Fairfax down 8% this morning

[Stone19]

Trade imbalance on the TSX settled at the close.

[compoundinglife]

Just an observation, but it's strange, FFH closed at 341.18, FRFHF at 352.02, and FFH.U at 361.52. I never really track the three quotations but would expect them to be a little narrower than that. An unusual end to the day I guess.

 

I bought FRFHF today and the cheapest I got was 348.30. According to Google finance volume for FRFHF was around 1/2 million and volume for FFH on the TSE was around 1 million. Unfortunately the account I had $ in was not one of the accounts I can buy TSE stock in otherwise I probably could of got them cheaper.

[pabraifan]

the reason for Fairfax declining maybe due to forced selling:  http://www.gurufocus.com/news/199642/forced-selling-of-fairfax-financial

[beerbaron]

the reason for Fairfax declining maybe due to forced selling:  http://www.gurufocus.com/news/199642/forced-selling-of-fairfax-financial

 

This article clearly does not know Fairfax, they won't buy back their shares at this price. If I remember correctly last time they bough back a meaningfull amount of shares it was in the early 90`s at a meaningfull discount to BV (80%).

 

BeerBaron

[giofranchi]

It is a bit curious to me that when FFH traded at $370 almost nobody wanted to look at it… Now that it is trading at $350 everybody seem to be very interested to invest in FFH!

I have increased my firm’s investment in FFH, but my view on the merits of the investment has not really changed. FFH has the know-how and the culture to compound capital at very satisfactorily rates of returns, while running very low risks, for the next 20 years. It seems to me that, if you invest in FFH, those merits are almost the same, whether its shares are traded at $350, or they are traded at $370. :)

 

giofranchi

[ourkid8]

I totally agree with you as the merits of the business have not changed besides the fact you are buying into this business under book value thus magnifying your returns further. (I also added substantially to my stake)  I can pull the quote from the book i am reading (Tap Dancing to Work) comparing buying business at book, 150% book and 80% book...

 

Tks,

S

 

It is a bit curious to me that when FFH traded at $370 almost nobody wanted to look at it… Now that it is trading at $350 everybody seem to be very interested to invest in FFH!

I have increased my firm’s investment in FFH, but my view on the merits of the investment has not really changed. FFH has the know-how and the culture to compound capital at very satisfactorily rates of returns, while running very low risks, for the next 20 years. It seems to me that, if you invest in FFH, those merits are almost the same, whether its shares are traded at $350, or they are traded at $370. :)

 

giofranchi

[giofranchi]

Sorry, I have read again what I wrote and I now understand that it is not clear. What I meant follows:

If you buy FFH today at $370, and FFH increases BV per share at 15% annual for the next 10 years, and in year 10 it trades at BV, you will get a 14.68% CAGR of your investment. On the other hand, if you buy FFH today at $350, you will get a 15.32% CAGR of your investment. I understand that 15,32% is better than 14,68%, but they are not dramatically different! So, I was surprised to find so few people interested in FFH, when it was trading slightly above BV, and so many people who are now buying into it, just because its share price fell slightly below BV…

I hope now it is clearer.

 

giofranchi

 

[StubbleJumper]

Sorry, I have read again what I wrote and I now understand that it is not clear. What I meant follows:

If you buy FFH today at $370, and FFH increases BV per share at 15% annual for the next 10 years, and in year 10 it trades at BV, you will get a 14.68% CAGR of your investment. On the other hand, if you buy FFH today at $350, you will get a 15.32% CAGR of your investment. I understand that 15,32% is better than 14,68%, but they are not dramatically different! So, I was surprised to find so few people interested in FFH, when it was trading slightly above BV, and so many people who are now buying into it, just because its share price fell slightly below BV…

I hope now it is clearer.

 

giofranchi

 

 

I suspect that the reason is that not everybody wishes to hold FFH for a decade like you and me.  Some people are more active investors and want to pick up a 50-cent dollar and then turn around and sell it for 80-cents in a year or two.  People who are able to do that reliably can have a better return than just holding FFH or BRK for lengthy periods.  I suspect that people are now looking at FFH as an opportunity to buy very cheap and sell a little bit less cheap sometime during 2013 for a quick 20%.

 

As an observation, back when ORH was still publicly traded, many of us made good money by flipping back and forth between FFH and ORH depending on which looked more attractive.  For whatever reason, the relative valuation of the parent and subsidiary would swing perhaps 30% back and forth a couple of times per year so you could play the relative valuation while retaining a long-term exposure to the basic P&C business and to the investing prowess of Prem et al.  Too bad we can't do that anymore!

 

 

SJ

[giofranchi]

Sorry, I have read again what I wrote and I now understand that it is not clear. What I meant follows:

If you buy FFH today at $370, and FFH increases BV per share at 15% annual for the next 10 years, and in year 10 it trades at BV, you will get a 14.68% CAGR of your investment. On the other hand, if you buy FFH today at $350, you will get a 15.32% CAGR of your investment. I understand that 15,32% is better than 14,68%, but they are not dramatically different! So, I was surprised to find so few people interested in FFH, when it was trading slightly above BV, and so many people who are now buying into it, just because its share price fell slightly below BV…

I hope now it is clearer.

