Fairfax Q1 2013 Results

[Mikenhe]

bring back the good old days when all we had to complain about was the runoff and the combined ratio exceeding 100% all the time.

 

I guess its a case of there will always been some big issues to complain about.....

 

as soon as you sort out the biggest issue - then the next one on the list becomes the biggest...

 

 

Runoff makes money, combined ratio is under 100%. They are good investment managers who look after all the cash being generated by the insurance operations. They also have hedges in place that will protect the company if the market goes tits up!!

 

I think that's a better strategy than cash under the mattress.

 

 

Its not a big part of my portfolio but its one I like having there...

[ERICOPOLY]

I would be very surprised if FFh does not get taken down in a market rout, by virtue of others having margin calls.

 

You don't really need margin calls.  You just need a lot of other relatively more appetizing bargains.

 

I'm sure if WFC is at $8 again, AXP is at $10 again, etc.. etc...  a given number of shareholders will once again dump their FFH.

 

Given the hedges, there will always be people who hold it as a "defensive" position, an "alternative to cash".  Those people will be gone when huge bargains arise.  Anyone buying their FFH shares will have to ask if the price for FFH is low enough to make them choose FFH over the rest of the bargains out there.  Thus the price will come down.

 

 

[giofranchi]

I would be very surprised if FFh does not get taken down in a market rout, by virtue of others having margin calls.

 

You don't really need margin calls.  You just need a lot of other relatively more appetizing bargains.

 

I'm sure if WFC is at $8 again, AXP is at $10 again, etc.. etc...  a given number of shareholders will once again dump their FFH.

 

Given the hedges, there will always be people who hold it as a "defensive" position, an "alternative to cash".  Those people will be gone when huge bargains arise.  Anyone buying their FFH shares will have to ask if the price for FFH is low enough to make them choose FFH over the rest of the bargains out there.  Thus the price will come down.

 

Warren Buffett is right when he says you should invest as if the market is going to be closed for the next five years. The fundamental principles of value investing, if they make sense to you, can allow you to survive and prosper when everyone else is rudderless. We have a proven map with which to navigate. It sounds kind of crazy, but in times of turmoil in the market, I’ve felt a sort of serenity in knowing that if I’ve checked and rechecked my work, one plus one still equals two regardless of where a stock trades right after I buy it.

--Seth Klarman

 

If FFH makes a ton of money and its stock price declines nonetheless, I couldn’t care less. The CAGR in BVPS for the next 20 years is all I care about. :)

 

giofranchi

 

[SharperDingaan]

HW makes mistakes, & does not walk on water.

 

The cost of the hedges are the quarterly amortized premium + mark-to-market. Pay little for out of the money hedges & suffer more volatile marks, or pay more & experience less mark-to-market volatility. FFH got its insurance at the lowest possible price, & its investors pay for it in under performance.

 

As already pointed out if FFH collected on the hedges tomorrow, you would not have to pay today's price for it.  And if they do not collect you would not pay much above today's price, because you have no idea how big the next adverse mark-to-market will be. The hedges protect FFH, but do absolutely squat for its investors. And ... as most would argue this is not about to change, the result is pricing at no more that 1.0x BV.

 

FFH almost lost it because they overstretched with TiG and C&F. But keep in mind - that raid could not have been initiated unless one/more of its major investors had actually lent their shares out; & the lending proposal would have not have flown, were the buy and hold cash yield on FFH not so low.

 

To an investor, FFH is essentially a rubber duckie riding the ocean. Pretty sure it will not sink, but buy in the troughs, sell on the crests, & hope for hurricanes.

 

 

 

   

[giofranchi]

SharperDingaan,

 

1) I really wish I knew how to buy in the troughs, and how to sell on the crests, but I don’t… I think Parsad said there are 1,400 members of this board. Maybe 100 of them know how to buy at the bottom and how to sell at the top… what about the remaining 1,300? What I think I know is how to recognize a wonderful business, and how to wait for the right price to get in, then I “own” a wonderful business, I do not “trade” it. Will I get inside the Forbes400? Most probably not. Will I be financially successful and do what I enjoy doing all my life? Most probably yes.

