Fairfax Financial Holdings (FFH.TO)

Fairfax Financial: A Mini Berkshire Hathaway?

The company owns the following subsidiaries:

• Northbridge Financial
• Crum & Forster (C&F)
• Zenith
• First Capital
• Falcon Insurance
• Fairfax Brasil
• OdysseyRe
• GroupRe
• Advent
• Polish Re
• The Resolution Group
• Hamblin Watsa Investment Counsel
• The Runoff Group

Fairfax corporate structure also includes a 26% interest in ICICI Lombard (an Indian property and casualty insurance company), a 40.5% interest in Falcon Thailand, a 22.7% interest in PTU S.A. (a Polish property and casualty insurance company), a 20% interest in Singapore Re, an approximate 20% interest in Arab Orient Insurance (a Jordanian company), an approximate 20% interest in Alliance Insurance (a Dubai, U. A. E. company), Cunningham Lindsey (43.6%) and Ridley (71.0%)

Fairfax Holdings Performance

Fairfax is a fairly diversified holding company with its primary interests lying in the insurance and reinsurance businesses. Fairfax is very similar to Berkshire in that its investment management team does an outstanding job of beating the returns of the market. Fairfax has outperformed the S&P500 by 10% per annum over the past 10 years. The company’s investments performed remarkably well during the financial crisis of 2008.

The company is in average  financial shape with over $1.5 billion dollars in cash and $2.7 billion dollars in debt. Fairfax has been able to increase book value over 26% annually for the past 25 years.  The stock has risen 21% annually over the past 25 years. That’s outstanding growth.

The stock looks like reasonably valued trading at 12 times this years earnings and at 0.9 times book value. The stock trades at 1.2 times sales. EPS has risen 54% over the past three years. Revenue numbers have been flat. The company has been hurt by higher net mark to market investment losses. The company made some bad bets in its bond portfolio. Fairfax took losses on its municipal bonds due to an increase in interest rates. Fairfax uses bonds to hedge its common stock portfolio.

Operating margins are solid at 15% and net margins are at 13%.  Return on equity is currently close to 12%.  Debt to equity is remarkably low at just 30%. The company has increased its annual dividend for 5 straight years with the current yield equating to 2.7%.

Based on the fundamentals of the company, the stock looks like a decent buy. I would feel comfortable initiating a position in the stock at its current level.

*This is a continuation of my stock investing series on stocks that mimic Warren Buffett’s Berkshire Hathaway.

©2012 BUY LIKE BUFFETT. All Rights Reserved.

BUY LIKE BUFFETT - Make Money Investing The Warren Buffett Way

There are growing rumblings that Berkshire Hathaway needs to make a few strategic moves if the company is going to remain a core holding of long term investors.

Berkshire Hathaway Dividend?

Some experts say that it’s time for Berkshire Hathaway to pay a dividend. The company has $34.46 billion dollars in cash and $17.65 billion dollars in free cash flow. Some say that this money should be returned to shareholders. I have a hard time seeing Buffett paying a regular quarterly dividend to shareholders. It would be seen as a sign of surrender with Buffett resigned to the fact that Berkshire’s acquisition and growth days are over.

There is another faction calling for Berkshire to be broken up so that shareholders will gain greater value. There are calls for Berkshire to separate its insurance holding from its other equity holdings to protect its equity portfolio.

Sell Berkshire Hathaway?

Shields is one of the few analysts that I have seen will to place a sell rating on Berkshire. He believes that investors are no longer willing to pay a premium for the privilege of investing with Buffett. Here is his reasoning.

“With the exception of insurance, which is pretty well-insulated from the economy, yes. Berkshire’s more exposed to homebuilding and less exposed to technology than the overall economy, but the bottom line is that if unemployment stays high, spending stays low, both for the U.S. in general and Berkshire in particular.”

“I think we’ll see bigger reactions to good and bad quarters than we’ve seen in the past.”

Shield has turned bearish on Berkshire despite Buffett’s knack for making money investing in stocks.  He first made his call last summer and is still sticking to it. So, is Shield right?

Is Berkshire Overvalued?

Shares currently trade:

• just under 17 times earnings
• 1.3 times book value.
• 1.5 time sales
• 11 times cash flow
• 3.5 times earnings growth projections

Many of the financial ratios show that the stock is not too expensive. The P/E ratio, book value, price to sales, and cash flow ratios are all lower than the company’s 5 year historical average.

