Author Topic: Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?  (Read 90591 times)

beerbaron

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Re: Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?
« Reply #10 on: June 26, 2013, 08:33:38 PM »
He's not going to buy back before 0.90 - 0.85 x BV. Check when was the last time they bough back shares... I believe it was in 92.

BeerBaron


giofranchi

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Re: Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?
« Reply #11 on: June 27, 2013, 12:00:36 AM »
Because in my previous post I used an expression I never use: “I am sure”, I want to make this much clearer.
With a way over leveraged economy, mired in the second slower decade of growth since the 1790s, the stock market should not be at an all time high. Mr. Grant Williams put it very clearly a few days ago:

Quote
So, naturally, in the topsy-turvy world that exists through the looking
glass of quantitative easing, the declaration by the Fed Chairman that the
economy is gaining sufficient strength to be allowed to stand on its own
two feet sent the market into a tailspin.

As you can see from the chart below, all was well until the Chairman began
speaking to the press; and then, after a few gyrations as the market
struggled to decipher Bernanke's words, it dawned upon the collective
conscious that the free-money party might just be coming to an end.

And there, in a nutshell, is the corner into which the Fed and the other
central banks of the world have backed themselves.
There is one reason and one reason only why the world's major equity
markets are, for the most part, floating around their all-time highs: QE.

Period.

It has absolutely nothing to do with the strength of the underlying
economy and everything to do with the corruption of traditional price
signals that central banks have, in their (desperation) wisdom felt happy
to allow in pursuit of rainbows and unicorns for everybody.

I repeat: the declaration by the Fed Chairman that the economy is gaining sufficient strength to be allowed to stand on its own two feet sent the market into a tailspin. Absurd! Isn’t it?!
In such an environment you must proceed with caution, either you are finally proven right or wrong. It doesn’t really matter.
You might argue: we don’t care about macro, and WEB has said this and WEB has said that... (or Peter Lynch, or whomever!)… But let me also tell you this: I don’t think general rules are of much help to asses specific risks. I mean, just because macro is useless 99% of the times, doesn’t mean that to be “stubbornly blind to macro no matter what” is a sensible course of action. Because 1 time out of 100 you will be terribly wrong. Imo, instead, the sensible course of action is to be always aware of macro, meaning what’s going on around you and your businesses, and each single time decide if it is relevant or not. That’s exactly what Mr. Watsa and his team seem to be doing. In fact, he has stated many a time that they think we are living trough a once in a lifetime period of deleveraging, much similar to the US in the ’30, or Japan in the ’90.
And in such an environment I want to proceed with caution and I want to partner with people who proceed with caution. Even if in a rally caution is thrown to the winds by everybody else!
This is the reason why I think until now they have made no serious mistake
.

Finally, I agree with beerbaron that Mr. Watsa won’t repurchase a lot of shares anytime soon. But he has also explained why: he doesn’t want to part with cash, because he believes in the near future cash will be the scarcest and the most precious of commodities! Nothing to do with his own assessment of FFH stock price… Actually, I can almost imagine this conversation between Parsad and Mr. Watsa:
Parsad: “Prem, what do you think of the stock at $380?”
Mr. Watsa: “Hum…! It just makes no sense!”

Cheers! :)

giofranchi
« Last Edit: June 27, 2013, 12:05:07 AM by giofranchi »
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longinvestor

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Re: Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?
« Reply #12 on: June 27, 2013, 05:54:04 AM »
He's not going to buy back before 0.90 - 0.85 x BV. Check when was the last time they bough back shares... I believe it was in 92.

