Author Topic: 2017 q4 result out!  (Read 17444 times)

racemize

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Re: 2017 q4 result out!
« Reply #60 on: February 22, 2018, 07:40:21 AM »
Oddly, therefore, 1xBV or not much higher might be the right price for FFH even if the equity compounds at 15%. It takes a bit to get my head round that but I think it's mathematically true. It's actually what I find very attractive about the stock - the likelihood that it will remain reasonably priced while compounding nicely.

I see where you get to this, but the market does not value other businesses this way (e.g., see MKL or BRK)


petec

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Re: 2017 q4 result out!
« Reply #61 on: February 22, 2018, 07:54:08 AM »
Oddly, therefore, 1xBV or not much higher might be the right price for FFH even if the equity compounds at 15%. It takes a bit to get my head round that but I think it's mathematically true. It's actually what I find very attractive about the stock - the likelihood that it will remain reasonably priced while compounding nicely.

I see where you get to this, but the market does not value other businesses this way (e.g., see MKL or BRK)

Arguably BRK is pretty cheap on BV compared to its historic returns. But I agree. It is quite possible the market will value FFH on a much higher multiple at some point. In fact it's highly likely, given how moody the market is. I'm simply saying that a potential multiple pop is not the reason I hold the stock. It's gravy.

Cardboard

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Re: 2017 q4 result out!
« Reply #62 on: February 22, 2018, 08:08:51 AM »
"I see where you get to this, but the market does not value other businesses this way (e.g., see MKL or BRK)"

BRK ok and we know that it is much more than an insurer investing money. I would suggest that MKL is overvalued: any misstep will cause a rapid and painful derating.

Cardboard

StubbleJumper

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Re: 2017 q4 result out!
« Reply #63 on: February 22, 2018, 08:19:51 AM »
Cardboard, two or three days ago, FFH was trading pretty much bang-on at book value.  My heuristic for BV (or at least a BV that is mostly tangible) is that this is the point where the business as a going concern offers zero value.  This is the point where, if one could liquidate the assets for a "fair price" and put the business in run-off, you'd be equally well off to do so.


Surely it should trade at 1xBV if the ROE=your cost of capital? If, for example, it generates a ROE of 10% but you've got a stack of ideas that offer a 20% return, you'd pay 0.5x book. If it generates 7% and your threshold is 7%, then you'd pay 1x.

Putting it another way, it is true to say that at BV the business is worth an equal amount as a going concern or liquidated, but only if the proceeds of liquidation are put into something else that generates your required rate of return. But it is not true to say that a business generating a 0% ROE, or a 2% ROE, is worth 1x BV whether it is kept going or liquidated. If the ROE is below your cost of capital then the business is only worth 1xBV if it is liquidated. If not, it is worth less.

Fairfax, assuming a fair long run return on a broad basket of stocks is 7%, should trade on 1xBV if the ROE is 7%. If the ROE is higher based on operating earnings then you could argue for a higher multiple, but that's not so easy if the higher ROE is based on investing results because you can, to an extent, replicate Fairfax's investments at 1xBV. The only reason you'd pay >1xBV for investment results is if the managers had an exceptional record and you couldn't successfully replicate the portfolio. So for example, if FFH puts their $20bn of cash to work in the 2y treasury you wouldn't pay >1xBV for that - but you might pay >1xBV for the investments where they have an advantaged position as a preferred provider of capital.

Oddly, therefore, 1xBV or not much higher might be the right price for FFH even if the equity compounds at 15%. It takes a bit to get my head round that but I think it's mathematically true. It's actually what I find very attractive about the stock - the likelihood that it will remain reasonably priced while compounding nicely.


1) They'll do better than ~7% ROE, which is why this thing is worth more alive than dead.  But, yes, if you think that their results will be sufficiently low, then it's worth less than BV.  The market is priced for FFH to perform with mediocrity.

2) You might very well pay FFH more than BV to invest in 2 year bonds because they have cost-free leverage from their float -- in fact, it's more than cost free leverage because they have every expectation of writing a CR < 100.  I do not know of any way that an individual investor can replicate cost-free leverage.

3) Haven't you slightly contradicted yourself?  You first (correctly) posited that if FFH's expected long-term ROE is ~7% it might actually just be worth roughly book.  We can quibble about whether 7% is the exact number, but I'd say your logic reasonable.  And then you close out your post by saying that if ROE is compounded by ~15% that 1x BV might be roughly right.  So which is it?  It strikes me that FFH is worth a great deal more than book if one truly believes all of that talk of a long-term expected ROE of 15%.



SJ



petec

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Re: 2017 q4 result out!
« Reply #64 on: February 22, 2018, 09:15:20 AM »

1) They'll do better than ~7% ROE, which is why this thing is worth more alive than dead.  But, yes, if you think that their results will be sufficiently low, then it's worth less than BV.  The market is priced for FFH to perform with mediocrity.

2) You might very well pay FFH more than BV to invest in 2 year bonds because they have cost-free leverage from their float -- in fact, it's more than cost free leverage because they have every expectation of writing a CR < 100.  I do not know of any way that an individual investor can replicate cost-free leverage.

