Author Topic: 2030-35 --- Fairfax 10-15 years from now  (Read 5000 times)

Parsad

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #10 on: September 24, 2020, 09:35:18 PM »
In 2035, Prem would be 85.  Let us hope that his health and mental acuity hold.  It is interesting that nobody in this thread has made mention of Ben or Christine.


SJ

Succession planning is something Fairfax gave much more thought to than Berkshire did at their relative ages.  Fairfax has always been a company run by committee...Berkshire until very recently, was always Buffett & Munger...and then really just Buffett.

Ben & Christine aren't being groomed as Prem's replacement, just like Howard Buffett isn't Warren's replacement.  They are there to maintain the culture their father instilled in the business, like Howard is there at Berkshire to do the same.

And everyone is talking about Fairfax 10-15 years from now.  How about Fairfax as an investment until it simply reaches fair value...I'm talking 2-3 years?   If Fairfax just recovered to book, plus 5% growth a year, that would be about $700 CDN in 3 years or around 23% a year.  That's as far as I'm looking like any of my portfolio holdings.  Cheers!
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Xerxes

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #11 on: September 25, 2020, 08:23:29 AM »
Makes perfect sense Parsad.
You go for the best risk/reward for that trade. And the spring is loaded on that one.

My impression was that though everyone is talking about the short term trade, ... and not enough the long term past the current woes.

A series of events turned Berkshire from $10 billion insurance business into a $100 billion conglomerate  in early 2000s and it is not just due to Buffet. There was luck involved. Just trying to see what is possible. 

 

Viking

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #12 on: September 25, 2020, 11:16:51 AM »
Xerxes, for Fairfax to become a long term holding for me i would need to see changes with how Fairfax executes the equity part of their investment portfolio. If they are going to continue putting significant amounts of money in shitty situations then Fairfax will continue to be a short term trade for me.

I wish they would tweak their model and simply reduce the number of shitty situation buys and move up the quality chain just a little.

So reduce the Resolute, RIMM, Eurobank, Recipe, Toys R Us, Stelco and all the special situation Canadian stuff they have.

Right now you can build out a basket of high quality utility, pipeline, telecom, reit stocks that pay a 5% dividend yield (on average). These companies will grow their dividends 4-6% in the comping years. In a zero interest rate world solid, stable, predictable. Would be great for an insurance company to own... maybe 20% of their equity portfolio.

Then you have a basket of high quality companies as your core equity holdings. Atlas might fall into this basket (we need a few more years of actual results to know). IIFL companies, Quess, Egypt Bank.

Have a few flyers... like Digit in India. But limit these to industries where Fairfax has a deep understanding (like insurance).

But please, please, reduce the low quality (company, industry, country... some are all three) ‘investments’.

Ben Graham defined investing as: “safety of principle and adequate return. Anything NOT meeting this definition is a speculation.”

There has been lots of hand wringing about how value investing is dead. My view is what we have instead seen is lots of shitty investing. Its not value investing and never has been. Look at Graham’s definition of value investing. Fairfax got away with it for the first 15-20 years of their existence so it became hard wired.

Mark Twain said “its not what you know that gets you in trouble. Its what you think you know that aint so.”

Fairfax has the bones of what can become a wonderful business. But they MUST make one small pivot. Move up the quality tree with the investment portfolio. And become real value investors...

PS: recessions happen every 8-10 years... they provide wonderful opportunities to reflect on how successful your investing style is. The insurance side of Fairfax is handicapped right now because they own too much dog shit in their investment portfolio. But this is very predicable. Dog shit companies get crushed in recessions. In 2008 recession Fairfax had these wonderful CDS that masked everything else. Quality is what gets buy and hold value investors through recessions.

PS 2: i think we might be seeing a slow shift with the equity portfolio that is encouraging. Reversing the massive short bet and all the commentary afterwards. Atlas has been the largest purchase the past few years and it looks encouraging (although it is still too early to say; and the position size has become too large). Other small examples of dealing with past mistakes: selling APR to Atlas and Fairfax Africa to Helios. Lots more work to be done. But at least to me it appears the super tanker might by slowly changing direction.
« Last Edit: September 25, 2020, 11:58:46 AM by Viking »

petec

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #13 on: September 25, 2020, 01:29:22 PM »
I don’t entirely agree with your characterizations, Viking.

For example, I’m not sure Atlas is a better business than Stelco, and it has far more debt, so its arguably riskier. The difference between the two is the price Prem paid relative to intrinsic value. That, and the position size; credit to him for sizing them right, I suppose.

Eurobank to me is also a mistake of price rather than anything else. This is my biggest issue with Prem. He says he’s a value investor but often, when he buys things, I run my slide rule over them and I don’t think they’re that cheap.

Resolute, on the other hand, is a classic case of a bad business. BlackBerry is a great example of totally missing what’s going on. Those were poorly chosen assets, not just expensive ones.