BeerBaron

Well, the questioner asked Prem specifically why he did not buy when the stock had dipped into this range last year ($350). This was the question Prem did not answer. At the same time, for the first time, Prem is singing the same tune that Warren has been singing(rather loudly) for the past couple of years, and that is, the IV is much higher than BV. Warren's buy order is now at 1.2 BV, it was 1.1 two years ago. The divergence of IV to BV arguably is widening. Warren uses the term "far understated" when talking about BV. Prem has started to do the same. Where does the understatement of BV for FFH come from? Besides the accounting treatment, the value of the ever larger stakes in Insurance subs/partial ownership in the emerging markets (read: India, China, Eastern EU..) are not fully captured in BV. Also, Prem is following Warren in owning more and more operating companies.

My take is that historical behavior with BV based buybacks is a-changing; even at Fairfax. We will see.

ap1234

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Re: Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?
« Reply #13 on: June 27, 2013, 06:13:56 AM »
"He's not going to buy back before 0.90 - 0.85 x BV. Check when was the last time they bough back shares... I believe it was in 92."

BeerBaron

On the topic of share repurchases, I believe Fairfax has repurchased 2.3 million shares @ an average cost of $230 over the past decade. The most aggresive buyback was in 2008 when the company repurchases 1.1 million shares o/s. If I'm not mistaken, I bleieve that Fairfax repurchased shares every single year over the past decade with the exception of 2012.

As you are all aware, despite the share repurchases the share count increased from 14 million shares o/s to 20 million shares o/s over the past decade. Fairfax issued 4 million shares in 2004/2005 to shore up the balance sheet to survive the 7 lean years. In 2009/2010, Fairfax issued further equity to private Odyssey Re and purchase Zenith.

The topic of share buybacks was raised at the 2013 AGM. The question was why Fairfax has not repurchased shares at current levels (i.e. P/B of 1x) given that Prem has suggested the company is undervalued. It appears that management is very focused on the financial position of the company. They don’t want to do anything that would come at the expense of the holding company cash/marketable securities (i.e. always maintain $1 billion at the parent corp.). Over time, I would expect management to reduce the share count but at the moment their first priority is the safety of the business especially given Prem’s concerns about the macro environment. Also, given Prem’s focus on having sufficient capital to expand the level of insurance premiums during a hard market, I can understand why Fairfax would be cautious about touching their capital base. 

ap1234

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Re: Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?
« Reply #14 on: June 27, 2013, 06:34:32 AM »
Gio said:

"In such an environment you must proceed with caution, either you are finally proven right or wrong. It doesn’t really matter.
You might argue: we don’t care about macro, and WEB has said this and WEB has said that... (or Peter Lynch, or whomever!)… But let me also tell you this: I don’t think general rules are of much help to asses specific risks. I mean, just because macro is useless 99% of the times, doesn’t mean that to be “stubbornly blind to macro no matter what” is a sensible course of action. Because 1 time out of 100 you will be terribly wrong. Imo, instead, the sensible course of action is to be always aware of macro, meaning what’s going on around you and your businesses, and each single time decide if it is relevant or not. That’s exactly what Mr. Watsa and his team seem to be doing. In fact, he has stated many a time that they think we are living trough a once in a lifetime period of deleveraging, much similar to the US in the ’30, or Japan in the ’90."

Gio, I love your approach to investing. Sticking with a concentrated portfolio of owner operators who have a great long-term track record, a repeatable process, with skin in the game, incentivized to create value on a per share basis who are still just as motivated about making the next $ as they were about the last one.

That said, I'm not sure I agree completely with your comparison on Fairfax vs. Berkshire. I understand your view on Fairfax being defensive. And I agree with you. Given current equity prices and the # of things that could go wrong in any part of the world, a defensive posture seems to makes sense. Having 30% cash in your investment portfolio is a nice asset to have to buy securities at lower prices in the future. And hedging the equity portfolio limits the mark-to-market fluctuations of their portfolio and still lets Fairfax generate some alpha by maintaining their equity exposures (i.e. similar to a market neutral hedge fund).

