Decline

[Lance]

Hello - what's behind this morning's decline?  I added.

 

Thanks

Lance

[giofranchi]

No idea…

Well, its peers in this market are by now selling for more than 1.3 x BVPS… Of course, they are making things that look smart, while FFH is making things that look dumb! Right?

… We will see.

 

Gio

 

[ourkid8]

It's currently selling for 21% over book value so 1.2x book. ($334.51)  Due to the hedges, this should sell around book so we could see continued decline in the stock.  The recent equity issuance was rather timely at 1.3x book and lets hope they are able to repurchase the majority of the stock issued at lower prices in the near future. 

 

This is a rather large position in my portfolio and I am still kicking myself for not selling it at $475 earlier this year.  The hedges are absolutely killing us and I hope in the future they use cash as a hedge instead.  I also hope there is no dividend announced either and they retain earnings for future non-insurance acquisitions.  (I forgot to add, high quality non-insurance acquisitions such as their 51% stake in The Keg)

 

Tks,

S

 

[tombgrt]

I think it's highly unlikely that they don't issue a dividend? And yes, you can't call Ffh cheap atm relative to others.

[ourkid8]

Unfortunately...  :-( 

 

I think it's highly unlikely that they don't issue a dividend? And yes, you can't call Ffh cheap atm relative to others.

[ourkid8]

Their peers do not have 100% hedged portfolios which is destroying shareholder value nor are they taking large positions in potential turnarounds such as Blackberry.  At this point, Fairfax has very few peers you can compare them against. 

 

Tks,

S

 

Well, its peers in this market are by now selling for more than 1.3 x BVPS… Of course, they are making things that look smart, while FFH is making things that look dumb! Right?

… We will see.

 

Gio

[rkbabang]

It's the day before Thanksgiving everyone is liquidating their portfolio to raise cash for black-Friday shopping.

[tengen]

valuesource had some interesting info he posted in a new thread "Large Market-on-Close Imbalance".

 

http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/large-market-on-close-imbalance

[giofranchi]

Unfortunately...  :-( 

 

I think it's highly unlikely that they don't issue a dividend? And yes, you can't call Ffh cheap atm relative to others.

 

Guys, it is very easy an plain to see: if you believe Mr. Watsa & Co. will go on creating value, FFH today is deeply undervalued; instead, if you believe Mr. Watsa & Co. will cease to create value, FFH is not undervalued. Period.

For my part, I repeat what I have said in another thread: under $380 I will buy more. :)

 

Gio

 

[ourkid8]

Gio, would you please help me understand how mr. Watsa will continue to create value with the 100% equity hedge besides a broad decline in the indexes?  So far, he has not been able to beat the delta of the hedges in place.

 

I agree.  Mr. Watsa did not go stupid all of a sudden but I cannot see how this is deeply undervalued at 1.2x book with 100% equity hedged.   

 

S

 

Unfortunately...  :-( 

 

I think it's highly unlikely that they don't issue a dividend? And yes, you can't call Ffh cheap atm relative to others.

 

Guys, it is very easy an plain to see: if you believe Mr. Watsa & Co. will go on creating value, FFH today is deeply undervalued; instead, if you believe Mr. Watsa & Co. will cease to create value, FFH is not undervalued. Period.

For my part, I repeat what I have said in another thread: under $380 I will buy more. :)

 

Gio

[giofranchi]

Gio, would you please help me understand how mr. Watsa will continue to create value with the 100% equity hedge besides a broad decline in the indexes?  So far, he has not been able to beat the delta of the hedges in place.

 

I agree.  Mr. Watsa did not go stupid all of a sudden but I cannot see how this is deeply undervalued at 1.2x book with 100% equity hedged.   

 

S

 

Simply enough, here we have 3 possibilities:

 

1) Mr. Watsa is right: today’s BVPS makes absolutely no sense… FFH will create great value.

 

2) Mr. Watsa is wrong, and will recognize the evidence of his mistake, when that evidence comes: he will take losses on FFH’s hedges and use a stupendous amount of cash to restart from there… FFH will create good enough value.

 

3) Mr. Watsa is wrong, and he will never recognize the evidence of his mistake… FFH will cease creating value.

 

Practically anybody on the board believes either in 2) or in 3)… I still believe in 1)…  ;D ;D ;D

 

Gio

 

 

[ourkid8]

Again, you are not explaining HOW it is currently undervalued as the stock is at 1.2x book and book value continues to fall.  Please help me understand how it is currently undervalued. . #1, you are looking for a broad decline of the index.  You have to remember, Prem does hold equity positions and those will also fall by an equivalent amount.  This is NOT like the CDS bet.  #2, that does not show it is undervalued in fact it will explain how we are overvalued as he will realize the mistake and start from there. How can the stock trade at a premium to book?

