Fairfax 2020

[Bryggen]

Hey guys and sorry for opening a new thread while I should have posted here on this news. Blame the newbie!

Would you say that Fairfax is in a position to capture the buying opportunities that this market currently offers? One would think that Prem would ''back up the truck'', but could they (and will they) use their cash pile to buy equities at great value? How read read the use of the line of credit relative to this point?

Prem said in his last letter that value investing was out-of-favour. I think it has now changed and would like to see them (and us!) benefit from it.

Thoughts?

Bry

[petec]

Hey guys and sorry for opening a new thread while I should have posted here on this news. Blame the newbie!

Would you say that Fairfax is in a position to capture the buying opportunities that this market currently offers? One would think that Prem would ''back up the truck'', but could they (and will they) use their cash pile to buy equities at great value? How read read the use of the line of credit relative to this point?

Prem said in his last letter that value investing was out-of-favour. I think it has now changed and would like to see them (and us!) benefit from it.

Thoughts?

Bry

They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income.

So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much.

They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.

[Bryggen]

Hey guys and sorry for opening a new thread while I should have posted here on this news. Blame the newbie!

Would you say that Fairfax is in a position to capture the buying opportunities that this market currently offers? One would think that Prem would ''back up the truck'', but could they (and will they) use their cash pile to buy equities at great value? How read read the use of the line of credit relative to this point?

Prem said in his last letter that value investing was out-of-favour. I think it has now changed and would like to see them (and us!) benefit from it.

Thoughts?

Bry

They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income.

So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much.

They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.

Thanks for your input. Pretty bad then. They missed the bull market few years ago because of the massive short positions and now they can't capitalize on the great bargains offered. Is it me or it is very disappointing from Prem? I am puzzled by his thinking, which appears to be against what he always been valuing.

[Bryggen]

On another note, a very good article on Fairfax and Prem:

https://junto.investments/companies/fairfax-financial/

[petec]

Hey guys and sorry for opening a new thread while I should have posted here on this news. Blame the newbie!

Would you say that Fairfax is in a position to capture the buying opportunities that this market currently offers? One would think that Prem would ''back up the truck'', but could they (and will they) use their cash pile to buy equities at great value? How read read the use of the line of credit relative to this point?

Prem said in his last letter that value investing was out-of-favour. I think it has now changed and would like to see them (and us!) benefit from it.

Thoughts?

Bry

They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income.

So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much.

They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.

Thanks for your input. Pretty bad then. They missed the bull market few years ago because of the massive short positions and now they can't capitalize on the great bargains offered. Is it me or it is very disappointing from Prem? I am puzzled by his thinking, which appears to be against what he always been valuing.

That is more or less the gist of this thread for most of the past decade, sadly.

The positive spin is that if you go through the holdings you can find serious value today, especially in Eurobank.

[Parsad]

Hey guys and sorry for opening a new thread while I should have posted here on this news. Blame the newbie!

Would you say that Fairfax is in a position to capture the buying opportunities that this market currently offers? One would think that Prem would ''back up the truck'', but could they (and will they) use their cash pile to buy equities at great value? How read read the use of the line of credit relative to this point?

Prem said in his last letter that value investing was out-of-favour. I think it has now changed and would like to see them (and us!) benefit from it.

Thoughts?

Bry

They can’t buy any more equities. Simplistically, they can invest their equity in equities but their float must be invested in fixed income.

So the opportunities are in switching from treasuries to corporates at expanded spreads and buying back stock. They’re doing a little of both but neither will change their prospects much.

They entered this sell off fully invested in cyclical value stocks. As a result, there’s not much they can do.

Hi Petec,

How did you conclude this?  They've said numerous times, Sam Mitchell, Prem, Brian, Francis...there is no limitation to how much they can allocate to equities, be it float or equity, but they have to make sure the portfolio is in a position where they aren't risking a huge reduction in statutory surplus or liquidity.

