Hey, Mr. Market! Do I really have to make FFH 50% of my portfolio?

[Parsad]

You live in a bubble Giofranchi.

 

+1

 

7.5% or even 15% arent garenteed just because you have a business model, or are happy with lumpy returns.

I think Al's message missed the mark....

 

Well, historically they have achieved a 9.4% annual return on their investment portfolio… I thought 7.5% was conservative enough… But it seems I live in a bubble!! ;D ;D

 

PS

Actually, I don’t need a 15% compounded increase in BVPS… My firm will probably continue to post operating profits for many years into the future… (of course, this might be another bubble of mine!! ;D ;D) Therefore, a 10% compounded annual return from its stock market investments will probably be more than enough! To achieve such a result Fairfax must get a 4.5-5% annual return on its investment portfolio… practically half its historical result. That’s I think a good margin of safety… Of course, a good margin of safety, if you find yourself in bubble territory, might still not be enough!! ;D ;D

 

giofranchi

 

I can perfectly live of my income as an employee but that doesn't mean I have to be happy with lower returns in investments because it's just an "extra".

 

I have my questions with the way Fairfax (or PW) presents the returns they achieved and the way Prem pounds the table about it in the annual letters. For example, is it correct to implement the first year of operations when that year achieved 180% return? Look at the CAGR when you remove the first few years (because those are irrelevant now anyway) and you get a clearer picture. Same goes for the last 10/15 years. It's just a lot more accurate when looking for future returns.

 

Buffett doesn't exclude his early years when he was killing the markets, nor does Leucadia where they made a killing in their first couple of years.  Investors, including board members here, take very short-term views of performance.  You look at those two companies above, as well as Fairfax, and their compounding of book over 10, 15, 20, 25 years has been extraordinary.  They get lumpy results when certain bets just kill it, and they buy things that fit their discipline. 

 

Leucadia's entire existence was buying turnarounds and it actually worked better than Buffett's purchases of quality businesses.  Fairfax is buying in Canada because they are testing the waters in areas they operate...easier to integrate...easier to flex your reputation...start small...start with businesses you know.  They've also stepped out and bought things like Thomas Cook India to expand and look for businesses there, but with people in place who know the region better than them. 

 

You are in the first inning of a nine inning game, and investors expect them to be swinging at every pitch like there will never be another opportunity.  Crazy!  Cheers!

[tombgrt]

Ok Parsad, good points. Thanks.

 

While others (hell, I do it!) include all past returns as well, that doesn't mean it's correct. I just think it's odd for firms like Fairfax, Leucadia and Berkshire because their size will make sure they will never get back to 25%+ CAGR. That is a problem others simple dont face. But I must admit that all are aware of this fact and quite articulate about it too. Nonetheless, 15% CAGR is steep, especially when you are thinking about the next 15-20 years and not just the next few years.

 

 

Your last sentence might hit the nail on the head... We'll see! I know for a fact that this is one of the many flaws I personally have and I rationalize it by saying that I have plenty of income that "needs" a place to go. I should ask myself what's wrong with cash more often given the 40-45 years of employment I (hopefully) have left... Opportunties will always be around.

[Myth465]

The bubble in my opinion is the inability to find fault in anything one of the Owner Manager does.

People arent arguing about FFH's returns are history (well some are), INMO they are saying they simply dont believe in the current strategy as its being employed, and are voting with their feet. You probably do.

 

I personally have never seen you critical of any decisions made by a Manager once you invest (well perhaps with the exception of BBRY). Perhaps you agree with everything down by Managers once you invest 95% of the time.

[gary17]

I'm wondering who is the Charles Munger of Fairfax.

 

Great businesses should depend on the business model and the brand the firm provides and less so on the men or women running them

[giofranchi]

The bubble in my opinion is the inability to find fault in anything one of the Owner Manager does.

People arent arguing about FFH's returns are history (well some are), INMO they are saying they simply dont believe in the current strategy as its being employed, and are voting with their feet. You probably do.

 

I personally have never seen you critical of any decisions made by a Manager once you invest (well perhaps with the exception of BBRY). Perhaps you agree with everything down by Managers once you invest 95% of the time.

 

Given the fact I AM THE BUBBLE GUY!!, I guess you are talking to me… ;D ;D

 

So, let’s examine what you are saying:

First of all, you write both about strategy and about decisions made by a Manager. They are two different things: I am critical about strategy, instead I almost never question single decisions made by a Manager (I only question them when they evidently seem to go against the general strategy).

 

(Btw, also the term “Manager” is somewhat misleading: I look for great entrepreneurs, and their first duty is to shift capital from poor performing assets to high yielding ones. Everything else follows. At least, this is my experience managing the two businesses I personally control. So, I guess the term “Entrepreneur” might be a much better choice! :) )

 

Second, not only the strategy of the company I decide to invest in is important, but it is important in relation to my own strategy (or the strategy I decide to follow for my firm). For instance, my firm’s equity is up 15% this year, yet I have basically three large stock market investments: FFH, LRE, and BH. FFH has gone nowhere, LRE has actually declined, BH is much smaller than the other two. Then, I hold a lot of cash.

