Revisiting Fairfax Financial

Ladies and gentlemen, welcome to the Business Brew. I'm your host Bill Brewster as always. This episode features Ashief Lalani and Charlie Fisher. I have known them since They came on on July twentieth, twenty twenty three is when the original Fairfax pitch was made on this program. Uh the business has performed in line with sort of what they were talking about. The stock has done better. So I wanted to have them back for

a bit of a positive postmortem and as you will see it's not a post mortem at all. It's still going on. They're still optimistic on Fairfax's Future, this would be a good time to remind you that this is one of at least two Fairfax related podcasts that are coming out directly after an annual meeting. So there's

Zero chance that people are overly optimistic after meeting all the people in the company and feeling all great about the stock doing well over the last three years. So, uh, you know, keep that context in mind when you're hearing what's going on. I will say the the Fairfax Way was a book that came out in December. Again, more media always I always get a little nervous for stocks when this much press is going on at once, but some would argue it's not that much press when you turn on

the uh tr traditional media. It's not as if people are raving and ranting about Fairfax. But anyway, David Thomas wrote a book. I'd check it out. It's a very good um summary of what Fairfax has been built um from and through and credit to Bram and his team. I found listening to the other episode really interesting given what ha has happened. I hope this episode is interesting as well. And uh I hope I did a good enough job as a host to extract good information for y'all. So

With that out of the way, I think we all know that none of this is financial advice. It's all for entertainment and educational purposes only. Do your own due diligence before making investment decisions. Consult your financial advisor, yada yada. And uh big shout out to fiscal.ai for sponsoring the program. I use them for all my data needs. I've used it on the show. Um, you know, in my personal use I find the

the the way to just switch things into graphs and how quickly you can sort of manipulate the data and the you know, just the general interface is wonderful. Um so you can check it out, fiscal dot ai forward slash brew. And you get yourself a discount and then uh shout out to Trata. You can find them at tritrata dot com. Trata is spelled T R A T A. It is a analyst to analyst transcript library.

The library grows every day. The conversations are super high quality. So I would check that out and uh go to tritrotta.com forward slash book. in order to see what that's all about. So Without uh any further ado, I hope that you enjoy the episode and then tune in to the earnings call, because I'm pretty sure these are gonna drop on the same day.

Alright ladies and gentlemen we are back for Yeah. A Fairfax check-in after Charlie and a shef, when were you here the first time? Was it two years ago? Uh almost three. It was July of twenty twenty three. Wow. He's back. You guys don't look a day older. Owning Fairfax has treated you well. Fail holder. Well, th th that happens. Do well thank you. Thank you. So yeah, so it's Chicok Zero, which is actually a solid product.

It's better better than uh I like Diet Coke, but it does I don't know. Anyway, no one needs the details. I prefer Coke Zero now. Regardless. Uh, you were both in Toronto for the annual meeting. I could not make it up there and I said Would you guys be willing to come on the pod to sort of give give some thoughts of the annual meeting and the state of the company and you oblige. So thank you very much. Thanks for having us. Appreciate it. How is Toronto?

I mean I'm I'm here all the time, so Toronto's great. I I'm Well how is the meeting? How is the meeting? The meeting was uh was excellent. It was um You know, I was very upbeat meeting I think. Uh it helps that there wasn't a temper tantrum this year and the market was uh was rallying a lot. Last year w was uh pretty stressful. Um, a lot of volatility. This year the market was ripping, so I think that probably helps the spirits, uh, generally. Um, but but I would say um, you know, the team

The Fairfax team seemed very upbeat. I mean, they're pretty level-headed, but Prem, I I thought, had a lot of energy this year. Um, he seemed very pumped. Um, and I think You know, they have a really good story to tell and and they and they told it well. Um and the thing about Fairfax is the consistency, you know, it's very it's a very consistent uh company, very consistent message. 查理, what do you think?

Um, I think Bill, the main issue was is business as usual. That they're the business is doing very well. They see it continuing to do well. Uh there's really uh currently the insurance market on the on the property side's getting softer. Casualty seems like it's holding in. Investment side's doing really well right now. So I think uh it was steady as she goes, but but good things are happening.

One one uh sort of thing that came out recently that we talked about, maybe talking about I I had recorded the podcast and then I kinda got killed due to to uh

I don't know, technical difficulties on the other side, but what do you d how has the Fairfax way to the extent that it helped you understand the history of the company? That book came out in what, December? Like w how how do you assess That story and and did it impact uh the people that attended, did it impact their understanding of the history of the company at all or or you know, do you think the people that are going up are pretty informed as it is?

I think I think there's a lot of investors who um if they'd be if they had invested for a long time, they they knew a lot of the stuff that was in the book already. But what I think it did is is frame it really well for new investors. I mean for old investors who just maybe didn't know all the intricacies and details, but it gave you a lot of background. I think it makes you feel really uh good about the culture ultimately.

um that this this culture has been developing and growing for, you know, forty years and and and I think tells you how important Prem is as part of it. And and you can s kind of s you can see it in sort of the tenure of the executive. You know, and Charlie and I were talking about this uh uh yesterday. We're just saying like when you look at how many executives have been there for, you know

most of their careers, it's pretty remarkable. You don't you don't see that very often. Um and and especially like on the on the you know, with so many presidents and and and CEOs of their of the under underlying companies. Um and I think the their approach to business of being, you know, um um of having these

divisions operate independently and everyone op op operate separately and have this this decentralized operation. They you know they you know they took that from from Berkshire and I think they've um they've really done an amazing job of of implementing it.

The the book helped me understand a little bit of where the Criticism about, you know, like the reserves, or maybe they weren't historically this great underwriting company, like that narrative It helped me understand how the acquisitions That that's a good thing.

bought at um I mean, obviously they turned out to be good acquisitions and Andy Bernard is uh, you know, no small part of why, right? But it it helped me appreciate that they bought a lot of problems and had to invest their way out of it and build a lot of businesses from a from a purchase book that Rightly or wrongly, may maybe they didn't understand or or it required getting Andy in to tighten up some of the underwriting and management.

But whatever whatever the confluence of factors were, it it helped me contextualize where that's a good thing. Yeah, I I get that. I I I think the I think the interesting thing about those acquisitions, I I think if you go back and you actually were to analyze the um

you know, where they issued equity to purchase those things and how big a discount they were. Um in a way it's you know, those those acquisitions were they knew they were they were um presumably they knew they were buying books that had a lot of losses that were that were coming.

Um, but they were they weren't paying uh anything in in many cases for the float, right?'Cause they were buying it below book um and the float they were they were they were getting and there were a lot of losses and the way the accounting works, you kind of get the benefit and the book value when you when you make the purchase.

uh and then you get the losses later and so it it it looks terrible from from an accounting perspective uh but the economics are probably still uh very good and ultimately have proven to be good over time. But you're right, it takes it takes Taking a flow generating business when you buy an insurance company and then changing the underwriting uh takes a long time for to work off the bad business.

Um and if you look at any acquisition that Fairfax has done of a of a an insurance company, um the reserves always go up uh afterwards. And and the general narrative that comes out of that is, oh, these guys are bad underwriters. Um, I think what reality what's happening is that all these guys are very conservative and are increasing their reserves.

um uh to offset, you know, future losses, but also d to defer taxes and it's just it's just a logical thing to do if you're uh a long-term investor and and I think that's that's the Fairfax approach. take a very long term view, uh be very conservative on on uh underwriting and reserving. Um and ultimately overall I think the balance sheet um

is understates what the fair value is or what the book value is uh of the company um if you were to mark everything, you know, to to fair value. And that includes the the reserves. I think there's a big chunk in the reserves are just future equity effectively as those reserves get released.

Charlie, you got any thoughts on this? Yeah. Um so I we I was going through the annual report yesterday and prepare preparing for the podcast. They they go back to two thousand seventeen, that's when we closed um Allied World. You had Allied World, you had Brit and you had Zenith. Those are sort of three different acquisitions and the history of Berkshire because those are really well run

Terrific companies where we had changed our model of instead of buying kind of crappy companies a lot of float, we're buying very high quality companies since 2017, just in terms of that's the date they had in the annual report. Um, lots of redundant. On the reserve.

There there's clearly uh we've had a conversation with management in the last few months and what they said, what they told us is that if they could, they would over reserve all the time because if you think about how it works and I learned this from Joe Brandon a long time ago. If you own the reserve, you cut your taxes down. And uh y you just Save a lot of money.

Uh you you pay less taxes in the future. If you have a problem later you get to clean it up. So there's really if you're really interested in running a company for the long term, you want to weigh over reserve and I think that's what Fairfax tries to do. In fact they told us that generally the auditors are try are trying to have them take

uh t to to uh lower the reserves over time and and and bring them forward. So th that was really uh I I think and that's demonstrated through the through the economics and and the the the f the economics That makes sense to me. I can I can imagine somebody saying, Well, isn't that playing accounting games so that they can release'em later? I mean, does that make any sense, that kind of a pushback if if somebody made that?

