Author Topic: 2018 shareholders letter  (Read 14578 times)

petec

  • Hero Member
  • *****
  • Posts: 1923
Re: 2018 shareholders letter
« Reply #20 on: March 12, 2019, 06:48:41 AM »
StubbleJumper makes very good points. However, I think shorting and CPI bets are better understood from the perspective of Mr. Watsa the individual.

Rewind back to the 2007-2009 period. Fairfax reported massive gains on the CDS portfolio, and many of us who have loaded up on Fairfax and its subs felt great at that time and patting ourselves on our backs for this. 

How would this have felt for Prem? After all, we Fairfax investors were on a high just from taking advantage of Fairfax gains. He is one of the handful of investors who came out with billions of dollars of gains directly during the period. For 3 years book value exploded and it is hardly a stretch to think he must have felt like a genius, especially when every other company is wallowing in misery.

I can recall a period like that, when my LEAPS on BAC paid off big time, then after a couple of months of research on O&G companies, invested in Sandridge Energy LEAPS and they paid off like 5x in a few short months. I was on a high and contrary to my normal behavior invested in HP LEAPS with very little research. Fortunately, it is only 0.1% of portfolio and to make a long story short, the HP LEAPS went to zero the moment Leo Apotheker did a deal with Autonomy.

I think the "rush" from the 2007-2009 gains might have been a contributing factor. It was never about hedging.

If you are really concerned about Great Depression type scenario, do you invest in crappy companies like Blackberry, Sandridge Energy, Greek/Irish banks, restaurants?

Further look and what he has done on the business side, he went ahead and bought a bunch of other companies.

Is this what you expect when you are preparing another Great Depression?

(Hat tip to UCCMAL for pointing these out in one of the earlier discussions.)

One more thing. Even when you have hedged 100% of the equity portfolio, you promise to investors 15% annual returns? There is a snowball chance in hell that you would reach that objective without a major market crash.

The only logical explanation that fits the facts is that Prem is expected a market crash and the S&P 500 shorts and CPI portfolio is a market call. Pure and simple. It is a market call that did not work out.

All the explanations - avoiding 1-100 year event, hedging, etc. do not fit the facts.

Prem is a wonderful person from everything that I gather. He has build a multi billion dollar company from scratch. Nothing can take these things away from him.

But as investors we have to separate Prem the wonderful person from Prem the CEO. He got the market call wrong. It happens. The problem is not being able to acknowledge it. Calling it hedging is just plain wrong.   

Vinod

Totally agree with this (except that in this letter he has finally come out and simply said the equity hedges were wrong and "dangerous"). In fact to "crappy companies" I would add overlevered companies. Why the hell do you get involved with Resolute if you fear a deflationary depression?

My referencing the Great Depression was simply to point out that they actually did a lot of research into what happens to insurecos in a deflation, but came to a different conclusion to the one that SJ speculated on.

Ultimately both factors are at play - the overconfidence drives the market call, but there has to be a thesis to give it a veneer of respectability and dispel any cognitive dissonance. The thesis (that insurecos really suffer in a depression) was sound - the issue was they wildly overestimated their competence in calling the market/economy.

Anyway, I've bored myself to death about the hedges so I will stop.


wachtwoord

  • Hero Member
  • *****
  • Posts: 1404
Re: 2018 shareholders letter
« Reply #21 on: March 12, 2019, 10:47:25 AM »
I agree the tone of the letter is infantile. I'm sure Watsa isn't infantile but coming across as such is not good.

I also believe Watsa's macro view is highly flawed. This wouldn't be an issue if he would act macro agnostic however he made huge bets in the past and even though he claims to have learned from the past I see him comment on Bitcoin which is a macro thing and quite clearly outside of his circle of competance. He seems to overly rely on his own ability on matters he knows little about which is a large risk going forward.

Finally I agree that the 3rd world insurance businesses look like crap. What's the plan there?

Out of interest do you think Watsa's style has changed or did you not like it from the start (whenever that was, for you)?

Watsa has as much right to comment on bitcoin as anyone else. Bitcoin can only be understood through two lenses: 1) crowd psychology and tulip bubbles and 2) fiat currency collapse. The first - which is the one he used - is well within his circle of competence as a value investor.

My framework for the third world insurance businesses is this: if one or two of them find that sweet nexus you occasionally get in insurance where a superb manager meets a superb opportunity, then you've seeded the next ICICI Lombard or First Capital. My guess is that's the game plan, but it's only a guess. The opportunity stems from the fact that in most of these places insurance will grow faster than GDP, because it is currently underpenetrated.

I think Watsa and Fairfax are very good value investors and underwriters. I don't believe they have any sort of edge at a macro level and therefore are adding variance with zero reward (at best, in reality it comes at a cost). I wish they would focus on what they are good in cause this would be a world class investment (I am a shareholder btw).

I mentioned Bitcoin because it's indicative of him having (and sharing in the context of his annual shareholder letter) an opinion about something he does not comprehend while having confidence in his uninformed opinion. In the case of Bitcoin I don't mind as he isn't basing an investment decision on it, but his certainty in the face of a flawed understanding scares me.
"Beware of he who would deny you access to information, for in his heart he dreams himself your master"

obtuse_investor

  • Sr. Member
  • ****
  • Posts: 386
Re: 2018 shareholders letter
« Reply #22 on: March 12, 2019, 05:20:08 PM »
Great conversation, everyone.

