Author Topic: Fairfax 2018  (Read 110313 times)

chrispy

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Re: Fairfax 2018
« Reply #20 on: January 10, 2018, 11:54:35 AM »
It seems very difficult to know the right time to sell the bonds but it seems even more difficult to know when to buy back into them. Any thoughts on that dazel/viking?


Viking

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Re: Fairfax 2018
« Reply #21 on: January 10, 2018, 01:00:27 PM »
Chrispy, I agree with Dalzel that in Bradstreet, FFH has one of the best bond managers so at an inflexion point like we are at right now in the bond market (from long term bull to bear market) I think you want to go with the firms that have the best people and trust that they will get it (mostly) right.

I have been reviewing what FFH has done with its bond portfolio since Q4 of 2016 and they look like they have absolutely nailed it (shifting out of long dated bonds to short term maturities). Below is the change in US interest rates just in the past 14 months. Amazing. If the Fed raises 4 times this year, yields will be climbing (short and long end). Who is going to want to own long dated treasuries moving forward? I am very interested to see what FFH has done with the Allied bond holdings when they report Q4 results.

            Nov 1 2016    Jan 9, 2018
1 year.     0.65               1.78
2 year.     0.83               1.98
10 year.    1.83              2.55
30 year.    2.58              2.88

In terms of what bonds to buy today, as I said earlier, Gundlach said 2 year treasury was the place to be. He said the yield differential (2 year versus 10 year) is not large enough to offset the risk of much higher rates (of 10 year). The 2 year has a decent yield; hold to maturity and reinvest in two years at likely much higher rate. You will not make a killing with this strategy. However you will make a positive return. Gundlach feels there is a reasonable chance the 10 bond yields will rise to 5-6% in the next 4 years. If this happens investors who hold 10, 20 or 30 year bonds will get killed. If Fairfax’s competitors are not careful losses on their bond portfolios may be material (potential catalyst for hard market in insurance?).
« Last Edit: January 10, 2018, 01:26:48 PM by Viking »

petec

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Re: Fairfax 2018
« Reply #22 on: January 11, 2018, 09:04:46 AM »
While I agree, the change of tone (on the board, not from specific members) amuses me. A year ago Fairfax were investment morons and could do no right. And then 2017 happened...

Same people, same philosophy, different years.

Next the market will crash and they'll be stupid for having sold the hedges ;)

RichardGibbons

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Re: Fairfax 2018
« Reply #23 on: January 11, 2018, 10:25:09 AM »
I agree that there's a change in tone.  I think it's largely the result of different people posting, as opposed to people who were bearish becoming bullish.

Viking

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Re: Fairfax 2018
« Reply #24 on: January 11, 2018, 12:12:54 PM »
Petec, I think the difference is a year later we all have a little more information. FFH has largely monetized ICICI Lombard. FFH has monetized First Capital. I think the size of both of these gains was much, much larger than most expected. I think they may have $2.5 billion in cash at the holding company when they report Q4 results and this is much more than a year ago.

FFH India has performed exceptionally well driven by the extraordinary gains of the Indian market. Again, I think performance was much better than most people expected at the start of the year.

Many of FFH large equity holdings also outperformed over the year: BlackBerry and Resolute come immediately to mind.

The re-positioning of the massive bond portfolio (moving to low duration) continues to looks like a very smart move.

The one blemish all year was the underwriting performance of Allied and Brit; This will need to be monitored moving forward. However, if all the hurricanes in 2017 results in a hard market there may be some benefit moving forward.

When I weave it all together, from my perspective, a lot of very good material things have happened at FFH in 2017. And as a result, 2017 YE reported book value will be significantly higher than 2016. Perhaps US$435 versus $367?

Where have the shares traded In mid January each year?
2018 = US $524
2017 = $470
2016 = $486
2015 = $505

And when you look at the FFH of even 18 months ago (and how it’s investment portfolio was positioned with all of the equity hedges) the changes are even more stark.

I have been very lucky with my investments in FFH over many years (from 2003 to 2009); these investments put me in a very good situation financially. One of the key reasons I invested in FFH is I felt I understood (somewhat) and liked how they were invested. This confidence allowed me to be patient and take advantage of the volatility (loading up on shares when they got crazy cheap). Since 2012 I have not liked how FFH was invested (especially the massive equity hedges). And yes, this stopped me from holding the shares for many years. Much has changed at FFH in the past 18 months and as a result of these changes my opinion of owning the shares has also changed. I now own a small position. If the shares get cheaper I will likely buy more :-)
« Last Edit: January 11, 2018, 12:31:56 PM by Viking »

StubbleJumper

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Re: Fairfax 2018
« Reply #25 on: January 11, 2018, 12:26:48 PM »
While I agree, the change of tone (on the board, not from specific members) amuses me. A year ago Fairfax were investment morons and could do no right. And then 2017 happened...

Same people, same philosophy, different years.

Next the market will crash and they'll be stupid for having sold the hedges ;)


Well, 2015 and 2016 were tough years to be a FFH shareholder and, based on some of the comments on this board and the lack of attendance at Sanj's annual supper, many long-term shareholders sold out.  They were tough years because financial performance was limited by the equity hedges, which were abruptly dropped after the US presidential election, and in 2015 Prem usurped minority shareholders' rights by changing the provisions of his multiple voting shares.  It's tough for a shareholder to endure poor financial results and then accept a 180-degree change in investment philosophy based solely on the faint hope of liberalization of the US economy by a new president.  And its tough for a shareholder to accept that our "managing partner" doesn't trust us enough to let us continue with our unfettered voting rights.  Frankly, I'm not particularly surprised that many long-time shareholders were unhappy and sold out.

