Author Topic: Prem's 2020 Letter to shareholders is out  (Read 8244 times)

Bryggen

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Re: Prem's 2020 Letter to shareholders is out
« Reply #20 on: May 05, 2020, 12:22:43 PM »
Points I took away from FFH 2019 Annual Letter:

1.   The letter lacks integrity. Starts with 2019 was a great year for FFH and continues mostly with unbridled optimism throughout. Reality is shareholder return for 5 & 10 years have been terrible - he doesn't openly admit it and doesn't admit frustration with it and lay out a plan to change it. If one cares for their shareholders, he would be more contrite about the returns he has delivered.
2.   Ends letter with : "Over our 34-year history, we have always operated at Fairfax with a small team which, with great integrity, team spirit and no egos, protects our company from unexpected downside risks and which takes advantage of opportunities when they arise".  Well, after reading a decade plus of his annual letters, I've changed my mind - he's not showing integrity/honesty and his writing has consistently exhibited egotistical behaviour and FFH has not been able to take advantage of opportunities like others have.
3.   Insurance business is doing very well, has improved significantly and is successfully generating no cost float and is the jewel of FFH
4.   I’m glad that he has openly admitted that BB, Exco, and Resolute were mistakes – he is more open about this today than in the past
5.   Believes, “India is the best country to invest in long term”. OK, but no explanation as to why. Not genuine.
6.   Believes Modi re-election will turn around Indian economy. Again, no explanation as to why especially given that was the thought at time of Modi’s first election and it didn’t come to fruition. Again not genuine in his writing.
7.   Over 5 years intrinsic value has compounded by <5%/yr & share price <1%/yr. Over 10 yrs: IV - 3.2%/yr & share price at 5.2%/yr. Prem’s only comment on stock price is : “In last 4 years stock price has not gone up with intrinsic value, but it will happen again” - with no explanation. What about the fact that IV is only up 3.2%/year over 10 years?
8.   On investments: “shows that Fairfax’s investment results have been consistently very good since inception, with the exception of the 2011 – 2016 time period, when we treaded water” - how can he say “consistently very good” as investment returns over 33 years have been 8%/yr and over past 10 years have been <5%/yr ? Isn’t the point of his investing prowess to do better than the index? How can he say “very good”?
9.   “So when the correction happens (and it may be happening as we speak), we expect value stocks to provide better protection on the downside”.  A week after the report comes out, we are in a correction. From what I see, when there is a correction, everything goes down – BRK & FFH are down just as much as tech stocks.
10.   Committed to buying back shares over next 10 years


Being optimistic is one thing. Not being in touch with reality and getting people to invest in you/your business by shrilling dishonest optimism is getting to be on the Ponzi scheme side of things. As a long term shareholder, I am so disappointed in this man.

@Sanjeev: You have been a big supporter and believer in Prem Watsa’s honesty and integrity. This website's name is in homage to FFH. Watsa has shown his belief in you and invested in you. I’d appreciate your thoughts to above comments. Would also love it if there was a way to get FFH to reply.


InvestMd: you are going pretty strong at it questioning the integrity of management associating them with possible fraudulent activities (re: ''Ponzi scheme side of things''). Aren't going at bit a bit harsh on that one?

Just saying....


petec

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Re: Prem's 2020 Letter to shareholders is out
« Reply #21 on: May 06, 2020, 12:56:20 AM »

Does Prem have a healthy ego?  You bet...and like Buffett it is tied directly to his company.  Every great leader or CEO has an enormous stake tied to their business.  Is Prem egotistical?  I honestly cannot say that is even remotely true.  He's genuinely one of the nicest people you will ever meet and one of the most supportive, encouraging figures I've ever met.  Do you wonder why people like Francis Chou are extremely loyal to Prem?  Why someone like Brian Bradstreet never left his side?  Or why Ajit Jain has enormous respect for him.  He's hands down one of the great business leaders in Canadian history.


