Author Topic: Q1 2020 Results  (Read 11096 times)

petec

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Re: Q1 2020 Results
« Reply #60 on: May 05, 2020, 12:29:01 AM »
The opportunity cost - in capital but more importantly in time - has been immense.

What's interesting is how few decisions they were away from doing really well over the last decade. If they had (1) not hedged, and (2) invested in (say) Microsoft and JNJ, both of which were cheap, instead of (say) Blackberry and Resolute, then we'd be having a very different conversation. It really does not take a lot to turn this ship.

In light of this I find the extensive discussion about the broader investment team encouraging. I very much like some of their investments here, especially Atlas and Eurobank, so I don't want them to sell everything and start again. And I don't want them to give up their value style - I can easily invest in the momentum* stocks of the day myself, if I want to. But I do want them to protect downside better. They did this brilliantly with Atlas (consider that despite coronavirus, which was more or less completely unforeseen, Atlas still trades above their going-in price) but extraordinarily poorly with Resolute, the initial investment in Eurobank, Stelco, and others.

In the letter and the AGM call Prem was quite clear that the team has an increasingly significant influence, both via direct management of part of the portfolio and via input on Prem, Brian, and Roger's decisions. I think this shift will accelerate, if only for psychological reasons - giving up control is not easy, but once you've accepted the need to start it's easy to take the incremental steps. I expect the old guard slowly fade into the background here. Actually, I speculate whether the purchase of preferred shares by insiders isn't a sign of this. Some of these guys are of an age where income might be more important than capital growth. At some point the position will be reversed: Wade & team will run the portfolio and Prem, Brian, and Roger will consult. 

*This is not an implied criticism of these stocks - it's just that I consider value and momentum to be at opposite ends of the spectrum, not value and growth. You can be a value investor in growing stocks, but not in momentum stocks.
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Viking

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Re: Q1 2020 Results
« Reply #61 on: May 05, 2020, 01:26:12 AM »

Fairfax’s investments (in aggregate) - including equities, hedges, warrants and private business purchases - have been value destroying for 8 years or so. Something looks broken in how they are managing investments (how they are picking individual securities and how structuring the overall portfolio). Confidence in management is at an all time low (in how it is managing the total investment portfolio). Many current investments are low quality and will struggle in the near term. If we get a severe recession that lasts into 2021 we can expect more large losses from the investment portfolio which will drive BV lower. Not surprising the discount to BV is where it is today. 


I wonder if part of what is broken is their investment decision "process" at Hamblin Watsa. Francis Chou and Mohnish Pabrai's harvard interview elucidates that at FFH they use a devil's advocate who is usually a senior member of the investment committee who is not going to have psychological imperatives towards deference to the portfolio managers.

However, this seems to lack the ability to incorporate a diversity of opinion. Some of which may actually come from junior members or the introverted individuals on the committee who may have a different perspective or special insight that would help the decision process or at least improve their accuracy.

Gary Klein and Paul Sonkin had a podcast on Capital Allocator's that was quite interesting about how to structure team discussions to make them more effective towards truth finding. Perhaps Sanjeev, you could pass this idea to them as it may have asymmetric outcomes (hopefully to the upside) and it costs them nothing.

On a secondary note, who makes the ultimate decision to increase FFH's financial leverage? Is it just Prem or do the executives play a role in the decision-making process? If Paul Rivett was to remain CEO, would he make the call?

If i had to pick one thing that Fairfax has gotten wrong with investing is it might be hubris. They appeared to get stuck in their old orthodoxy. It is/was almost like a religion cloaked in value investing clothes. They had success in the beginning and for many years. They then tried to replicate this same formula over and over and over. Even when it did not work and the world was changing. They were not able to make beneficial small incremental changes to their philosophy over time. Results suffered.

Value investing works. Bad investing (even if wearing the cloak of value investing) does not.

Buffett was, for many years, able to keep learning (inquisitive and open minded) and updating his model of ‘value investing’. The shift to buying quality was one shift of many. He got progressively better his first 30 years as Berkshire got larger.

The evolution of Fairfax’s investment philosophy the past 8 years has been pretty messed up and results reflect the challenges. The good news is with some new blood the investment part of Fairfax may be in transition. They are decent underwriters; if they can get average results on their investment portfolio the stock is dirt cheap. We will see what they do.
« Last Edit: May 05, 2020, 01:54:54 AM by Viking »

petec

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Re: Q1 2020 Results
« Reply #62 on: May 05, 2020, 02:06:21 AM »

Value investing works. Bad investing (even if wearing the cloak of value investing) does not.


This is a very good way of putting it. They made some excellent investments, but they made too many duds, and they hedged.

My guess is hubris and/or complacency (which are highly linked at a subconscious level) plus distraction (time spent on assembling and managing Fairfax's sprawling insurance business, rather than on investing) led to them applying simplistic heuristics (e.g. low p/bv, or supposedly great management) to investments rather than doing really hard investigative work.
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vinod1

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Re: Q1 2020 Results
« Reply #63 on: May 05, 2020, 09:02:20 AM »
I read the Q1 Transcript to hear what Trump of the North has to say.

- Bleach could be effective antidote to Covid. We expect to generate a 15% return for our shareholders over time.
- One day it would go poof and we would have a big celebration. The best is yet to come.
- We are doing a fantastic job at the federal level to respond to Covid. Our investment team operating in a stock pickers market.

