Author Topic: Fairfax 2020  (Read 206545 times)

bearprowler6

  • Full Member
  • ***
  • Posts: 212
Re: Fairfax 2020
« Reply #480 on: July 17, 2020, 06:59:41 AM »
Yet the deals keep headed towards Fairfax....

A few comments/questions:

1) Perhaps most importantly, in my view Fairfax's behavior on the Torstar acquisition (and during the several examples cited earlier in this thread) cannot be justified by the "deal flow" sent its way.

2) What about the deals Fairfax did not get a chance to look at because of how it behaved on previous deals? There is no way of knowing this however it is a possibility. Are you sure the company's reputation is as strong as it ever was?

3) Finally, what deals that headed toward Fairfax are you specifically referring to? And are you sure the terms of those deals did not adversely impact Fairfax due to the company's previous behavior?


KFS

  • Jr. Member
  • **
  • Posts: 67
Re: Fairfax 2020
« Reply #481 on: July 17, 2020, 07:27:08 AM »
Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will. 


StubbleJumper

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1533
Re: Fairfax 2020
« Reply #482 on: July 17, 2020, 07:46:39 AM »
Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will.


Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice. 

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa.  What is FFH paying Ben's firm to manage that $50m?  Is it 200 bps per year?  More?  Less?  Nobody on the outside knows.  But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k.  Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that.

Is it the same type of situation with TS?  As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations.  Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars.  But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends?  Who really knows at this point.  I would hope that Prem provides an explanation at the next quarterly call.

The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions.  The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars.  We like to believe that all of these donations are made with the most altruistic and best intentions.  But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders.


SJ
« Last Edit: July 17, 2020, 07:53:47 AM by StubbleJumper »

bearprowler6

  • Full Member
  • ***
  • Posts: 212
Re: Fairfax 2020
« Reply #483 on: July 17, 2020, 08:31:01 AM »
Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will.


Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice. 

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa.  What is FFH paying Ben's firm to manage that $50m?  Is it 200 bps per year?  More?  Less?  Nobody on the outside knows.  But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k.  Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that.

Is it the same type of situation with TS?  As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations.  Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars.  But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends?  Who really knows at this point.  I would hope that Prem provides an explanation at the next quarterly call.

The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions.  The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars.  We like to believe that all of these donations are made with the most altruistic and best intentions.  But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders.


SJ

The "market" has responded to all of Prem's actions in the way that matters most; Fairfax's share price has gone no where. In fact, it is currently back to where it was at the end of 2013.

Closing Price in CAD:

Dec 31/13: $424.21

Dec 31/14: $608.78
.
.
.
.
Dec 31/19: $609.74

July 16/20: $424.41

It will take performance of 15% per year for the next 3 years to get us slightly above the price at the end of Dec 31/14! So this will be a 9 year period where the share price will have done absolutely nothing.

There are many reasons for the under performance of the share price however I can't help but think that Prem's pattern of personal conduct has played at least a small part.


« Last Edit: July 17, 2020, 09:17:33 AM by bearprowler6 »

Xerxes

  • Hero Member
  • *****
  • Posts: 572
Re: Fairfax 2020
« Reply #484 on: July 17, 2020, 09:14:34 AM »
Just a quick comment since it was not mentioned.
On BNN it was alluded that the families prefer the Rivett bid because it was seen as more aligned with the political view that the newspaper has. Something along those lines.

In the grand scheme of things, peanuts for FFH but if there is a pattern than that is more problematic.
I suspect this wouldn’t be a huge issue if FFH overall return would have been spectacular in the past 10 years. Which says something about us as well. When the tide is high, we tend to look past these  things. Well I should speak for myself I guess.

On the subs, you cannot blame FFH to prioritize FFH book value above FIH and FAH. We always said there is a permanent discount to BV on them for this very reason. Their discount to BV will widen and shrink but will never close. Even if it widens by huge margin, it is likely that the market is discounting a steep drop that is yet to come on the BV as oppose it to be a great opportunity.

At the end of the day, FIH return to its shareholder will be great as long as India massive long term potential holds and exceed despite “structural issues with the vehicle”. But for that you are getting a discount.

On OMERS, I like to fly on a wall in their internal meeting to how they really perceive their deals with FFH. Do they keep coming back because it is the devil that they know, or are they somehow perceive that they can get good and fair deals. 

Parsad

  • Administrator
  • Hero Member
  • *****
  • Posts: 9469
Re: Fairfax 2020
« Reply #485 on: July 17, 2020, 12:08:05 PM »
Is it just me, or are Charlie Munger's lessons on the "power of incentives" screaming loudly here?  "Incentives are too powerful a control over human cognition or human behavior."

The history lesson from all of this is to simply own the parent FFH stock and avoid the underlings... FIH, FAH, ORH, etc.  It feels very similar to discussion on the BAM board.  If any "unfair" deals are taking place, owning stock in the parent company ensures your interests are aligned.  The majority of Prem's net worth is in FFH and he just purchased $150M of additional shares.  One could argue that FIH and FAH are just as undervalued as the parent FFH, if not more so, but you don't see Prem making any grand announcements of buying $150M of those.  The priority hasn't changed and I don't think it will.


Well, yes, that is one potentially valid conclusion, and I generally view it as solid, sound advice. 

But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 

This might be a potential explanation for seemingly strange decisions like hiving off $50m of FFH's investment portfolio to be managed by Ben Watsa.  What is FFH paying Ben's firm to manage that $50m?  Is it 200 bps per year?  More?  Less?  Nobody on the outside knows.  But, what we do know is that if it is 200 bps, that makes $1 million per year, and of that sum Prem would pay $90k to guarantee his son a job while the minority (majority) shareholders would pay the other $910k.  Prem could have allowed his son to manage $50m of his personal assets, which would also have guaranteed Ben a job, but then Prem alone would be paying the freight on that.