 

giofranchi

 

 

I suspect that the reason is that not everybody wishes to hold FFH for a decade like you and me.  Some people are more active investors and want to pick up a 50-cent dollar and then turn around and sell it for 80-cents in a year or two.  People who are able to do that reliably can have a better return than just holding FFH or BRK for lengthy periods.  I suspect that people are now looking at FFH as an opportunity to buy very cheap and sell a little bit less cheap sometime during 2013 for a quick 20%.

 

As an observation, back when ORH was still publicly traded, many of us made good money by flipping back and forth between FFH and ORH depending on which looked more attractive.  For whatever reason, the relative valuation of the parent and subsidiary would swing perhaps 30% back and forth a couple of times per year so you could play the relative valuation while retaining a long-term exposure to the basic P&C business and to the investing prowess of Prem et al.  Too bad we can't do that anymore!

 

 

SJ

 

Thank you SJ! And yes! I was suspecting the same reason. But, let’s say that FFH is worth 1,5BV (it is worth much more, especially if the ‘Kaboom’ moment Mr. Gundlach talked about is really in our future, but let’s keep it simple!): when people buy FFH at $370, they are buying $1 bill for 68.5 cents; on the other hand, when they buy FFH at $350, they are buying $1 bill for 64.8 cents. Again, not such a dramatic difference!

Anyway, it was just a passing thought of mine… by no means an interesting remark!

 

giofranchi

[txlaw]

Sorry, I have read again what I wrote and I now understand that it is not clear. What I meant follows:

If you buy FFH today at $370, and FFH increases BV per share at 15% annual for the next 10 years, and in year 10 it trades at BV, you will get a 14.68% CAGR of your investment. On the other hand, if you buy FFH today at $350, you will get a 15.32% CAGR of your investment. I understand that 15,32% is better than 14,68%, but they are not dramatically different! So, I was surprised to find so few people interested in FFH, when it was trading slightly above BV, and so many people who are now buying into it, just because its share price fell slightly below BV…

I hope now it is clearer.

 

giofranchi

 

 

I suspect that the reason is that not everybody wishes to hold FFH for a decade like you and me.  Some people are more active investors and want to pick up a 50-cent dollar and then turn around and sell it for 80-cents in a year or two.  People who are able to do that reliably can have a better return than just holding FFH or BRK for lengthy periods.  I suspect that people are now looking at FFH as an opportunity to buy very cheap and sell a little bit less cheap sometime during 2013 for a quick 20%.

 

As an observation, back when ORH was still publicly traded, many of us made good money by flipping back and forth between FFH and ORH depending on which looked more attractive.  For whatever reason, the relative valuation of the parent and subsidiary would swing perhaps 30% back and forth a couple of times per year so you could play the relative valuation while retaining a long-term exposure to the basic P&C business and to the investing prowess of Prem et al.  Too bad we can't do that anymore!

 

 

SJ

 

Or it could be that FFH at the current price meets these investors' hurdle rates for investing.

 

I can tell you that I don't just go by the rule of thumb that FFH will increase BV by 15% and, therefore, I will get a 15% return over time if I buy at BV.  I have my own assessment of when I think FFH is cheap, and it's not dependent on nominal IV (i.e., BV).

[plato1976]

Sorry, I have read again what I wrote and I now understand that it is not clear. What I meant follows:

If you buy FFH today at $370, and FFH increases BV per share at 15% annual for the next 10 years, and in year 10 it trades at BV, you will get a 14.68% CAGR of your investment. On the other hand, if you buy FFH today at $350, you will get a 15.32% CAGR of your investment. I understand that 15,32% is better than 14,68%, but they are not dramatically different! So, I was surprised to find so few people interested in FFH, when it was trading slightly above BV, and so many people who are now buying into it, just because its share price fell slightly below BV…

I hope now it is clearer.

 

giofranchi

 

 

I suspect that the reason is that not everybody wishes to hold FFH for a decade like you and me.  Some people are more active investors and want to pick up a 50-cent dollar and then turn around and sell it for 80-cents in a year or two.  People who are able to do that reliably can have a better return than just holding FFH or BRK for lengthy periods.  I suspect that people are now looking at FFH as an opportunity to buy very cheap and sell a little bit less cheap sometime during 2013 for a quick 20%.

 

As an observation, back when ORH was still publicly traded, many of us made good money by flipping back and forth between FFH and ORH depending on which looked more attractive.  For whatever reason, the relative valuation of the parent and subsidiary would swing perhaps 30% back and forth a couple of times per year so you could play the relative valuation while retaining a long-term exposure to the basic P&C business and to the investing prowess of Prem et al.  Too bad we can't do that anymore!

 

 

SJ

 

Thank you SJ! And yes! I was suspecting the same reason. But, let’s say that FFH is worth 1,5BV (it is worth much more, especially if the ‘Kaboom’ moment Mr. Gundlach talked about is really in our future, but let’s keep it simple!): when people buy FFH at $370, they are buying $1 bill for 68.5 cents; on the other hand, when they buy FFH at $350, they are buying $1 bill for 64.8 cents. Again, not such a dramatic difference!

