Yet Another Value Podcast - The Fairfax Way with David Thomas $FFH.TO

Episode Date: December 16, 2025

David Thomas, author of The Fairfax Way (amazon link: https://amzn.to/4adQ7JS), comes on the podcast for a wide-ranging podcast on Fairfax, including the company's origins, macro wins, missteps in insurance, and what the future looks like for Fairfax as Prem approaches his 80s.__________________________________________________________[00:00:00] Andrew returns with David Thomas[00:02:31] David’s background in business journalism[00:06:25] Fairfax’s long-term investment returns[00:08:16] Evolution of investment and insurance strategy[00:13:01] Fairfax’s stock picking and equity style[00:16:39] Inflation themes in stock selection[00:20:32] BlackBerry investment strategy and challenges[00:24:14] Macro success: shorting housing and tech[00:29:20] 2010–2016 bearish misstep reflection[00:35:12] Politics influence on macro decisions[00:36:56] Prem’s current macro outlook[00:40:55] Discussion of Fairfax valuation[00:41:34] Book value and buyback logic[00:44:28] Overview of the short seller campaign[00:49:04] Perspective on Fairfax's hedge fund lawsuit[00:51:14] Succession planning at Fairfax[00:53:44] Stability of all business segments[00:57:45] 15% target: still realistic?Links:Yet Another Value Blog - https://www.yetanothervalueblog.com See our legal disclaimer here: https://www.yetanothervalueblog.com/p/legal-and-disclaimer

You're about to listen to the yet another value podcast with your host, me, Andrew Walker. Look, I've been off for a month on paternity leave for the podcast. Not too much for work. I've been working pretty hard the whole time. But I'm excited to be back with the podcast, and I think you're going to enjoy today's episode. I have David Thomas on. He wrote the book, The Fairfax Way, which is The Book on Fairfax. Fairfax for Value Investors is, you know, it is a complicated name.

Some people compare it to Berkshire. there's been a story history with short sellers. It's got some of the best macro calls you're ever going to see. David wrote the book on it. Obviously, I read it. I enjoyed it. I'll include a link in the show notes. But we talk about all things, Fairfax.

We talk about the history, the short selling, the macro calls, the investing, the insurance. We kind of wrap it up with what do you think about the company going forward, all that sort of stuff. So I think you're going to enjoy it. We're going to get there in one second. But first, a word from our sponsors. Today's podcast is sponsored by try trotta.com. Look, I've mentioned Trotta multiple times over the page. few months. It's a product that I've really come to like and enjoy. It is expert calls between two

by-siders, right? You get two by-siders on a call. Sometimes you have two bears. Sometimes you have two bulls. Sometimes you have a bear and a bull. And they're talking about a company. Do you want to learn about Uber? You get a bull in a bear. And a bull is out there saying, hey, network affairs, all this sort of stuff. You've got a bear saying, hey, Waymo is coming. And they debate all the key topics, all the key trunks. But the best thing I can tell you about Trada is I had two friends recently who emailed me and, you know, they know I work with Trada and I talked to them. They said, My least favorite thing about Trada is when I'm researching a company and they don't have coverage of the company because I love to start my research off with looking at the Trada call and seeing what smart bowls and bears are debating about the company. And I thought that was just such a great endorsement and I kind of feel the same way.

So I wanted to really that impaired you. If you want to try Trota, just go to try trotta.com. That's try, T-R-A-T-R-A-T-T-R-A-T-T-R-T-R-T-O-M and check them out. All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. With me today, I'm excited to have the author of the Fairfax Way. David, Thomas, David, how's it going? It's going great.

Happy to be here. Thanks for the invite. I'm really excited. I've followed Fairfax off and on for years, and I'm just really excited to dive into everything with them. Before we dive in, just remind everyone, we're talking about a book. Nothing on this podcast is an investing advice. You can see a full disclaimer at the end of the podcast.

So, dude, let's shove them into it. I'll just start here. Why don't you give a quick background, quickly give your background and why you were interested in writing literally, the book on Fairfax, and then we can just start diving into all my questions. Yeah, you bet. So my background is business journalism, Canadian national business, the major national news paper brands running the business coverage.

So, and then run magazines and things like that. I started off writing markets and economics, so I'm a bit of a numbers geek that way. And I love a good story that's got interesting numbers to study. And Fairfax is certainly one. of those. So over the decades, you know, going back, these guys started out in 1985. And so I wouldn't have come on the story until the late 90s, where I paid any attention. And by then they were going gonzo, right? They were making a lot of acquisitions. And, but I still studied them over the years a little bit. I discovered Prenz letters, you know, after I discovered Warren Puffett's

letters and used to just read those every year. And it was just an interesting company to, to follow. It sort of fell off the map for me and I think for off the radar for a lot of investors in the decades that followed. So I sort of jumped back in and out of the story. But what happened was, you know, to jump forward to more recent history. I did a piece with Prem and I reached out with to Prem Watson, the founder, CEO, chairman. And we got on to, we got on to, to his vision of capitalism and how he came to it and how he thought that, you know, capitalism is a force for good. It's under a lot of pressure these days.

We need to step up our game. We need to, you know, let the magic of capitalism work its way. But also, he saw something else in it. And, you know, he's got strong religious background. And he thought the company should stand for good as well. You should treat people right. And that became a big part of his license. Anyway, we had this conversation, did a long Q&A with him.

It's sort of far-reaching, looking a little bit of his history and what's right in the world, what's going on in India, and where Canada and the U.S. needed to go. And I think something clicked with him. I really enjoyed the interview, but he is the guy, you know, he's famous for being really, you know, people thought of him as a recluse. He just, he saw no need for media. Again, sort of similar to Buffett and a lot of the value guys. But I think he thought, you know what, you can, to me, you know, I think, David, you can sort of translate me and maybe we should do something.