However, I would just suggest that Fairfax's defensive positioning is not nearly as strong as Berkshire. To me defense comes from your balance sheet (i.e. capital) and your earnings power. In that respect, BRK seems to win hands down. The company has a fortress balance sheet and huge amount of earnings power. As Buffett noted, Berkshire's operating businesses are 'firing on all cylinders.' So Buffett may not think about 'macro', but in my opinion he has built a much better arc than Fairfax. And ultimately it's not about predicting the rain but having the best arc for when the rain comes.

In terms of Fairfax, the investment portfolio is very defensively positioned. But their balance sheet is weaker than Berkshire. And they have extremely low earnings power today directly as a result of their defensive investment positioning.

From a balance sheet perspective, Fairfax has $1.1 billion in cash/ST investments at the holding co level. But they also hold $3 billion of debt. And while there are no material debt maturities for the next 5 years (a good thing), the cost of the debt is very high. The interest expense on an annual basis is approx. $200 million. The interest expense alone is approx. 2.5% of Fairfax's BV.

From an earnings perspective, the company generates income from underwriting and investing. If we assume they write at 100% (better than their long-term average), they have no underwriting profits. Even if you give them a 98% CR, they have only $120 of underwriting profits ($6 billion premiums X 0.98). From the investment perspective, the company has approx. 500 million pre-tax in income (interest + dividends). With the equity markets hedged, there isn't much in the way of capital gains unless you think they will outperform the market by a significant margin (they have done this historically but not sure you'd want to count on it happening every year).

Fairfax has a lot of expenses: $200 million of corp. overhead + runoff costs, $200 million of int. expense, $65 million and they will have to pay taxes as well.

In 2011, Fairfax had $1 billion in cat losses. If we got hit with similar cat losses in 2013, I'm not sure how Fairfax would have $1 billion in earnings power to cover the losses. In this scenario, BV would actually go down.

Anywyas, I like Fairfax and think it is an interesting investment. But I just wanted to highlight my perspective (which you could completely disagree with) that Fairfax might worry more about the macro picture than Buffett, but I think Berkshire is a much safer business if things go wrong. As such, Buffett doesn't need to worry as much about the macro because his ark is so much stronger.

giofranchi

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Re: Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?
« Reply #15 on: June 27, 2013, 07:10:22 AM »
Sticking with a concentrated portfolio of owner operators who have a great long-term track record, a repeatable process, with skin in the game, incentivized to create value on a per share basis who are still just as motivated about making the next $ as they were about the last one.

Hi ap1234,
I couldn’t have said it better! Maybe, just add some very safe means those owner operators use to leverage their game, and the picture is perfect! ;)

Regarding your comparison between BRK and FFH, I agree 100%. My problems with BRK are: 1) its size, 2) Mr. Buffett’s age. Tell whatever you want about growing a $250 billion company and about the succession plan, I won’t be convinced... Because those are two things I really cannot judge. And, if I don’t understand, I don’t invest.
This being said, we all know a good business and a good investment are two different things: and I have no doubt BRK is a very strong ark! Maybe, as you say, much stronger than FFH.
On behalf of FFH, please consider: Mr. Watsa is 20 years younger than Mr. Buffett… was BRK 20 years ago such a strong ark as it is today? Probably not… So, just give Mr. Watsa time and let’s meet again 20 years from now! ;D
Furthermore, as longinvestor rightly pointed out,
Quote
Prem is following Warren in owning more and more operating companies.
So, earning power will gradually build up! :)

giofranchi
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valueInv

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Re: Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?
« Reply #16 on: June 27, 2013, 08:01:03 AM »
Giofranchi, be carefull BV will likely do down in Q2 because of their bond portfolio. FFH marks most of their bonds to market (held for trading bonds are MTM). I can foresee some repricing of FFH this quarter.

