Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?

[Myth465]

Parsad I think you echo the comment as well.

I think you have love and respect for the company and the employees, but not unconventional love for the investment.

That's different then a few other posters here.

[Parsad]

Parsad I think you echo the comment as well.

I think you have love and respect for the company and the employees, but not unconventional love for the investment.

That's different then a few other posters here.

 

Well, I have unconditional love for Prem and everyone at Fairfax, but I won't hold something to hold it.  Otherwise you just create more risk in the portfolio if the margin of safety isn't adequate, and you give up opportunities that may be even better elsewhere.

 

That being said, the average investor would be far better off holding Fairfax than any index over the long-term, and I would suspect will do better than if they even owned Berkshire Hathaway, simply because of size. 

 

As well, it's been three years of subpar performance because of their conservative stance, while markets have roared ahead.  And now, you have the additional impact of significant acquisitions and deals that have gone sideways...Sandridge, Torstar, Blackberry...while insurance pricing has had a tepid recovery.  So the amount of pessimism around Fairfax is pretty damn big when considering that the company is no where near the financial distress it has faced in the past, and is very well positioned to take advantage of others when the shit hits the fan.  I don't know...sentiment on here may be a good contrary indicator.  Cheers!

 

 

[giofranchi]

And now RIM.  Thats a big set of chains to be dragging around for the "long term". 

 

Hi Al,

here I must (ruefully) admit I agree with you…

 

The exact opposite to the majority of people on the board, I invested in Fairfax not “in spite of”, but “because of” all its cash and hedges…

 

Now, this BBRY deal threatens to put in jeopardy its until now rock solid balance sheet…

 

Of course, I will wait for more disclosure on the subject, in order to be able to evaluate the matter with as much objectivity as possible. Then, if I don’t like what I see, I will act accordingly.

 

giofranchi

 

[Uccmal]

Parsad I think you echo the comment as well.

I think you have love and respect for the company and the employees, but not unconventional love for the investment.

That's different then a few other posters here.

 

Well, I have unconditional love for Prem and everyone at Fairfax, but I won't hold something to hold it.  Otherwise you just create more risk in the portfolio if the margin of safety isn't adequate, and you give up opportunities that may be even better elsewhere.

 

That being said, the average investor would be far better off holding Fairfax than any index over the long-term, and I would suspect will do better than if they even owned Berkshire Hathaway, simply because of size. 

 

As well, it's been three years of subpar performance because of their conservative stance, while markets have roared ahead.  And now, you have the additional impact of significant acquisitions and deals that have gone sideways...Sandridge, Torstar, Blackberry...while insurance pricing has had a tepid recovery.  So the amount of pessimism around Fairfax is pretty damn big when considering that the company is no where near the financial distress it has faced in the past, and is very well positioned to take advantage of others when the shit hits the fan.  I don't know...sentiment on here may be a good contrary indicator.  Cheers!

 

 

 

Maybe so, but quite frankly, At this point my cash is better waiting in my hands than in the hands of FFH right now.  As much as I admire the FFh teams abilities they need to transition away from turn arounds and mediocre buyouts toward high quality wholly owned businesses or partnerships.  I have suggested three in Canada.  I could easily come up with a dozen or two more. 

 

I would much rather see them pay 500 million toward a great investment that immediately put 75 million a year on the balance sheet than turn arounds.  BBRY, Torstar, Sandridge, Resolute are all weak businesses with no moats, and in a couple of cases very dubious management.  They have billions tied up in these kind of mediocre operations.  2 billion invested in a Mullen or Russell would provide cash flow immediately to their balance sheet.  When the shit hits the fan they could deploy that cash flow, as Buffett does.  It is now time for Fairfax to use their size and power to advantage. 

 

 

I fully understand that holding FFh over the long term will yield decent results, probably well in excess of the S&P 500.  So it is an okay investment from that standpoint, but not as good as some oard members are able to do. 

 

Part of what drives my thinking on this is the reverse engineering I have done on my acquisitions from March 2009.  At the time I bought Leaps and common  for Sbux, HD, Axp, GE, and WFC.  I would have done at least as well over the past 4.5 years leaving those alone, and rolling them over rather than selling them and going into BAC.  And my intention going forward is to keep a portion of my BAC, AIG, JPM, and WFC, at least until a financial crisis starts to brew again.  I bought SSW around christmas 2008 and the common has tripled, paying dividends for the last 3 years as well. 

 

It all goes back to time being the friend of the truly great business.  FFh is not taking advantage of this! 

