3rd Quarter results

[frommi]

 

 

To be clear....Fairfax strength is it's insurance business...the acquisitions made were excellent and this part of the business is night and

day compared to decade ago...that what has saved them over the last half decade...it used to be the other way around. We would rather have it that way for sure. However, the only way for Fairfax to grow in the future is through their investment portfolio...which was the strength and it is now their weakness. If this happens like it has at Berkshire and Markel the sky is the limit which is what I have been cheering about for sometime.

Unfortunately we are stuck in two themes...massive hedge losses and large losses in Resolute, Blackberry, Eurobank, SD etc...and it continues because we know that they did not cover any shorts and the Oct was the best month for stocks since 2011. Resolute, Blackberry, SD and Eurobank did not rebound they actually fell and the short postitio hedges got killed in the month.

 

its like playing short handed.

 

Dazel

 

Thats not true. Bonds are flat, IWM is up 6% since 9/30 and BBRY for example is up 19% since then, so overall they shouldn`t have lost that much in october. Eurobank is immaterial now. Its crazy how they lost a billion and you don`t even see it in the results (BV). If they suddenly have a good quarter they will hit the ball out of the park.

[Guest Dazel]

.Resolute is down...hedges are down almost half a billion....they own a lot of  Blackberry convertible....which are about 30% out of the money...so its not 19%.

 

when you are 100% hedged...and your equity portfolio is sub par in company quality...you can't knock the ball out of the park....that is what I am trying to say...they could have last quarter had they sold the hedges or bought more stocks...or bought bonds when they were down in july which they did not.

So we have CPI contracts which I do believe will be valuable...but their low grade equity holdings will get hit as they did last quarter if we have another stock market correction...they might as well have cash...its less risk and less work.

 

anyways...enough on this....I hope they get it together...They are my favorite company in the world and I "want' to see them knock it out of the park...It's unusual to be taking about under performance...like this it was certainly not like this in 2005 and 2006...they only had $360m into credit default swaps over a 4 year period.

 

[gary17]

Dazel

with all this , do you still feel like owning FFH?  what's the margin of safety in this investment ?

 

would BAC not be better ?

[Partner24]

Dazel, you're right on your historical perspective.

 

I'm really happy if insurance operations are good now, because 12 years ago, it was the problem and investments were there to keep us alive.

 

Remember Peter Eavis? For those who are wondering, he's still post on the web...

 

Now thanks God we have good insurance operations, but buying some giant cigar butt and be pessimistic have not helped us since 2009. We are now 6 years in the making....

 

And Prem did that "pissing on shareholders" transaction last summer (wich I will always remember and keep in perspective). That make you wonder if you want to keep the faith. I prefer the silver medal reachers like Joffe, the Markels, Buffett and the likes, but I still keep the FFH shares for now. I'm really interested about what Sanjeev and Pabrai are doing. One day, I might sell my FFH share and replace them with shares of the company they respectively manage.

 

Cheers!

 

Cheers! 

 

 

 

[captkerosene]

<<How many 50% crash's have happened in the last 100 years?>>

 

The better question is: What percentage of the time have equity prices gone down 50% after reaching today's high valuations?

 

Answer: 100%

[Phoenix01]

 

 

To be clear....Fairfax strength is it's insurance business...the acquisitions made were excellent and this part of the business is night and

day compared to decade ago...that what has saved them over the last half decade...it used to be the other way around. We would rather have it that way for sure. However, the only way for Fairfax to grow in the future is through their investment portfolio...which was the strength and it is now their weakness. If this happens like it has at Berkshire and Markel the sky is the limit which is what I have been cheering about for sometime.

Unfortunately we are stuck in two themes...massive hedge losses and large losses in Resolute, Blackberry, Eurobank, SD etc...and it continues because we know that they did not cover any shorts and the Oct was the best month for stocks since 2011. Resolute, Blackberry, SD and Eurobank did not rebound they actually fell and the short postitio hedges got killed in the month.

 

its like playing short handed.

 

Dazel

 

Wow!  When an intelligent investor like Dazel is turning on the Fairfax management, I think it is safe to say that we have reached a turning point.  This reminds me of the flack that Warren Buffet received for refusing to invest in the tech wreck.

[petec]

A few thoughts...

 

- on the issue of time horizon and the equity hedges, Prem has repeatedly quoted Graham's "if you weren't bearish in 1925 you went bankrupt in 1932" or words to that effect.  You might disagree entirely with the thesis, but don't underestimate the time horizon these guys work on!