Meta thought: I am only hearing ffh bears. No bulls around. I happen to be agreeing with the bears. Maybe itís just my frustration.

Second level thinking: if I am hearing so much negativity about this business, this is probably a better time to buy than to sell.
Value Investor who manages his personal portfolio with a 25-45 year time horizon | @obtuse_investor

petec

  • Hero Member
  • *****
  • Posts: 1923
Re: 2018 shareholders letter
« Reply #23 on: March 13, 2019, 01:34:32 AM »
Great conversation, everyone.

Meta thought: I am only hearing ffh bears. No bulls around. I happen to be agreeing with the bears. Maybe itís just my frustration.

Second level thinking: if I am hearing so much negativity about this business, this is probably a better time to buy than to sell.

Put me down as a (long term) bull. I sleep like a baby with this position - although I probably wouldn't without the robust debate on here, which really makes me think, so thanks all.

Unrelated but interesting: https://www.imf.org/en/News/Articles/2019/03/11/na031119-greece-economy-improves-key-reforms-still-needed

I know being "among the best performers in the Eurozone" isn't saying much, but it's better than being among the worst. I think Eurobank could be an exceptional investment as the economy starts to reflate.


Dazel

  • Sr. Member
  • ****
  • Posts: 260
Re: 2018 shareholders letter
« Reply #24 on: March 13, 2019, 05:02:51 AM »
There is nothing new....
Looking forward....I like where they sit....lots of options.
Time to perform that simple.

Dazel

petec

  • Hero Member
  • *****
  • Posts: 1923
Re: 2018 shareholders letter
« Reply #25 on: March 13, 2019, 06:32:38 AM »
There is nothing new....
Looking forward....I like where they sit....lots of options.
Time to perform that simple.

Dazel

Dazel you were bullish on the buyback - how do you feel about that now and in particular have you satisfied yourself about the options?

Dazel

  • Sr. Member
  • ****
  • Posts: 260
Re: 2018 shareholders letter
« Reply #26 on: March 13, 2019, 03:01:53 PM »

Petec,

I get it...a good year is expensive in share dilution because of share based awards....but profits will go into more buybacks which will bring the share count down the next year... Itís incentive that is not being met which is why 89888 shares were issued the insurance companies that did well I am assuming.
So if Fairfax performs I can worry if not the buy back continues at a good clip unabated by share based awards.
Why not just pay cash bonuses from profits if it is a good year and take the share count down? Surely no one is begging for more shares the price has not moved in years!

shalab

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1157
Re: 2018 shareholders letter
« Reply #27 on: March 14, 2019, 03:24:29 AM »
This is also a year when the cash declined at the holding company and debt increased. As noted in page 19 of AR

Financial Position
The  following  table  shows  our  financial  position,  excluding  consolidated  non-insurance  companies,  at  the  endof 2018:

Holding company cash and investments (net of short sale and derivative obligations)1,550.6
Borrowings Ė holding company3,859.5



Petec,

I get it...a good year is expensive in share dilution because of share based awards....but profits will go into more buybacks which will bring the share count down the next year... Itís incentive that is not being met which is why 89888 shares were issued the insurance companies that did well I am assuming.
So if Fairfax performs I can worry if not the buy back continues at a good clip unabated by share based awards.
Why not just pay cash bonuses from profits if it is a good year and take the share count down? Surely no one is begging for more shares the price has not moved in years!

Dazel

  • Sr. Member
  • ****
  • Posts: 260
Re: 2018 shareholders letter
« Reply #28 on: March 14, 2019, 08:54:16 AM »

I am not concerned with the drop in holdco cash vs debt....they bought back more of their subs and they had a miserable year investing not unlike everyone else this time. I have argued and continue to argue their massive cash position and treasury position puts them in position to outperform the Markelís of the world who got caught in quarter four of 2018. This has allowed them to fund AGT, Seaspan, Greek eurobank-real Estate merger funding if needed and to give Blackberry the courage to make a game changing acquisition and most importantly to me...to give Brian Bradstreet the ability to print cash (I like the corporate bond position and hope that he went bigger in quarter one...it is likely up 10 to 15%=$700m to $1b from dec 31). Fairfax and Premís gift are operating companies not stock picking. They are vultures....it has cost them lately but thatís how they built Fairfax. Bradstreet and the insurance companies give me enough confidence that they will create very solid operating earnings...the investing side needs to do very little to create big numbers from the 2018 low.

In quiet year this year...Fairfax should make $3b pretax.

ourkid8

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1049
Re: 2018 shareholders letter
« Reply #29 on: March 14, 2019, 09:19:35 AM »
Dazel, $3B maybe too aggressive but let's use the numbers that Prem has provided to us in his annual letter as a starting point:

A 15% return on equity implies earnings of approximately $2 billion, so paying approximately $300 million in dividends would leave us with $1.7 billion for stock buybacks and tuck-in acquisitions.

In quiet year this year...Fairfax should make $3b pretax.