The fundamental algorithm of life: repeat what works. –Charlie Munger

bearprowler6

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Re: Q1 2020 Results
« Reply #64 on: May 05, 2020, 09:40:28 AM »
I read the Q1 Transcript to hear what Trump of the North has to say.

- Bleach could be effective antidote to Covid. We expect to generate a 15% return for our shareholders over time.
- One day it would go poof and we would have a big celebration. The best is yet to come.
- We are doing a fantastic job at the federal level to respond to Covid. Our investment team operating in a stock pickers market.

Vinod1....brilliant....simply brilliant!

Bryggen

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Re: Q1 2020 Results
« Reply #65 on: May 05, 2020, 02:47:35 PM »
Also interesting noting RBC's report published May 2nd:

''While results are likely to be pressured over the near term, Fairfax continues to see good underwriting and operating results, particularly at OdysseyRe. The transformative Allied World acquisition, along with a number of smaller acquisitions, will meaningfully expand Fairfax's global footprint and we expect it to bring notable top-line and bottom-line growth. Our thesis is that Fairfax’s long-term track record of double-digit book value growth will continue and the current valuation provides an attractive risk-reward entry point for those willing to back the company’s long-term investment track record. Fairfax has a deep cash position and ample access to capital, which gives it the flexibility to be opportunistic as well as patient.''

Trying to put this with you guys' analysis together. This report seems positive while some opinion of yours are more bleak.

Newbie trying to figure out where to stand. Read: Buy more and sit on my ass. ;)


Maybe RBC was the outfit that extended the $2B revolver to FFH?   ::)


SJ

Interestingly, the author of this report was also pro-Fairfax back in 2006, but working out of a Washington DC firm: Mark Dwelle. Normal to have the same guy following/ promoting FFH over the years....? I have some investigator DNA. Maybe overthinking ;)

January 2006

https://www.theglobeandmail.com/report-on-business/rob-magazine/short-shrift/article702684/

 "The third quarter served as a real-world 'field test' of the financial strength of Fairfax, a test the company comfortably passed," says Mark Dwelle, an equity analyst with Ferris, Baker Watts, Inc., a Washington, D.C.-based investment bank that has long rated Fairfax a "buy."

petec

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Re: Q1 2020 Results
« Reply #66 on: May 05, 2020, 02:59:03 PM »
Yes, it’s pretty normal for an analyst to cover the same stock for a long time. Dwelle knows Fairfax well.
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Bryggen

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Re: Q1 2020 Results
« Reply #67 on: May 06, 2020, 08:38:13 AM »
Yes, it’s pretty normal for an analyst to cover the same stock for a long time. Dwelle knows Fairfax well.

Thanks Petec.

Parsad

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Re: Q1 2020 Results
« Reply #68 on: May 06, 2020, 02:10:59 PM »
Also interesting noting RBC's report published May 2nd:

''While results are likely to be pressured over the near term, Fairfax continues to see good underwriting and operating results, particularly at OdysseyRe. The transformative Allied World acquisition, along with a number of smaller acquisitions, will meaningfully expand Fairfax's global footprint and we expect it to bring notable top-line and bottom-line growth. Our thesis is that Fairfax’s long-term track record of double-digit book value growth will continue and the current valuation provides an attractive risk-reward entry point for those willing to back the company’s long-term investment track record. Fairfax has a deep cash position and ample access to capital, which gives it the flexibility to be opportunistic as well as patient.''

Trying to put this with you guys' analysis together. This report seems positive while some opinion of yours are more bleak.

Newbie trying to figure out where to stand. Read: Buy more and sit on my ass. ;)


Maybe RBC was the outfit that extended the $2B revolver to FFH?   ::)


SJ

Interestingly, the author of this report was also pro-Fairfax back in 2006, but working out of a Washington DC firm: Mark Dwelle. Normal to have the same guy following/ promoting FFH over the years....? I have some investigator DNA. Maybe overthinking ;)

January 2006

https://www.theglobeandmail.com/report-on-business/rob-magazine/short-shrift/article702684/

 "The third quarter served as a real-world 'field test' of the financial strength of Fairfax, a test the company comfortably passed," says Mark Dwelle, an equity analyst with Ferris, Baker Watts, Inc., a Washington, D.C.-based investment bank that has long rated Fairfax a "buy."

Fairfax was at $175 when Dwelle wrote that report...Fairfax hit over $700 pre-pandemic...300% gain from 2006, through 2008-2009, all the way to the end of 2019...not 15%, but 11.3% annualized over those 13 years from 2006 to 2019.  S&P500 did around 7.7% annualized during that 13 years. 

And that is with alot of bungling by Fairfax...insurance wasn't running smoothly until 2012-2013...the purchase of BB...lack of investment in equities during the bull market...taking the hit on swaps...purchase of mediocre businesses/cigar butts, rather than the best in class businesses you all complain about.  With those mistakes, Fairfax with it's bond portfolio, insurance business and the picks they did get right, combined with their float and leverage, managed to still do reasonably well. 

I hope Brian teaches Wade and Lawrence everything he knows, because I think the day we lose Brian, it will be nearly as painful as losing Prem.  That being said, I think Wade and Lawrence will do better on the equity side long-term.  Cheers!
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