Sort of like the way UHAL does their accounting. When you look at UHAL, they don't capitalize anything. They're they're expensing everything. So they always pay they don't want to pay income taxes. And it's just a very it's the way you run a business if your family owned it. Yeah, I I don't think it I I wouldn't call it accounting games. I would c I would call it using accounting to your benefit. Yeah.

Um and and the benefit here is I mean most most companies you uh are who are using accounting for the benefit, the management teams are trying to boost current income so they can get paid more. Um and and this is the opposite, right? This is like let's defer as much income as possible. Um, because we rather not pay tax now. And it's especially interesting in a in um in a float business because effectively you get use of the assets.

um in the float and you don't have to pay the tax. In fact you get to use more assets because you haven't paid the tax. So it There there's all the more reason to defer uh income um when you're w Fairfax is C whereas most other companies just don't have the same culture, um, let alone a set incentive.

Yeah, that was the other the other thing that the book kinda put into perspective for me. Um Sometimes it takes reading something back to back to back and having the story sorta laid out, uh, for me to appreciate what happened, but The willingness to power through and take a long term view and and invest in these businesses to make them better. and uh, you know, really treat it like a I mean, it it was a long term is a long term holding for Prem. It's a life's work, right? So

I don't know. I thought it was good. I I'm a little bummed that the episode never never aired, but onward.

To me to me the favorite my my favorite part of the book was uh was part three where he was talking with he was talking about all the investors that that uh Fairfax has um um you know copied effectively, you know, like Singleton and Templeton and and you know Buffett and you know all these sort of exemplary investors over time um who ha have all added to sort of the ability to, you know, the the knowledge base of how to how to invest.

um, you know, Fairfax kind of takes from from all of them. Um and I think and and that's why I think like when you when you read that and you and you read the rest of the book and and then you and then you contextualize that with how the

the company looks and the annual report and the balance sheet and so on. It's it that's why like I I make the claim that, you know, I think Fairfax has and Prem has uh, you know, built a better mouse trap than than Berkshire. You know, Berkshire is an amazing company.

And and the stock perf the the performance of the stock has a lot to do with the returns uh on the equity returns in the portfolio. Um and but they did and it was done without a lot of leverage. And I think with with Fairfax they've

They've institutionalized, you know, a leverage ratio that makes it easier for them to h hit that 15%, you know, book value per share hurdle that they talk about. Um and I don't think that's really understood by investors. I think they kind of just by a narrative, um, and don't really understand where where the returns come from.

She can you tell if to can you take people through the three to one leverage on the balance sheet?'cause it'd be very Yeah. So so when you look at um the balance sheet, effectively with with Fairfax, you have about seventy five billion of investments. um and about twenty five billion of of uh shareholders equity. Um and

And the and the reason why that's important is because when you look at it, you know, what's funding the leverage? Well, there's uh about forty billion afloat, insurance float, uh what you're getting paid to own.

Um and there's uh close to ten billion of of debt, uh other debt, uh whether it be between uh most of that debt is held to Holco and and some some uh debt is held at the insurance companies. Um and so That three to one leverage means that your underwriting profit uh more than offsets the head office expenses um and the leverage expenses.

Um, so you're left g sort of getting paid to own a seventy five billion dollar portfolio, uh, and you're paying, you know, thirty five to forty billion dollars for it depending on on what what pr what market the market cap is on the day. So when you're when you when you can earn on the on the fixed income portfolio, which has a five percent a little over a five percent coupon.

You effectively have two turns of fixed income portfolio versus a shareless equity. So you're already at a 10% pre-tax return from the jump. Um, the rest of the portfolio is invested in equities. And if it can earn a ten percent return on on equities, which is kind of a long term expectation for equities,

Um, and of course they expect to do better than that. But if you're gonna earn ten, um then you're already at a twenty percent pre-tax return. Tax rate is twenty-five percent or less, is twenty, twenty-five percent. You're already at a fifteen percent ROE. um before any anything from the underwriting income. So so you you you have a really good starting place.

And and I think that and I and I think that I think if people under could understand that better, they would they would be understand why the stock is such a bargain.

with the float, what do you think is a I mean I what do you think is a reasonable midterm Estimate of what your combined ratio would be. And I and I ask that as somebody that's looking at Uh you know, the property market's clearly getting softer. I n I know casualties hanging in there, but uh part of me just wonders if that's just a function of the money hasn't entered yet.

Um, you know, Chubb, WR Berkeley, Kinsale, they're all they're all saying it's more competitive out there and they're all definitely slowing growth, which is not the most bullish sign for what the risk in the future may look like. Yeah. Yeah, look, I think uh the market's slowing down. I think the weakness in some of these stocks is exactly because of that.

I think that in Fairfax's case, there'll be a few things they can do to mitigate it. They can buyback the the minority interest in Brit and an Allied and that'll be like a five percent increase of premium each each time they do that. Uh they'll they all these companies you saw that with uh

the the folks that can sell they'll they'll buy a little less reinsurance. That'll be another way to kind of generate some more premium. So I think the the higher quality companies that can behave in the right way will be able to kind of manage this process. And of course I think the reality is we're gonna need some sort of uh problem in the insurance space to harden the market up. You're gonna need a hurricane in Florida, you're gonna need something to hit

Houston or something on the East Coast to to really firm the market up. One last thing I would say is that Fairfax is starting to do a really good job of diversifying um where they're getting their premiums from. Yeah, maybe twenty, thirty years ago a lot of Atlantic hurricane. Now they've got Asian uh interest, they've got Gulf interest.

They're they're starting to broaden that out. So maybe that's I don't know, fifteen or twenty percent now of the premiums are coming outside of uh North America, which which is really starting to help. She

Yeah, I think the... You know, you think about the softening insurance market and and and what that means, um, I think a lot of people assume that uh if the market softens that underwriting profit is gonna soften as well and that the combined ratio uh is gonna go up uh a lot.

And I think I think it misses a couple of things. One, I think it misses that reserves conversation that we just had because I think, you know, the way they the way they do reserving is they try to you know, property you kinda have to release the reserves as soon as your risk is over, right? So there's not a lot of extra

uh reserves that are held on to necessarily. But in casualty, you're holding on to a lot of reserves. And so, um, you know, and and they say, you know, they used to say four years, they tried to hold on to reserves. And lately I I've been hearing them say five years. Um so they're trying to defer that income as much as possible and and you know, and and they'll argue that look, there's been previous cashless cycles.

You know, reserve reserves are released too early and then you end up having problems. So they're gonna try to push off releasing those reserves. But, you know, we're five years into um or more than five years past where the hard market last market hard market started. It started twenty nineteen.

and kind of like strengthened um into twenty twenty two as interest rates went up and a lot of insurance companies, you know, didn't have excess capital to to to write into the hard market. So which kinda hardened the market even even further.

And so I think what you're gonna see from an underwriting perspective and where the profitability is, I think you're s you're gonna see those reserve releases keep coming out. Um, and you're gonna see them, you know, write less property, which they are doing.

But also as Charlie said, grow net premiums by using less reinsurance. Um and then also buy back stock to end up end up growing net premiums per share at a pr at a at a pretty decent rate. Um what's what's interesting and I think the reason why the stock has been, you know, sort of flat since

uh last April or sorry, I guess maybe last June, July, um is people are responding to the slower revenue growth, right? So when they see gross premium slow, um, you know For any business, it's like when you see bros premium slow, you're like, Let me sell because usually there's operating leverage associated with with revenues and so they

They want to um, you know, it it's usually highly correlated to weaker stock prices when you have slower revenue growth, right? Which is not surprising. Um, but for an insurance business, it's it's not the same because here your returns aren't necessarily impacted, right? The returns are coming from um all kinds of different sources. Underwriting is actually a relatively small amount of of the income. Um but

the underwriting it doesn't mean the underwriting profit is gonna go down, right? So I I think you have this Um you sort of have investors who are kind of acting like it's any other sector uh and not looking at the uh idiosyncratic returns that that Fairfax produces. So I I think that's what that's what's presenting, I think, the opportunity right now. Um, you know, even though, you know, I think when we came on the start uh last time, uh, you know, it's been almost three years.

The stock was trading at point nine times book and now it's at one point four times book. So you've had a a reasonable appreciation in the in the price to book multiple The book value was around eight hundred and now it's uh you know twelve sixty. Um so you've seen a uh a very nice increase in the in the book value. And if you include the dividends, you've had about a nineteen percent or so appreciation in in book value, including the dividends uh that were paid out. So sort of high teens.

um Kager uh in in book value. So and and there's and from what I can tell when I look at the forecast it it's hard for me to see why that can't continue despite the the you know slower premium growth that we're seeing. Um there's enough places for them to allocate capital.

And the book is so undervalued, um, that we know there's a a a a certain amount of gains that are gonna come into the into uh book value over the next five years. And so you can have sort of high confidence that they can keep up um the returns necessary to get to a fifteen percent, you know, book value per share growth per year.

