Author Topic: Is this patient investor flogging a dead horse with FFH? I Sell side discipline  (Read 5964 times)

cwericb

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Fat Pitch

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I remember selling out of this stock back when Prem added those equity hedges when franchise businesses were selling below book value. I'll give them the benefit of the doubt that they may have been over-levered for a protracted recession, but boy what an error.

For those "value" investors clinging on for hopes of getting validation, here's something to consider: "Software is eating the world". It's not "value" investing isn't working it's just that these companies are getting destroyed by fundamental shifts in the global economy brought on by technology. The opportunity costs are enormous when you consider tech companies can grow at 0% marginal costs while "value" companies are lucky to get 5% ROIC going forward.

On the latter point, I spoke for about 2 hours in depth about this at my annual meeting this year in NY. I think you're exactly on point here :)

How does software "destroy", for example, Stelco? Or is the thesis just that software companies have higher ROICs and can therefore grow faster, provided demand is there? Because if it's the latter, you're right, but that doesn't mean you can't make an amazing return on a Stelco if you buy at the right price. And it may be easier/lower risk to make money that way vs investing in software, because 1) everyone is looking at software and ignoring the likes of Stelco and 2) it's not always easy to predict the winner software winners before the market does.

FD: Microsoft is one of my biggest positions so I have drunk the Kool-Aid - but only to a point.

It just comes down to opportunity costs and redeploying capital. Less decisions you have to make the better. Would you rather chase Stelco like opportunities (5% ROIC) and redeploy into another after you get your pop or focus on companies that can endlessly redeploy capital on your behalf at ridiculous ROIC?

Tech based companies can scale to the masses in a blink of an eye vs traditional businesses. There's roughly 2.5 billion people (it's growing too) with a smart phone and they are all 1 click away from using your product/service. Your time is better spent angel seeding smart developers with sensible ideas and going for that 100x-1,000x than over analyzing some steel company that maybe might double your money in 3-5 years. The beauty of this is you only have to win once and your life and future generations are forever changed. I feel blessed in living such a world that affords these opportunities to anyone.
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KFS

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This thing is trading at around 90% of book value.  I understand the concerns and frustrations and I'd probably agree if this was at 1.4x book, and folks on this site could argue all day long whether the intrinsic value should be 1.1x book or 1.5x book, or whatever.  I just do not see how we reach 0.9x book.

Compare this to other insurers (Markel at 1.56x, CB at 1.35x, TRV at 1.47x, WRB, etc...) 

At "peak optimism" in 1996, FFH traded at 3.3x book, and this turned out to be a terrible time to buy.  Today, the pendulum has swung pretty far in the opposite direction.

On the investments, instead of rear-view mirror driving, the question is where do we go from here.  Prem has stated that it's extremely unlikely he will resort to macro hedges or significant short selling in the future.  His long term investment performance is not bad.  He has placed Wade Burton in charge of the investment team, and Wade supposedly has a very good track record (it would be interesting to see more detail/clarity on his past investments...).  In any case, I don't think it's safe to assume the future investment performance will resemble the recent past.  At the current stock price, I don't need their investments to be brilliant.

Their insurance business has drastically improved.  I keep going back and re-reading Ben Comston's article on this (link below).  If someone has an argument to make against the sustainability of this improvement, I'd love to hear it.
https://seekingalpha.com/article/3974653-fairfax-financials-meaningfully-improved-underwriting

With the stock trading at book value, you essentially get the float per share for nothing, and below book value, you essentially get a discount on the investments, correct?  Please explain if I'm going crazy. 


petec

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It just comes down to opportunity costs and redeploying capital. Less decisions you have to make the better. Would you rather chase Stelco like opportunities (5% ROIC) and redeploy into another after you get your pop or focus on companies that can endlessly redeploy capital on your behalf at ridiculous ROIC?

Tech based companies can scale to the masses in a blink of an eye vs traditional businesses. There's roughly 2.5 billion people (it's growing too) with a smart phone and they are all 1 click away from using your product/service. Your time is better spent angel seeding smart developers with sensible ideas and going for that 100x-1,000x than over analyzing some steel company that maybe might double your money in 3-5 years. The beauty of this is you only have to win once and your life and future generations are forever changed. I feel blessed in living such a world that affords these opportunities to anyone.

a) If I buy Stelco at the right price and trust management to allocate capital I can compound very nicely, not just pop. Just requires discipline.

b) The kind of companies you're looking at can't endlessly redeploy capital at a ridiculous ROIC. The very fact that they have a ridiculous ROIC tells you they can't deploy capital in the business. That's why they end up with tons of cash and doing deals at silly valuations, both of which depress ROIC.

c) App development is becoming commoditised and it's viciously competitive. Picking winners is nigh impossible so while 100x is possible, 0x is probable, and I don't have access to nearly enough opportunities to offset that risk (do you, and if so how?).

d) Summary: I'd rather invest in what I know and understand than punt in what I don't. I'm happy to have my life changed slowly, but surely.

