Author Topic: Q1 2020 Results  (Read 9808 times)

Parsad

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Re: Q1 2020 Results
« Reply #20 on: May 01, 2020, 09:06:40 PM »
https://www.bnnbloomberg.ca/video/the-markets-are-picking-winners-and-losers-coming-out-of-this-crisis-mccreath~1950578

FFH not his cup of tea...hummm

Although a very short term view, I kinda agree on the poor investment results comment.

His comments are accurate, except for the fact that no one, including McCreath, expected a global pandemic to hit.  Look Markel lost like $1.4B as well, but their insurance business was at a 110% combined ratio...it's still trading near book.  Berkshire is going to get hit too this quarter, and has plenty of operating businesses that were shut down...it's trading just above book.  Fairfax never has gotten the same sort of respect or overvaluation, except in 1998 when it was 4 times book.  With insurance doing great, a hard market at our backs, an investment portfolio that should rebound and trading at 0.6 times book...I think McCreath is looking at things with a glass half-empty perspective.  Fairfax will do very well over the next 5 years.  Cheers!
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vinod1

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Re: Q1 2020 Results
« Reply #21 on: May 02, 2020, 05:38:56 AM »

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

How are you getting 15% with portfolio investments returning 2.5%?

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

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

petec

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Re: Q1 2020 Results
« Reply #22 on: May 02, 2020, 07:02:18 AM »

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

How are you getting 15% with portfolio investments returning 2.5%?

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

Vinod

For a shorthand analysis like this, it would not be entirely unreasonable to net underwriting profits against head office costs (incl interest) and simply look at investment return/stock price.
FFH MSFT BRK BAM ATCO LNG IHG TFG CGT DC/A

Xerxes

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Re: Q1 2020 Results
« Reply #23 on: May 02, 2020, 08:08:59 AM »
2CC, you stated this on the other thread:

"With $835/share in float, $420/share in equity, and $337/share in debt - it's hard for me to come up with a case where returns aren't going exceptional @ $260/share.

That is $1500+/share earning you a return. 15% compounded from these depths only requires an annualized return of 2.5% on the float/debt/equity to get 15% ROIC for your dollars. Such a low bar! Particularly in an environment that is being disrupted where investment grade corporate debt and high-grade equities/preferred yield quite a bit more than that.
"

To me, Prem's promise of 15% return over the long term is a return on BK not market value. The fact that the stock is at deep discount, although good from a new investor point of view, is (1) less good for existing shareholders that don't plan to take advantage of the discount, given other market opportunities (2) also less good for existing shareholders, if Prem doesn't take advantage of the downturn and (3) completely unrelated to the 15% return over the long term BV.

For sure, the stock will at one point bounce back like an elastic from a discount of 0.6 to a discount 0.9 (as an example). But just like the downdraft was not Prem's fault and was market's doing, the bounce back is not a Prem's win ... unless he takes advantage of it in a major way.

But i agree that it is doubly good for new investors with a new entry point. Basically market is treating Prem Watsa as a risk thus paying new investors a discount for taking shares at this point.

Unrelated, i was thinking about Petec comment about lumpy return from a different thread. Taking that point of view on the FANGs names, i would characterize Alphabet and Apple as the ones with reliable return whilst Amazon is the one that has lumpy return, which i am happy to stomach, every time spigots get turned on or off. FFH's lumpy return however hasn't been there on the upside. And any excess return I get here as an existing FFH shareholder by buying the dip, is a market return as oppose to fruits of FFH investments from the past.

Xerxes

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Re: Q1 2020 Results
« Reply #24 on: May 02, 2020, 08:17:56 AM »
https://www.bnnbloomberg.ca/video/the-markets-are-picking-winners-and-losers-coming-out-of-this-crisis-mccreath~1950578

FFH not his cup of tea...hummm

Although a very short term view, I kinda agree on the poor investment results comment.

The BBN analysis is good one.
But I would just say that FFH is not a conventional name, so i don't really count on BNN or their analysts to say Strong Buy.
I bet if i were to go on BNN archives in the years 2004-2010, you don't get too much Strong Buys from BNN on technology names, with the analyst keep referring to the spectre of the Dot.com bubble.

Not saying FFH is the new high-tech in the making. All i am saying is that BNN has a conventional main stream view with a certain framework and FFH is outside the norm.

vinod1

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Re: Q1 2020 Results
« Reply #25 on: May 02, 2020, 08:58:29 AM »

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

How are you getting 15% with portfolio investments returning 2.5%?

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

Vinod

For a shorthand analysis like this, it would not be entirely unreasonable to net underwriting profits against head office costs (incl interest) and simply look at investment return/stock price.

I think we are looking at nearly $650 million in these other expenses and underwriting could cover half of it. So it has a material impact. I get a 7-8% return on capital under those assumptions. Not 15%.

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

StubbleJumper

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Re: Q1 2020 Results
« Reply #26 on: May 02, 2020, 09:36:00 AM »

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

How are you getting 15% with portfolio investments returning 2.5%?

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

Vinod

For a shorthand analysis like this, it would not be entirely unreasonable to net underwriting profits against head office costs (incl interest) and simply look at investment return/stock price.