 

- Also coming out of that, don't underestimate how bad they think things might get.  They weren't short in fear of a 20% correction so don't be surprised when they don't add to equities in one!

 

- I *totally* agree with Dazel about the quality of the equity investments.  They like real crap.  But then they used to like real crap in insurance too, and they learned.  I suspect "Fairfax 3.0" will be quality insurance plus a core of quality equity compounders bought cheap, but we're not there yet.

 

- One way of "squaring the circle" in terms of how they think is this: they sold their quality compounders (JNJ, WFC etc.) when they were reasonably valued and this has been proved "wrong" because QE pushed valuations above reasonable levels; and because they couldn't find quality at what they thought was the right price they switched to a barbell strategy which was Graham 50c dollars offset by hedges, which would have been fine if the 50c dollars hadn't gone to 25c while the markets went up.  Essentially, for me, they failed to see what QE would do to equity markets (although they were more right than many about how hard it would be to reflate the real economy).

 

 

 

[giofranchi]

But then they used to like real crap in insurance too, and they learned.  I suspect "Fairfax 3.0" will be quality insurance plus a core of quality equity compounders bought cheap, but we're not there yet.

 

I hope you are right. Until then FFH has a place in my portfolio as "ready cash" or "something that zigs while others zag".

 

Cheers,

 

Gio

[petec]

But then they used to like real crap in insurance too, and they learned.  I suspect "Fairfax 3.0" will be quality insurance plus a core of quality equity compounders bought cheap, but we're not there yet.

 

I hope you are right. Until then FFH has a place in my portfolio as "ready cash" or "something that zigs while others zag".

 

Cheers,

 

Gio

 

Me, too.

[Guest Dazel]

 

Gary17,

 

I will always have shares of Fairfax there is no one smarter in the world than Fairfax in my opinion Brian Bradstreet is the best bond investor in the world...he is better Gross and Gundlach!

 

There are times when I have loaded up on Fairfax and this is one of those times (stocks are frothy and deflation is here) when I would have liked to...I had visions of sugarplums on what the company would look like coming out of quarter 3 which historically has been a great one for them because of their negative bias...I did not get it....and I sound like a baby for sure...Fairfax will learn that Berkshire and Markel made a choice to be less lumpy with size...and they "will" outperform long term but for now they are stuck like they have been for sometime....they are much better buys than the other two because they "will" figure it out. the same management started with a $5 million company how can we expect them to operate a $30 billion portfolio without hiccups? They are the smartest guys in the room and I expect the future to be bright!

 

B of A is a steal at these prices...Brand is restored, is cheap, management will "start" to get credit for the turn around and we will head towards a valuation close to JP Morgan and Wells Fargo. People have forgotten that Buffett called B of A another American Express and Geico situation where the brand is there and it woud take some time to right the ship. We are there now...the market has not given them credit yet.

 

Dazel

[gary17]

Thanks  :D

[Jurgis]

- One way of "squaring the circle" in terms of how they think is this: they sold their quality compounders (JNJ, WFC etc.) when they were reasonably valued and this has been proved "wrong" because QE pushed valuations above reasonable levels;

 

So you believe that WFC is currently overvalued????  :o

[petec]

- One way of "squaring the circle" in terms of how they think is this: they sold their quality compounders (JNJ, WFC etc.) when they were reasonably valued and this has been proved "wrong" because QE pushed valuations above reasonable levels;

 

So you believe that WFC is currently overvalued????  :o

 

I doubt it but I'm not sure.  Company levered 10x earns 12.7% roe and trades at 1.7x in a highly competitive industry.  It's an incredible company and it's almost certainly under-earning, which makes the valuation eminently justifiable.  But then it is ten times levered, and things do go wrong in banking, and I am very uncertain about the economic outlook, so I don't know how to discount the risks. 

 

More importantly for this discussion I'm trying to remember when FFGH sold it, because I'm not sure it was a lot more expensive (on book) than it is now.  I'd stand by the assertion that they bought it when it was dirt cheap and sold it when it was reasonably valued which is surely what you'd expect of Graham investors.

 

I should perhaps clarify that Fairfax has a particular purpose in my portfolio and for that reason I am more worried about whether they are internally consistent than whether they are right!  I'd think very differently if it was the only stock I owned.

[wknecht]

I'm speculating, but I wouldn't be surprised if their selling of WFC was part of the plan to protect from deflation. Deflation is generally thought to be bad for credit.

