Viking Posted February 16 Posted February 16 (edited) Performance and Valuation – Comparing Fairfax to P/C Insurance Peers - Part 2 Interpreting the Results Whether measured by: BVPS growth + dividends, or Total shareholder return Fairfax delivered outstanding performance over the six-year period from 2020 to 2025—both in absolute and relative terms. What Drove the Results? Steady improvement and strong growth in insurance operations Major gains in the investment portfolio Record earnings generation Best-in-class capital allocation Compounding working its magic A favorable external environment aligned with the company’s capabilities The natural next question: How is the market rewarding this top-tier performance? Valuation Analysis 1) Price-to-Book Value (P/BV) Fairfax P/BV: 1.36 Fairfax has the lowest P/BV in the peer group. Compared to higher-valued names such as W.R. Berkley and Intact Financial, Fairfax trades at a meaningful discount. Importantly, Fairfax’s book value materially understates its economic value. Adjusting for this suggests the company’s economic P/BV is even lower. In other words, the stock is cheaper than it appears based on reported numbers. 2) Price-to-Earnings (P/E) While P/E is not ideal as a stand-alone metric for insurers, it remains useful for peer comparison. Fairfax trailing P/E: 8.6 Once again, Fairfax screens as the cheapest stock in the group—by a wide margin. Summary of Findings Performance Over the past six years, Fairfax has delivered: Best-in-class BVPS growth + dividends Best-in-class total shareholder return Valuation Despite this performance, Fairfax currently trades at: P/BV: 1.36 P/E: 8.6 Both are the lowest among peers. Conclusion: Investors can buy the top-performing P/C insurer—with strong future prospects—at the lowest valuation in its peer group. Interpreting the Disconnect What explains the valuation gap? Management quality? Best-in-class (we have gone into great detail on this important topic in the past) Earnings quality? Highest in the company’s history; durable and repeatable Future prospects? Stronger than ever, with both insurance and investment engines performing at a high level So, what else could explain it? Likely factors include: Smaller company – not widely followed Management is not promotional Business model is complex Unorthodox methods Past trust issues and a colorful history Fairfax remains under-followed. It is hard to understand. It is unconventional. As a result, it is often misunderstood and underappreciated – conditions that can lead to persistent mispricing. This is not a complaint. It is simply an attempt to be rational and grounded. Investors need to operate in the world as it exists—not as they wish it existed. Being Perpetually Undervalued – A Feature, Not a Bug Is owning a perpetually undervalued compounding machine a bad thing? For long-term investors, it can be a meaningful advantage. Benefits for Investors Long learning runway – Time to build conviction Position sizing – Easier to hold a concentrated stake Patience – Less temptation to sell due to overvaluation concerns Benefits for Fairfax Persistent undervaluation creates an opportunity to repurchase shares at attractive prices. This is essentially the “Buffett dream scenario”: A high-quality business earning strong returns on capital while buying back stock at low multiples for years. Each buyback at a low multiple accelerates per-share value creation. Will Fairfax do it? Based on their actions in recent years, yes. Over the past six years, Fairfax has spent $4.5 billion repurchasing shares and reduced effective shares outstanding by 5.8 million (21.7%). Average cost: $773 Share price (Feb 10, 2026): $1,710 Outstanding. How the Big Money Gets Made Fairfax is a compounding machine. These businesses are rare. When you find one, the key is simple: Hold it. Let it compound. Paradoxically, persistent undervaluation can make that easier—and more profitable—over time. Edited February 16 by Viking
