FH Q3 Results

[Valuebo]

 

"Alot of people here make too many excuses for FFH". 

 

 

Hey Uccmal,  I always appreciate your thoughts (along with everyone else who contributes) and you may well be right.  This quarterly loss certainly caught me off guard, so if you saw it coming then well done.  I figured a wash to a small loss for this quarter, so my modelling needs some revising  :-[  However even after the biggest quarterly loss I have experienced as an owner, they are still only trading at 1.3 x's book and will probably trade  somewhat lower shortly.  I have my view that this company is undervalued at 1x's book and fair value at 1.5x's book.  How do you value them especially in a hardening market for insurance and where the broader market is stretched?

 

Hi nwoodman,

I will let you know what I call “My 7 lean years model for FFH”… don’t tell anybody, please! ;D ;D ;D

 

Ok, we all know that FFH increased BVPS by 146% during the 3 years of 2007, 2008, and 2009. That equates to a 35% CAGR in BVPS. So, let’s just see what will happen if two more cycles of 7 lean years + 3 roaring years will unfold. I have assumed in my model that FFH doesn’t grow BVPS at all during the 7 lean years, then increases its BVPS at a CAGR of 35% for the next 3 roaring years.

2013 has been the fourth year of the 7 lean years that will go on until 2016. 2017, 2018, and 2019 will be the 3 roaring years. Then from 2020 until 2026 we will experience another 7 lean years. Finally, 2027, 2028, 2029 will be the 3 roaring years that close the second and last cycle.

As you can see in the files attached, with these assumptions BVPS will grow at a CAGR of 12% for the next 16 years, and that equates to a Present Value of Equity equal to 1.54 x BVPS at 2013 year end.

 

You might think I must be joking, but this model of mine follows Mr. Munger’s idea that “you must do very few things right in your whole career, to achieve great financial results, as long as you avoid too many stupid things”. And that’s what great financial minds past and present have always done: to have ready cash, when everybody else is panicking. Even though those moments don’t come that often, I think you should plan and prepare for them. And that exactly what FFH is doing.

 

giofranchi

 

 

Wow. So we just randomly extrapolate the last 7 years into the future and that's it? How is this analysis to determine IV?!

 

 

Fairfax is lucky there weren't any big cats or BV would have been under $300 as Uccmal suggested.

[giofranchi]

Combining for a second with the micro cap thread, I have to chuckle at the people who would be "satisfied" with 20% returns.  Good lord.  Sure, any mook can do that for a period of time, but to do it for an extended basis puts your in the rarified air of the greats like Buffett and yes, Graham and Schloss.  I would also strongly disagree with the statements that diversifying is for those who don't know what they're doing.  That's total bullshit.  It's simply that what's being done is different and for some unknown reason that is not acceptable.

 

Hi Kraven,

I know that what you do is different from what I do (or try to do). I respect your work and have absolutely no problem accepting it. I am also positive you will go on being very successful.

I understand what you do, and hope you understand what I do (or try to do). :)

 

Cheers!

 

giofranchi

 

[rjstc]

 

Gio; Curious if you own any Berkshire? It seems like that would meet most of your criteria without the 7 lean years. Good owner operators, etc. Ron

[giofranchi]

Wow. So we just randomly extrapolate the last 7 years into the future and that's it? How is this analysis to determine IV?!

 

Well, it is just a present discounted valuation… That’s all! No idea of true IV here… Anyway, it would be much higher!

 

tombgrt,

it is just what they do: they wait, and wait, and wait, until the odds suddenly become so much in their favor… I am not saying the waiting is for everyone… Far from me… I just tried to quantified, to put some numbers on they way they operate.

 

And came to the conclusion that it is possible to have great financial success that way. And let me add this: I think it is a very safe way to achieve your financial goals. To be very conservative, until people around you lose their mind… it has worked many times in the past, and I guess it will work very well in the future as well.

 

giofranchi

 

[giofranchi]

 

Gio; Curious if you own any Berkshire? It seems like that would meet most of your criteria without the 7 lean years. Good owner operators, etc. Ron

 

Hi Ron!