Anyway, it was just a passing thought of mine… by no means an interesting remark!

 

giofranchi

 

Gio, I am afraid the 'Kaboom' moment Mr. Gundlach mentioned doesn't necessarily mean that will benefit FFH

If I was reading correctly, he was worrying about sovereign debt explosion and high inflation, will that necessarily lead to

market crash ? Or deflation first and then high inflation later ? If the later case, FFH will benefit

 

[ERICOPOLY]

But, let’s say that FFH is worth 1,5BV (it is worth much more, especially if the ‘Kaboom’ moment Mr. Gundlach talked about is really in our future, but let’s keep it simple

 

As to whether it's worth more than 1.5BV if a 'Kaboom' moment is coming,  Mr. Gundlach's fund can be invested in without any premium to book value whatsoever.

 

The market is having trouble valuing FFH at a high premium to book value because the market itself is the one setting the value of the underlying portfolio investments -- it would be truly bizarre for it to say that JNJ is worth more in FFH's portfolio than outside of it. 

 

Thus it's down to the operating income and growth assumptions of the insurance operations for the market to use as it's input for setting a PB multiple on the stock.

[ourkid8]

In my situation I do plan on holding Fairfax for life along with my other core positions. (Philip Morris International, CN Rail, TD Bank, Berkshire Hathaway and Fairfax Financial)  My hurdle rate is under book value for FFH because every once in a while it drops below my rate and I get the opportunity to continue to add to my position.  As of right now, FFH is about 17% of my portfolio and I would continue to add the lower it goes below book.  I understand the difference is very nominal but it has to reach my price otherwise I would not buy.

 

Tks,

S

 

Sorry, I have read again what I wrote and I now understand that it is not clear. What I meant follows:

If you buy FFH today at $370, and FFH increases BV per share at 15% annual for the next 10 years, and in year 10 it trades at BV, you will get a 14.68% CAGR of your investment. On the other hand, if you buy FFH today at $350, you will get a 15.32% CAGR of your investment. I understand that 15,32% is better than 14,68%, but they are not dramatically different! So, I was surprised to find so few people interested in FFH, when it was trading slightly above BV, and so many people who are now buying into it, just because its share price fell slightly below BV…

I hope now it is clearer.

 

giofranchi

 

 

I suspect that the reason is that not everybody wishes to hold FFH for a decade like you and me.  Some people are more active investors and want to pick up a 50-cent dollar and then turn around and sell it for 80-cents in a year or two.  People who are able to do that reliably can have a better return than just holding FFH or BRK for lengthy periods.  I suspect that people are now looking at FFH as an opportunity to buy very cheap and sell a little bit less cheap sometime during 2013 for a quick 20%.

 

As an observation, back when ORH was still publicly traded, many of us made good money by flipping back and forth between FFH and ORH depending on which looked more attractive.  For whatever reason, the relative valuation of the parent and subsidiary would swing perhaps 30% back and forth a couple of times per year so you could play the relative valuation while retaining a long-term exposure to the basic P&C business and to the investing prowess of Prem et al.  Too bad we can't do that anymore!

 

 

SJ

[Parsad]

Just an observation, but it's strange, FFH closed at 341.18, FRFHF at 352.02, and FFH.U at 361.52. I never really track the three quotations but would expect them to be a little narrower than that. An unusual end to the day I guess.

 

We haven't bought Fairfax in a couple of years, but we snagged some right at $341.18.  We'll buy more if it goes lower, but I suspect they will be buying back some shares below that as well.  Cheers!

[giofranchi]

Sorry, I have read again what I wrote and I now understand that it is not clear. What I meant follows:

If you buy FFH today at $370, and FFH increases BV per share at 15% annual for the next 10 years, and in year 10 it trades at BV, you will get a 14.68% CAGR of your investment. On the other hand, if you buy FFH today at $350, you will get a 15.32% CAGR of your investment. I understand that 15,32% is better than 14,68%, but they are not dramatically different! So, I was surprised to find so few people interested in FFH, when it was trading slightly above BV, and so many people who are now buying into it, just because its share price fell slightly below BV…

I hope now it is clearer.

 

giofranchi

 

 

I suspect that the reason is that not everybody wishes to hold FFH for a decade like you and me.  Some people are more active investors and want to pick up a 50-cent dollar and then turn around and sell it for 80-cents in a year or two.  People who are able to do that reliably can have a better return than just holding FFH or BRK for lengthy periods.  I suspect that people are now looking at FFH as an opportunity to buy very cheap and sell a little bit less cheap sometime during 2013 for a quick 20%.

 

As an observation, back when ORH was still publicly traded, many of us made good money by flipping back and forth between FFH and ORH depending on which looked more attractive.  For whatever reason, the relative valuation of the parent and subsidiary would swing perhaps 30% back and forth a couple of times per year so you could play the relative valuation while retaining a long-term exposure to the basic P&C business and to the investing prowess of Prem et al.  Too bad we can't do that anymore!

 

 

SJ

 

Or it could be that FFH at the current price meets these investors' hurdle rates for investing.

