Fairfax 2020

[Bryggen]

I suspect we will have one more down swing here through the 2nd quarter...from the posts above, we are getting closer to capitulation, as the bears are all growling and even some of the bulls are getting frustrated.  You've hit bottom when people just give up...probably around high 290's.

- People are complaining about Fairfax India and Fairfax Africa...one has been about 5-6 years and one has been about 2-3 years.  Do you know how long it took Fairfax Asia to become the fantastic deal it was when we sold...13 years! 
- I hear complaints about Eurobank...but we saw the same thing with Bank of Ireland which was a winner. 
- Whining about insurance...we're writing at 96% across the board for several years...do you guys remember when we could barely break 105% for 8 years! 
- We have a ton of bonds and cash, while debt to equity is below 35%...about $1.5B in the holding company...do you remember when we borrowed $300M from Cundill, Southeastern and Markel?!
- While Seaspan is breakeven right now, can anyone deny that this going to be a winner 10-15 years from now? 
- Yes, we are having challenges with BB, but this is a business that for all intents and purposes should have been bankrupt already...if the board had listened to Prem and hired John Chen in the beginning, BB would be sitting on another $1B in cash and wouldn't have wasted 18 months since Fairfax originally bought the stock.  Yeah, they should have avoided it, but shit happens...at least they dealing with it!
- You have a young portfolio team but with alot of experience, and you still have the old dogs like Brian and Prem paving the way...I think non-bond investments will do better this decade than last!
- It's trading at 60 cents on the tangible dollar...yet people are scared it might go down to 50 cents on the tangible dollar before it eventually goes back to par...that's the psychology right now from you guys!

As a distressed value investor, I'm almost always early in and early out...that's just the nature of the beast.  So I don't care if Fairfax falls another $100 in the next 6 months...as long as it's back at par 2 years from now!  Cheers!

Very thoughtful comments Parsad. Thanks!

[Parsad]

Can someone call up Mitsui and get them to offer 4X BV for all of FFH like they did for First Capital? That would be a nice way to expand their  broad global partnership.

https://www.fairfax.ca/news/press-releases/press-release-details/2017/Fairfax-and-Mitsui-Sumitomo-Insurance--Enter-into-Strategic-Alliance-and-Sale-of-First-Capital/default.aspx

Pedro, you hit the nail on the head.  Today, no one wants Fairfax or its businesses at 0.6 times book...yet a couple of years ago, Mitsui paid 4x book for First Capital. 

Like I said, I don't care if Fairfax goes down another $100, just as long as they sell off their assets at 1.5 times book or better in the future.  Partner Re just sold for $9B US...I would imagine Odyssey Re would get at least 4.5B-5B US...that's over 75% of Fairfax's entire market cap right now alone. 

Back in 2003, Fairfax couldn't sell it's insurance businesses because no one would buy them then when they were running at 105% per year.  If Fairfax needs money, they have tangible, quality insurance assets, alongside their non-insurance assets they can sell.  Heck they, can just dividend up surplus capital if they need it.  They could not do these things in the past.  Cheers!

[patterson]

Clearly a very polarized name with very diverse and interesting point of views. 
Much like the Tesla thread but without the Muskism.

Covid 19 changed the chessboard, I rather wait to see what the new generation would be doing. Starting by this quarter 13F. I like to think I should not underestimate someone who built a multi billion dollar business and his capacity to learn from mistakes.

I sold Nvidia few weeks ago after a good run from $130 ish.
At least that is what I tell to comfort myself when I look at my melting FFH holding ....

Feeling better that I am not alone watching my FFH holding melting

You aren't alone. FRFHF is my largest holding, followed by WFC. I’ve still managed to break even over the past year due to large positions in mining stocks such as NG (purchased in early 2019 and sold recently for 150% gain) and SGGDX (purchased throughout 2019 and up 70%). Now, I’m trying to figure out where to go from here. I’m tempted to keep averaging into my losing positions but am afraid that I’ll box myself into becoming too concentrated.

The bearish arguments provided by Viking, Bearprowler, and others are very compelling, and would probably be enough to convince me to sell if I didn't think that the things they point out (terrible investment results, low interest rates, etc) are already factored into the price. Those would have been great reasons to have already exited (as Viking and Bearprowler did I believe, at much higher prices), but they may or may not be good reasons to sell going forward. I've followed Fairfax for about 15 years and have never seen sentiment as negative as it is now. While it could get worse, I wouldn't want to bet on it getting worse, not at these prices.

[Bryggen]

Clearly a very polarized name with very diverse and interesting point of views. 
Much like the Tesla thread but without the Muskism.

Covid 19 changed the chessboard, I rather wait to see what the new generation would be doing. Starting by this quarter 13F. I like to think I should not underestimate someone who built a multi billion dollar business and his capacity to learn from mistakes.

I sold Nvidia few weeks ago after a good run from $130 ish.
At least that is what I tell to comfort myself when I look at my melting FFH holding ....