I think this is absolutely right. But I would love to know how you came by the information about Ajit Jain?
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PJM

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Re: Prem's 2020 Letter to shareholders is out
« Reply #22 on: May 06, 2020, 02:31:34 AM »
Somebody pointed this post out to me, and I had not seen it.  My responses in "red" after each point.

5.   Believes, “India is the best country to invest in long term”. OK, but no explanation as to why. Not genuine.

He's given significant reasoning around this belief.  There are a ton of books out there that you can read on why this MAY be true.  I've seen the companies we've invested in, and what is happening in India, and it is eerily similar to China 15-20 years ago.  I think executing will be a bit more difficult than China, simply because the Communist government said we are going to do this and did it over 20 years.  India will have similar success, but I suspect it will come with more challenges.

6.   Believes Modi re-election will turn around Indian economy. Again, no explanation as to why especially given that was the thought at time of Modi’s first election and it didn’t come to fruition. Again not genuine in his writing.

Again, plenty of comments by Prem in the past and present, and alot of books.  I agree with you, this is arguable though, as Modi's tenure is not guaranteed over the next 15 years...only for the next 5 years.


India story seems to be a mirage. Though we have heard many plausible explanations on why India is what China was 20 years ago, the ground reality seems to suggest a very different picture. In fact this is self-explanatory when one looks at the last 10 years, both in terms of the growth of the economy as well as the market returns. The S&P dollex 30 has given less than 20% total return in last 10 years and almost negative since the current government came to power 7 years ago. So much for the supposedly "world's fastest growing economy" !! This performance is with the fantastic global tailwind of low oil prices, low interest rates, flood of cheap money apart from the usual demographics, large market size etc that people talk about.

There is no change in the modus operandi of buying political votes by distributing free money at the cost of investment in infrastructure, health, education or other economical development. India continues to run twin deficit, have high unemployment, has trade deficit, saddled with bad loans in the banks/NBFCs, poor infrastructure, heavily dependant on imported oil/gas etc and we don't even want to discuss the poor corporate governance, weak judicial system, bureaucracy and red-tapism etc. I can give concrete examples of industry after industry that are getting killed due to bad policies.

Sorry to have side-tracked this post which was about Prem's letter and Fairfax.
« Last Edit: May 06, 2020, 02:50:58 AM by PJM »

petec

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Re: Prem's 2020 Letter to shareholders is out
« Reply #23 on: May 06, 2020, 04:50:41 AM »
Somebody pointed this post out to me, and I had not seen it.  My responses in "red" after each point.

5.   Believes, “India is the best country to invest in long term”. OK, but no explanation as to why. Not genuine.

He's given significant reasoning around this belief.  There are a ton of books out there that you can read on why this MAY be true.  I've seen the companies we've invested in, and what is happening in India, and it is eerily similar to China 15-20 years ago.  I think executing will be a bit more difficult than China, simply because the Communist government said we are going to do this and did it over 20 years.  India will have similar success, but I suspect it will come with more challenges.

6.   Believes Modi re-election will turn around Indian economy. Again, no explanation as to why especially given that was the thought at time of Modi’s first election and it didn’t come to fruition. Again not genuine in his writing.

Again, plenty of comments by Prem in the past and present, and alot of books.  I agree with you, this is arguable though, as Modi's tenure is not guaranteed over the next 15 years...only for the next 5 years.


India story seems to be a mirage. Though we have heard many plausible explanations on why India is what China was 20 years ago, the ground reality seems to suggest a very different picture. In fact this is self-explanatory when one looks at the last 10 years, both in terms of the growth of the economy as well as the market returns. The S&P dollex 30 has given less than 20% total return in last 10 years and almost negative since the current government came to power 7 years ago. So much for the supposedly "world's fastest growing economy" !! This performance is with the fantastic global tailwind of low oil prices, low interest rates, flood of cheap money apart from the usual demographics, large market size etc that people talk about.