[james22]

So the amount of pessimism around Fairfax is pretty damn big when considering that the company is no where near the financial distress it has faced in the past, and is very well positioned to take advantage of others when the shit hits the fan.  I don't know...sentiment on here may be a good contrary indicator.

 

My only reservation: the pessimism doesn't seem reflected in the P/B yet. Trades at 5% over its 5-year average P/B.

 

Like giofranchi, I'm defensive and like FRFHF because of its cash and hedges. But LUK ("Fortress Leucadia") at 15% below its 5-year average P/B maybe the better position?

[giofranchi]

But LUK ("Fortress Leucadia") at 15% below its 5-year average P/B maybe the better position?

 

Except that I like the FFH’s business model much better than LUK’s. And like Al says (well, ok, someone else said it before…), time is the friend of the truly great business! :)

 

giofranchi

 

[Cardboard]

Fairfax is expensive and there is no pessimism surrounding the stock whatsoever. I would argue that it trades at a premium because of the hedges and perceived safety vs actual results.

 

I have sold all my stock a few years ago and never looked back. They made money on a macro bet that paid off in 2008-2009 and it has been it. All the rest of the money made since then has been pretty much destroyed by another macro bet or a short of the S&P at 1,000.

 

Now some people seem to think that if the market drops a lot that they will make a ton of money but, what will happen to their common stocks or bonds? What if the market keeps going up or stays stable? If you are looking for a true hedge: be in cash.

 

IMO, they are addicted to these macro bets having been very successful in the past and are too much in love with bargain basement stocks. I agree fully with Al that deploying capital in cash returning businesses vs cash sucking businesses would have been a much better strategy. This strategy also has another benefit which is to improve credit and insurance ratings by having measurable, stable cash flows coming in year after year.

 

The way the company has turned out is indeed very disappointing to me. I was there defending it during the dark days of late 2002 and early 2003. Then again all the way into 2006. I truly thought that the lesson of buying bad businesses such as TIG and Crum & Forster had been fully understood. 7 years later, it is the investment portfolio that is a mess with large macro bets and more crappy stocks than high quality ones. Mr. Watsa is still being called the Buffett on Canada but, if he keeps going down that road, it is the reputation of the bad businesses being acquired that will stick. I also find unacceptable the way minority shareholders of Fibrek and Blackberry have been treated. Buffett did not have to turn to such tactics when he acquired a Heinz for example.

 

Cardboard

[Partner24]

I'm not a contrarian, neither a follow-the-crowd kind of investor. The crowd can be right and the crowd can be wrong. You have to have faith in your own judgement.

 

Regarding that Blackberry possible acquisition, a lot of scenarios (and mixes between them) can come up:

 

- Liquidation: cash and short term investments plus intellectual property? An asset play? I would be surprised if that would be their plan. (Prem comments, past FFH history, etc.)

 

- Turnaround: Possible, but it's very difficult to predict the outcome. You can think about what's happened with Apple since the 2000's, but you can also think about the toads that are on the backyard of many managers who tought that their magic kiss would change toads into princess.

 

- Keep the costs down and take cash from the latest version of Blackberry until it dies.

 

- Another scenarios?

 

But, at first glance, it seems like a major cigar butt. But unlike insurance, it's easier to control the costs if things turn up badly.

 

Well, it's too soon to me to decide what will I do with my FFH shares. But, as a shareholder, since it would be a major transaction, I think it's very fair to ask what is their own view, and clearly.

 

 

[giofranchi]

Fairfax is expensive and there is no pessimism surrounding the stock whatsoever. I would argue that it trades at a premium because of the hedges and perceived safety vs actual results.

 

I have sold all my stock a few years ago and never looked back. They made money on a macro bet that paid off in 2008-2009 and it has been it. All the rest of the money made since then has been pretty much destroyed by another macro bet or a short of the S&P at 1,000.

 

Now some people seem to think that if the market drops a lot that they will make a ton of money but, what will happen to their common stocks or bonds? What if the market keeps going up or stays stable? If you are looking for a true hedge: be in cash.

 

IMO, they are addicted to these macro bets having been very successful in the past and are too much in love with bargain basement stocks. I agree fully with Al that deploying capital in cash returning businesses vs cash sucking businesses would have been a much better strategy. This strategy also has another benefit which is to improve credit and insurance ratings by having measurable, stable cash flows coming in year after year.

