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

[Packer16]

I think they will change but until I see that I am not going to invest more in FFH.  I have a position today. If they stated they were going to change tommorow, I would definately invest more given the current valuation with proceeds if I sell some of my holdings.

 

Packer

[giofranchi]

I think they will change but until I see that I am not going to invest more in FFH.  I have a position today. If they stated they were going to change tommorow, I would definately invest more given the current valuation with proceeds if I sell some of my holdings.

 

Packer

 

Ok, I have understood your thinking. I would also like to know what Eric and Al think about the causes of HWIC’s mistakes today, and whether they will be able to correct them in the future.

 

giofranchi

 

[warrior]

I understand Prem’s intention for protection ,however,  in my view Prem  has been fighting  the FED and  that is not easy…

  The situation at this present moment, It is like residing with inadequate (bad) spouse difficult to leave with and impossible to quit.

 

[Partner24]

So far, what happened with Fairfax is the scenario that I have underlined here for a few years. Fairfax built an "ark" with their hedges and other sophisticated investments like that and lot of people tought that we were safe. It is an ark that protect us from rain (deflation, bad economy, stock market downside, etc.), but what happen if the sun shines? We might get thirsty. It seemed that this scenario was not the one that most FFH vocal fans here were seing...

 

...but that is exactely what happened over the last few years. The sun have shined, we did not have a lot of rain, and obviously you guys are now thirsty. It could have been far worse, but this is what happened overall.

 

I'm not in the business of "forecasting weather" (macro things). This is the kind of things that FFH do, not me. Personaly, I just take a look at a situation and try to see the two sides of the coin.

 

I'm still happy and optimistic with FFH over the long term and keeping my shares. You have to be very patient with FFH and let them do what they have proven to do well over the long term.

 

But like you said guys, over the last few years, their "cautious" view haven't paid off. Let's see what happen over the mid-term. If I don't see anything interesting over the next 2 to 3 years, I could change my opinion.

 

Cheers!

 

 

 

 

[SharperDingaan]

The argument really comes down to whether you expect Mr Market to assign significantly higher valuations to FFH over the forseeable future (5 yrs). The assesment determines whether you buy and hold, or trade.

 

Increasing a position using house money from seasonal trading, has the same effect as buy and hold. We just use the industry & market volatility to get there - versus growth in IV. Lots of ways to skin the cat.

 

SD 

[giofranchi]

So far, what happened with Fairfax is the scenario that I have underlined here for a few years. Fairfax built an "ark" with their hedges and other sophisticated investments like that and lot of people tought that we were safe. It is an ark that protect us from rain (deflation, bad economy, stock market downside, etc.), but what happen if the sun shines? We might get thirsty. It seemed that this scenario was not the one that most FFH vocal fans here were seing...

 

...but that is exactely what happened over the last few years. The sun have shined, we did not have a lot of rain, and obviously you guys are now thirsty. It could have been far worse, but this is what happened overall.

 

I'm not in the business of "forecasting weather" (macro things). This is the kind of things that FFH do, not me. Personaly, I just take a look at a situation and try to see the two sides of the coin.

 

I'm still happy and optimistic with FFH over the long term and keeping my shares. You have to be very patient with FFH and let them do what they have proven to do well over the long term.

 

But like you said guys, over the last few years, their "cautious" view haven't paid off. Let's see what happen over the mid-term. If I don't see anything interesting over the next 2 to 3 years, I could change my opinion.

 

Cheers!

 

Sorry Partner24, but I don’t understand: either your aim is to protect capital, or your aim is to increase capital. If you think rationally, you know there is a time when the first policy is right, and another time when the second policy is right. I understand Packer who says: for me now is the time to increase capital, so I won’t invest in FFH, until they take away the equity hedges. I think, on the contrary, that now is the time to protect capital, so the equity hedges are part of the reasons I am investing in FFH. Two different views, but I can understand both. Do you, instead, know a way to increase capital, should the sun shine, and at the same time to protect capital, should rain come?!  ???

 

giofranchi

[Partner24]

Hi giofranchi,

 

either your aim is to protect capital, or your aim is to increase capital

 

Or both! There is ways to grow that are safer than others (ex.: quality businesses, good moat, good managers, good price vs. speculation on penny stocks).

 

If you think rationally, you know there is a time when the first policy is right, and another time when the second policy is right.

 

Easy said, but to time these things is a very hard job. It's easy to believe in your crystall ball. Like one fellow said, the only time I made money with a crystall ball is when I sold it on Ebay. I am absolutely sure that there will be a recession. When? I don't have any idea! I try to build arks that will do fairly well when the sun shines and will do ok when it rains.