Of course, I used to holding BRK and made some serious money. But I hold it no more.

Two of the things I look for in an investment, BRK can no longer meet:

1) The age of the owner/manager I partner with should be preferably in between 45 and 65 years. That way he surely has already proven himself, but still has many years ahead to go on compounding capital.

2) The company simply doesn’t have to be too big. For BRK to double, it must become the largest company in the world… I cannot convincingly judge such a situation… It is too many orders of magnitudes away from what I am accustomed to…

 

giofranchi

 

[nwoodman]

 

You might think I must be joking, but this model of mine follows Mr. Munger’s idea that “you have to do very few things right in your whole career, to achieve great financial results, as long as you avoid too many stupid things”. And that’s what great financial minds past and present have always done: to have ready cash, when everybody else is panicking. Even though those moments don’t come that often, I think you should plan and prepare for them. And that exactly what FFH is doing.

 

giofranchi

 

Thanks Gio, the models are appreciated.  Not surprisingly they mirror my view of investing and results.  Periods of not much, followed by FX hits  (in my case) and capital declines, followed by feelings of I'm a genius, followed by oh $#$%.  However over time, the NAV moves forward at an acceptable rate. The constant reminder is never play this game with leverage.  I take my hat off to the  Erics and Parsad's of the worlds that can make money from that kind of (time based) strategy.  However,  I am just a simple engineer (like you I believe) and margin of safety (value and time) must always apply.  We must also be careful in this endeavor as group think is the biggest challenge we face :)

[LowIQinvestor]

Anybody else hear Prem's comment that he would sell the company for 2x today's price!?

 

That comment keeps ringing in my ear...I would gladly sell around 2.5 times book value!

 

Thoughts?

 

 

[LowIQinvestor]

Sorry that should have said

"Anybody else hear Prem's comment that he would NOT sell the company for 2x today's price!? "

[racemize]

Sorry that should have said

"Anybody else hear Prem's comment that he would NOT sell the company for 2x today's price!? "

 

This company is his baby--he'd never sell it!  That's like asking Buffett to sell Berkshire, simply a no-go from the start.

[SharperDingaan]

You might want to look tactically at FFH, over the next 2-3 months  ;)

 

SD

[PED]

The paradox is that FFH mgt has been fairly septical about the equity market valuation since 2010.

Their (mine!) scepticism had a great opportunistic, unrealised and realised cost to FFH.

Would they consider the current valuation of their own stock the ultimate proof of the current bubble they seem to fear?  :o  :'(

Those with a very long term views and medium return target have little to fear owning the stock at current level, those with a more disciplined and unemotional approach will feel less comfortable...

The question is not about this Q3 but the future, and the answer is a bit "too complicated" ...

 

 

[giofranchi]

Isn't that exactly what macro investing is? You look at the average of 2000 company valuations and you base your investment decisions on that, instead of looking for individual securities.

 

On a sidenote, I've been thinking a bit about the following: lots of forum members don't 'do' macro investing. However, some of us do invest a lot of money with owner/operators who happen to have identical views on the economy as we have (including me). Gio, isn't one of the reasons you invest in Fairfax that you like their cautious view of the economy? So if Fairfax loses 8% of book value during a quarter because of their hedges and your portfolio loses value because of that , aren't you effectively macro-investing?

 

Are we sometimes deluding ourselves about the reasons we invest in specific companies? I.e. a bullish forum member might invest in Berkshire, a bearish member in Fairfax and we both try to rationalize it by looking at completely different metrics afterwards.

 

Hi writser!