Berkshire has increased revenues +4.5% over the past 3 years and +8.6% over the past 5 years.  EPS was down -10% over the past 3 years and increased +1.79% over 5 years.  Return on equity is at 8.4% and return on invested capital is at +6.2%. Return on assets has risen to +3.5%.

This time I am going to save my opinion. I want to get yours first. What do you think? Is now the time to sell Berkshire Hathaway? Buy, Sell, or Hold?

Disclosure: I do own shares of Berkshire Hathaway.

©2012 BUY LIKE BUFFETT. All Rights Reserved.

BUY LIKE BUFFETT - Make Money Investing The Warren Buffett Way

On CNBC yesterday, Warren Buffett admitted that the Berkshire Hathaway CEO never should have purchased Berkshire Hathaway. It was a terrible investment in a failing textile mill company. Fortunately for Buffett, his Berkshire Hathaway company was saved by a shrewd investment in Geico Insurance. Buffett disclosed that he should have just created a new business and started with Geico.

©2012 BUY LIKE BUFFETT. All Rights Reserved.

BUY LIKE BUFFETT - Make Money Investing The Warren Buffett Way

Warren Buffett used to say that he never invested in technology companies because he doesn’t understand them. That doesn’t mean that his holding company, Berskhire Hathaway doesn’t invest in information technology companies. Recently, Buffett’s company has had an appetite for information services companies. These investments were probably made by Charlie Munger or Lou Simpson.

He now owns 8 million shares of Iron Mountain Inc. (IRM) which provides information management services to IT companies. The company offers document management, data protection, destruction services, and records management services. Iron Mountain is one of the companies on the cutting edge of cloud computing. Buffett also owns 4.4 million shares of Fiserv (FISV). Fiserv offers information management services and electronic payment processing solutions to its clients.

So, why is Buffett buying shares of both of these companies?

It’s simple really. Both companies are classic Buffett investments. Fiserv and Iron Mountain both generate large amounts of free cash flow. Fiserv generates $970 million dollars in free cash flow and Iron Mountain has $630 million dollars in free cash. Both companies have similar balance sheets with $300 million in cash and $3 billion dollars in long term debt.

Both companies had straight years of sequential revenue growth until last year. The economic crash of 2009 hit the service revenues for both companies as clients ratcheted down capital spending. Iron Mountain had nine straight years of revenue growth before last year. Fiserv had a streak of consecutive earnings growth until the company had its first revenue drop in 2009.

Fiserv trades at 12.5 times earnings which is right in line with the historical growth rate. Iron Mountain trades at 17.5 times earnings which is slightly higher than the 13.6% historical growth rate. Neither company could be classified as a steal or as expensive. Both companies appear reasonably valued. They trade at PEG ratios close to 1.

E-commerce is the present and future of business. The market is still in its infancy and has great growth potential. E-commerce sales are currently 7% of all United States retail sales and are expected to hit $170 billion dollars this year. Berkshire Hathaway’s investments in both firms are clearly designed to benefit from this emerging trend.

©2012 BUY LIKE BUFFETT. All Rights Reserved.

BUY LIKE BUFFETT - Make Money Investing The Warren Buffett Way

One of the major cogs of the three headed monster at Berkshire Hathaway (BRK-A) is stepping down. Lou Simpson, the Geico portfolio manager, announced his plans to retire today. This is important despite the fact that it has gone largely unnoticed by most major media networks.

Simpson is very similar to Buffett sidekick Charlie Munger. Both men have operated under the radar for years at Berkshire Hathaway. He successfully managed Geico’s 4 billion dollar portfolio in anonymity for 25 years. Simpson keeps such a low profile that there is not even a Wikipedia page for him.

So, why is the loss of Simpson important?

The loss of Simpson is important because he is a man that Buffett trusts. He trusted him so much that Buffett let him make his own investment decisions with no oversight. As any good investor knows, trust is essential in the investment industry. If you don’t believe in yourself or whoever is managing your portfolio then you will never be satisfied. Buffett has complete confidence in Simpson.

Some of the stocks in Berkshire’s portfolio are picks of Lou Simpson. Buffett told the Chicago Tribune that “people are always attributing to me what he’s doing”.  Buffett said that investments in the hundreds of millions are probably stock picks of Simpson’s. Buffett is quoted in the Tribune as saying that “at least $1 billion of whatever it is we buy. So Nike, those things are his, while Wells Fargo, Kraft, those will be mine.”