 

2) No, you don’t have to hope for hurricanes. You just have to do what any shrewd businessman is doing right now: to be cautious. It has been 4 years now that, despite debt all over the developed world has never been higher in human history and despite the fact that central banks need to go on buying new debt at an ever increasing speed, the market has done nothing but going up. You must be cautious. Ask yourself: what would happen to the market, if central banks stop buying? I repeat: you must be cautious. And to be cautious means not to reach for yield: as I have said, FFH could increase BVPS at 7%-10% annual WITH equity hedges in place, if it keeps achieving CRs around 95%. To be content with 7%-10% annual is to be cautious. In a two years time, either a hurricane will have come our way, or we will have dodged a very dangerous bullet. In both outcomes equity hedges will most probably be gone, and FFH will resume compounding BVPS at 12%-15% annual (exactly what a wonderful business is meant to do!). Irrespective of the outcome, what FFH is doing now is what should be done.

 

FFH almost lost it because they overstretched with TiG and C&F. But keep in mind - that raid could not have been initiated unless one/more of its major investors had actually lent their shares out; & the lending proposal would have not have flown, were the buy and hold cash yield on FFH not so low.

 

I don’t understand what you mean. Could you please elaborate a little bit further?

Thank you,

 

giofranchi

 

[Guest longinvestor]

SharperDingaan,

 

1) I really wish I knew how to buy in the troughs, and how to sell on the crests, but I don’t… I think Parsad said there are 1,400 members of this board. Maybe 100 of them know how to buy at the bottom and how to sell at the top… what about the remaining 1,300? What I think I know is how to recognize a wonderful business, and how to wait for the right price to get in, then I “own” a wonderful business, I do not “trade” it. Will I get inside the Forbes400? Most probably not. Will I be financially successful and do what I enjoy doing all my life? Most probably yes.

 

2) No, you don’t have to hope for hurricanes. You just have to do what any shrewd businessman is doing right now: to be cautious. It has been 4 years now that, despite debt all over the developed world has never been higher in human history and despite the fact that central banks need to go on buying new debt at an ever increasing speed, the market has done nothing but going up. You must be cautious. Ask yourself: what would happen to the market, if central banks stop buying? I repeat: you must be cautious. And to be cautious means not to reach for yield: as I have said, FFH could increase BVPS at 7%-10% annual WITH equity hedges in place, if it keeps achieving CRs around 95%. To be content with 7%-10% annual is to be cautious. In a two years time, either a hurricane will have come our way, or we will have dodged a very dangerous bullet. In both outcomes equity hedges will most probably be gone, and FFH will resume compounding BVPS at 12%-15% annual (exactly what a wonderful business is meant to do!). Irrespective of the outcome, what FFH is doing now is what should be done.

 

FFH almost lost it because they overstretched with TiG and C&F. But keep in mind - that raid could not have been initiated unless one/more of its major investors had actually lent their shares out; & the lending proposal would have not have flown, were the buy and hold cash yield on FFH not so low.

 

I don’t understand what you mean. Could you please elaborate a little bit further?

Thank you,

 

 

giofranchi

 

+1

 

During the search for the investment heads (Todd C and Ted W) Warren Buffett talked about looking for people with a genetic pre-disposition to risk avoidance as the right candidates for the capital allocator job. Prem Watsa fits this bill perfectly in my view. This explains the hedges now and every other cautious postures he has held in the past. Prem simply will not risk large (or permanent) capital loss. Period.

 

As I read about underperformance of FFH, something I've started to believe more is the constitution of this message board. We have people who are managing their own money and those managing others' money. I belong in the former group and I've talked to many in the other and my conclusion is that there is an understandable impatience with FFH's returns primarily in the latter group. Those managing others' money are simply not in a position to suffer subdued returns over a few years. Especially if FFH is a large position in their basket.

 

Individual investors like myself absolutely love Prem's risk avoidance bias. I'm more than willing to suffer the $10 dividend and relative mediocre results in the near term while waiting for all the value FFH has been adding to the coffers to be fully realized. I continue to add to my FFH holdings. Better yet, I can concentrate without being bound in any way.

