SEC Completes Fairfax Investigation!!

[oldye]

The liquidation value is what you could get if you'd sell all the bits and pieces of the company to private investors. Its no the most adverse scenario, I think that would mean going back to the capital markets and issuing shares at current prices which would be very painful. 

 

I'm not sure what would need to happen for it to liquidated in a way that would leave shareholders holding the current capital.  Maybe you can help me understand that a bit better.

 

Cardboard,

 

I think you can expect them to make a lot more than 35-40 a share over the next 3-4 years, thats "only" 700 mil on average, their stock portfolio will likely do that on its own. They own some fantastic stocks!  If insurance rates harden like they have in past cycles, short term rates go up, we'll enjoy even loftier gains. It will be bumpy but thats what we accepted when we first purchased shares. 

[ERICOPOLY]

 

I'm not sure what would need to happen for it to liquidated in a way that would leave shareholders holding the current capital.  Maybe you can help me understand that a bit better.

 

 

I never mentioned liquidation.  The way you phrased it though, it sounds like you aren't addressing Cardboard because you didn't mention him by name until the next paragraph.

 

I'm the one who thinks capital gains are much better when they are bigger :-)  Nothing at all about liquidation.

[SharperDingaan]

 

Couple of critical things being missed:

 

We (this board) may value based on fundamentals & patience, but the market doesn't. Momentum $ flowed in because the realized CDS gains were huge & sexy - they flowed out when players realized it was a one-time thing & a FFH investment became perceived as 'dead money'.

 

We are approaching the riskiest part of their year (hurricanes) & we have an AIG in the marketplace sitting out there with an open (federal) wallet should it turn out to be a bad UW year. Most would be hedging their downside, & inherently limiting the upside over the short-term.

 

Most investors want quick & easy: P/E multiple x fairly reliable earnings (with upside surprizes). But with P&C coys a large portion of the market values at BV multiples - & for very good reason. Deep dive vs surface fluff. Todays accounting magnifies BV volatility, so dissapointment is almost enivitable - exaggerating price swings.

 

Most would expect FFH to return at least a 15% 'buy & hold' ROE/yr over the next 5 years. Few recognize that you could very easily (& fairly reliably) double the return by simply trading the volatility; which you could only do if you have a good understanding of the coy & have been actively tracking for at least 2-3 years.

 

Patience doesn't mean blindly 'buy and hold forever'.

 

SD

 

 

 

 

[FlyingArrow]

 

Most would expect FFH to return at least a 15% 'buy & hold' ROE/yr over the next 5 years. Few recognize that you could very easily (& fairly reliably) double the return by simply trading the volatility; which you could only do if you have a good understanding of the coy & have been actively tracking for at least 2-3 years.

 

Patience doesn't mean blindly 'buy and hold forever'.

 

SD

 

 

 

Well said SD. Some might say from a cursory look at FFH that it hasn't really gone anywhere over a number of years. While I have not capitalized as much as I could of by selling at peaks (though I've also avoided the taxes and friction inherent in this approach) I have picked up significant shares and options at silly prices along the way - buying in the troughs - hence averaging down and enhancing returns significantly.

 

In my case patience is defined as buy and hold forever and buy more when opportunity presents itself. I guess I could say my interests and approach is aligned with Prem. I haven't seen him churning his ownership based on short term opportunity. In 3 years I will have been in FFH for a total of 10 years. The long term story and thesis is intact now and I expect it to still be intact then. I'm looking forward to determining my 10 year return at that time using this approach. It has been an interesting experiment and I'm looking forward to comparing the after tax returns from this approach to those folks who have been much more active with their portfolios over this time.

[oldye]

 

Couple of critical things being missed:

 

We (this board) may value based on fundamentals & patience, but the market doesn't. Momentum $ flowed in because the realized CDS gains were huge & sexy - they flowed out when players realized it was a one-time thing & a FFH investment became perceived as 'dead money'.

 

We are approaching the riskiest part of their year (hurricanes) & we have an AIG in the marketplace sitting out there with an open (federal) wallet should it turn out to be a bad UW year. Most would be hedging their downside, & inherently limiting the upside over the short-term.

 

Most investors want quick & easy: P/E multiple x fairly reliable earnings (with upside surprizes). But with P&C coys a large portion of the market values at BV multiples - & for very good reason. Deep dive vs surface fluff. Todays accounting magnifies BV volatility, so dissapointment is almost enivitable - exaggerating price swings.

 

Most would expect FFH to return at least a 15% 'buy & hold' ROE/yr over the next 5 years. Few recognize that you could very easily (& fairly reliably) double the return by simply trading the volatility; which you could only do if you have a good understanding of the coy & have been actively tracking for at least 2-3 years.

 

Patience doesn't mean blindly 'buy and hold forever'.

 

SD

 

 

I guess its all relative,  The relationship between intrinsic value growth and stock price is pretty self explanatory, the purchase price locks in the rate of return. Say you think company X increases its intrinsic value by about 1.7 billion dollars a year or 100$ per share.  If you buy at 210, you get in  on a 45% return...if you buy at 350 you get a 28.5% return.

 

  If you do what you are talking about, you could have doubled the return of the shares over the last few years but that doesn't make you right!

 

  You are speculating that someone will keep selling you the stock at a price point where the owner can sit on his ass and beat treasuries by 3000-4000 bp's per year.  Now this can keep happening, but the odds are good that self interest will eventually prevail and this inane cycle will stop. The only time this wouldn't be speculating is if you end up giving up your shares to buy something that is creating even more value than you are giving up.