But it took a long time for the book to actually come. And I basically had to say, you know what, I'm going to write this thing. And I guess I'm going to have to make you happy. You're going to have to trust that I do a good job. But I'm willing to just step in and start going on it. And I basically, I think I'm going to have to prove to you that I can tell this story and and capture it for you. And so that was kind of cool.

It took three years. It was a dance. It moved slowly at first. And I sort of just started reading and researching. And then we really got into it and then finished it. If I can, if I can hop in here. So you, you actually answered my second question really well right there. My second question was going to be, tell me why Prem obviously participates in a lot, a lot in this book.

and everybody in Fairfax. They are kind of recluse. So that was my second question. I will comment on one thing. You said, Buffett has no need for media. I think Mr. Buffett is, he's pretty skilled at getting immediate and he does a lot of CNBCs.

But let me ask my first question. Look, a lot of my listeners, my listeners tend to skew, you know, their value investors, they tend to skew. But I've got some friends who listen because they love the cut of my jabbin and all that's yourself. Why should anyone care about Fairfax? Can you tell me just, you know, the headliner,

what is the track record here? Well, yeah, exactly. I mean, you might come at it, loving it because you're a value investor. You might be interested in insurance. Investing is always the sexier side than insurance. Track record, though, I mean, that speaks volume. So it's 19.2% cumulative annual return through the end of 2024 from their start in 1985. So that puts them up in very, very good company. it's not it's not quite berkshire but i mean we're we're approaching berkshire levels of returns and well there so so not for early days i mean even even fairfax was running at 35 you know 40% for a while they were uh you know it's easier when you're coming out from nothing right and you're buying up companies and but they're they're they're actually accelerating which is kind of cool because berkshire hasn't been able to maintain you know the the early returns uh fairfax is actually They're getting the second win.

They're almost like a teenager as they turn 40 because they made a lot of mistakes. And they're really, they're kind of firing on all engines right now. Well, I mean, Fairfax is big. But Berkshire, the reason they slow down is they are so, so F&B. Like at some point, you become the market. And it's just impressive. They've managed to. But let me have this now.

You mentioned, look, Fairfax is the story of, it's kind of got, there are a lot of stories here. But as a business, it is the story of three things. The investments, the insurance, and the macro calls, I would love. I would say. And you can tell me if you think I'm wrong, but I think those are three driving things. And I just want to ask you, like, when I talk about the, we can talk about each side and there's a lot in the book, but what do you think Fairfax is really the best at when it comes to those three? What do you think has been kind of the driving force over the past 40 years for them? I think if you look at them at different points in time, they change hands, right?

So in the early days, these were smart investors that bought insurance. And frankly, they were maybe a little cocky and thought that running insurance wasn't that hard. They were good at investing. He already had a good record. So what happened was they were buying and they took a value approach, which was maybe a little short-sighted, but a value approach to buying insurance. assets, not just on their investment portfolio. And they've discovered a lot of long tail liabilities. You've got things like asbestos and whatever. And so buying a broken insurer is not necessarily a great strategy. So the good thing is early days strong investment record, which offset a lot of

a long time of turning these broken insurers around, right? No, you hit the nail on the head because I'm familiar with Fairfax kind of in the past 15 years, you know, kind of since I've been a working professional. And the past 15 years, the story is the hedge macro call in 2016, 2010-2016, which we'll talk about, the inflation call and the insurance business really firing on all cylinders for the past 10 years. But when I was reading this book, you know, it jumps out to me. My first question, what's going to be, you know, the first five insurance companies they buy it, under-reserved. under reserve right off the surety business almost puts them out of business. I was kind of wondering, like, would Fairfax have been better off without the insurance business for, maybe at this point, no, but the first 25 years, would they have been better off

as a traditional kind of hedge fund just investing and making macrofalls? Impossible to say. I mean, they had a pretty good record, so maybe. But they wanted to make it work, and they took a very long-term view. And, you know, I think, I think if they had decided, you know, they're basically taking a Berkshire model, right, in doing the investments and having the insurers on the other side. Now, there is a third leg, which we haven't really talked about yet, which we can get to, which is all the non-insurance operating companies, which have really come into play for them. but if they were committed to doing this kind of model with those two engines, would they have done it the same?

I think is maybe a better question because, you know, they say that they probably would have done it the same, but there's certain assets that they bought that Prem said, you know what, I would not today buy an asset in that kind of shape and think that that was a good investment because it just takes too long. to turn around. So would they have done it exactly the same way? I doubt it. But what do I know? You know, maybe. The point is that these guys learned. And I think this is really important, too,

because you look at them as a turnaround story. And did they change the model? No. Did they bring in new management? No. What they did was learned how to retool their strategy and to rethink, you know, a core value investing strategy and to stop buying, you know, broken insurers. Their last, you know, companies that they bought, especially Allied World in 2017, which was the biggest, a huge one. And it's all kind of been bolt-ons after that. And they're not in the business of buying broken cheap rundown, you know, assets anymore for sure. It's just because you read in the early 90s when they're doing these and they're buying

insurers left and right, you know, below book value. And you read it and as somebody who's been doing this for a little bit, like, oh, they're about to learn the same lesson I did. You buy an insurer below book value. And it can be good, but you better be real careful about that reserve because they just, one after the other, they buy and they're like, oh, there's a lot of asbestos reserve. It's just funny. Like the greats, they're just like us, you know? Let me turn today. I really want to talk about macro because I think macro is the sexiest thing. But let's talk investments. You know, one thing, you, you mentioned the investments and obviously they get their start,

Prem gets his start, you know, running money. He goes to business school. He learns kind of, not the Warren Buffet way, but he learns value investment stuff. The one area of the book I think that kind of gets glossed over is a lot of just the stock picking and stuff. So I love to talk, like, what is Prem and Fairfax? What is their value investors, obviously, but what is their stock picking skill?