Hi Bryggen,

While Fairfax was optimistic about equities after Trump won, they are deep value investors and have only felt that the markets provided tremendous opportunity on two occasions in the last 20 years...the collapse of the tech bubble in 2000 and again in 2009 after the financial crisis.  Even when markets fell 50% each of those times, they were reluctant to invest all of their capital...so it's going to have to take a bigger drop for them to buy alot more.  I think they would rather let Brian do his thing on the bond side right now, then take a ton of risk on equities...I think they will still be highly selective at this point.  That may be awfully conservative, but that's they way they operate. 

Compare that to Charlie Munger who went all in with Daily Journal's excess capital in 2009...today, Daily Journal is the best capitalized media company in the world!  While most other print media is scrambling for investors or donors, Daily Journal will probably never have to worry about financing again...or at least for 100 years or so!   

Cheers!

[Xerxes]

Petec / StubbleJumper

What is the link between cash at holding co. ... and the $40 billion portfolio ?

I understand that the debt they are raising, recap of insurance entities, dividends, buybacks, and the money they are getting by selling run-off business, and the buyout of the minorities are all financed through the holding company cash. That is clear.

What about the return on the $40 billion portfolio ? the returns generated by $40 billion portfolio are either unrealized (so not usable just yet), realized (some phantom accounting return but some real gain as well) or through dividend/interest streams. How does the interest/dividend generated by the portfolio flow back to the company holding co.

I am trying to understand the mechanics of how one side of the business (portfolio) is funding the overall FFH business (i.e. holding co. cash position)

[Xerxes]

Hi Petec,

How did you conclude this?  They've said numerous times, Sam Mitchell, Prem, Brian, Francis...there is no limitation to how much they can allocate to equities, be it float or equity, but they have to make sure the portfolio is in a position where they aren't risking a huge reduction in statutory surplus or liquidity.

I think at this point, when it comes to the FFH optics Petec (like myself and others) would like to be wrong, wrong, wrong and then right !
:-)

[StubbleJumper]

Petec / StubbleJumper

What is the link between cash at holding co. ... and the $40 billion portfolio ?

I understand that the debt they are raising, recap of insurance entities, dividends, buybacks, and the money they are getting by selling run-off business, and the buyout of the minorities are all financed through the holding company cash. That is clear.

What about the return on the $40 billion portfolio ? the returns generated by $40 billion portfolio are either unrealized (so not usable just yet), realized (some phantom accounting return but some real gain as well) or through dividend/interest streams. How does the interest/dividend generated by the portfolio flow back to the company holding co.

I am trying to understand the mechanics of how one side of the business (portfolio) is funding the overall FFH business (i.e. holding co. cash position)

Most of the investment portfolio is held in the subs -- like 95% of it or so.  If the subs succeed in their underwriting, and if Hamlin Watsa does a good job of investing the subs' float for them, the subs can be highly profitable and can issue dividends to FFH holdco.  But, the subs can only issue a dividend to the holdco if the insurance regulators in the various jurisdictions approve.  On page 95 of the AR, FFH describes the approved dividend capacity of the major subs.  However, if the subs max out their dividends to the holdco, it results in a reduction of the subs' capital and underwriting capacity, so the challenge is to find that happy medium.

One of the challenges for FFH is to ensure that there is adequate holdco liquidity.  FFH holdco needs cash for interest payments on holdco debt, operating expenses for the holdco, and holdco common and preferred dividends.  In addition to those cash needs, there are also opportunities that the holdco can exploit using cash, such as acquisitions and share buybacks.  If the holdco does not have adequate divvies from the subs, management fees arising from Hamblin Watsa, Fairfax India and Africa, and interest/divvies on holdco investments, it becomes dependent on debt (including the revolver) to finance its activities.  That's all fine and good until capital markets freeze up.


SJ

[Xerxes]

On another note, a very good article on Fairfax and Prem:

https://junto.investments/companies/fairfax-financial/

Vinod had a great quote earlier in which he referred to Amazon and FFH.

I own both for about 4 years or so (more or less), on FFH I have been averaging down on every purchase, on AMZN I have been averaging up on every purchase.

I don't consider myself as an top-notch investor and I am sucker for a good story, but a top-notch investor would have probably looked at these two names and my record of averaging up/down at these two specific names, and would have said: this is obvious, don't average down on FFH, in fact sell FFH and buy more AMZN.

Alas, i am who i am :-)