Good points vinod1.
My own reservations regarding Fairfax are as follows:
1. Leverage: FFH has roughy $3 in insurance liabilities for $1 of common equity and another $0.50 mostly in debt. With so much insurance liability leverage, I think they are forced to keep most of the float in fixed income or cash. Obviously when it works, leverage produces great results but the reverse is true also. One major CAT loss, a huge portion of common equity will be wiped out. I really don't like the way annual letter shows underwriting results with and w/o CAT losses as if CAT losses were not supposed to happen and are highly unusual. It is as if management wants shareholders/readers to ignore these insurance losses when they are normal part of being in the insurance business.
2. Invested Assets: Just the fixed income portion of assets is larger than common equity. And it is highly unlikely that FI portfolio will produce great results going forward. And common stock selection has been awful during the last 10+ years. As others pointed out, they like to go for the crappy stuff all the while completely avoiding quality long term investments.
3. Macro Calls: A big negative in my book. One can easily see them making a 2020 US election macro bet for example if past is any indication.
4. Sub-optimal capital allocation: The dividend policy doesn't make any sense especially because they immediately issued more stock many times in the past right after declaring dividends. If they need more capital why not retain earnings? Why force shareholders to pay tax on dividends and immediately dilute them with new stock issuance?
5. Board governance: Too much Watsa family involvement without a clear benefit to the company or shareholders.
Out of those five items, only really the macro calls affected performance. Their equity positions overall have done reasonably well since 2008, excluding the puts and derivatives. That's what really killed about $2B in gains. As for the Watsa family involvement, Ben has only been involved for the last 3 years, while Christine has been involved for one year...are you going to tell me that was the reason Fairfax underperformed for the last decade?
Ben Graham must be turning over in his grave. Do not blame value investing or indexing.
What happened over the past decade is that earnings for companies that fall in the value spectrum have not grown as much as they have historically done. Why that is so is a separate topic of discussion. Where as for the growth stocks they are pretty much in line with history. See attached table from philosophical economics blog. Pay attention to the earnings growth rate of value.
This earnings slowdown for value stocks is what is causing the under-performance. Market is paying attention to fundamentals. That is in line with what Ben Graham has been teaching. Stocks. Long Run. Weighting Machine.
Fairfax portfolio and Fairfax itself performed poorly because the earnings of their portfolio companies and itself were below par. Are we really blaming indexing for Fairfax's portfolios poor returns? Should Blackberry be worth $100 because Fairfax first paid what $45 a share several years back?
Vinod
Fairfax is not buying the market...be it value or growth. So that's not an excuse, nor the reason why it underperformed. We all know clearly from the letters that the macro calls since after 2009 offset about $2B in gains. And that extremely conservative position left them holding a ton of cash and a ton of bonds, when equities were priced at 50 year lows. So if shareholders want to blame anything, I would say they should be blaming the macro calls on what might happen.
- Going back to shareholders holding the stock or considering buying...if you think that Fairfax has learned their lesson on macro calls, Fairfax will probably do well in the future.
- If you think that Fairfax will continue to try and make these macro bets, then yes, it is possible Fairfax will be out of step.
I personally am betting on the former, but at the same time, I manage a considerable amount of my own portfolio and only a portion is in Fairfax. Cheers!