BeerBaron

C’mon, beerbaron! That’s exactly Mr. Market’s thesis… There is always a reason why Mr. Market gives you an opportunity!
And a repricing is never easy to foresee… What you can and do know with FFH is the price you pay and the value you get!
Let a repricing unfold: I will average down gladly! ;)

giofranchi

It's not a thesis, the actual value of FFH went down with the bond portfolio. I like to anchor myself at a specific price/BV not a dollar value. I'll gladly buy a shipload at 90% of Q2 BV tough!

BeerBaron

The actual value of FFH will fluctuate a lot... Will go up and down... But I don't really care. What I care about is very simple: a company, that has increased BVPS at 20% annual for 26 years, has almost gone nowhere for 3 years now. And in the meantime it has done everything right. Someone believes they have made mistakes... But I disagree. I would have done exactely the same! And I don't think we will have to wait a lot more, to see BVPS increase very fast again. That's why I have no doubt that any price below $380 is great value!

giofranchi

What about Sandridge?

rjstc

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Re: Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?
« Reply #17 on: June 27, 2013, 08:11:38 AM »
Gio said:

"In such an environment you must proceed with caution, either you are finally proven right or wrong. It doesn’t really matter.
You might argue: we don’t care about macro, and WEB has said this and WEB has said that... (or Peter Lynch, or whomever!)… But let me also tell you this: I don’t think general rules are of much help to asses specific risks. I mean, just because macro is useless 99% of the times, doesn’t mean that to be “stubbornly blind to macro no matter what” is a sensible course of action. Because 1 time out of 100 you will be terribly wrong. Imo, instead, the sensible course of action is to be always aware of macro, meaning what’s going on around you and your businesses, and each single time decide if it is relevant or not. That’s exactly what Mr. Watsa and his team seem to be doing. In fact, he has stated many a time that they think we are living trough a once in a lifetime period of deleveraging, much similar to the US in the ’30, or Japan in the ’90."

Gio, I love your approach to investing. Sticking with a concentrated portfolio of owner operators who have a great long-term track record, a repeatable process, with skin in the game, incentivized to create value on a per share basis who are still just as motivated about making the next $ as they were about the last one.

That said, I'm not sure I agree completely with your comparison on Fairfax vs. Berkshire. I understand your view on Fairfax being defensive. And I agree with you. Given current equity prices and the # of things that could go wrong in any part of the world, a defensive posture seems to makes sense. Having 30% cash in your investment portfolio is a nice asset to have to buy securities at lower prices in the future. And hedging the equity portfolio limits the mark-to-market fluctuations of their portfolio and still lets Fairfax generate some alpha by maintaining their equity exposures (i.e. similar to a market neutral hedge fund).

However, I would just suggest that Fairfax's defensive positioning is not nearly as strong as Berkshire. To me defense comes from your balance sheet (i.e. capital) and your earnings power. In that respect, BRK seems to win hands down. The company has a fortress balance sheet and huge amount of earnings power. As Buffett noted, Berkshire's operating businesses are 'firing on all cylinders.' So Buffett may not think about 'macro', but in my opinion he has built a much better arc than Fairfax. And ultimately it's not about predicting the rain but having the best arc for when the rain comes.

In terms of Fairfax, the investment portfolio is very defensively positioned. But their balance sheet is weaker than Berkshire. And they have extremely low earnings power today directly as a result of their defensive investment positioning.

From a balance sheet perspective, Fairfax has $1.1 billion in cash/ST investments at the holding co level. But they also hold $3 billion of debt. And while there are no material debt maturities for the next 5 years (a good thing), the cost of the debt is very high. The interest expense on an annual basis is approx. $200 million. The interest expense alone is approx. 2.5% of Fairfax's BV.

From an earnings perspective, the company generates income from underwriting and investing. If we assume they write at 100% (better than their long-term average), they have no underwriting profits. Even if you give them a 98% CR, they have only $120 of underwriting profits ($6 billion premiums X 0.98). From the investment perspective, the company has approx. 500 million pre-tax in income (interest + dividends). With the equity markets hedged, there isn't much in the way of capital gains unless you think they will outperform the market by a significant margin (they have done this historically but not sure you'd want to count on it happening every year).

