Time to buy Fairfax again?

[Ross812]

IB withholds foreign taxes for FRFHF in my Roth.

[wisdom]

http://www.bloomberg.com/video/tilman-fertitta-real-estate-crash-like-1986-coming-j2rFvvu~Rbq87Gyv1G9Ryw.html

 

Interesting - Landry

[peter1234]

http://www.bloomberg.com/video/tilman-fertitta-real-estate-crash-like-1986-coming-j2rFvvu~Rbq87Gyv1G9Ryw.html

Interesting - Landry

Thanks, this is an interesting and insightful short interview.

;)

 

[petec]

Gio,

 

Your original post here was a pretty epic call.  What are you thinking now?

 

Pete

[Guest Dazel]

 

 

yes congrats too all....I have sold out in the last two days great run. hoping for another entry..

.I think Prem would raise money here if he could.

 

Dazel

[giofranchi]

Gio,

 

Your original post here was a pretty epic call.  What are you thinking now?

 

Pete

 

Hi Pete,

pretty epic good luck!! ;D ;D

 

What am I thinking about Fairfax? Or about other investments of mine?

 

I will try to answer both questions:

 

Fairfax: the multiple expansion is probably over. But I think from now on they might be able to make money both if the cycle goes on and if the cycle folds and starts going the other way.

 

If the cycle goes on, I like their insurance operations, their investments in wholly owned businesses, and I like their bond investments: I mean, just look at 10 years government interest rates, Japan 0.44%, Germany 0.71%, Spain 1.84%, Italy 1.96%, UK 2.02%… US 2.28%?? Doesn’t make any sense to me! If the yield on US 10yrs bonds gets to the level of Italy or Spain, Fairfax’s bonds portfolio will make a lot of money.

 

If the cycle folds, in addition to the list above I also like their deflation and stock market hedges.

 

Other investments of mine: Biglari Holdings at 1.04 x BVPS doesn’t make any sense to me, and I like the fast food industry as somewhat counter cyclical. Oaktree Capital is worth at least $70 if this cycle goes on, much more if this cycle were finally to fold, being at least as counter cyclical as Fairfax.

 

Cheers,

 

Gio

 

[Partner24]

"Fairfax: the multiple expansion is probably over."

 

Well, nobody know for sure, but if the price to book reach 1.7 or so, I'll probably sell some shares that I kept since the last 12 years.

[naboo]

"Fairfax: the multiple expansion is probably over."

 

Well, nobody know for sure, but if the price to book reach 1.7 or so, I'll probably sell some shares that I kept since the last 12 years.

 

so you are talking about  USD$700/share now.  Way to go!

[petec]

"Fairfax: the multiple expansion is probably over."

 

Well, nobody know for sure, but if the price to book reach 1.7 or so, I'll probably sell some shares that I kept since the last 12 years.

 

so you are talking about  USD$700/share now.  Way to go!

 

I'd probably do the same.  Or consider it.

[Crip1]

"Fairfax: the multiple expansion is probably over."Well, nobody know for sure, but if the price to book reach 1.7 or so, I'll probably sell some shares that I kept since the last 12 years.

 

 

P24,

 

 

Well, that's an interesting point to ponder. I want to say that it was roughly 2007 that Markel was selling for 2X book and, at that time, I contemplated selling a good-sized chunk of my holdings. I think they also got pretty close to 2x BV in 1999 as well. Ultimately I never did and it cost me dearly as I could have, a couple of years later, purchased some MKL for dramatically less. I promised myself that, even though I think MKL is a great company to own (and I know you do as well), that I'd sell half or so of my holdings if it was selling at 2x BV. I think that it is a reasonable conclusion that 2X book for MKL is a result of price getting ahead of value. As we are currently sitting at about 1.3x BV, we've got a ways to go.

 

 

The same concept would seemingly apply to FFH but the specifics are not as clear to me. I cannot argue with your assertion that 1.7x BV being a selling point, but I cannot endorse it either. Do you have any specific calculation that says 1/7x BV is overvalued? Not trying to challenge you on this, just looking to understand.

 

 

-Crip

[petec]

"Fairfax: the multiple expansion is probably over."Well, nobody know for sure, but if the price to book reach 1.7 or so, I'll probably sell some shares that I kept since the last 12 years.