Where do you see that in undervaluation in the book? I mean there's there's there's a couple of places. Uh you know, one um is to look at the the obvious place is just to look at their disclosure. They have this disclosure for their uh it's called fair value or caring value. So this is you know, public publicly traded stocks uh generally or s or there's some other estimate, um like there like there uh was for uh Poseidon, for example, which is something that they recently monetized a bit of.

Um but so they you know, at the end of the year they tell you, okay, this number um is something like uh, you know, two and a half billion of fair value over carrying value between Um, you know, Eurobank and Poseidon, for example. And Eurobank's the the biggest source of it, right? So, you know, here's a here's a position which we have marked a little over, you know, two dollars a share, um, and it's uh worth uh you know four dollars a share.

Uh and trading in the public market, you know, trading tens of millions of shares a day in Europe, uh in Greece. And and so there there's some obvious places where there's this fair value over over carrying value that we can see directly. Um and then there's other stuff like um like the consolidated portfolio, which, you know, is marked at

3.7 billion, uh has revenue of eight and a half billion, has earnings, trading income. If you take out sort of the one-time losses of uh north of 500 million, uh maybe even close to six hundred million. that book is not worth, you know, three, four billion more than where it's marked. That those positions, right? So you You you're now you're up to six, seven and a half billion um between um you know, Eurobank, Poseidon and and uh and and the consolidated portfolio.

And then there's stuff on the insurance side which is not in the investment portfolio, uh, like Key, the insurance group, um, which is uh a joint venture between Blackstone and and Fairfax.

Um that has grown from, you know, zero in premiums in twenty twenty to over a billion of gross premiums uh today uh annually. Um and is is marked for, you know, less than two hundred million on the books. But Arguably, if it were IPO, um, it might get a valuation of you know five times premiums uh plus because it's growing fast, it's an AI, you know, fintech.

uh company that's gonna l potentially list on the LSC that's backed by Blackstone. You can see how it could get a very healthy, uh, healthy multiple um and there might be a you know a a billion, two to billion dollar gain there that that could be booked.

Um and so there's there's all kinds of places and uh um where you can find gains and the question is, will they come in? Um and I think what we've seen over the past, you know, five years especially is that well there are there is stuff that is consistently being uh realized uh as um as Fairfax you know, has a different approach I think, which I think i i is part of what makes it a better mousetrap than Berkshire.

is that they're willing to, you know, sell things. Um and they tend to partner with management teams. And if the management team is ready to sell, um, then they are often ready to sell. And I think that's a that's a Um, I think that avoids sort of that the key a key risk. You know, when you have a business and the management leaves, um

That's usually a good time to reconsider selling or not. And there's a lot of risks that that can show up when that happens. And so uh I think it's a it's it's a good process to be Right. Okay, if they're ready to sell then maybe we should sell. Um it also probably helps the manager get the best price for their equity'cause they usually are partners. Um and and it helps Fairfax and then and then it's a it's an opportunity to recycle that capital. Um

So Bill, this is this is really actually very helpful, right? Because the whole story behind Berkshire was you sell to me and I own it forever. I'm not like private. Um, and that I think was a terrific pitch for for Buffett to buy some really good businesses over time. Also doesn't have the window when the the entrepreneur who takes a private with you decides, Hey, I'd like to liquidate.

And in y it link about Berkshire, I don't remember one deal where the entrepreneur said to Buffett later, Hey, let's go sell uh Candy or Let's do something and Buffett really that's not really encouraged. It's just so you sell to me and then I own it forever. And I think even with our recent sale of Poseidon, uh, there was some strategic reasons why w the large partner one wanted to buy our twenty five percent interest in the company.

assume someone like David Sokel who runs a company calls Prem and says, Hey, uh, I'll get you a reasonable price. Do you want to sell? And Prem says, Yeah, I'll sell that. And and so that gives us it's really another weapon and it's another arrow in the quiver, so to speak, uh when we do deals.

it's and it's it's not insignificant that when you come to us, we can be incredibly uh I would say we, Fairfax can be incredibly flexible to be we can own it for twenty years, but we can also sell it in five years if it works for you.

Yeah. Um uh one one one other thing to go to go back to what what she said, is she used to love modest. He also has a degree in accounting and was an auditor in his previous life, so he's really good on these accounting issues. Achief, could you just for the for the listener, take like thirty seconds to go over the accounting on how Eurobank is accounted for to really explain why it doesn't the book value doesn't show up in in in uh in our book value. Their value

So I think I think it I think this is an interesting'cause I think the uh I'll make it a bigger um than thirty seconds and not not just talk about Eurobank. But I like I I think I think um I think this is like the variant perception uh on Fairfax. something I didn't appreciate the last time we spoke uh as much. Um or maybe maybe at all.

You know, they really started buying positions where they would take over twenty percent stake um in twenty twelve from what I can tell. Um, you know, going back and looking at the annual reports. Um and'cause they just got to the size where they could start doing that. Um And, you know, that has just grown over time. You know, they they've they've continued to buy um stakes over twenty percent in things or in in in many cases, you know, take control of things.

Um, and the accounting, you know, from a from a book value perspective is is pretty much the same, or the impact on book value is pretty much the same once you own over 20%. The share of earnings that you um the the the only change to book value that happens is the share of the earnings that you take. Now, if there's bad news, you take losses immediately, right? So if you have write downs, that all hits earnings, you take the loss immediately.

Uh, if there's good news and things are going well, then the book value only goes up by your share of earnings. It doesn't go up by your multiple of your share of earnings. Uh it doesn't go up by there's no uh increase in the change in the multiple either. So Um so both of those things don't get realized right away uh until there's a monetization.

Uh, which is why we've seen sort of these big gains get recognized over time. You know, um, you know, we talked about Poseidon, that that one was just announced and and Um, you know, eight I think it's around eight hundred and fifty million pre-tax will get realized uh in Q two. Um there's EuroLife, which is on the insurance side, but also there'll be a realization in Q two.

You know, last year there was uh you know, a water company that they that I I didn't even know they owned that they realized, you know, a a pretty decent gain on. Um and sort of over time there's all these gains that are coming through.

And when you think about it from an accounting perspective, um, it's like they started filling the funnel in twenty twelve and and these gains start to pop out in the past sort of five years. Um, and I think the size of the investments have been going up over time. Um and the compounding effect is happening with the with the ones that are working well obviously.

And so the amount of gains that are coming are just getting, you know, bigger and bigger is is is how I think about it. Um And with Eurobank, you know, they they initially, you know, made an investment and um it's worth going back and listening to the transcript from the AGM because you know, Prem talks about Eurobank. And there's a lot of information in the letter and and in the even the annual um the present the AGM presentation pack.

You know, we talked about how much we invested initially um and how much cash we've taken out of it. And I think um as of twenty twenty it was like an investment of one point one billion euros and since then, you know, six hundred million euros we've taken out of it. Or sorry, net investment is about five hundred million euros.

But the the the position, you know, is marked at significantly less than fair market value because we're only increasing our positions position size by our share of earnings. And then any dividends we get reduces that that that valuation, right? So you you actually reduce the value. Uh any any buybacks the company does, we we have to sell our shares that proportion share. uh into it because Fairfax is a um is close to the regulatory limit of how much it's allowed to own.

Um, and so they turn around and and and sell some shares and that reduces the carrying value. So so that's why you end up with this, you know, giant gap between sort of fair value uh and carrying value. And I think um no all the information is is in the in the annual report. You know, there's the disclosure is very good. Anyone who wants to can figure it out.

Um I just think most investors or most investing now is done off of a screen um and Done a lot by Quants and and um and so they're only gonna look at the reported numbers um and they're not gonna dig into figuring out where the reported numbers might be understated.

Um and if they are, they're the type of investor who's gonna buy in a downtick and not buy in an uptick. So you don't have that sort of mo price momentum that you would see if people were, you know, trying to value this thing. Um based on what it's worth uh as opposed to what it looks like it's uh what it looks like it's worth it.

Yeah, so so Bill, what that really means for for I think most investors is if you have a twelve sixty book value, really it's north of tw fifteen hundred. So now when you're paying eighteen hundred, you're more like one fifteen, one twenty a book. It's not the one forty that it might look like. That's the most important technique. Takeaway. from having listened to Rashid's you know, takeaway on on how the accounting has understated these asset values.

And uh the any buybacks reduce book, right? I mean that's there's the longer the time goes, the theoretically as long as These these uh investments are increasing in value, the greater the spread between what your stated book and your actual Realizable book is maybe held. Exactly. But w the one the one thing that's interesting about it though is is if the book value is really understated.

