Canadian FairFax holder.

[ERICOPOLY]

Berkshire Hathaway does trade today at 1.36 times book value, but to compare it with Fairfax we should make an adjustment for goodwill. Goodwill at Berkshire is $33.8 billion or 33% of common equity. At Fairfax, it's only $286 million or 6.4% of common equity. Removing the goodwill at Berkshire makes it trade at 2.03 times book value.

 

This made me think again about goodwill and book values.

 

I could form an investment holding company and put 100% of the assets into DELL common stock at current market price of approximately $12 per share (which is trading at roughly 5x book).  Let's call this holding company "Fairfax".

 

Instead, let's say my holding company acquires all of the shares of DELL at $12 per share, thereby taking it private.  Now, given that we paid 5x book for DELL we need to record a goodwill item on the balance sheet of $9.60 per share.  Let's call this holding company "Berkshire".

 

Is it fair to strip out the goodwill from the "Berkshire" company and compare the book value to the "Fairfax" company?  They invested in exactly the same thing, but one of them is going to have a tangible equity value of 5x the other one.

 

I think Berkshire's goodwill is understated and if anything we should be significantly adding to it before comparing the company to Fairfax.  A liquidation of Berkshire isn't a situation where the employees are laid off and the PP&E sold.  Rather, you simply find a buyer for each and every operating sub and my thinking is Berkshire shareholders would be getting compensated far in excess of the stated book value (inclusive of goodwill).

[Guest JackRiver]

Berkshire Hathaway does trade today at 1.36 times book value, but to compare it with Fairfax we should make an adjustment for goodwill. Goodwill at Berkshire is $33.8 billion or 33% of common equity. At Fairfax, it's only $286 million or 6.4% of common equity. Removing the goodwill at Berkshire makes it trade at 2.03 times book value.

 

This made me think again about goodwill and book values.

 

I could form an investment holding company and put 100% of the assets into DELL common stock at current market price of approximately $12 per share (which is trading at roughly 5x book).  Let's call this holding company "Fairfax".

 

Instead, let's say my holding company acquires all of the shares of DELL at $12 per share, thereby taking it private.  Now, given that we paid 5x book for DELL we need to record a goodwill item on the balance sheet of $9.60 per share.  Let's call this holding company "Berkshire".

 

Is it fair to strip out the goodwill from the "Berkshire" company and compare the book value to the "Fairfax" company?  They invested in exactly the same thing, but one of them is going to have a tangible equity value of 5x the other one.

 

I think Berkshire's goodwill is understated and if anything we should be significantly adding to it before comparing the company to Fairfax.  A liquidation of Berkshire isn't a situation where the employees are laid off and the PP&E sold.  Rather, you simply find a buyer for each and every operating sub and my thinking is Berkshire shareholders would be getting compensated far in excess of the stated book value (inclusive of goodwill).

 

I'm glad you are back.  If I may, it has been suggested that something I did was the reason you left, do you hold that same opinion?

 

Yours

 

Jack River

[ERICOPOLY]

Berkshire Hathaway does trade today at 1.36 times book value, but to compare it with Fairfax we should make an adjustment for goodwill. Goodwill at Berkshire is $33.8 billion or 33% of common equity. At Fairfax, it's only $286 million or 6.4% of common equity. Removing the goodwill at Berkshire makes it trade at 2.03 times book value.

 

This made me think again about goodwill and book values.

 

I could form an investment holding company and put 100% of the assets into DELL common stock at current market price of approximately $12 per share (which is trading at roughly 5x book).  Let's call this holding company "Fairfax".

 

Instead, let's say my holding company acquires all of the shares of DELL at $12 per share, thereby taking it private.  Now, given that we paid 5x book for DELL we need to record a goodwill item on the balance sheet of $9.60 per share.  Let's call this holding company "Berkshire".

 

Is it fair to strip out the goodwill from the "Berkshire" company and compare the book value to the "Fairfax" company?  They invested in exactly the same thing, but one of them is going to have a tangible equity value of 5x the other one.

 

I think Berkshire's goodwill is understated and if anything we should be significantly adding to it before comparing the company to Fairfax.  A liquidation of Berkshire isn't a situation where the employees are laid off and the PP&E sold.  Rather, you simply find a buyer for each and every operating sub and my thinking is Berkshire shareholders would be getting compensated far in excess of the stated book value (inclusive of goodwill).

 

I'm glad you are back.  If I may, it has been suggested that something I did was the reason you left, do you hold that same opinion?

 

Yours

 

Jack River

 

 

I'm all sorted out now  :)

 

[Guest JackRiver]

You were fine before, but that didn't answer my question.

 

Yours

 

Jack River

[prevalou]

comparing Fairfax and Leucadia book value is like comparing apples with oranges.

