Fairfax a strong buy?

[steph]

Fairfax seems to attract a lot less of interest on this board.  What are the reasons? Better alternatives (BAC, AIG), their equity hedge or just not cheap enough? 

With the markets where they are and with Blackberry rebounding nicely, Fairfax, not too far from book value, seems like a very good risk-return proposition.

 

[giofranchi]

I agree, and 28.5% of my firm’s portfolio is in FFH right now.

Christopher1 has reminded me of a wonderful quote by Mr. Buffett this morning:

Predicting rain doesn't count; building arks does

Mr. Watsa has built the strongest ark I know of.

 

PS

Thank you Cristopher1!

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[racemize]

I think there are also a lot of FFH owners on the board, but just don't talk about it that much.

[T-bone1]

I think there are also a lot of FFH owners on the board, but just don't talk about it that much.

 

+1

[JEast]

The board has a love / (oh no) relationship with FFH.  For the ones that have been owners for a long time (6-15 years) it has always been 2 steps forward and 1 step back.  Nevertheless, I would agree that the arc is being built.  Unfortunately, it is truly unrecognized by the investing community and reason for an earlier comment on why some are holding so much cash given FFH's price.  Over the years, I have been in the camp saying over and over "I love these guys"  then  "Oh No what just happened" :)

 

Cheers

JEast

(FFH owner going on 13 years now)

[Guest longinvestor]

The board has a love / (oh no) relationship with FFH.  For the ones that have been owners for a long time (6-15 years) it has always been 2 steps forward and 1 step back.  Nevertheless, I would agree that the arc is being built.  Unfortunately, it is truly unrecognized by the investing community and reason for an earlier comment on why some are holding so much cash given FFH's price.  Over the years, I have been in the camp saying over and over "I love these guys"  then  "Oh No what just happened" :)

 

Cheers

JEast

(FFH owner going on 13 years now)

I would respectfully submit that there are two human (investor) behaviors

at work amongst the long term FFH shareholders.

1. Impatience

2. Impatience made worse by the huge amount of money made over the period 2007-11

 

FFH is one of those "Go away for 10 -15 years" investments.

And lots of folks seem to have disagreements over HWIC's recent investments in special situations, turnarounds Ex RIMM, LVLT, Abitibi etc. It is not necessary for all of these to work out for FFH. I keep telling myself that these make up a small piece of the pie. And some of these will work out great IMO.

 

[petec]

Agreed on the 10-15 year front.  I just keep buying slowly at reasonable multiples of BV and I'm fairly sure things will work out OK.  I hope so - it's 19% of my book ;)

[Uccmal]

FFh is just boring these days.  It still makes up 20%-25% of my holdings, down from 40% when FFh was higher, and everything else was lower. 

 

Around 14 yrs.  Boring is not a bad thing.  Collectively, we of this board, and its predecessor, probably wrote 100000 pages on FFH. 

 

 

[WhoIsWarren]

Unlike James East and Uccmal, I've only been a shareholder in Fairfax for a year or so.  Like a few others on the board, it's a large enough part of my portfolio.  I'm licking my lips: it trades at around book, management is talented, conservative and owns lots of stock -- right up my investment street.  Back up the truck!!

 

Like many / most / all of you, I've read all Fairfax's past shareholder letters and a good number of the annual reports.  Of course I've seen how the share price has moved over time and I know all about the "seven lean years". 

 

However, it's all very easy to read a company's history and imagine how you would have stuck to your guns.  The only way of knowing is by living through it yourself.  Others on the board passed this test.  They felt those two steps forward and one step back.  In retrospect the attacks by the hedge funds looks an obvious case of wrongful opportunism, the Northridge consolidation a storm in a tea cup etc., but I am sure it all felt sickening and disorientating at the time.  There's nothing worse than being in an investment and losing your sense of anchor, when a company's integrity is called into question, when you lose faith in your estimate of intrinsic value or earnings power.

 

Fairfax is no Diageo or J&J.  While I believe in Fairfax's ability to generate above average returns over the long run, mentally I am prepared to hold my nerve through what I think will be a prosperous but potentially volatile journey.  Right now is certainly not one of those volatile times, which is why talk of impatience at the stock's lacklustre performance strikes me as far, far, far too premature.

 

But what do I know, eh?

 

[buylowersellhigh]

One thing I am not fond of is the lack of underwriting profits.  Sure you are betting on good capital allocation, protection to the downside, etc., but the lack of uw profits at an insurer bothers me.

 

Not a big deal for others? 

 

Trying to dig into Fairfax...

[racemize]

One thing I am not fond of is the lack of underwriting profits.  Sure you are betting on good capital allocation, protection to the downside, etc., but the lack of uw profits at an insurer bothers me.

 

Not a big deal for others? 

 

Trying to dig into Fairfax...

 

bear in mind underwriting for longer running FFH insurance subs are much better than those that have only been acquired recently.  If they stop acquiring insurance companies, the underwriting would look a lot better. 

