Fairfax's 1st Annual Report - Markel Financial Holdings

[Parsad]

On the weekends, I like reading all sorts of things.  Often, I'll go back and look at old partnership letters, annual reports, etc, of the people I admire.  I read the original Buffett Partnership letters AGAIN!   ;D  And then re-read the first few years of Fairfax's business.  In particular, I carefully scrutinized the 1st Annual Report, which was still under the Markel Financial Holdings name.

 

http://www.fairfax.ca/Assets/Downloads/AR1985.pdf

 

In the letter, Prem has the breakdown of the capital that was injected into Markel when they acquired it:

 

$5M - The Sixty-Two Investment Company

$2.6M - Markel Corp

$1.5M - Private Investors

 

I was thinking about that $5M.  I remember Prem telling me the whole story over lunch, and for him at the time, it was very, very difficult to raise the capital.  He had every cent invested in this deal...for him and his family, it meant all or nothing!  Robbert Hartog of course was one of the private investors.  Francis was in there as well.  

 

It's amazing the confluence of events that lead to Prem meeting the Gardiners, then Tony Hamblin, Francis, Robbert, the Markels, etc.  In the letter he goes on to tell the shareholders:

 

Our investment philsophy is based on the value approach as laid out by Ben Graham and practiced by his famous disciple, Warren Buffett.  

 

Remember this was only 1985 and Buffett’s net worth was a little more than Prem’s today in dollars.  Granted in 1985, $600M was probably like $2B today.

 

Prem talked about his 20% return on equity objective.  Milton Markel remained the Honorary Chairman, Steve and Tony Markel remained as directors, and Prem became Chairman.

 

They had about $42M in total assets and a little over $10M in equity…primarily from the $9M injection of capital when they took over.  Equity per share was about $2 and they had 5,000,000 shares outstanding.

 

Twenty-Four years later and look at what has happened.  That little business, not entirely different than when Sardar put half of the Lion Fund into Western Sizzlin, is now a behemoth with over $4.5B in equity and the shares outstanding have only tripled.  

 

Today, the Markels run their own very successful company, Tony Hamblin and Francis have done pretty good to say the least, not to mention all the other principals at Hamblin-Watsa, and little old Prem Watsa…well his dividends alone now annually generate more than 3-4 times all the money he had to scrape together to buy Markel in the first place.  Wow, what a story!  Cheers!  

 

[Rabbitisrich]

It's also interesting that Prem states that he will not purchase a future or derivative. Yet, only ten years later, he purchases index puts to guard against a "nuclear bomb" scenario. You can see the development of his craft, as well as his long history of guarding against unforeseen events (before 'black swans' even).

[Parsad]

I think this goes back to what Sam Mitchell said at our dinner this year..."Sometimes macro does matter."  Cheers!