3) Haven't you slightly contradicted yourself?  You first (correctly) posited that if FFH's expected long-term ROE is ~7% it might actually just be worth roughly book.  We can quibble about whether 7% is the exact number, but I'd say your logic reasonable.  And then you close out your post by saying that if ROE is compounded by ~15% that 1x BV might be roughly right.  So which is it?  It strikes me that FFH is worth a great deal more than book if one truly believes all of that talk of a long-term expected ROE of 15%.


1. Agreed.

2. That's a fair point. I just have a sense that, insurance being the highly competitive, impenetrable, and volatile business that it is, people don't attach big book value premiums to 97% or 98% combined ratios. 80%, sure, but in the high 90's (which is where I guess Fairfax will come out in the long run) I think it's too hard to understand why the advantage exists, and too volatile (losses in bad years can be huge if the average is 98%) and I don't think that gets you a big premium. I'll be delighted if I am wrong.

3. My point is that it is quite possible for a business to be worth 1x BV but to compound at 15%. I realise that's a very unorthodox statement but if the majority of the return comes from investments that can be easily replicated in the market at 1x BV, then it is true. It is not true if the majority of the return comes from operating earnings or irreplicable investments.

Overall, then, I see Fairfax somewhere in the 1-1.5x book range. Over 1x because of the cheap leverage, profitable underwriting, and investment record. But not over 1.5x because of the black box nature of insurance and the replicability of much of the portfolio.

I realise a 50% gain to 1.5x would be wildly exciting to plenty of people on here. I can easily see that happening if they have another couple of good years. But personally I couldn't care less and would probably rather the multiple didn't rise, because I intend to hold this one for a VERY long time and would be happy to keep buying at 1x (and for years of buybacks to steadily reduce the share count a la Teledyne).

Still, its refreshing to be on the bearish end of a Fairfax discussion for once ;)

FFHWatcher

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Re: 2017 q4 result out!
« Reply #65 on: February 22, 2018, 11:57:18 AM »
Can you imagine a stock that is $5.50 and then 20 years it is up to $6.50 ?

That's Fairfax if you move the decimal point.  Perhaps the next 20 years will be different than the previous years and a lot of great things have happened at FFH during that time yet here we are, 20 years later with a similar stock price.  The company is a lot different today, there have been dividends, cat losses, hedging gains, hedging losses, etc. but a lot of people in 1997 and 1998 said the exact same thing you just said (I will hold FFH for a VERY long time). 
I also heard the same scenario about 15 years ago that I am hearing today... 'If FFH only invests their cash in bonds at x%, what will be the earnings?'  Huge!! 
20 years is a long time.

StubbleJumper

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Re: 2017 q4 result out!
« Reply #66 on: February 22, 2018, 12:08:05 PM »
Can you imagine a stock that is $5.50 and then 20 years it is up to $6.50 ?

That's Fairfax if you move the decimal point.  Perhaps the next 20 years will be different than the previous years and a lot of great things have happened at FFH during that time yet here we are, 20 years later with a similar stock price.  The company is a lot different today, there have been dividends, cat losses, hedging gains, hedging losses, etc. but a lot of people in 1997 and 1998 said the exact same thing you just said (I will hold FFH for a VERY long time). 
I also heard the same scenario about 15 years ago that I am hearing today... 'If FFH only invests their cash in bonds at x%, what will be the earnings?'  Huge!! 
20 years is a long time.


Sure, you might have heard that 15 years ago.  But as I recall, I bought a few shares right around Martin Luther King day almost exactly 15 years ago and I paid less than cdn$100. 

Purchase price matters greatly.


SJ

Santayana

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Re: 2017 q4 result out!
« Reply #67 on: February 22, 2018, 12:44:22 PM »
And on a 25 year timeframe it's a 10 bagger.

Cigarbutt

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Re: 2017 q4 result out!
« Reply #68 on: February 22, 2018, 01:07:34 PM »
20 years is a long time.
I've done very well with Fairfax and related holdings during the time period but the result has occurred in the context of a variable level of ownership.
Often hoped for a stable long term position but the ingredients have never been assembled (so far).

Thank you for the post FFHWatcher.
Perspective helps.

In 1997:
NPW=1392,6 (million CDN)
Total investments=4054,1 (million USD)
SO=11,1 (million shares)

In 2017:
NPW=9983,5 (million USD)
Total investments=39381,6 (million USD)
SO=27,8 (million shares)

Then, FFH was getting ready to acquire CFI and TIG.
Now, FFH is getting ready to play offense.

Humble tentative conclusion: the earning power has been multiplied and the P/B premium that needs to be applied is in large part a function of float deployment. 


petec

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Re: 2017 q4 result out!
« Reply #69 on: February 23, 2018, 12:45:44 AM »
A lot of people in 1997 and 1998 said the exact same thing you just said (I will hold FFH for a VERY long time). 

Well, those people were dumb (apologies to anyone I've just called dumb!). If Fairfax gets back to the P/BV that it was at then, I won't hold it for a very long time. I know I didn't explicitly state that, but it's what I was getting at when I said I hoped the multiple would not rise. Price is (almost) everything and every statement about holding period should be viewed through a price lens.
« Last Edit: February 23, 2018, 01:24:57 AM by petec »