 

I can tell you that I don't just go by the rule of thumb that FFH will increase BV by 15% and, therefore, I will get a 15% return over time if I buy at BV.  I have my own assessment of when I think FFH is cheap, and it's not dependent on nominal IV (i.e., BV).

 

txlaw,

I didn’t want to upset anyone… I am sorry if I did! Certainly not you, because I really enjoy your posts!

Anyway, I said 15% annual increase in BV per share just because that is their stated goal. But the math doesn’t change if you use 10%, 5%, or if you use 20%.

Personally, I do not have any idea of what their future results will be… But I think I understand what they are doing, why they are doing it, and how they are doing it. And that’s what really matters to me. If I have studied history enough, and I understand the historical period we are living through, so that caution is really warranted here, FFH might turn out to be one of the best investment in north America for the next 10 years. An entry point today at $350, instead of $370, won’t make any meaningful difference.

Of course, that’s just my humble idea. And many of you might now think I am nuts!  :)

 

giofranchi

[racemize]

Sorry, I have read again what I wrote and I now understand that it is not clear. What I meant follows:

If you buy FFH today at $370, and FFH increases BV per share at 15% annual for the next 10 years, and in year 10 it trades at BV, you will get a 14.68% CAGR of your investment. On the other hand, if you buy FFH today at $350, you will get a 15.32% CAGR of your investment. I understand that 15,32% is better than 14,68%, but they are not dramatically different! So, I was surprised to find so few people interested in FFH, when it was trading slightly above BV, and so many people who are now buying into it, just because its share price fell slightly below BV…

I hope now it is clearer.

 

giofranchi

 

 

I suspect that the reason is that not everybody wishes to hold FFH for a decade like you and me.  Some people are more active investors and want to pick up a 50-cent dollar and then turn around and sell it for 80-cents in a year or two.  People who are able to do that reliably can have a better return than just holding FFH or BRK for lengthy periods.  I suspect that people are now looking at FFH as an opportunity to buy very cheap and sell a little bit less cheap sometime during 2013 for a quick 20%.

 

As an observation, back when ORH was still publicly traded, many of us made good money by flipping back and forth between FFH and ORH depending on which looked more attractive.  For whatever reason, the relative valuation of the parent and subsidiary would swing perhaps 30% back and forth a couple of times per year so you could play the relative valuation while retaining a long-term exposure to the basic P&C business and to the investing prowess of Prem et al.  Too bad we can't do that anymore!

 

 

SJ

 

Or it could be that FFH at the current price meets these investors' hurdle rates for investing.

 

I can tell you that I don't just go by the rule of thumb that FFH will increase BV by 15% and, therefore, I will get a 15% return over time if I buy at BV.  I have my own assessment of when I think FFH is cheap, and it's not dependent on nominal IV (i.e., BV).

 

Would you mind sharing your thoughts on when it is cheap?  e.g., if you agree with their current bets (such as hedges), hardening market, etc?

[giofranchi]

But, let’s say that FFH is worth 1,5BV (it is worth much more, especially if the ‘Kaboom’ moment Mr. Gundlach talked about is really in our future, but let’s keep it simple

 

As to whether it's worth more than 1.5BV if a 'Kaboom' moment is coming,  Mr. Gundlach's fund can be invested in without any premium to book value whatsoever.

 

The market is having trouble valuing FFH at a high premium to book value because the market itself is the one setting the value of the underlying portfolio investments -- it would be truly bizarre for it to say that JNJ is worth more in FFH's portfolio than outside of it. 

 

Thus it's down to the operating income and growth assumptions of the insurance operations for the market to use as it's input for setting a PB multiple on the stock.

 

ERICOPOLY,

I think the market is extremely allergic to those “lumpy results” Mr. Watsa is used to referring to. FFH has not meaningfully increased BV per share for some time now. That’s why, in my humble opinion, the market is completely mispricing FFH today. Because lumpy results in a secular bear for stocks are the only sustainable results possible. My best guess is the market sooner or later will recognize that Mr. Watsa & Company are right, and that will be the moment when BV per share starts to rise again very quickly. Until then the market might not have patience, but FFH shareholders must have it.

 

giofranchi

[txlaw]

txlaw,

I didn’t want to upset anyone… I am sorry if I did! Certainly not you, because I really enjoy your posts!

Anyway, I said 15% annual increase in BV per share just because that is their stated goal. But the math doesn’t change if you use 10%, 5%, or if you use 20%.

Personally, I do not have any idea of what their future results will be… But I think I understand what they are doing, why they are doing it, and how they are doing it. And that’s what really matters to me. If I have studied history enough, and I understand the historical period we are living through, so that caution is really warranted here, FFH might turn out to be one of the best investment in north America for the next 10 years. An entry point today at $350, instead of $370, won’t make any meaningful difference.

Of course, that’s just my humble idea. And many of you might now think I am nuts!  :)

 

giofranchi

 

Gio, no worries.  You did not upset me. 

 

I was merely pointing out that we probably shouldn't assume that people bought at the prices available last week only because it has now met their price target for buying and selling within a short period, although I will admit that I often do sell within short time frames as I reallocate for various reasons (better opportunities, tax loss harvesting, portfolio re-balancing, etc.).  I'm sure a number of people who bought last week -- like Sanjeev, for example -- felt that they finally got an acceptable price for FFH, given other available opportunities (e.g., various FFH investee companies).

