Author Topic: FFH Flat in Bull Market  (Read 8844 times)

investmd

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FFH Flat in Bull Market
« on: January 05, 2019, 07:28:18 AM »
FFH is a core pillar in my portfolio strategy. Have taking a buy and hold approach over past dozen years with ongoing purchases on dips. Full confidence in the ability to run an insurance business well and effectively deploy float and ability to take advantage of opportunities.
Today, I noticed that price on Jan 1, 2015 is essentially identical to price on Jan 1, 2019. Completely flat over 4 years of a "bull market". Yes, I'm picking the dates, as if we go over 5 years, it's up a total of some 30%. So over 5 years, annual return of 7%'ish is not terrible. However, 4 years is a significant time period. To be flat (with 2% dividend yield) for past 4 years is raising some questions for me about management going forwards and questioning my long term core nature of this investment. Watsa is always so positive, energetic and bullish. Recent thoughts on this Board included that FFH was undervalued, was well positioned for regime of increased interest rates and would/should be buying back shares.

Is there full confidence that this company can AVERAGE 7%/yr over any 10 year investment period? Means some flat 4 year periods and some 30%+ years. I'm fine with lumpy returns, but over time they need to at least meet market return with potential for alpha.


petec

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Re: FFH Flat in Bull Market
« Reply #1 on: January 05, 2019, 09:19:57 AM »
I’d look further than the stock price if I were you. Do you feel they’ve made good decisions? Created value? Surfaced value? Positioned themselves to create value in the future?

no_free_lunch

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Re: FFH Flat in Bull Market
« Reply #2 on: January 05, 2019, 09:42:56 AM »
FFH is a core pillar in my portfolio strategy. Have taking a buy and hold approach over past dozen years with ongoing purchases on dips. Full confidence in the ability to run an insurance business well and effectively deploy float and ability to take advantage of opportunities.
Today, I noticed that price on Jan 1, 2015 is essentially identical to price on Jan 1, 2019. Completely flat over 4 years of a "bull market". Yes, I'm picking the dates, as if we go over 5 years, it's up a total of some 30%. So over 5 years, annual return of 7%'ish is not terrible. However, 4 years is a significant time period. To be flat (with 2% dividend yield) for past 4 years is raising some questions for me about management going forwards and questioning my long term core nature of this investment. Watsa is always so positive, energetic and bullish. Recent thoughts on this Board included that FFH was undervalued, was well positioned for regime of increased interest rates and would/should be buying back shares.

Is there full confidence that this company can AVERAGE 7%/yr over any 10 year investment period? Means some flat 4 year periods and some 30%+ years. I'm fine with lumpy returns, but over time they need to at least meet market return with potential for alpha.

If you look at their performance historically, they did do well over 2007-2017.  However, just about any period shorter than they aren't hitting 7% (from a bvps + dividend perspective) so I sure wouldn't expect it going forward either.
« Last Edit: January 05, 2019, 09:46:46 AM by no_free_lunch »

obtuse_investor

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Re: FFH Flat in Bull Market
« Reply #3 on: January 05, 2019, 12:27:05 PM »
Let's use a gardening analogy.

From 2010-2016 (7 years); FFH management was getting ready for winter. They weren't planting any new plants. They were hoarding their seeds (cash) and keeping them safe (bonds). They were internally getting stronger (slowly but surely making their insurance operations profitable- lowering cost of capital). This was prudent management consider their weather forecast.

From 2017-current (2 years); FFH management suddenly realized that winter isn't coming any time soon. They cracked open their seed vault and started planting. And now they wait for the flowers to bloom, while the weather does it's own thing.

I don't want to digress into the validity of their forecast.