Fairfax has a lot of expenses: $200 million of corp. overhead + runoff costs, $200 million of int. expense, $65 million and they will have to pay taxes as well.

In 2011, Fairfax had $1 billion in cat losses. If we got hit with similar cat losses in 2013, I'm not sure how Fairfax would have $1 billion in earnings power to cover the losses. In this scenario, BV would actually go down.

Anywyas, I like Fairfax and think it is an interesting investment. But I just wanted to highlight my perspective (which you could completely disagree with) that Fairfax might worry more about the macro picture than Buffett, but I think Berkshire is a much safer business if things go wrong. As such, Buffett doesn't need to worry as much about the macro because his ark is so much stronger.

Very nice logic.

longinvestor

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Re: Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?
« Reply #18 on: June 27, 2013, 09:06:55 AM »
Sticking with a concentrated portfolio of owner operators who have a great long-term track record, a repeatable process, with skin in the game, incentivized to create value on a per share basis who are still just as motivated about making the next $ as they were about the last one.

Hi ap1234,
Regarding your comparison between BRK and FFH, I agree 100%. My problems with BRK are: 1) its size, 2) Mr. Buffett’s age. Tell whatever you want about growing a $250 billion company and about the succession plan, I won’t be convinced... Because those are two things I really cannot judge. And, if I don’t understand, I don’t invest.
This being said, we all know a good business and a good investment are two different things: and I have no doubt BRK is a very strong ark! Maybe, as you say, much stronger than FFH.
On behalf of FFH, please consider: Mr. Watsa is 20 years younger than Mr. Buffett… was BRK 20 years ago such a strong ark as it is today? Probably not… So, just give Mr. Watsa time and let’s meet again 20 years from now! ;D
Furthermore, as longinvestor rightly pointed out,
Quote
Prem is following Warren in owning more and more operating companies.
So, earning power will gradually build up! :)

giofranchi

On the subject of Warren's and Prem's ages, it matters little how old each of them actually are. What matters most is, where is the succession plan? In the case of BRK, it is fully in place, not in some planning phase. At FFH, what is the plan?

I'm actually with ap1234 when it comes to which is better and hence I have 60% of my money in BRK and 30% in FRFHF. As the world obsesses with Warren's age, he has quietly positioned BRK for the long term by weaning it away from the need to make "very large" investments(iow, dependence on WEB/CM deal making). If you carefully study what's happening, his operating chiefs invested>$10 B last year on tuck-in's and capital investments. Besides, Combs and Weschler are taking more and more off Warren's investment hand. $ 12 B to date. It would be naďve to expect that all of these investments will always produce the kind of returns that Warren had in the past, and we have been amply warned not to expect past performance but if fear of Warren's morbidity is what keeps one from investing in BRK, that thought needs to be re-examined with the facts (read the past 5 years of AR's). And while we have struck the morbid note, we need to be just as concerned with Prem's succession plan, all the more so since should a successor take over FFH's reins, he/she has to stay very defensive over the medium term and it is not in most people's nature to be so. Risk aversion of the Prem kind is rare. Why we would be hard pressed to name 10 people with that quality.

AP1234 is exactly correct, Fairfax must stay defensive because they simply are not in the same league as BRK is at the current time.

giofranchi

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Re: Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?
« Reply #19 on: June 27, 2013, 10:55:46 AM »
Hi longinvestor!
I know and agree with all those true things about BRK... Yet, still I am not convinced... I just don't understand a business on autopilot... A business without a strong person at the helm... Just one man or woman... Not a team or a board of directors... But I know that's me, and only me!

Vice versa, I am not worried at all about Mr. Watsa's succession plan. When, 20 years from now, he steps down, FFH will simply be what BRK is today. And I will sell my investment.

giofranchi
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