Global Macro Hedge Fund

[JEast]

In the old Lucy TV show, about every third show or so, you could hear Ricky shout “Lu-uu-cy!!, you go some s-plaining to do.”  In an attempt to do such, this sometimes knuckle-dragging analyst offers the following:

 

FFH has morphed into something else.  But first, let me offer what it is not.  It is not a stock (in the traditional sense), it is not an owner operator, it is not a deep value asset play (though may be in the future), and it is not an insurance company (again in the traditional sense).  On the other hand what the equity may be is a global macro hedge fund without the fees (e.g. an alternative investment) and analyzed as such (if possible).  If you had not figured this aspect out by now, the events of the last few weeks should make this distinction more likely.

 

This morphing process from a somewhat normal insurance company stock with a demonstrated investment acumen started (in my mind) around the 2005/06 timeframe.  I am of the believe that the investment committee of Lace, Martin, Watsa, Bradstreet, Mitchell, Chou and others did not strategically plan this transformation, it just came about due to circumstances.  The core of FFH has always been centered in the investment committee (and to a lesser degree ORH since 2002).  This nucleus searches the globe in India, Poland, Ireland, Brazil, China, Greece and elsewhere in search of assets either that are cheap or strategic.  This process has a basic need in that it demands to be fed on a regular basis and they have some insurance companies that help feed it.  However, this newer global appetite/process also needs to be hedged for initial execution risk, at least for the next few years.

 

To side step briefly, some very astute investors that many of us admire in this community have commented over the years that BRK was/is deemed as a kind of cash equivalent holding until something really-really interesting popped up.  I too have deemed FFH in similar fashion as a cash equivalent since around 2007.  Presently, being roughly 100% hedged on the equity side, and the remaining assets mostly in munis, treasuries, and commercial real estate, why would you not consider it a cash equivalent? 

 

So for the newer folks to this board (welcome) and even some of you from the old ‘stockhouse.com’ days, your concerns of today should not be overly overwhelmed about present possible or factual mistakes.  If one wants to find fault, one should look more at mental model errors than anything else.  I put forth possible areas such as group-think or sunk cost fallacy.  Or my own view is swayed to the influence-from-mere-association error because of what I heard last year at the annual meeting when the comment/reason for an investment was that ‘he is a genius’, bells started to ring loudly.  I have committed all three of these errors several times so it is not the end.  It is just lost opportunity on the road of 3 steps forward and 2 ½ steps backward.

 

Irrespective of my comments, FFH may have a place in your portfolio as an alternative (which it is) mainly for diversification purposes.  Should be another fun event for us come this April!

 

 

Cheers

 

[racemize]

Interesting post James.  Since you are a long term holder, I'm curious how it affects your investment in FFH going forward--I presume you still hold?  How do you think about its future, using this model?

[maxthetrade]

I have always viewed Fairfax more as a hedge fund, so I have no problem with them speculating in CPI derivatives, buying BBRY or hedging their portfolio. My main criticism is that they got position sizing terribly wrong, e.g. people keep saying they invested only such a tiny percentage of assets in BBRY but I think the appropriate measure is the percentage of equity they invest in something. Or why hedge 100% of your equity portfolio, wouldn't say 80% have served the purpose just as well or better?

 

[constructive]

If one wants to find fault, one should look more at mental model errors than anything else.  I put forth possible areas such as group-think or sunk cost fallacy.  Or my own view is swayed to the influence-from-mere-association error because of what I heard last year at the annual meeting when the comment/reason for an investment was that ‘he is a genius’, bells started to ring loudly.

 

Every investment has similar potential mental errors, either on the investor's part or management's part. I don't see how meta thinking is more useful than primary investment thinking (i.e. "present possible or factual mistakes").