Author Topic: FFH Flat in Bull Market  (Read 8980 times)

Gregmal

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Re: FFH Flat in Bull Market
« Reply #10 on: January 05, 2019, 09:54:02 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...

I don't recall specifically, and to be 100% forthright I could be thinking of Francis Chou(who seems to mirror Watsa with his portfolio quite a bit) but I'm pretty sure it was FFH, but maybe 1-2 years ago I saw VRX pop up in the filings. It wasn't anywhere near the top. Perhaps when VRX had crashed and was in the 30's or 40's. But the thing that stuck out for me was the pattern. WTF is the obsession with these heavily levered problem child companies? Like, you're bearish on everything; OK. I get it. But then what the heck are you doing allocating money to companies that look like this??? SD, BBRY, RFP, SSW.... Thats the whole portfolio betting on companies that more or less constitute the same sort of macro bet. You don't get home run turn arounds, if the broader market is, as you say it is(ie overvalued and headed towards chaos). That is what I've never been comfortable with. I am ok betting on managers who express differing views than me. I understand others have a circle of competence where I don't. But for the past decade, I can't reconcile the logic used for the FFH portfolio. It just hasn't made sense and the results have more or less been what I'd expect given how out there they are.


petec

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Re: FFH Flat in Bull Market
« Reply #11 on: January 05, 2019, 10:39:26 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...

I don't recall specifically, and to be 100% forthright I could be thinking of Francis Chou(who seems to mirror Watsa with his portfolio quite a bit) but I'm pretty sure it was FFH, but maybe 1-2 years ago I saw VRX pop up in the filings. It wasn't anywhere near the top. Perhaps when VRX had crashed and was in the 30's or 40's. But the thing that stuck out for me was the pattern. WTF is the obsession with these heavily levered problem child companies? Like, you're bearish on everything; OK. I get it. But then what the heck are you doing allocating money to companies that look like this??? SD, BBRY, RFP, SSW.... Thats the whole portfolio betting on companies that more or less constitute the same sort of macro bet. You don't get home run turn arounds, if the broader market is, as you say it is(ie overvalued and headed towards chaos). That is what I've never been comfortable with. I am ok betting on managers who express differing views than me. I understand others have a circle of competence where I don't. But for the past decade, I can't reconcile the logic used for the FFH portfolio. It just hasn't made sense and the results have more or less been what I'd expect given how out there they are.

I don't recall their investing in VRX so if you ever come across the filing again please post it.

I think you're being a but (bit arguably only a bit) simplistic in your characterisation. SD was a perfect example of what you're talking about, but was very popular as a value investment and hotly debated here as I recall. BBRY wasn't levered, it just got steamrollered by the iPhone which FFH underestmated badly. SSW only became an investment as it embarked on a dramatic deleveraging under a new and proven hard-asset management team.

The bottom line is that FFH are value investors. Sometimes they see value in fast growing companies (Quess) and sometimes its in great businsses at silly prices (Grivalia) but sometimes it's in levered junk at (what they think are) silly prices. By and large that third category hasn't worked for them in this cycle, partly because they chose the wrong horses and partly because value hasn't worked for a while. That doesn't mean it's all they do and beware detractors who focus solely on these losers. Equally, don't hope they will fill the portfolio with KO and WFC and JNJ and just sit there for years. I just don't think that's their style.

As to whether investing in levered junk while hedging the portfolio was contradictory, I'm not so sure. This is pure speculation but it's not entirely irrational to hedge your positions in case there's a collapse but to have some levered junk in case there isn't. You don't buy Eurobank if you think there's a deflationary collapse coming, but maybe you do if you feel you're fully hedged against a deflationary collapse and want some value exposure to its not happening. Equity hedge+deflation swaps+Eurobank could be viewed as a macro barbell. I have no idea if this is what they were thinking but it's not a daft framework. What it didn't give exposure to is the epic rerating of quality over the last decade despite (or because of) record margins, but that's unlikely to recur.