Like, how is their track record just picking stocks, separating out the macro, securing out the Holyoan Company? How is that going to help them over the past 40-ish years. Yeah, and you just mentioned some of the macro stuff. I mean, they're most famous for the big bearish calls. We're going to talk about that as soon as we talk as soon as we self-investment. But I'm just talking to stuff.

And those made a lot of money. Because this stock, every now and then, you'll say like, hey, this Indian company that they invested 200 million in and now it's worth 600 million or something. And you'll be like, well, that's a lot of money, though it's kind of small on the scale of Fairfax Day. But it was the one area was like, oh, I don't, I think they're skilled in investing, but it doesn't really break it out. So I'd love to just ask you that as suitless or seven as a follow-ins to the book. Yeah, they roll stuff over. I mean, they're long-term investors, but the portfolio

has changed a lot. So if you check in, you know, once a decade, you're just going to see different companies. It's not like, you know, you associate much fewer companies with someone like Berkshire Hathaway, right? I mean, you can go back and look at Gillette and Coca-Cola or whatever. Apple is the big thing now and some of the operating companies. It's changed a lot for them. So it's, you know, it's hard to sort of sum it up in a,

you know, a sentence. They love to invest in this. They're in commodities. They're, I mean, they don't do, they don't get into technology. He's, he's not into, too, too much technology. They've bought Micron before,

but not, not a whole lot. So, You know, tracking the 13F, whatever, as investors, you want to see what they're into. Today, you're going to see names that you might not be even able to buy, something like Eurobank, which is the huge star holding for them. And it was a huge value in. They bought it. It went down to almost nothing. And this was when the deflation and post-crisis period were the pigs, if you remember, the pigs.

So the G and pigs, Greece, they bought it. bunch of assets there and they had to just keep recapitalizing and recapitalizing. And finally now it's the biggest holding. And other things they buy that would have been publicly traded but have now been privatized like Poseidon, which is Atlas, which is David Sokol, who runs that and that C-SPAN shipping. So it's a name that everybody knows. But it's now he has a couple of partners there. They control it, but they don't own it outright. So, you know, it's hard to sort of sum up, you know, their approach. You can see their returns, though, and they do very well on the equity side. Bonds is the big, much bigger part, of course, when you're investing at the

float of an insurance company, right? And they're very good on the bonds. So let me do one more on investing. And this might smoothly transition us since the macro. You know, when I look at their investments i look at their 13 a half i look at their annual report and they break out it's funny they break out their common stocks but they break out like the top six holdings and then there's just other which are you know 75 percent because they've got so many so uh yeah but when i look at i'm just looking uh oral mining is the big publicly traded one that they don't like fully control there's occidental petroleum you know it's got a flavor of and we're going to talk about the two thousand twenty two big inflation when they have but it does have

the flavor of someone who is bringing a inflationary protectionist mindset into the investing? Am I imprinting that? Or do they kind of bring their macro views into how they buy and pick common stocks? You know, that again would primarily be an issue with bond market, obviously, on macro calls and interest rates and inflation and everything. But I don't know what I could really say in terms of how to define their macro focus, but, you know, there are sectors that they keep returning to, and they ended up building and sort of doing a big roll-up. It's called Recipe. It's a whole bunch of fast food and family food restaurants. So that was kind of like an unlikely business you wouldn't normally associate with them, but they've stuck with it and grown it. And now it's a,

it's a big part of the revenue stream as well. And shipping, you know, I think Prem, what Prem would tell you is it all comes down to management. And if somebody has a good company and wants to sell it or be partnered or help take it private or whatever, he's going to be investing in management. And they bought a mattress company recently. You know, you wouldn't think, what macro call would you make to sort of say, I need to be in mattresses? I don't know.

But they're now in the mattress. Sleep country was a big acquisition recently. The big comparison, I mean, look, Fairfax is obviously modeled a lot off of Berkshire, and that's the big comparison. It's constantly mentioned throughout the book. Teledyne comes in there a little bit. But I did think it was interesting. I think it was Chapter 9.

I can't remember if it's in a section, if it's Chapter 9 of a section or Chapter 9 overall. But you have a section like just talking about the importance of management to Prem. And they're talking about, hey, how one of the CEOs that they have currently, they identify them. And they're like, hey, come on over. And he's like, well, what role are you going to give me? And they're like, we don't know, but you'd be perfect with us. Well, we'll buy right. And it was really interesting because Buffett, he appreciates management, obviously, and he'll work with them.

But, you know, he's also the guy who said, you've got to find a business that can be run by an idiot because eventually an idiot will run it. And I was a little taken by, you know, the CEOs there, 20 plus year, 10 years, almost across the board, the focus on management. Am I putting too much into that or do you think that's kind of accurate? No, I mean, that's, again, he would say it's it is about management. management, management, management, and that's Phil Kerratt, is somebody that he really admires. And, yeah, the person, there were a couple of cases where people got hired with no job, and they didn't know what to make of this, you know, and he just basically is looking for culture and fit, and somebody who has a track record of investing and running a company profitably.

So those are the people they were after, whether it was the mattresses, whether it's C-Sys, ban shipping, whether it's the restaurant operators. And it's all part, you know, of being decentralized, right? Where you really, you've got to trust the people to run it. Oh, decentralization is a huge thing here. Let me ask a more question on the investing side, and then we'll go to macro. You know, the one investment that I think really got Fairfax in the news that is not mentioned a lot in the book is the Blackberry investment in kind of the 2010, 2012 range. And if you're just listening to, even if you don't know Fairfax, right, we've talked about macro we've talked about buying a shipping company we talked about uh you know

he's 10k a mining company uh stilco which is a steel company a lot of hard asset businesses here you mentioned he bought microm once but blackberry he gets really involved with he does a take private that morphs into a convertible bond they they still i believe have the blackberry but that is just it's so far out there and i'd love to just get the story from you of what happened with blackberry what did he see there why did he get so involved because Because it just, it's so, it's the one investment that like, it just sticks out like such a sore thumb versus everything else he's done. Yeah. I think, I think a lot of the team, um, saw an opportunity there.