Um, that means that the returns are very high, right? So the and and the way you know, the way that balance sheet businesses um are generally valued is a relationship between the ROE and the price to book. Um, you know, the higher the ROE. um, you know, the higher the price to book should be. And um, you know, um we all have a common friend, uh John Fox who uh presented uh who was talking about the the ROE and the relationship and his quick

sort of rule of thumb is to take the um the ROE uh and divide it by seven and that gives you a a a reasonable price to book uh if you wanna do it on that or you can do a return on tangible book value and and and get a price to tangible book value. Either way you end up with a a pretty good approximation, I think, of where the multiple should g should be. And it gives you a little more protection when you use that methodology when the multiple is a lot.

Um when the r ROE's a lot higher. Um, because it's in theory it should be an exponential relationship, right? Like the higher so you shouldn't be like a you shouldn't be able to use a number like seven, but it works because of generally of where the where the ROEs end up. So with Fairfax, you know, it's Um it's kind of a high teens ROE is what it's averaged. And and when which makes sense when you think about the leverage.

uh conversation that we had earlier, if you've got that three to one leverage. And your historical return on your uh investment portfolio is seven point seven percent. Um you get three times that, you know, you're you're already up to twenty-two, twenty-three percent pre-tax um. post a a twenty to twenty five percent tax ratio, you're in a high teens number.

And so, you know, the right price to book for for Fairfax if you were to do that math is like, you know, that number and a half percent, whatever whatever you want to pick, divided by seven, just gets you at about two and a half times uh two and a half times book value. Should that be slightly lower given how much leverage is embedded in the market?

I actually think it should be higher I I think I I think the the leverage is is so smartly um um deployed in in a very protective way, right?'Cause a lot of the float uh a lot of the leverage is coming from the float. And I think, you know, when you listen to Buffett and you say, Well, if you have a high quality insurance company, you should get uh you know, for your float is worth more than equity effectively.

And you when you do the math on on Fairfax, they have about two thousand dollars per share afloat. And so if you were to add that to the book value of 1260, you know, you're talking 3200, 3300 of of being like a reasonable intrinsic value estimate. And we trade a

you know, seventeen fifty, eighteen hundred. So there's a there's a there's a really big, you know, discount to that number. Um, and that's not including the, you know, the the financial leverage. But when you look at the financial leverage, You know, they've structured it so that there's no maturities uh for three years out. Um, you know, they've locked in a lot of long term funding.

um like 30 year bonds uh and so on. So uh and they're and they're borrowing at rates um you know six percent uh or less uh around there. So they they they really like They've really structured in a way that the returns are more reliable and therefore you could argue you should get a multiple that's commensurate with uh with with where it trades. Now I wouldn't I wouldn't pay that obviously. Like I wouldn't pay full intrinsic value for something. I want to buy stuff at a forty percent

uh to intrinsic value. Um and so with the way I think about, you know, for the average investor um is, you know, you should try to buy the stock at less than one and a half times book because The company has shown that they're willing to pay at least one and a half times book uh for the shares.

So that gives you some um confidence about, you know, where the floor might be uh or sort of where um where at least they're they will be doing a creative things to help your help your value'cause they'll be they'll be buying stock back. Uh

And the what the the you know, the one thing is we talked about a soft insurance market. I think what's em when uh what's really interesting about a soft insurance market is that you have a lot of excess capital then, right? Because when you're in a strong, when you're in a hard market, you're writing a lot of business, you have to put up equity to grow.

when you slow down growth, there's a lot more, you know, cash flow available for buybacks. Um and so Fairfax is in a a particularly interesting position because Um, they have really high return places to deploy capital. Like, you know, Charlie mentioned they can buy in the minority interests in Ally World and Odyssey. Um, they can buy back their own stock.

Uh and even if their stock gets too expensive for them to do normal course issue rebate or I shouldn't say too expensive, but like at at a not a big enough discount to intrinsic value for them to want to go out and buy stock in the open market, um, they can go and buy uh close out the the total return swaps that they had taken out.

uh five, six years ago as a w another place to deploy capital. So when you think about all these places to deploy capital, you know what makes a compounder a compounder is the high returns on incremental capital. And here you have I would I would say depending on how f how long the stock tr stays below one and a half times book, which I think it might stay until the next hard market. So they might have

you know, years and years of opportunity to to buy back stock at a at a big discount. Um, but at the very least when you account for, you know, Odyssey in Allied World. uh and sort of what they have for buybacks this year in the TRS, there might be, you know, four to six billion of where they can allocate capital. And I think this this year, I think they have about, you know, 2.4 billion to invest in uh in buyback. Um and um and I come up with that number because

The last couple of years they've been able to dividend out a certain amount from the from the subsidiaries, which they disclosed in the annual report. Last year was three point two billion. This year it's four billion. Last year they took out one point six basically and and bought stock with it. Uh this year if they were to the same and do half, that's about two billion uh for buybacks. They also held around four hundred million of Poseidon at the Holco level.

Um, you know, they sold um almost half their position in Poseidon. Not clear if they sold the shares in the Holco, but my guess is they probably did. Um, in which case they might have two point four billion then for buybacks this year. Um and so

you know, w which when you look at the current price, that you know, that's that's you know, north of a million shares that they bought last year. Um and so I I think you you kinda have these You it's it's really nice because then you can see how the compounding, you know, can continue, um, which is which is really the most important thing, um, especially when you're not paying you know, when you're not paying for

Um if if if we were trading in a much higher valuation, it'd be much harder to justify. Uh and I think it's a problem that a lot of other companies have. Like, you know, I I own a little bit of Kin Sale, um, and I really like the management team. I think they're great. I think the business is great. Uh

Um, but when you look at what their biggest issue is in a soft market, is that they don't have a place to put the excess capital. So they're buying stock back at, you know, close to four times book. Um Yeah. Yeah. I don't even I don't even think it's down to three. Yeah, I think it's like three I think it's like three two or something like that. Book is eighty book is eighty five I think it can sell. Yeah. So at four thirty Three thirty. Yeah. Three thirty, sorry.

And I think I I think what I think what happened last Three point nine. Three point nine thumbs. Didn't realize it's still that high. I thought it was a little bit more. Buying shares back last quarter at three seventy. Right. So they earn five bucks. They're buying stock at uh above books, so their book value only grew a dollar. Right. So now they're there for ROE in theory should be higher as a result, you know. So we should want to pay a higher multiple, but

Um but generally I think the way the market acts is they they will trade around that price to book multiple. Um that's how the investors who who own the stock make their decisions. Um So it's not stopping me from owning it. Uh but but it's um but I can see why, you know, it's gonna have it's gonna have trouble um, you know, performing well. Um whereas with with Fairfax, I I just know they can I know the book value's gonna grow.

You know, three to six percent a quarter plus they're gonna be buying stock. Yeah, I'm not sure. Sorry, go ahead, Charlie. I'll be real quick. So the the simple math is that we're probably buying at least a million shares net after employees' shares moving forward at these prices.

So we're knocking off four or five percent of the of the shares. So even if in if it premiums are flat, our premiums per share are gonna grow four or five percent. That's a really nice place to live and we're we're get to do that because of where the stock is.

If a stock were three times book, we wouldn't be able to do that. So it's actually actually for shareholders, th this is actually the sweet spot. If we were at two t two point two times book, you'd feel better. You'd have fifty percent more value, but the company would have way fewer options to create value.

I I think the I think the last time uh we were on You know, my thought was up until very recently actually that that the price of book multiple would just keep going up because investors would look at the track record and then go, Oh my gosh, these guys have been able to compound book value for twenty percent a year for five years. Uh I should really be paying up for that. Uh

And th it'll get added to the TS X sixty uh and that'll really help uh get the multiple higher. Uh well the T S X sixty ad did happen in December.

Um the company did, you know, grow book value twenty percent a year. Um, and yet our multiple price to book multiple peaked out uh last uh July uh at one point six nine times. Um and I and I think the reason you know, in retrospect the reason why, um, the stock was performing as well as it was from, you know, after we after we came on or even just before we came on your your podcast, um, last time, um, is be was because of the momentum, you know, the revenue momentum.

uh and the interesting momentum. And I think the Canadian institutional active manager uh is very well trained in the arts uh of quants and so they want to follow the earnings momentum and they want to follow the revenue momentum. Um and for the past year uh almost uh they've been they've been selling because that momentum uh has stopped.

despite the company, you know, buying back over a million shares and the and the index probably buying uh, you know, eight hundred thousand shares plus, um, you know, that's selling, you know uh you know, has been absorbed, but the you know the stock price hasn't kept going, the multiple hasn't kept going. Um and so when you look at sort of who's the who's gonna be available to buy the stock now, um I think it's

passive and and the company uh are the ones who are willing to, you know, pay up to one and a half times book. Passive can take it higher, but I don't know if there's enough passive demand. Um so I think I think maybe we'll it'll take it to the next hard market before we see, you know, real multiple expansion, right? So where we might see it go to, you know, three times book or or something that no one thinks is possible.