Just my view :)

Spekulatius

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a) If I buy Stelco at the right price and trust management to allocate capital I can compound very nicely, not just pop. Just requires discipline.


I think over time, Stelco is a zero, itís just a matter of time. Blast steel mills in NA donít work economically any more, as the mini mills over time eat their lunch, breakfast and dinner.
« Last Edit: October 09, 2019, 07:11:32 AM by Spekulatius »
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Fat Pitch

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It just comes down to opportunity costs and redeploying capital. Less decisions you have to make the better. Would you rather chase Stelco like opportunities (5% ROIC) and redeploy into another after you get your pop or focus on companies that can endlessly redeploy capital on your behalf at ridiculous ROIC?

Tech based companies can scale to the masses in a blink of an eye vs traditional businesses. There's roughly 2.5 billion people (it's growing too) with a smart phone and they are all 1 click away from using your product/service. Your time is better spent angel seeding smart developers with sensible ideas and going for that 100x-1,000x than over analyzing some steel company that maybe might double your money in 3-5 years. The beauty of this is you only have to win once and your life and future generations are forever changed. I feel blessed in living such a world that affords these opportunities to anyone.

a) If I buy Stelco at the right price and trust management to allocate capital I can compound very nicely, not just pop. Just requires discipline.

b) The kind of companies you're looking at can't endlessly redeploy capital at a ridiculous ROIC. The very fact that they have a ridiculous ROIC tells you they can't deploy capital in the business. That's why they end up with tons of cash and doing deals at silly valuations, both of which depress ROIC.

c) App development is becoming commoditised and it's viciously competitive. Picking winners is nigh impossible so while 100x is possible, 0x is probable, and I don't have access to nearly enough opportunities to offset that risk (do you, and if so how?).

d) Summary: I'd rather invest in what I know and understand than punt in what I don't. I'm happy to have my life changed slowly, but surely.

Just my view :)

All I just read are excuses not to adapt to the changing environment that tech is bringing to the global economies. Very much reminds me of Plato's allegory of the cave when you mention tech to a "value" investor  ;)
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petec

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It just comes down to opportunity costs and redeploying capital. Less decisions you have to make the better. Would you rather chase Stelco like opportunities (5% ROIC) and redeploy into another after you get your pop or focus on companies that can endlessly redeploy capital on your behalf at ridiculous ROIC?

Tech based companies can scale to the masses in a blink of an eye vs traditional businesses. There's roughly 2.5 billion people (it's growing too) with a smart phone and they are all 1 click away from using your product/service. Your time is better spent angel seeding smart developers with sensible ideas and going for that 100x-1,000x than over analyzing some steel company that maybe might double your money in 3-5 years. The beauty of this is you only have to win once and your life and future generations are forever changed. I feel blessed in living such a world that affords these opportunities to anyone.

a) If I buy Stelco at the right price and trust management to allocate capital I can compound very nicely, not just pop. Just requires discipline.

b) The kind of companies you're looking at can't endlessly redeploy capital at a ridiculous ROIC. The very fact that they have a ridiculous ROIC tells you they can't deploy capital in the business. That's why they end up with tons of cash and doing deals at silly valuations, both of which depress ROIC.

c) App development is becoming commoditised and it's viciously competitive. Picking winners is nigh impossible so while 100x is possible, 0x is probable, and I don't have access to nearly enough opportunities to offset that risk (do you, and if so how?).

d) Summary: I'd rather invest in what I know and understand than punt in what I don't. I'm happy to have my life changed slowly, but surely.

Just my view :)

All I just read are excuses not to adapt to the changing environment that tech is bringing to the global economies. Very much reminds me of Plato's allegory of the cave when you mention tech to a "value" investor  ;)

I must look up Plato's cave, but FWIW I wouldn't describe myself as a value investor. In general I'm a value-aware growth investor with a weakness (I use that term deliberately) for a few deep value stocks. More broadly, as a personal investor I own both tech and startups (but not tech startups so far as I haven't found any good ones yet) and as a professional investor I would say I spend 75% of my time thinking about what impact tech will have on a given industry/company and how to benefit from it. That thinking has driven huge shifts in my portfolios over time. So I am moderately confident that you're wrong, although there's always room for improvement.