 

I also don't agree that the summer time is the riskiest time to hold the stock, in fact since the price is usually so low, the risk is much lower during months where the perceived risk is high (this supports your strategy).  Insurable events can happen year round, you have far more at risk when the price is higher.  Your stock portfolio is probably much larger than it would be had you followed the "right" strategy but the intrinsic value" of mine has grown at a very satisfactory rate as well.    To each his own. 

 

[Uccmal]

Good points all;

 

I too am not sure we can count on seasonal discounts for FFH.  Rather than buying and holding forever, I am buying more when the price is low, and selling some when the price is high.  Basically I use the fluctuations to advance the time and lower the strike of my call positions. 

 

After the earnings release in late Feb. the stock lost 25%.  There is abolutely no  reason this could not reverse any time and gain 50 or 100%. or even more.  Most investors dislike uncertainty.  The SEC investigation was an uncertainty that is now completely gone.  The uncertainty we live with right now is primarily the weather related one.  It is my feeling that regardless of the hurricane season outcome FFH's ability to thrive through the summer will cause the stock to rise in a few weeks.  Even a bad scenario where they eat 400 M in losses could cause the stock to rise since the unknown would now be the known. 

How Rumsfeldian of me....

[Uccmal]

I have bought two stocks in the past that were in the valuation ranges of FFH:

 

Sino Forest:  around $3.00; PE = 5.0 around purchase; sold as it rose; mostly sold out at $10.00

Russell Metals:  bought around $8-11 PE=6.0; sold most in the twenties.  Still hold some today and have even bought back in. 

 

FFH today:  PE = 3.2x- say normalized of 6.0; Yield = 3.1%; P/B = 0.9:  By any measure it is insanely cheap and will rise a great deal in the not too distant future. 

[SharperDingaan]

 

Agreed there is no 'right' way, & to each his own.

 

Worth noting is that if you sell the underlying & simultaneously buy a long dated call at the market, you get the best of both worlds provided the stock is volatile. At best, either up or down, you lose the premium - which is what you'd expect when buying insurance.

 

Also note this is a trading strategy relying on volatility (not Mr Market selling inopportunely), that works because IFRS accounting drives BV volatility - & P&C's typically value at a BV multiple. Returns are higher than they would otherwise be, but its a trading gain/loss on top of the IV gain/loss.

 

Not for everyone, but something to keep in mind.

 

SD

 

 

 

 

 

 

 

 

 

[ShahKhezri]

 

Agreed there is no 'right' way, & to each his own.

 

Worth noting is that if you sell the underlying & simultaneously buy a long dated call at the market, you get the best of both worlds provided the stock is volatile. At best, either up or down, you lose the premium - which is what you'd expect when buying insurance.

 

Also note this is a trading strategy relying on volatility (not Mr Market selling inopportunely), that works because IFRS accounting drives BV volatility - & P&C's typically value at a BV multiple. Returns are higher than they would otherwise be, but its a trading gain/loss on top of the IV gain/loss.

 

Not for everyone, but something to keep in mind.

 

SD

 

 

 

 

 

 

 

 

 

 

You also lose out on the dividend, something Prem has provided higher guidance to.  This discussion, to me, is really based on your tax situation.  If you are in IRA, buy high, sell higher; if not and you enjoy paying double tax rate (short term vs. long term), you are inherently creating friction costs and if this really is a company where you think is in the upper echelon, you are playing with fire imo.  Personally, I hold a core position (avg. price 238), when the price fell to 210, I purchased equal to 30% of core position in call options (jan 2011 @300) that I believe are "in the money" right now.  I also have my eyes on purchasing another 30% at another strike price.  I plan on selling the options, but the core position is not for sell. 

 

Off topic, since there were some changes in the equity portfolio 4Q08 to 1Q09, anyone have a guess what changes we'll see?  Personally, I hope they sold some short term gains and purchased a JNJ like $ position in Berkshire and maybe COP at 40% off Buffett prices.  Berkshire at this price and a $400-500MM investment is like reinvesting in some of our own equity holdings, and our own bread and butter, insurance.  I am hopeful. 

[oldye]

Berkshire would be a perfect holding at these prices except they already have large bets on Berkshire's maintaining their economic strength with the 3.6 billion in munis + reinsurance contracts.  The stock portfolio is there to provide long term growth but also needs to provide liquidity which would likely come at a time when Berkshire's stock price may also be doing quite poorly.

 

That is my guess why they haven't taken a serious position in Berkshire (they bought a little Wesco) even though it has been available at very attractive prices.  I'm far more familiar with Berkshire but I'd guess that JNJ and Berkshire shares perform equally well over the next 5 years. 

[Partner24]

I agree with al. Fairfax is actually quite cheap to me. I wonder who is selling at these prices and why.

 

Remember, this board believe, on it's mean vote, that it will generate a total return on a CAGR basis of approximately 17% over the next 10 years.

 

It would be a nice reward to just sit on your rear end and wait patiently.

 

Time will tell (the vote was closed on June 10 2009, we'll see what will be the real return will be on June 10 2019).

[Guest Broxburnboy]

It seems that the market prices FFH in step with its latest quarterly earnings report. FFH earnings are notoriously lumpy, therefore the stock price is correspondingly volatile.

 

http://bigcharts.marketwatch.com/interchart/interchart.asp?symb=ffh&draw.x=35&draw.y=8

 

This thread has reminded me to take some profits in other areas and buy more FFH in expectation of the

August positive earnings report. I'm not big on options because of the time limits in a market that is more than

ever prone to a Black Swan.

 

Cheers to all

 

[ERICOPOLY]

Going forward, I am curious to see whether the volatility will be reduced with the much smaller aggregate short position.