73 Reds Posted February 16 Posted February 16 15 minutes ago, Viking said: Performance and Valuation – Comparing Fairfax to P/C Insurance Peers - Part 2 Interpreting the Results Whether measured by: BVPS growth + dividends, or Total shareholder return Fairfax delivered outstanding performance over the six-year period from 2020 to 2025—both in absolute and relative terms. What Drove the Results? Steady improvement and strong growth in insurance operations Major gains in the investment portfolio Record earnings generation Best-in-class capital allocation Compounding working its magic A favorable external environment aligned with the company’s capabilities The natural next question: How is the market rewarding this top-tier performance? Valuation Analysis 1) Price-to-Book Value (P/BV) Fairfax P/BV: 1.36 Fairfax has the lowest P/BV in the peer group. Compared to higher-valued names such as W.R. Berkley and Intact Financial, Fairfax trades at a meaningful discount. Importantly, Fairfax’s book value materially understates its economic value. Adjusting for this suggests the company’s economic P/BV is even lower. In other words, the stock is cheaper than it appears based on reported numbers. 2) Price-to-Earnings (P/E) While P/E is not ideal as a stand-alone metric for insurers, it remains useful for peer comparison. Fairfax trailing P/E: 8.6 Once again, Fairfax screens as the cheapest stock in the group—by a wide margin. Summary of Findings Performance Over the past six years, Fairfax has delivered: Best-in-class BVPS growth + dividends Best-in-class total shareholder return Valuation Despite this performance, Fairfax currently trades at: P/BV: 1.36 P/E: 8.6 Both are the lowest among peers. Conclusion: Investors can buy the top-performing P/C insurer—with strong future prospects—at the lowest valuation in its peer group. Interpreting the Disconnect What explains the valuation gap? Management quality? Best-in-class (we have gone into great detail on this important topic in the past) Earnings quality? Highest in the company’s history; durable and repeatable Future prospects? Stronger than ever, with both insurance and investment engines performing at a high level So, what else could explain it? Likely factors include: Smaller company – not widely followed Management is not promotional Business model is complex Unorthodox methods Past trust issues and a colorful history Fairfax remains under-followed. It is hard to understand. It is unconventional. As a result, it is often misunderstood and underappreciated – conditions that can lead to persistent mispricing. This is not a complaint. It is simply an attempt to be rational and grounded. Investors need to operate in the world as it exists—not as they wish it existed. Being Perpetually Undervalued – A Feature, Not a Bug Is owning a perpetually undervalued compounding machine a bad thing? For long-term investors, it can be a meaningful advantage. Benefits for Investors Long learning runway – Time to build conviction Position sizing – Easier to hold a concentrated stake Patience – Less temptation to sell due to overvaluation concerns Benefits for Fairfax Persistent undervaluation creates an opportunity to repurchase shares at attractive prices. This is essentially the “Buffett dream scenario”: A high-quality business earning strong returns on capital while buying back stock at low multiples for years. Each buyback at a low multiple accelerates per-share value creation. Will Fairfax do it? Based on their actions in recent years, yes. Over the past six years, Fairfax has spent $4.5 billion repurchasing shares and reduced effective shares outstanding by 5.8 million (21.7%). Average cost: $773 Share price (Feb 10, 2026): $1,710 Outstanding. How the Big Money Gets Made Fairfax is a compounding machine. These businesses are rare. When you find one, the key is simple: Hold it. Let it compound. Paradoxically, persistent undervaluation can make that easier—and more profitable—over time. Thanks as always @Viking. The irony is, Fairfax trounced its competitors and its not as if the competition's performance was bad; I mean on what planet is a 10-15% annual return for 6 years running considered awful? I think a couple things did make a difference; namely that Fairfax started from such a low base and also, to its credit they recognized how cheap the share price was and not only bought back a lot of stock, the TRS added a whole new gear. Why Buffett didn't consider a TRS during times when Berkshire's share price traded like a hated company is still a mystery to me. Certainly while the TRS remains in place, there is no reason why not to keep adding shares with excess investment capital. In fact, I will likely continue to gradually accumulate shares until the time comes when the company issues shares to make an acquisition.
Viking Posted February 16 Posted February 16 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).
longlake95 Posted February 16 Posted February 16 great work, as always Viking. i'm in the camp, that as FFH grows and continues to buy non-insurance businesses, it will become less unknown and attract a higher valuation. However, the caveat is that the market will be painfully slow to recognize this. That slowness is our opportunity to increase our personal allocations over time, and FFH's opportunity to shrink the share count.