 

One of the presenters,a fund manager, at the Fairfax Shareholders' pre-meeting dinner event said "We are truly envious of the individual investor". How true indeed!

 

[benhacker]

As I read about underperformance of FFH, something I've started to believe more is the constitution of this message board. We have people who are managing their own money and those managing others' money. I belong in the former group and I've talked to many in the other and my conclusion is that there is an understandable impatience with FFH's returns primarily in the latter group. Those managing others' money are simply not in a position to suffer subdued returns over a few years. Especially if FFH is a large position in their basket.

 

Always be cautious of whether you are counting votes only from those who are raising their hands.  On message boards, those of us who have nothing new to add tend to be silent.  We don't stand up and say "Long time Fairfax holder, fine with the current strategy.  Just for the record."

 

Ben (Long time Fairfax shareholder.  I manage money for others.  Fairfax is my #1 position.  I'm not disappointed or concerned about their hedging strategy.)

[mcliu]

It's probably better to look at these hedges within the context of their insurance business, rather than just as a standalone investment portfolio. Rather than just value increases, these hedges can add significant amounts of value to the insurance business should the hedged events occur.

[Partner24]

Hi Al,

 

Fair enough. Unlike FFH, I'm not in the macro predictions business because that's outside of my circle of competencies. I let them do that. I keep the long term view and let's see what will happen over the next few years. Like I said here a few times, people were saying that FFH is an ark that were being protected very well if we would have rain, but didn't ask themselves much what would happen if we would have sunshine and no water (we could then become a little thirsty).

 

But, like I said, that's in their circle of competencies, not mine, and I'll let them do their job with patience.

 

Cheers!

 

 

 

[ap1234]

Giofranchi said:

 

"And what’s unrealistic in saying that it is HIGHLY UNUSUAL for FFH to post a loss on its bonds portfolio? And that it therefore could be just noise?"

 

Gio, I don’t have much experience in bonds (I’ve never owned one!) so I could be totally off base. But when I look through the 2012 AR it doesn’t’ seem unreasonable that Fairfax will have capital losses on their bond portfolio over time (even if rates don’t increase).

 

Fairfax’s bond portfolio generated a pre-tax yield of 4.1% in 2012 (ignoring the tax impacts of the tax-exempt munis). It appears the muni bonds are yielding approx. 4.9%. I would imagine that given the yields these bonds are trading above par. As the bonds mature, would it not be fair to say that these bonds will mature at par and trigger a capital loss?

 

[giofranchi]

Giofranchi said:

 

"And what’s unrealistic in saying that it is HIGHLY UNUSUAL for FFH to post a loss on its bonds portfolio? And that it therefore could be just noise?"

 

Gio, I don’t have much experience in bonds (I’ve never owned one!) so I could be totally off base. But when I look through the 2012 AR it doesn’t’ seem unreasonable that Fairfax will have capital losses on their bond portfolio over time (even if rates don’t increase).

 

Fairfax’s bond portfolio generated a pre-tax yield of 4.1% in 2012 (ignoring the tax impacts of the tax-exempt munis). It appears the muni bonds are yielding approx. 4.9%. I would imagine that given the yields these bonds are trading above par. As the bonds mature, would it not be fair to say that these bonds will mature at par and trigger a capital loss?

 

Hi ap1234,

from Q1 2011, when FFH started reporting investment results on a marked to market basis, as required by the IFRS, the only two quarters in which FFH declared a loss on its bonds portfolio were Q1 2011 and Q1 2013, and cumulatively they have declared a gain of $1,278.7 (2011) + $728.1 (2012) – $119 (2013) = $1,887.8 million.