 

Read the BAC thread, Eric clearly demonstrated to us how BAC was dirt cheap and due to his analysis I was able to take a HUGE position which has paid off exceedingly well. (Thanks Eric)

 

S

 

Gio, would you please help me understand how mr. Watsa will continue to create value with the 100% equity hedge besides a broad decline in the indexes?  So far, he has not been able to beat the delta of the hedges in place.

 

I agree.  Mr. Watsa did not go stupid all of a sudden but I cannot see how this is deeply undervalued at 1.2x book with 100% equity hedged.   

 

S

 

Simply enough, here we have 3 possibilities:

 

1) Mr. Watsa is right: today’s BVPS makes absolutely no sense… FFH will create great value.

 

2) Mr. Watsa is wrong, and will recognize the evidence of his mistake, when that evidence comes: he will take losses on FFH’s hedges and use a stupendous amount of cash to restart from there… FFH will create good enough value.

 

3) Mr. Watsa is wrong, and he will never recognize the evidence of his mistake… FFH will cease creating value.

 

Practically anybody on the board believes either in 2) or in 3)… I still believe in 1)…  ;D ;D ;D

 

Gio

[giofranchi]

Again, you are not explaining HOW it is currently undervalued as the stock is at 1.2x book and book value continues to fall.  Please help me understand how it is currently undervalued. . #1, you are looking for a broad decline of the index.  You have to remember, Prem does hold equity positions and those will also fall by an equivalent amount.  This is NOT like the CDS bet.  #2, that does not show it is undervalued in fact it will explain how we are overvalued as he will realize the mistake and start from there. How can the stock trade at a premium to book?

 

Read the BAC thread, Eric clearly demonstrated to us how BAC was dirt cheap and due to his analysis I was able to take a HUGE position which has paid off exceedingly well. (Thanks Eric)

 

S

 

If Mr. Watsa is right, as I believe, BV today is extremely compressed! It simply is not a metric you could rely on, to arrive at a valuation for its stock. In 2007, 2008, and 2009 BV increased 35% annual. And go look at the numbers: FFH in those years booked much larger gains from its equity hedges than from CDS. Simply because its equity investments will fall dramatically less than the Russell2000, the index they are using to hedge. Then, with all that cash at their disposal they will take advantage of very compressed and undervalued stock prices, and position themselves like almost nobody else for the subsequent bull market. They are following the pendulum, and positioning themselves accordingly. They are extremely contrarian and therefore very hard to follow… but, sooner or later I still believe they will be proven right.

 

Remember that business is always about decisions, better: strategic decisions. This is true for practically every kind of business, but most of all if it is a financial business. I am happy for your investment in BAC. And I will never invest in BAC. Simply because I have no idea of the process that goes on inside such a gigantic organization. And because I don’t really know who is in charge. What he has achieved in the past. Why he should achieve good results in the future. Because he hasn’t deserved my trust. And I invest only with people who have won my trust. Rest assured: it is not such a simple thing to do. This is how I do business, and it is also how I invest.

 

Gio

 

[giofranchi]

Read the BAC thread, Eric clearly demonstrated to us how BAC was dirt cheap and due to his analysis I was able to take a HUGE position which has paid off exceedingly well. (Thanks Eric)

 

Anyway, I have posted a model for FFH, which discounts its BV to the present, and arrives at 1.5 x BVPS. And it clearly underestimates fair value!

So, probably, Eric is much more convincing than me… no doubt about that!! But I also have made the effort to communicate my thesis about FFH! ;)

 

Gio

 

[ourkid8]

Lets say the decline Prem is waiting for does not transpire as that is entirely possible.  Is Fairfax still undervalued based on your analysis considering they will need to book huge losses on their hedges or is it overvalued in that scenario?  As a business owner, we have to look at both sides.  I fully understand your position if there is a market decline. 

 

Tks,

S

 

Again, you are not explaining HOW it is currently undervalued as the stock is at 1.2x book and book value continues to fall.  Please help me understand how it is currently undervalued. . #1, you are looking for a broad decline of the index.  You have to remember, Prem does hold equity positions and those will also fall by an equivalent amount.  This is NOT like the CDS bet.  #2, that does not show it is undervalued in fact it will explain how we are overvalued as he will realize the mistake and start from there. How can the stock trade at a premium to book?