The point is, none of that stops me from investing in an old-industry business if I think it has certain characteristics - for example a high (say, 20%) sustainable free cash flow yield, a solid balance sheet, and a management team that can allocate capital. (For clarity, I am not saying Stelco has these things. I'm interested but haven't done enough work. I was using it as a hypothetical example.)

So, a question: leaving aside the general impression my comments gave you, what did I say above that was actually wrong?

Fat Pitch

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It just comes down to opportunity costs and redeploying capital. Less decisions you have to make the better. Would you rather chase Stelco like opportunities (5% ROIC) and redeploy into another after you get your pop or focus on companies that can endlessly redeploy capital on your behalf at ridiculous ROIC?

Tech based companies can scale to the masses in a blink of an eye vs traditional businesses. There's roughly 2.5 billion people (it's growing too) with a smart phone and they are all 1 click away from using your product/service. Your time is better spent angel seeding smart developers with sensible ideas and going for that 100x-1,000x than over analyzing some steel company that maybe might double your money in 3-5 years. The beauty of this is you only have to win once and your life and future generations are forever changed. I feel blessed in living such a world that affords these opportunities to anyone.

a) If I buy Stelco at the right price and trust management to allocate capital I can compound very nicely, not just pop. Just requires discipline.

b) The kind of companies you're looking at can't endlessly redeploy capital at a ridiculous ROIC. The very fact that they have a ridiculous ROIC tells you they can't deploy capital in the business. That's why they end up with tons of cash and doing deals at silly valuations, both of which depress ROIC.

c) App development is becoming commoditised and it's viciously competitive. Picking winners is nigh impossible so while 100x is possible, 0x is probable, and I don't have access to nearly enough opportunities to offset that risk (do you, and if so how?).

d) Summary: I'd rather invest in what I know and understand than punt in what I don't. I'm happy to have my life changed slowly, but surely.

Just my view :)

All I just read are excuses not to adapt to the changing environment that tech is bringing to the global economies. Very much reminds me of Plato's allegory of the cave when you mention tech to a "value" investor  ;)

I must look up Plato's cave, but FWIW I wouldn't describe myself as a value investor. In general I'm a value-aware growth investor with a weakness (I use that term deliberately) for a few deep value stocks. More broadly, as a personal investor I own both tech and startups (but not tech startups so far as I haven't found any good ones yet) and as a professional investor I would say I spend 75% of my time thinking about what impact tech will have on a given industry/company and how to benefit from it. That thinking has driven huge shifts in my portfolios over time. So I am moderately confident that you're wrong, although there's always room for improvement.

The point is, none of that stops me from investing in an old-industry business if I think it has certain characteristics - for example a high (say, 20%) sustainable free cash flow yield, a solid balance sheet, and a management team that can allocate capital. (For clarity, I am not saying Stelco has these things. I'm interested but haven't done enough work. I was using it as a hypothetical example.)

So, a question: leaving aside the general impression my comments gave you, what did I say above that was actually wrong?

We are still in the early innings of tech disrupting the global economies so we haven't seen anything yet. I tend to fish around in the frontier tech (AI, blockchain) so I'm very confident we'll be shifting to a p2p world where commerce can bypass nation borders at the micro level and also give birth to a virtual economy (100% digital, detached from analog world).

So with that lens the ROIC of the next ecosystems will surprise many as capital formation and coordination can be bootstrapped from literally nothing. The joint stock company formula that powered capitalism for the last several hundred years is about to get disrupted. What's great about digital is that it's not bound to the same physics of analog based companies (supply chain, distribution channels, etc). It may sound sci-fi, but I'm witnessing the building blocks being laid and there's a nascent digital economy already forming.
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petec

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We are still in the early innings of tech disrupting the global economies so we haven't seen anything yet. I tend to fish around in the frontier tech (AI, blockchain) so I'm very confident we'll be shifting to a p2p world where commerce can bypass nation borders at the micro level and also give birth to a virtual economy (100% digital, detached from analog world).

So with that lens the ROIC of the next ecosystems will surprise many as capital formation and coordination can be bootstrapped from literally nothing. The joint stock company formula that powered capitalism for the last several hundred years is about to get disrupted. What's great about digital is that it's not bound to the same physics of analog based companies (supply chain, distribution channels, etc). It may sound sci-fi, but I'm witnessing the building blocks being laid and there's a nascent digital economy already forming.

The only thing I disagree with here is the ROIC part. Some ROICs will be very high; but we might be surprised at how accessible some of these technologies and how competing ecosystems drive down returns. That's not a prediction, but it is a risk. I think I am already starting to see it in some spheres of activity.

Incidentally, if you have any recommended reading on this I'd love to see it.