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Why the continued slide In Fairfax share price?


accutronman
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The standard answer is more sellers than buyers!  ;D

 

But more likely people moving from less risky investments to more risky investments.  It'll go the other way next week if the news from the vote is bad.  Cheers!

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Insights?

 

The market sees the horrible value traps they have bought recently in businesses or industries eclipsed by technological change and ignores their outstanding, long term investing record, especially in bonds.

 

The $500 million question for this quarter is when during the quarter they unloaded the LT treasuries. Did they get any benefit at all from the day yields dropped to 1.45% on the ten year, or were they already out completely? I fear they were pretty much out of the trade by then.

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Why would fresh money buy Fairfax which trades over book value while you can buy AIG at half of tangible book? And, with a manager that is committed to buy a massive amount of stock back from a crazy seller with cash that they have or are getting?

 

You may say look at the investing record or look at the bond gains that are coming, but what about the losses in RIMM, LVLT, ABH, DELL. These are in the 100's million $. They will negate most of the bond gains. And what about underwriting income? Any better than AIG or the rest of the industry?

 

Fairfax has been a refuge ever since 2008-2009 or since the massive CDS gains. People feel safe in there. How much time can change??? I think that people should ask more what is next to create book value growth and what if speculating in bonds and derivatives no longer works as well as in the past? It is not priced for perfection, certainly not, but there seems to be a built-in premium for these hedges which are far less than risk free.

 

It may still be a good investment, but just remember that there is competition out there for your hard earned dollars in terms of rate of return. BAC is another one. There is a ton of stocks being discussed on this board regularly that will deliver IMO, more value to their owners in next 3 to 5 years than Fairfax.

 

Cardboard

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Why do you think they have sold them already?  Did I miss an annoucement?  That money would have had to go somewhere.

Prem Watsa in Q&A on most recent conference call May 2, 2012:

 

Treasury rates have come down. Last year, long treasuries were the best asset to have, and so we've sold half our treasuries, we told you, long treasuries, and we continue to sell it. We likely won't have any treasuries soon. And so we're continuing to sell that, the long treasury position.

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I sold out of about 2/3 of my FFH holdings over the last couple years at average prices of 400+.  I've reinvested half of the proceeds into their 2037 bonds and the other half into much better values.

 

Why did I sell?

 

1. I don't think it is that great of a value - the bonds are paying a spread of 550 (i've hedged the fixed to float) are a much better value than the stock.  Other opportunities as well. 

2. I don't like to speculate on short term performance (which is why I still hold a large chunk of FFH and haven't sold it all), but I'm skeptical the stock will really advance anywhere in the near term.  Investments are hedged, so there is limited room for gains.  long bonds have been sold.

3.  My net worth was very exposed to large cat risk because of how large of a holding FFH was.  I was comfortable with this risk when it was trading below book and a great value.  I wasn't comfortable with this when valuation levels increased. 

 

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Why would fresh money buy Fairfax which trades over book value while you can buy AIG at half of tangible book? And, with a manager that is committed to buy a massive amount of stock back from a crazy seller with cash that they have or are getting?

 

You may say look at the investing record or look at the bond gains that are coming, but what about the losses in RIMM, LVLT, ABH, DELL. These are in the 100's million $. They will negate most of the bond gains. And what about underwriting income? Any better than AIG or the rest of the industry?

 

Fairfax has been a refuge ever since 2008-2009 or since the massive CDS gains. People feel safe in there. How much time can change??? I think that people should ask more what is next to create book value growth and what if speculating in bonds and derivatives no longer works as well as in the past? It is not priced for perfection, certainly not, but there seems to be a built-in premium for these hedges which are far less than risk free.

 

It may still be a good investment, but just remember that there is competition out there for your hard earned dollars in terms of rate of return. BAC is another one. There is a ton of stocks being discussed on this board regularly that will deliver IMO, more value to their owners in next 3 to 5 years than Fairfax.

 

Cardboard

 

For the most part you are right of course Cardboard, but at the same time, remember there are certain investments we will not be able to buy and Fairfax can buy at very cheap prices...small private, quality insurers, private non-insurance companies, and even interesting deals in preferreds, debt, etc. that we would not be offered.  Cheers!

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I sold out of about 2/3 of my FFH holdings over the last couple years at average prices of 400+.  I've reinvested half of the proceeds into their 2037 bonds and the other half into much better values.

 

Why did I sell?

 

1. I don't think it is that great of a value - the bonds are paying a spread of 550 (i've hedged the fixed to float) are a much better value than the stock.  Other opportunities as well. 

2. I don't like to speculate on short term performance (which is why I still hold a large chunk of FFH and haven't sold it all), but I'm skeptical the stock will really advance anywhere in the near term.  Investments are hedged, so there is limited room for gains.  long bonds have been sold.