I guess it depends on what you mean by “macro investing”… My meaning of macro investing is making investment decisions based on what you think the economy will do… My idea of value investing is comparing probable future real earnings with current prices and come to some conclusion of under, fair, or over valuation. The number of companies imo doesn’t matter… I have 10 companies in my firm’s portfolio, Kraven, if I am right, might have 200 companies in his portfolio, the Russell 2000 has 2000 companies…

 

A second thought is that I don’t invest based on macro, because I don’t think I am able to do so… but this certainly doesn’t mean I think nobody can do that! The fact FFH makes some investment decisions based on macro is not the only difference between what I can do and what they can do… It neither is the only difference between how I operate and how they operate… Take, for instance, their way of investing in equities: they are deep value investors a la Graham, and they usually employ a basket approach, they tend to be very diversified like Kraven tends to be… I cannot do that, and you know I operate differently… Yet, who cares? Exactly as I do know Kraven will go on being very successful, the same I think is true for FFH. I must understand what the partners I choose do and how they will be able to perform in the future; I absolutely don’t need to be able to replicate their way of working… Or, put it in another way, if I could do what they do, I would do it myself!! ;D ;D

 

giofranchi

 

[LowIQinvestor]

Quote from: LowIQinvestor on Today at 07:28:54 AM

 

    Sorry that should have said

    "Anybody else hear Prem's comment that he would NOT sell the company for 2x today's price!? "

 

 

This company is his baby--he'd never sell it!  That's like asking Buffett to sell Berkshire, simply a no-go from the start.

 

For the record, if I had a baby I wouldn't sell him/her for any price....However, I own a small business and would gladly accept an extremely inflated offer despite my bullish outlook!

I am just playing devil's advocate here: Could you imagine any other CEO in your portfolio saying they wouldn't sell the company at 2x the current value ( assuming today's value is not ridiculously undervalued).

 

So there is no number that Fairfax would entertain? 4 x book value?

[racemize]

Quote from: LowIQinvestor on Today at 07:28:54 AM

 

    Sorry that should have said

    "Anybody else hear Prem's comment that he would NOT sell the company for 2x today's price!? "

 

 

This company is his baby--he'd never sell it!  That's like asking Buffett to sell Berkshire, simply a no-go from the start.

 

For the record, if I had a baby I wouldn't sell him/her for any price....However, I own a small business and would gladly accept an extremely inflated offer despite my bullish outlook!

I am just playing devil's advocate here: Could you imagine any other CEO in your portfolio saying they wouldn't sell the company at 2x the current value ( assuming today's value is not ridiculously undervalued).

 

So there is no number that Fairfax would entertain? 4 x book value?

 

Oh very easily!  I also own berkshire (I bet you saw that coming).  I'm also sure MKL wouldn't do it (they've sold at over 2x the current book multiple in the past).  I think the offer would have to be so obscene that it just couldn't happen.  Even so, if you are working on your life's work and your goal is to see it build over time, then selling just doesn't line up. 

 

Were I in that situation, I probably wouldn't sell either--I'd already be rich, so I'm doing this for my own pleasure, not money.  As long as shareholders understand this, it seems fair to me. 

[gary17]

just thought i post this publication from Lauren Templeton - interestingly she also talked about long term performance of FairFax and used Apple as a comparison 

http://www.laurentempletoninvestments.com/documents/sma-1383076603.pdf

[james22]

A Hussman fan, I do macro invest by matching my Small Value index beta with expected returns.

 

But I also always hold select owner-operators (BRK, MKL, LUK). I like to believe they'll work regardless the expected returns:

 

The overall national debt level, the ongoing federal deficits, and the extreme monetary intervention will eventually prove disastrous. We remain worried about the consequences for securities markets and thus continue to maintain a conservative investment posture.

 

Rather than furthering our argument of why it is risky to centrally plan the most important price in an economy (i.e. interest rates), we devote the bulk of this letter to a discussion of our top five investments.

 

...

 

One of our objectives has been to increase our exposure to what we believe to be the highest quality businesses with proven leadership at navigating dynamic economic conditions and redeploying earned capital at favorable rates. Each of the businesses we discuss stands out on both fronts.

 

...

 

The current investment environment is fraught with risk. Interest rates are near generational lows. Broad market equity indices are rich after adjusting earnings for normalized profit margins. Government intervention is distorting the economy in an unsustainable way. We by no means deem these risks inconsequential. Yet, in any environment, opportunities exist. We are willing to deal with ("overlook") these risks in the context of owning the businesses described above. We believe the quality of the businesses and their leadership is strong enough to overcome many headwinds.

