueurs during the winter months.  Cheers!

[Berk]

On 6/3/2026 at 9:28 PM, Viking said:

One of Fairfax’s great strengths is they are very opportunistic. Their stock is - once again - wicked cheap. They know it. What to do? Back up the truck with buybacks. Time for another dutch auction? Or do they simply max out the NCIB. It is fun to speculate…

 

This quote from Buffett comes to mind: "Big opportunities come infrequently. When it rains gold, reach for a bucket, not a thimble."

 

@Viking sorry I am a little late here but, I've been thinking about this since they raised the debt. Do you have a sense for why they chose such long-term financing with a 2056 maturity? I believe you asked management about this during AGM week, but I can’t remember their response. At a 6.2% coupon, the debt was issued at ~123 bps over the 30-year Treasury, at that time. I understand the logic of locking in long-term capital, but I’m trying to better understand why Fairfax would prefer 30-year debt versus something shorter-dated, especially given the cost.

 

[MMM20]

8 hours ago, Wanderer said:

https://ir.andrewpeller.com/news/news-details/2026/Andrew-Peller-Enters-into-Definitive-Agreement-to-be-Acquired-by-Fairfax/default.aspx

 

>20x FCF for wine? Isn't that a struggling industry with typical multiples in the mid single digits?

 

What's Prem's angle here? Working with KW to redevelop the land? Synergies with Recipe?

 

[rogermunibond]

@MMM20 that's funny.  Ian Cumming and Joe Steinberg of Leucadia fame bought four wineries the first in 2000 iirc.  They opined in every shareholder letter about how bad they were as businesses but they liked wine and wine lubricated camaraderie.

 

Eventually they spun off the wineries in 2013 as Crimson Wine Group.  It's publically traded on the OTC but tiny and still a terrible business. lol

[civic248]

On 6/13/2026 at 10:30 AM, Viking said:

 

Credit Default Swaps (2005-2009): Fairfax's Version of The Big Short

 

I am finally getting around to updating parts of my book. This is a fun one. 

 

 

“Sizing is 70% to 80% of the equation. It’s not whether you’re right or wrong, it’s how much you make when you’re right and how much you lose when you’re wrong.”  Stanley Druckenmiller

 

 

In The Big Short, Michael Lewis tells the story of a small group of investors who recognized the risks building in the U.S. housing market and positioned themselves to profit when the system eventually broke.

 

The best-known participants were Michael Burry at Scion Capital, Steve Eisman at FrontPoint Partners, and Charlie Geller and Jamie Shipley at Brownfield Capital.

 

A small Canadian property and casualty insurer could easily have been added to that list.

 

Fairfax Financial.

 

While the investors featured in The Big Short purchased credit default swaps tied directly to subprime mortgages, Fairfax built a broader portfolio of protection against systemic financial risk. The objective, however, was similar: profit from — and protect against — a severe disruption in the financial system.

 

The trade would become one of the most successful investments in Fairfax's history.

 

Insurance Against a Financial Crisis

 

A credit default swap (CDS) is essentially insurance against default. The buyer pays a premium, and in return the seller agrees to compensate the buyer if a specified company or security experiences a credit event such as bankruptcy or default.

 

The attraction of a CDS is its asymmetry. If nothing happens, the buyer loses only the premium paid. If credit conditions deteriorate, the value of the CDS can increase many times over.

 

In The Big Short movie, a large investor in Burry's fund summed up the trade perfectly: “In other words, we lose millions until something that has never happened before happens?” Burry replied: “That's right.”

 

That was essentially Fairfax's position.

 

Management believed the global financial system was becoming increasingly fragile. Credit standards were deteriorating, leverage was rising, and financial institutions were taking risks that were poorly understood by both regulators and investors.

 

As Fairfax explained in its 2005 Annual Report:

 

 

“The company has invested approximately $250 in 5-year to 10-year credit default swaps on a number of companies, primarily financial institutions, to provide protection against systemic financial risk arising from financial difficulties these entities could experience in a more difficult financial environment.” Fairfax 2005AR

 

 

The original concern centered on Fairfax's reinsurance counterparties. If a severe financial crisis occurred, would the institutions Fairfax relied upon remain financially sound?

 

As management dug deeper, they discovered that many of these firms had significant exposure to mortgage-related assets and other risky securities.

 

The more they researched, the more protection they purchased.

 

Fairfax began building its CDS position in 2002 and continued adding through early 2007.

 

Looking Wrong Before Being Right

 

Initially, the trade appeared to be a mistake.