 

Read the BAC thread, Eric clearly demonstrated to us how BAC was dirt cheap and due to his analysis I was able to take a HUGE position which has paid off exceedingly well. (Thanks Eric)

 

S

 

If Mr. Watsa is right, as I believe, BV today is extremely compressed! It simply is not a metric you could rely on, to arrive at a valuation for its stock. In 2007, 2008, and 2009 BV increased 35% annual. And go look at the numbers: FFH in those years booked much larger gains from its equity hedges than from CDS. Simply because its equity investments will fall dramatically less than the Russell2000, the index they are using to hedge. Then, with all that cash at their disposal they will take advantage of very compressed and undervalued stock prices, and position themselves like almost nobody else for the subsequent bull market. They are following the pendulum, and positioning themselves accordingly. They are extremely contrarian and therefore very hard to follow… but, sooner or later I still believe they will be proven right.

 

Remember that business is always about decisions, better: strategic decisions. This is true for practically every kind of business, but most of all if it is a financial business. I am happy for your investment in BAC. And I will never invest in BAC. Simply because I have no idea of the process that goes on inside such a gigantic organization. And because I don’t really know who is in charge. What he has achieved in the past. Why he should achieve good results in the future. Because he hasn’t deserved my trust. And I invest only with people who have won my trust. Rest assured: it is not such a simple thing to do. This is how I do business, and it is also how I invest.

 

Gio

[gary17]

Gio

I am wondering what's the margin of safety in your assessment of Fairfax - so you are thinking it should be worth north of 500? so at 380 it's a good entry point?

 

On the comment of BAC - I think I tend to agree with you there's a lot of unknowns.  But I am starting (just starting) to get comfortable with the idea that the years after the worst recession caused by these banks, they have very strict lending practices and there's indeed big changes going on...    If I have to choose between a very predictable business for which the performance is may be 20 - 30% dependent on management vs another business where the performance is 50 - 60% dependent on management, I'd go with the former.  I think one of the things in investing is to be flexible at times and being able to exercise that judgment.  I think this is probably one of the reasons Prem invested in BoI - I think he had a look at the numbers, weighted the risks of his investments against the outcome in a fairly predictable industry at its worst time in history and decided the margin of safety is very attractive. 

 

[giofranchi]

Lets say the decline Prem is waiting for does not transpire as that is entirely possible.  Is Fairfax still undervalued based on your analysis considering they will need to book huge losses on their hedges or is it overvalued in that scenario?  As a business owner, we have to look at both sides.  I fully understand your position if there is a market decline. 

 

Tks,

S

 

Look, my model considers a 12% CAGR in BVPS for the next 16 years… then FFH might as well completely close doors and distribute all its capital to owners. To get a 12% CAGR in BVPS, they have to achieve little more than 5% on their portfolio of investments going forward… Historically, they have achieved 9.2%.

Even if FFH loses 2 or 3 more years because of equity hedges, I don’t think something “cataclysmic” has to happen for FFH to provide those returns to shareholders…

But I would tell you a lie, if I didn’t admit that I am invested in FFH also because I think that the general market price level will be little changed 10 years from now! ;)

 

Gio

 

[giofranchi]

Gio

I am wondering what's the margin of safety in your assessment of Fairfax - so you are thinking it should be worth north of 500? so at 380 it's a good entry point?

 

On the comment of BAC - I think I tend to agree with you there's a lot of unknowns.  But I am starting (just starting) to get comfortable with the idea that the years after the worst recession caused by these banks, they have very strict lending practices and there's indeed big changes going on...    If I have to choose between a very predictable business for which the performance is may be 20 - 30% dependent on management vs another business where the performance is 50 - 60% dependent on management, I'd go with the former.  I think one of the things in investing is to be flexible at times and being able to exercise that judgment.  I think this is probably one of the reasons Prem invested in BoI - I think he had a look at the numbers, weighted the risks of his investments against the outcome in a fairly predictable industry at its worst time in history and decided the margin of safety is very attractive.

 

I understand what you mean… It is just that a business which doesn’t depend on management is UTTERLY outside my experience, and therefore outside my circle of competence… Especially if it is a financial business… (for what I know, even KO could be killed by bad management… but Mr. Buffett seems to disagree… therefore, who am I to judge?). Of course, I am no one, but I don’t understand why I should do something I don’t understand… I can live without the BAC of this world very well indeed: I have bought OAK at $36 and sold it at $57, my investment in TPOU doubled before I sold it, I bought ENDP at $37 and now it is worth $67, I bought LMCA at $95 now it is at $154 (and also gave me more money with the STRZA spin-off), I have bought VRX at $75 now it is at $108, etc. I am making a lot of money even with BH!!!!!! ;D ;D ;D ;D

 

Gio

 

[Buffett_Groupie]

Gio:

 

I'm going to Italy next year to visit you to get some good tips from you!

[Guest valueInv]

Gio, would you please help me understand how mr. Watsa will continue to create value with the 100% equity hedge besides a broad decline in the indexes?  So far, he has not been able to beat the delta of the hedges in place.

