Fairfax 2020

[Spekulatius]

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.

FFH is run like a Family business and outside shareholders have no recourse and are just along for the ride. This is fine and doesn’t matter much when they are performing but it does matter a lot when they don’t (as is the case here) and warrants a discount. FFH and Biglari are just different shades of grey here’s with BH being extreme and uninvestible.  FFH is just a much milder form of nepotism.

That’s the real danger with family run business. If they perform Mr Market Will not care much about the lack of influence for outside shareholder, but if not, Mr Market will discount a steeper and steeper discount to fair value based on perception of management capability (or lack thereof), much more so than with a truly public company, where an activist could jump in and shake things up.

[Phoenix01]

Prem is not lining his pockets.

Fairfax Financial Holdings Limited is worth CA$15b, and total annual CEO compensation was reported as US$1.3m for the year to December 2018.

Bank of America CEO Brian Moynihan's pay for 2019 stayed flat at $26.5 million, the Charlotte-based bank said Friday. The bank's board gave Moynihan $25 million in restricted stock and a base salary of $1.5 million for his performance, according to a Securities and Exchange Commission filing.Feb 7, 2020.

[Phoenix01]

Prem's son & daughter on the board of directors is a head scratcher for me.

Fairfax is definitely Prem's baby & he wants to take good care of it and everyone associated with it.  His multiple voting shares allow him the freedom to do what he thinks is best. So far it has worked out very well, but it has not been a smooth ride.

His children will inherit a fortune and perhaps they need to understand what that means and how it will impact all stakeholders.   What better way than to place them on the board of directors?

Allowing his son to manage a tiny portfolio may be the cheapest way to groom a future key player.  If he fails, then it would have cost much less than had he been given a big role right from the beginning.   If he succeeds then everyone wins.

Nepotism is in the opportunities given to family members. Shareholders are not being ripped off.  Even Buffet has family members on his board of directors....

[SharperDingaan]

Like it or not, FFH is a family business transitioning succession. An inherently higher risk activity.
Mistakes are inevitable. There is a reason why merit is a criteria, and not nepotism - and the higher the appointment, the more critical that separation is. It is preferable that the screw-ups happen in a row-boat, not the ship carrying the row-boats; there are lots of potential solutions, but it will be a family decision, not the shareholders.

Higher risk, gets settled via a higher price discount. Lower multiples, haircuts for opportunity loss, waning 'popularity', etc.
There are plenty of fish in the sea. An investor can toss back an ugly one, and get a replacement, at any time. 

We wish them luck, but most investors would be better off elsewhere.

SD

[Bryggen]

To feed the discussion, an interesting read on integrity and good leadership as per Prem Watsa:

https://www.ivey.uwo.ca/news/blogs/2020/july/prem-watsa-explains-integrity-is-the-cornerstone-of-good-leadership/

[SharperDingaan]

Sadly - good leadership, and a good investment, don't have a high degree of correlation.
Mostly because leadership is long-term orientated whereas investment is short term orientated. A great business requires reputation, growth & predictability, whereas a great investment - just requires volatility.

An Enron a Worldcom, a Nortel were all great investments; both on the way up (long), and on the way down (short). Had you 'invested' wisely, you would have made stupid amounts of money. The leadership in those companies? not so hot. There are all kinds of other examples - and we see them every day. Might not be most peoples preference, but it is just another way of turning a profit.

The equation changes when you have partners. Shareholders are NOT partners. no matter how much they might think they are.
Partners have unlimited liability exposure to each other, shareholders don't. Different dynamics.

SD

 

[Parsad]

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

I think Berkshire and Fairfax shareholders know the difference between how these two companies are managed and the typical corporate structure of most corporations.  You get what you get with Berkshire and Fairfax...that you will be treated equal to management, and that management has interests that are aligned with shareholders long-term.  That some family influence or atypical culture will exist...be it Howard Buffett on the board of Berkshire or Ben Watsa on the board of Fairfax.  Otherwise investors are welcome to invest in other companies where the culture is more agreeable to them.  Cheers!

[Parsad]

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.

+1!  Cheers!

[EricSchleien]

To feed the discussion, an interesting read on integrity and good leadership as per Prem Watsa:

https://www.ivey.uwo.ca/news/blogs/2020/july/prem-watsa-explains-integrity-is-the-cornerstone-of-good-leadership/

My colleagues and I just had a good laugh at this paper. I'd argue it's worthless and totally predictable based off the current awareness in the business world.

This is a nice description of integrity, however, it doesn't really get at the heart of the matter of the power of integrity. When integrity degrades into a morality conversation it loses its power. Also having a set of guiding principles will NOT inherently ground a good culture.

The Jensen/Erhard course taught at Harvard as well as 44 other Universities actually gets to the heart of the matter of Integrity. I've done this work and it's nothing that you can get from reading about integrity.

They give the program away for free online which you can get here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=920625

On a side note, businesses that get integrity as a distinction experience increase of profits of 600% within 1 year. Businesses that get their "guiding principles" actually aligned with their culture, takes about 2 days to do and 6-24 months to be seen into action and you get a result on average of 3-5x.

It's my hope that this work gets taught in every business school in the country one day. It's a HUGE missing in our society.

[rkbabang]

To feed the discussion, an interesting read on integrity and good leadership as per Prem Watsa:

https://www.ivey.uwo.ca/news/blogs/2020/july/prem-watsa-explains-integrity-is-the-cornerstone-of-good-leadership/

My colleagues and I just had a good laugh at this paper. I'd argue it's worthless and totally predictable based off the current awareness in the business world.

This is a nice description of integrity, however, it doesn't really get at the heart of the matter of the power of integrity. When integrity degrades into a morality conversation it loses its power. Also having a set of guiding principles will NOT inherently ground a good culture.

The Jensen/Erhard course taught at Harvard as well as 44 other Universities actually gets to the heart of the matter of Integrity. I've done this work and it's nothing that you can get from reading about integrity.

They give the program away for free online which you can get here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=920625

On a side note, businesses that get integrity as a distinction experience increase of profits of 600% within 1 year. Businesses that get their "guiding principles" actually aligned with their culture, takes about 2 days to do and 6-24 months to be seen into action and you get a result on average of 3-5x.

It's my hope that this work gets taught in every business school in the country one day. It's a HUGE missing in our society.

Just read that abstract.  It sounds like they are equating "integrity" with keeping your word and owning your shit.  Roughly speaking.  Not sure how that is teachable, I've always thought about integrity as something someone has or doesn't, but I'm interested enough that I think I'm going to read the whole paper.