I understand people might be worried that future results from FFH’s bonds portfolio won’t match past results, because interest rates are bound to rise sooner or later… but, to lose money?! With Mr. Bradstreet managing that portfolio?! I might be wrong, but just don’t see it happening! :)

 

giofranchi

 

[mcliu]

I think ap1234 meant that, a lot of these bonds were marked on the books at above-par since yield would likely have dropped below the coupon rates of the bonds. (I think that's the case in IFRS where you mark most securities to fair value, right?) As these bonds mature, FFH would be receiving par for the bonds and taking an accounting loss. ex. Buy bonds at $50, bonds get marked up to $120 (+$70), bonds mature at $100 (-$20).

[DynamicPerception]

SharperDingaan, benhacker,

  As always great posts from you guys.

 

[Guest longinvestor]

As I read about underperformance of FFH, something I've started to believe more is the constitution of this message board. We have people who are managing their own money and those managing others' money. I belong in the former group and I've talked to many in the other and my conclusion is that there is an understandable impatience with FFH's returns primarily in the latter group. Those managing others' money are simply not in a position to suffer subdued returns over a few years. Especially if FFH is a large position in their basket.

 

Always be cautious of whether you are counting votes only from those who are raising their hands.  On message boards, those of us who have nothing new to add tend to be silent.  We don't stand up and say "Long time Fairfax holder, fine with the current strategy.  Just for the record."

 

Ben (Long time Fairfax shareholder.  I manage money for others.  Fairfax is my #1 position.  I'm not disappointed or concerned about their hedging strategy.)

 

Noted!

[giofranchi]

I think ap1234 meant that, a lot of these bonds were marked on the books at above-par since yield would likely have dropped below the coupon rates of the bonds. (I think that's the case in IFRS where you mark most securities to fair value, right?) As these bonds mature, FFH would be receiving par for the bonds and taking an accounting loss. ex. Buy bonds at $50, bonds get marked up to $120 (+$70), bonds mature at $100 (-$20).

 

Sorry, but I don’t understand. Why keep a bond bought at $50, that is trading at $120, and that will mature at $100? At $120 it is clearly overvalued! Why wait for it to mature, instead of just selling it at $120? I must be surely be missing something here, but I don’t understand why Mr. Bradstreet would keep overvalued investments.

 

giofranchi

[ap1234]

Fairfax acquired muni bonds that were yielding 6%+ during the financial crisis. The majority of these bonds were insured by Berkshire. Today, these bonds are yielding 4.9%. When Fairfax purchased these bonds they likely traded at a discount to par. Today, I can't imagine the muni bonds yielding 4.9% are trading below par.

 

The reason Fairfax does not sell the bonds is because they want the income. The investment income of the investment portfolio is extremely low in the current int. rate environment. With the equity hedges in place (Fairfax pays the dividends on the indices they are short) and 25-30% of the portfolio in cash, Fairfax needs as much income as possible. If they sold the muni bonds yielding 4.9%, they would need to replace that income. However, you can't buy any investment grade bonds yielding anything close to 4.9% in today's environment.

 

I believe the average maturity of the muni bonds that Fairfax holds is 10 years. I imagine they will hold these bonds to maturity. As these bonds approach maturity, they will go down in value (i.e. drop from above to par to par by the time of maturity).

 

Brian Bradstreet and his FI team are very talented. Over time, I expect their resutls will outperform the overall FI market. But I don't see how they can do magic with their bond portfolio. You can't sell your long treausuries and sit on a lot of cash in a low int. rate environment and still collect 4% yields on your bond portfolios. After all, the 10 year US gov't bond is yielding 1.75%. The only way to do this is to keep bonds you previously purchased at attractive prices and hold them to maturity even if it means triggering capital losses on the bond portfolio. 

 

 

[petec]

Also, they may not be able to sell some of them - Prem implies on the call that some of these bonds are now highly illiquid.  In fairness, he always said he'd be very happy to hold them to maturity.

[giofranchi]

Fairfax acquired muni bonds that were yielding 6%+ during the financial crisis. The majority of these bonds were insured by Berkshire. Today, these bonds are yielding 4.9%. When Fairfax purchased these bonds they likely traded at a discount to par. Today, I can't imagine the muni bonds yielding 4.9% are trading below par.