Feeling better that I am not alone watching my FFH holding melting

You aren't alone. FRFHF is my largest holding, followed by WFC. I’ve still managed to break even over the past year due to large positions in mining stocks such as NG (purchased in early 2019 and sold recently for 150% gain) and SGGDX (purchased throughout 2019 and up 70%). Now, I’m trying to figure out where to go from here. I’m tempted to keep averaging into my losing positions but am afraid that I’ll box myself into becoming too concentrated.

The bearish arguments provided by Viking, Bearprowler, and others are very compelling, and would probably be enough to convince me to sell if I didn't think that the things they point out (terrible investment results, low interest rates, etc) are already factored into the price. Those would have been great reasons to have already exited (as Viking and Bearprowler did I believe, at much higher prices), but they may or may not be good reasons to sell going forward. I've followed Fairfax for about 15 years and have never seen sentiment as negative as it is now. While it could get worse, I wouldn't want to bet on it getting worse, not at these prices.

If you ask me - and I am a newbie - I give lots of weight to Parsad's comments. Maybe it is some confirmation bias, but it is appealing to me, credible, and make sense when you have a long time horizon. I do trust they have a great safety net with their valuable assets as Parsad commented. That alone should calm us down a bit and allow us to see the big picture. This company isn't going bankrupt tomorrow. A comment that was also made today is to trust a guy that has built a multi billions dollars company; I also buy that one. Yes, our bearish friends also have valid comments, but I am convinced Prem and his team are working hard to weather the storm and head in the right direction on solid ground going forward. They aren't going to stand still here.

I value different opinions and the beauty of it is that is generates a debate of ideas like this one. You then have the information you need to make your own decision. Mine is to hold and maybe add a little as it gets closer to 300 although I hope not ! Parsad said it all when he said it will eventually revert back close to BV. I can afford to wait. I am happy with 2 years ( or a little more!).

[Xerxes]

generally speaking if one wants a good return one needs to be radically right when the market is saying something else and one should be ok with that divergence of opinion and capitalize on it. Otherwise Index consensus investing is the way to go.

But also, it is also true that when one averages down on a stock too often it is sign that the initial thesis was off. I made more money when I averaged UP on a stock. 

At this point though I think FFH has probably become deep value itself.

I just cannot believe that Prem with his 90% holding wouldn’t have an economic interest to right ship AND his reputation.

I am staying course.

[vinod1]

At the current prices it is pretty cheap and I see no reason why it should not be worth say at least 0.8x adjusted book value. So pretty decent upside from $230. Forget the stock price, look at what the business is likely to generate.

Pre-covid I used to buy this at 0.95x and sell at 1.05x.

Now, low rates are likely to last a long time reducing the investment portfolio return big time. In addition, it is exposed to tail risks. I sold out at $455 and it is very very tempting to buy. If I buy I would have a strict position limit.

I think it is good to remember what Buffett mentioned:

When I look at worst case possibilities, I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.

Yes, Fairfax has a lot of levers to pull, but it needs a bit of luck.

Vinod

[bearprowler6]

At the current prices it is pretty cheap and I see no reason why it should not be worth say at least 0.8x adjusted book value. So pretty decent upside from $230. Forget the stock price, look at what the business is likely to generate.

Pre-covid I used to buy this at 0.95x and sell at 1.05x.

Now, low rates are likely to last a long time reducing the investment portfolio return big time. In addition, it is exposed to tail risks. I sold out at $455 and it is very very tempting to buy. If I buy I would have a strict position limit.

I think it is good to remember what Buffett mentioned:

When I look at worst case possibilities, I would say that there are things that I think are quite improbable. And I hope they don’t happen, but that doesn’t mean they won’t happen. I mean, for example, in our insurance business, we could have the world’s, or the country’s, number one hurricane that it’s ever had, but that doesn’t preclude the fact that could have the biggest earthquake a month later. So we don’t prepare ourselves for a single problem. We prepare ourselves for problems that sometimes create their own momentum. I mean 2008 and 9, you didn’t see all the problems the first day, when what really kicked it off was when the Freddie and Fannie, the GSEs went into conservatorship in early September. And then when money market funds broke the buck… There are things to trip other things, and we take a very much a worst case scenario into mind that probably is a considerably worse case than most people do.

Yes, Fairfax has a lot of levers to pull, but it needs a bit of luck.

Vinod

+1

[Viking]

When looking at Fairfax today:
1.) insurance businesses in aggregate are in solid shape writing at 96 CR.
2.) bond portfolio is positioned reasonably well
3.) dividend and interest income, with run rate of $900 million is solid.

What is the above worth?

4.) the remainder is the equity portfolio: stocks, associates, wholly owned companies  which i think is around $9 billion.

The real question When trying to value Fairfax is what is this group of assets worth?

I wonder what would happen to Fairfax’s stock price if they publicly stated that moving forward they will be moving up the quality spectrum with future equity purchases. And disposing of some legacy equity positions (the stinkers). Shift a couple of billion in equities from low quality to higher quality. This would hit BV in the short term (losses on sales); but would likely also result in a higher price/BV from Mr Market.