For the next 3-4 years I can see my firm’s equity increasing 15% annual, practically without running any stock market risk. And why should I accept market risk? To grow 20%? In a deleveraging with stock market prices high? No, thank you! That’s why FFH’s strategy fits perfectly with mine.

The same thing can be said for LRE: I want a cash generating machine in an industry that works well during a deleveraging. Engineering services surely are not such a business, for profit higher education might be and is working just fine, insurance might do very well. So, Lancashire as well fits perfectly with my own strategy. Then, what is Mr. Brindle’s strategy? Well… basically to look for the best bargains he can find… and what should I question about that?

 

This being said, I am well aware FFH and LRE might not fit well with someone else’s strategy… But, of course, I can only speak for myself.

 

giofranchi

 

[returnonmycapital]

Great businesses should depend on the business model and the brand the firm provides and less so on the men or women running them

 

+1

[giofranchi]

Great businesses should depend on the business model and the brand the firm provides and less so on the men or women running them

 

+1

 

Unfortunately, this is much easier said than done: this world changes ever more quickly and business models and brands seldom benefit from changes.

Great entrepreneurs, instead, adapt. :)

 

giofranchi

 

[gary17]

My point is that companies like FFH and LRE seem to depend heavily on one person.  Who is the second in command?

[ourkid8]

I am pretty sure Fairfax does not depend heavily on Prem but there is a comittee for full sized equity positions and acquisitions.  He makes the ultimate decision but there is a comittee in place which will help with succession planning.

 

Tks,

S

 

My point is that companies like FFH and LRE seem to depend heavily on one person.  Who is the second in command?

[constructive]

My point is that companies like FFH and LRE seem to depend heavily on one person.  Who is the second in command?

 

Paul Rivett and Alex Maloney respectively.

 

And as Vice Chairman, Munger is not the second in command at Berkshire. He sits in his office in Pasadena and talks on the phone with Buffett.

[Myth465]

Fair enough Gio.

 

We just have different styles. A Manager runs the company, but I am always watching and analyzing the decisions and direction they go. If I question enough of the decisions I will eventually vote with my feet. We all have different styles though, and it will be interesting to watch things play out.

[returnonmycapital]

Great businesses should depend on the business model and the brand the firm provides and less so on the men or women running them

 

+1

 

Unfortunately, this is much easier said than done: this world changes ever more quickly and business models and brands seldom benefit from changes.

Great entrepreneurs, instead, adapt. :)

 

giofranchi

 

But we are talking about insurance companies and as such we are talking about underwriting and investing. In FFH's case, investing. The quote was interesting because it made me think how much better off and how much easier the last few years would have been for FFH and its owners if Prem had bought only first-class assets while they were clearly on sale. First-class assets typically depend on their business model and maintaining their "brand", not so much on individuals (although the right ones certainly do help).

 

Instead, Prem decided to wrestle with macro hedges/speculations and second-class assets. That is hard work. He's now got to figure out how to blow some wind into the sails of the faltering assets in order to dispose of them. Meanwhile, BRK doesn't have to do anything but concentrate on the acquisition of ever more first-class assets because it concentrates on them exclusively. I would argue that the difference between the two approaches favours BRK over FFH over time.

 

 

[Guest longinvestor]

Great businesses should depend on the business model and the brand the firm provides and less so on the men or women running them

 

+1

 

Unfortunately, this is much easier said than done: this world changes ever more quickly and business models and brands seldom benefit from changes.

Great entrepreneurs, instead, adapt. :)

 

giofranchi

 

But we are talking about insurance companies and as such we are talking about underwriting and investing. In FFH's case, investing. The quote was interesting because it made me think how much better off and how much easier the last few years would have been for FFH and its owners if Prem had bought only first-class assets while they were clearly on sale. First-class assets typically depend on their business model and maintaining their "brand", not so much on individuals (although the right ones certainly do help).

 

Instead, Prem decided to wrestle with macro hedges/speculations and second-class assets. That is hard work. He's now got to figure out how to blow some wind into the sails of the faltering assets in order to dispose of them. Meanwhile, BRK doesn't have to do anything but concentrate on the acquisition of ever more first-class assets because it concentrates on them exclusively. I would argue that the difference between the two approaches favours BRK over FFH over time.

 

+1

 

FFH (Prem) wants to be like BRK (Warren) in owning operating businesses but the first few steps they have taken have been "really hard" for me. I somewhat understand the hedging strategy to protect their base but none of the operating companies.

 

BRK is so easy in comparison that I am now completely out of FFH. Will wait for a few years to see if a change is in order. What will really bring me back is not so much their investing prowess but their insurance underwriting discipline demonstrated for a few years.

 

That said, FFH has made more money for me over the past decade than any other investment. Good luck to investees!