I think we are looking at nearly $650 million in these other expenses and underwriting could cover half of it. So it has a material impact. I get a 7-8% return on capital under those assumptions. Not 15%.

Vinod


No, everybody does the rough math a bit differently, but the math has gotten pretty attractive over the past month, irrespective of how exactly you do it.

The quick math in my mind is that if you believe that FFH is good for $15B net written and a 95 CR, that's $750m UW profit which is roughly enough to offset the interest and holdco admin costs.  So what's left is the investment income and the other operating income (but let's call the operating income a zero from Toys, William Ashley, etc).  The investment portfolio as at Dec 31 was US$1,300/sh and yesterday's stock price was ~US$260/share, so call it about 5:1 leverage.  So, from where I sit a 2.5% yield on the investment portfolio gives you 5 x 2.5%=12.5% pre-tax.  To get 15% earnings yield post-tax you might need an investment portfolio yield of 3.5% to 4% (ie at 5x that would be 17.5% or 20% pre-tax to get your 15% post-tax). 

My quick math excludes any contribution from Fairfax India and Africa, which are clearly valuable, but a bit hard to predict.  If you believe that the operating companies and Fairfax India and Africa will contribute something positive, then you could get your math down to 2.5%....


SJ


TwoCitiesCapital

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Re: Q1 2020 Results
« Reply #27 on: May 02, 2020, 03:51:51 PM »

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

How are you getting 15% with portfolio investments returning 2.5%?

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

Vinod

Not portfolio investments. Fairfax has $1500-1600/share in float/equity/debt.

A net 2.5% return in those figures is $37.50/share at the low end. On a $260/share price, that's 14.4% annualized.

I'm not talking about portfolio returns, just that they need to net only 2.5% on the total of float/equity/debt after expenses. It doesn't seem like that should be a high bar, particularly if insurance (what the equity/debt supports) is performing well.

If people don't seem convinced of 2.5% net on those various forms of funding, then who the hell was buying this at $500-$600/share when the various forms so funding were the same, but the bar for acceptable performance far higher?

Parsad

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Re: Q1 2020 Results
« Reply #28 on: May 02, 2020, 04:04:15 PM »

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

How are you getting 15% with portfolio investments returning 2.5%?

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

Vinod

Not portfolio investments. Fairfax has $1500-1600/share in float/equity/debt.

A net 2.5% return in those figures is $37.50/share at the low end. On a $260/share price, that's 14.4% annualized.

I'm not talking about portfolio returns, just that they need to net only 2.5% on the total of float/equity/debt after expenses. It doesn't seem like that should be a high bar, particularly if insurance (what the equity/debt supports) is performing well.

If people don't seem convinced of 2.5% net on those various forms of funding, then who the hell was buying this at $500-$600/share when the various forms so funding were the same, but the bar for acceptable performance far higher?

Normal human psychology.  The guys buying at $600 were the ones selling at $350-400!

We just heard from Prem in the annual letter that Wade Burton has averaged 19.8% annualized since 2008 for Fairfax, and we all know what Brian Bradstreet can do...yet we're worried that they won't be able to achieve 3-4% annualized on the portfolio over the next 10 years! 

The only concern would be if we see a massive LA earthquake or the worst hurricane in history in the Gulf Coast this year on top of everything going on.  I'm betting against those two happening!  Cheers!
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Spekulatius

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Re: Q1 2020 Results
« Reply #29 on: May 02, 2020, 07:12:28 PM »

Well, not sure 60% of either necessarily matters. I made the point in the other thread that, at these prices, Fairfax need only generate 2.5% annualized on their float, debt, and equity to achieve 15% compounded returns from here.

No worrying about the accuracy of BV or IV or any of that necessary. No wondering if permanent impossible or a return to prior values. All of that is basically in the past. Do you think they can do 2.5% per year? If so, you get 15+% return on your capital.

How are you getting 15% with portfolio investments returning 2.5%?

I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%.

Vinod

Not portfolio investments. Fairfax has $1500-1600/share in float/equity/debt.

A net 2.5% return in those figures is $37.50/share at the low end. On a $260/share price, that's 14.4% annualized.

I'm not talking about portfolio returns, just that they need to net only 2.5% on the total of float/equity/debt after expenses. It doesn't seem like that should be a high bar, particularly if insurance (what the equity/debt supports) is performing well.

If people don't seem convinced of 2.5% net on those various forms of funding, then who the hell was buying this at $500-$600/share when the various forms so funding were the same, but the bar for acceptable performance far higher?

Normal human psychology.  The guys buying at $600 were the ones selling at $350-400!

We just heard from Prem in the annual letter that Wade Burton has averaged 19.8% annualized since 2008 for Fairfax, and we all know what Brian Bradstreet can do...yet we're worried that they won't be able to achieve 3-4% annualized on the portfolio over the next 10 years! 

The only concern would be if we see a massive LA earthquake or the worst hurricane in history in the Gulf Coast this year on top of everything going on.  I'm betting against those two happening!  Cheers!

Ever so optimistic. I haven’t seen many great things coming to shareholders of financials after they drew down the credit line. Better allocation on the investment side would be great, but first they need to get rid of the existing stuff, which is mostly impaired.
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