 

Do you, instead, know a way to increase capital, should the sun shine, and at the same time to protect capital, should rain come?!

 

That's mostly the Berkshire Hathaway way IMO. No sophisticated ways to protect capital, but good streams of income from good businesses, lot of cash and equities from good businesses on the balance sheet. They will intrinsicaly do ok if it rains, and fairly good if the sun shines.

 

But I don't want to complain about FFH style. It's their style, they have done well with it on the long run and I keep the long term view with this company...and all the companies in wich I have put my money. Like I said, I'll see what happens over the next few years and decide then if I have to keep the faith or not.

 

Cheers!

 

 

 

[Liberty]

Lots of interesting views on Fairfax. I'd be curious to hear what is Sanjeev's current thinking on FFH?

[Uccmal]

GIo, HWIC has made mistakes as we all do.  Its easy to be an armchair quarterback. 

 

Shalab has summed it up and I have seen this with FFH before.  They have trouble admitting mistakes.  There have been numerous high profile goof ups over the years such as the biggie with TIG and C&F, listing on the NYSE in the first place, 2006 restatements, Canwest Global, and now the hedges without protection on the other side. 

 

The are handling vast amounts of capital now, and really need to shift focus to buying great, large businesses at reasonable prices like Buffett does.  They probably need to hire someone to identify these choices, who is from outside the org. chart and is not infected with too much Ben Graham. 

 

The investment in ABX (Res) is particularly disturbing.  500 M or more invested in a crap business. 

 

Dont you think the 1.2 billion between Rimm and ABX would be better spent on an operating business that spins off 10% cash per year levered through insurance would be better than hoping for a turn around on those dogs? 

 

One thing I really like is the Kennedy Wilson alliance.  These guys are really good at what they do.

 

I would like to see a whole new direction that minimizes the macro, and focusses on real operating businesses.  It is now less than 10 % of my portfolio. 

 

 

[Parsad]

Lots of interesting views on Fairfax. I'd be curious to hear what is Sanjeev's current thinking on FFH?

 

I think it depends on the investor.  If you don't want to fiddle too much with your portfolio, then leave it up to Buffett, Prem, the Markels, Leucadia, Loews, Alleghany, et al.  They all have made tremendous money over the years, and they didn't suddenly become stupid. 

 

Fairfax right now is making money with less market risk, although that can be argued with their exposure to property casualty insurance, asset to equity leverage, and the use of debt.  But you can't teach an old dog new tricks, and that's probably pretty damn good if you happen to be a value investor. 

 

At the same time, this grand experiment the world has been participating in, has really forced investors to choose a side...asset bubble here we come, or sit on the sidelines and wait for the pin prick!  I was on the first side for the last three years, and now I'm firmly moving to the other side.  So is it any wonder you have value investors and long-time FFH holders giving up on Fairfax, as asset prices continue to rise? 

 

It's the nature of the beast.  Money has been made while Fairfax sat on the sidelines, and so now those who have made money become oblivious to the fact that risk premiums have all but shriveled and died.  As more pile on, and Fairfax looks to be a dumber and dumber bet, the tide will turn and many who floated up will plummet downwards.  When?  I don't know.  But as the seconds march forward, we only get closer and closer.

 

My advice:  If you don't want to worry about your portfolio...ignore the gyrations and hold onto Fairfax.  For those that like to be hands on, buy whenever you find something that provides an adequate LONG-TERM risk premium...and you can sell Fairfax if the LONG-TERM risk premium is even greater than Fairfax after taxes.  Not short-term based on the current risk-free rate, but on a long-term historical perspective.  Cheers!   

[Liberty]

Thank you for your thoughtful perspective, Sanjeev!

[ERICOPOLY]

I think they will change but until I see that I am not going to invest more in FFH.  I have a position today. If they stated they were going to change tommorow, I would definately invest more given the current valuation with proceeds if I sell some of my holdings.

 

Packer

 

Ok, I have understood your thinking. I would also like to know what Eric and Al think about the causes of HWIC’s mistakes today, and whether they will be able to correct them in the future.

 

giofranchi

 

Do you think I had inferred mistakes they are making today?  Certainly (to me) I have not done so.  I can only tell you that my position on Fairfax is far more nuanced than I suspect you believe. 

 

Hopefully you understand this following comment:

 

My thinking is multidimensional yet my communication is two dimensional.  So realize that my thoughts are populating a multidimensional space and yet you see only a two dimensional plane.  Limitations of communication.

