Author Topic: Is this patient investor flogging a dead horse with FFH? I Sell side discipline  (Read 5961 times)

Parsad

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"I partly held it for the hedges, because I don't hedge but wanted downside protection"

Ditto. But how much of that protection remains?

Deep down I still have faith that Fairfax will continue to grow and I like the fact that they are reasonable diversified. But the problem I see is that Prem and Fairfax have lost much of the respect they once had and that reflects directly on share price.

Lost more respect than when the stock dropped from $590 to $68 between 1999 and 2003?  Now that was a sign the company had lost respect!

This is value investing being out of fashion.  Unless Ben Graham was wrong, eventually value will become fashionable as people pay attention to fundamentals.  But when 1/2 of all capital is moving into index stocks, it's kind of hard to love value stocks.

As for the silly comment by Gregmal about "nepotism"...how is it different than Howard Buffett sitting on Berkshire's board?  Or the Desmarais family, Thompson family or Weston family?

At least both Ben and Christine have finance backgrounds...what the heck is a photographer/farmer doing on Berkshire's board? And I know the Watsa kids quite well...they have learned carefully from their mother and father on what is ethical, what Fairfax means, how to treat shareholders, etc.  I'm much more comfortable with the two of them on there than Howard Buffett on Berkshire's board...as nice a guy as Howard is!  Cheers!
No man is a failure who has friends!


Parsad

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Going forward I think Fairfax's insurance & reinsurance businesses will find it harder to generate profits in a low interest rate environment. Their float is not earning much which makes good underwriting even more important and harder to achieve (because of competition). Berkshire has an advantage over Fairfax in this regard. For example GEICO is a low cost growth machine in a commodity auto insurance business and they don't rely as much on earnings generated by float because GEICO float is short-tailed anyway. GEICO cost advantage stems from direct distribution channel. Berkshire is building their primary commercial insurance biz along similar lines and have reduced reinsurance exposure significantly in recent times due to insufficient premiums. Finally, Berkshire is no longer primarily an insurance company with a much stronger balance sheet and very low leverage compared to Fairfax.

You have so much cash sloshing around that it is hard to find undervalued investments or write insurance business that is priced correctly.  Look at the hurricanes the market has seen for the last 5 years, yet pricing pressure isn't even close to what we saw after Hugo 15-16 years ago. 

Fairfax doesn't have to do well every year, or year to year.  All Fairfax has to do is wait for when liquidity is at a premium again.  Do we really think that such low interest rates will persist on a global basis?  Asset prices as a whole are all hitting highs or close to highs...inflation is non-existent at this point in time.  Both elections in the U.S. and Canada...not one person, including Republican/Conservatives are talking about balanced budgets or reducing debt relative to GDP!  I've never seen that!

The day of reckoning for all of this easy money will come.  Only a handful of countries are below 90% debt to GDP...and it ain't any of the large economies!  You wait for the fat pitch!  Cheers!
No man is a failure who has friends!

Gregmal

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Sanjeev its not just value investing that's the issue though...it's the investing!

Maybe I'm gifted, IDK. But it really doesn't take long to size up a public company and determine if it's worth considering an investment. Even average investors should be able to look at something and kind of figure out what it's universe of outcomes will be, with a certain degree of accuracy. Which is why its just baffling when I look at some of the decisions these guys have made over the years. Like how many examples of broken tech companies(let alone gadget companies) do you need to see(cough Palm) to know that Blackberry was a lousy investment? Is there anything really that jumps out and screams "I need to own me some Resolute Forst Products?". I get they may be cigar butts, or turn arounds or whatever; the textbook "value investor" stocks...But these are just downright shitty businesses, with high risk and rather static reward(especially if you start looking at the entry points these guys had).

So it's not just "value investing is out of favor"...one really needs to question the judgment being used. I criticize some of the BRK investment performance, but at least they almost exclusively buy high quality companies/businesses...Prem is buying garbage.

Spekulatius

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Sanjeev its not just value investing that's the issue though...it's the investing!

Maybe I'm gifted, IDK. But it really doesn't take long to size up a public company and determine if it's worth considering an investment. Even average investors should be able to look at something and kind of figure out what it's universe of outcomes will be, with a certain degree of accuracy. Which is why its just baffling when I look at some of the decisions these guys have made over the years. Like how many examples of broken tech companies(let alone gadget companies) do you need to see(cough Palm) to know that Blackberry was a lousy investment? Is there anything really that jumps out and screams "I need to own me some Resolute Forst Products?". I get they may be cigar butts, or turn arounds or whatever; the textbook "value investor" stocks...But these are just downright shitty businesses, with high risk and rather static reward(especially if you start looking at the entry points these guys had).