Viking Posted February 16 Posted February 16 11 minutes ago, 73 Reds said: Thanks as always @Viking. The irony is, Fairfax trounced its competitors and its not as if the competition's performance was bad; I mean on what planet is a 10-15% annual return for 6 years running considered awful? I think a couple things did make a difference; namely that Fairfax started from such a low base and also, to its credit they recognized how cheap the share price was and not only bought back a lot of stock, the TRS added a whole new gear. Why Buffett didn't consider a TRS during times when Berkshire's share price traded like a hated company is still a mystery to me. Certainly while the TRS remains in place, there is no reason why not to keep adding shares with excess investment capital. In fact, I will likely continue to gradually accumulate shares until the time comes when the company issues shares to make an acquisition. @73 Reds, thanks for commenting. I do like to try to lean out a little with my analysis. I agree, most P/C insurance companies have performed well over the past 6 years. I think most will also perform well moving forward - all are going to be gushing cash and most will be aggressive with buybacks. Starting point. This is important. If I had used 5 years as the time frame, Fairfax would have looked even better - its stock price was still depressed at Dec 31, 2020. Instead I decided to use Dec 31, 2019 because this took Covid out of the picture. Now you say "Fairfax started from such a low base". We know that now. But we didn't know that then. Fairfax was not on most investors radar in late 2019. What drove performance the past 6 years. You reference the TRS. Yes it has been an outstanding investment. But Fairfax has have a bunch: Fixed income: taking the average duration to 1.2 years in Dec 2021 was a masterstroke and saved the company billions in losses. Share buybacks: crazy how many shares they bought back (and the price). Selling 9.9% of Odyssey to fund part of the buybacks was a masterstroke. Asset sales: pet insurance ($1 billion gain), RFP (top of lumber cycle), Stelco (top of steel cycle), Orla (after big gain). Equities: Pulled the weeds and watered the flowers: too many examples to list. Their equity portfolio has been significantly upgraded (in terms of quality) and it looks very well positioned today. It has been performing very well. Insurance: in addition to all the above, they doubled the size of the insurance business. The big learning for me over the past 6 years is how good Fairfax is at capital allocation. They have been putting on a clinic. This matters to an investor today because it is capital allocation skill that determines future ROE. To me that is the big disconnect with Fairfax today - the stock is being priced like they are terrible at capital allocation.
73 Reds Posted February 16 Posted February 16 21 minutes 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). A lot of folks recognized Buffett as one of the greatest investors of all time yet never owned the stock.
Viking Posted February 16 Posted February 16 (edited) 18 minutes ago, longlake95 said: great work, as always Viking. i'm in the camp, that as FFH grows and continues to buy non-insurance businesses, it will become less unknown and attract a higher valuation. However, the caveat is that the market will be painfully slow to recognize this. That slowness is our opportunity to increase our personal allocations over time, and FFH's opportunity to shrink the share count. @longlake95, I appreciate the comment. As I do my updates, I have been able to add more pieces that (hopefully) make them a little better. It is work in progress. I am interested to see what they do with non-insurance businesses moving forward. I don't think they want to become a conglomerate like BRK. But I think they see the value of having a large earnings stream that is separate from the insurance business - makes the company more resilient. One of the things that makes Fairfax so hard to understand is it keeps morphing as a company. Part of this is because of how opportunistic they are - what they do depends on what Mr. Market serves up. Non-insurance is perhaps the best example of that today. That income stream looks like it is breaking out - and it is not on anyones radar. I am putting together a post on why Fairfax is so hard to understand and so misunderstood - and how that can provide an investor with a big edge. Edited February 16 by Viking