Um, because I think when the when the momentum investors come back, they're gonna find there's a lot less shares available to buy. Um and they're gonna have to come back because it's in the benchmark and it's in the sixty Uh it's in you know it's it's a it's it's a big part of their benchmark and you know the way most Canadian active managers I think manage is that they are trying to um you know beat

their own sector, right? So if you're in a if you're in the financials, you're switching back between insurance companies and banks. Uh there's a constant game of uh of switching back between insurance companies and banks and occasionally like also by like Brookfield or, you know Maybe on payments now. Yeah, but we don't have a lot of payments in Canada. So if you're in the benchmark Yeah, you're talking Canadian ones. Yeah.

Yeah. But it's true though, a lot of a lot of Canadian managers for a long time, you know, instead of owning uh as much in the Canadian financial index, they would own MasterCard and Visa, right? And and that gave them a a really big outperformance. You know, has that has started to uh stumble as well, or you know, there's been a bit of a sell off in quality, it seems like, or at least multiple contraction quality.

You know, some of that money probably rotated back into the Canadian banks and the Canadian banks look kind of fully kind of fully value now. But if you're a Canadian investor and the banks are doing well um and you're competing against that benchmark, you kind of have to buy the banks. And so that's what ends up happening and they end up selling the insurance companies. And if you look at sort of the insurance companies in Canada, especially on the P and C side,

Um, you know, Fairfax has outperformed uh the other ones. Um Intact and Definity are the two biggest. Um, they're both down. They both, you know, see multiple contraction. Um, and and Fairfax has seen less of it, but it's because it's starting from much it started from much lower valuation.

And the prices are such that value investors uh like us uh are willing to buy it in the open market, uh and sort of re are stopping the the uh the sell-off from from getting worse along with the company uh and and the index demand. I hope you're enjoying the program. I would be remiss to not at least shout out somebody that goes by the name

At Viking Van One Hundred on Twitter, if you're enjoying this conversation, the man has a nine hundred page book. It can be found on the C O B F dot com, is in the corner of Berkshire and Fairfax.

So follow him. He's got Fairfax thoughts. It's all gonna be confirmation bias, but you know, th it is good information, so you can either Be pure and avoid really good work, or you can accept the fact that it's gonna be some confirmation bias, but you're building on the blocks of people that have done a lot of work. Up to you how you want to handle that particular dilemma. I am interrupting the program to remind you that this pr program is brought to you by fiscal dot AI.

Again, fiscal.ai forward slash brew to get yourself some free access and a discount f to paid plans. If you have any type of business that has an API and you need your data to be accurate and it's on public stocks, give'em a call. They're trying to sell that product. They will work with you, I'm sure. So see what they have to offer.

And uh also Trata T R Y T R A T A dot com, buy side to buy side analyst transcripts. You got Koupang, Lift, Coinbase, DraftKings, couple DraftKings, couple Coinbase, um it I don't know, hurts. Booze Chipotle. So I mean they got they got a wide library. It grows every day. Um so check them out and you can try it at tritro dot com forward slash brew. Back to the show.

So I think that's the dynamic that we're dealing with. You know, I I I I think I I had previously been much more like, Hey, you have to buy this thing because who knows when the multiple is gonna really take off. Now I'm like, well, you know, three to six percent a quarter is pretty good. Happy to own it. Uh maybe we'll go to one and a half times.

uh book. Um and then the next hard market, you know, we'll s then watch out and then we'll really see what happens. Um but so I I deal for long term investment. How do you guys think about the total return swap and when, if ever, it should be taken And I I guess the the downside scenario that I see in my head is is let's say there's a scenario where Where The economy slows down, interest rates go down, the insurance market remains soft.

on the company creating a sort of a cash strain as as it's gotta be settled or or am I thinking that wrong? Th I think you I think you've got the the the mechanics right. Like I think you're right. If the stock does poorly, um there will be a cash call uh at the Holdco. Um, but the size of it, you know, the size of the pullback would have to be so big, uh, to make it

uh have an impact on how they're financed, right? So they have, you know, almost three billion of cash um at the Holco. Um they own a bunch of other investments, they have a large line. Um there's a really no need to to uh worry about sort of short term fluctuations. I know a lot of investors um they don't worry about it from the sense of will they be able to fund this?

Uh, they worry about it um in terms of the quarterly volatility uh to the earnings, right? And we're gonna experience that in Q one. So they're gonna report Q one um on April thirtieth. Um And and we're recording this on April twenty seventh. So um the earnings are coming out soon. And, you know, this this quarter, you know, I think the hit to Fairfax from the stock is gonna be like four hundred and fifty million. So almost twenty bucks a share of earnings.

Um so uh you know, a material amount um uh that earnings are gonna be lower than they otherwise would be if they didn't have the T R S on. Um and it hasn't happened many times since they put it on. You know, most most Yeah, it's it was a it was a genius thing to do, so I'm not yeah not knocking it. I'm just curious. Yeah. So I think I I came to uh uh actually this meeting was really helpful to to um come to sort of my view of what they're gonna do going forward, right?'Cause you talk to

you know, all kinds of different people at Fairfax. Um they talk about it on stage as to how they think about the T R S. You know, there's so there's lots of questions being asked about it. And and sort of my my conclusion is um that above one and a half times book when they are allocating capital for buybacks, I think they're gonna they're gonna take off the TRS.

Um if it's less than one and a half times book, then I think they're gonna buy in the open market. Um and it's a very logical thing when you think about what the TRS really are, right? So the TRS, to me, what they really are are is a deferred buyback tool.

Um now they won't commit to say that they're definitely gonna buy those shares back'cause why would you um if uh why would you give up that flexibility in case there is some reason why you just wanna take it off without without buying the shares back? But I think what it gives them is is the ability to allocate capital to keep their, you know their leverage ratio uh at three to one, even if um, you know, the stock goes up a lot.

Um, because if the stock goes up a lot, you're earning it your those earnings go into your book value. So then if you buy it back higher, it comes right off again. It doesn't really It doesn't it it you your price was really locked in uh when you bought it and when you entered into the into the swap. Um and you've earned the book value over time and yes the outlays coming at the end uh Bacchus! Bacchus!

you know, those earnings have been you've been using those earnings f you know throughout the whole period before you took them off. So that's that's kinda how I I I think about it. And I think when you look at sort of where they bought the stock back, they did take some TRS off in December of twenty four. And it was around that multiple. Around one and a half time. And and so I think that's what they're gonna continue to do. And I I I think it's a I think it's a really

I think it's so well thought out, uh, in a lot of ways. You know, I I you know the another way I think it's really well thought out the T R S is that It's held at the Holco and it's generated income for the Holco. Um and there's a lot of interest expense that's coming out of the whole co to fund the leverage. And so this offers the ability to offset

uh is have some income to offset expenses, right? Which makes the leverage more uh uh efficient. Um so I I think that's also a big a big help and and part of the reason why um it makes sense for them to keep it on. And they know they they they know what's gonna happen to book value as well over the next few years. So they I think they're happy to hold it hold on to it um and and take it off opportunistically.

Again, I think having the ability to put excess capital to work in a higher return area, um, is one of the th reasons why it's easy to sort of make the claim that, well, are we is going to stay above 15% on average for the next, you know, 10 years, five to ten years.

Um, I I I feel I feel pretty good about that. Um and and you know, we talk about like well what what do you where do you think the stock's gonna go? I I you know, I tell people like five to ten X over t over ten years is is totally reasonable and and when you you know on the five times You know, you need a little bit of multiple expansion on a fifteen percent kager. Um, but the book value might keger twenty percent, like it did for the past.

Um or it might it might Kager even higher than that, given all these gains that we have to book and how inefficient the market is, they may get, you know,

a real opportunity to swing the bat. If we have a big sell off like everyone is waiting for for Berkshire to put money to work, I think, you know, Fairfax is also in a position to put a lot of money to work if that happens. So there's There's a lot of optionality I think that you're not paying for w you know, when you're buying it at at this kind of price.

Hey Charlie, as as you've gotten to know, uh, you know, the people at the company over there Um, you know, how how concerned are you about key man risk with Prem and and how institutionalized Uh do you believe The sort of competences over there. I mean w what what's your sleeping at night level with the the team? Yeah, that's a great question. So in broad daylight, Pram is doing his transition.

Wh which is interesting. Um, Peter Clark, who's in his early fifties, very earnest guy, he's been at the company uh twenty five years, uh, is is really the the heir apparent to Premier. He's already the president, he's running the conference call. Very straightforward guy, very approachable. B Brian Bradstreet kind of started to announce that who who is he he runs a fixed income for the company. He's really very talented guy, who his era parents gonna be.