 

As to valuation, if you believe that FFH is as undervalued as, say, a BAC, then I agree that the recent price action doesn't matter.  But I view FFH as a great company now selling at a cheap but not crazy cheap price, and I tend to prefer the crazy cheap investments.  Just my style of investing, and I have a certain hurdle rate that must be met before I buy into an investment.

 

I believe that seeking a very large MOS -- while fully taking into account how business prospects could be affected by macroeconomic factors -- is all the hedge one needs, unless one is concerned about monthly, quarterly, or even yearly NAV marks.  For example, one can see that many of FFH's investee companies have been affected by the global economic slowdown (DELL, LVLT, RFP), but I think that this is more than baked into their prices and that there is a very large MOS in those stocks. 

[giofranchi]

Sorry, I have read again what I wrote and I now understand that it is not clear. What I meant follows:

If you buy FFH today at $370, and FFH increases BV per share at 15% annual for the next 10 years, and in year 10 it trades at BV, you will get a 14.68% CAGR of your investment. On the other hand, if you buy FFH today at $350, you will get a 15.32% CAGR of your investment. I understand that 15,32% is better than 14,68%, but they are not dramatically different! So, I was surprised to find so few people interested in FFH, when it was trading slightly above BV, and so many people who are now buying into it, just because its share price fell slightly below BV…

I hope now it is clearer.

 

giofranchi

 

 

I suspect that the reason is that not everybody wishes to hold FFH for a decade like you and me.  Some people are more active investors and want to pick up a 50-cent dollar and then turn around and sell it for 80-cents in a year or two.  People who are able to do that reliably can have a better return than just holding FFH or BRK for lengthy periods.  I suspect that people are now looking at FFH as an opportunity to buy very cheap and sell a little bit less cheap sometime during 2013 for a quick 20%.

 

As an observation, back when ORH was still publicly traded, many of us made good money by flipping back and forth between FFH and ORH depending on which looked more attractive.  For whatever reason, the relative valuation of the parent and subsidiary would swing perhaps 30% back and forth a couple of times per year so you could play the relative valuation while retaining a long-term exposure to the basic P&C business and to the investing prowess of Prem et al.  Too bad we can't do that anymore!

 

 

SJ

 

Thank you SJ! And yes! I was suspecting the same reason. But, let’s say that FFH is worth 1,5BV (it is worth much more, especially if the ‘Kaboom’ moment Mr. Gundlach talked about is really in our future, but let’s keep it simple!): when people buy FFH at $370, they are buying $1 bill for 68.5 cents; on the other hand, when they buy FFH at $350, they are buying $1 bill for 64.8 cents. Again, not such a dramatic difference!

Anyway, it was just a passing thought of mine… by no means an interesting remark!

 

giofranchi

 

Gio, I am afraid the 'Kaboom' moment Mr. Gundlach mentioned doesn't necessarily mean that will benefit FFH

If I was reading correctly, he was worrying about sovereign debt explosion and high inflation, will that necessarily lead to

market crash ? Or deflation first and then high inflation later ? If the later case, FFH will benefit

 

Plato1976,

it seems to me that markets at this point are very fragile… I think any scare could make them decrease significantly. Don’t know when or why, but it is a danger we’d better be very well aware of. And yes, I still see a deflation threat, before high inflation might become a problem. From 1932 to 1937 a lot of money was printed and the dollar was devalued many times. Talks about very high inflation were the order of the day… we all know what actually happened from 1938 until WWII. Japan during the last 20 years printed a ton of money, yet it is still in chronic deflation. And I think that the US in the ‘30s and the last 20 years in Japan are the most relevant periods for what we are living through today.

 

giofranchi

[txlaw]

Sorry, I have read again what I wrote and I now understand that it is not clear. What I meant follows:

If you buy FFH today at $370, and FFH increases BV per share at 15% annual for the next 10 years, and in year 10 it trades at BV, you will get a 14.68% CAGR of your investment. On the other hand, if you buy FFH today at $350, you will get a 15.32% CAGR of your investment. I understand that 15,32% is better than 14,68%, but they are not dramatically different! So, I was surprised to find so few people interested in FFH, when it was trading slightly above BV, and so many people who are now buying into it, just because its share price fell slightly below BV…

I hope now it is clearer.

 

giofranchi

 

 

I suspect that the reason is that not everybody wishes to hold FFH for a decade like you and me.  Some people are more active investors and want to pick up a 50-cent dollar and then turn around and sell it for 80-cents in a year or two.  People who are able to do that reliably can have a better return than just holding FFH or BRK for lengthy periods.  I suspect that people are now looking at FFH as an opportunity to buy very cheap and sell a little bit less cheap sometime during 2013 for a quick 20%.

 

As an observation, back when ORH was still publicly traded, many of us made good money by flipping back and forth between FFH and ORH depending on which looked more attractive.  For whatever reason, the relative valuation of the parent and subsidiary would swing perhaps 30% back and forth a couple of times per year so you could play the relative valuation while retaining a long-term exposure to the basic P&C business and to the investing prowess of Prem et al.  Too bad we can't do that anymore!

