Friday File Part One: Visit to the Thawing North, and a Few Buys (and sells)
by Travis Johnson, Stock Gumshoe | April 27, 2018 4:47 pm
Notes from the Fairfax Financial Annual Meeting (plus sum-up of a bunch of transactions -- more coming in separate posts this week)
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Source URL: https://www.stockgumshoe.com/2018/04/friday-file-visit-to-the-thawing-north-and-a-few-buys-and-sells/
Thanks for the write up, makes me want to go out and buy some Fairfax, but already have a lot of Fairfax India. Really happy with the Toys R Us deal.
Travis — You made a good number of positive points about Fairfax with the most important one being you added to your position. I may be overlooking a positive long term capital gain because I can’t reconcile with this type of nepotism with appointing 2 children to the Board.
John K M
That depends on your perspective, I guess, and the addition of his daughter this year was a little troubling to me originally as they “double up” on the family board positions.
But along the same lines, Berkshire Hathaway has Warren’s son Howard on the board, set up to be Chair after he departs, with the sole job of “maintaining the culture” — and other than the fact that Howard is arguably less qualified professionally than Prem’s kids, that seems very similar to what Watsa is doing here.
My decision, after some thought, was that it’s not terribly egregious, and I have no reason to avoid the company just because they’ve promoted a couple family representatives to the board over other qualified potential boardmembers. While Prem Watsa’s around it likely won’t make any difference regardless, since he has huge influence over pretty much everything and has super-voting shares that make his (and presumably later his family’s) control insurmountable… and he has made it clear that Fairfax will never be sold, so this seems to some degree like ‘grooming’ the future holders of that super-voting control stake.
Because of the fact that both Fairfax and Berkshire are heavily reliant on their corporate culture (Berkshire more so, of course, since it’s much larger but even more decentralized and has been around longer), and so closely tied to the founders who push that culture, I can accept the urge of those founders to have their families protect the “soft” foundation of the company.
I think it’s actually probably unnecessary, given the substantial contribution that non-family members make to both companies, and the extent to which the board has really internalized the culture already (and the family’s control of the voting shares, in Fairfax’s case)… but I can understand it, and don’t think it’s necessarily a mortal sin.
Travis
I always wonder why, if you think something is worth investing in, you put in 1% or less. In the end you end up with your own mutual fund or ETF.
Yes you spread your risk but you are limiting the real potential. Isn’t it better to hold 20 strong conviction stocks verses 75 from a total return point of view?
Probably. But I don’t start big. I usually have to own and study a stock for quite a long time before I’m comfortable with a large position — I do have seven holdings now that are each over 5%, and often 2/3 of my portfolio is concentrated in my top ten holdings, but it often takes me many years to build up to a large overweight position like that, either buying on dips or buying as confidence increases. My goal with most of my investments is to hold positions for a long time, but it often also takes a long time to build those long-term positions.
Some of the smaller positions are either options speculations or small cap/microcap or junior mining speculations, where I know my risk is really 100% of the position. Sometimes it’s best to think of your risk first — if I know it’s a position where I can easily see losing 50-100% if something goes bad, perhaps even overnight on a bad earnings report or similar news, then I typically keep the position quite small.
My smallest 20 positions in terms of the amount of capital I’ve committed to them, many of which are either options or warrants, are in total about 4% of the capital invested in the portfolio. There’s a long tail of things I’m interested in but not willing to commit a lot of money to, and a small speculation is somewhat akin to a “watch” investment where I’m committing just enough money to make me pay closer attention.
If I knew with some conviction which of the 20 stocks would outperform the other 20 or 30 in the long run, I would only buy those — of course… but my opinion is usually more nuanced than that. Those that are higher conviction are likely to get many add-on buys as I build positions, those that are lower-conviction tend to be a single purchase that I just let ride if it lacks a compelling reason for me to add or sell (like some of my more momentum-driven positions over the years, like Ligand — it has become a large position as it has skyrocketed higher, but it’s been a long time since I was comfortable enough with the price to buy any… so I just let it rise as it seems wont to do, with a stop loss to protect profits on the day when my valuation concerns finally do hit).
Nice explanation, reasonable and balanced. Thanks Travis.