So it's not just "value investing is out of favor"...one really needs to question the judgment being used. I criticize some of the BRK investment performance, but at least they almost exclusively buy high quality companies/businesses...Prem is buying garbage.

Besides just the fact that they keep investing in crap business, they don’t seem to dump the losing bets either or they can’t. The Stelco investment really got me to second guess. I think they are like 0:3 with their commodity investments. Why don’t they just put some money in Enbridge or something like this. It huge and liquid too and Canadian. They could just cash in the dividend checks  yielding ~6.5% and wouldn’t really need to think. This would work even if the shares don’t go anywhere.
« Last Edit: October 09, 2019, 04:46:21 PM by Spekulatius »
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vinod1

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Ben Graham must be turning over in his grave. Do not blame value investing or indexing.

What happened over the past decade is that earnings for companies that fall in the value spectrum have not grown as much as they have historically done. Why that is so is a separate topic of discussion. Where as for the growth stocks they are pretty much in line with history. See attached table from philosophical economics blog. Pay attention to the earnings growth rate of value.

This earnings slowdown for value stocks is what is causing the under-performance. Market is paying attention to fundamentals. That is in line with what Ben Graham has been teaching. Stocks. Long Run. Weighting Machine.

Fairfax portfolio and Fairfax itself performed poorly because the earnings of their portfolio companies and itself were below par. Are we really blaming indexing for Fairfax's portfolios poor returns? Should Blackberry be worth $100 because Fairfax first paid what $45 a share several years back?

Vinod

The fundamental algorithm of life: repeat what works. –Charlie Munger

vinod1

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Those who are putting the blame on value investing being out of style or on indexing really should read "Factors from Scratch" at the link below:

https://osam.com/Commentary/factors-from-scratch

It would disabuse them of such notions.

Vinod

The fundamental algorithm of life: repeat what works. –Charlie Munger

vinod1

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The much maligned Mr. Market got Fairfax valuation right over the past decade better than most.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

vinod1

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investmd - Ask yourself if you are someone new who has just found Fairfax and started researching the company and you do not have any emotional baggage of knowing Prem and participating in its fantastic record during the great recession, would you make an investment in Fairfax now?

If you think afresh it might give you a better perspective.

I sold in late 2011 or 2012 I think and it was really tough to let go. I pretty much learned value investing as the Fairfax saga was going on and learned a lot reading Fairfax annual reports and benefited a lot from its Great Recession performance. So I was sad to sell and it was also a very large position. But when BAC was around $10 and Fairfax was $420 it was much easier.

Vinod

The fundamental algorithm of life: repeat what works. –Charlie Munger

Jurgis

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Ben Graham must be turning over in his grave. Do not blame value investing or indexing.

What happened over the past decade is that earnings for companies that fall in the value spectrum have not grown as much as they have historically done. Why that is so is a separate topic of discussion. Where as for the growth stocks they are pretty much in line with history. See attached table from philosophical economics blog. Pay attention to the earnings growth rate of value.

This earnings slowdown for value stocks is what is causing the under-performance. Market is paying attention to fundamentals. That is in line with what Ben Graham has been teaching. Stocks. Long Run. Weighting Machine.

Fairfax portfolio and Fairfax itself performed poorly because the earnings of their portfolio companies and itself were below par. Are we really blaming indexing for Fairfax's portfolios poor returns? Should Blackberry be worth $100 because Fairfax first paid what $45 a share several years back?

Vinod

Great observations.  8)
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Munger_Disciple

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Good points vinod1.

My own reservations regarding Fairfax are as follows:

1. Leverage: FFH has roughy $3 in insurance liabilities for $1 of common equity and another $0.50 mostly in debt. With so much insurance liability leverage, I think they are forced to keep most of the float in fixed income or cash. Obviously when it works, leverage produces great results but the reverse is true also. One major CAT loss, a huge portion of common equity will be wiped out. I really don't like the way annual letter shows underwriting results with and w/o CAT losses as if CAT losses were not supposed to happen and are highly unusual. It is as if management wants shareholders/readers to ignore these insurance losses when they are normal part of being in the insurance business.

2. Invested Assets: Just the fixed income portion of assets is larger than common equity. And it is highly unlikely that FI portfolio will produce great results going forward. And common stock selection has been awful during the last 10+ years. As others pointed out, they like to go for the crappy stuff all the while completely avoiding quality long term investments.

3. Macro Calls: A big negative in my book. One can easily see them making a 2020 US election macro bet for example if past is any indication.

4. Sub-optimal capital allocation: The dividend policy doesn't make any sense especially because they immediately issued more stock many times in the past right after declaring dividends. If they need more capital why not retain earnings? Why force shareholders to pay tax on dividends and immediately dilute them with new stock issuance?

5. Board governance: Too much Watsa family involvement without a clear benefit to the company or shareholders.