Fairfax and Base Effect

In the previous post, we had spoken about 5, 10 and 15 year record of Fairfax.

So, why do we hold Fairfax?

a. Since 2008, Fairfax has publically had a different equity strategy compared to Berkshire and Markel.

b. If we consider 2009 to 2013 as base effect issues because they have taken a fairly different strategy as against the market.

c. Let us look at 1998 to 2008 and 2003 to 2008 and 2008:

Fairfax

1998 to 2008 9.3%
2003 to 2008 10.9%

Berkshire

1998 to 2008 6.4%
2003 to 2008 6.9%

Markel

1998 to 2008 11.2%
2003 to 2008 9.6%

Fairfax and Thomas Cook

When Fairfax financial invested into Thomas Cook, every Tom, Dick and Harry went out and bought Thomas Cook in India as they thought they were buying into the 'Warren Buffett of Canada'. The 20% compounder, value investor supreme.

So, we decided to look at Fairfax financials - the actual parent company - and look at their performance versus Berkshire and Markel and see how the numbers stack up. The table below explains itself.

While this is not representative of what Thomas Cook will do, one must look carefully at how Prem has performed in the last 10 to 15 years. Please note that the annual change is Book Value change, there is no point in tracking the stock performance.

If you take out the first few years of Fairfax, it is a very different story.


FairFax Financials	100 $ Invested	Annual Change
	100
1998	130.0	30
1999	179.4	38
2000	170.4	-5
2001	134.6	-21
2002	144.1	7
2003	188.7	31
2004	186.8	-1
2005	156.9	-16
2006	171.1	9
2007	261.7	53
2008	316.7	21
2009	421.2	33
2010	429.6	2
2011	416.7	-3
2012	433.4	4
2013	390.1	-10
1998 to 2013	9.5%
2003 to 2013	7.5%
2008 to 2013	4.3%

Berkshire Hathaway	100 $ Invested	Annual Change
	100
1998	148.3	48.3
1999	149.0	0.5
2000	158.7	6.5
2001	148.9	-6.2
2002	163.8	10
2003	198.2	21
2004	219.0	10.5
2005	233.0	6.4
2006	275.9	18.4
2007	306.2	11
2008	276.8	-9.6
2009	331.6	19.8
2010	374.7	13
2011	392.0	4.6
2012	448.4	14.4
2013	530.0	18.2
1998 to 2013	11.8%
2003 to 2013	10.3%
2008 to 2013	13.9%

Markel	100 $ Invested	Annual Change
	100
1998	118.4	18.4
1999	105.2	-11.2
2000	157.5	49.7
2001	169.5	7.7
2002	180.9	6.7
2003	215.4	19.1
2004	258.1	19.8
2005	267.0	3.4
2006	352.6	32.1
2007	407.0	15.4
2008	340.9	-16.2
2009	433.6	27.2
2010	500.8	15.5
2011	540.2	7.9
2012	619.7	14.7
2013	732.1	18.1
1998 to 2013	14.2%
2003 to 2013	13.0%
2008 to 2013	16.5%

Disclosure: Long Fairfax for a very strange reason and a small portion of the portfolio. No position in Thomas Cook

Correlation and Concentration!!!

Beware of the contents in this post!!!!

One of the cardinal rules in investing has been diversification to prevent concentration and correlation of risk!! Currently, I am in serious violation of the rule in a significant portion of the US portfolio on the rule and I am NOT losing any sleep over it.

Will my volatility be higher? The answer is yes. Will there be significantly higher volatility than the rest of the market? The answer is absolutely yes.

But in my book, volatility and risk are not the same. My correlation and concentration are between companies that I consider Fort Knox's of the world and while we may a terrible year because the all the stocks in the sector might go down in a particular year, we are not worried.

Our position derives from our significant exposure to the insurance businesses in the US. A significant piece of our US portfolio rests with four US insurers -- Berkshire Hathaway, Fairfax financials, Markel and AIG.

We expect all these companies to exist 25 years from now playing with their services still being required in the economy. While there might be a year or two, where due to natural catastrophes or bad year in the stock market or regulatory headwinds, we might see a significantly bad years but overall we do not intend to sell any of these four anytime in the near future and are willing to ride through volatility.

We were lucky to buy the companies that were well in discount to their intrinsic value. We bought Berkshire on two occasions when WEB gave a singing endorsement by buying back stock. (We are happy to buy with the same terms as WEB though his cost of capital is lower) We bought Markel at book value right after the Alterra acquisition and Fairfax at discount to book value a couple of years ago. AIG was acquired at 0.5 times book. All were purchased with a margin of safety and run by top capital allocators who will do a tremendous job in a downturn in deploying cash,

We are very comfortable with the management all these four companies and expect them to do very well over the course of the next ten years.