[petec]

I'm speculating, but I wouldn't be surprised if their selling of WFC was part of the plan to protect from deflation. Deflation is generally thought to be bad for credit.

 

Agreed.

[Guest Dazel]

 

 

Okay thank you for bringing that up....

you sell WFC because you see deflation...and then you spend a fortune betting on Eurobank in Greece of all places?

 

Buffett buys WFC all the way up...and now has a massive position and his dividend yield in WFC is now crazy high...He looks at these investments like bonds...Fairfax is looking at Capital gains...and we needed them to survive 15 years ago...now we don't.

 

so let Brian Bradstreet run a large portion of your equity portfolio that looks a growth in dividend yields...its not a tectonic shift Fairfax are brilliant and they will do this eventually.They will buy and hold privately anid they have been very successful here in the 2000's. They will do the same in high quality stocks during the next sell off...I was hoping they started in in quarter 3!

 

[petec]

 

 

Okay thank you for bringing that up....

you sell WFC because you see deflation...and then you spend a fortune betting on Eurobank in Greece of all places?

 

Buffett buys WFC all the way up...and now has a massive position and his dividend yield in WFC is now crazy high...He looks at these investments like bonds...Fairfax is looking at Capital gains...and we needed them to survive 15 years ago...now we don't.

 

so let Brian Bradstreet run a large portion of your equity portfolio that looks a growth in dividend yields...its not a tectonic shift Fairfax are brilliant and they will do this eventually.They will buy and hold privately anid they have been very successful here in the 2000's. They will do the same in high quality stocks during the next sell off...I was hoping they started in in quarter 3!

 

I agree with this too, broadly.  What I don't understand is why this quarter prompted your comments on this issue?  I would have thought this has been obvious for years.  What I find particularly weird about it is that the insurance acquisitions in the same time period have been terrific - high quality assets bought fairly but not outstandingly cheaply.  Yet they haven't applied the same thought process to the equity portfolio.

 

Then again, I do like the basic idea of going where there is blood in the streets and I think the counter to your opening point is simply that when they ought Bank of Ireland and Eurobank they thought deflation was priced in there.

[Luckyone77]

 

James 22,

 

How many 50% crash's have happened in the last 100 years? Energy dropped well over 50% across the board...more like 70%. Prem is buying now....why not during the crash? They have lost $6b in hedge losses...had they closed them out during the two 20% drops in 2011...and 2015...they would have cut them in half.

and guess what they could re hedge now at a better price...That is two trades 6 years hardly day trading! When we moved from the 80's to the 200's and 300's we could be assured that Fairfax would trade the bond portfolio with huge capital gains...

 

I am their biggest fan...but they have looked unintelligent in the markets for quite awhile...the Markel's and Berkshire have not they have prospered.. its a long game but wow they are getting smoked by their peers for some reason.

 

They were all over china yet they did not make any money on the fall of commodities from what I see and they own Resolute and SD? I am miffed that they did nothing from June 30th to Sept 30th...is Prem all right? Bond prices plummeted in July and they did not buy...and then stock prices plunged and they did not cover shorts or buy...WTF?

 

I hope they right the ship...but I have not seen them look this bad before for this long. I have been a cheer leader here for a long time and I made a lot of money with Fairfax to which I am most grateful...but It's tough to defend them for this amount of time....I will look at deflation hedges on my own.

 

 

Dazel

 

Totally agree with you Dazel. Simply inexplicable just how bad their stock picking is. Like you said, it has to be in the bottom 5% over the last few years. I invested in them for that ability yet I truly believe a monkey could have randomly selected equities with a MUCH better chance of not going to ZERO! 

 

Both SD and Blackberry, and I'm sure there's others, are companies who's original thesis for buying was thrown out the window long ago and now they're holding on for a Hail Mary. At what point does someone get fired or does the strategy change?

[Uccmal]

 

James 22,

 

How many 50% crash's have happened in the last 100 years? Energy dropped well over 50% across the board...more like 70%. Prem is buying now....why not during the crash? They have lost $6b in hedge losses...had they closed them out during the two 20% drops in 2011...and 2015...they would have cut them in half.

and guess what they could re hedge now at a better price...That is two trades 6 years hardly day trading! When we moved from the 80's to the 200's and 300's we could be assured that Fairfax would trade the bond portfolio with huge capital gains...

 

I am their biggest fan...but they have looked unintelligent in the markets for quite awhile...the Markel's and Berkshire have not they have prospered.. its a long game but wow they are getting smoked by their peers for some reason.