Crip1 Posted February 16 Posted February 16 (edited) 1 hour 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). As always, really appreciate your insights, Viking. Many of us, myself included, would likely not own as much FFH as we do now without you…or, we would have bought in later than we did. What do board members think of my suggestion in my post above that Fairfax could remain perpetually undervalued as a company? I think that’s likely. We all know that share price fluctuates far more than the underlying value. I do think that FFH will, at times, be fairly valued by the market. But I’d opine that it will spend far more time being undervalued…the complexity of the company coupled with the fact that it’s far from “sexy” are two reasons for this conclusion. Additionally, the conglomerate discount feeds into this (although this will be mitigated if the monetize their investments like they are doing with AGT…it’s interesting to think what Poseidon or Exco may be worth 10 years from now if they were to be spun off) Would perpetual undervaluation be a good or a bad thing for long term investors if that happened? It is mainly neutral, but is more of a good thing than a bad thing, simply because being undervalued allows management to use capital to buy back shares if they cannot find a better use for capital in the marketplace. I can’t speak for others, but I am far more concerned with their ROIC than I am share price. Let's suppose that FFH is really worth 50% more than it’s selling for. If FFH can earn15%/year ROIC, and FFH continues to be worth 50% more than it is selling for, then I am still making 15% on my investment. Business performance is the driver, long-term. Closing the valuation gap would be nice, I guess, but performance is where the rubber meets the road. -Crip Edited February 16 by Crip1
UK Posted February 16 Posted February 16 55 minutes ago, 73 Reds said: A lot of folks recognized Buffett as one of the greatest investors of all time yet never owned the stock. +1
TwoCitiesCapital Posted February 16 Posted February 16 2 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). I agree with you. A below-intrinsic valuation limits what they can do with share issuance, but is essentially a guaranteed boost to ROE and ROIC figures by giving a no-brainer activity of repurchasing shares. Having high price shares lowers the cost of acquisitions, which increases optionality, but also introduces the execution for risk of large acquisitions and isn't necessarily a no-brainer. I'm ok with a an undervalued stock as long as the management is doing the rational thing and repurchasing it.
dartmonkey Posted February 16 Posted February 16 4 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). I think your answer to your own question (the 2nd on) is exactly right. It is true that thel ow share price limits how much Fairfax can expand its business thru share issuance, but in any case I do not want Fairfax to morph into a trillion-dollar company like Berkshire in 25 years and to then be in a situation where there are no further acquisitions that move the needle. I would much prefer for it to be able to sop up all of its retained earnings with share repurchases, and for it to remain at roughly the same size indefinitely. As others have said, the important thing for investment returns is that the company have a high return on equity, and having the opportunity to buy shares of a company it knows intimately, at 8-9x earnings, means they can not only keep to a reasonable size, but also generate high returns. It also means they have a high bar for making other acquisitions - logically, why would they buy take the chance of buying another company at 15-20x earnings when they can buy their own at 9x? As for the first question, I have no idea, but I suppose it has traded at a high P:B in the past so it might well do that again, if and when investors ever forget the short sales, the inflation hedges, and the Blackberry-like equity investments of 10 years ago. If that happens, I trust that Watsa will shift gears and halt the repurchases, and maybe issue shares again. This is the Singleton playbook, and Watsa has said Singleton is the gold standard, and while I would like to see even more aggressive share repurchases, credit where credit is due, Watsa has done this much more effectively than the great Buffett. Just one more thing to like about Fairfax...