 

The reason Fairfax does not sell the bonds is because they want the income. The investment income of the investment portfolio is extremely low in the current int. rate environment. With the equity hedges in place (Fairfax pays the dividends on the indices they are short) and 25-30% of the portfolio in cash, Fairfax needs as much income as possible. If they sold the muni bonds yielding 4.9%, they would need to replace that income. However, you can't buy any investment grade bonds yielding anything close to 4.9% in today's environment.

 

I believe the average maturity of the muni bonds that Fairfax holds is 10 years. I imagine they will hold these bonds to maturity. As these bonds approach maturity, they will go down in value (i.e. drop from above to par to par by the time of maturity).

 

Brian Bradstreet and his FI team are very talented. Over time, I expect their resutls will outperform the overall FI market. But I don't see how they can do magic with their bond portfolio. You can't sell your long treausuries and sit on a lot of cash in a low int. rate environment and still collect 4% yields on your bond portfolios. After all, the 10 year US gov't bond is yielding 1.75%. The only way to do this is to keep bonds you previously purchased at attractive prices and hold them to maturity even if it means triggering capital losses on the bond portfolio.

 

Yes! That makes sense, thank you!

Though, Mr. Watsa wrote enthusiastically about California bonds in his AL2012:

 

Our Brian Bradstreet purchased $1 billion in California state government bonds in 2009, most of this position directly from the government at a 7.25% yield when California was considered to be on the verge of being non-investment grade. Those bonds are yielding 4.55% today!! Our muni bond portfolio (tax exempt and taxable) continued to do well in 2012. We have $1,279.5 million in unrealized gains in these bonds (approximately 22.9% on our cost) while earning $310 million annually in interest.

 

He spoke about $1,279.5 million in unrealized gains and didn’t warn about future capital losses, if they were assured?! It seems very unlikely… What I have always admired the most in Mr. Watsa is something I look for in everyone I choose to partner with: “an under promising, over achieving attitude”. Now, he boasts about capital gains, failing to warn about future capital losses?!

 

ap1234, what makes you believe that those bonds are selling above par value? Couldn’t it be that in 2009 they were just selling circa 18% below par? After all, like Mr. Watsa has pointed out, in 2009 California was considered to be on the verge of being non-investment grade. And now, after appreciating 22.9% on their original cost, they are trading around par?

 

giofranchi

[ap1234]

Gio, I hope this helps:

 

If you go to pg. 54 of the 2012 annual report you will see that Fairfax holds $11.4 billion in bonds. There are $6.9 billion in municipal bonds ($5.3 billion tax-exempt, $1.6 billion). $4 billion of those bonds are insured by Berkshire. The yield on these bonds is approx. 4.6% (320/6,900). The $1 billion of California bonds are a small part of the total muni bond position.

 

If we set aside liquidity, imagine you could buy muni bonds (predominantly insured by Berkshire) today yielding 4.6% and trading at par. The average maturity of these bonds is 10 years. The 10 year US treasury is yielding 1.7%. I do not follow the bond space closely but I have a hard time believing that bond investors would not rush to buy these muni bonds yielding 4.6% especially when they are GUARENTEED by Buffett. In fact, your return will be better than 4.6% if you buy these bonds at par because of the tax exempt status of these bonds.

 

My guess is that the reason investors don't buy these bonds today is because they are trading above par and the yield to maturity is much lower than 4.6%. In other words, the return to an investor who buys the bonds today is not 4.6% because you have to buy the bonds above par.

 

It is true that Fairfax has a large amount of unrealized gains on the muni bonds to date. But going forward, it seems likely that the unrealized gains will shrink as these bonds are held to maturity. The only thing you care about as a FFH shareholder are the future gains/losses NOT the gains that were made in the past.

 

 

 

 

 

 

 

[giofranchi]

My guess is that the reason investors don't buy these bonds today is because they are trading above par and the yield to maturity is much lower than 4.6%. In other words, the return to an investor who buys the bonds today is not 4.6% because you have to buy the bonds above par.