Based on that information, here are 5 stocks that I believe Simpson selected for the Berkshire Hathaway portfolio:

Nike

M&T Bank

Republic Services

Costco

Fiserv

I would be willing to throw Comcast, Ingersoll Rand, and Nalco Holding into that group. Everyone assumed that Buffett was extremely bullish on Republic Services (me included). The interesting part is that Republic Services may have actually been a pick of Simpson and not Buffett.

©2012 BUY LIKE BUFFETT. All Rights Reserved.

BUY LIKE BUFFETT - Make Money Investing The Warren Buffett Way

There has been a lot of speculation over who will take over when Warren Buffett steps down.  Buffett is the creator, founder, and mastermind behind the success at Berkshire Hathaway. Berkshire Hathaway (BRK-A) is the highest valued stock in the stock market with a price of $116,305.00 per share. Buffett has turned early investors into multimillionaires through his shrewd investment moves.

Rumors have Li Lu taking over for the longtime Berkshire chairman when he finally does retire. Lu is a Columbia graduate and chairman of Himalaya Capital Management. Lu has made a number of smart investments including his deployment of capital in BYD Company Limited. Although Lu is a very successful investor, he will be placed in a situation where it will be impossible to duplicate the results of the investing legend.

Here are a few reasons why there will never be another Warren Buffett.

1) The stock market’s days of double digit growth are likely over.

There will always be potential in smaller stocks for double digit gains but the market as a whole will not be as robust as it once was. The 5 largest stakes in the Berkshire portfolio are Coca Cola, Wells Fargo, American Express, Proctor & Gamble, and Kraft Foods. These 5 large cap stocks represent nearly 70% of the entire $48 billion dollar public stock portfolio. These are all great companies but none are expected to grow at a double digit rate. A lot will depend on Buffett’s successor’s ability to make strategic acquisition to Berkshire Holdings. Buffett has a knack for knowing that GEICO and Dairy Queen would be great additions to the company’s holdings.

2.)  Buffett’s successor will be managing a multibillion dollar portfolio.

It will be impossible with a portfolio that large to come near the past successes of Warren Buffett. Buffett has been able to generate an average return of 20% annually for over 45 years. In his 2008 annual report Buffett himself stated that “Berkshire’s past record can’t be duplicated or even approached. Our base of assets and earnings is now far too large for us to make outsized gains in the future.” An informed investor actually has a better chance of outperforming Berkshire due to their ability to take advantage of new opportunities and remain nimble in the marketplace.

3) Investors buy shares of Berkshire Hathaway for one reason and one reason only, Warren Buffett.

Everyone wants to own what Buffett owns. The disclosure of his holdings each quarter drives fund managers and investors alike to acquire shares of Buffett’s newest acquisitions. I am convinced that investors trying to mimic the moves of Buffett plays some small part in the rising prices of Buffett’s investments. When Buffett is no longer at the helm, will investors pay up for shares of Berkshire and scramble to acquire the newest Berkshire acquisition?

©2012 BUY LIKE BUFFETT. All Rights Reserved.

BUY LIKE BUFFETT - Make Money Investing The Warren Buffett Way

Warren Buffett’s Smart Investments

Any list of great CEO’s would not be complete without Warren Buffett. Buffett is the head of Berkshire Hathaway and the namesake for this blog. Berkshire Hathaway is the holding company for Geico, Dairy Queen, Nebraska Furniture Mart, Burlington Northern, and a number of subsidiaries.

The Oracle of Omaha is still one of the greatest investors around. With so many pundits claiming the demise of Buffett’s investment prowess; Buffett just continues to make shrewd investments. How about his investment in Goldman Sachs (GS) when the investment bank was desperate for capital? His $5 billion dollar investment looks pretty smart now even with Goldman’s government problems. How about his $3 billion dollar stake in General Electric (GE) during the financial crisis? While the warrants are still underwater, the 10% dividend on preferred shares has paid off nicely.

His company, Berkshire Hathaway (BRK.A) has made millionaires out of many investors over the past 25 years. Shares have skyrocketed from $7,100 in 1990 to over $118,280 in 2010. The stock has performed well in recent years also. Berkshire Hathaway has returned 98.12% to shareholders over the past decade. Buffett’s shareholder meetings are legendary with investors trekking to Nebraska annually to hear the financial wisdom of Buffett. While insurance companies like AIG needed government bailouts to stay afloat; Berkshire Hathaway has not needed one dime from the government. This is because Buffett has managed to properly manage risk. The firm has made some poor bets on derivatives in the past but did not allow these bets to jeopardize the underlying businesses.

