Introduction

[Guest swf83]

Hi to all,

 

I just wanted to briefly introduce myself as I am new to this board. I am a new investor in FFH (as of a few weeks ago) and am very excited about the future of the company. I have owned BRKB in the past, but just didn't feel "comfortable" owning it-- particulary because of the unknown about its future after Buffett. Furthermore, the daily volatility in the stock is quite extreme, which I have a hard time swallowing. The daily volatility in FFH has been minimal, but I know the stock is known to be volatile in some situations (i.e. rumors).

 

When I began to research and do my due diligence on FFH, I was extrememly impressed with everything I watched and read on Prem Watsa. As we all know, there are many bashers and those that want to see FFH go down, but I just don't see how that theory is even possible with its financial position today. Does FFH remind anyone else of a Berkshire in its younger years??

 

Anyways, I am glad to be here and hope to contribute from time to time.

 

Scott

[benhacker]

Scott,

 

Welcome aboard.  Some comments from me, meant to be harsh, but not that harsh, hope this comes across correctly.

 

I have owned BRKB in the past, but just didn't feel "comfortable" owning it-- particulary because of the unknown about its future after Buffett.

This is a fair thing to worry about.  Many here worry about this as well.

Furthermore, the daily volatility in the stock is quite extreme, which I have a hard time swallowing.

If you think the recent volatility in Berkshire has been high, I suggest you do not invest in inidividual stocks.  This is a volatile profession.  Volatility also tends to increase during market downturns, which means if volatility makes you sick you will continually be selling when prices are the lowest... this is what most investors do, but that should not be confused with thinking it a winning strategy.

The daily volatility in FFH has been minimal, but I know the stock is known to be volatile in some situations (i.e. rumors).

I would argue that FFH has been volatile even without the rumors.  Many companies are volaitle, the average stock moves +/-35% in a given year.  The market as a whole usually does +/-15%.

As we all know, there are many bashers and those that want to see FFH go down, but I just don't see how that theory is even possible with its financial position today.

Well, I think the bashers have mostly stopped.  But that doesn' mean the stock won't go down again by a lot.  Their financial positioning much nicer now though, that is true.  But at the same time, they are no longer hedged, so if the market tanks, FFH will follow as we saw in February and March.

Does FFH remind anyone else of a Berkshire in its younger years??

 

Not much for me.  Berkshire and Fairfax have taken rather different paths.  Other than the fact they both run insurance (mostly) companies, and have honest CEOs that have investing talent, I think the comparisions are misplaced.

 

 

[Guest swf83]

Thanks for your thoughts, and they are well-received. A few follow-up points.

 

Regarding volatility: I should have stated that FFH has one the lowest Beta of any stock I have ever owned, or even seen for that matter. The Beta for FFH (according to Yahoo! Finance) is .36. Compare that to Berskhire which is .68 and to an Apple, which is 1.58.

 

Regarding FFH vs. Berkshire: I consider them very similar in that they both own companies, directly and through subsidiary operations, that kick off a lot of cash flow to the parent corporation. This cash is then used for corporate purposes and as investments, which really can generate book value for the company and the stock on a per share basis. I think the size of FFH, currently, can allow FFH to grow a lot quicker than a Berkshire currently can, with wise decisions made by Prem of course. I am 26 years old and plan on continuing to build a position in FFH to hold for 15-20 years, or more. I can only imagine where the BV per share for FFH may be by then...

 

 

Scott

 

[benhacker]

Regarding volatility: I should have stated that FFH has one the lowest Beta of any stock I have ever owned, or even seen for that matter. The Beta for FFH (according to Yahoo! Finance) is .36. Compare that to Berskhire which is .68 and to an Apple, which is 1.58.

 

What do these numbers mean exactly?  Is this monthly beta, daily beta, quarterly beta?  How far does it look back?  One time period, 5 years ?