And, um, you know, I don't know what the one overall compelling reason might be. I know that he is attracted to, um, uh, saving companies that need a little bit of health. and maybe need a longer leash or a little bit of time where he thinks a turnaround is going to happen. And I think, you know, you have two founders, CEOs, co-CEOs are fighting at Rim at Blackberry, and it got kind of messy and it wasn't workable. But John Chen was somebody that Prem really wanted to see in there. And I think he really thought it could happen and they made progress, but it just never really got the momentum going.

So again, I don't think that was, I need to be in technology. I think it was, here's this company. It's got a great, you know, past and maybe they can recover that. And John Chan is a guy that, that I think could really make it work and didn't quite get there. But he's also very patient. So it took, it took them a while to sort of cut free of that. He, they, he offered to take it private and they switched that eventually. into a $1 billion, if I remember correctly, like kind of distressed is convert loan.

The one thing that jumps out also through this book is, I mean, Fairfax basically their word is their bond, right? They go, they strike fair deals. It's Prem, and one of his lieutenants are the entire M&A team, and there are multiple examples to the books of he goes, he makes an offer, you shake hands, and it's done within 24 hours, and they're really honorable. You've got one where they get a reinsurance transaction that I think no matter what happens, Fairfax, we get paid, insurance guy calls them up in a year and says, this unfair. And Fairfax instead of being like, pay us, says, oh, you're right. Let's, uh, let's, uh, let's restrict this.

Yeah. Yeah. Why, why don't they take Blackberry private? I mean, they, they dodge a bullet there, but why don't they take Blackberry private? What was the gating factor there? Oh, you know what? I, I, I could not. I can't even begin to, to speak to that.

I mean, they, they thought there was a strategy there and they wanted to give them time to try and make it work and, you know, uh, there, there was a take, you know, they tried to buy it. They, there were discussions. Yeah. Before, um, you know, there were a lot of balls in the air. And so before there, there were attempts to, to look at a, at a transaction before they went in and did the convertibles and, uh, well, they had a public offer. It's just like, it strikes me as for Fairfax to put a public offer out, and then for it to get morphed into a convert. I wasn't sure if there was anything else behind the scenes or anything. Let's switch to macro.

I mean, I think the thing here, when I was reading this book, and again, it's hard to segment out all the returns, but the one thing I wrote was like, is he the best macro trader of all the time? Like, is this not the story of insurance and investments? Is this the story of a fine insurance business that takes 20 years to get rolling, fine investment? but a guy who just over and over again smashes it on macro trades. And those are like what really cares it. I mean, Jim Chanos, we'll talk about the shorts letters later.

Jim Chanos flat out says, hey, I think I would have been right about Fairfax, except they made so much money on the subprime trade. It bails them out of the under-reserving of the insurance. And we'll talk about that later. But let's just talk about the macro. And you can detail all the hits. We can detail the kind of one miss. But I'd love to just talk about the macro trade in here.

Yeah. And I think that's the key is it's, it's, His record was incredible over a long period of time. They were good in 87. They were already being cautious when there was the crash. If you're looking at Japan in the late 80s, they were pounding the table and saying we should get out of this and sold it all. So the later ones we're going to talk about,

he's actually short. He's got the CDS rate on in the GFC. He's short tech stocks in 2000. Was he short Japan and short into Black Monday in 87, or was he just like kind of cashed up? I might get myself into trouble, but my sense was mostly what they were doing there was selling down their positions. So their equity exposure, certainly the, yeah, the shorting was a much bigger part of 2000 to some extent in 2008 in a very big way. Because for 87 and particularly 89 in 2000, I mean, you detail in the book, and I think people famously know the Julian Robertson, Tiger, like, the thing with Japan and the tech bubble is there were plenty of people who said this is a bubble. These valuations are crazy. The issue was the shorting, right? Like, if you were short, well, cool, you know, you started short in 98, as Prem does. The NASDAQ is up 150% and you've had your face ripped off and you've got a margin. And I was particularly wondering about Japan.

if there was some interesting trade there or anything done. But please continue. So we talked about 87-89. I'd love to talk the ones he's really known for are tech and really GFC in inflation trade. So why don't we hit those? Yeah, yeah. So, well, in terms of macro, yeah, same thing with Japan as what you saw with Japan. At first, it's just a matter of selling down your exposures,

but then they actively did, you know, start putting some trades in to, to short the index. And so they did very well in 2000. And that was also good timing because that was sort of the beginning of a rough patch for them. You know, and Chanos will talk about them doing well in 2007. But 2000 really helped them at a tough time too. That was a very good windfall. But the 2008, I mean, they were warning about asset back

securities and the mortgage market, if you go back to like 2003, 2004, they were, they took positions several years before, before it all blew up. And, you know, they were down a lot on those, but they just kept doubling down and, you know, they were convinced that they were, they were going to do well. Now, you know, it was, it was positions where they were trying to figure out how to protect themselves, protect their capital, right? So they were looking at vulnerabilities if they couldn't pay out and cover it on insurance that they've taken out reinsurance. Now they're worried that the reinsurers are all going to go bankrupt and that the, you know, Fannie and Freddie, who are funding the reinsurers are also going to go

bankrupt. So they went after all of those to sort of save themselves money, but they quickly figured out that they make a bundle if all those companies did fail and it happened. Look, I think that's just like, it's the height of investing skill, in my opinion, not the timing of the trade, but that they looked and they thought, hey, you know, I'm not an insurance, obviously. So maybe I'm just a dumb, dumb. But if I bought reinsurance on something I just say, hey, this is done, right? It's off my plate. But I think it's the height of risk management that they said, hey, what if our reinsurers went bankrupt and looked at the reinsurance balance? Because again, yes, there flaws with the rating agencies, but I probably just look and be like, oh, my reinsurers rated A. I've got the rancher. And they were thinking, no, what if they go bankrupt? And they found and expressed a way to make a lot of money. So look, they hit it out the park. You've got the stats of, hey, Michael Burry makes this much much on the CBS crisis. And I think Fairfax makes 10 times as much or something, right? Let's go to 2010 to 2016, because this is when I'm, like,

I graduate college, start investing and all that and kind of when I know them. And I know them as, hey, these guys who made a bundle in the GFC, but like so many people who make a bundle in the GFC, they're bearers the market as it recovers in 2010, right? And they are, you said they doubled down from two and three, four, five on the CSRE to make a bundle. Well, on the shorts, they're bearish the market in 2010. They double down, double down, double down, double down, from 2010 to 2016. I'd love it.