Viking Posted February 17 Posted February 17 (edited) On 2/16/2026 at 3:16 PM, dartmonkey said: I think your answer to your own question (the 2nd on) is exactly right. It is true that thel ow share price limits how much Fairfax can expand its business thru share issuance, but in any case I do not want Fairfax to morph into a trillion-dollar company like Berkshire in 25 years and to then be in a situation where there are no further acquisitions that move the needle. I would much prefer for it to be able to sop up all of its retained earnings with share repurchases, and for it to remain at roughly the same size indefinitely. As others have said, the important thing for investment returns is that the company have a high return on equity, and having the opportunity to buy shares of a company it knows intimately, at 8-9x earnings, means they can not only keep to a reasonable size, but also generate high returns. It also means they have a high bar for making other acquisitions - logically, why would they buy take the chance of buying another company at 15-20x earnings when they can buy their own at 9x? As for the first question, I have no idea, but I suppose it has traded at a high P:B in the past so it might well do that again, if and when investors ever forget the short sales, the inflation hedges, and the Blackberry-like equity investments of 10 years ago. If that happens, I trust that Watsa will shift gears and halt the repurchases, and maybe issue shares again. This is the Singleton playbook, and Watsa has said Singleton is the gold standard, and while I would like to see even more aggressive share repurchases, credit where credit is due, Watsa has done this much more effectively than the great Buffett. Just one more thing to like about Fairfax. I like Singleton as a comparable for Fairfax, but looking through a wider lens: 1. Optimize results at the operating companies. I think many investors are asleep at the wheel on what has happened at Fairfax over the past 8 years on this front and what it means for the company moving forward (quality ofearnings). Insurance really got going on this path in 2011 when Andy Barnard got put into a leadership position. Equities got going on this path around 2018. it has been a long road - but it looks like mission accomplished. Both insurance and equities are both generating an enormous amount of cash for Fairfax. This is a relatively new and very exciting development for Fairfax. 2.) Being maverick at capital allocation. Buying back stock in the 1970’s was considered a dumb thing for a management team to do. Singleton was heavily criticized then. Singleton did it because he was so analytical and rational. He didn’t care what others thought. And he owned/controlled enough of the company he could do unconventional things and not to worry about getting removed. (Does this sound familiar?) I look at Fairfax’s TRS investment as classic Henry Singleton. Also how they use equity of the insurance subs (minority interests) and non-insurance subs (public markets) to raise capital. Again, classic Singleton. Nontraditional. Ignored. Misunderstood. 3.) Of course there is also the share buyback angle. It will be very interesting to see how aggressive Fairfax remains on the buyback front. If the stock remains perpetually undervalued (which also happened with Teledyne) they may get a wonderful opportunity. Edited February 17 by Viking
roundball100 Posted February 17 Posted February 17 5 hours ago, Viking said: [...] I am putting together a post on why Fairfax is so hard to understand and so misunderstood - and how that can provide an investor with a big edge. What struck me most on reading [The Fairfax Way] was how much pain (losses) the company suffered early on from the bad books of business they inherited from the set of insurance companies that they bought over time (excluding a couple of the more recent ones). It took a long time to turn these around, and they eventually learned the Munger-like lesson: it's better to pay a reasonable price for good insurance companies. This was a headwind for far longer than I had realized. And is probably a not insignificant factor in the current misunderstanding (mispricing) of Fairfax ... Mr. Market seems to still not recognize that this headwind has been removed for some time now (among several others you've pointed out several times: low interest rates being another big headwind that has changed) .
Hektor Posted February 17 Posted February 17 6 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). #1 is also dependent on FFH and (more importantly) Prem attracting and retaining the kind of share holders FFH desires/deserves, I think.