Perhaps this is kind of what we are seeing play out the last 18-24 months. The biggest new purchase, by far, is Seaspan/Atlas and this looks like a decent company (how good we will only know in a few years as it is still very young in its current incarnation). Last year there were lots of moves to get some of the operating companies into a better spot (Eurobank, AGT etc). We will see the size of Alphabet and Exxon positions.

Wishful thinking?

[Xerxes]

13F is couple of days.
We will get some real answer if the equity investment attitude is changing

[Parsad]

Clearly a very polarized name with very diverse and interesting point of views. 
Much like the Tesla thread but without the Muskism.

Covid 19 changed the chessboard, I rather wait to see what the new generation would be doing. Starting by this quarter 13F. I like to think I should not underestimate someone who built a multi billion dollar business and his capacity to learn from mistakes.

I sold Nvidia few weeks ago after a good run from $130 ish.
At least that is what I tell to comfort myself when I look at my melting FFH holding ....

Feeling better that I am not alone watching my FFH holding melting

You aren't alone. FRFHF is my largest holding, followed by WFC. I’ve still managed to break even over the past year due to large positions in mining stocks such as NG (purchased in early 2019 and sold recently for 150% gain) and SGGDX (purchased throughout 2019 and up 70%). Now, I’m trying to figure out where to go from here. I’m tempted to keep averaging into my losing positions but am afraid that I’ll box myself into becoming too concentrated.

The bearish arguments provided by Viking, Bearprowler, and others are very compelling, and would probably be enough to convince me to sell if I didn't think that the things they point out (terrible investment results, low interest rates, etc) are already factored into the price. Those would have been great reasons to have already exited (as Viking and Bearprowler did I believe, at much higher prices), but they may or may not be good reasons to sell going forward. I've followed Fairfax for about 15 years and have never seen sentiment as negative as it is now. While it could get worse, I wouldn't want to bet on it getting worse, not at these prices.

If you ask me - and I am a newbie - I give lots of weight to Parsad's comments. Maybe it is some confirmation bias, but it is appealing to me, credible, and make sense when you have a long time horizon. I do trust they have a great safety net with their valuable assets as Parsad commented. That alone should calm us down a bit and allow us to see the big picture. This company isn't going bankrupt tomorrow. A comment that was also made today is to trust a guy that has built a multi billions dollars company; I also buy that one. Yes, our bearish friends also have valid comments, but I am convinced Prem and his team are working hard to weather the storm and head in the right direction on solid ground going forward. They aren't going to stand still here.

I value different opinions and the beauty of it is that is generates a debate of ideas like this one. You then have the information you need to make your own decision. Mine is to hold and maybe add a little as it gets closer to 300 although I hope not ! Parsad said it all when he said it will eventually revert back close to BV. I can afford to wait. I am happy with 2 years ( or a little more!).

Always make your own analytical decisions about investing.  Doesn't matter what I say, what Prem says or even Buffett!  Doesn't matter what we do either.  The easiest way to go broke as a value investor is to simply follow what others are doing instead of doing your own research.  And if you can't stand behind your own research, buy ETF's and dollar cost average in over time.

What I can provide you is perspective, my rational assumptions and how I came to my conclusions.  Yes, I've seen this rodeo before...including with Fairfax.  Amazing what 22 years of investing teaches you, especially over this last generation where we've incredibly seen compressed cycles of 50% drops in the market 3 times...1999/2000, 2008/2009 and 2020/2021. 

You generally get one of those cycles every other generation...we've seen three in one generation.  Is that due to the internet?  Computer trading?  ETF's?  Massive amounts of competition by hedge funds, private equity, pensions, etc?  Recklessness in financial instruments, by the Fed, IMF?  Distortions in monetary policy?  Maybe a combination of all them!

All I know is that I've been given 3 massive swings at the bat in one generation...300% gains over several years.  This is probably the last one before I retire, and I'm going big!  I expect the stuff I'm buying today to be up 300% or better from my current cost over the next 5-7 years. 

While I mourn for the personal losses...we've had 4 people we know die from Covid-19 now...the other part of me like Buffett has always said, welcomes this moment of uncertainty and crisis.  These are the times that the true value investor benefits from the normal transfer of wealth, because everyone is afraid...including the institutions, hedge funds, private equity guys and general market. 

Have we seen the bottom...probably not...I would imagine it will hit in the 2nd or 3rd quarter.  And then the locked up, pent-up consumer frenzy in subsequent quarters will end the recession and breath new life into a new bull market next year.  We'll then face the consequences of all of this loose money flying around.  At some point, I cannot imagine how we will avoid some sort of inflation...as good as governments have become at quantitative easing and tightening.  Government debt will undoubtedly be of concern at some point...not necessarily the U.S., but probably Europe or South America.  Until then, enjoy these prices because this bear market won't last forever...even though they seem like they've been coming fast and furiously!  Cheers!