I have been looking at Fairfax Financial Holdings (OTCPK:FRFHF) for a while, following my reading of the Value Investor Insights of July and June this year. In many ways, Fairfax has resemblances to Berkshire (NYSE:BRK.A): a great investor managing the premiums of a good insurance business. The difference is that instead of trading at 1.2x P/BV like Berkshire, it trades at 1.0x Price to Book Value.
Here is what Steve Leonard had to say about Prem Watsh:
What makes Fairfax exceptional is Prem Watsa, who as CEO and Chief Investment Officer has an unsurpassed record of making investment decisions over the past 25 years. He’s outperformed in both fixed income and equities, increasing book value by more than 20% annually over that time.
Since that article, P/BV had been increasing, but lately the price has stagnated/declined opening a window of opportunity to buy at 1.0x P/BV. I have very limited understanding of financials and usually do not consider them unless I have a strong compelling outside reason. I think at this price, and based on what I read, I have a good chance of "betting on the horse" and thus bought some Fairfax last week.
So if Prem Watsa can increase book value at the 20% annual rate of the last 25 years over the next 25 years, I could put all my money in this and go home. I don’t think that’s likely, given that the business is bigger and that they have in that book value more goodwill, on which it’s harder to earn that kind of return. But it’s not unreasonable to expect he can earn 15% annually. It’s also not unreasonable to expect the market will eventually wake up and pay at least 1.25x book for a company with this type of track record. Even if that happened, it’s still unlikely I’d be a seller.
In addition, while I can patiently wait for such a great outcome to happen, I get rewarded by a good 2.5% dividend yield.
Disclosure: Long FRFHF