[Partner24]

Fairfax is not the strongest ark that I've ever seen. Being defensive does not necessarely mean having a strong ark. What if the sun shines too much (inflation goes up, interest rates go up, stock indexes go up, etc.)? Not the strongest ark in that scenario.

 

No comparaison with Berkshire. It's very shiny? No problem. It rains a lot? No problem.

 

That does not making me staying away from being a Fairfax shareholder (10 years and still counting), but you have to understand that it is not as safe as Berkshire.

 

Cheers!

[ShahKhezri]

This thread feels like an AA meeting.

 

I've been a shareholder for 5 years.  The last 3 have been frustrating, but I bought in 2008 so my avg is in the low 200's and starting this year I started re-investing my dividends, because to a certain point I agree with JEast.  In 2009 and 2010 I sold a significant position in the low 400's...but at the height of 2008, FFH represented as much as 110% of my portfolio if I include the option position I had. 

 

There are threads with arguments on why their underwriting is crappy.  I agree that in the past they underperfoms; going forward I disagree, having been a P&C underwriter and knowing full well that there are no superstar underwriters out there that only write 70% CR's, your CR is as good as the markets you serve.  RLI writes in such a small pie with little competition and they are able to price their way.  You can look at HCC and basically this goes for most insurance...you're size determines the markets you serve and your economics.  There are no insurance companies with 10Bn market cap and consistent 80% combined.  Chubb and TRV are special though, but even they don't avg 80% through a full cycle.

 

With that said, I believe you can look forward to better results.  1) in the past C&F represented a higher % of premiums than today, Zenith, Mercury (both bought at cyclical lows) and Asian ops will improve. 2) Northbridge's market was pretty tough, I had a good friend (no longer in the business) but he was an underwriter for an entity that competed directly with NB and there were tough times.  Going forward...legacy issues at C&F and NB will be less of a problem...CR should improve and if you're invested in FFH with an assumption/expectation of 80-90% CR consistently, I think you are looking in the wrong place.

[KFRCanuk]

One thing I am not fond of is the lack of underwriting profits.  Sure you are betting on good capital allocation, protection to the downside, etc., but the lack of uw profits at an insurer bothers me.

 

Not a big deal for others? 

 

Trying to dig into Fairfax...

 

bear in mind underwriting for longer running FFH insurance subs are much better than those that have only been acquired recently.  If they stop acquiring insurance companies, the underwriting would look a lot better.

 

Also the amalgamation of Northbridge companies should help drive down the combined ratio in the short term (1-3 years).

 

I'm not a fan of Northbridge's amalgamation of it's companies. I think it's a big mistake long term. I think it dilutes the brands and doesn't force the companies to compete. I get the feeling that the might be too many consultants or MBA's on the Northbridge ship.

 

One a side note. I do want to learn more about sister companies that compete against each other. Unfortunately the only examples I have are car companies such as Volkswagen Group (Porsche, Audi, Lamborghini, Bentley ) and GM of the 1930's. Both of which are/were extremely well managed.

[vinod1]

This thread feels like an AA meeting.

 

LOL

 

Chubb and TRV are special though, but even they don't avg 80% through a full cycle.

 

ShahKhezri,

 

How are they special? Any insight you can share?

 

Thanks

 

Vinod

[buylowersellhigh]

This thread feels like an AA meeting.

 

I've been a shareholder for 5 years.  The last 3 have been frustrating, but I bought in 2008 so my avg is in the low 200's and starting this year I started re-investing my dividends, because to a certain point I agree with JEast.  In 2009 and 2010 I sold a significant position in the low 400's...but at the height of 2008, FFH represented as much as 110% of my portfolio if I include the option position I had. 

 

There are threads with arguments on why their underwriting is crappy.  I agree that in the past they underperfoms; going forward I disagree, having been a P&C underwriter and knowing full well that there are no superstar underwriters out there that only write 70% CR's, your CR is as good as the markets you serve.  RLI writes in such a small pie with little competition and they are able to price their way.  You can look at HCC and basically this goes for most insurance...you're size determines the markets you serve and your economics.  There are no insurance companies with 10Bn market cap and consistent 80% combined.  Chubb and TRV are special though, but even they don't avg 80% through a full cycle.

 

With that said, I believe you can look forward to better results.  1) in the past C&F represented a higher % of premiums than today, Zenith, Mercury (both bought at cyclical lows) and Asian ops will improve. 2) Northbridge's market was pretty tough, I had a good friend (no longer in the business) but he was an underwriter for an entity that competed directly with NB and there were tough times.  Going forward...legacy issues at C&F and NB will be less of a problem...CR should improve and if you're invested in FFH with an assumption/expectation of 80-90% CR consistently, I think you are looking in the wrong place.

 

So what are your expectations from Fairfax going forward?

[racemize]

I personally expect 10-15% compounding on book value over long periods of time (hopefully 15% or even greater, but 10-15% is my expectation). 