I agree there are signs of mistakes being rectified, which is great. That, plus the promise not to hedge, the success of the rest of the investment team, the discount to book, the hard market, and the leverage, all make me think the next 5 years could work out quite well.
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petec

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #14 on: September 25, 2020, 01:33:38 PM »
By the way, why do you characterize Eurobank as a low quality investment and CIB as a high quality one? Is this rondo with the quality of the franchise, or the domicile?
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Viking

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #15 on: September 25, 2020, 04:43:57 PM »
By the way, why do you characterize Eurobank as a low quality investment and CIB as a high quality one? Is this rondo with the quality of the franchise, or the domicile?

I was looking at each across three metrics: company, industry, country

From the little bit of reading i did on CIB last year they appear to have a very good track record over many years (decades if memory serves me correct). The issue for Fairfax has been currency. But even with all the country/currency issues the investment has not been terrible (in US$ terms).

Eurobank looks to me to be a much more complicated situation with many more risks. The Greek economy was an issue. The government debt was an issue. Grecce’s path forward in the Euro zone was an issue. All the bad loans on the books of all the Greek banks was a massive issue. The proposed carve out of bad loans was risky (great idea but needing lots of time to play out). The merger with Grivalia had risks (all big mergers in banking do). Throw in the risk of another recession hitting (what we are seeing now) and the risk now is progress made is set back years. Position size also matters. If this investment was small i wouldn’t care. It is a massive investment so position size added more risk.

CIB? Solid company with proven business model - need to watch country / currency risk. Chug, chug, chug

Eurobank? Solid company? Not sure yet. Proven business model? Not sure yet. Likely years more of more of work to get back to break even for Fairfax. And this assumes things in Europe start to get better. There is a decent chance the Eurozone could be mired in recession for years.

Some may say: who could have predicted the pandemic? The simple answer is bad things, like recessions, happen all the time and often unexpectedly. Fairfax is an insurer and one would think they understand how to calculate and manage risks - and carry the learnings into the investment portfolio. Instead they have been messing up badly for many, many years. They need to stop with the outsized poorly considered investments.

The position size of Altas is another big, big red flag. Fairfax last year talked about having maximum position sizes as a learning from past mistakes. I think they said they wanted to limit equity position sizes to $1 billion. What do they do? They proceed grow Atlas to well past 1 billion. They better hope Atlas does not mess up, given its size. This swing for the fence mentality is great when it works but can be devastating when it does not work and you are trying to re-build investor confidence.

PS: in February of this year I was thinking Eurobank was very close to turning the corner and finally rewarding Fairfax shareholders. The pandemic/recession changed things overnight. But that is sometimes what happens. Fairfax has built a company to knock the lights out when times are good (overweight higher risk investments like Atlas, Eurobank, EM equities). But they missed the monetization phase and now that times are bad Book Value had been ravaged and they are left trying to dig out.
« Last Edit: September 25, 2020, 04:57:50 PM by Viking »

petec

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #16 on: September 26, 2020, 12:01:23 AM »
I share a lot of those views but fwiw the points of difference are below.

CIB is a fantastic bank and will outgrow inflation so currency is not a risk long term. But I don’t trust Egyptian institutions. CIB could compound at 15% for 30 years and then go to zero. Chug chug boom. I don’t know how to handicap that.

Eurobank is a very well run and is a great option on reflation in a country that’s had a depression for 10 years and has a newly-consolidated banking sector. There was no risk in the Grivalia merger, which wasn’t a banking merger - more of an equity raise. Institutions are far stronger than in Egypt (arguably true even if they leave the EU). Fairfax’s mistake was being too early and buying too much at (far) too high a price, but I think there is a high probability that the return from here is superb.

Atlas equity stake is, I believe, below $1bn.
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Viking

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #17 on: September 26, 2020, 01:30:09 AM »
Thanks for the questions and for providing your perspective. I don’t think we are too far apart :-). Great to debate ideas and perspectives. I learn something new every time.

On a more positive note, Fairfax has done some nice things in 2020:
1.) closing of the European Runoff deal was nice to see. Got very good value and the timing of the cash from the sale was ideal.
- https://www.canadianunderwriter.ca/insurance/the-thinking-behind-the-latest-omers-pc-insurer-deal-1004177121/
2.) the significant bond purchases made after the virus sell off. I think it has already resulted in a couple hundred million in unrealized gains with an increase in dividend yield the next couple of years.
3.) insurance business (Underwriting) is chug, chug, chugging along.

Hopefully they will be able to monetize a few more assets this year.

petec

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #18 on: September 26, 2020, 06:01:03 AM »
Agreed with one exception: so far they haven’t *monetised* anything in the strict sense. They’ve swapped one asset for another (APR for Atlas, Dexterra for Horizon, FAH for HFP). I like the look of each deal but none is cash.
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Viking

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Re: 2030-35 --- Fairfax 10-15 years from now
« Reply #19 on: September 26, 2020, 09:54:49 AM »
Agreed with one exception: so far they haven’t *monetised* anything in the strict sense. They’ve swapped one asset for another (APR for Atlas, Dexterra for Horizon, FAH for HFP). I like the look of each deal but none is cash.

Yes, i was thinking about those deals but was too lazy to look them up. On pivot Fairfax looks to me making is partnering with established players to manage some of their assets. Smart.

The Blackberry Convertible debenture deal is a big win.

So as discussed, the tanker does look to be slowly changing course :-)