Fairfax Annual Letter?

[Guest longinvestor]

Also enjoyed the video.

 

+1. Thanks for posting the video.

 

First time listening to Shilling. Very lucid, belongs amongst the greats.

[ERICOPOLY]

Because of the S&P hedging and the CPI-linked securities hedge shareholders are not receiving the returns on the equity portfolio, but are effectively receiving the delta between Hamblin-Watsa’s returns and the overall market. Based on my knowledge of HWIC's long term historical portfolio returns, I personally feel very comfortable with this delta return.

 

I was thinking about this delta return today.  Implicitly it means they have confidence that their delta will exceed what they could otherwise earn in fixed income.  Otherwise, why not just buy bonds instead?

 

 

 

 

[twacowfca]

Because of the S&P hedging and the CPI-linked securities hedge shareholders are not receiving the returns on the equity portfolio, but are effectively receiving the delta between Hamblin-Watsa’s returns and the overall market. Based on my knowledge of HWIC's long term historical portfolio returns, I personally feel very comfortable with this delta return.

 

I was thinking about this delta return today.  Implicitly it means they have confidence that their delta will exceed what they could otherwise earn in fixed income.  Otherwise, why not just buy bonds instead?

 

Yup.  They go by the balance sheet, giving it a lot more weight than I would when it's a crappy business.  For this reason, there is huge basis risk in their "hedging".  Nevertheless, It's hard to argue with their long term success.

[ERICOPOLY]

Because of the S&P hedging and the CPI-linked securities hedge shareholders are not receiving the returns on the equity portfolio, but are effectively receiving the delta between Hamblin-Watsa’s returns and the overall market. Based on my knowledge of HWIC's long term historical portfolio returns, I personally feel very comfortable with this delta return.

 

I was thinking about this delta return today.  Implicitly it means they have confidence that their delta will exceed what they could otherwise earn in fixed income.  Otherwise, why not just buy bonds instead?

 

Yup.  They go by the balance sheet, giving it a lot more weight than I would when it's a crappy business.  For this reason, there is huge basis risk in their "hedging".  Nevertheless, It's hard to argue with their long term success.

 

You also had that "Buffett put" strategy with Berkshire trading down near 1.1x book value.

 

Fairfax bought none!  That seemed to be a possible holding for them that wouldn't require too much (if any) hedging, and could compound away tax-deferred for a long time.  Perhaps they think they can do better than Berkshire with their delta?  Or they don't believe in the Buffett put, or they don't want to own Berkshire.  Or they believe the hedges won't take long to be wildly useful.  Hmm...  It's got to be better than JNJ as a defensive blue chip holding, either way.

[Shane]

Berkshire is a very strong company, but they own a fair amount of cyclical businesses.  In a deflationary scenario maybe they will hold up better than the average, but I don't think it will hold up as well as the hedges.

[twacowfca]

Because of the S&P hedging and the CPI-linked securities hedge shareholders are not receiving the returns on the equity portfolio, but are effectively receiving the delta between Hamblin-Watsa’s returns and the overall market. Based on my knowledge of HWIC's long term historical portfolio returns, I personally feel very comfortable with this delta return.

 

I was thinking about this delta return today.  Implicitly it means they have confidence that their delta will exceed what they could otherwise earn in fixed income.  Otherwise, why not just buy bonds instead?

 

Yup.  They go by the balance sheet, giving it a lot more weight than I would when it's a crappy business.  For this reason, there is huge basis risk in their "hedging".  Nevertheless, It's hard to argue with their long term success.

 

You also had that "Buffett put" strategy with Berkshire trading down near 1.1x book value.

 

Fairfax bought none!  That seemed to be a possible holding for them that wouldn't require too much (if any) hedging, and could compound away tax-deferred for a long time.  Perhaps they think they can do better than Berkshire with their delta?  Or they don't believe in the Buffett put, or they don't want to own Berkshire.  Or they believe the hedges won't take long to be wildly useful.  Hmm...  It's got to be better than JNJ as a defensive blue chip holding, either way.

 

That makes sense, but I doubt the rating agencies would see it that way, even though both companies have ultra low PML's for all sorts of catastrophes.  The rating companies would think: here are two insurance companies that should have a high correlation for losses in extreme events.  Also, FFH and BRK have done a non insurance deal with each other, but they are surely competitors in a lot of lines. Owning BRK stock might cause confusion with regulators and managers.  BRK has taken size able stakes in European insurers but only with the wholehearted approval of the other company.

[dartmonkey]

You also had that "Buffett put" strategy with Berkshire trading down near 1.1x book value.

 

Fairfax bought none!  That seemed to be a possible holding for them that wouldn't require too much (if any) hedging, and could compound away tax-deferred for a long time.  Perhaps they think they can do better than Berkshire with their delta?  Or they don't believe in the Buffett put, or they don't want to own Berkshire.  Or they believe the hedges won't take long to be wildly useful.  Hmm...  It's got to be better than JNJ as a defensive blue chip holding, either way.

 

Good points were made about the potential correlation with other insurers, and the possible conflict of interest issue. In addition, the so-called Buffett put means that Berkshire might be expected not to fall below 1.2x book. But in a market rout, there is no guarantee that Berkshire's book might not fall pretty precipitously - after all, a good part of Berkshire's value comes from its major equity holdings. In addition, it might well be that Buffett would see other, better sources of value if there were a general downturn in the markets, and not buy back Berkshire shares, even if they fell below 1.2x book. Buffett has been pretty explicit about this.

[ERICOPOLY]

Forbes interview with Gary Shilling; talking about the "grand disconnect" that Mr. Watsa mentioned in his Annual letter this year.

 

http://t.co/Ur39RIyvzk [video + transcript]

 

Summary:

He says the US will return to high rates of growth (unlike Grantham). 

 

But first, there will be 5 more years of consumer de-levering.

 

On the whole that sounds very good -- we need that high growth to shrink the government debt relative to GDP.  So, just a couple more years!  Then another one, and then just a couple more!

 

Sounds like we're almost there given that this whole thing began when the 2000 bubble burst nearly 12-13 years ago.

 

We are almost (just two more years) 83% of the way through!  ::)  (in two years we will be 15 years through this out of 18 total years beginning in year 2000)

 

[jay21]

Because of the S&P hedging and the CPI-linked securities hedge shareholders are not receiving the returns on the equity portfolio, but are effectively receiving the delta between Hamblin-Watsa’s returns and the overall market. Based on my knowledge of HWIC's long term historical portfolio returns, I personally feel very comfortable with this delta return.

 

I was thinking about this delta return today.  Implicitly it means they have confidence that their delta will exceed what they could otherwise earn in fixed income.  Otherwise, why not just buy bonds instead?

 

Yup.  They go by the balance sheet, giving it a lot more weight than I would when it's a crappy business.  For this reason, there is huge basis risk in their "hedging".  Nevertheless, It's hard to argue with their long term success.

 

You also had that "Buffett put" strategy with Berkshire trading down near 1.1x book value.

 

Fairfax bought none!  That seemed to be a possible holding for them that wouldn't require too much (if any) hedging, and could compound away tax-deferred for a long time.  Perhaps they think they can do better than Berkshire with their delta?  Or they don't believe in the Buffett put, or they don't want to own Berkshire.  Or they believe the hedges won't take long to be wildly useful.  Hmm...  It's got to be better than JNJ as a defensive blue chip holding, either way.

 

It depends.  If you think that the US economy will experience deflation, BRK might not be such a great holding.  JNJ operates in one of the areas that they probably view as inflating.