What I want to point out is that for ~7 years they didn't plant anything new. The meager BVPS growth we see right now is a result of that lack of investment. It takes a 2-5 years for the flowers to bloom, assuming winter doesn't actually arrive (and frost kills off some of those plants even before the buds formed).
Value Investor who manages his personal portfolio with a 25-45 year time horizon | @obtuse_investor

rb

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Re: FFH Flat in Bull Market
« Reply #4 on: January 05, 2019, 01:29:07 PM »
They weren't just getting ready for winter. They were shorting the market. They basically looked at valuations in 2010 and said that stocks are richly priced.

investmd

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Re: FFH Flat in Bull Market
« Reply #5 on: January 05, 2019, 06:03:31 PM »
Thanks Peter, No free lunch, Obtuse investor and Rb. I'm re-assured that all of you are pointing out a similar theme. Very much appreciate the insight and calmness of the gardening analogy :) What I'm hearing is that mistakes were made (in terms of choosing a hedging strategy during a bull market) and it takes a while to grow out of the mistakes. Weeds are cleared and waiting for flowers to blossom. There is potential for a bountiful harvest.

Gregmal

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Re: FFH Flat in Bull Market
« Reply #6 on: January 05, 2019, 06:27:30 PM »
I personally view FFH to be uninvestable.

This is a company I have really wanted to like for a long time, but could never get comfortable with it simply because there are others who do what they do, but are better at it. The investment decisions for the past decade have been atrocious. Off the top of my heads its what? BBRY, RFP, SHLD, VRX, SD... probably more that I am forgetting, all of which fit the same theme. Troubled companies, with mediocre management, and TONS OF DEBT. The results have been as expected given those things. Not only have these been heavily concentrated positions, but they've collectively shown poor judgment and demonstrated a lack of an ability to locate good investments in a fertile environment.

Going off of a comment by rb, how the f*** was ANYONE, let alone a professional, looking at the market in 2010 and calling stocks richly valued????? I can understand having macro concerns, or thinking trouble lays ahead, but richly valued???? "Oh gee, let me short the market with the S&P trading at 13x!" Pure stupidity.



shalab

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Re: FFH Flat in Bull Market
« Reply #7 on: January 05, 2019, 06:51:26 PM »
I see several issues with this setup - some of them below:

- Watsa is 70 or 70+ and is in the middle of transition to his kids
       - he is semi-retired and not clear how long he will continue
- They still promise to deliver 15% returns even after a decade when they haven't done it
- The dividend is static at 10$s/share - apparently this is for management that holds significant chunks of their assets in FRFHF. That shows the company's attitude - what about ordinary shareholders
- The investment return from the past decade speaks for itself

I personally view FFH to be uninvestable.

This is a company I have really wanted to like for a long time, but could never get comfortable with it simply because there are others who do what they do, but are better at it. The investment decisions for the past decade have been atrocious. Off the top of my heads its what? BBRY, RFP, SHLD, VRX, SD... probably more that I am forgetting, all of which fit the same theme. Troubled companies, with mediocre management, and TONS OF DEBT. The results have been as expected given those things. Not only have these been heavily concentrated positions, but they've collectively shown poor judgment and demonstrated a lack of an ability to locate good investments in a fertile environment.

Going off of a comment by rb, how the f*** was ANYONE, let alone a professional, looking at the market in 2010 and calling stocks richly valued????? I can understand having macro concerns, or thinking trouble lays ahead, but richly valued???? "Oh gee, let me short the market with the S&P trading at 13x!" Pure stupidity.

wisowis

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Re: FFH Flat in Bull Market
« Reply #8 on: January 05, 2019, 08:33:20 PM »
...
This is a company I have really wanted to like for a long time, but could never get comfortable with it simply because there are others who do what they do, but are better at it. The investment decisions for the past decade have been atrocious. Off the top of my heads its what? BBRY, RFP, SHLD, VRX, SD... probably more that I am forgetting, all of which fit the same theme. Troubled companies, with mediocre management, and TONS OF DEBT. The results have been as expected given those things. Not only have these been heavily concentrated positions, but they've collectively shown poor judgment and demonstrated a lack of an ability to locate good investments in a fertile environment.
...