There is no change in the modus operandi of buying political votes by distributing free money at the cost of investment in infrastructure, health, education or other economical development. India continues to run twin deficit, have high unemployment, has trade deficit, saddled with bad loans in the banks/NBFCs, poor infrastructure, heavily dependant on imported oil/gas etc and we don't even want to discuss the poor corporate governance, weak judicial system, bureaucracy and red-tapism etc. I can give concrete examples of industry after industry that are getting killed due to bad policies.

Sorry to have side-tracked this post which was about Prem's letter and Fairfax.

Actually, that just makes the analogy with China even better. The Chinese index has been one of the worst-performing in the world over the last 30 or so years.

On the bright side:
1) I think you make the most money when you go from bad to less bad, not from good to great. There's a plausible argument that India is going from bad to less bad.
2) Growing EM's offer huge opportunities for investors in high-quality, deep-moat, high-ROIC companies that benefit from a growing middle class, even when the relevant index (often dominated by capital intensive old world companies) aren't doing well.
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Parsad

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Re: Prem's 2020 Letter to shareholders is out
« Reply #24 on: May 06, 2020, 02:14:59 PM »

Does Prem have a healthy ego?  You bet...and like Buffett it is tied directly to his company.  Every great leader or CEO has an enormous stake tied to their business.  Is Prem egotistical?  I honestly cannot say that is even remotely true.  He's genuinely one of the nicest people you will ever meet and one of the most supportive, encouraging figures I've ever met.  Do you wonder why people like Francis Chou are extremely loyal to Prem?  Why someone like Brian Bradstreet never left his side?  Or why Ajit Jain has enormous respect for him.  He's hands down one of the great business leaders in Canadian history.


I think this is absolutely right. But I would love to know how you came by the information about Ajit Jain?

I spoke to Ajit and I spoke to Prem.  Incidentally, I think Ajit would have made a superb replacement for Buffett...genuinely a nice guy, but can be tough like Buffett as well.  Cheers!
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Parsad

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Re: Prem's 2020 Letter to shareholders is out
« Reply #25 on: May 06, 2020, 02:22:14 PM »
Somebody pointed this post out to me, and I had not seen it.  My responses in "red" after each point.

5.   Believes, “India is the best country to invest in long term”. OK, but no explanation as to why. Not genuine.

He's given significant reasoning around this belief.  There are a ton of books out there that you can read on why this MAY be true.  I've seen the companies we've invested in, and what is happening in India, and it is eerily similar to China 15-20 years ago.  I think executing will be a bit more difficult than China, simply because the Communist government said we are going to do this and did it over 20 years.  India will have similar success, but I suspect it will come with more challenges.

6.   Believes Modi re-election will turn around Indian economy. Again, no explanation as to why especially given that was the thought at time of Modi’s first election and it didn’t come to fruition. Again not genuine in his writing.

Again, plenty of comments by Prem in the past and present, and alot of books.  I agree with you, this is arguable though, as Modi's tenure is not guaranteed over the next 15 years...only for the next 5 years.


India story seems to be a mirage. Though we have heard many plausible explanations on why India is what China was 20 years ago, the ground reality seems to suggest a very different picture. In fact this is self-explanatory when one looks at the last 10 years, both in terms of the growth of the economy as well as the market returns. The S&P dollex 30 has given less than 20% total return in last 10 years and almost negative since the current government came to power 7 years ago. So much for the supposedly "world's fastest growing economy" !! This performance is with the fantastic global tailwind of low oil prices, low interest rates, flood of cheap money apart from the usual demographics, large market size etc that people talk about.

There is no change in the modus operandi of buying political votes by distributing free money at the cost of investment in infrastructure, health, education or other economical development. India continues to run twin deficit, have high unemployment, has trade deficit, saddled with bad loans in the banks/NBFCs, poor infrastructure, heavily dependant on imported oil/gas etc and we don't even want to discuss the poor corporate governance, weak judicial system, bureaucracy and red-tapism etc. I can give concrete examples of industry after industry that are getting killed due to bad policies.

Sorry to have side-tracked this post which was about Prem's letter and Fairfax.