Viking Posted February 17 Posted February 17 (edited) 49 minutes ago, roundball100 said: What struck me most on reading [The Fairfax Way] was how much pain (losses) the company suffered early on from the bad books of business they inherited from the set of insurance companies that they bought over time (excluding a couple of the more recent ones). It took a long time to turn these around, and they eventually learned the Munger-like lesson: it's better to pay a reasonable price for good insurance companies. This was a headwind for far longer than I had realized. And is probably a not insignificant factor in the current misunderstanding (mispricing) of Fairfax ... Mr. Market seems to still not recognize that this headwind has been removed for some time now (among several others you've pointed out several times: low interest rates being another big headwind that has changed) . Fairfax had two periods where results suffered for extended periods because of self inflicted wounds: Bad insurance purchases at the end of the 1990’s Equity hedge (exited 2016) and shorts (ended 2020) The first mistake put insurance on the right path. The second mistake put investment management on the right path. Those are Fairfax’s two businesses. An investor in Fairfax today is getting a company that has learned important lessons. It is battle tested. The amazing thing to me is that the company has been able to compound at 19% for 40 years, despite taking a couple of big missteps. I think that provides a pretty strong indication of the incredible strength of their business model. The interesting thing is we have never seen the current version of their business model before: strong insurance operations + strong investment management + strong capital allocation. And we are getting this at a very low valuation (P/BV = 1.35) and we get all the hidden value for free (+$4B?). Edited February 17 by Viking
Viking Posted February 17 Posted February 17 (edited) 34 minutes ago, Hektor said: #1 is also dependent on FFH and (more importantly) Prem attracting and retaining the kind of share holders FFH desires/deserves, I think. @Hektor, I think that is what Fairfax wants. But I don’t think it is realistic. And that is because of how Fairfax invests. They are very good. But they tend to be very unconventional. And every decision they make is HIGHLY scrutinized - even the small ones. And they are going to have some clunkers. A couple in a row? Bottom line, one of my high certainty views with Fairfax is the share price is going to be volatile moving forward (like all stocks). And that is what we have seen over the past 4 months (2 fairly large sell offs as their business just keeps chugging along). Edited February 17 by Viking
SafetyinNumbers Posted February 17 Posted February 17 1 hour ago, roundball100 said: What struck me most on reading [The Fairfax Way] was how much pain (losses) the company suffered early on from the bad books of business they inherited from the set of insurance companies that they bought over time (excluding a couple of the more recent ones). It took a long time to turn these around, and they eventually learned the Munger-like lesson: it's better to pay a reasonable price for good insurance companies. This was a headwind for far longer than I had realized. And is probably a not insignificant factor in the current misunderstanding (mispricing) of Fairfax ... Mr. Market seems to still not recognize that this headwind has been removed for some time now (among several others you've pointed out several times: low interest rates being another big headwind that has changed) . The accounting made those acquisitions look bad but my guess is the economics were on average pretty great.
SafetyinNumbers Posted February 17 Posted February 17 7 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). This comments are mainly focused on the narrative to explain the discount but ultimately it will come down to supply and demand of shares. Passive demand is going up, buybacks bring supply down. The larger unrealized gains investors have the less likely they are to sell shares for tax reasons also reduces supply. Maybe we’ll need another hard market for momentum investors to jump back in for revenue/float growth to get the multiple really going but in the meantime shares will be bought back and minority interests bought in which provides excellent growth on per share basis.
Txvestor Posted February 17 Posted February 17 (edited) 9 hours ago, Viking said: @73 Reds, thanks for commenting. I do like to try to lean out a little with my analysis. I agree, most P/C insurance companies have performed well over the past 6 years. I think most will also perform well moving forward - all are going to be gushing cash and most will be aggressive with buybacks. Starting point. This is important. If I had used 5 years as the time frame, Fairfax would have looked even better - its stock price was still depressed at Dec 31, 2020. Instead I decided to use Dec 31, 2019 because this took Covid out of the picture. Now you say "Fairfax started from such a low base". We know that now. But we didn't know that then. Fairfax was not on most investors radar in late 2019. What drove performance the past 6 years. You reference the TRS. Yes it has been an outstanding investment. But Fairfax has have a bunch: Fixed income: taking the average duration to 1.2 years in Dec 2021 was a masterstroke and saved the company billions in losses. Share buybacks: crazy how many shares they bought back (and the price). Selling 