 

Beta usually has a reference... such as the S&P or Wilshire 5000, so the fact that the benchmark to compare Beta against is at an all time high level of volatility should give you pause at to whether this metric has much meaning to you or not.

 

Regarding FFH vs. Berkshire: I consider them very similar in that they both own companies, directly and through subsidiary operations, that kick off a lot of cash flow to the parent corporation.

 

This to me is another way of saying the FFH and Berkshire are similar because they are both holding companies that own insurance subsidiaries... this may be true, but that does not really imply they are very similar in reality (to me).  But they do have some things in common no doubt.

 

Thanks,

[Guest swf83]

I have been looking for a chart in the annual report or the quarterly report showing the share price performance and/or the book value per share on an annual year-end basis back to when FFH began to trade publicly. Any idea where I can find this?

 

 

[nodnub]

I have owned BRKB in the past, but just didn't feel "comfortable" owning it-- particulary because of the unknown about its future after Buffett.

 

Hi Scott,

 

Rest assured that Warren has given a lot of thought to succession planning and company culture-building at Berkshire.  Wouldn't you say that a company like Fairfax has an equal "key person" risk (imagine the risk that Prem is hit by a bus)?

 

The reality is that both Prem and Warren have surrounded themselves with extremely capable managers that have a strong sense of integrity.  I suspect that the culture at both companies will survive for at least 10 years after the founders move on.  There will be ample opportunity to sell at that point if you see the culture or fortune of Berkshire fading.

[Parsad]

Hi Scott,

 

Welcome to the board.  Just a note of caution, as a new investor, if you run into any blunt comments by our boardmembers, take them in stride.  They are ardent students of Benjamin Graham and don't take kindly to modern portfolio theory (MPT)... so please forgive their trespasses!  ;D

 

In terms of beta, that is a metric that has little value for those outside of MPT.  Seth Klarman did a terrific webcast for the Richard Ivey School of Business, and that link is in the General Discussions section.  Seth lays it out in plain terms how he feels about beta...which is commonly used as a yardstick for volatility and risk.  For example, the markets have been extremely volatile over the last year, yet has risk actually increased or decreased?  The answer is that MPT would argue using beta that risk is high, yet the values of businesses relative to their intrinsic value have plummeted...risk in the markets has significantly decreased in actuality.  So looking for a chart or graph for Fairfax's beta won't do you much good long-term.  Cheers! 

[Cardboard]

Scott,

 

You can find the price to book relationship all the way back to 1985 in a data table at P.157 of Fairfax's annual report.

 

http://www.fairfax.ca/Assets/Downloads/AR2008.pdf

 

Personally, I feel that the risk of the owner disappearing is a greater risk at Berkshire. Warren still makes the big investment decisions while it is a team at Fairfax. However, I am pretty confident that Warren will find a solid investment manager.

 

What I find to be a bigger risk is the market premium paid for Warren. Who knows what it is now since the market premium has shrunk in recent years due to more and more attention paid to this issue. One has to remember that this guy attracts 40,000 people to his shareholders meeting. I would tend to believe that the attendance will shrink once he and Munger are gone. See, I have never been to a Berkshire meeting, but I am thinking about it because I like Warren. If he was not there, I would not even consider attending. To me it means that the market will take a wait and see approach once he is gone and that the company will be considered more or less like any other.

 

While I agree that Berkshire's operating performance will likely continue in a similar manner following Warren's departure. There is a market risk on the timing of the "event" which is impossible to predict. If it is far out in the future, then the impact on returns is likely negligeable. If it is tomorrow, then you could look at a 20, 30% haircut? Who knows?

 

Honestly, I don't understand why Warren is not considering to replace himself while capable to ensure a smooth transition. As Chairman, he could still be there to monitor what is going on and ensure that his selections are right on. It is pretty hard to "tweak" some details that you have forgotten once you have passed away. Previously, he did not want to give away anything to charity before his death because he could keep compounding money. He has changed all that. So I figure that he could come out and decide at some point to initiate the transition while alive.