 

The position was expensive to carry and Fairfax recorded losses of approximately $102 million in 2005 and another $76 million in 2006 as credit spreads tightened and financial markets continued to strengthen.

 

Like Michael Burry, Fairfax looked wrong for several years before it was ultimately proven right.

By 2006, however, cracks were beginning to appear in the U.S. housing market. Early in 2007, conditions deteriorated rapidly. Fairfax responded by increasing its CDS exposure.

 

Then the financial system began to unravel.

 

The Payoff

 

As credit spreads widened and financial institutions came under increasing pressure, the value of Fairfax's CDS positions surged.

 

By the end of 2007, Fairfax had recorded approximately $1 billion in gains. Another $1 billion followed in 2008 as the financial crisis intensified. Most of the positions were sold during 2008 and early 2009, locking in extraordinary profits.

 

In total, Fairfax invested approximately $433 million and realized gains of roughly $2.1 billion.

For perspective, Fairfax's common shareholders' equity at the end of 2008 was approximately $4.9 billion. The CDS trade materially strengthened the company's balance sheet at one of the most difficult periods in modern financial history.

 

How did Fairfax compare with some of the investors featured in The Big Short?

• Scion Capital: approximately $2.7 billion
• FrontPoint Partners: approximately $1 billion
• Brownfield Capital: approximately $50 million
• Fairfax Financial: approximately $2.1 billion

 Fairfax sized the position exceptionally well.

 

The Impact on Shareholders

 

Shareholders were major beneficiaries.

 

From 2005 to 2009, Fairfax shares increased approximately 174%, while the S&P 500 declined 11%.

During one of the most challenging periods in modern financial history, Fairfax dramatically outperformed the broader market.

 

 

Lessons for Investors

 

The CDS trade highlights several characteristics that have long defined Fairfax.

 

First, Fairfax excelled at risk management. The original purpose of the CDS position was not speculation. It was protection against a financial crisis that management believed was becoming increasingly likely.

 

Second, management was willing to follow the evidence wherever it led, even when that meant taking a highly contrarian position.

 

Third, Fairfax demonstrated patience and temperament. The trade generated losses for years before producing extraordinary gains.

 

Finally, Fairfax sized the opportunity aggressively. Identifying a great investment is important, but as Druckenmiller observed, returns are often driven as much by position size as by being right. Fairfax continued adding to the position as the evidence strengthened and the opportunity improved.

 

The CDS trade ultimately delivered both protection and enormous profits.

 

More importantly, it revealed the core strengths of Fairfax's investment culture: independent thinking, deep research, patience, conviction, and a willingness to act when risk and opportunity are mispriced.

 

Those qualities helped Fairfax execute one of the greatest investments in its history.

 

---------- 

 

COBF and the Trade of a Lifetime

 

The period was also memorable for members of the Corner of Berkshire & Fairfax (COBF) investing forum.

 

At the time, Fairfax was the target of a high-profile short attack and its shares traded at what many forum members believed was a deeply discounted valuation.

 

Many investors on the forum understood Fairfax's CDS position and recognized its potential value. As conditions in the U.S. housing market deteriorated, they believed Fairfax was likely to generate enormous gains if a financial crisis unfolded. Yet the stock price appeared to reflect little of that possibility.

 

As a result, a number of forum members made concentrated investments in Fairfax shares during 2005 and 2006.

 

A few went even further, purchasing long-dated call options (LEAPS) on Fairfax stock, which traded on the NYSE at the time.

 

For some, it became the investment of a lifetime.

 

 ----------

 

Brian Bradstreet Explains the CDS Trade

 

The following excerpt is from Fair and Friendly: The First 25 Years of Fairfax (2010). Bradstreet explains how Fairfax's concern about reinsurance counterparties eventually led to one of the most successful investments in the company's history.

 

 

When I looked at that, I got scared. The more I looked into those reinsurance companies, the more scared I got. The investment markets were bubbly. There was a lot of crazy risk-taking. We ourselves on the fixed-income side were being offered Ponzi-type stuff that came with an AA or AAA rating. So I began to fear that the reinsurance companies we were relying on to pay us might buy this junk and get into trouble and we wouldn't get paid. That would blow us right out of the water. And so I asked, How can we protect ourselves?

 

With the help of our analysts, I started researching all these reinsurance companies to see how many treasury bonds they did or didn't own. If they owned a lot, I could rest easy. If they didn't own a lot, that meant they might not be able to pay us. What we found was that pretty well all of them, including the best of them like AIG, were taking enormous risks. That was our initial screening. Then we started to dig more, company by company, and we realized they owned all these asset-backed, mortgage-backed, high-yield bonds, which were pronounced as safe as treasury bonds but were in fact pure risk.

