Author Topic: 2017 Annual Letter  (Read 31660 times)

FairFacts

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Re: 2017 Annual Letter
« Reply #80 on: March 21, 2018, 07:41:11 AM »
FFH trading right around BV...anyone warming up to the name given the recent/modest selloff?

Sincerely,
VM

I am very warm on FFH these days. I'm not sure what the catalyst will be to get the price moving but a couple of thoughts come to mind.
1. Are the AWH shareholders who received FFH shares selling steadliy and thus depressing the price?
2. The market may need to see several quarters of the new approach 'playing offence' and 'disciplined underwriting'.
3. When and in what form will buybacks take?

As WB said "The Stock Market is a device for transferring money from the impatient to the patient".


Dazel

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Re: 2017 Annual Letter
« Reply #81 on: March 21, 2018, 09:26:01 AM »


I would agree with your number 1. There is a constant seller in the market that is knocking down the price and it is likely former AWH holders that waited for 2018 to sell for lower tax rate on their capital gains. To be honest this is like looking a gift horse in the mouth I would like Prem to pick off all of those shares being sold.


LightWhale

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Re: 2017 Annual Letter
« Reply #82 on: March 22, 2018, 01:04:12 AM »
Thanks Petec, Fairfacts and TwoCities,
I'll start digging in on the weekend.

jfan

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FFH long-term investment returns
« Reply #83 on: December 17, 2018, 06:32:34 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

I was wondering if someone could help me understand something I noticed with FFH's goal to hit a 7% investment return.

The average investment portfolio allocation (2000-2017) with respect to cash & short term investments/bonds/stock is the following:
28%/52%/18% (2% in real estate and preferred shares).

The 2017 allocation is 49%/26%/23% (2% in real estate and preferred shares).

Their 10 year stock return was 4.2% as per their annual report. Assuming a 1.5% return on cash and 2.8% return on bonds. The total investment return is in the order of 2.4% currently.

This is significantly far from FFH's goal of 7%.

So I did a little digging into their 2017 annual report and came across pg 174 which describes their investment portfolio returns since 1986.
Taking their total return on average investment, I calculated their investment return based on the business cycles. What I got was this:

Time interval   Geometric Return
Since inception   8.02%
Last 5 years   1.79%
Last 10 years   5.12%
Last 15 years   6.50%
Business Cycle    
1986-1991   10.8%
1991-2001   8.9%
2001-2009   10.4%
2009-2017?   3.9%

So historically, their returns were above their target 7%. With the last cycle performing poorly (due to the hedging activity).

There was a change in accounting practice whereby at least on the table, 2007 to present is IFRS and before that CGAAP.
But included in the table are columns that include "Change in unrealized gains/losses on investments in associates". This is the difference between the Fair value less carrying value of T+1 and FV less carrying value of T0.

I notice that over time, there has been a progressive increase in unrealized value over time which is contributing to the total return.

I am a bit conflicted with respect to whether this is too aggressive (ie counting your eggs before that are actualized) or whether this would be appropriate given FFH's tendency to seemingly build value in its associates over time (eg Thomas Cook, First Capital).

An investment in FFH is really a bet on their ability to improve their investment returns over time. If the inclusion of their unrealized fair value gains is kosher, than perhaps the probability of FFH achieving their average return of 7% would be slightly less far-fetched.

Interested in hearing your thoughts on this manner.

Jerome


 





StevieV

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Re: 2017 Annual Letter
« Reply #84 on: December 18, 2018, 07:10:14 AM »
As you point out, 7% is aggressive.  Difficult to get there without a change to the mix, and some higher rates.

What is interesting is that Fairfax's investment style may make 7% more plausible, while at the same time making a big miss also more of a possibility.  I am not sure if that is a good thing.  Somewhat higher rates, somewhat more aggressive mix, better underwriting and more conservative stock investments may make 7% investment returns less likely, but it may make double-digit BVPS growth more likely. 

StubbleJumper

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Re: FFH long-term investment returns
« Reply #85 on: December 18, 2018, 07:18:56 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

I was wondering if someone could help me understand something I noticed with FFH's goal to hit a 7% investment return.

The average investment portfolio allocation (2000-2017) with respect to cash & short term investments/bonds/stock is the following:
28%/52%/18% (2% in real estate and preferred shares).

The 2017 allocation is 49%/26%/23% (2% in real estate and preferred shares).

Their 10 year stock return was 4.2% as per their annual report. Assuming a 1.5% return on cash and 2.8% return on bonds. The total investment return is in the order of 2.4% currently.