You may be right, you may be wrong, or it may end up somewhere in the middle.  I'm guessing it will be one of those three!   :o

That being said, I cannot help but wonder what India will be like when true financial services become widely available to the populace, as it has been to most developed countries for the better part of the last century.  They have the youngest population in the world, a rapidly growing middle class, and mobile penetration is in the 94-95% range...including villages!  I see a company like Quess, IFIL or an airport like BIAL...I think, wow this young population is now getting access to the things generations in our country had.  The simple fact that Modi has registered all citizens, opened some 300M bank accounts, and expanded insurance/financial services/capital markets in a dramatic fashion...yes, miles and miles to go, but they are taking that step forward that only Gandhi and Nehru could have dreamed of.  Corruption will never disappear...it hasn't disappeared in the U.S., why would it disappear in India.  But it can be curtailed...the graft culture and thought process can be changed over a generation if the young people want and demand it.  It will be interesting to see how this experiment unfolds!  Cheers!
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Spekulatius

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Re: Prem's 2020 Letter to shareholders is out
« Reply #26 on: May 06, 2020, 03:52:02 PM »
Re India - GDP growth isn’t everything. India has substantial problems. For example inflation picked up from ~5% in 2019 to 7.35% lately. That’s a huge headwind as it causes a weakness in exchange rates relative to the dollar if purchase parity is kept. The valuations on India that I am seeing are just no attractive considering this backdrop.

You can buy bald for book value and with 20% ROE in Brazil right now if you care, but the country is run by a moron and the economy is probably going totally into the toilet as they can’t borrow for nothing like the US can.

You can make a lot of money when the situation improves and they rerate, but they also can do an Argentina and you are out of luck. For the time being, I‘d rather be in anything dollar or Euro denominated.
« Last Edit: May 06, 2020, 05:25:45 PM by Spekulatius »
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PJM

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Re: Prem's 2020 Letter to shareholders is out
« Reply #27 on: May 06, 2020, 04:20:25 PM »
You may be right, you may be wrong, or it may end up somewhere in the middle.  I'm guessing it will be one of those three!   :o

That being said, I cannot help but wonder what India will be like when true financial services become widely available to the populace, as it has been to most developed countries for the better part of the last century.  They have the youngest population in the world, a rapidly growing middle class, and mobile penetration is in the 94-95% range...including villages!  I see a company like Quess, IFIL or an airport like BIAL...I think, wow this young population is now getting access to the things generations in our country had.  The simple fact that Modi has registered all citizens, opened some 300M bank accounts, and expanded insurance/financial services/capital markets in a dramatic fashion...yes, miles and miles to go, but they are taking that step forward that only Gandhi and Nehru could have dreamed of.  Corruption will never disappear...it hasn't disappeared in the U.S., why would it disappear in India.  But it can be curtailed...the graft culture and thought process can be changed over a generation if the young people want and demand it.  It will be interesting to see how this experiment unfolds!  Cheers!

I sincerely hope I'm wrong because I'll win more if i'm wrong :)

Some simple observations:
1. People always talk about the young population which can be great for the economy but only if you are able to create millions of jobs. Look at the employment rate as well as the quality of jobs created. The demographic advantage will not stay forever so if you don't leverage it you have missed the boat.
2. If you look at the history of any largish country that has grown strongly on per-capita basis (which is a more important metric than GDP) it has to be on the back of exporting the world its labour (manufacturing) or Tech (services) which eventually leads to high per-capita and middle class population, but Indian policy makers lack the desire or will power to do so.
3. The cost of risk capital in India is 60%+ for a country that needs massive capital to build its economy
4. A lot of the steps that you highlighted such as financial inclusion are great and theoretically should take the country forward but you are overseeing the numerous additional bad policies that has overridden the good.
5. Uday Kotak, one of the smartest guys in India summed it up well "Indian economy is like a white shirt that has gone dirty. Currently its undergoing washing but the fear is that it is washed so badly that it may end up tearing" (not exact phrase but something along those lines)

Sorry but I feel that a lot of people who look from outside are reading India like a great travel marketing brochure, especially when some political leaders are such marketing-savvy people.