As as the chairman, his son Ben is now the chairman of Fairfax India and has been that for a couple of years. He ran a really nice annual meeting, a couple hour m annual meeting at the at the during the week. And and Ben is a very seasoned very put together uh young man in his forties. So I think the pieces are all kind of coming together where i in right in front of you the transition's happening. But premise seventy five, I would assume the way I think about it

Prem will be involved for at least the next ten years and he'll be shepherding big decisions and big things that that happen. We'll we'll have Prem's fingerprints all over them, but the the team, the people who are on the field every day are are all being put in place. Chief, how do you think about it? Yeah, I I think about the same way. I think there's a really high town level. Um uh at Fairfax. And I think unlike um Berkshire, I think there's uh

uh a lot more discussion happens before an any investments are put on. Like they have this investment committee Um and it has, you know, Peter Clark and Prem and and and and other guys from around the business, including um at Hamlet Wattsa. And I think they do make decisions together. Now I I would say the the biggest positions are, you know, you have to have Prem's endorsement obviously um before before it happens.

But I think that's just their their collaborative, you know, nature uh over there. And I think that bodes well for um, you know, succession. Um and on the on the investment side, I think they also have some really strong uh investors. You know, we talked about the bond side, but on the equity side too, I think

Um I think Wade Wade Burton is considered to be a very good investor. Um, you know, uh Lawrence Chin, Peter Furland, there's some there's some good investors uh there. And when you talk to when you talk to them, you feel really good because You know, at least I do because I it's confirmation bias to me because I think they think a a lot like we do. Um and um which is why I think it's it's um it's easier for us to understand

you know, what this business is worth. Whereas for most investors, you know, don't think probabilistically and I think they they don't really appreciate uh what they've got. Um but yeah, I I the succession I don't I don't I don't worry about. I mean I love Prem. I think Prem's awesome. I think I think everyone, you know, I think he I think he really um

Is an energizer bunny to a certain extent. Like I think he just keeps going uh and keeps doing stuff. Um and you know, when you when you talk to Peter Clark, he talks about you know trying to keep up with press. Um, because you know, Prem Prem is uh constantly doing stuff and I think he I think he's really spending a lot more of his time um on the investing. Um and uh and I think that's that's probably good for everyone.

Um Bill, this is a s a side note, but like when you go to the annual meeting, I've been to I don't know, twenty five annual meetings at Berkshire, and to go head out on Friday. to see what what the new birth show is gonna be like. And uh when I first started you could have interactions with with lots of people at the company. You could find a G chain and talk to him for ten minutes. You could have a

Forty five minute discussion with David Sokel. Uh obviously that's those days of Berkshire are long gone. Maybe coming back. You you're right. It might be. It you might when we get down to five thousand people at the meeting in three, four years it might be Berkshire two point oh might be a really good meeting to go to. It just you know, the people won't go there for life advice, which is probably a good thing. I agree with you. We won't get as many thirteen year old girls asking.

I'll start going again. Yeah. There you go. There you go. But and uh At Fairfax, when you go, there's lots of interactions that you can get. I mean this is silly, but if you want a picture with Prem, not a problem. If you want to talk to Prem for two minutes, you can grab him. You want to talk to anybody on the on the management team, anybody that I could think of, you can get

And so that's it's that's why it's really fun because you're you're more actively involved. It's less passive as a shareholder of Fairfax than, you know, w at at a really big company. You can actually be involved and actually get to know these people. Yeah. Yeah, well once once the cult stuff starts it gets tough. Yeah. We're bringing two and a half times multiple. Yeah, well yeah.

You know, Berkshire was lots of fun and you'd see lots of friends when you go. It's still a fun weekend. I you know, I I'm not as excited when I was thirty years old. I used to just pine for that weekend. Uh I don't do that quite as much, but it's still I have more fun than I realize. weekend and I'm I'm happy I went. But it's not to see w hear what what the the CEOs are gonna say anymore. It's it's you know, it's gonna see some friends and and talk to some people.

I I'm I'm very curious for Berkshire two point oh. I'm I'm I think Greg might do a really good job. We'll see. But Bill, how do you the the big question of course is his company is interesting'cause he's got the four hundred billion cash, we're earning four or five So he's gotta redeploy that. Do you think he just does five fifty billion a year in buybacks which is kind of the cash flow of the company?

Yeah, I th I s I think that they should probably invest as much as possible in modernizing the current portfolio. Trim the the leaves or whatever on what needs to be trimmed and then basically run it cash neutral. And if they want some sort of equity allocation, do some sort of like like buy VTV, some value ETF. I I think it's it's asking too much of people that deploy that that much capital in public markets. Especially in the way that Buffett did it. I I just don't think it's a fair act.

I I I do think if you think about the big four or five insurance companies and you can put Markell in there and Fairfax and Berkshore And Berkeley and and Kinsel. It is important to unknow those companies when you invest in any one of the four or five big ones, eight big ones, because they're all they're all compared with

So you can't just say I'm going to own this without knowing how the others work. I think that's that's kind of a little bit of investing malpractice. I think you have to kind of keep your eyes on all these kinds of things. What do you think makes Berkeley so um attuned to cycles? I mean, i i it's clearly how they were founded, but I mean, like they they are cycle managers and own that.

Um I think I think anyone that's good at insurance is good at putting risk on when it's a hard market and taking it off when it's a soft one. But they seem to be consistently better at that than I'm not an expert in Berkeley. I've owned it off and on for a bunch of years. The investing is really, in my opinion, a black box. And they're they're based in Greenwich, probably got a lot of hedge funds that they invest in. You don't really know what they

Uh, but they're very good at what they do on the investing side and they generally they put up pretty good returns over time. That's really been a and they run a good insurance company. Other people have tried this, Einhorn tried it, Loeb tried it. It's been tried before and you gotta get both pieces right. And it's very hard. The insurance p piece is really hard.

And the other people that have tried to kind of glom onto this business have failed miserably b because they screw up the insurance side. Mainly they do a bunch of property and like you know it's a crappy business. They're the third best, they're the fifth call in the in the room when when there's a good piece of business.

Yeah. I'll tell you one of my favorite parts of the podcast that we did in the the first time is I realized how little I knew and how dumb I sounded in certain areas. And it caused me to do some work and it opened my eyes. So thank you guys. E every once in a while it's good to hear yourself be stupid out loud. It's every day for me.

I listened back to it too and I was like I looked at point all the places where I I sounded like dumb and have have changed my mind on things or uh or maybe have evolved. Yeah, it's it's always uh looking back is always uh You always find humility, I find.

Yeah, well that that episode in particular was well timed and and I found when I was listening to it I was I was Listening to some of the things that I had thought that were old thoughts, and then I was listening to some of the things that I was repeating that.

I just I was listening to your answers, what I was saying, and then I was like, okay, I think I gotta figure out if I'm just repeating narrative here or if this is reality. And um thankfully it opened my eyes to reality. So appreciate you guys. Yeah, th the last thing I'd say, Bill, this is a high quality company and I don't think they get as much um credit for that. They've got incredibly long, smart, tenured. The compounded returns over since eighty five or eighteen, nineteen

Problem's the last decade, right? Like people got burned by it. Well, think about that. We had a lost decade and they still produced nineteen, eighteen, nineteen percent current returns in book value. No doubt. So and you're buying it at eight or nine, ten times earnings at one twenty or one thirty a book, the whole team's in place. The business has never been in better shape, the balance sheet's never been better. It's just it's very interesting that it is the Rodney Dangerfield.

uh of stock in some we just can't get any respect, which is working out well for current insurer for current investors, which uh it doesn't bother me at all.

You know, we we were talking about the Fairfax Way before and the and the and the that's the one point I think the Fairfax Way book really uh hits home with is

Look, you had this long period where the investing was carrying the weight and they were buying, you know, insurance companies that were struggling uh for the float, right? Um and so you're getting losses on the insurance side, but the ret equity returns were so good that they were offsetting or the investment portfolio returns were so good that they were offsetting

um the insurance. And then the insurance was carrying the weight and the and the investments were struggling, right? And in part because they, you know, chose to put hedges on, um, thinking that if we're heading into a deflationary world and if interest rates might go negative, um they need to protect the balance sheet, right? So I you know, I have a lot of empathy for sort of why they put on those hedges in the in the in the first place. Um but

You know, the big part of the last decade was the was in the near zero interest rates, right? Which I you know, I think I think again, I I don't think people really understand what that does to ROE, right? So if you go from, you know, we talked about them having two turns of leverage Uh sorry, two turns of the fixed income portfolio versus shareless equity.

you know, that if you go from five percent interest rates to one percent interest rates, you take eight percentage points off your uh pre tax ROE, right?'Cause you're, you know, four times two. So so it's a m it's a really big impact ROE which helps Um, you know, the the stock goes sideways uh, you know, for for a long time.

