Author Topic: Fairfax 2020  (Read 218853 times)

StubbleJumper

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Re: Fairfax 2020
« Reply #420 on: June 08, 2020, 06:52:42 AM »
Pete
FFH is definitely using the full extent of accounting when it suits them, but two things:

- I really doubt that they are going to overinvest hundreds of  millions so that is passes the threshold above 20% ownership to be equity accounted

- equity accounting also has a huge impact on book value. Ex When impairment was done on recipe and resolute that also pass through income statement hitting book value. Worse it doesnít bounce back quarter to quarter. My view is that Equity method is a better way to account for large strategic holdings that are below 50%. 

On BRK side, there is no shortages of interviews where Buffet actually tells people to ignore mark to market accounting.

Yes - I am not saying M2M is particularly worthwhile. My main concern is whether FFH are being a little manipulative, seeming to find ways to lock in relatively high equity accounting values and then being slow to impair. I don't really have an issue with it frankly because no accounting system is perfect but it's something to be aware of.


Hard to know whether they are being manipulative, but it does argue for squinting a bit when looking at the EPS number (there was BV growth of 14.8% in 2019, right?!).  Usually EPS is one of the metrics used to measure how well a company has performed in a particular year, but the paper gains triggered by periodic marks, or the failure to write down assets that are not marked can conceal true economic performance for the year.  Usually when FFH triggers paper gains, they are the result of good decisions made 4 or 5 years ago -- these decisions are still to the credit of management, but they are not really indicative of performance in the current year.

Maybe Ben Graham was a pretty smart guy when he advocated the use of a E10?


SJ


Xerxes

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Re: Fairfax 2020
« Reply #421 on: June 08, 2020, 07:42:55 AM »
For BRK, there are three different valuations:  book value, intrinsic value (a range) and market value. The first one has been dropped as a yardstick.

For FFH, there are only two different valuations they look at : book value and market value.
On annual letters, if I recall, Prem W. equals book value with intrinsic value.

It is safe to say that BRK looks more at economic reality as oppose to FFH that sees accounting  book value as a significant yardstick in representing economic reality.

Xerxes

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Re: Fairfax 2020
« Reply #422 on: June 08, 2020, 07:47:04 AM »
I think it mostly provides stability and allows better long term focus. Berkshire enjoys the same benefits. Iím sure, for example, it was nice not having to mark BNSF down to fair market value on March 31.

I may be wrong, but I think the value of BNSF and mid-American energy are their historical purchase cost without any upward adjustment to account for all the value created since their purchase.. So an adjustment would be a boost to BRK book value.

I think your comment assumes BNSF was being carried out fair market value, in which case a mark to market drop would bring it down.

Thrifty3000

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Re: Fairfax 2020
« Reply #423 on: June 08, 2020, 08:09:34 AM »
Pete
FFH is definitely using the full extent of accounting when it suits them, but two things:

- I really doubt that they are going to overinvest hundreds of  millions so that is passes the threshold above 20% ownership to be equity accounted

- equity accounting also has a huge impact on book value. Ex When impairment was done on recipe and resolute that also pass through income statement hitting book value. Worse it doesnít bounce back quarter to quarter. My view is that Equity method is a better way to account for large strategic holdings that are below 50%. 

On BRK side, there is no shortages of interviews where Buffet actually tells people to ignore mark to market accounting.

Yes - I am not saying M2M is particularly worthwhile. My main concern is whether FFH are being a little manipulative, seeming to find ways to lock in relatively high equity accounting values and then being slow to impair. I don't really have an issue with it frankly because no accounting system is perfect but it's something to be aware of.


Hard to know whether they are being manipulative, but it does argue for squinting a bit when looking at the EPS number (there was BV growth of 14.8% in 2019, right?!).  Usually EPS is one of the metrics used to measure how well a company has performed in a particular year, but the paper gains triggered by periodic marks, or the failure to write down assets that are not marked can conceal true economic performance for the year.  Usually when FFH triggers paper gains, they are the result of good decisions made 4 or 5 years ago -- these decisions are still to the credit of management, but they are not really indicative of performance in the current year.

Maybe Ben Graham was a pretty smart guy when he advocated the use of a E10?


SJ

I agree with watching look through earnings over time. It would be nice if we could have any sense of what "normalized" non-insurance earnings looks like now, or what non-insurance earnings might look like 10 years from now. I predict non-insurance earnings in 2030 will be somewhere between $0 and $2 billion. How's that for precision?

Thrifty3000

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Re: Fairfax 2020
« Reply #424 on: June 08, 2020, 08:24:50 AM »
I think it mostly provides stability and allows better long term focus. Berkshire enjoys the same benefits. Iím sure, for example, it was nice not having to mark BNSF down to fair market value on March 31.

I may be wrong, but I think the value of BNSF and mid-American energy are their historical purchase cost without any upward adjustment to account for all the value created since their purchase.. So an adjustment would be a boost to BRK book value.

I think your comment assumes BNSF was being carried out fair market value, in which case a mark to market drop would bring it down.

Yeah, I used BNSF as an example because it was the first holding that popped into my mind that BRK had to mark to market during the prior crisis, but had the luxury of not needing to do that for BNSF this time around.

Bryggen

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Re: Fairfax 2020
« Reply #425 on: June 08, 2020, 09:12:49 AM »
Not sure if I should laugh rather than being excited reading this ;)
Thought this news was now well in the past and the topic concluded.
Not sure about you, but it ain't going to happen, right?

https://ca.yahoo.com/finance/news/buy-alert-blackberry-tsx-bb-200059026.html


StubbleJumper

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Re: Fairfax 2020
« Reply #426 on: June 08, 2020, 09:28:32 AM »
Not sure if I should laugh rather than being excited reading this ;)
Thought this news was now well in the past and the topic concluded.
Not sure about you, but it ain't going to happen, right?

https://ca.yahoo.com/finance/news/buy-alert-blackberry-tsx-bb-200059026.html


It wouldn't surprise me if Prem were interested in buying BB outright, but the market cap is $3B+ and then you'd probably need to offer some sort of premium, which might value the company at $3.5-4B.  To execute a takeover, FFH would probably need to find about $2.5B to add to its existing equity and debenture position.  It would probably be a significant challenge to float that much debt, and it would require that FFH also renegotiate its revolver.  Even if FFH partnered with an outfit like OMERS, it would still need to find a large pile of capital.

I can't see it happening, but never say never.


SJ

TwoCitiesCapital

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Re: Fairfax 2020
« Reply #427 on: June 10, 2020, 11:22:08 AM »
Can someone explain what is driving the hard market?

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?

petec

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Re: Fairfax 2020
« Reply #428 on: June 10, 2020, 11:25:42 AM »
Can someone explain what is driving the hard market?

I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital.

So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different?

Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?

Ive been wondering the same.
FFH MSFT BRK BAM ATCO LNG TFG

ERICOPOLY

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Re: Fairfax 2020
« Reply #429 on: June 10, 2020, 11:38:35 AM »
we were told the reason for the soft market was the massive inflows of capital

Have the inflows of capital changed?