 

 

SJ

 

Or it could be that FFH at the current price meets these investors' hurdle rates for investing.

 

I can tell you that I don't just go by the rule of thumb that FFH will increase BV by 15% and, therefore, I will get a 15% return over time if I buy at BV.  I have my own assessment of when I think FFH is cheap, and it's not dependent on nominal IV (i.e., BV).

 

Would you mind sharing your thoughts on when it is cheap?  e.g., if you agree with their current bets (such as hedges), hardening market, etc?

 

I won't say exactly when I think it's cheap, although I did just tell you guys that I bought some FFH, so that should say something.

 

As to underwriting, I think that their current conservative underwriting will show up in the results over time and part of the problem is that the operating leverage involved with the insurance biz won't show up until they start writing material amounts of new business as the economy recovers.  Also, we still have drags in some insurance lines that are a result of the slow economy (for example, Zenith).  We may not see it now, but at some point, FFH shareholders will reap the benefits of their underwriting process. 

 

But, frankly, there are people on this board who are much better than I am when it come to analyzing insurance underwriting, and so they are the best people to talk to in this regard. 

 

As to hedges, I'm quite happy to have both inflation and deflation hedges, but I'm not a big fan of a fully hedged equity portfolio, which is one reason why I probably don't think it's as cheap as others think it is.  Now, I do think the equity portfolio will substantially outperform the market, so there will be return despite having a fully hedged equity portfolio.  But I would rather have seen FFH put more into cash flowing equities to potentially mitigate volatility -- more of a MKL like portfolio.  But HWIC has their own style of investing, and so who am I to say that they're going the wrong route?

 

I'll give you an example of the types of companies I would be putting money into if I were HWIC.  I'd be putting a lot of money into an RSG, which is a utility type business that benefits from scale over time, that has some level of pricing power (though there is pressure there), a moat for sure, a nice dividend to cover cash outflows from the insurance biz, and the optionality of harvesting waste for energy, recycled materials, etc.  I believe that's why Gates is going heavy into RSG, and I think it makes a lot of sense for an insurance co like FFH to be invested in such a company.

 

But I really like FFH's increased focus on new operating businesses.  I like their actions abroad.  I like Fairbridge.  I like the ventures with Wilbur Ross and Bill Morrow.  I think they're coming into their own in terms of distressed investing, generally.  There are more things I'm forgetting, I'm sure.

 

So many things to like despite a fully hedged equity portfolio.

[Viking]

Gio, I like your question as it is logical and straight forward.

 

I have been investing in FFH on and off for the past 10 years... I must admit I have not been a buy and hold investor. In the good old days the stock could be purchased for under 0.80 x BV (sometimes much below) and sold a short time later for much higher (50 to 100% gains were not uncommon). Not only would the stock sell below book at the same time FFH would sometimes be sitting on large gains in its investment portfolio that were not yet priced into BV (like the credit default swaps back in 08 and 09); this made the purchase even more compelling. It was kind of like shooting fish in a barrel. Needless to say, back in the good old days, a trader mentality produced far better returns than buy and hold.

 

And then FFH delisted from the NYSE and the crazy volatility vanished. Since then FFH's stock price movement has become a different animal. BV has gone sideways for two years and the stock is trading today where it was last trading during the financial crises in 2009.

 

I was not a buyer at $370. I have been an aggressive buyer at $350 for three reasons:

1.) BV = $360. I am buying below BV. Not 0.80xBV but still below.

2.) Insurance market looks to be hardening with each passing month. FFH should be able to grow its insurance business very well.

3.) Investing: recently, FFH investments have made some nice moves (Cunningham & Brick sales, RIM getting some positive coverage and stock up almost 100% from lows) which may help Q4 BV.

 

Dividend: expect announcement shortly; expect another $10. Helps stock have strong finish to end of year. Not a reason to buy but something I will be paying attention to.

 

Should the stock continue to go lower I will be happy to purchase more.

 

I am not sure yet if this is a short term or long term holding. If the company pops back to $380 by year end I may simply lock in a nice 7% gain. I need to spend more time understanding how much insurance pricing is improving... if the hard market is gaining more traction I would be foolish to sell at anything under 1.2xBV.

[ERICOPOLY]

But, let’s say that FFH is worth 1,5BV (it is worth much more, especially if the ‘Kaboom’ moment Mr. Gundlach talked about is really in our future, but let’s keep it simple

 

As to whether it's worth more than 1.5BV if a 'Kaboom' moment is coming,  Mr. Gundlach's fund can be invested in without any premium to book value whatsoever.

 

The market is having trouble valuing FFH at a high premium to book value because the market itself is the one setting the value of the underlying portfolio investments -- it would be truly bizarre for it to say that JNJ is worth more in FFH's portfolio than outside of it. 

 

Thus it's down to the operating income and growth assumptions of the insurance operations for the market to use as it's input for setting a PB multiple on the stock.