But I would argue now I think interest rates are more of a in a more normal environment. Um and if you listen to the company, you know, um, you know, uh uh had a chance to talk to Brian Bradstreet for a little bit or hear hear him talk. Um and he you know, he they think that we're in a world where r rates are um gonna have uh higher highs and higher lows. So, um, you know, they're not willing to extend duration beyond two years right now.

because they don't feel like they're getting paid for it. Um, whereas, you know, a lot of the peers, um who always just match their claims with their with their um the d clay uh the duration of their claims to the duration of their fixed income portfolio. Um, which again takes off the risk of having the timing wrong, but

can ignore, you know, common sense. And so um so you're you're you're really I think when you're when you're betting on Fairfax, you're kinda betting on common sense and not on Um, not on heuristics, you know, like they're not making decisions because everyone else is making the same decision.

um or because their investors want them to do something. Um, they're just gonna do whatever whatever makes sense. Um and I think in this kind of environment where you have this sort of really bizarre market structure, um, which I think has kind of

you know, dramatically changed from, you know, before the before the GFC to now and it and it's been a long process but You know, and and maybe we're seeing some reverberations of that now, but I think what I think what you kinda happen is Um before the GFC in simplistic terms, you had a lot of investors that were focused on absolute returns, like Fairfax is and I think like we are. Um and then post GFC, uh a lot of investors um focused on relative returns, right? Because

You know, if they couldn't beat the index, then they might as well just buy the index. Um, and so if you can't beat the index um short term Um that's the the highest chance that you won't be able to beat the index long term if you can't beat it short term. So I think so I think a lot of institutions just start pulling money out of investors who couldn't beat the market in the short term.

um which has ended up making a lot of in uh capital being invested in in quant funds and and other um type growth, you know, growth east um quality growth because that's where all the capital was going, you know. And and I think a lot of these qu quality growth managers, um, don't realize why they outperformed so much. They didn't realize that they had this sort of all these flows, you know, going into them. Um

uh going into the stocks that they own um and they feel like they're really smart, but then the valuations get really, really high and now we're starting to see, you know, what that looks like when on the other side, if you just hold stuff and you don't care about value. Um, it can become and become a bit of an uh an issue over time.

Um and you know, I hope to have that issue with Fairfax. I hope to be in a situation where it's so over it's it's it's valued so high that I'm I'm tempted to sell. Um I I don't know if we'll get there. I think we will, but but but that's one of those things where

trying to figure that out's really is really uh is really difficult and and are you willing to accept getting most of your returns up front and then having to suffer later on or can you make the decision to to actually sell and and and move it to something else? Um, you know, that that It's a really it's a really tough uh uh tough game. But what I think what what's happened now is it's made the market very inefficient. Um and I think for the type of investor that Fairfax is

Um, I think it increases the, you know, expected returns on their equity portfolio. Um, and, you know, given we get the three to one leverage, that means uh extra returns for for us as shareholders.

Well one nice thing is if you have a CEO that loves Henry Singleton, if you do get this situation where you're absurdly valued, uh it's not someone that is immune to the thinking of special dividends and share issuances and the uh the classic procyclical buyback at the absolute peak is probably less likely to occur than might otherwise another.

A positive point. Yeah, absolutely. I mean previous times where they've had a premium evaluation they've used it to to do deals. Um now when I think about when I think about the Holco, I think uh you know, I think there's an another thing that people I think get confused often is that they Confuse the insurance subsidiary portfolio with the Hold Co's actions.

Um, so if something gets sold in the insurance portfolio subsidiary, they think, Okay, why don't you buy back stock with that? Well, it's it's not quite that simple. You know, they got dividend money out from the insurance subsidiary and that's regulated and there's only so much they can do.

Um, just because they're buying uh, you know, another position, the insurance subsidiary doesn't mean that they fought you know, they were um they were not buying back stock. Like it's not these are not binary decisions, they're they're totally separate. So when you think about the whole co, I think about the whole co as having sort of um

two things that well really yeah, two things they can do, I guess. They pay a dividend, um and um they buy insurance companies and sometimes it's they buy themselves, um, as the insurance companies. So they buy back their own stock. Um You know, taking in the TRS.

um, which is also by Met Stock, or uh buying another uh other insurance companies as well. So I think I think that's kinda what they're uh or in that includes the minority interests in in Allied World and and Odyssey. Um not when you talk to them

They don't seem um they don't think that they need to do any more big deals. Um, so I think we're gonna probably see more tuck ins. But if the multiple were to get to some crazy high level I could totally see them using the equity to to do an acquisition.

And uh and I imagine they'll be very creative and you you may not want to own the stock after they do that because there's probably gonna be a lot of flowback. Oh so you you know, you kinda you you kinda have to see what you know what happens, what they decide to do. But um but I you know I I I feel very confident that when they make a decision, it's gonna make sense.

You know, I'm not gonna and I'm not gonna participate in resulting'cause I don't I I try not to do that for myself either. Um'cause it just leads to uh uh Yeah, it's

The odds or the odds were what they were when you put it on, right? Like I you know, Annie Duke has taught me a lot about about that. Um, and uh it it it leads to much better mental health on when you don't participate in a lot of resulting, I think. I was just saying. My expectations are, I was just kinda noodling this in my head. Um, I think eight thousand in eight years is a pretty good number. We're at seven, eighteen hundred now.

eight thousand in eight years would be it'd probably get us to a two point two point oh or two point two times book and and growth in book value. So that's a nice eighteen, seventeen percent compound return. For for me

That's nice because you'll get a small under one percent dividend. So the whole the whole gain will come to you without having any tax liability over the next eight years too. Which is really good for an invest you don't you don't have to go and s have this go up double and then have to go sell it and pay some taxes and go buy another investment. There's a clear pathway here for a five or a ten year process, which is really also incredibly tax efficient, which people should consider.

Could be year six of AOC's presidency though. Yeah. It's Canadian though, so we're a little bit advanced. Yeah, but we still gotta pay the taxes anyway. Uh

Follow following up on something that as she said, Charlie, I know you dabble in some interesting areas of the market. Do you feel as though the opportunity set is uh Uh how would you r rank it relative to to times in your career? Do you think it's as robust as it's been? We were we were cheap a month, you know, at that March thirty low, we were cheap. Yeah and there were things to do.

And we've come up a little bit. We're up probably ten or fifteen or twenty percent of these kind of typical small caps. But there's a I I this is old news, but there's obviously an A A team and a B team and the B team is still really cheap and there's some re you know, th among those B team players there are some reasonable companies that you you can own that are gonna have good results. And unfortunately I always l I I'm on the B team. I was a B team

sports player mostly and I'm a B team investor so I'm stuck in the kind of value trap. I never get to own the the Googles and the the Adobe's and the open AIs of the world. I have to kind of live with live with my people. Yeah, well I don't know that you want to own Adobe now, but uh it's it certainly was a nice it was a nice thing. Yeah, that's right. Going forward, who knows?

But we uh you know, I think we both own uh constellation software now. Like I think small small positions, but you know, it finally got to a level where it made sense to to buy some. Um,'cause I think I think secretly all like probistic, like expected value investors is kind of what I call ourselves. Um, you know, I think we all want to be quality investors. Like we just we just wanna buy

'Cause it seems so easy, you know, you just buy quality and it goes up and and uh your multiple expands and you get the return to the business plus you get the multiple expansion. It's a really nice uh cocktail. But, you know, I uh end of the day I think we we just like really good risk rewards or d degenerate somehow and we just wanna find these really good risk reward situations. I I'm finding it hard to put m stuff in uh money into new positions.

partially because, you know, I my return expectation's so high on Fairfax, you know, so when you have A belief that you're gonna make 15 to 25% a year on something and your hurdle rate's 10, it's hard, it's hard not to put a lot of capital there. And so that's what I've done with Fairfax.

Do you worry that you're too close to it? I... I don't... I don't know. I I it's a possibility, right? Like it's definitely a possibility. I I have it now, it's uh it's uh it's a little over half my net assets. Um, you know, I've added to it uh every time. I should have checked how much I owned bef when the last time we were on, but Uh my guess is my position's up at least fifty percent since the last time we s we spoke. Um in terms of the number of shares, obviously the stock's up a lot more.

Um so I've I've grown the position a lot. Um and I think as I've as I've as I've tr sort of figured out, uh, I think sort of what the range of expectations or I feel more comfortable with. Um And uh and I've done it all with leverage too. So it's not like I you know, it's not like I've sold other stuff to to fund it. Um and so I'm taking a big I'm taking definitely taking a big swing. Um so am I too close to it? It's entirely possible I'm missing something.

Um but it's part of the reason why, you know, I I talk to as many people as I do and I I'm here with you, uh, you know, is is to try to get feedback to explain to me why why I'm wrong. You know, I think last time we were on there were a lot of people saying that they were writing really bad business when they're um when they were growing premiums so fast um in twenty two and twenty three.

And it just turns out they just had a b the better balance sheet to be able to write more business. And that business was actually quite good that they were writing. Um and I don't even think we've seen the bull b full benefit of this good business they were writing because we haven't seen the reserve releases yet. Um so I I you know I I think I think the um

I think it's better than I expected, you know, last time I I was on or we were on. Uh but but I also think that there's a risk that that there's something being missed. But when I look at the odds, I it's hard for me to underwrite it being less than a ten percent return, which is my hurdle rate, um, over the next five to ten years. I don't see what happens to make that happen. Um, even if interest rates go down a lot, it'll take a time for them to go down.