There is much to criticise in what FFH have done over the last decade, but it's also easy to oversimplify that criticism. My biggest criticism is actually that they are terrible communicators. Maybe that will change with Rivett doing the calls but it would be nice to get to a point where we don't spend ages debating what they meant when they said X or Y.
« Last Edit: January 05, 2019, 10:49:00 PM by petec »

rb

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Re: FFH Flat in Bull Market
« Reply #12 on: January 05, 2019, 10:50:18 PM »
Well I don't share Gremal's writing style, but he has a point. Yes, mistakes were made. But the type of mistakes matter. For example, Berkshire made a mistake when they bought IBM. They broke even for a few years on that capital. Fairfax shorted a massive bull market. Different sort of mistake. If they didn't think that stocks were expensive, then why short? That's not value investing.

Then there's the individual picks. Then there's the macro stuff. I agree that there was a macro case to be made in 2010 that you could have a replay of the 1930s, albeit in a lighter way. But if you're still thinking that in 2014, then you're no good at macro. So did they swear it off? Did they say never again? No. In fact, in my opinion it was shameful the way they took the shorts off. Oh Trump get elected, stocks are good value now. Yea, after the S&P did a 100% run which they shorted.

These were big mistakes which should raise serious questions about what they're doing. They can't just be brushed off. Are they still really good capital allocators?  Do I want my capital to be handled in this manner?

I'm not saying that they're uninvestible. But they're trading around book. Why would I buy them at book when I can buy BRK at 1.3x book? (yes I know both books need to be adjusted). How many fiascoes happened at BRK?

rb

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Re: FFH Flat in Bull Market
« Reply #13 on: January 05, 2019, 10:59:23 PM »
I don't recall their investing in VRX so if you ever come across the filing again please post it.
I just took a quick look and I don't think they bought VRX. I think Gregmal may be confusing it with Chou whom I remember did buy VRX.

petec

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Re: FFH Flat in Bull Market
« Reply #14 on: January 05, 2019, 11:08:02 PM »
Well I don't share Gremal's writing style, but he has a point. Yes, mistakes were made. But the type of mistakes matter. For example, Berkshire made a mistake when they bought IBM. They broke even for a few years on that capital. Fairfax shorted a massive bull market. Different sort of mistake. If they didn't think that stocks were expensive, then why short? That's not value investing.

Then there's the individual picks. Then there's the macro stuff. I agree that there was a macro case to be made in 2010 that you could have a replay of the 1930s, albeit in a lighter way. But if you're still thinking that in 2014, then you're no good at macro. So did they swear it off? Did they say never again? No. In fact, in my opinion it was shameful the way they took the shorts off. Oh Trump get elected, stocks are good value now. Yea, after the S&P did a 100% run which they shorted.

These were big mistakes which should raise serious questions about what they're doing. They can't just be brushed off. Are they still really good capital allocators?  Do I want my capital to be handled in this manner?

I'm not saying that they're uninvestible. But they're trading around book. Why would I buy them at book when I can buy BRK at 1.3x book? (yes I know both books need to be adjusted). How many fiascoes happened at BRK?

I agree with much of this and also own BRK (but smaller, for various reasons including the impact of geographic exposure on my overall portfolio which has a lot of US as it is). FWIW:
- the short wasn't value, it was macro, and I think they were pretty clear on why they did it.
- you're right they have a very mixed macro record. They got the CDS bet and much of the bond stuff right, but the equity hedge and deflation swaps wrong (both direction and especially sizing).
- removing the hedge was the right thing to do and for the right reason. They said Trump would unleash animal spirits and he did. Holding the hedge through 2900 on the S&P would have been disastrous. They took the long bonds off at the same time for the same reason, a decision which has been lauded on here. They did NOT say stocks were good value - in fact they said they still had worries about valuations, and bought almost no stocks, focussing instead on converts.
- I would add to your list of questions "have they learned?". It will be interesting to look back on the next decade.

I'm not defending them here. The errors have been gargantuan. I'm just trying to help make the critique more accurate.
« Last Edit: January 05, 2019, 11:11:32 PM by petec »

shalab

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Re: FFH Flat in Bull Market
« Reply #15 on: January 05, 2019, 11:27:27 PM »
FRFHF or FFH is mostly invested in the US - that is why they report their book value and dividend in USD. So you aren't getting more geo diversification by holding it.

Well I don't share Gremal's writing style, but he has a point. Yes, mistakes were made. But the type of mistakes matter. For example, Berkshire made a mistake when they bought IBM. They broke even for a few years on that capital. Fairfax shorted a massive bull market. Different sort of mistake. If they didn't think that stocks were expensive, then why short? That's not value investing.