[Guest valueInv]

I personally expect 10-15% compounding on book value over long periods of time (hopefully 15% or even greater, but 10-15% is my expectation).

That would be quite under Prem's goal.

 

What is the relationship between Fairfax and Hamblin Watsa? How are investment decisions made?

[Parsad]

I personally expect 10-15% compounding on book value over long periods of time (hopefully 15% or even greater, but 10-15% is my expectation).

That would be quite under Prem's goal.

 

What is the relationship between Fairfax and Hamblin Watsa? How are investment decisions made?

 

They will average close to 15% annualized over time...I'm talking 10-20-30 years.  You have 3.5-1 asset to equity ratio.  They've historically averaged close to 5% on the overall portfolio.  After operating expenses and viewing their underwriting long-term (since they generally over-reserve and release surpluses), they can get the 15% ROE.

 

The relationship between Fairfax and Hamblin Watsa is that HW is the investment manager for all of the capital.  You have six heads plus input from the analysts.  The six heads are allocated small pieces of the pie and the analysts are given even smaller pieces.  For large investments, there has to be consensus by the six heads.  Prem has final say, but it is primarily a collective, team effort.  Cheers!

[Guest valueInv]

I personally expect 10-15% compounding on book value over long periods of time (hopefully 15% or even greater, but 10-15% is my expectation).

That would be quite under Prem's goal.

 

What is the relationship between Fairfax and Hamblin Watsa? How are investment decisions made?

 

They will average close to 15% annualized over time...I'm talking 10-20-30 years.  You have 3.5-1 asset to equity ratio.  They've historically averaged close to 5% on the overall portfolio.  After operating expenses and viewing their underwriting long-term (since they generally over-reserve and release surpluses), they can get the 15% ROE.

 

The relationship between Fairfax and Hamblin Watsa is that HW is the investment manager for all of the capital.  You have six heads plus input from the analysts.  The six heads are allocated small pieces of the pie and the analysts are given even smaller pieces.  For large investments, there has to be consensus by the six heads.  Prem has final say, but it is primarily a collective, team effort.  Cheers!

 

Why do people make it seem like Prem is the one making investment decisions when HW the one? It seems like Prem's is more of a veto role.

[Parsad]

I personally expect 10-15% compounding on book value over long periods of time (hopefully 15% or even greater, but 10-15% is my expectation).

That would be quite under Prem's goal.

 

What is the relationship between Fairfax and Hamblin Watsa? How are investment decisions made?

 

They will average close to 15% annualized over time...I'm talking 10-20-30 years.  You have 3.5-1 asset to equity ratio.  They've historically averaged close to 5% on the overall portfolio.  After operating expenses and viewing their underwriting long-term (since they generally over-reserve and release surpluses), they can get the 15% ROE.

 

The relationship between Fairfax and Hamblin Watsa is that HW is the investment manager for all of the capital.  You have six heads plus input from the analysts.  The six heads are allocated small pieces of the pie and the analysts are given even smaller pieces.  For large investments, there has to be consensus by the six heads.  Prem has final say, but it is primarily a collective, team effort.  Cheers!

 

Why do people make it seem like Prem is the one making investment decisions when HW the one? It seems like Prem's is more of a veto role.

 

Yes, that would be correct.  But as Chairman, CEO and pretty much the face of the company, all decisions ultimately fall on his shoulders. 

 

I think the characteristic that Prem provides, which always takes a back seat to insurance, investments and the business, is simply his leadership abilities.  In a team environment, you cannot have an efficient, constructive and cohesive atmosphere unless the leader provides it. 

 

Buffett does not work in a team environment...managers run everything and he makes all of the investment decisions other than the small portfolios Combs and Weschler handle.  That is actually quite different than what HW does...and a testament to Prem and his colleagues.  Cheers! 

[Buffett_Groupie]

IMHO, Mr. Watsa has a strong religious faith which should never be under-estimated and is something that Buffett lacks.

[Parsad]

IMHO, Mr. Watsa has a strong religious faith which should never be under-estimated and is something that Buffett lacks.

 

That adds zero value (be it one of faith or not) to either of them.  There are plenty of people, both of faith and athiests, who do very stupid and unethical things.  I would not allocate faith with any sort of value as a manager.  Cheers!

[Mikenhe]

Having met Mr Watsa several times I have to say that his relious leanings (or not) have no bearing on me whatsoever. Its him as a person and a leader that allows me to continue to carry on invest in FFH.

They may not get everything right, sometimes they may do things in a manner that costs them more money that if other people had done them but ultimatley he lays out the ground rules and actually does what he says.

 

my biggest concern is that as FFH get bigger will there be too much distance betweem Mr Watsa and the FFH standards and principals and those who are charged with implementing them.

[ScottHall]

I don't know if there's a more useless topic to talk about than religion. It doesn't really add anything to most discussions and people are mostly irrational and become easily offended when discussing it.

 

Those discussions are probably not something this board needs to have on it.