Author Topic: Prem's 2020 Letter to shareholders is out  (Read 8035 times)

Daphne

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Re: Prem's 2020 Letter to shareholders is out
« Reply #30 on: May 06, 2020, 05:35:18 PM »
India: a huge and skilled workforce ready and able to to take on so much more manufacturing as the Covid fallout lands squarely on China.  Geopolitics may very well drive the future here.


Viking

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Re: Prem's 2020 Letter to shareholders is out
« Reply #31 on: May 06, 2020, 06:26:26 PM »
my guess is that they will continue to underperform as a function of relatively inferior investment results.

This is the problem. We can all speculate, but we simply cannot know whether the causes of poor investment performance are ongoing or whether the company can improve.

Lumpiness I can deal with. In fact I like it - the market pays a premium for predictability that (all else equal) Iíd rather not pay. All I care about is whether Fairfax can adapt.

ďThe best predictor of future performance is past performance.Ē 10 years is a good amount of time. Much better than using the first 10 years, which an investor probably should throw out (given the company has changed immeasurably since then).

Well if you think that then for Godís sake donít invest. But until recently you seemed quite positive on the portfolio they own; may I ask what changed?

Petec, sorry for the late reply to your question. I was just re-reading the thread and saw it :-)

What changed for me? The virus and its impact on the global economy. As i mentioned on the Coronovirus thread, on Feb 27 I went to 80% cash (and to 100% shortly after that).

Beginning last year and to start this year my read was Fairfax was slowly digging itself out of the hole they had put themselves in (with their investment portfolio). I liked the moves from the company that i had seen during 2019 and to start 2020. (Fairfax India was also a very large holding for me). But much work still needed to be done to get the company in a good place.

The virus changed everything overnight (for every company). Unfortunately for Fairfax, it put them deeper in the hole and may set them back years in terms of their recovery/transition. Their investing style is being exposed again as wanting, this time by the virus. Their low quality holdings are getting killed: Eurobank, Stelco, Blackberry, Resolute etc. (By low quality it might be country or industry or company.) At the same time, emerging markets/currencies have sold off so this has hit their substantial Indian holdings. Other large purchases like Recipe (collection of restaurant stocks) are turning into a disaster. Other recent investments like Toys R Us are likely severely stressed.

The bottom line is in 2019 Fairfax was moving in the right direction but much more work still needed to be done (more asset sales, repositioning etc). The virus has set them back ( yet again). Not fair. But you reap what you sow. Fairfax has to learn their style of investing puts them at risk to these sorts of events... hence the need to slowly, incrementally over time, shift the investment strategy. The reason i am so hard on Fairfax is i do like the company and i want them to succeed :-) i just canít understand why they make things so difficult on themselves.
« Last Edit: May 06, 2020, 06:35:05 PM by Viking »

petec

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Re: Prem's 2020 Letter to shareholders is out
« Reply #32 on: May 07, 2020, 12:33:22 AM »

You can buy bald for book value and with 20% ROE in Brazil right now if you care, but the country is run by a moron


Thank God the leader of the free world is an intellectual colossus, eh?
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petec

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Re: Prem's 2020 Letter to shareholders is out
« Reply #33 on: May 07, 2020, 01:09:52 AM »
@Viking - thanks.

On Emerging Markets, a couple of thoughts.

Currency will be a drag over the long run if local inflation is higher than dollar inflation. But currencies are very volatile around that long term purchase-parity trend. EM currencies are largely cheap today and more likely to be a positive than negative contributor on a medium term view.

Also, the inflation that drives EM currencies down over time also drives nominal GDP, revenues, and profits up over time. In the very long term it is likely a wash in that sense. The real impact of inflation a higher cost of capital. As a result of this, the best EM companies are some of the best stewards of capital I know of (but some of the others are awful).

Bottom line: for long term investors like Fairfax I don't worry about the impact of currency but I do worry about political risk and I always look at ROIC in real terms.

EMs certainly have their problems. A good way to think of this is that India's GDP/capita is $2,000. With all the technology, knowledge, and capital available in today's world it takes a really shit system to keep GDP/capita down that low. Even Brazil is 5x richer. But the positive side of this is that relatively small improvements in the system can have outsize effects. Progress is slow, but many emerging markets are moving forwards with better institutions, better regulations, better business conditions. And technology is turbocharging the process. The availability of technology to the man on the street, no matter how poor or poorly educated, is just incredible, and it is beginning to allow him to throw off the systemic shackles. A farmer who had to rely on the middleman to tell him the price of his crops can now check online. A family that can't access basic education can now get it on a phone. A bank that has not been able to address 50% of the population because the price of processing account and loan applications in branches is prohibitive for small amounts, can now address everyone via an app. This is transformative.

India and Africa may not reach our standards of living - possibly ever - but they will make enormous strides over the lifetime of Fairfax's investments, and lots of money will be made along the way.

As a related aside, one of the things that intrigues me about Fairfax is whether they will be able to share knowledge effectively across their sprawling empire. For example they have Digit in India. Can they export that approach to Fairfax Latin America, or Atlas Mara, or even Eurolife? Can CIB teach them how to operate UBN or CSB? There's a lot of cross-seeding in the portfolio - Richie Boucher (who led the turnaround of Allied Irish) is on the board and risk committee at Eurobank, and Hisham Ezz Al-Arab (the CEO of CIB) is on the board of Fairfax Africa. On paper there is enormous potential here and I almost feel Fairfax needs someone to coordinate this (as Carmilani is set to do on the insurance side).


« Last Edit: May 07, 2020, 01:12:11 AM by petec »
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Spekulatius

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Re: Prem's 2020 Letter to shareholders is out
« Reply #34 on: May 07, 2020, 04:57:58 PM »

You can buy bald for book value and with 20% ROE in Brazil right now if you care, but the country is run by a moron


Thank God the leader of the free world is an intellectual colossus, eh?

Hardly so. However, the US can take a few punches while Brazil cannot. Itís mostly because theYS can print $ and borrow trillions for almost nothing. Brazil cannot do that, their currency tanked already and they have issues with inflation as is..
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petec

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Re: Prem's 2020 Letter to shareholders is out
« Reply #35 on: May 08, 2020, 09:07:27 AM »

You can buy bald for book value and with 20% ROE in Brazil right now if you care, but the country is run by a moron


Thank God the leader of the free world is an intellectual colossus, eh?

Hardly so. However, the US can take a few punches while Brazil cannot. Itís mostly because theYS can print $ and borrow trillions for almost nothing. Brazil cannot do that, their currency tanked already and they have issues with inflation as is..

Agreed.

That said, Brazil has been on a disinflationary trend for 30 years and pre-covid, inflation was well anchored in the low-mid single digits. The pension reform done last year was a big step towards controlling the deficit, which will help. And while the president is a moron the finance minister is superb and the administration has been doing a great job of improving business conditions.

Your point stands, but there are counterpoints, and the real question is: what's already priced in?
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