Like, what goes on there, obviously anyone can miss, but the doubling down, like, why are they so hesitant? And because benefit of hindsight, valuations don't look at that expense of then. Stocks were still cheap. The economy was recovering. Like, what do you think kind of miss or what do you think they kind of learn from that experience? Well, yeah, they learned a difficult, a hard lesson.

But, you know, I mean, the the investments they were making and they ended up losing $4 billion. They just kind of wiped out their earnings. It was a, it was, as Prem calls it a very, it was protection. Because again, they were thinking defense first, but it was a very costly protection. And basically, they learned that there's a smarter way to play defense. And if you're doing shorts, it's a one-way bet. If it just keeps going down, you're just going to keep losing money.

But you can do options on the market and protect yourself in other ways that aren't going to open you up to really getting hammered. I mean, that's the beautiful thing about the CBS trade. right? You buy it and if it pays off, you make multiples, multiple of money. And if it doesn't, you kind of know exactly how much you're going to lose. Yeah, you just let it go. But you know what? I mean, I think, and I tried to raise this too, is that you were playing, because I was, you know, covering economics and reading this stuff every day too. And the people who were looking at deflation, I mean, this was like, this was always the fear. You know, people who's learnings were sort of born in the Great Depression, they always think, are looking for.

return to that kind of environment, right? And deflation is a big part of it. And deflation happened in Japan. So here we are, you know, the crash has happened. Inflation is zero. It's dipping into deflation in a lot of markets. The debt load. Again, we talked about the pigs, whatever. This is all the same sort of period, right? You've got countries that are breaking. You're heading into deflation. The market's suffering. And people had never, we'd never, it was unprecedented what the central banks managed to do, right, a concerted effort on qualitative, quantitative, and buying up treasuries, bonds, you know, whatever. So, I don't know, it's, it's interesting to imagine, you know, how close were

they to being right, you know, and if they were right, they, they would have been the smartest macro guys, you know, ever. But in the end, it wasn't a great call. And I think what they learned is that they were doing it for the right reason, but they were doing it wrong. And so they just gave them a totally new approach to sharding and protection. Look, I haven't gone through the portfolio in depth. But the other thing that strikes me is these guys are investors, right? And they're obviously not running a long, short pot shop or something. But you mentioned, hey, they buy in the depths of the crisis, they buy some like blue chip,

great companies at crazy valuations, right? and their intention is to basically hold them forever. And they kind of sell them in the 2011-2012 range in part because, and it just strikes me like, hey, what of the best trades you can do if you think things are going to go to hell is it they're basically running net short because they've got this, just run it net zero or net neutral, right? Like you hold on to, I'm just going to shoot, you hold on to the Berkshire halfway, you hold on to the J&J and you're just short the market.

And yeah, there is basis risk there, but at least you're not like, you know, if the market it keeps rising, your, your stock should keep, so you don't have this huge drag. It's just, it kind of surprised me that they went so hard in the other direction with the short, if that makes sense. Yeah. Well, it, um, uh, and actually, you know, Prem is really good at owning his mistakes, right? Like says, there's great letter writers do the, you know, they, they, they, they try to turn it into an educational, you know, opportunity for shareholders.

You treat them like a partner and explain what happened. And he sort of, he did the math on. how much they, because they had to sell because their earnings were getting wiped out, but from the hedges, how much they sold of that portfolio you were just talking about. And, and, you know, so far from trying to whitewash it, they sort of said, here's how dumb we are. Here's how, here's how badly we got here. This is a good lesson. You should never do this. And it's, that's kind of cool. So as someone who, right, I really appreciate how much he rubs his, his nose and stuff, especially as someone like,

You write a letter and then you give it to the editor and your editor will always be like, hey, you're not putting yourself in the best light here, right? Like, you want to project confidence and you're the seat. Like, for them, confidence is the most important thing as an insurance company. We'll come back to this on the short sales. Like, you want to project people want to lend to you. And he's just, I just love the willingness. Let me just.

So the end, I want to come to the 2020 and 2022. It's in a second. The end of the big short, in this case, the big short of the equity and the street is 2016. And he says, look, Trump gets elected and we end it, right? Our fears of deflation are over, right? We think the market's going up. And I did read the book. And, you know, there are three times. Trump gets elected. He ends the big short. Moody gets elected in India. And I can't remember the year 2012, was it? 2013. And he says, I've been waiting to go whole log into India. Modi's going to be great. Let's go. Let's get in India. And then in Greece,

I mean, they start doing the distress stuff and they really lean into the distressed stuff. when I don't know the Greece prime ministers, but he's like this great Greece prime minister who I believe is more on the social side, but like takes care of everything. So that's three times where he lets the politics come and influence the macro and the investing. And that's interesting to me because politics and macro are obviously very intertwining, but a lot of macro people I say like they're aware of the government. But this was just like for a value investor, whole hog doing like saying, I like this politician,

let's go. I thought it was interested. So I'd love to hear how you think he kind of equates politics and macro and investing. I would just, I would draw a direct link back to how we were talking about management. And I think what he's looking for there is just people who have the right vision in an environment where, you know, equity values and the economy are all beaten down or just, you know, have so much room to grow in something like India. And is, is Modi and in that. instance, the guy who's going to be able to make enough progress on corruption and deregulation and, you know, doing the macro things in the country as a manager. So, you know, I think that that's, that's, that's just reading the tea leaves in a really smart way, I think. Yeah. Excellent. Excellent. I mean, he makes a lot of money in the inflation trade in 2022. We can talk about that if you want. I don't think that it's quite as interesting. I think we've hit on it a lot.