Disclosure: I've been an investor in India since 2014 and have seen/spoken to hundreds of listed and unlisted companies, done scuttle-butting on many of these companies. So of course I'd love to see the country and the markets do well, but as a person of Indian origin it is extremely painful to see India constantly wasting an opportunity to really lift its people up. We are still hopeful but as any good investor one needs to avoid anchoring bias while assessing the investment.

PJM

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Re: Prem's 2020 Letter to shareholders is out
« Reply #28 on: May 06, 2020, 04:33:24 PM »
Re InDia - GDP growth isn’t everything. India has substantial problems. For example inflation picked up from ~5% in 2019 to 7.35% lately. That’s a huge headwind as it causes a weakness in exchange rates relative to the dollar if purchase parity is kept. The valuations on India that I am seeing are just no attractive considering this backdrop.

You can buy bald for book value and with 20% ROE in Brazil right now if you care, but the country is run by a moron and the economy is probably going totally into the toilet as they can’t borrow for nothing like the US can.

You can make a lot of money when the situation improves and they rerate, but they also can do an Argentina and you are out of luck. For the time being, I‘d rather be in anything dollar or Euro denominated.

You are absolutely correct. With the twin deficits, high inflation and import oriented economy, there is a constant pressure on the INR. Historically INR has depreciated 5% annually, and then when you add up all the taxes and high cost of investment in India, you land up making 6-7% $ return if you can get 15% lNR return which is a tall ask.

Currently the top 15 companies in India has 40% market cap of all listed companies and pretty much all companies that have out performed in India has done that on the back of multiple expansion. Just look at the multiples of even simple consumer companies such like Nestle, Hind Unilever, Asian paints etc which would have been fine if they were growing at decent clip but none of these companies are growing at even 10%. So all the new money from local mutual funds are chasing these handful of 10-20 companies which has led to extreme polarisation. If you have put money outside these companies your portfolio has lost money. The funny bit is local regulation discourage investment outside the top 100 companies.

The other problem is that there is no bond market which makes it extremely difficult for corporates to raise debt money.

TwoCitiesCapital

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Re: Prem's 2020 Letter to shareholders is out
« Reply #29 on: May 06, 2020, 05:21:31 PM »
Re InDia - GDP growth isn’t everything. India has substantial problems. For example inflation picked up from ~5% in 2019 to 7.35% lately. That’s a huge headwind as it causes a weakness in exchange rates relative to the dollar if purchase parity is kept. The valuations on India that I am seeing are just no attractive considering this backdrop.

You can buy bald for book value and with 20% ROE in Brazil right now if you care, but the country is run by a moron and the economy is probably going totally into the toilet as they can’t borrow for nothing like the US can.

You can make a lot of money when the situation improves and they rerate, but they also can do an Argentina and you are out of luck. For the time being, I‘d rather be in anything dollar or Euro denominated.

You are absolutely correct. With the twin deficits, high inflation and import oriented economy, there is a constant pressure on the INR. Historically INR has depreciated 5% annually, and then when you add up all the taxes and high cost of investment in India, you land up making 6-7% $ return if you can get 15% lNR return which is a tall ask.

Currently the top 15 companies in India has 40% market cap of all listed companies and pretty much all companies that have out performed in India has done that on the back of multiple expansion. Just look at the multiples of even simple consumer companies such like Nestle, Hind Unilever, Asian paints etc which would have been fine if they were growing at decent clip but none of these companies are growing at even 10%. So all the new money from local mutual funds are chasing these handful of 10-20 companies which has led to extreme polarisation. If you have put money outside these companies your portfolio has lost money. The funny bit is local regulation discourage investment outside the top 100 companies.

The other problem is that there is no bond market which makes it extremely difficult for corporates to raise debt money.

Weird. Sounds like the S&P 500 in 2020.