Is it the same type of situation with TS?  As others have noted, the TS controversy amounts to chicken-feed in the context of FFH's operations.  Giving Paul Rivett a sweet-heart deal on TS would only potentially cost a few million of FFH's dollars.  But, is this a case where Prem is happily spending 9-cent dollars for the benefit of his friends?  Who really knows at this point.  I would hope that Prem provides an explanation at the next quarterly call.

The problem with this type of personal conduct that gives the appearance of a potential conflict of interest is that it casts suspicion on both good and bad decisions.  The charitable gifts that FFH makes are the same sort of thing where Prem is effectively spending 9-cent dollars.  We like to believe that all of these donations are made with the most altruistic and best intentions.  But, now, when an expenditure is made that is not perfectly obviously aligned with the duty of a fiduciary, it is hard to not have a niggling concern in the back of one's head that the expenditure might not really be in the interest of shareholders.


SJ

The "market" has responded to all of Prem's actions in the way that matters most; Fairfax's share price has gone no where. In fact, it is currently back to where it was at the end of 2013.

Closing Price in CAD:

Dec 31/13: $424.21

Dec 31/14: $608.78
.
.
.
.
Dec 31/19: $609.74

July 16/20: $424.41

It will take performance of 15% per year for the next 3 years to get us slightly above the price at the end of Dec 31/14! So this will be a 9 year period where the share price will have done absolutely nothing.

There are many reasons for the under performance of the share price however I can't help but think that Prem's pattern of personal conduct has played at least a small part.

Markel's price hit 2015 prices...WTM hit 2015 prices...Everest Re hit 2014 prices at their lows...this is irrelevant to whether an investment is a good investment or not.  Whether FFH is a good investment now...especially compared to when it was priced higher.  You know better than that!  Cheers!
No man is a failure who has friends!

Daphne

  • Jr. Member
  • **
  • Posts: 91
Re: Fairfax 2020
« Reply #486 on: July 18, 2020, 07:33:33 AM »
The “pattern” I’m seeing here is that this board is filling up with conspiracy theorists.

Dr. John Grohol, a psychologist and the founder of Psych Central, says that conspiracy theorists come up with ideas out of thin air to match whatever 'fact' they think is true, and often use paranoia-based beliefs to convince others.

bizaro86

  • Hero Member
  • *****
  • Posts: 1548
Re: Fairfax 2020
« Reply #487 on: July 18, 2020, 07:56:12 AM »
The “pattern” I’m seeing here is that this board is filling up with conspiracy theorists.

Dr. John Grohol, a psychologist and the founder of Psych Central, says that conspiracy theorists come up with ideas out of thin air to match whatever 'fact' they think is true, and often use paranoia-based beliefs to convince others.

Or maybe strongly held beliefs (backed up in many case by previous large Fairfax projects) are being held on to even in the face of disconfirming evidence.

“For some of our most important beliefs, we have no evidence at all, except that people we love and trust hold these beliefs. Considering how little we know, the confidence we have in our beliefs is preposterous—and it is also essential.”

—2002 Nobel Laureate Daniel Kahneman

Moat beliefs aren't necessary to change, which is why people don't change them. However, if a management team begins to take shareholder unfriendly actions, it's usually best to assume those actions will continue and not change back.

You can see that on this board on the Biglari thread. Many folks were defending how optically cheap that was long after it became obvious that ~100% of the value was going to Biglari and ~0% to outside shareholders. I don't think Fairfax is at that level, but there are enough examples of shareholder unfriendly actions that a management discount is absolutely appropriate. Maybe that hasn't always been true, but like Munger said:

"We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side."

Dismissing cogent arguments as paranoia is pretty obviously an ad hominem attack, imo.

Xerxes

  • Hero Member
  • *****
  • Posts: 572
Re: Fairfax 2020
« Reply #488 on: July 18, 2020, 08:25:13 PM »
But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 


i disagree with this comment specifically.
I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high.
More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions.

Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends.
But that is me.

 

StubbleJumper

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1533
Re: Fairfax 2020
« Reply #489 on: July 19, 2020, 06:43:23 AM »
But, there is yet one more problem with an outfit that sometimes does not seem to respect its partners.  That problem is that the controlling shareholder has, until recently, only owned 7% of the economic interest in FFH but is likely now up to 9% ownership of the economic interest.  That arrangement once again creates incentive problems because it creates a situation where every dollar of FFH's money that the controlling shareholder channels to his pet projects only costs him personally 9-cents. 


i disagree with this comment specifically.
I think 9-10% ownership is a huge incentive. Sure, this is not BRK level of ownership with Buffet. But if i compare to many other companies their CEO ownership is as low as 1%, it is really high.
More so, what else is in Watsa's portfolio. Is it >90% FFH stock, if yes, than i think proper economics incentive is there on both dimensions.

Personally, i would preferred no dividends as it gives the optics of cash-cow that all it does is to ensure the cash inflows is just enough to cover the cash outflows + $10 per share for dividends.
But that is me.


Yes, the key difference is that the typical CEO with a 1% ownership stake is not entrenched by virtue of multiple-voting shares and is at risk of being turfed if he pursues too many visible pet projects.  That is possibly one reason why you will not see the CEO of Bank of America hive off $50m for his son to manage.  It is probably also the reason why the CEO of BAC will not nominate his son and daughter to sit on the Board.  If you are going to make use of multiple voting shares to retain control with a relatively small economic interest, you need to always be more Catholic than the Pope when it comes to using the firm's funds.


SJ