 

So much thinking, little explanation.  So many things to say, so few said.  Precious attention of the listener.  Misunderstanding is the price of compromise. 

[Liberty]

You guys broke Eric, now he speaks in koans  ;)

[Parsad]

You guys broke Eric, now he speaks in koans  ;)

 

LOL!  That's what I was thinking too.  Cheers!

[ERICOPOLY]

With so much drama in the L.B.C., it's kinda hard being Snoop D O Double G.

[Liberty]

With so much drama in the L.B.C., it's kinda hard being Snoop D O Double G.

 

But I, somehow, some way, keep comin up with funky investment widsom like every single day...

 

(that's Eric's line, not mine obviously)

[valuecfa]

...with my mind on my money and my money on my mind

[giofranchi]

I think they should dial down their 15% return down to 6-7%.

 

Well, shalab, imo this makes no arithmetic sense… ??? they would have to achieve a 3-3.5% return on their portfolio of investments, to get a 6-7% growth in BVPS… I don’t even get out of bed in the morning for a 3.5%… ;)

 

HWIC I think is very large now ( 100 person team or some such... ) - dont know how effective they will be...

 

This doesn’t worry me at all. As I have shown many a time in previous posts, as a stock picker FFH is trouncing the indices hands down! Take away the equity hedges, and their investment abilities are undiminished and in plain sight!

 

It is also not clear what FRFHF plans for succession - if it is Prem's family taking over from him as chairman.

 

I couldn’t care less about what happens after Mr. Watsa retires… I will think about it 20 years from now!

 

giofranchi

[Parsad]

I own FRFHF and I like Prem/Francis et.al - I even think the management is pretty shareholder friendly.

 

However I do think FRFHF don't admit their mistakes, I think they should dial down their 15% return down to 6-7%. Under promise and over deliver is better than over promise and under deliver. HWIC I think is very large now ( 100 person team or some such... ) - dont know how effective they will be...

 

 

It is also not clear what FRFHF plans for succession - if it is Prem's family taking over from him as chairman.

 

These are somewhat erroneous statements and assumptions.  Let me clarify the first glaring one:

 

HWIC is nowhere near a 100 person team.  7 principals including Prem, probably about another 6 analysts and then say 5-6 managers they have capital with (I'm guessing on that, but have some information about some managers, so consider it a calculated guess).  You then also have a couple of enterprises that will be acquiring businesses in certain areas like Fairbridge and Thomas Cook.  In total, I think you are talking about 20-25 people!

 

The next one I would like to tackle is the recommendation to reduce their ROE to 6-7%.  This is crazy!  Historically, they've done far better...closer to 24%.  With the leverage they employ, they could easily return 15% ROE by achieving a 6% return on their portfolio and keeping insurance losses to historical levels.  Like Berkshire, they are going to have a significant advantage over the next 20 years when they really start acquiring private companies, and the global reach of their insurance business becomes much more pertinent.  They will return 15% ROE long-term for the next 20 years. 

 

Lastly, succession at Fairfax is one of the least concerns for shareholders.  Succession planning at Fairfax has been in place for many years, and the people in place are probably the best they've ever had.  You have Andy Barnard overseeing all of the insurance companies...a man who achieved extraordinary results at Odyssey Re, nearly on par with Berkshire's insurance businesses.  You have a decentralized investment team where the bench was far deeper than Berkshire's 15 years ago!  It may be the best team out there today...they definitely have one of the best fixed income minds of the last 30 years running their bond portfolio.  And Prem is already delegating many duties to subordinates such as Paul Rivett and Madhaven Menon to name just a couple.  Cheers!   

[giofranchi]

I own FRFHF and I like Prem/Francis et.al - I even think the management is pretty shareholder friendly.

 

However I do think FRFHF don't admit their mistakes, I think they should dial down their 15% return down to 6-7%. Under promise and over deliver is better than over promise and under deliver. HWIC I think is very large now ( 100 person team or some such... ) - dont know how effective they will be...

 

 

It is also not clear what FRFHF plans for succession - if it is Prem's family taking over from him as chairman.

 

These are somewhat erroneous statements and assumptions.  Let me clarify the first glaring one:

 

HWIC is nowhere near a 100 person team.  7 principals including Prem, probably about another 6 analysts and then say 5-6 managers they have capital with (I'm guessing on that, but have some information about some managers, so consider it a calculated guess).  You then also have a couple of enterprises that will be acquiring businesses in certain areas like Fairbridge and Thomas Cook.  In total, I think you are talking about 20-25 people!