This is significantly far from FFH's goal of 7%.

So I did a little digging into their 2017 annual report and came across pg 174 which describes their investment portfolio returns since 1986.
Taking their total return on average investment, I calculated their investment return based on the business cycles. What I got was this:

Time interval   Geometric Return
Since inception   8.02%
Last 5 years   1.79%
Last 10 years   5.12%
Last 15 years   6.50%
Business Cycle    
1986-1991   10.8%
1991-2001   8.9%
2001-2009   10.4%
2009-2017?   3.9%

So historically, their returns were above their target 7%. With the last cycle performing poorly (due to the hedging activity).

There was a change in accounting practice whereby at least on the table, 2007 to present is IFRS and before that CGAAP.
But included in the table are columns that include "Change in unrealized gains/losses on investments in associates". This is the difference between the Fair value less carrying value of T+1 and FV less carrying value of T0.

I notice that over time, there has been a progressive increase in unrealized value over time which is contributing to the total return.

I am a bit conflicted with respect to whether this is too aggressive (ie counting your eggs before that are actualized) or whether this would be appropriate given FFH's tendency to seemingly build value in its associates over time (eg Thomas Cook, First Capital).

An investment in FFH is really a bet on their ability to improve their investment returns over time. If the inclusion of their unrealized fair value gains is kosher, than perhaps the probability of FFH achieving their average return of 7% would be slightly less far-fetched.

Interested in hearing your thoughts on this manner.

Jerome



I tend to think of the investment return as something which excludes the private investments which are not readily marketable, but others may wish to include them.

Turning to the publicly traded investment return, I'd say that 7% is not a ridiculous hurdle over the longer term.  The 10-year treasury rate has been exceptionally low for about the past 10 years, but it seems to be slowly trending up.  For an outfit like FFH that must hold a large portion of its reserves in the form of sovereign debt, such low rates kneecap their longer term ability to achieve a weighted average of 7% (but in the short term, when prevailing rates decline and Bradstreet shifts from 10-year to 2-year rates, there's a benefit).  Thinking forward a year or two, if we return to a world where financial repression no longer exists and the 10-year treasury returns to say 4% or 4.5% and if you believe that equities have a long-term return of 9 or 10%, it doesn't take a lot of imagination to get to a weighted return of 7% (you wouldn't need much alpha to get there).


SJ

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Re: 2017 Annual Letter
« Reply #86 on: December 22, 2018, 09:09:03 AM »
Anyone turned off the lights here yet?  FFH has gotten absolutely wrecked. I am not quite sure why, their holdings arenít of the best quality, but their insurance business is really not affected by an economic slowdown.
To be a realist, one has to believe in miracles.

StubbleJumper

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Re: 2017 Annual Letter
« Reply #87 on: December 22, 2018, 12:14:35 PM »
Anyone turned off the lights here yet?  FFH has gotten absolutely wrecked. I am not quite sure why, their holdings arenít of the best quality, but their insurance business is really not affected by an economic slowdown.


Lots of good companies have gotten wrecked.  The Canadian banks are trading at relatively low multiples and their divvies are approaching 5%.  Even BRK has been administered a haircut.

At this point, should we begin to consider FFH to be a dividend stock?   ;D  The good news is that I have no doubt that FFH will be buying back shares, hand over fist, if they can scrape together a bit of cash.


SJ

TwoCitiesCapital

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Re: 2017 Annual Letter
« Reply #88 on: December 22, 2018, 10:20:56 PM »
Anyone turned off the lights here yet?  FFH has gotten absolutely wrecked. I am not quite sure why, their holdings arenít of the best quality, but their insurance business is really not affected by an economic slowdown.

They got wrecked because long-term yield have come down ~0.50%. The story of a secular rise in Fairfax's interest income from higher rates is now being questioned.

If the Fed is coming to the end of it's tightening cycle, it means Fairfax missed their opportunity to roll into longer-duration debt to lock in higher earnings for the long-haul and it's quarterly profits are dependent on the Fed not cutting rates.

.

Jurgis

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Re: 2017 Annual Letter
« Reply #89 on: December 24, 2018, 08:35:02 AM »
Anyone turned off the lights here yet?  FFH has gotten absolutely wrecked. I am not quite sure why, their holdings arenít of the best quality, but their insurance business is really not affected by an economic slowdown.

I am holding what I have had for X years now, but I'm not buying. BRK seems more attractive and so do some other stocks (including the ones that BRK may be buying).
"Before you can be rich, you must be poor." - Nef Anyo
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