 

They were all over china yet they did not make any money on the fall of commodities from what I see and they own Resolute and SD? I am miffed that they did nothing from June 30th to Sept 30th...is Prem all right? Bond prices plummeted in July and they did not buy...and then stock prices plunged and they did not cover shorts or buy...WTF?

 

I hope they right the ship...but I have not seen them look this bad before for this long. I have been a cheer leader here for a long time and I made a lot of money with Fairfax to which I am most grateful...but It's tough to defend them for this amount of time....I will look at deflation hedges on my own.

 

 

Dazel

 

Totally agree with you Dazel. Simply inexplicable just how bad their stock picking is. Like you said, it has to be in the bottom 5% over the last few years. I invested in them for that ability yet I truly believe a monkey could have randomly selected equities with a MUCH better chance of not going to ZERO! 

 

Both SD and Blackberry, and I'm sure there's others, are companies who's original thesis for buying was thrown out the window long ago and now they're holding on for a Hail Mary. At what point does someone get fired or does the strategy change?

 

One hopes the strategy changes.  "at what point does someone get fired" - there is multiple voting shares to prevent that event.  There is a reason I haven't held any Fairfax for a few years.  It seems you cant practice Graham type investing, and concentration at the same time, and get decent results.  Buffett and Munger realized this 45 years ago. 

[Williams406]

Given the hedging/investment results, it's good they righted the good ship Fairfax's underwriting when they did.  I owned more Odyssey Re (common and preferred series) than Fairfax before the ORH buyout and was thrilled when Barnard was given charge of insurance subsidiaries.

 

I will be interested to see how and if Fairfax adapts on the investment side. Perhaps both increasing size and recent experience will prompt some adjustments. As has been noted, concentrated deep value can hurt badly when things don't work out. I've lived that. I also see the approach to hedging/deflation bets as fitting in to the category of "you're gonna look like a bum five times before those pay off", perhaps. If memory serves, their CDS bet was put on in 2004 and almost immediately lost half the capital invested. It took several years before it paid off--and did it ever. If concentrated deep value is in their DNA, fine. Take a sleeve of the portfolio and do that. But insurance offers periodic unpleasant surprises even to good underwriters. Timing  hedges/macro bets can be tricky and may not pay off for a long time. I don't mind lumpiness, but I'm not convinced current path leads to lumpy 15%. I prefer a smooth 12% to a lumpy 12%.

 

I like a lot of what is going on at Fairfax, but maybe it's time to diversify investment approaches. 

[Williams406]

Forgot to add: Though it may not dovetail so well with their deflation thesis, perhaps they should consider royalties...

[ERICOPOLY]

It has been asked "at what point does the strategy change".

 

Well, it changed several years ago when they bought JNJ, WFC, KFT, and I think USB -- I forget.

 

At that time they said they were switching to a strategy of buying high quality businesses for the long term.  Said that they've finally learned it makes sense and mentioned taxes as well.

 

Since then they've invested in Blackberry among other things and I think they've sold every one of those aforementioned high quality "hold for the long term" investments.

 

Sorry to be talking like such a bitch, but it's something I've noticed.

[gary17]

It's so interesting for me to look at these high quality mega cap names and think all day to which one do I want to be a partner with...

 

Fairfax....  Constellation....  Knight Therapeutics....  Berkshire...  Markel.....    the name goes on.

 

If I had a crystal ball  I'd be rich LOL

[james22]

I should perhaps clarify that Fairfax has a particular purpose in my portfolio and for that reason I am more worried about whether they are internally consistent than whether they are right!  I'd think very differently if it was the only stock I owned.

 

Yup.

[petec]

It has been asked "at what point does the strategy change".

 

Well, it changed several years ago when they bought JNJ, WFC, KFT, and I think USB -- I forget.

 

At that time they said they were switching to a strategy of buying high quality businesses for the long term.  Said that they've finally learned it makes sense and mentioned taxes as well.

 

Since then they've invested in Blackberry among other things and I think they've sold every one of those aforementioned high quality "hold for the long term" investments.

 

Sorry to be talking like such a bitch, but it's something I've noticed.

 

Totally agree.  I can't understand why they don't have a core portfolio of wonderful businesses bought cheap and held forever, and then do their Graham investing with another portion of the portfolio.

 

I do disagree with a previous poster that said you can't do Graham investing with a concentrated portfolio.  Their record prior to this 5 year patch was just fine, IIRC.