 

Wayne Gretzky liked to say, "I skate to where the puck is going to be, not where it has been." The bulk of our portfolio constitutes high quality businesses with leadership that has demonstrated an exceptional ability to allocate capital and to move the business to where the market is going to be.

 

http://seekingalpha.com/article/1792922-5-attractive-investments-for-todays-difficult-environment

 

(They like BRK and MKL.)

 

I'll buy FRFHF when attractively valued and hold for the same reason (they've run away from me since June).

[giofranchi]

just thought i post this publication from Lauren Templeton - interestingly she also talked about long term performance of FairFax and used Apple as a comparison 

http://www.laurentempletoninvestments.com/documents/sma-1383076603.pdf

 

Thank you for posting! :)

 

giofranchi

[Kraven]

Combining for a second with the micro cap thread, I have to chuckle at the people who would be "satisfied" with 20% returns.  Good lord.  Sure, any mook can do that for a period of time, but to do it for an extended basis puts your in the rarified air of the greats like Buffett and yes, Graham and Schloss.  I would also strongly disagree with the statements that diversifying is for those who don't know what they're doing.  That's total bullshit.  It's simply that what's being done is different and for some unknown reason that is not acceptable.

 

Hi Kraven,

I know that what you do is different from what I do (or try to do). I respect your work and have absolutely no problem accepting it. I am also positive you will go on being very successful.

I understand what you do, and hope you understand what I do (or try to do). :)

 

Cheers!

 

giofranchi

 

Gio - I do completely understand what you do.  You have been successful with it and I have no doubt will continue to be both as an investor and in your company.  My issue (not directed to you at all) is what we see on this board time and time again.  You have 2 broad camps if you will - the Buffett Concentrators and the Graham/Schloss Diversifiers.  I find that the former can't seem to understand why someone wouldn't just put everything into the very best super idea.  The latter, of which I am one, have said repeatedly to know thyself.  If you can do it that way, it's probably the best way, but not everyone is cut out to invest that way.  I strongly disagree with the comments that diversifying is to cover up for ignorance.  It's simply a different strategy and one which requires the same hard work, dedication and discipline.

[JEast]

I have been reading FFH’s quarterly reports for nearly 15 years.  That is a lot of quarterly reports my friends.  Upon reflection, I believe that the correlation to what I expect and what gets reported quarterly is running at about a (-)0.90!  In other words, you nearly have to be a masochistic to own it as I still do :)  But I guess that trait has to be at least a little present to be a value investor.  This wonderful correlation also makes it hard for the average analyst or portfolio manger that stays in their job around 3 years to ever get a handle on this company.

 

Oh well, 3 steps forward, 2 steps back in the slow drip of time arbitrage.

 

Cheers

JEast

[Packer16]

I think the reasons for the love is that no matter what, FFH shareholders will share in the gains and losses in a fair way like Berkshire but for BH you will share in the losses and the upside will be capped by Biglari much the way it will be for Greenlight RE as they have structured the vehicles as hedge funds.  Nothing against Einhorn and Biglari and if they are successful they you will make money but how are this different than investing in a hedge fund put together by KKR or others (fees includes).  FFH is like investing in hedge fund will less fees.  Which one would you rather invest in?

 

Packer

[giofranchi]

I think the reasons for the love is that no matter what, FFH shareholders will share in the gains and losses in a fair way like Berkshire but for BH you will share in the losses and the upside will be capped by Biglari much the way it will be for Greenlight RE as they have structured the vehicles as hedge funds.  Nothing against Einhorn and Biglari and if they are successful they you will make money but how are this different than investing in a hedge fund put together by KKR or others (fees includes).  FFH is like investing in hedge fund will less fees.  Which one would you rather invest in?

 

Packer

 

Well, hedge funds almost never manage entire businesses. In other words, they are (or at least are supposed to be) good investors, but seldom are good businessmen too. When you partner with Mr. Einhorn and Mr. Biglari, you partner with both good investors and good businessmen. The strategic advantage of managing wholly owned businesses, that keep providing their owners and managers with free cash flow and/or free float, is not to be undervalued!