 

The next one I would like to tackle is the recommendation to reduce their ROE to 6-7%.  This is crazy!  Historically, they've done far better...closer to 24%.  With the leverage they employ, they could easily return 15% ROE by achieving a 6% return on their portfolio and keeping insurance losses to historical levels.  Like Berkshire, they are going to have a significant advantage over the next 20 years when they really start acquiring private companies, and the global reach of their insurance business becomes much more pertinent.  They will return 15% ROE long-term for the next 20 years. 

 

Lastly, succession at Fairfax is one of the least concerns for shareholders.  Succession planning at Fairfax has been in place for many years, and the people in place are probably the best they've ever had.  You have Andy Barnard overseeing all of the insurance companies...a man who achieved extraordinary results at Odyssey Re, nearly on par with Berkshire's insurance businesses.  You have a decentralized investment team where the bench was far deeper than Berkshire's 15 years ago!  It may be the best team out there today...they definitely have one of the best fixed income minds of the last 30 years running their bond portfolio.  And Prem is already delegating many duties to subordinates such as Paul Rivett and Madhaven Menon to name just a couple.  Cheers! 

 

Ok… Now, I know that when Parsad speaks, people listen! And rightly so!!

But… what else have I tried to "desperately" say for the last few days?!?! >:(

 

giofranchi

 

[giofranchi]

scorpioncapital has posted the file in attachment a few hours ago in another thread. I want to quote it here as well, because theme n.3 and theme n.4 on page 2 are of great relevance in the discussion about FFH as well:

3. Long-term value can be created as long as you protect your company from the inevitable market panics and setbacks. If showing up is 90%, always staying in the game may be the other 10%.

4. It is hardest to buy when everyone is selling and vice versa, but that is always where value is created or protected.

The true reason it is so hard to invest in FFH is because they constantly buy when everyone is selling and vice versa. But that is always where value is created, if you buy when everyone is selling, or protected, if you sell when everyone is buying.

Both are extremely important! The focus should be 90% of the time on the creation of value, and only 10% of the time on the protection of value, but this doesn’t mean that 10% is less important!

I think the protection of value is underrated and not studied enough even among value investors.

 

giofranchi

JefferiesInsights_July2013.pdf

[Sportgamma]

And Prem is already delegating many duties to subordinates such as Paul Rivett and Madhaven Menon to name just a couple.

 

Wow. Would not want to meet someone with that name in a dark alley, would you?

[Uccmal]

Sanj, My argument is that FFH is likely dead money for sometime.  Coupled to that is the inevitability that FFh stock will go down in a market panic. 

 

On the flip side they will not go OOB, by any means. 

 

The money I have taken from FFH is staying as cash to deploy when markets or specific opportunities are cheaper.  I have by no means moved up the risk curve.  If anything, overall my total risk is much much less.  Taxation avoidance is not a valid means to protect ones portfolio, at least in Canada where I will pay 15% on the gains from FFH.  Buy it back 30% or even 40 % cheaper and that problem is solved. 

 

Good point on Thomas Cook. 

 

Things have changed at FFH in terms of amount of capital that needs to be deployed.  They need to change with the capital levels as Buffett did, and Markel is doing. 

 

How much FFH does your fund hold now, percentage wise?

 

Al

[Uccmal]

BTW, I dont think succession is the same issue at FFH as BRK. 

[ERICOPOLY]

The true reason it is so hard to invest in FFH is because they constantly buy when everyone is selling and vice versa. But that is always where value is created, if you buy when everyone is selling, or protected, if you sell when everyone is buying.

Both are extremely important! The focus should be 90% of the time on the creation of value, and only 10% of the time on the protection of value, but this doesn’t mean that 10% is less important!

I think the protection of value is underrated and not studied enough even among value investors.

 

giofranchi

 

The trouble for me with holding FFH for long periods of time is that when equities get really cheap, I want to load up on them.  I don't want to be 50% invested in them at that time.  Furthermore, I want to maximize the opportunity and not sit around in JNJ.  They are limited in what they can do because they are an insurer.

 

So the very time when the market bottoms... is the time that would be most rewarding to leave them behind.  Further, if you expected the collapse to come you would be best off never owning FFH in the first place (because it too will drop).

 

I made a mistake in holding FFH and adding to it in March 2009 -- I imagined they were aggressively buying up stocks on my behalf but it didn't happen.  I realize today that my expectations were unreasonable -- they are an insurer.