 

Or, maybe, like petec pointed out, they are just highly illiquid? I am just guessing here…

 

It is true that Fairfax has a large amount of unrealized gains on the muni bonds to date. But going forward, it seems likely that the unrealized gains will shrink as these bonds are held to maturity. The only thing you care about as a FFH shareholder are the future gains/losses NOT the gains that were made in the past.

 

Of course, you are right! But that’s precisely why I don’t see Mr. Watsa boast about capital gains that he knows will necessarily have be reversed in the future! Still, I am going on guessing…

 

In general, I agree Mr. Bradstreet will have an hard time replicating past successes. But to post capital losses on a bonds portfolio managed by him quarter after quarter seems too pessimistic!

 

giofranchi

 

[petec]

I would expect Prem, when he says 4.55%, to be talking about the yield to maturity not the running yield.  No proof, but that's what I would assume.  Is it too hard to imagine that these bonds are trading at par?

[JEast]

Bring back the good old days when all we had to complain about was the runoff and the combined ratio exceeding 100% all the time

  —  Heck — bring back the days when recoverables were the biggest concern.  Looking back on it all (10+ years), all that stuff accounts for little today.  However and more importantly it took a lot of hard work over the years, and means/implies a lot today that we have the team in place to work thru the issues and they have been tested.

 

For you old school punkers out there, The Mighty Mighty Bosstones had a song called Knock On Wood

  I'm not a coward, I've just never been tested

  I'd like to think that if I was, I would pass

 

Well, HWIC has passed in my book.  At roughly $400 today, holding FFH is similar to holding a cash equivalent which is safety to some extent.  I would have preferred that HWIC had gone into the hedges as a half Kelly, but maybe a full Kelly helps one sleep better at night.  In the end, none of us know what the alternative histories will be.  So we take a percentage or two off our longer term returns.  Does it matter as the alternative history turned out not to have happened?  Heads you win, Tails you don't lose too much.

 

 

Cheers

JEast

 

[SharperDingaan]

Gio: If you did nothing more than annually sell at 1.05x BV, buy at .95x BV, & cross the year end; at an average $400 BV; you would increase your annual return to $50, versus $10. Zero thought involved, & you definitely did not increase your risk 400%.

 

To initiate a short sale you have to evidence that you have the shares to sell; a share loan agreement, and a delivery of the specified shares under that agreement. As sizeable share loans are risky (potential reputation damage, & exposure to the counterparty’s ability to repay), there are a very limited number of potential candidates.

 

Short hard and fast, & you can use the market turmoil to pull in additional on-the-day share loans for little additional cost; as market players/media will be desperate to get in on the action. Finesse a large enough quantity of initial share loans to fuel a credible initial dump, & you will snowball the price drop. Push hard enough, & you will put the target under before it can marshal any kind of effective defence.

 

FFH was saved, because the manner of the short execution was so abusive that it created reputational damage. Had the short execution been more acceptable, FFH might well not exist today. 

 

The vehemence of the reaction was a Black Swan event, the abuse woke up a number of other good people who chose to stand up to it, & it eventually bled the predator white. The principles of ‘crowd funding’ were turned to ‘crowd defence’, & it probably could not have occurred anywhere else but in Canada. 

 

FFH is an ark designed to survive extreme adversity; essentially a business rubber duckie. Nothing wrong in that, but you put your money in the rubber duckie because you know it will not sink - & it will earn a positive compound return over an extended period. You are seeking safety, & the alternative is a long-term Canada/T-Bill.

 

When investing in the rubber duckie you are more interested in the ocean level at which the rubber duckie is floating, versus the rubber duckie itself. A volatile roiling economic ocean with rapid changes in activity level is highly desirable; as BV multiple changes are large, and frequent. And if you are pretty sure the rubber duckie will not sink, the more violent the economic hurricanes the better. It is really just an application of Taleb’s Bar-Bell approach; the rubber duckie itself is one bell, the volatility of the ocean on which it floats is the other.   

 

The caution is that too much money, stuffed into the same sized rubber duckie, will eventually make it too heavy & cause it to sink; the rubber duckie has to either get bigger, or hatch ducklings. Hence multiple/sizeable acquisitions are not a bad thing.

