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FFH has underperformed the S&P midcap 400 over the past 15 years or so.


stahleyp
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Watsa is a very ethical guy and a superb investor. However, doesn't anyone else find it strange that he's underperformed the S&P 400 midcap index over the past 15 years? I know it's a Canadian company, but wouldn't you think it would still beat the index over that time? Am I missing something here?

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What you are missing is the starting point or 1996. At that time, Fairfax was a high flier since it was considered a fast grower that could do no wrong and traded at a high multiple of book value and a high P/E. The story changed quite a bit after that following disastrous under-reserving at two companies that they bought almost at the same time: Crum & Forster and TIG.

 

I don't think that Watsa could have done anything about the high multiples in 1996 except maybe trying to lower the Street's expectations. However, he could do something about today's multiple by buying back stock or trying to improve the visibility of the company. And this may or may not work at all considering the low multiples currently attached to insurance companies.

 

I have no position at the moment.

 

Cardboard

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Hi Paul,

 

What you really should be looking at is growth in book value per share between 1996 and 2010.  Fairfax's book value per share in 1996 was $63.31, whereas book value per share at the end of 2010 is $379.46.  That's an increase of 12.7% annualized.  I believe the S&P Midcap 400 TR did a little better than 9% annualized over the same period.

 

Market prices can be significantly overvalued and undervalued at various times, but ultimately market prices track increases in book value per share.  In Fairfax's case, the market assumed ridiculous views on the stock back during 1996-1998.  It would have been very silly for anyone to hold on to Fairfax stock back in 1998 when it hit $600 per share, while book value was only $112.

 

If you go to the second to last page of Fairfax's 2009 annual report, you get the best view of the company's progress over the years. 

 

http://www.fairfax.ca/Assets/Downloads/AR2009.pdf

 

Cheers!

 

 

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Cardboard, Your out of FFH entirely? 

Fed up?

Better values elsewhere?  I find that hard to believe at the moment?

Gone to cash?

I keep a sizable FFH position in my RRSPs - well protected on the downside.  It still makes up my largest position in the non-registered accounts.  If I could find better values than a depressed 15% grower at Book value than I would sell but nothing is compelling enough to justify taxes on the gains I have this year.  I have probably taken 100 k in gains since January 1st as it is.

 

Can I take this as a buy signal on FFH. ;)

 

BTW:  I dont think FFH can budge the stock price right now.  They certainly have alot of cash but would be required to make a formal offer to buy in 500 M of stock, when it trades a couple of million per day at best.  They might be able to pull in  a few hundred million in stock if the price stays at this level for 3 or 4 years. 

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If you follow my posts on fairfax you will notice that we take a very close look at Fairfax bond portfolio which  included the CDS portfolio a couple of years ago...because their bond portfolio is almost 4 to 1 in size compared to equity positions...Fairfax bonds determines a greater portion of Book value movements. They are unwilling to make Berkshire like bets on common stock so it is tough to gauge what the equity portfolio is doing...it rarely shows one time gains big enough to move the needle.

ie BONDS $15b @10%=$1.5b (this bet went the other way this year..thats why we knew they had a large loss)

Their hedged equity portfolio is dead money..they maybe have $1b net long exposure @10%=$100m   

 

They have made extremely big equity bets (Northbridge,ORH, Zenith and others) that we think they will be great in the future. However, their bond bet and equity hedges are dead wrong right now. We will be watching closely...we do not own any FFH right now and have not since the Spring of last year. We think they will eventually be right (bonds) but that could be  awhile in the works.

 

Dazel.

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sorry lost my point there...point is that the "rock star" at Fairfax is Brian Bradstreet...even though their bond bet has been off (for now)...he and his team have the best record we have seen in bond investing over the last 15 years.....and if you count $$$ like we did above...they are the driving force behind Fairfax. Knowing they have to be conservative as well to maintain income. When buy large at Fairfax it is usually beacus ethe bond team has done something great again. We of course are very happy with the equity portfolio over the years!!! But the big$$$ are in bonds because of leverage.

 

Dazel.

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Hi Al,

 

Yes, I sold all my remaining Fairfax shares in early 2010. It is a nice grower selling at book value as you said, but 15% may be a little agressive IMO. The bigger problem is that I see very little chance of multiple expansion until they start making money on the underwriting side and when is that going to be?

 

So I kind of look at it as a very well managed fund with the potential for multiple expansion once the cycle turns. But, due to their size, I figure that I can do better picking my own stocks. I can buy into very small companies where you always seem to be able to find amazing values. Maybe that I am over confident, but historically it has worked out.

 

If Fairfax had remained U.S. listed and still offered options, I would have likely created a synthetic long (buy a call and sell a put of same duration and strike) whenever the stock became quite undervalued or bought a relatively deep in the money call. That is what I do with big companies so that my price to value ratio on capital employed remains similar to the price to value ratio of small caps where I am long the equity.

 

However, if at some point I decide to slow down investing myself, Fairfax will certainly be in my top 10 choices of companies/funds to manage my capital.

 

Cardboard

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