 

The way the company has turned out is indeed very disappointing to me. I was there defending it during the dark days of late 2002 and early 2003. Then again all the way into 2006. I truly thought that the lesson of buying bad businesses such as TIG and Crum & Forster had been fully understood. 7 years later, it is the investment portfolio that is a mess with large macro bets and more crappy stocks than high quality ones. Mr. Watsa is still being called the Buffett on Canada but, if he keeps going down that road, it is the reputation of the bad businesses being acquired that will stick. I also find unacceptable the way minority shareholders of Fibrek and Blackberry have been treated. Buffett did not have to turn to such tactics when he acquired a Heinz for example.

 

Cardboard

 

I don’t agree.

What matters is the business model. And, if there is one thing Mr. Buffett showed the world, is that Fairfax’s business model is one of the very best.

To achieve a 7.5% yearly return on your investment portfolio is not all that difficult! Remember Mr. Graham who said that to achieve satisfactory results in investing is easier than you think? Well, exactly!

The business model will do the rest, and Fairfax’s BVPS will compound at 15% annual for many years into the future.

And, of course, it doesn’t matter if that 7.5% return is achieved in a manner you don’t like or you don’t approve.

Of course, many members of the board are not satisfied with a 15% compounded return… Because, like Al has said, they can achieve much better results… That’s a good reason to sell your Fairfax shares!

But not because you think they won’t achieve a 7.5% annual return on their portfolio! That is a bet you are most probably going to lose.

 

giofranchi

 

[Guest longinvestor]

The question circling in my head is, "Are they simply buying Canada?". Is that how they see their circle of competence. As an example, I walked away from the annual meeting in Toronto unimpressed by their purchase of the China shop, the restaurants, the sporting goods business etc. For example, I shopped their China store (set up like an art museum) and bought a few things only to find the same damn things on Amazon for 30% less. Borrowing Warren's latest phrase, I don't see any of these businesses as "things that move" (Ketchup). So what is Fairfax's story in buying whole companies? Is it simply places where Prem has shopped before? William Ashley Toronto is nothing like Nebraska Furniture mart, in case someone is thinking that.

[A_Hamilton]

"I would much rather see them pay 500 million toward a great investment that immediately put 75 million a year on the balance sheet than turn arounds.  BBRY, Torstar, Sandridge, Resolute are all weak businesses with no moats, and in a couple of cases very dubious management.  They have billions tied up in these kind of mediocre operations.  2 billion invested in a Mullen or Russell would provide cash flow immediately to their balance sheet.  When the shit hits the fan they could deploy that cash flow, as Buffett does.  It is now time for Fairfax to use their size and power to advantage. "

 

 

What about BKIR ID, KW Convertible Preferred's, International Coal, gains on LT bonds over the last 5 years. Haven't these all worked out well?

 

The real pain for FFH has been hedges (which could be transitory), greek bonds (a $300 million mistake no one seems to even know about and for which FFH's hubris in thinking that CDS would never be triggered ever again/thinking the Eurozone would bail these out at 100 cents on the dollar absolutely hammered them), and the total return swaps long that FFH had on BBRY in the mid-$20's that were converted to equity at $7-$8 per share.

 

Your complaint seems very what have you done for me lately.

[Cardboard]

You live in a bubble Giofranchi.

 

"Mr. Buffett showed the world, is that Fairfax’s business model is one of the very best."

 

That is exactly what Al and I are trying to tell you or that he is not following the model. Go compare the numbers and see what percentage of shareholders equity is invested in stocks and businesses at Fairfax vs Berkshire. And even if he was less bearish, he would not even be able to come nowhere near close to Berkshire ratios because of ratings.

 

"The business model will do the rest, and Fairfax’s BVPS will compound at 15% annual for many years into the future."

 

The numbers are not indicating that such results have been achieved. P208 of the 2012 annual report shows that per share growth in book value is 10.5% over the last 5 years and 11.4% over the last 10 years. You can add up the dividends if you want but, we are still a long way from 15% and just missing by 1% over such long periods is almost impossible to catch-up.

 

Of course you can look at the numbers all the way to 1985 but, just keep in mind that you will never enjoy these results since they were made when Fairfax was tiny and a roll-up.

 

Cardboard

[Myth465]

You live in a bubble Giofranchi.

 

+1

 

7.5% or even 15% arent garenteed just because you have a business model, or are happy with lumpy returns.

I think Al's message missed the mark....

[ERICOPOLY]

You live in a bubble Giofranchi.