 

 

P24,

 

 

Well, that's an interesting point to ponder. I want to say that it was roughly 2007 that Markel was selling for 2X book and, at that time, I contemplated selling a good-sized chunk of my holdings. I think they also got pretty close to 2x BV in 1999 as well. Ultimately I never did and it cost me dearly as I could have, a couple of years later, purchased some MKL for dramatically less. I promised myself that, even though I think MKL is a great company to own (and I know you do as well), that I'd sell half or so of my holdings if it was selling at 2x BV. I think that it is a reasonable conclusion that 2X book for MKL is a result of price getting ahead of value. As we are currently sitting at about 1.3x BV, we've got a ways to go.

 

 

The same concept would seemingly apply to FFH but the specifics are not as clear to me. I cannot argue with your assertion that 1.7x BV being a selling point, but I cannot endorse it either. Do you have any specific calculation that says 1/7x BV is overvalued? Not trying to challenge you on this, just looking to understand.

 

 

-Crip

 

I agree.  Gut says that somewhere between 1.5x and 2x it becomes very fully priced, but with the deflation swaps it's hard to know what happens to bv.

[ERICOPOLY]

As we are currently sitting at about 1.3x BV

 

That's the multiple that sits ABOVE another multiple.

 

Out of the $8.5b common equity, you've got nearly $1.5b goodwill.

 

I could take Fairfax private at $1,000 per share and then sit here and argue that it was a mere bargain at $600 when it traded at 40% discount to the new book value.

 

 

[ERICOPOLY]

Historically Fairfax purchased things at discounts to book.  The goodwill asset started to grow materially upon the Northbridge takeover...  since then the premiums paid over book value have been piling up.

 

It trades around 1.5x book I believe. 

 

 

[Liberty]

What if the things that were bought had goodwill on their balance sheet, and they themselves had bought things that had goodwill, and so on... Goodwill all the way down!

[ERICOPOLY]

What if the things that were bought had goodwill on their balance sheet, and they themselves had bought things that had goodwill, and so on... Goodwill all the way down!

 

Actually there is look-through goodwill in their equities portfolio.

 

They held JNJ before at market value, but market value was vastly in excess of JNJ's per-share tangible book.  It was implicit goodwill that fluctuated with the market value of JNJ shares.

 

So then JNJ is a huge bargain at today's prices which we can view as merely book value :-)

[Partner24]

"Fairfax: the multiple expansion is probably over."Well, nobody know for sure, but if the price to book reach 1.7 or so, I'll probably sell some shares that I kept since the last 12 years.

 

 

P24,

 

 

Well, that's an interesting point to ponder. I want to say that it was roughly 2007 that Markel was selling for 2X book and, at that time, I contemplated selling a good-sized chunk of my holdings. I think they also got pretty close to 2x BV in 1999 as well. Ultimately I never did and it cost me dearly as I could have, a couple of years later, purchased some MKL for dramatically less. I promised myself that, even though I think MKL is a great company to own (and I know you do as well), that I'd sell half or so of my holdings if it was selling at 2x BV. I think that it is a reasonable conclusion that 2X book for MKL is a result of price getting ahead of value. As we are currently sitting at about 1.3x BV, we've got a ways to go.

 

 

The same concept would seemingly apply to FFH but the specifics are not as clear to me. I cannot argue with your assertion that 1.7x BV being a selling point, but I cannot endorse it either. Do you have any specific calculation that says 1/7x BV is overvalued? Not trying to challenge you on this, just looking to understand.

 

 

-Crip

 

Crip,

 

Regarding FFH, when I take a look at it's normal capacity to generate earnings with the investment portfolio (less the expenses) and a normalized return on it's equity calculation, using both methods, I get that 1.7 times book is a fair price. These are the two main methods that I use in evaluating an insurance business. Even at 1.7 times book, I would still keep some shares. Over two times book, I think that the buyer would be cheerful and would make me feel uncomfortable to keep it, unless something unusual that would boost book value in a short period of time would very likely happen with FFH.

 

And I'm curious to know. In your mind Crip, what would be a fair price?

 

Cheers!

 

 

[Crip1]

 

 

And I'm curious to know. In your mind Crip, what would be a fair price?

 

Cheers!

 

 

That's where my concern comes in. Except for my first purchase of FFH eons ago, I had always purchased Fairfax at below BV assuming the following:

* FFH would, over time, earn an average of 15% ROE...lumpy though it may be.

* At any given time, FFH would be able to be sold at BV.

 

 

This meant that annualized returns would be 15% taking into account the price "catching up" to BV which is growing at the previously referenced 15% clip. Operating under those two assumptions, I did not need to know intrinsic value or fair price. Granted this is very simplistic, but I considered this a reasonably easy "hurdle" to jump over (Warren Buffett: "I don’t try to jump over 7-foot hurdles: I look for 1-foot hurdles that I can step over.")