3.  My net worth was very exposed to large cat risk because of how large of a holding FFH was.  I was comfortable with this risk when it was trading below book and a great value.  I wasn't comfortable with this when valuation levels increased. 

 

 

Nice summary.  Probably echos my reasons.  I have sold about 25% of my FFH holdings, to both raise cash, and invest elsewhere, notably AIG, and JPM recently.  I have been selling JPM, BAC, and AIG leaps very slowly into the rally.  Mostly just raising cash, albeit slowly.

 

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As long as Fairfax is hedged and the market isn't falling, then upside for Fairfax should exist but should be rather limited, don't you think?

 

I think Fairfax will struggle (as currently positioned) to climb much in price at least until stocks really do enter a bear market.

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I see Fairfax as a relatively safe long term investment, so for me I use it partially as a hedge against some of my other investments. When markets drop, Fairfax usually rises and takes some of the sting out of it. If they drop enough I will probably buy some more. The biggest concern I have with Fairfax is what happens if all you fellows on the left coast drop into the sea in a massive earthquake or some other catastrophic event. Is anyone else doing this?

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As long as Fairfax is hedged and the market isn't falling, then upside for Fairfax should exist but should be rather limited, don't you think?

 

I think Fairfax will struggle (as currently positioned) to climb much in price at least until stocks really do enter a bear market.

 

One of their problems is that there is basis risk in their supposed hedges.  The hedges don't cushion the decline in the worst of their stock holdings.  They will only pay off well in an extreme market event.  Even then, inflation could trump their CPI bets.

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  • 1 month later...

Bloomberg is saying that Fairfax Financial is reporting a 9.9% state in RIM.  Prem must be quite confident in RIM and think that the hugh amount of negativity in the market surrounding RIM has been vastly overdone.  Almost everything you hear about RIM these days is negative, here and in the press, perhaps justified and perhaps not justified, but Prem seems to have taken the opposite view of the situation with RIM as he has often done in the past with an opinion contrary to the consensus. 

http://www.reuters.com/article/2012/07/23/rim-stake-idUSL4E8IN45Q20120723?type=companyNews&feedType=RSS&feedName=companyNews&rpc=43

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Prem must be quite confident in RIM and think that the hugh amount of negativity in the market surrounding RIM has been vastly overdone.

 

That would be fine, except for him having this opinion since RIM was priced at around $55/share.

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Prem has made a string of horrible investments over the last several years - in a time when the market has increased about 100%. Mediocre underwriting + awful investments = sliding share price.

 

DCG, you know as well as anyone that measuring over the short-term means virtually nothing.  Fairfax's shareholder equity in 1999 was $155...at the end of 2011 it was $364...or about 8.2% annualized compared to the S&P500, which was down about -1.3% annualized, but with dividends broke about even.  During that time, Fairfax also paid dividends in half of those years, so their return is closer to 9.5%.  So, let's not focus on the short-term, and worry only if Prem and Fairfax can stay ahead of the indices over the long-term.  Cheers!

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Prem has made a string of horrible investments over the last several years - in a time when the market has increased about 100%. Mediocre underwriting + awful investments = sliding share price.

 

DCG, you know as well as anyone that measuring over the short-term means virtually nothing.  Fairfax's shareholder equity in 1999 was $155...at the end of 2011 it was $364...or about 8.2% annualized compared to the S&P500, which was down about -1.3% annualized, but with dividends broke about even.  During that time, Fairfax also paid dividends in half of those years, so their return is closer to 9.5%.  So, let's not focus on the short-term, and worry only if Prem and Fairfax can stay ahead of the indices over the long-term.  Cheers!

 

Understood, and I haven't sold a single share of Fairfax, but large investments in companies like RIMM are a cause of the stock sliding (or not moving).

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Prem has made a string of horrible investments over the last several years - in a time when the market has increased about 100%. Mediocre underwriting + awful investments = sliding share price.

 

DCG, you know as well as anyone that measuring over the short-term means virtually nothing.  Fairfax's shareholder equity in 1999 was $155...at the end of 2011 it was $364...or about 8.2% annualized compared to the S&P500, which was down about -1.3% annualized, but with dividends broke about even.  During that time, Fairfax also paid dividends in half of those years, so their return is closer to 9.5%.  So, let's not focus on the short-term, and worry only if Prem and Fairfax can stay ahead of the indices over the long-term.  Cheers!

 

Understood, and I haven't sold a single share of Fairfax, but large investments in companies like RIMM are a cause of the stock sliding (or not moving).

 

I agree.  I think it's mainly a lack of catalysts...holding pattern on investments with the hedges...and investments in things that would be counterintuitive...RIMM, Resolute, private companies, etc. 

 

Spain is getting incredibly close to a full-scale bailout...Greece is essentially in a Depression.  Much of what Fairfax is concerned about is slowly coming to fruition, and it is likely some of their longer terms hedges will pay some dividends over the next couple of years.  Cheers!

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