So if you're okay, unless you've got any particular insight, I'd love to just end the macro call with, look, I just went and re-read his 2004 annual letter. Pretty barrenish, right? He says, hey, U.S. stock market is 70% of the world index, despite only being 26% of the world economy. I'd probably take some umbrage with that just based on a lot of, you know, Apple isn't only a U.S. company. But he says that, says the market is more expensive than during the dot-com bubble, compares it to Japan in 1989, complains about the MAG7, worries about the downside if the wealth effect of the U.S. stock market ever drops. So I'm probably answering my own question here, but you recently spent time with Frem. You know, I'm probably better than just about anyone

outside of Fairfax. Where do you think, like, he thinks the macro is? Where do you think, is he making any big macro plays right now? How do you kind of think about the macro framing for them in the moment? I'm not aware of any sort of marked change in terms of where their exposures are going, but he's always been that way if you were, and I was the first thing I did when I started to get to know them as I read through, you know, 40 years of letters. And he's always flagging, you know, concerns on valuations, uh, distortions, uh, potential issues. And some of them come good. Other ones are just, you know, hey, let's, let's watch this. And you'll get the occasional caveat impor, you know, advice to, to, to, to, to people to watch out.

So, yeah, that's, you know, it's not, it's not super bearish overall, I don't think. I think he's probably less of a, you know, sounding alarms these days, certainly compared to in the past. But yeah, no, that's just prem being pram. Things are expensive, you know. Let's, you know, tread carefully, I think, is just a general sort of message to, to investors. They haven't completely stopped the buyback, but they've really slowed it down this year. Do you think that, I mean, your book, because I would just guess based on when you publish your book, you probably wrap up the writing early 2025, would be my guess.

Yeah. You know, fair, go ahead. Is that right? Yeah, yeah, yeah. Fairfax for those who have been following, I mean, from 2020 to 2025 are on a great run. You know, part of it is they nailed the inflation trade. A lot of their stocks go in. And I mean, the stock is probably a three-bagger.

four bagger since 2020 and they're still buying back stock as this happening and it is just noticeable to me this year they've really slowed down the the repurchases do you think that's hey they think they're getting closer to fair value so they don't need to be as aggressive or do you think that's they're thinking hey we're still undervalued but the world is a scary place let's have dry powder ready because it's always served us in the past i think there's i mean there is a lot of dry powder so that you know who i don't i'm not privy to what they're planning on investing in in a big way. But they've always made it clear that they like buybacks.

And it just, you know, that starts bringing you into what's intrinsic. You know, what's intrinsic value? If the shares are trading below intrinsic, they're going to say whenever we can, we're probably going to be investing. Now, he also sort of laid out, you know, this is the Henry Singleton stuff with Teledy. and incredible allocation of, you know, issuing shares and buying up everything and then buying back all the shares. I don't know, you know, the running total, it changes every month.

I'm not totally on top of it, but it's, you know, it's over 20 percent since they started this last run of buybacks. And there's no indication that's, you know, it's, it's, it's, it's, it's, it's, it's, it's, it's, it's, going to be over. So I, you know, I would just keep reading the, uh, the letter that he writes each year and, um, um, it, there's no, there's no, uh, stated plan where this would end. In 2017, when they sort of said, hey, we got to go. He laid it out at that point. And he said, actually, we're planning for the next decade to be really going at this. So maybe they got a couple years left. Maybe it's, uh, maybe it's going to, uh, keep up. It's just, because again,

He lays out intrinsic value, but much like Berkshire, you know, he says intrinsic values higher than book value, but you don't know how much, right? Is it five times higher than book value? Is it two times higher than book value? It's interesting because right now they've slowed the buyback program. This stock trades for about two times price to book. So you wonder, again, maybe they think this is around fair or maybe they're just getting their drive powder rate. I want to talk about the one other thing. I think it's quite, it's closer to like 1.3 times book. But again, some of the number, some of the number. Some of the number. are lagging and, you know, good time to take stock is, you know, it's end of December soon, so we'll get fresh numbers. And I could be completely off. I just, I just looked at Fairfax holding Canada. Maybe I'm doing USD versus CAD, that could be the issue. But Fairfax holding Canada trades for 2,400. And I'm looking at their Q3 that has the book value at 1,200. But I very much, no, I think that per share is in book, whatever, it doesn't matter. Let me look at probably U.S. but the 24 would be Canadian. Yeah, so maybe that's where the...

Let me go to one last question. The other place that Fairfax is very famous in financial circles is the short report. And you, the shorts from kind of 2003 to 2006. And you detail it a lot, you mentioned a lot. But I'd love to just go through. Maybe you could do a quick overview of what the short, the big short thesis I am

that I'm talking about. And then I've got some questions that I'd love to dive in with you. Yeah, just, I mean, a quick recap. So things really, there was a little bit of shorts happening before, but it really began in earnest when Fairfax took a U.S. listing on the NISISE. And part of the plan there was just more exposure. By this point, they really, most of the acquisitions that they'd made in the late 90s were American.

So there was a real American presence there. And they thought that would be a good idea and a good exposure for, for the assets. Things like Odyssey, Odyssey Re. Anyway, boy, it's a long messy story, but a number of different hedge funds were involved in it, became a little very, well, actually quite colorful. They hired some people, some investigators,

and it got into some rather questionable tactics and things, which never actually made it to, to litigation. So I'm going to have to speak of them as just alleged. But the stories are very colorful. There's a lot in the book to read. But it played out over a number of years. Fairfax was, you know, still digesting some broken assets.