How big was their VRX position? I didn't know about that one...

petec

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Re: FFH Flat in Bull Market
« Reply #9 on: January 05, 2019, 08:57:42 PM »
Lots of partial truths here! FWIW my view is that:

They didn't think the market was overvalued in 2010. Instead they made a macro call that a USA 1930's/Japan 1990s deflation was in the cards. They totally underestimated the power of printing fiat (as did I).

To say they didn't sow seeds for 7 years is false. They sowed a lot of them. The problem was that many of them didn't work. For every home run (e.g. Quess) there were two disasters (e.g. BBRY, Eurobank). This is partly, but by no means only, because they are value investors and value investing has been a nightmare for a long time.

In total they were more or less fully allocated to equity and also fully hedged. In other words they chose to keep their alpha but give away the market return, and then they generated negative alpha while the market took off. Oops.

Judging by the wholesale changeover in the investment team and the (somewhat) contrite tone of the last letter, some of these lessons might have been learned.

On the bond side they shot the lights out. The problem is that while there's a fairly deep bench on the equity investing side, on the bond side I don't think the team stretches much beyond Brian Bradstreet. Then again, I wonder if we give Bradstreet too much credit. He's been a phenomenal bond manager but I suspect some of the deflationary thinking that drove the equity hedges came from him.

In summary they’ve done nothing over the last 10 years to show that they can invest well on a sustained basis. You have to decide what the next 10 will look like. Do you like what they own now? Do you think they can turn the investing side around like they did the insurance side? (Worth remembering that in 2009 they had done nothing for over a decade to show that they could underwrite well. How that's changed…)

Prem has certainly given lots of people more power, partly I believe in response to growing discontent about the investing strategy. But I believe he is still very involved. If he is "semi-retired" please give evidence.

Prem is not handing over to his kids - yet. The kids have joined the board. They don't work at the firm or hold executive positions. It's clear Paul Rivett is the heir to the executive throne and there's also been a wholesale shakeup of the investing team that hasn't involved employing the kids. In short there's a generational management change going on which the kids aren't part of. The worrying bit is that when Prem dies his kids will get the multivoters (and if they've bought in a lot of shares like they promise, the multivoters will have even more power than they do today). As Prem gets older understanding how the kids will use that power will be very important, but I am very glad that they are on the board because they need a decade or so of watching how the company works before they get the votes.

At a deeper level FFH has an incredible bench of talent working for it and few people seem to leave. Every time they discuss an entity it seems to have someone impressive running it.

It's also worth remembering that the model of using float to lever equity works very well when you do it right. Fairfax have absolutely nailed the underwriting side in a way that few predicted 10 years ago. They've also completely ballsed up the investing side in a way that few predicted 10 years ago. I personally suspect one of those changes is permanent but the other isn't. That's partly because I think they're smart enough to change, and I hope the recent reorg of the investing team is evidence of this. It's also partly because I am starting to really like some of the individual positions they own.

They have the dividend because Prem is paid a pittance compared to similar executives (WR Berkeley cough cough). Plenty of people think they shouldn't pay one at all. I'd far rather have a CEO compensated primarily by dividends than by higher pay, because I am more aligned. But not growing the divi while BV wasn't growing much is a credit to Prem, not a failure.

FD: I am heavily long FFH and intend to remain so. Under the bonnet they've been building an impressive machine - huge and profitable underwriting platforms with the capital to grow plus an ever-growing bench of long term control equity positions including FIH, FAH, Recipe, and the private operations. Unfortunately they've also hidden that machine well with poor investing results and too much expensive financing at the holdco. But I like what they have built and, I like the current equity positions, and it is currently reasonably cheap. My biggest fear is that for this to really fly maybe you need higher rates and I don't see much of a pathway to that at the moment, although if jobs reports keep coming like the one earlier this week we might get there.

All that said, the argument that it is uninvestable has basis and is promulgated by intelligent people worth listening to. I happen to disagree but don't dismiss their arguments.
« Last Edit: January 05, 2019, 09:15:01 PM by petec »