 

ERICOPOLY,

I think the market is extremely allergic to those “lumpy results” Mr. Watsa is used to referring to. FFH has not meaningfully increased BV per share for some time now. That’s why, in my humble opinion, the market is completely mispricing FFH today. Because lumpy results in a secular bear for stocks are the only sustainable results possible. My best guess is the market sooner or later will recognize that Mr. Watsa & Company are right, and that will be the moment when BV per share starts to rise again very quickly. Until then the market might not have patience, but FFH shareholders must have it.

 

giofranchi

 

Yes, BV will no doubt rise quickly when their investments rise quickly.  But that isn't in itself in any way warranting a high book value multiple.  It merely results in very high rates of compounding over time, which is just dandy anyhow.

 

There are no investment funds compounding at a high rate that command a high multiple to their underlying portfolio investments.

 

FFH by definition should always trade below intrinsic value, otherwise it would be overvalued.  That's the nature of gaining much of your intrinsic value by making shrewed equity investments.

 

The place where they do command some kind of BV multiple would come from evaluating their insurance operations and their wholly owned non-insurance subs.  Figure out some sort of value of what the float+floatgrowth+underwriting results brings to the table, and then add that to the BV to get some sort of BV multiple.

 

But the lumpy capital gains... I don't see them worth anything more than portfolio mark-to-market value.

[giofranchi]

But, let’s say that FFH is worth 1,5BV (it is worth much more, especially if the ‘Kaboom’ moment Mr. Gundlach talked about is really in our future, but let’s keep it simple

 

As to whether it's worth more than 1.5BV if a 'Kaboom' moment is coming,  Mr. Gundlach's fund can be invested in without any premium to book value whatsoever.

 

The market is having trouble valuing FFH at a high premium to book value because the market itself is the one setting the value of the underlying portfolio investments -- it would be truly bizarre for it to say that JNJ is worth more in FFH's portfolio than outside of it. 

 

Thus it's down to the operating income and growth assumptions of the insurance operations for the market to use as it's input for setting a PB multiple on the stock.

 

ERICOPOLY,

I think the market is extremely allergic to those “lumpy results” Mr. Watsa is used to referring to. FFH has not meaningfully increased BV per share for some time now. That’s why, in my humble opinion, the market is completely mispricing FFH today. Because lumpy results in a secular bear for stocks are the only sustainable results possible. My best guess is the market sooner or later will recognize that Mr. Watsa & Company are right, and that will be the moment when BV per share starts to rise again very quickly. Until then the market might not have patience, but FFH shareholders must have it.

 

giofranchi

 

Yes, BV will no doubt rise quickly when their investments rise quickly.  But that isn't in itself in any way warranting a high book value multiple.  It merely results in very high rates of compounding over time, which is just dandy anyhow.

 

There are no investment funds compounding at a high rate that command a high multiple to their underlying portfolio investments.

 

FFH by definition should always trade below intrinsic value, otherwise it would be overvalued.  That's the nature of gaining much of your intrinsic value by making shrewed equity investments.

 

The place where they do command some kind of BV multiple would come from evaluating their insurance operations and their wholly owned non-insurance subs.  Figure out some sort of value of what the float+floatgrowth+underwriting results brings to the table, and then add that to the BV to get some sort of BV multiple.

 

But the lumpy capital gains... I don't see them worth anything more than portfolio mark-to-market value.

 

ERICOPOLY,

I am well aware of the fact that almost nobody wants to hear about discounted valuations on this board… And I agree that they are not very useful. But let’s just make a simple exercise, and calculate the discounted value of equity (VOE) of FFH 20 years from now.

To do it, I will use Professor Penman’s formula from his book “Accounting for Value”, page 68, Columbia Business School Publishing:

 

Present value of equity = B0 + [(ROE1 – r) * B0] / (1 + r) + [(ROE2 – r) * B1] / (1 + r)2 +[(ROE3 – r) * B2] / (1 + r)3 + … + [(ROE20 – r) * B19] / (1 + r)20.

 

Assumptions:

B0 = book value today = $360,

ROE1 = return on equity in year 1

ROE2 = return on equity in year 2

…

ROE20 = return on equity in year 20

r = interest rate

 

Let’s say our required minimum return is 9%, so r = 9%. Let’s assume that ROE in year 1 and 2 will be equal to their stated goal of 15%, and then, from year 3 to year 20, it falls to 10% (just above the minimum required return).

 

Under these assumptions we get to a present value of equity: VOE = $570.24, or 1.584 x B0.

 

If we assume that a ROE = 15% will be sustained for the next 20 years, we get to a present value of equity: VOE = $1,112.39, or 3.09 x B0.

 

If, instead of using our required minimum return, we choose to use FFH’s cost of capital as interest rate, so that r = 2,8% (until year end 2011 the weighted average cost of float for FFH since inception has been 2,8%), future ROEs just have to average 6,5% for the next 20 years, to get to a present value of equity that is 2 x B0.

 

My intention here is not to put a precise number on VOE, but simply to argue that the market always has a very hard time valuing properly a machine that can compound capital at high rates of return for a very long time. That’s why I think that, even if FFH might not look “statistically” very cheap, right now it is, like Sir John Templeton was used to saying, a “true bargain”.