9.9% of Odyssey to fund part of the buybacks was a masterstroke. Asset sales: pet insurance ($1 billion gain), RFP (top of lumber cycle), Stelco (top of steel cycle), Orla (after big gain). Equities: Pulled the weeds and watered the flowers: too many examples to list. Their equity portfolio has been significantly upgraded (in terms of quality) and it looks very well positioned today. It has been performing very well. Insurance: in addition to all the above, they doubled the size of the insurance business. The big learning for me over the past 6 years is how good Fairfax is at capital allocation. They have been putting on a clinic. This matters to an investor today because it is capital allocation skill that determines future ROE. To me that is the big disconnect with Fairfax today - the stock is being priced like they are terrible at capital allocation. Thanks @Viking for your post and generously sharing your thoughts. At the risk of sounding a bit pessimistic allow me to present a few counter arguments. The change to the IFRS accounting caused a significant jump in Book value per share by around $100 per share in circa April 2023. As I recall(off my memory) it pushed it up like $650->$750 or so when they reported it. So atleast part of the BV gain is attributable to that accounting change. The share buybacks have been great but let's remember all those 6yrs of buybacks did was approximately to make up for the dilution realized when they issued shares for the Allied world acquisition in 2017. Again we are better off for it as it's been a great acquisition but we need to bear in mind we are back to where we were in 2017. With reference to the "low base" comment. As a shareholder since 2009, I can tell you till 2019 was a painful decade. Between the hedges, other poor equity investments, zero interest rates and a still evolving insurance operations, returns were dismal. A lost decade. All while the stock markets ripped easily 5x higher from GFC lows. I recollect the stock at times trading as low as 0.55 BV at one point and generally no higher that 0.85-0.9 BV for most of this time. A truly testing time for any shareholder. Not just from a valuation point of view but also from a performance perspective too. I held a smaller position all of this time and fortunately since 2023 gradually developed conviction to build my position to 3x what I previously held. So yes, I agree with most of your points, but the above items do bear some consideration in understanding the reasons for any perceived undervaluation. It may take yet another few years before the market totally shakes off those memories. Edited February 17 by Txvestor
Txvestor Posted February 17 Posted February 17 2 hours ago, Viking said: Fairfax had two periods where results suffered for extended periods because of self inflicted wounds: Bad insurance purchases at the end of the 1990’s Equity hedge (exited 2016) and shorts (ended 2020) The first mistake put insurance on the right path. The second mistake put investment management on the right path. Those are Fairfax’s two businesses. An investor in Fairfax today is getting a company that has learned important lessons. It is battle tested. The amazing thing to me is that the company has been able to compound at 19% for 40 years, despite taking a couple of big missteps. I think that provides a pretty strong indication of the incredible strength of their business model. The interesting thing is we have never seen the current version of their business model before: strong insurance operations + strong investment management + strong capital allocation. And we are getting this at a very low valuation (P/BV = 1.35) and we get all the hidden value for free (+$4B?). The compounding rate is not going to be anything close to that if you take it since 2009. Yes I agree the set up is a lot better today. And hence why I increased my position since 2023, but pretending like that lost decade didn't happen is not a good idea when doing the case study. As we saw with them reducing their bind duration recently they're still somewhat in the macro game. There are no guarantees they won't make big mistakes again. I agree less likely but not a zero likelihood event.
Txvestor Posted February 17 Posted February 17 (edited) 5 hours ago, dartmonkey said: I think your answer to your own question (the 2nd on) is exactly right. It is true that thel ow share price limits how much Fairfax can expand its business thru share issuance, but in any case I do not want Fairfax to morph into a trillion-dollar company like Berkshire in 25 years and to then be in a situation where there are no further acquisitions that move the needle. I would much prefer for it to be able to sop up all of its retained earnings with share repurchases, and for it to remain at roughly the same size indefinitely. As others have said, the important thing for investment returns is that the company have a high return on equity, and having the opportunity to buy shares of a company it knows intimately, at 8-9x earnings, means they can not only keep to a reasonable size, but also generate high returns. It also means they have a high bar for making other acquisitions - logically, why would they buy take the chance of buying another company at 15-20x earnings when they can buy their own at 9x? As for the first question, I have no idea, but I suppose it has traded at a high P:B in the past so it might well do that again, if and when investors ever forget the short sales, the inflation hedges, and the