They didn't have the deep reserves. They had to shuffle around money. They had to buy insurance cover, which is like an extra, you know, chunk of reinsurance just to make. make sure that they were able to have the cash flows to feed companies like Crumb, Crum Enforster. Odyssey was in better shape by then, but TIG and a few others, American assets. So anyway, they were pressed and the shorts managed to get a lot of newspaper coverage and alleging that this was the crime of the century, the fraud of the century, it was another

Enron and Pram being Prem thought, you know, maybe they'll just go away and let's not fight them. And eventually they filed a suit, a major suit in 2006. So this thing just dragged on and on. And at that point, they launched a $6 billion suit against the hedge funds and the whole thing kind of did. So let me ask a few questions. here. One, I mean, one of the things is we saw it was Silicon Valley Bank in 2023, right? Insurers, particularly banks, but insurers to rely on kind of the whims of the market, right? They are creatures to the market. They need financing at some point. I think Fairfax says,

hey, if our debt ratings get pulled, if we get indicted, whatever, like, we're not going to be able to function anything. So how much of the short report is these guys, and there's some, there are some very bad actors on the short side. I mean, one person obviously gets indicted, it goes to how much of the short report is, hey, we think we can just create our own destiny by making a bunch of, by kind of creating a bunch of smoke at this little Canadian company that doesn't have any PR function that doesn't know how I respond. We think we can create our own destiny and send it to zero. And you've got in the book, they're going to hire Bob Dylan to sing at a party over Labor Day as if once they zero the second. How much is it that versus how much is it, hey, there is real smoke here. there is an under-reserved problem.

Like, where would you put it on the spectrum between the two? Oh, I don't think I could weigh one versus the other. But I think, yeah, if you were, you know, and maybe Chanos wasn't looking that closely, other people brought the idea to him or whatever. But if you're looking at a company, like Fairfax that it had a bunch of broken assets that didn't think, I mean, I guess I'm trying to think. If you looked at those, you might think, those guys are stupid. They should be selling off those companies.

They should be doing write downs. They should be just cleaning up. Whereas, you know, they didn't get that Fairfax doesn't operate that way, right? They didn't get that, you know, we're just going to write it out. We're going to fix them. We don't want to lay people off. We want to make it work. We wanted to make Blackberry work.

We wanted to make Eurobank work, which eventually did. And so you can't blame them. My guess is what I'm saying is that they did look vulnerable. And but then you get the issue of them not talking to the media. You get the issue of them having so, you know, such a wide global reach. You've got holding companies in Madagascar for Indian assets. You've got joint management of all these different companies that they're being used to capitalize their, their operations.

And it can look confusing and you might think that they're hiding something. Or it could have just been confusing. And I think, I think it actually was just, they didn't design it to be confusing. They designed it so they actually had maximum flexibility in having all their holdings capitalize their, their network of companies around the world, and they could shuffle it around. So, yeah, I hear you. The one thing that just remains crazy me in hindsight, it's kind of a throwaway. But so Fairfax has Odyssey, which is one of their gems.

And as part of all this shuffling in 2003, they IPO a piece of Odyssey. And then they have to do a weird convert deal because the IPO too much of Odyssey and they own 74% and they need to get to 80% for tax reasons. And that sounds normal. But I also look at it, I'm like, look, I'm not a tax expert, but I know you need 80% to consolidate for taxes. And I don't know how a company can accidentally IPO too much of like kind of their crown jewel insurance officer. So I look at that, I'm like, man, it wasn't right in hindsight, but I can see why I short stuff. would say, hey, this company doesn't know how much it's IPO, and if it's subs and doesn't know how much,

I can see why they were a little worried, you know, that's pretty simple. Reserving for surety bonds and a specific side bill. If you can't get Odyssey's IPO right, like how am I supposed to trust your accounting on the reserves? Well, I guess there was a lot of demand and maybe they just, you know, let it go too far. I don't know what happened there.

But yeah, they did, they did buy it back with a convertible. I want to ask one other question here. the Fairfax suit against the short sellers they sue all the short sellers i believe it eventually gets tossed out for the most part on jurisdiction grounds and a bunch of other things yeah i guess you know again just my training when a company now this is 2005 and the rules are much different in 2005 than kind of what we come up with and know around short sellers today but my training today is when a company sues the short seller it's the company that you you kind of want to point the eye to And I believe Bethany McLean suggests in one of her articles that this suit was done to muzzle the hedge funds and it never pays out, right?

So I just want to ask you, what did you think about the lawsuit against the hedge funds there? Oh, you know what? I mean, they, well, the book covers all the drama. And really what they were seeing is, is that the campaign was being stepped up, that Bob Dylan was being hired to sing at their funeral party in the Hamptons. and so I think they decided we haven't I mean they would have considered lawsuits before but at that point they just decided you know what we've now got to get our story out in the open so there was just no opportunity before then to put the allegations on paper and and in terms of the strategy you know yeah it was jurisdictional it was New Jersey it was racketeering elements to to the the complaint And so there are reasons why they did it there. And then they ran into, you know, the judges excluding some people and some whatever. So they won some settlements separately in that.

But the whole thing has never officially died. It's still sort of sitting there. Yeah. Let's, we got about five minutes left. I have one final question I want to ask right at the end. But let me just ask, the book ends and it talks about succession, right? and it talks about Prem's son is going to become the chairman, very much like Warren Buffett's son, Howard,

I believe will become the chairman of Berkshire. Now, Prem is younger, Prem's mid to late 70s, so he's probably got fingers crossed 10 to 15 years if he follows the Buffett model, but he does have this session coming up. You identify the CEO and waiting kind of in the book and everything,

but just what does the future of Fairfax looks like? Because when you lose the top guy, I know it's easy to say the culture has been set, all this sort of stuff. But this is a verb that's made their living on, as we've discussed, big macro swings have been a big part of what they've done. And you lose the top guy who's willing to say, hey, let's eat these CBS losses for 2003, 2004, 2005, 2006, until they pay off in a major way. You lose that guy. It's going to be really hard for the next person who doesn't own as much stock, who doesn't have that reputational.