If Sanj organizes another supper in Toronto this spring, it will be interesting to observe the level of interest.  I'd say that many people voted with their feet and will not re-establish a large position in FFH.

Personally, I have held my nose and maintained my position over the last number of years.  After having marked time for the past 5 years, the investment portfolio looks like it is well positioned to make some decent returns in the coming years.  Even FFH's ridiculous "error of commission" in the sizing of its Blackberry position seems have been redeemed (now they just need to find an exit-strategy).  So, things are looking somewhat positive, but that comes after 5 or 6 years of some head-scratching decisions.


SJ

petec

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Re: Fairfax 2018
« Reply #26 on: January 11, 2018, 01:25:06 PM »
Viking and SJ - while everything you post is true, I take a slightly different approach with FFH. I decided a long time ago that a) I like the float-investment model; b) I trust Prem and his team and the culture they are building; and c) that they are smart people who will make more good decisions than bad over time. So I decided to hold the shares long term (unless they got to a silly valuation) and see what happened.

Maybe that's naïve - many would say so. But then again all investment managers go through good patches and rough ones, and if you can't stick the rough patches you seldom compound with them. So far I am very happy with the results, although I will admit that keeping the faith was easier in 2015/6 by the fact that I agreed with the hedges! Oops! where Prem and team beat me hands down is I wouldn't have taken them off when they did. Big oops, but then that's why I let them manage some of my money!

Anyway, that's why I don't really feel we have more info than a year ago. We have more precise data on the value of certain subs and investments, yes. But what creates the value is the people and the culture, which has proven itself over 30 years, and that hasn't changed in the last 12 months.

I accept that the ratio between the "surfaced" value per share and the share price has changed, but that only explains why people are more bullish on the shares. It does not explain why Fairfax has gone from hero to zero, from dumb to smart. I honestly think that anyone who has changed their mind on that in the last 12 months simply didn't know the history or isn't being rational. However as RG said, the tone has changed because different people are posting so it is a moot point.

I'm not trying to start a fight here, BTW, so I slightly regret my initial post.

Dazel

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Re: Fairfax 2018
« Reply #27 on: January 11, 2018, 01:53:38 PM »

Those are great posts....really dead on....I agree with what you are saying.

A couple of quick points of why I am back heavy...

1. Value investing was left for dead in 2015
2. Fairfax were wrong on Greece and their large individual positions on the worst hedges in history.....truly got killed making* the 2007-2008 win a disaster...they did not change their mind and were stuck in that state of mind....absolutely terrible performance...maybe the worst hedging program I have ever seen. They were a man with a hammer and every short position was a nail!
3. With the massive investment losses of those years the true operating strength of Fairfax was masked and missed...humility sucks but it was Prem and his equity side that were terribly wrong. I believe they will right the ship. It was a big and bold move to eat S...t and remove the hedges and I applaud them for the strength they showed doing it.
4. Brian Bradstreet continued to absolutely kill it compared to his peers in a low interest rate environment
5.2017 would have been a record transformational year without the huge insurance losses...that is their business but the year was record losses for industry
6. Insurance market is not hard but prices are rising 10-30% depending on the line and where
7.Fairfax is now a $15b a year premium company at just the right time...expect the new India insurance company to create huge value as well
8.$2.5b in cash at the holding company means an upgrade from the ratings agencies bringing down debt costs, and expect very large buybacks
9.$40b investments are set up for rising rates , the dead  beat equity investments are rising sharply, expect Greece to the same
10. Prem told us all in April that the insurance companies were greatly undervalued and book values did not properly value Fairfax...he went out and proved it with $2.6b in gains from two “Small” insurance operation sales...First Capital may be the best deal Fairfax has ever made. What do you think Odyssey is worth if he sold it? A lot...he is not going to of course.

The last time I took a chance believing in Prem and his Fairfax teams redemption it was a euphoric outcome. I expect the same this time around.

P.S stop buying the damn shares...lots of bitcoin and pot stocks out there!

Cigarbutt

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Re: Fairfax 2018
« Reply #28 on: January 11, 2018, 02:58:48 PM »
Dazel,
Agree with most of what you put on your list.

For point 3, I'm not sure. The way the hedges were set up has been discussed. If what you say is true, I just wish they would have come out with the real reasons behind the change in strategy (hedges too large, too early, no longer sustainable with the release of "animal spirits" etc).

For point 6, from what I read, price increases are lower and not widespread. Despite record losses, 2017 events barely met the definition of capital events and "alternative" capital continues to be plentiful.

I agree that it will be interesting to see how and when they deploy their huge liquid capital position.
The financial outcome also has a lot to do with their ability to participate in the hard market which will happen eventually.

Viking

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Re: Fairfax 2018
« Reply #29 on: January 11, 2018, 03:38:35 PM »
Petec, no offense taken. Two people can look at the same situation and come to two very different conclusions; does not mean one is right and one is wrong. It often comes back to what ones objectives are and investing style.

Dalzel/cigarbutt, regarding the large amount of cash at the holding company, yes, it will be interesting to see what FFH does. Prem has clearly stated that he feels the shares are cheap and buybacks are likely. I wonder if they will wait and see if there is a bit of a hard market as we start 2018 and therefore an opportunity to grow the business organically. I think he has stated another large acquisition is not likely. I would like to see them start to get the share count down. You can see all the shares that have been added the past 10 years on the one page summary at the beginn8ng of the annual report. If I had to guess i think they will end up using the excess cash to reduce the share count; if this happens we should see a nice jump in the shares. This is another reason I bought shares recently (I got concerned they would not stay cheap). Shares also go ex dividend Jan 17 and this will net shareholders US$10 per share a week later.
« Last Edit: January 11, 2018, 03:40:17 PM by Viking »