Author Topic: 2017 Annual Letter  (Read 20567 times)

StevieV

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Re: 2017 Annual Letter
« Reply #20 on: March 10, 2018, 04:43:00 PM »
Need to break down the 7% returns.

Fairfax has averaged 23% / 50% / 27% for Cash/Bond/Stock Allocation between 1986 to 2014 (when I last calculated them).

Assuming a 25% 50% 25% cash bond stock allocation.

If you assume 2% returns for the cash portion, 5% returns for bond portion, to get to 7% investment returns on total portfolio, the stock portfolio has to return 16%.

Even assuming 6% for bond portfolio would require the stocks to deliver 14% annually.

Vinod

Vinod,

Thanks for correcting my calculations.  Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations).

My earlier post on this should be ignored.  I was reading and posting too fast.  7% for the equity portion of the portfolio and 7% for a blended portolio is much different.  A 14-16% return for the equity portion isn't plausible.


chrispy

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Re: 2017 Annual Letter
« Reply #21 on: March 11, 2018, 05:46:48 AM »
Prem touched on many topics that have been talked about here. Share buybacks, the consequences of selling JNJ WFC USB, changes in their equity investment approach, and his sons $50m investment fund. It appeared to me he is a little humbled by the way things have gone over the past few years...

StevieV

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Re: 2017 Annual Letter
« Reply #22 on: March 11, 2018, 06:51:31 AM »
Need to break down the 7% returns.

Fairfax has averaged 23% / 50% / 27% for Cash/Bond/Stock Allocation between 1986 to 2014 (when I last calculated them).

Assuming a 25% 50% 25% cash bond stock allocation.

If you assume 2% returns for the cash portion, 5% returns for bond portion, to get to 7% investment returns on total portfolio, the stock portfolio has to return 16%.

Even assuming 6% for bond portfolio would require the stocks to deliver 14% annually.

Vinod

Vinod,

Thanks for correcting my calculations.  Seems to me it's a tall order to get to 7% return in this kind of market (high stock AND bond valuations).

My earlier post on this should be ignored.  I was reading and posting too fast.  7% for the equity portion of the portfolio and 7% for a blended portolio is much different.  A 14-16% return for the equity portion isn't plausible.

I need to look more closely at this later today.  The numbers below are a little hasty.

It looks to me as though the book value is about $12.5B US.  A little under $10B CAD.  (most I see are per share; so perhaps I have this total book value incorrect).

If there are $40B in investments, at a 95% combined ratio, why would they need a 7% return to grow book at 15% (about 1.8B USD)?

Anyway, I've gotten myself confused here and need to take a fresh look.

chrispy

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Re: 2017 Annual Letter
« Reply #23 on: March 11, 2018, 08:08:41 AM »
I recall that if you remove the equity hedges from the 2016 report, bv grew by ~15% over the past 5 years. While it's not fair to pick and choose data, it does show that amount is possible.

petec

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Re: 2017 Annual Letter
« Reply #24 on: March 11, 2018, 10:53:22 AM »
FFH will not consolidate Quess and thefore the gain will be recognised which until now was an unrealized gain in Thomas Cook.

Won't they equity account it and therefore still not record it in BV?

petec

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Re: 2017 Annual Letter
« Reply #25 on: March 11, 2018, 10:55:09 AM »
Only $9 billion is currently in bonds; of this amount only $1 billion is 5-10 year duration and $2 billion is more than 10 year duration.

...and even that part is fully rate-hedged, according to this letter.

StubbleJumper

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Re: 2017 Annual Letter
« Reply #26 on: March 11, 2018, 11:24:54 AM »
I am offline more than online these days, but I gave the letter a quick read on my phone.  The tone was better, but the governance issues persist.  I will say it because nobody else has.  Prem's underhanded move to reweight his multiple voting shares continues to manifest itself in poorer governance.

1) Does anybody actually believe his explanation of shifting $50m of shareholders' money to be invested by his son?  Suddenly in 2017 it became critically important to put a tiny portion of the port into small and med caps?  So since 1986 it wasn't important, but now it is?  And the existing brains in hamblin Watsa couldn't do it in house?  My bullshit detector is ringing rather loudly.

2) Minority shareholders need independent board members to keep Prem from doing wacky and reckless things from his little echo chamber.  Actually, I should say MAJORITY shareholders need this because the Watsa family has only a small minority economic interest in FFH.  So, Prem is going to use his multiple voting shares to appoint his daughter to the board.  Yet another appointee who lacks business and life experience.  We need these board members to challenge Prem's tendency to do wacky things.  Young family members who are beholden to Prem for any future ownership of FFH shares cannot do this effectively.  And damned few people under age 50 do a good job of this sort of challenge function because they just don't have the range of experience required to do it.

3) After 5 shitty years due mainly to Prem's ill considered hedging strategy, the company is finally well positioned to make some money in the next few years.  We just need him to not make the next position sizing error like blackberry or the hedging (hedging was a position sizing problem, principally).

4) After the pathetic governance abuses over the past 3 or 4 years, all we can do is hope to Christ that Prem doesn't do the ultimately stupid move and give one of his kids a real job at FFH where their lack of experience can really fuck things up.  At least with Ben, the worst fuck-up is likely the shortfall of 300 or 400 bps of return on a risk adjusted basis.  If they are ever given the role of president in one of the subs, we may be in deep trouble.


Some things never seem to improve.


SJ 
« Last Edit: March 11, 2018, 11:31:32 AM by StubbleJumper »

FairFacts

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Re: 2017 Annual Letter
« Reply #27 on: March 11, 2018, 11:38:04 AM »
Petec
"Won't they equity account it and therefore still not record it in BV?"

I'm not certain of this but I believe that if FFH receive the spin-out shares in Quess they will book them at their current market value which will be reflected in BV.

petec

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Re: 2017 Annual Letter
« Reply #28 on: March 11, 2018, 02:48:01 PM »
Petec
"Won't they equity account it and therefore still not record it in BV?"

I'm not certain of this but I believe that if FFH receive the spin-out shares in Quess they will book them at their current market value which will be reflected in BV.

I'm fairly sure that as it is a >20% holding Fairfax would equity account it, reporting their share of Quess's net income and book value and ignoring the market price. That's why equity accounted associates contribute to the $1.2bn of unrealised gains that aren't in the book value currently. Quess would just add to that, I think.

SJ - largely agree with you - not too bothered about Ben's $50m mandate but the appointment of a second child to the board worries me and the suggestion that it is done to defend the culture without any detail as to why she is the right person to defend the culture is insulting both to our collective intelligence as shareholders and, frankly, to the significant number of very bright people at FFH who are more deserving of that seat and whose experience of the culture is far greater. Very annoying. And if they are going into Singleton-style buyback mode as they say, at some point in the next decade those multivoters will have outright control.

Spekulatius

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Re: 2017 Annual Letter
« Reply #29 on: March 11, 2018, 06:23:42 PM »
I agree on above criticism by Stubblejumper and I really think that the culture is of questionable value here (as discussed in another thread) and I would rather see a culture change than preserving it.

i am not sure about this, but if it were not for realized gains, FFH would have shown an operating losss, due to underwriting losses (mostly from FFH) which interest income did not compensate for. Again, this can happen, but itís not a great result operationally. Did anyone notice thwt AWH (which they bought last year) had an understand ration above 100 before catastrophe losses? Not great either, hopefully itís a one off.

Also Premium blabbers a bit too much about all these small deals that  are with 1-2% positions (if not less) and while they work out well, they donít do all that much for the bottom line. They need to get big things right (AWH acqusition etc.)
To be a realist, one has to believe in miracles.