Then there's the individual picks. Then there's the macro stuff. I agree that there was a macro case to be made in 2010 that you could have a replay of the 1930s, albeit in a lighter way. But if you're still thinking that in 2014, then you're no good at macro. So did they swear it off? Did they say never again? No. In fact, in my opinion it was shameful the way they took the shorts off. Oh Trump get elected, stocks are good value now. Yea, after the S&P did a 100% run which they shorted.

These were big mistakes which should raise serious questions about what they're doing. They can't just be brushed off. Are they still really good capital allocators?  Do I want my capital to be handled in this manner?

I'm not saying that they're uninvestible. But they're trading around book. Why would I buy them at book when I can buy BRK at 1.3x book? (yes I know both books need to be adjusted). How many fiascoes happened at BRK?

I agree with much of this and also own BRK (but smaller, for various reasons including the impact of geographic exposure on my overall portfolio which has a lot of US as it is). FWIW:
- the short wasn't value, it was macro, and I think they were pretty clear on why they did it.
- you're right they have a very mixed macro record. They got the CDS bet and much of the bond stuff right, but the equity hedge and deflation swaps wrong (both direction and especially sizing).
- removing the hedge was the right thing to do and for the right reason. They said Trump would unleash animal spirits and he did. Holding the hedge through 2900 on the S&P would have been disastrous. They took the long bonds off at the same time for the same reason, a decision which has been lauded on here. They did NOT say stocks were good value - in fact they said they still had worries about valuations, and bought almost no stocks, focussing instead on converts.
- I would add to your list of questions "have they learned?". It will be interesting to look back on the next decade.

I'm not defending them here. The errors have been gargantuan. I'm just trying to help make the critique more accurate.

petec

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Re: FFH Flat in Bull Market
« Reply #16 on: January 05, 2019, 11:34:48 PM »
FRFHF or FFH is mostly invested in the US - that is why they report their book value and dividend in USD. So you aren't getting more geo diversification by holding it.

Including bonds you're right but unless rates rise bonds won't contribute much to the equity return. Incidentally that's why the float-levered equity model won't deliver the returns it did in the past. Having 3x your equity invested in bonds at a 7% return gave a great nominal return on equity. Not so much fun at 3%.

Their equities are global: India, Greece, Egypt, Canada, Africa, etc.

I suspect they report in USD less because of where they are invested and more because of where their insurance subs operate and are domiciled.

John Hjorth

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Re: FFH Flat in Bull Market
« Reply #17 on: January 06, 2019, 12:43:15 AM »
... I don't recall their investing in VRX so if you ever come across the filing again please post it. ...

I'm just kicking in a footnote here. I looked up the FFH portfolio at Dataroma, using the "activity" button for Fairfax. [It would be like searching for a needle in a haystack that perhaps not was there to walk through the filings directly.] There is no sign of VRX for the FFH portfolio on Dataroma. So I think it's safe to say that FFH has not been long VRX in the last few years [after 2013 - VRX tanked in 2016].

Thank you for a great discussion in this forum [not only in this topic] about FFH lately, especially to Pete.
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StubbleJumper

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Re: FFH Flat in Bull Market
« Reply #18 on: January 06, 2019, 07:26:59 AM »
...
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...

I don't recall specifically, and to be 100% forthright I could be thinking of Francis Chou(who seems to mirror Watsa with his portfolio quite a bit) but I'm pretty sure it was FFH, but maybe 1-2 years ago I saw VRX pop up in the filings. It wasn't anywhere near the top. Perhaps when VRX had crashed and was in the 30's or 40's. But the thing that stuck out for me was the pattern. WTF is the obsession with these heavily levered problem child companies? Like, you're bearish on everything; OK. I get it. But then what the heck are you doing allocating money to companies that look like this??? SD, BBRY, RFP, SSW.... Thats the whole portfolio betting on companies that more or less constitute the same sort of macro bet. You don't get home run turn arounds, if the broader market is, as you say it is(ie overvalued and headed towards chaos). That is what I've never been comfortable with. I am ok betting on managers who express differing views than me. I understand others have a circle of competence where I don't. But for the past decade, I can't reconcile the logic used for the FFH portfolio. It just hasn't made sense and the results have more or less been what I'd expect given how out there they are.