Fairfax book is at market, not Leucadia. Certain items are understated (Fortescue bond, NOL, participations, etc.)

[Guest JackRiver]

Berkshire Hathaway does trade today at 1.36 times book value, but to compare it with Fairfax we should make an adjustment for goodwill. Goodwill at Berkshire is $33.8 billion or 33% of common equity. At Fairfax, it's only $286 million or 6.4% of common equity. Removing the goodwill at Berkshire makes it trade at 2.03 times book value.

 

This made me think again about goodwill and book values.

 

I could form an investment holding company and put 100% of the assets into DELL common stock at current market price of approximately $12 per share (which is trading at roughly 5x book).  Let's call this holding company "Fairfax".

 

Instead, let's say my holding company acquires all of the shares of DELL at $12 per share, thereby taking it private.  Now, given that we paid 5x book for DELL we need to record a goodwill item on the balance sheet of $9.60 per share.  Let's call this holding company "Berkshire".

 

Is it fair to strip out the goodwill from the "Berkshire" company and compare the book value to the "Fairfax" company?  They invested in exactly the same thing, but one of them is going to have a tangible equity value of 5x the other one.

 

I think Berkshire's goodwill is understated and if anything we should be significantly adding to it before comparing the company to Fairfax.  A liquidation of Berkshire isn't a situation where the employees are laid off and the PP&E sold.  Rather, you simply find a buyer for each and every operating sub and my thinking is Berkshire shareholders would be getting compensated far in excess of the stated book value (inclusive of goodwill).

 

I'm glad you are back.  If I may, it has been suggested that something I did was the reason you left, do you hold that same opinion?

 

Yours

 

Jack River

 

 

I'm all sorted out now  :)

 

 

Ericopoly

 

Might you take the time to answer my question.

 

Yours

 

Jack River

[alertmeipp]

Okay.. I will probably regret it.

I actually sold some FFH today to add to some other holdings (COP is the major one).

[Cardboard]

Alertmeipp,

 

You could look into buying deep in the money call options on both COP and FFH to avoid selling one or the other. If you go far enough, the premium will be very small and they will trade very closely to the stock. Using these however, you will not receive the dividend. Using margin is also attractive currently since it is so cheap with the dividend on these two stocks being enough to cover the interest charges. However, you have to keep monitoring for margin calls, change in interest and the currency.

 

Cardboard 

[Cardboard]

Ericopoly,

 

You make an excellent point around goodwill and it is true that my comparison with Berkshire on that standpoint is quite weak. If Dell or JNJ were proportionally consolidated on Fairfax's balance sheet, instead of being accounted as investments, we would see a goodwill amount appear or just like when Berkshire makes the acquisition of an entire business above book value.

 

However, it becomes tougher to value because you have to figure out the market value of these individual businesses via look through earnings. With Fairfax at the moment, it is easy because most of their assets are traded securities. We can establish a liquidation amount quite easily.

 

So if we consider Fairfax as some kind of levered closed end fund, this liquidation amount should be the minimum amount that one would be willing to pay for this business: You risk $1, but there are many more at work for you and if they close shop tomorrow, you get your dollar back. Then one should ask, why should I pay anymore than this amount?

 

I believe that the answer lies in the confidence for management to underwrite properly (leading to cost of float) and to invest the funds at a high rate of return. How stable or risky is the business structured (amount of leverage, type of insurance) is probably also another important factor. We get more into the value of the insurance business itself or its sustainable earning power. Of course, if they are doing poorly in the above, then the risk to see your dollar back diminishes because book value is being eroded. Again, I don’t think that is the case for Fairfax anymore.

 

Cardboard

 

[ERICOPOLY]

I think back in the early 1990s recession Fairfax traded at 65% of book value.  That's when they bought back 20+% of the shares.

 

Right now it seems like the shares trade at the same BV discount as last September right before the short selling ban.  Except this time the holdco has better cash flow due to the NB takeover.  Less hedges though.

 

[Crip1]

I think back in the early 1990s recession Fairfax traded at 65% of book value.  That's when they bought back 20+% of the shares.

 

Right now it seems like the shares trade at the same BV discount as last September right before the short selling ban.  Except this time the holdco has better cash flow due to the NB takeover.  Less hedges though.

 

 

Adding to the above, FFH now will have more interest income (current munis vs. the treasuries last September) and a harder insurance market now (especially for ORH). If your point is that FFH's value has increased in the past 8 months whereas the price has not, I would tend to agree.

 

I am tempted to buy more at these levels, even though FFH accounts for close to 30% of my investment accounts. Further price declines will, eventually, make it a no-brainer to buy.

 

-Crip