 

Very different approach.

 

SD   

 

[ERICOPOLY]

Personally I think opportunity costs are real.  That's okay though, we just live with them.  They don't feel as bad, which is probably what has led to the traditional of not thinking of them as real losses.  Gains don't feel as emotionally important as losses, so I think people are relatively comfortable with losing by missing out.

 

[giofranchi]

Gio: If you did nothing more than annually sell at 1.05x BV, buy at .95x BV, & cross the year end; at an average $400 BV; you would increase your annual return to $50, versus $10. Zero thought involved, & you definitely did not increase your risk 400%.

 

To initiate a short sale you have to evidence that you have the shares to sell; a share loan agreement, and a delivery of the specified shares under that agreement. As sizeable share loans are risky (potential reputation damage, & exposure to the counterparty’s ability to repay), there are a very limited number of potential candidates.

 

Short hard and fast, & you can use the market turmoil to pull in additional on-the-day share loans for little additional cost; as market players/media will be desperate to get in on the action. Finesse a large enough quantity of initial share loans to fuel a credible initial dump, & you will snowball the price drop. Push hard enough, & you will put the target under before it can marshal any kind of effective defence.

 

FFH was saved, because the manner of the short execution was so abusive that it created reputational damage. Had the short execution been more acceptable, FFH might well not exist today. 

 

The vehemence of the reaction was a Black Swan event, the abuse woke up a number of other good people who chose to stand up to it, & it eventually bled the predator white. The principles of ‘crowd funding’ were turned to ‘crowd defence’, & it probably could not have occurred anywhere else but in Canada. 

 

FFH is an ark designed to survive extreme adversity; essentially a business rubber duckie. Nothing wrong in that, but you put your money in the rubber duckie because you know it will not sink - & it will earn a positive compound return over an extended period. You are seeking safety, & the alternative is a long-term Canada/T-Bill.

 

When investing in the rubber duckie you are more interested in the ocean level at which the rubber duckie is floating, versus the rubber duckie itself. A volatile roiling economic ocean with rapid changes in activity level is highly desirable; as BV multiple changes are large, and frequent. And if you are pretty sure the rubber duckie will not sink, the more violent the economic hurricanes the better. It is really just an application of Taleb’s Bar-Bell approach; the rubber duckie itself is one bell, the volatility of the ocean on which it floats is the other.   

 

The caution is that too much money, stuffed into the same sized rubber duckie, will eventually make it too heavy & cause it to sink; the rubber duckie has to either get bigger, or hatch ducklings. Hence multiple/sizeable acquisitions are not a bad thing.

 

Very different approach.

 

SD 

 

SharperDingaan,

I am sure your trading strategy must be much more sophisticated than that:

1) Ever since I have started following FFH on a daily basis some years ago, it has never traded below 0.95 x BV…

2) At 1.1 x BVPS FFH is cheap. The market already is irrational about FFH. Of course, you could bet on the fact that the market gets even more irrational… But I don’t make such bets… What if, instead, its price from now on fluctuates in between 1.1 x BVPS and FV? While BVPS compounds at 15% annual? Following the trading strategy you have suggested, I would completely miss a wonderful investment, that I think I understand very well, and in which I think I can put full confidence. The problem is you cannot afford missing many such investment opportunities, because most probably you will find just a few in a lifetime!

 

It is clear you know the dynamics of short selling much better than I do… So, I must again admit that I don’t understand why FFH could have gone under… Anyway, what I know about business follows: a business that is still controlled and managed by its founder, and that still has an equity > 0, is solvent, no matter what short sellers say or do. My business has equity > 0, and I have full control over it: if anyone, no matter who he or she is, comes to me tomorrow and says I have to close doors, I will be very glad to meet him or her at the door... with a gun in my right hand and a rifle in my left hand!!  ;D ;D

During its 27 years of great results FFH has experienced a maximum yearly drawdown in BVPS of (21%) in 2001: not even enough to wound it seriously, like subsequent years have demonstrated.

 

giofranchi