And there'll be gains. And if there is a big recession, and that's the reason why interest rates went down, then credit spreads m might widen. Um so they'll be able to switch into corporates, which most of their peers are already in. Um and so I I I think there's Whatever path we go down, the more chances they have to swing the bat, the better off we are. Um So the more volatile the the path is, I think the better the return.

uh will ultimately be. And that's nice to have in you in as uh sort of your your uh biggest position uh because they play offense for you um when the market if the market sells off or if there's a an opportunity and they can do things that I can't do. I think about their portfolio being similar to mine, there's a lot of optionality in their in their portfolio.

And um and y you're not paying anything for it, right? Um and you're getting it levered. So it's it's a really it's a really I think good place to to have as a um as a key part of your portfolio. And I think a lot of people think about Berkshire that way

They own a lot of Berkshire because it's sending a lot of cash and either the market sells off or they'll buy it. And the stock kind of acts like that a little bit, you know, acts like a um contrarian. And Fairfax for a long time acted like that. Um when they had the C D S on in in um in two thousand eight, the big short and they were taking advantage of that, you know, you would see Canadian managers pile into it whenever they were worried about uh the financial system.

Um, you know, and and when they had the hedges on, you know, the multiple was still pretty close to where it is now because people really liked that the fact that they had the hedges on. Um and and people would pile into that when the rest of their finances were selling off. Um, you know, and so so I think I I I think that it should be the place where people go um for uh to play offense. Um and here you can earn a really good base return.

And they get exposed to that optionality.'Cause it you know, if you do have a really big pullback in the market and they put several billion dollars to work in in The equity markets and earn like a 15% return on that. Well, that's really going to boost your heart rate. Um and the thing is they don't have much public market stuff right now. So you're not gonna see it the same way on the way down. Um most of their investments are um are either controlled or they have significant influence.

Sure. We know we we just got back. We went we were there two years ago on the trip and uh That they've done a really good job. The the the sh the investment as a whole hasn't worked out that well for investors because it went public ten years ago at ten bucks a share and we're eighteen. But we're sitting on a a world truly great asset. We've got a monopoly airport in Bangalore that's doing really well.

Not just an airport either. Like it's got a partnership with Live Nation. They're they've got I mean it's like uh if Acreage there. It's uh it's not a ballpark, it's an ecosystem. No, I I think that's the truth. Valuable it's a really valuable asset, getting valuable more every day, more every day. Traffic's continue to pick up. They have uh uh maintenance facilities that they're building out for big important airlines. They're doing a ton of cargo.

So that asset, you know, if you are fully if you went and sold it today and you really ran a full process, the NAV probably it that India probably goes to thirty two, thirty three, thirty four dollars a share after we paid Fairfax their their fee, which is a big number. That would really kind of normalize the returns for shareholders if they just liquidated it.

And you're getting first first look at a lot of assets in India. People Prem has a really good reputation in India. He's really it you know, in a way that it's a weird split between Berkshire and Fairfax. the Buffett really has dominated on the ki on the Chinese side. So when you go to the f the Fairfax meeting, it's gonna tend to be more uh people from with hi Indian h histories or Indian backgrounds in China

Berkshire, it's chock full of folks from from mainland China at the meeting and who who own it and who revere buff it. It's kind of interesting how that works out. It's a bit of an different access. But prep India's a giant place and there's lots to do in India for Fairfax and for Fairfax India. I think um I think India is probably the most exciting it's been um in a long time. Um because

You know, what Charlie said is right. Like the the actual intrinsic value is is m significantly higher, right? I'm I'm even more optimistic than than Charlie is. I think it's probably north of thirty five, um, maybe forty, forty plus. And so

You know, you're trading at a really big discount to intrinsic value. Um and and just like in Fairfax Financial, uh, in Fairfax, India, it's the accounting that kinda holds back the values and you know, it and In retrospect and looking back, if you if you recognize, well, Fairfax is always conservative you know, the book value is always gonna um grow slower than intrinsic value. Um, you know, you you maybe wouldn't have bought Fairfax India on, you know, on the IPO.

And you know, when you're when you're buying something when you're buying it back then, you're you're buying on the promise and I think part partially it would happen and it and it's a good sort of indicator of how the market structure changed and how that the market structure change accelerated sort of after twenty twenty seventeen, twenty eighteen because before twenty seventeen, twenty before then India traded a premium to Book Vet.

And then when the market structure changed and and everyone you know, everyone who didn't if you didn't own anything, if you own something outside of your benchmark Um, you know, chances are you were told to stop doing that and sell it or you were out of business. Um and so so I think a lot of the sort of natural Fairfax India shareholders were forced to sell.

Um and so that pushes you into a a a discount book value situation. And if the market is as ineffici in inefficient as I think it is, um then it makes sense because there there are so many other things that people can do and things that the people can buy, um, where they have a lot more confidence in what the returns are gonna be.

Um and you know even for myself, you know, I I I I think Fairfax India probably trades at half of intrinsic value. Uh I think, you know, Fairfax might trade at at close to half of intrinsic value, but I'm willing to own ten times more Fairfax. than I am Fairfax India because I know the mechanism for valuation on that is much easier to predict. Whereas for Fairfax India, um, there's no nat there are no natural buyers, right? So

Um, so if they if they do announce that the IPO of the airport is gonna go forward, um the stock at at that point might trade temporarily above book value until until the book value gets written up. But that's probably the only time you're gonna have it trade at a premium to book. Um and and people are are you know, are keyed off of the book value and not intrinsic value, right? So, um, which I think tells you, you know, how you know how

with the type of investor that's buying Fairfax India. It's a guy who's not gonna pay a premium to book. You know, so so there's no way for it to get there, um and and stay there. But The book value can reflect the intrinsic value if they do an IPO of of uh of the airport.

Uh which I it sounds like is something that could happen. Even even if the IPO doesn't happen, it sounds like uh there's a good opportunity for them to pay dividends out of the airport into Fairfax, India, which would give them cash.

either do more investments or to buy back uh more stock, uh which will help close the discount to book value. So there there are there are opportunities for them to create value, but when you think about an intrinsic value that might be thirty five dollars, if it's if it's growing ten to fifteen percent a year uh and you're buying a stock at seventeen fifty Uh you know, you're earning a twenty percent plus return on your you know, on your uh investment at your cost basis.

Uh and I think that's that's the interesting uh thing about about uh about uh Fairfax India. Um I also think, you know, there's a there's a chance that they are successful in acquiring um IDB I bank, which is a very large Indian Bank. There's been a lot of press about the bidding process and who's involved. Um and Fairfax, India is one of the two bidders. Um this acquisition is multiples of the size of Fairfax India. So how it how would they possibly buy it?

And the thought is that they they could use like a GP LP structure. So Fairfax India could be the GP uh and they could get LPs, including Fairfax Financial as an LP. And, you know, a variety of other investors globally could you know, could be

you know, the the pension funds in Canada that help could be Brookfield, could be Blackstone. Um th you know, they'll invite plenty of uh uh you know, partners to join them. Um and if they're able to do that, then all of a sudden they generate a fee stream. Um

Um, which they've never had before, which offsets the fees that they pay Fairfax Financial, which is one of the the key points that investors point to as to why they don't invest in Fairfax India. I think partially it's just narratives, so many people say. But I but you know, to the extent that it does increase

the likelihood of someone buying, it should help uh also close the discount. Um and I think that investment might work out very well as well. So it it could be a very meaningful impact to book value uh for Fairfax India and for and for Fire Fairfax Financial. Um, and so you know, hopefully we'll see some progress on that over the next uh six to twelve months as well.

There you have it. Well is there anything that we missed? Do you guys want to touch on anything else? No, this has been great, Bill. Um I think that it's it's a nice story. It makes a lot of sense. There's a nice margin of safety here. People own it. They they could buy it, literally forget about it and come back in four, five, six, eight years. I think it's gonna be worth a lot more than they thought.

Well I thank you guys for highlighting it. Uh I don't want to say when it was a real opportunity because I don't want to imply that it's not here, but uh it was highly divergent at the time that you came on um and I appreciate you coming back on to follow up uh to educate everybody on on what's been going on and I'll try to make the annual meeting next year. I I just couldn't do it this year, but uh hopefully next

We'd love to see you, Bill. You should you should come in uh um early'cause uh the festivities kinda start uh Monday. Yeah, I'd like that. I like Toronto. I think Toronto's a good time. Yeah, I wish it was a bit later. Yeah, I wish the meeting was like a month like close to Marquel time'cause the uh Yeah, the weather would be slightly better. The weather would be a lot better. Yeah. But although we had it we had good weather this year. And you want to have hockey going on. That's important.

Yeah. Yeah, well we have to make the playoffs for that. Yeah, that's true. All right, cool. Well thank you guys. Have a good one. Okay. Bye bye. Take care.