 

I agree.  Mr. Watsa did not go stupid all of a sudden but I cannot see how this is deeply undervalued at 1.2x book with 100% equity hedged.   

 

S

 

 

 

Simply enough, here we have 3 possibilities:

 

1) Mr. Watsa is right: today’s BVPS makes absolutely no sense… FFH will create great value.

 

2) Mr. Watsa is wrong, and will recognize the evidence of his mistake, when that evidence comes: he will take losses on FFH’s hedges and use a stupendous amount of cash to restart from there… FFH will create good enough value.

 

3) Mr. Watsa is wrong, and he will never recognize the evidence of his mistake… FFH will cease creating value.

 

Practically anybody on the board believes either in 2) or in 3)… I still believe in 1)…  ;D ;D ;D

 

Gio

 

Let's say the market goes up 20% in 2014 and then drops 20% in 2015. Is Prem right?

[giofranchi]

Gio:

 

I'm going to Italy next year to visit you to get some good tips from you!

 

No, I am certainly not as good as other board members… I am very well aware of that!

I just wanted to point out that I don’t need to do things I don’t understand… because, although I will never achieve Eric’s or Packer’s returns, I can live quite comfortably with mine! And I sleep soundly at night! ;)

 

Gio

 

[giofranchi]

Gio, would you please help me understand how mr. Watsa will continue to create value with the 100% equity hedge besides a broad decline in the indexes?  So far, he has not been able to beat the delta of the hedges in place.

 

I agree.  Mr. Watsa did not go stupid all of a sudden but I cannot see how this is deeply undervalued at 1.2x book with 100% equity hedged.   

 

S

 

 

 

Simply enough, here we have 3 possibilities:

 

1) Mr. Watsa is right: today’s BVPS makes absolutely no sense… FFH will create great value.

 

2) Mr. Watsa is wrong, and will recognize the evidence of his mistake, when that evidence comes: he will take losses on FFH’s hedges and use a stupendous amount of cash to restart from there… FFH will create good enough value.

 

3) Mr. Watsa is wrong, and he will never recognize the evidence of his mistake… FFH will cease creating value.

 

Practically anybody on the board believes either in 2) or in 3)… I still believe in 1)…  ;D ;D ;D

 

Gio

 

Let's say the market goes up 20% in 2014 and then drops 20% in 2015. Is Prem right?

 

No.

That would be possibility n.2 or n.3 (let's hope n.2!!)

 

Gio

[TwoCitiesCapital]

I think it's wrong to look at it from a point of right or wrong because that suggests that Watsa is making a market directional bet.

 

The equity hedges clearly aren't as he has hedged 100% and has recently rebalanced to maintain 100%. If he were making a directional bet, his net equity exposure would have to be significantly negative and for a decent period of time.

 

The deflation hedges are a little less clear since he seems to be adding exposure over time; however, Watsa has raised points in the past. He jas reminded us that Japan didn't experience deflation until 5 years after that crisis. The slack in the U.S. and European labor forces,  the low interest rate environment,  and continuation of QE over the last five years all support the argument that deflation is still the biggest danger. Its hard to fault Watsa hedging HIS business from such an economic catastrophe. 

 

If you're thinking in terms of "right" and "wrong" you're assuming he's making a market directional bet which isn't currently supported by the evidence.  He's simply being cautious and you can't be "right" or "wrong" by being careful. 

[Guest valueInv]

I think it's wrong to look at it from a point of right or wrong because that suggests that Watsa is making a market directional bet.

 

The equity hedges clearly aren't as he has hedged 100% and has recently rebalanced to maintain 100%. If he were making a directional bet, his net equity exposure would have to be significantly negative and for a decent period of time.

 

The deflation hedges are a little less clear since he seems to be adding exposure over time; however, Watsa has raised points in the past. He jas reminded us that Japan didn't experience deflation until 5 years after that crisis. The slack in the U.S. and European labor forces,  the low interest rate environment,  and continuation of QE over the last five years all support the argument that deflation is still the biggest danger. Its hard to fault Watsa hedging HIS business from such an economic catastrophe. 

 

If you're thinking in terms of "right" and "wrong" you're assuming he's making a market directional bet which isn't currently supported by the evidence.  He's simply being cautious and you can't be "right" or "wrong" by being careful.

 

Why hedge 100% of your equity portfolio? Why not 50% ? Why not hold cash instead?

[ourkid8]

I take offence to this since it is not "HIS" business, it's a public company and it is owned by shareholders.  Yes, he is a large shareholder but it's not HIS business. 

 

Tks,

S

 

Its hard to fault Watsa hedging HIS business from such an economic catastrophe.