 

On volatility, Fairfax share price has been quite volatile in my book. Their results are also quite volatile and more so than Berkshire. I would say that Berkshire has a diverse stream of reliable operating earnings while Fairfax operating earnings are almost entirely dependent on the investment decisions since they generate little underwriting income and they still have non-negligeable interest payments.

 

Cardboard

[Guest swf83]

Thank you all for the warm welcome. I am glad to be here.

 

Thanks, Cardboard, for the link to that table.

"I would say that Berkshire has a diverse stream of reliable operating earnings while Fairfax operating earnings are almost entirely dependent on the investment decisions since they generate little underwriting income and they still have non-negligeable interest payments."

 

This is exactly why I think the opportunity for Fairfax is HUGE right now in setting a very strong financial foundation, something that they haven't been able to really do over the past 10 years. The investment decisions and returns are key, you are right, but if they can grow their underwriting and interest/dividend income, this could be a big winner in 5,10,15, 20 yrs down the road. Berkshire has a reliable stream of operating earnings, and that is why the stock is where it is. If Fairfax can get to half of that level imagine...

 

Scott

 

 

[Guest swf83]

After looking through that chart, here is what jumps out... Fairfax has had just four years of negative book value growth since 1985. That is remarkable. Shareholders' equity, one of my favorite corporate metrics, is growing at a nice clip annually as well.

 

I just don't see what is NOT to like about Fairfax.

[benhacker]

I just don't see what is NOT to like about Fairfax.

 

Other than the fact they almost went under in the middle, it's a pretty great record. ;-)

 

Don't get me wrong, I love these guys... just trying to temper and add some realism to your excitement.  This is my largest holding.

[Guest swf83]

You are right Ben. That was a kink in the chain. Let's hope that Prem learned his lesson when it comes to acquisitions. I have a feeling that he did.

[Guest swf83]

I was wrong. The volatility of FFH is not for the weak of heart! When I first invested in FFH in early May, I thought FFH didn't move in very big swings. Boy was I wrong. I am hoping Mr. Market will let me buy some shares under $250 here pretty soon...

[value-is-what-you-get]

Honestly, I don't understand why Warren is not considering to replace himself while capable to ensure a smooth transition.

 

I distinctly remember seeing an interview with Warren and of course the nice reporter asked him if he had any stock tips.  He gave his usual gracious answer (considering the inanity of the question) and then stopped himself for a second and said "Yeah here's one - the day my death is announced - Buy Berkshire"

 

This known event - a certainty - will be his final and profitable lesson to all regarding letting the market serve us, not educate us.

 

It's the only time I've ever heard or read of him recommending a stock - and I don't think it was a joke although she giggled away anyway.

[snailslug]

Honestly, I don't understand why Warren is not considering to replace himself while capable to ensure a smooth transition.

 

He spoke to this at the annual meeting.  He said all 3 successors are currently running large businesses and creating value for Berkshire.  If they were to come to headquarters in Omaha, there wouldn't be anything for them to do.  He made a joke like, I just finished reading the WSJ, do you want to read it now?

 

It seems like what Warren is thinking is that if he lasts 10 more years, for example, that's 10 less years of operating genius / value creation he gets out of the successor.  That could amount to a sizable sum, especially because good managers are hard to find.

 

I think Sokol is the guy, and if that's the case, I don't forsee much of a transition problem, because he's working with Buffett on big deals, so knows the thought process, and MidAmerican already has some other random businesses other than energy (Home Services, the real estate brokerage).

[calonego]

David Sokol is no longer the CEO of MAEH - he's only the Chairman and claims he does 'special projects' at MA/BRK, which is likely code for something to do with doing research on companies they'd look to acquire... CEG is a good example, as is BYD.

There are ways to put people in pre-CEO roles at BRK without defining it as such.