This outstanding performance comes at a cheap price. The world’s third richest man is arguably the most underpaid CEO of any major company. Buffett takes home just $100,000 annually in salary. Buffett’s salary has been the same for the past 25 years. His total compensation comes in at just over half a million a year with over $300,000 being spent on personal security to protect Buffett. Buffett is generous with both his time and money. He has pledged to donate 85% of his wealth to charitable causes and shares his insights with young investors.

I do own shares of Berkshire Hathaway Class B stock.

Photo by: Ethan Bloch

©2012 BUY LIKE BUFFETT. All Rights Reserved.

BUY LIKE BUFFETT - Make Money Investing The Warren Buffett Way

Moody’s says Berkshire and its insurance companies, including National Indemnity and Geico, aren’t as strong financially because the market value of their investments has fallen. Also, Moody’s says the recession hurt Berkshire’s non-insurance businesses.

“These extraordinary market pressures have reduced the excess cushion available from National Indemnity and the other affected operations to support potential funding needs of the parent company,” Moody’s analyst Bruce Ballentine said in a statement.

It appears that ratings agencies are being ultra conservative after being too lenient for years in their ratings of financial companies.

©2012 BUY LIKE BUFFETT. All Rights Reserved.

BUY LIKE BUFFETT - Make Money Investing The Warren Buffett Way

Berkshire Hathaway (BRK.B) Class B shares are looking cheap. Berkshire is one of the few AAA rated companies left. Plus you get the opportunity to invest with the world’s greatest investor for $2,300.

I am adding more Nike (NKE) stock to my long term portfolio. Great balance sheet and the stock is trading at just over $39 per share. Nike has no debt problems and does not rely on borrowing to fund operations.

I have not bought any Microsoft (MSFT) stock in years but at roughly $15 a share I am willing to buy again.

©2012 BUY LIKE BUFFETT. All Rights Reserved.

BUY LIKE BUFFETT - Make Money Investing The Warren Buffett Way

Morningstar has named Warren Buffett its 2008 CEO of the Year. Listed below are excerpts from the article.

Beyond creating a company that treats common shareholders with the utmost fairness and respect, one needs only to look at the long-term value created at Berkshire Hathaway to see why Buffett deserves the award. Since taking the helm of the sleepy textile business 44 years ago and turning it into arguably the strongest conglomerate on the planet, Buffett and his managers have grown the book value per A share from $19 to just over $77,500, as of Sept. 30. This translates to a 20.7% annualized increase in book value since 1965, versus a mere 9.6% annualized return in the S&P 500 (including dividends) over the same time period.

Investors can learn a lot from studying Buffett’s actions, but his decisions to stay on the sidelines are also notable. Indeed, he steered Berkshire Hathaway from many of the temptations that have caused competitors to crash and burn this past year. For instance, Buffett warned back in 2003 that derivatives were “financial weapons of mass destruction” that are “time bombs, both for the parties that deal in them and the economic system.” Given all that has transpired in 2008, these statements–and Berkshire’s actions–look especially prescient. While AIG and other competitors now wallow in bankruptcy or near-bankruptcy, Berkshire is as financially healthy as ever.

Beyond derivatives, Berkshire also avoided excessive leverage back when credit was flowing a little too easy and asset prices were too high. In mid-2007, the opening salvos of the credit crisis were being shot across the subprime mortgage market, and many financial firms were levered to the hilt. Yet Berkshire had $47 billion–over one third of its equity at the time–in cash and cash equivalents, most of it unencumbered. By practicing prudence and patience earlier in the decade, Berkshire was in a position to put large amounts of capital to work in 2008. In other words, rather than blowing its ammunition hunting squirrels a few years ago, Berkshire has been able to shoot the proverbial elephants now walking by.

Of course, we’ve always preferred managers who do not view the companies they run as their personal piggy banks.  I think we as owners are getting one heck of a deal by paying Buffett a $100,000 salary. (He earns less than $200,000 in total compensation annually.) Buffett allows his significant ownership stake in Berkshire to act as motivation enough to perform well as a manager, which nearly perfectly aligns his interests with those of common shareholders.

While many corporate managers may say they are positive and careful stewards of owner capital, few overtly view common shareholders for what they really are–partners. For being a successful managing partner, both in principle as well as in practice, Warren Buffett is our 2008 CEO of the Year.

©2012 BUY LIKE BUFFETT. All Rights Reserved.

BUY LIKE BUFFETT - Make Money Investing The Warren Buffett Way