 

+1

 

7.5% or even 15% arent garenteed just because you have a business model, or are happy with lumpy returns.

I think Al's message missed the mark....

 

Their business model seems better suited for smooth returns, not lumpy ones.  They've had 17% annualized growth in stocks over the long term.  Why not just have lumpy returns if you are satisfied with lumpy returns?  The bonds seem to smooth out the returns (they perform well often when stocks are weak, and they seem to underperform vs stocks when stocks are at bottom -- but at that time they can't load up 100% in stocks because of the insurance business risk/rules).

 

The hedges also seem to echo this -- they can't accept returns that are too lumpy, so they need to hedge and smooth it out.

 

Without the insurance business they could accept the risk of lumpy returns.

[giofranchi]

You live in a bubble Giofranchi.

 

+1

 

7.5% or even 15% arent garenteed just because you have a business model, or are happy with lumpy returns.

I think Al's message missed the mark....

 

Well, historically they have achieved a 9.4% annual return on their investment portfolio… I thought 7.5% was somewhat conservative… But it seems I live in a bubble!! ;D ;D

 

PS

Actually, I don’t even need a 15% compounded increase in BVPS… My firm will probably continue to post operating profits for many years into the future… (of course, this might be another bubble of mine!! ;D ;D) Therefore, a 10% compounded annual return from its stock market investments will probably be satisfactory! To achieve such a result Fairfax must get a 4.5-5% annual return on its investment portfolio… practically half its historical result. That’s I think a good margin of safety… Of course, a good margin of safety, if you find yourself in bubble territory, might still not be enough!! ;D ;D

 

giofranchi

 

[Valuebo]

You live in a bubble Giofranchi.

 

+1

 

7.5% or even 15% arent garenteed just because you have a business model, or are happy with lumpy returns.

I think Al's message missed the mark....

 

Well, historically they have achieved a 9.4% annual return on their investment portfolio… I thought 7.5% was conservative enough… But it seems I live in a bubble!! ;D ;D

 

PS

Actually, I don’t need a 15% compounded increase in BVPS… My firm will probably continue to post operating profits for many years into the future… (of course, this might be another bubble of mine!! ;D ;D) Therefore, a 10% compounded annual return from its stock market investments will probably be more than enough! To achieve such a result Fairfax must get a 4.5-5% annual return on its investment portfolio… practically half its historical result. That’s I think a good margin of safety… Of course, a good margin of safety, if you find yourself in bubble territory, might still not be enough!! ;D ;D

 

giofranchi

 

I can perfectly live of my income as an employee but that doesn't mean I have to be happy with lower returns in investments because it's just an "extra".

 

I have my questions with the way Fairfax (or PW) presents the returns they achieved and the way Prem pounds the table about it in the annual letters. For example, is it correct to implement the first year of operations when that year achieved 180% return? Look at the CAGR when you remove the first few years (because those are irrelevant now anyway) and you get a clearer picture. Same goes for the last 10/15 years. It's just a lot more accurate when looking for future returns.

[giofranchi]

I can perfectly live of my income as an employee but that doesn't mean I have to be happy with lower returns in investments because it's just an "extra".

 

Not at all! The goal I have is to increase my firm’s equity at a CAGR of 15%. If I achieve that, I will be satisfied. And I still think Fairfax might play a meaningful role. That’s all!

 

giofranchi

 

[giofranchi]

I have my questions with the way Fairfax (or PW) presents the returns they achieved and the way Prem pounds the table about it in the annual letters.

 

I see only 1 clear outlier here: 1988.

 

giofranchi

[Valuebo]

I'm talking about BV growth per year. That was 180% in year 1. The first 5 years gave close to a 10-bagger in BV growth. How is this relevant for today?

[Valuebo]

They did amazing until about 2000, in part helped by the incredible bull markets in both stocks and bonds. The last 10 years were pretty lukewarm in comparison to all that. I'm not taking PW's word on his 15% BV growth target. He's already behind badly since he said it and the math is getting harder and harder to get there if he wants to make up for the last few years! Idk, maybe he increases BV by 30% a couple of times the next few years but I don't see how with the way he has positioned Fairfax. Also, if it's pretty hard now, how will it work out with double the capital. Miniature privatizations won't cut it and "going big" (although relatively it's not that big) in things like BBRY means a lot of risk that it goes the other way at one point.  I want to believe but I can't and I'd rather hold cash than Fairfax now.