 

One way to protect ourselves was to buy credit default swaps (CDSs), which were just appearing on the market around this time. They were basically bankruptcy insurance on the reinsurers. But I soon realized that we couldn't buy enough contracts on enough reinsurance companies to be diversified and fully protected. Then it occurred to me, Why don't we buy protection on the companies that are standing behind what the reinsurance companies are buying? If I was worried about the high-risk mortgage business, for example, why not buy insurance on the mortgage insurers in the United States? So we did. The next step was to buy insurance on the mortgage-lending companies like Fannie Mae and Freddie Mac, which were supposed to be government-backed but weren't in legal terms. Fannie Mae, for example, had $80 of exposure for every $1 of common equity, so it was a very good bet to fail.

 

We bought our first contracts in 2003 and our last ones in December 2007. We just kept buying more and more, first five-year, then seven-year, because they were so cheap. By the end of 2006 we had invested $276 million in CDSs that the market valued at $72 million. At any other place I would have been kicked out on the street. Not here though. I remember going into an investment committee meeting where Prem asked, "What's the best idea we've got?" Francis Chou, who's a pretty shy guy, piped up, "Buy more credit default insurance." I didn't have the guts to say it.

 

Brian Bradstreet – Source: Fair and Friendly: The First 25 Years of Fairfax

 

 

----------

 

In Fairfax's 2009 Annual Report, Prem Watsa closed the chapter on the company's credit default swap strategy.

 

Fairfax had invested approximately $433 million and generated cumulative gains of roughly $2.1 billion, making it one of the most successful investments in the company's history. The trade protected Fairfax during the financial crisis, materially strengthened its balance sheet, and helped position the company for the years that followed. As Prem noted, it would remain "one of the more significant events in our history."

 

 

Great write up! Wasn't it AIG & other financial companies that also took on the counterparty risk for the CDS. Imagined if the government allowed it to fail like Lehman and what a catastrophe for the whole financial system this would have had. They recognized the exposure but did not imagine their hedge could have been wiped out entirely by the same companies that were taking these extraordinary risks?

[Viking]

1 hour ago, Berk said:

@Viking sorry I am a little late here but, I've been thinking about this since they raised the debt. Do you have a sense for why they chose such long-term financing with a 2056 maturity? I believe you asked management about this during AGM week, but I can’t remember their response. At a 6.2% coupon, the debt was issued at ~123 bps over the 30-year Treasury, at that time. I understand the logic of locking in long-term capital, but I’m trying to better understand why Fairfax would prefer 30-year debt versus something shorter-dated, especially given the cost.

 

 

Here is a stab at what Fairfax might be thinking…

 

Management believes the future is likely to feature higher highs and lower lows in inflation and interest rates. Long-term financing becomes more valuable. From that perspective, paying an extra 1% today for a 30-year bond may be a bargain.

 

Imagine two scenarios:

 

Scenario 1: The last 20 years (1982-2020)

• Inflation trends lower.
• Interest rates trend lower.
• Refinancing gets cheaper over time.

In this world, issuing 30-year debt often looks expensive in hindsight because you could repeatedly refinance at lower rates.

 

Scenario 2: Th current environment?

• Inflation is structurally higher.
• Government debt levels are much higher.
• Interest rates are more volatile.

The risk of a future refinancing at higher rates is meaningful.

 

In this world, a 30-year bond is valuable because it removes uncertainty.

 

The company is effectively saying:

 

"We are willing to pay a little more today so we never have to worry about what the bond market looks like in 2036, 2046, or 2056."

 

This is very consistent with Fairfax's historical approach to risk management. The company often sacrifices a little current profitability to reduce exposure to adverse scenarios.

 

Edited 41 minutes ago by Viking

[Crip1]

1 hour ago, rogermunibond said:

@MMM20 that's funny.  Ian Cumming and Joe Steinberg of Leucadia fame bought four wineries the first in 2000 iirc.  They opined in every shareholder letter about how bad they were as businesses but they liked wine and wine lubricated camaraderie.

 

Eventually they spun off the wineries in 2013 as Crimson Wine Group.  It's publically traded on the OTC but tiny and still a terrible business. lol

 

Thank you for the Leucadia reference...it's been forever since I even thought about the company, much less saw something in writing about them.

 

-Crip