Blackberry-like equity investments of 10 years ago. If that happens, I trust that Watsa will shift gears and halt the repurchases, and maybe issue shares again. This is the Singleton playbook, and Watsa has said Singleton is the gold standard, and while I would like to see even more aggressive share repurchases, credit where credit is due, Watsa has done this much more effectively than the great Buffett. Just one more thing to like about Fairfax... You are absolutely correct, for the loyal long term shareholder, the ability for the share price to stay at the current levels is a true blessing. Mainly because it puts a hurdle in front of every other investment decision that management wants to make. And when management is a major shareholder it just makes it that much more likely that they will be focused on that primary measure of shareholder returns. So if you asked me, whether Watsa would rather prefer a $250 billion company with a great shareholder return or $1 trillion company with a more mediocre one, I think most of us on this board believe he would take the first option. Buying back 21.7% of the company for $4.5B over the last 6yrs demonstrates this. Alternately the empire could have been $10B or so bigger easily. The fact that Watsa is more inclined to buy back shares, issue shares, buy companies, sell companies, TRS on their shares, partial sub sales, and do all the other sort of shareholder value accretive maneuvers to juice up shareholder returns demonstrates that priority and focus. Edited February 17 by Txvestor
Viking Posted February 17 Posted February 17 9 minutes ago, Txvestor said: The compounding rate is not going to be anything close to that if you take it since 2009. Yes I agree the set up is a lot better today. And hence why I increased my position since 2023, but pretending like that lost decade didn't happen is not a good idea when doing the case study. As we saw with them reducing their bind duration recently they're still somewhat in the macro game. There are no guarantees they won't make big mistakes again. I agree less likely but not a zero likelihood event. @Txvestor, I appreciate the opportunity to discuss Fairfax. Please keep the comments coming. In terms of future compounding, I think ROE = 15% is a good mildly conservative baseline number to use for the next 5 years (as far out as I go). I view this as mildly conservative because of all the hidden value that has accumulated over the past 5 years (and continues to grow) - this will eventually flow into future earnings. I don’t think I have ever pretended 2010 to 2020 did not happen. I just don’t think parts of it are relevant today (I think Fairfax learned from their mistakes made). And every year Fairfax continues to execute well it becomes less relevant (for me). Fairfax approaches all aspects of their business through the lens of value investing (of course, there are other considerations). Given how well they have executed the past 5 years I am ok giving them some rope - from my perspective they have earned it. I don’t have a strong opinion about what they are doing with the average duration of the fixed income portfolio (I think Brian Bradstreet and team are very good). I think it is guaranteed they will make mistakes moving forward. Buffett made lots over his whole career. Investors in Fairfax have been very lucky the past 5 years - the company has been on a hot streak. My eyes are wide open.
UK Posted February 17 Posted February 17 (edited) 13 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). I think generally it is not a bad thing, especially for a buy and hold investors, because of the more atractive bb alternative, but also because of the lower risk of occational drawdown caused by multiple compression. And I think going forward FFH is in no need (or in less of a need) of the overpriced shares tool anyway. But maybe this is not ideal for more active investors, because greater volatility (I mean something like 1.2-1.7 BV range vs 1.3-1.4), would allow us to juice these 15 percent expected returns a bit:). But I think this will happen, even BRK in the last 15 years provided the opportunity to do this two times (2011-2012 and 2020). Edited February 17 by UK
Junior R Posted February 17 Posted February 17 (edited) Quote Kennedy Wilson Enters into Agreement to be Acquired by Consortium Led by William McMorrow and Fairfax Financial Quote Concurrent with entering into the Merger Agreement, Fairfax has entered into a commitment letter pursuant to which Fairfax has committed to provide the Consortium with funding up to an aggregate amount of $1.65 billion, which is the amount necessary to fund the cash purchase price in respect of the Transaction, the redemption of those preferred shares of the Company not owned by the Consortium, and certain other amounts required to be paid under the terms of the Merger Agreement. The Transaction is not subject to a financing condition. Following consummation of the Transaction, the KW Management Group, led by William McMorrow, will have effective and operational control of and will continue to lead and have ultimate responsibility for the Company and its subsidiaries. Fairfax is expected to have a majority of the economic interest in the Company immediately following the closing of the Transaction. Edited February 17 by Junior R
UK Posted February 17 Posted February 17 (edited) 15 minutes ago, Junior R said: More HALO assets...whats not to like:)? Edited February 17 by UK
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