This being said, I agree that Mr. Watsa is cheaper than both Mr. Einhorn and Mr. Biglari. On the other hand, GLRE and BH are still much smaller than FFH, and could probably grow faster.

 

giofranchi

 

[Packer16]

I think I used the wrong word to describe KKR and Blackstone types of company, they are more akin to private equity.  I think BH is more akin to private equity with Greenlight is more akin to hedge funds.  I think on the scale these guys operate it is difficult to find bargains so when when you find a successful one capping the upside can be harmful for the investor.  I don't see how either BH or Greenlight is that much different than an LP interest in a KKR of Blackstone fund (fees included).

 

Packer

[giofranchi]

Actually, I don’t know KKR or Blackstone well, therefore I cannot really judge… But I look at BH as a mini-BRK, with a manager who has some advantages (is much younger and has much more room to grow) and some disadvantages (is less cheap and probably not as talented as Mr. Buffett). If KKR and Blackstone fit this description, then I guess they are like BH.

The reason GLRE is different from an hedge fund is very clear to me: GLRE assumes underwriting risk and enjoys the use of float, a typical hedge fund doesn’t assume underwriting risk and doesn’t enjoy the use of float.

 

giofranchi

 

[Packer16]

BH is no mini-BRK.  The only part of that description that fits is mini.  BRK has build a culture around treating folks fairly (the same with FFH).  BH has developed a reputation for hosing folks and providing the rewards to Mr. Biglari.  The BRK model is dependent upon purchasing business at or below IV in a non-combative way.  Buffet and Watsa never go hostile.  Who would want to sell there business to BH?  No one.  So if you have a choice, you go with someone else maybe even for a lower price.  I think that is downside to BH and you see it in the valuation.  Selling at a discount to other restaurant chains.  If you want a mini-BRK I think you have to look at other firms similar cultures not just appearance and structures (smoke and mirrors in my opinion).  I think an interesting question is would you Gio want to sell your business to Mr. Biglari or Mr. Watsa or Mr. Buffett?

 

Greenlight I think has more positive attributes but I am not sure how good his underwriting is.  Poor underwriting has offset investment gains since 2010.  He has done OK in 2013, CR<100 but has had a really benign years for cats.  We will see.  I have no problem with investment side but (like FFH) it is the underwriting which cam stunt growth. 

 

Packer

[Valuebo]

Wow. So we just randomly extrapolate the last 7 years into the future and that's it? How is this analysis to determine IV?!

 

Well, it is just a present discounted valuation… That’s all! No idea of true IV here… Anyway, it would be much higher!

 

tombgrt,

it is just what they do: they wait, and wait, and wait, until the odds suddenly become so much in their favor… I am not saying the waiting is for everyone… Far from me… I just tried to quantified, to put some numbers on they way they operate.

 

And came to the conclusion that it is possible to have great financial success that way. And let me add this: I think it is a very safe way to achieve your financial goals. To be very conservative, until people around you lose their mind… it has worked many times in the past, and I guess it will work very well in the future as well.

 

giofranchi

 

 

That is not valuation but random speculation of what might happen and rationalizing your speculative thoughts by saying that this is what they do, "waiting". They didn't wait these last few years but made a macro bet (it was more than just protection imo) that has cost shareholders a lot of money. If the markets keep pushing higher and if they get hit by a big cat next year, they will absolutely have lost at least half a decade of possible value creation. How is that for a present discounted valuation? Assuming something about the future and then extrapolating the possible returns is just not possible in any accurate way.

 

They are conservative in the way that they have to be in part because of Fairfax' leverage but the question is whether it has to be so aggressive. Buffett was likely smarter by not fighting the market and simply buying businesses that generate cash flows that over time provide the best hedge for all kind of circumstances. If Buffett was in Prem's shoes, he would have at least admitted that he might be wrong. I know, hindsight and all that. In any other parralel universum Fairfax could have been the best performing stock. The question is whether they made the right decision in terms of likely possible outcomes.

 

But I look at BH as a mini-BRK.

 

giofranchi

 

 

Honestly; why do you believe this?