It's really hard. So what do you think the future of Fairfax looks like? Well, that, I mean, for them, I mean, obviously they recognize the need to address succession, and they've been building a lot of depth in there. So from the CEO level, they haven't been able to say that until the last few years. So now they have Peter Clark. The architect of the insurance side is Andy Bernard, and he's, his protege has been working with him for 30 years already. And he's, he's got fewer years on him. it's Brian Young.

And so I think, you know, they feel like they're in pretty good shape. And on the investing side, they've still got some of the guys that have worked with Pram alongside him like Roger Lace and Brian Bradstreet, who's the Bond guy, the bond whiz, the master of their short, big short. So they're still active, but they've got a young team that have been making the investment decisions for the last, you know, 10 plus years. And I think they think they've got the right people in place. So, and it's a different game too. If you sort of look at the who's the architect as founder and, you know, the early days of choosing what to buy and making the strategy to

buy all the insurance companies, whatever, the way they see it now, it's more bolt-ons and the insurance company, keeping the insurance companies profitable and the investments, especially now that bonds will come back are in a really good space. So, you know, and I don't think Prem's going to be stepping away anytime soon. You know, two last questions on the future of Fairfax. Number one, I think you could tell the story of Fairfax in seven lean years, seven fat years, and just the cycle happens over and over and over again. I mean, you absolutely can.

Now, some of that might be luck or whatever, but, you know, I would say right now from 2020, to 2025, we're kind of at, we're, we're in the midst towards the tail end, if you believe, the seven fat years story. We're very much in the fat years. Do you think, you know, it's a little bit different now, though, because the insurance segment is really working. Now, that might be macro, hard insurance market, or it might be, hey, they've got the crundials. Do you think we're going to repeat that cycle, just knowing Fairfax, having seen the history? Do you think, you know, I'm not saying tomorrow goes lean, but are we going to see another seven lean years, or is this just a more stable, bigger company and kind of the boom bust is a little bit past up?

I think, you know, and I sort of led off, I think the preface in the book is Prem sort of, you know, dawning on him how things were coming together just a couple of years ago and, you know, that we've never been in this position before. And we talked about this before. It was always a case of the investment side's doing really great and the insurers suck. The insurers came back. And then you had the hedging drought, you know, with the parking brake on and wiped it out. So I think it is interesting to look at that sort of pass a baton, pass a baton.

Now, what's happened differently now is this emergence of a third, a third engine, right, which is the sea spans and the banks. And they've got banks in Egypt. They've got a lot of new digital insurance companies being sort of nurtured along elephant IPOs. And so the complexion of it is really changing. So I have no idea if things are going to crash or slow down or whatever. But what's interesting now is there's no part of the industry. There's no part of their business that's broken. And that's what they've never been able to say before.

So is it going to last seven years and it's going to change? Maybe. Who knows? Yeah. I don't know. As you say that, it strikes me like we've talked about how Berkshire. the parallels are there. And, you know, Berkshire was, it was investing, and then it was investing in insurance, and then kind of starting in the 90s, it really got the own businesses going. And

it does, the railways and all that. Yeah, yeah. Fairfax sitting that. Two more questions, and then I'll let you go. First question. Are you, Kennedy Wilson, has mentioned a few times throughout the book. Are you familiar with what's going on right now there at all? Well, I'm not privy to, I mean, there is an offer to take them private, to involve The founder again, it's all about the person. So, I mean, the relationship that he's had, the Prem has had with them has been really strong. They collaborated on rescue of the Bank of Ireland. It's they, with that team, they went into Greece after that.

So the partnership has been really strong. And then, of course, you know, when when rates turns and regional banks, got caught in the bear bond market, right? In 2022, they brokered Kennedy, Kennedy brokered the big regional bank. I forget the name of them, Pacific Northwest Regional Bank and buying a huge bond portfolio. And in the process, they also took the whole desk that ran that operation and brought that from the bank to Kennedy. So now if this all goes through with Fairfax,

that's all going to sort of be in-house, which it'd be interesting to watch. But yeah. No, I just, it's been an on and off again. Kennedy's been in on a position of mine, and it's currently on over the years. So it's, A, it's the one thing that Fairfax is most likely

to be in the news for in the next two months and be out of personal interest. I had to, but none of the, the relationship, the way Prem speaks so warmly of him, the, you know, you mentioned the C-SPAN. It feels like that's a business that they want under the Fairfax roof if they can get it at the right price and bring that management team and everything in. Last question I want to ask you. Yes.

They have, they've taken it down 15% long-term target. Fairfax is big, man. That is a tough target to beat. Do you think that is still a realistic target for them going forward or do you think they're going to have to? Berkshire. Berkshire brought all their return things down over time. 30 years from now, Fairfax would have to bring it down. But do you think for the next, let's call it 10 years,

that's still a realistic target, or are they going to be bringing it back in? I mean, they've softened it over the years, right? They've got changed it from, you know, an ROE to, and then 15% growth and book value, and then not annually, but over time. So they changed, they changed the calculation a little bit over the years.

And, you know, prems talked about keeping it high. to keep them focused and they knew that they would have trouble it was 20% when they started and then they dropped it to 15 so where it goes from here you know I doubt they're gonna drop it can they hit it every year maybe but they're they're closer now than they were a few years ago so well David thank you so much for coming on look I've been wanting to talk about Fairfax for a long time I followed it loosely for the past 15 years I learned a lot especially about the first 20 years, but, you know, a lot of stuff on the shorts, a little bit on

the macro. I really enjoyed it. So thank you for coming on. I'll include a link to the, I'll include a link to the book in the show notes. If anybody wants to hop on and get that Amazon book or anything. Yeah. Appreciate it. That's great. No, no, I love talking about it. It was a great book to write. So good talking to you. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guess or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a finance. financial advisor. Thanks.