 

Something that’s trading below book value is worth more dead than alive… Now, please read how Mr. Watsa answered to Mr. Shezad, when he asked if FFH shareholders had to expect other 7 lean years (Q3 2012 results conference call):

 

“Yes, that was -- Shezad, that's a good question. And so the first thing, just to say you is we've always focused on the long-term and when we went through our 7 lean years, Shezad, we were turning around our company. We were turning around Crum & Forster and the -- take reinsurance and all of that, and that took sometime to turn it around. Today, our companies are in excellent position, they're underwriting-focused, they are well reserved, they've cut back in the soft markets and they are well- positioned to expand significantly at the right time. And then as we are expanding today, you're seeing that in Zenith, and you're seeing it in Crum & Forster, you're seeing it on Odyssey. And the Canadian market's always lag -- have lagged in the past and you'll see it in time in Canada. So underwriting operations are very well-positioned, and our investment philosophy and position -- they're always long term. So when we had credit default swaps in the past, it took a few years for it to work out and as you know, we made a lot of money. And so right now, it's very important not to reach for yield because if you do reach for yield, if you put money into the stock market at these prices, you could suffer permanent losses. We'll take temporary losses but we don't like taking permanent losses. So I don't think we'll be at a position where our results will be poor for a long period of time but you're right for the last year and a half, it hasn't been good. But our results for year ending 2011, for the 5 years, is among the best in the business and of course, for the 26 years ending 2011, it's better than anyone else in our industry. So we're focused on the long-term and we continue, we've always been focused on the long-term, and continue to be focused on doing well for our shareholders always.”

 

It really doesn’t sound to me as something worth more dead than alive! :)

 

giofranchi

 

[giofranchi]

Gio, I like your question as it is logical and straight forward.

 

I have been investing in FFH on and off for the past 10 years... I must admit I have not been a buy and hold investor. In the good old days the stock could be purchased for under 0.80 x BV (sometimes much below) and sold a short time later for much higher (50 to 100% gains were not uncommon). Not only would the stock sell below book at the same time FFH would sometimes be sitting on large gains in its investment portfolio that were not yet priced into BV (like the credit default swaps back in 08 and 09); this made the purchase even more compelling. It was kind of like shooting fish in a barrel. Needless to say, back in the good old days, a trader mentality produced far better returns than buy and hold.

 

And then FFH delisted from the NYSE and the crazy volatility vanished. Since then FFH's stock price movement has become a different animal. BV has gone sideways for two years and the stock is trading today where it was last trading during the financial crises in 2009.

 

I was not a buyer at $370. I have been an aggressive buyer at $350 for three reasons:

1.) BV = $360. I am buying below BV. Not 0.80xBV but still below.

2.) Insurance market looks to be hardening with each passing month. FFH should be able to grow its insurance business very well.

3.) Investing: recently, FFH investments have made some nice moves (Cunningham & Brick sales, RIM getting some positive coverage and stock up almost 100% from lows) which may help Q4 BV.

 

Dividend: expect announcement shortly; expect another $10. Helps stock have strong finish to end of year. Not a reason to buy but something I will be paying attention to.

 

Should the stock continue to go lower I will be happy to purchase more.

 

I am not sure yet if this is a short term or long term holding. If the company pops back to $380 by year end I may simply lock in a nice 7% gain. I need to spend more time understanding how much insurance pricing is improving... if the hard market is gaining more traction I would be foolish to sell at anything under 1.2xBV.

 

Viking,

thank you for your very clear answer!

I understand what you are saying very well. My point of view is a little bit different, though. Because I don’t trade. I am an entrepreneur (at least, I try to be one!), not a finance guy. And sincerely I find trading to be quite risky… maybe just because I am so bad at it! ;D

Instead, I find much easier to identify outstanding mangers, who are at the helm of compounding machines, and partner with them. I invest in owner-operators and almost never sell. Price should really be out of whack on the upside, to induce me to sell.

Historically, if you take away the returns generated by owner-operators, you find that the performance of the S&P500 is quite unsatisfactory. Right now there are more or less 100 owner-operators. I have put together a portfolio of 10 owner-operators, that I think I understand quite well, and that are trading close to book value. The S&P500, on the contrary, according to the iShare Core S&P500 ETF (IVV), is trading at 3.75 x BV.

It seems to me a no-brainer market beating strategy. :)

 

giofranchi

 

[Bart]

 

 

Historically, if you take away the returns generated by owner-operators, you find that the performance of the S&P500 is quite unsatisfactory. Right now there are more or less 100 owner-operators. I have put together a portfolio of 10 owner-operators, that I think I understand quite well, and that are trading close to book value. The S&P500, on the contrary, according to the iShare Core S&P500 ETF (IVV), is trading at 3.75 x BV.

It seems to me a no-brainer market beating strategy. :)

 

giofranchi

 

Gio, would you mind sharing the 10 owner-operators you've found worthy of investment? From your insightful posts, I'm sure LRE, BRK, GLRE, FFH are four of them, but I'd certainly be curious for the others, just to study them.

 

Also, do you know of any good European owner-operators, besides Brindle?

 

thanks!

 

Bart