 

 

Also one thing I (think I have) learned: if you shoot for a specific return, aim higher. Don't bet on your exit being great. If you want 15% CAGR I'd look out for 20-25% CAGR. Not LRE at exactly that point at which it gives you 15% if they achieve the same returns. Same goes for FFH. At some point they slip up (or catastrophe etc) and it's then that you want to act.

[giofranchi]

I'm talking about BV growth per year. That was 180% in year 1. The first 5 years gave close to a 10-bagger in BV growth. How is this relevant for today?

 

Well, keep in mind they now enjoy a leverage they have never enjoyed before… because it takes time to put insurance float together, and to make it grow.

So, you don’t want to necessarily compare past results with present results. Because past and present find Fairfax in two very different situations…

Instead, the average return on its portfolio of investments is imo a much more reliable figure, to judge their investment acumen… And investment acumen hopefully doesn’t deteriorate over time… For those very few great practitioners it actually increases year after year! :)

 

giofranchi

 

[giofranchi]

Not LRE at exactly that point at which it gives you 15% if they achieve the same returns. Same goes for FFH. At some point they slip up (or catastrophe etc) and it's then that you want to act.

 

But what exactly do you mean by “slipping”?! If FFH hasn’t slipped during the last three years… It has posted almost no earnings!!

 

LRE is another matter: the importance of LRE is to possess a "cash machine". I suggest to anyone who is interested to read every conference call by Mr. Pearson of Valeant. You will clearly understand how a business with not so much upside, but that keeps generating substantial amount of cash, might be a great asset to own. :)

 

giofranchi

 

[ERICOPOLY]

 

But what exactly do you mean by “slipping”?! If FFH hasn’t slipped during the last three years… It has posted almost no earnings!!

 

I take the time to read all of your posts and I presumed your belief (based on the general tone of your posts) was that they hadn't slipped up -- merely been early.  I think that true of a lot of the shareholders who are buying today.  Thus, it's not the kind of "slippage" that's going to create a buying opportunity as some people are seeing it as favorable slippage.

[bearprowler6]

Back to BBRY for a moment---I would suggest that yesterday’s move on BBRY was more defensive than offensive---done to protect/salvage FFH’s existing investment in the company. Only time will allow us to know whether the move is ultimately successful or not. While the list of recent equity investment “failures” (Torstar, Abitibi, Canwest) is long so is the list of recent mega hits -- Bank of Ireland, Mega Brands, the Brick and J&J to name just a few. It is also worth mentioning the almost flawless execution around the management of FFH’s fixed income portfolio. The frustration surrounding FFH and Prem seems to be at an all-time high---however those who are patient and focus on the long term will stand to benefit the most. For the record---I still believe that FFH will realize significant gains from both its deflation bet and equity hedges however I understand why not everyone holds this view. For these individuals; investments other than FFH may hold more appeal.

[giofranchi]

 

But what exactly do you mean by “slipping”?! If FFH hasn’t slipped during the last three years… It has posted almost no earnings!!

 

I take the time to read all of your posts and I presumed your belief (based on the general tone of your posts) was that they hadn't slipped up -- merely been early.  I think that true of a lot of the shareholders who are buying today.  Thus, it's not the kind of "slippage" that's going to create a buying opportunity as some people are seeing it as favorable slippage.

 

No Eric! Please, don't waste you precious time!! :)

 

Fwiw, I don't think Mr. Watsa was early... I think he was and is successfully following a strategy... Ok, another bubble talking, I know...

 

In a deleveraging I think you must have a strategy. Surely you must have one, if you are at the helm of a large company. And a strategy like this: "don't worry, everything is going to be fine!" is not what I have in mind...

 

Mr. Buffett has the following strategy: "every month $1.2 billion in cash are delivered at my door". Ok, that's a good strategy.

 

Can Mr. Watsa use Mr. Buffett's strategy? Unfortunately no! So, Mr. Watsa devised this alternative strategy: "I will grow capital when general stock market prices are low, and I will PROTECT capital when general stock market prices are high".

 

This is what I think and this is what I have seen him doing since 2006.

 

But the market doesn't care what I think! The market only sees a business that hasn't been meaningfully profitable for 3 years now!

 

To get more bearish on FFH, the market must see something worse than the lack of profitability, which is the loss of capital. But, wait, if FFH loses capital, its management would have failed exactly to do what it is striving to achieve since 2010... To protect capital!

 

So, the question would become: do you prefer to invest at BV with a management who is successful at what it wants to do, or to invest at 0.8 x BV with a management that has proven to be a failure?

 

giofranchi