 

 

Now, the issue being faced by me now is that Fairfax is priced will above BV so, in order to maintain the 15% annualized return, either FFH needs to continue to trade at 1.3x BV as it currently trades or FFH needs to achieve better than a 15% ROE.

 

 

 

So, with apologies for being a bit long-winded in response to your question, I don't have a firm figure/multiple.

 

 

-Crip

[Partner24]

Ok Crip, let's take the 15% ROE assumption. At 1.3 times book, it means that on a normalized basis, you would pay nearly 9 times the earnings that the business can generate. It is a fair price to you?

 

What is a fair multiple regarding FFH? To me, the 1.7 figure is fair. There is certainly no absolute and I might be wrong, but that's my number. Time is a friend to me. When I get a business that can likely add intrinsic value at a satisfactory clip over a long period of time, I think twice before starting selling, but I'm very open to do it.

 

I'm wondering if I'll finally get the chance to have this dilemma after all these years of patience!

 

Cheers!

 

 

 

 

 

 

[mcliu]

I think at some point you really have to value FFH based on its underlying assets rather than using the P/BV shortcut.

 

As the company acquires majority stakes in subsidiaries that aren't marked to market, the spread between intrinsic value and book value should grow wider.

[giofranchi]

Well, nobody know for sure, but if the price to book reach 1.7 or so, I'll probably sell some shares that I kept since the last 12 years.

 

In fact, I hope this never happens. ;)

 

Let me explain:

I think I am good enough at identifying great entrepreneurs, good businesses, and at taking advantage of low prices… But I know I am not good at all at taking advantage of high prices!

I mean, I want to own a business like Fairfax for the next 20 years… While a high stock price might tempt me to do something stupid (or at least that I am not comfortable with).

It’s just something I feel to be out of my circle of competence (think of Buffett holding onto KO in 1999-2000…).

 

Gio

 

[giofranchi]

And I'm curious to know. In your mind Crip, what would be a fair price?

 

Well, Buffett suggests the following:

For an insurance company which is able to increase float for many years into the future underwriting profitably, float is as valuable as equity, if not more.

This would put FFH FV at more or less 3 x BV.

 

If you calculate the discounted value of FFH BVPS twenty years from now, assuming a CAGR in BVPS of 15% and a discount rate of 9%, you get 2.92 x BVPS0 (which is BVPS at year 0, or today).

 

Of course, this is not to say the market will ever price FFH at such an high multiple! ;)

 

Gio

 

[Partner24]

Every single stock that I have is for sale...at a given price. Mr Market has to be turned to our advantage. If you don't find other good opportunities, you can always sell something, keep the cash and wait to buy it again later when it will come back to a good price.

[giofranchi]

Every single stock that I have is for sale...at a given price. Mr Market has to be turned to our advantage. If you don't find other good opportunities, you can always sell something, keep the cash and wait to buy it again later when it will come back to a good price.

 

Yeah! I know the theory… And I also agree with it 100%! ;)

 

Gio

 

[james22]

Who likes FRFHF at 1.26 P/B ($508.75) today?

[giofranchi]

Who likes FRFHF at 1.26 P/B ($508.75) today?

 

I still like it. And it is still my largest investment.

 

If you factor in what have probably been strong results for Q4 2014, FFH is selling for a lower multiple.

 

Furthermore, I think BV might grow very rapidly as long as rates keep coming down: I mean, just look at the yield of Spain 10yr Treasuries 1.611%, U.K. 10yr Treasuries 1.566%, Germany 10yr Treasuries 0.464%, Japan 10yr Treasuries 0.30%… And compare those yields to the one of the U.S. 10yr Treasuries 1.959%… It doesn’t make much sense to me… And, if financial markets truly start cooling down or even getting problematic, U.S. Treasuries still have much room to appreciate in value!

 

I think the probabilities that scenario will play itself out in the next 2 to 3 years are quite high: if so, FFH is among the very few investments which could make you some money…

 

And don’t forget that in such a scenario also its equity hedges and its cash reserve might serve you very well. Not to mention those CPI linked contracts, which could start appreciating unexpectedly and fast.

 

In other words, if financial markets get into trouble, FFH’s BV today means very little. ;)

 

If, instead, financial markets keep going up undisturbed, I like FFH’s strategy to concentrate on purchasing whole insurance businesses, especially in EM where insurance penetration is still very low and therefore margins could be very satisfactory, and on building a truly global insurance/reinsurance enterprise.

 

Gio