I don't recall their investing in VRX so if you ever come across the filing again please post it.

I think you're being a but (bit arguably only a bit) simplistic in your characterisation. SD was a perfect example of what you're talking about, but was very popular as a value investment and hotly debated here as I recall. BBRY wasn't levered, it just got steamrollered by the iPhone which FFH underestmated badly. SSW only became an investment as it embarked on a dramatic deleveraging under a new and proven hard-asset management team.

The bottom line is that FFH are value investors. Sometimes they see value in fast growing companies (Quess) and sometimes its in great businsses at silly prices (Grivalia) but sometimes it's in levered junk at (what they think are) silly prices. By and large that third category hasn't worked for them in this cycle, partly because they chose the wrong horses and partly because value hasn't worked for a while. That doesn't mean it's all they do and beware detractors who focus solely on these losers. Equally, don't hope they will fill the portfolio with KO and WFC and JNJ and just sit there for years. I just don't think that's their style.

As to whether investing in levered junk while hedging the portfolio was contradictory, I'm not so sure. This is pure speculation but it's not entirely irrational to hedge your positions in case there's a collapse but to have some levered junk in case there isn't. You don't buy Eurobank if you think there's a deflationary collapse coming, but maybe you do if you feel you're fully hedged against a deflationary collapse and want some value exposure to its not happening. Equity hedge+deflation swaps+Eurobank could be viewed as a macro barbell. I have no idea if this is what they were thinking but it's not a daft framework. What it didn't give exposure to is the epic rerating of quality over the last decade despite (or because of) record margins, but that's unlikely to recur.

There is much to criticise in what FFH have done over the last decade, but it's also easy to oversimplify that criticism. My biggest criticism is actually that they are terrible communicators. Maybe that will change with Rivett doing the calls but it would be nice to get to a point where we don't spend ages debating what they meant when they said X or Y.


They are terrible communicators?  Not on your life.  The communications has not been the problem at all.  The problem has been recurring corporate governance abuses and reckless investment practices. 

-they communicated very well each major chunk of BB that they acquired, they communicated that Prem was joining the board of directors, and they communicated that they were looking at a complete takeover of BB.  Nothing ambiguous here, they just took a recklessly large position size that FFH cannot easily exit.

-they communicated very well that they were re-weighting the multiple voting shares and, when it looked like it might fail, they communicated that they were taking a few extra weeks to twist the arms of a few institutional shareholders to ensure that they got enough votes.  There was nothing ambiguous here.  The only question that I have on my mind about this is whether they paid off any of the institution shareholders to make it happen (like the two-tiered share structure, paying off large shareholders for their vote is a crappy Canadian tradition).  There's been no declaration from Prem about whether any FFH resources were ever shifted to the large shareholders during or around the voting period.

-they communicated very well the hedging strategy, including the fact that their hedge ratio was 100%+.  Nothing ambiguous here, it was just very poor risk management.

-Prem communicated very clearly that his son would be added to the BoD, even though he would never be considered for a board position for any other Canadian company based on merit.  Then he did the same thing with Christine.  Nothing ambiguous here, it's just a couple of board positions being used up for unqualified family members who are beholden to their father for their future wealth.  They'll surely be able to effectively play the challenge function when their billions of inheritance is contingent on not pissing daddy off, right?

-Prem communicated clearly that a portion of FFH's portfolio would be hived off to be invested by his son's investment firm.  The details were scant, but the overall messaging was clear that daddy was creating a job for his son, irrespective of whether his son would ever be able to attract that type of capital on the basis of merit alone.

-FFH was very clear that it was spurning large cap value in plain sight (you know, it was stuff that was a dead easy way to make money?) in favour of throwing money into obscure, risky investments that are not easily exited.  There was no ambiguity, but that looks like a major unforced error.


No, I'd say that communication was generally pretty clear.  It was the decision making and integrity where I have issues.


SJ

petec

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Re: FFH Flat in Bull Market
« Reply #19 on: January 06, 2019, 07:37:55 AM »
Heh, I wondered how long it would take you to react SJ ;)

Fair points all. My comment about communications is related to the fact that Iíve often had to go direct to the company to clarify comments made on calls etc, and often they didnít mean what people on here thought they meant. By definition thatís bad communications.

Serious question to which I donít know the answer: why is Howard Buffett qualified to be on the BRK board?