与 David Thomas 谈 Fairfax 之道 $FFH.TO

You’re about to listen to the Yet Another Value podcast with your host, me, Andrew Walker.

I’ve been off for a month on paternity leave from the podcast. Not too much from 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 Fairfax Way, which is the book on Fairfax. Fairfax, for value investors, is a complicated name. Some people compare it to Berkshire Hathaway. It has a storied history with short sellers, and it has made some of the best macro calls you’re ever going to see. David wrote the book on it. Obviously, I read it, and I enjoyed it. I’ll include a link in the show notes.

We talk about all things Fairfax: the history, the short selling, the macro calls, the investing, and the insurance. We wrap it up with what he thinks about the company going forward, all that sort of stuff. I think you’re going to enjoy it.

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Hello, and welcome to the 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 really excited to dive into everything with them. Before we dive in, just a reminder that we’re talking about a book. Nothing on this podcast is investment advice. You can see a full disclaimer at the end of the podcast.

So, let’s jump into it. I’ll start here: Why don’t you quickly give your background and explain why you were interested in writing literally the book on Fairfax? Then we can start diving into all my questions.

You bet. My background is in business journalism, working for the major Canadian national newspaper brands and running the business coverage. Then I ran magazines and things like that. I started off writing about markets and economics, so I’m a bit of a numbers geek that way. I love a good story that has interesting numbers to study, and Fairfax is certainly one of those.

These guys started out in 1985, so I wouldn’t have come onto the story until the late 1990s, when I paid any attention. By then, they were going gonzo. They were making a lot of acquisitions, but I still studied them over the years a little bit.

I discovered Prem’s letters after I discovered Warren Buffett’s letters and started reading those every year. Fairfax was just an interesting company to follow. It sort of fell off the map for me, and I think it fell off the radar for a lot of investors in the decades that followed. I jumped back in and out of the story.

What happened was, jumping forward to more recent history, I did a piece with Prem. I reached out to Prem Watsa, the founder, CEO, and chairman, and we got into his vision of capitalism and how he came to it. He thought capitalism was a force for good. It’s under a lot of pressure these days, and we need to step up our game. We need to let the magic of capitalism work its way through. But he also saw something else in it. He has a strong religious background, and he thought companies should stand for good as well. You should treat people right, and that became a big part of his life.

We had this conversation and did a long Q&A with him, sort of far-reaching, looking at a little bit of his history, what’s right in the world, what’s going on in India, and where Canada and the US needed to go. I think something clicked with him. I really enjoyed the interview, but he’s famous for being a recluse. People thought of him as someone who saw no need for the media, again, similar to Buffett and a lot of the value guys.

But I think he thought, “You know what? I think, David, you can sort of translate me, and maybe we should do something.” It took a long time for the book to actually come together. 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 step in and start going on it.”

I think I had to prove to him that I could tell this story and capture it for him. That was kind of cool. It took 3 years. It was a dance. It moved slowly at first, and I sort of just started reading and researching. Then we really got into it and finished it.

If I can hop in here, you actually answered my second question really well. My second question was going to be about why Prem participates so much in this book, and how everybody at Fairfax got involved, given that they’re kind of reclusive. So, you answered my second question.

I will comment on 1 thing: You said Buffett has no need for the media. I think Mr. Buffett is pretty skilled at getting media, and he does a lot of CNBC. But let me ask my first question.

A lot of my listeners tend to skew toward value investors. I’ve also got some friends who listen because they love the cut of my jib and all that sort of stuff. Why should anyone care about Fairfax? Can you tell me the headline? What is the track record here?

Yeah, exactly. 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.

The track record speaks volumes. It’s a 19.2% cumulative annual return through the end of 2024, from their start in 1985. That puts them in very, very good company.

It’s not quite Berkshire Hathaway, but we’re approaching Berkshire Hathaway levels of returns and wealth there.

Especially in the early days. Even Fairfax was running at 35% or 40% for a while. It’s easier when you’re coming out from nothing and buying up companies. But they’re actually accelerating, which is kind of cool, because Berkshire Hathaway hasn’t been able to maintain its early returns.

Fairfax is getting this second wind. They’re almost like a teenager as they turn 40, because they made a lot of mistakes and they’re really firing on all engines right now.

Well, I mean, Fairfax is big, but Berkshire Hathaway slowed down because it’s so freaking big. At some point, you become the market, and it’s just impressive that they’ve managed to maintain those returns.

But you mentioned that Fairfax is the story of—

There are a lot of stories here, but as a business, it is the story of 3 things: the investments, the insurance, and the macro calls. I would say—and you can tell me if you think I’m wrong—that those are the 3 driving things.

When I talk about each side, and there’s a lot in the book, what do you think Fairfax is really the best at? When it comes to those 3 things, what do you think has been the driving force over the past 40 years for them?

I think if you look at them at different points in time, those things change hands. In the early days, these were smart investors who bought insurance, and frankly, they were maybe a little cocky and thought that running insurance wasn’t that hard. They were good at investing. Prem already had a good record.

What happened was that they were buying insurance assets and took a value approach, which was maybe a little shortsighted. They applied a value approach to buying insurance assets, not just to their investment portfolio, and they discovered a lot of long-tail liabilities. You’ve got things like asbestos and whatever. Buying a broken insurer is not necessarily a great strategy.

The good thing in the early days was the strong investment record, which offset a long period of turning these broken insurers around.

You hit the nail on the head. I’m familiar with Fairfax primarily over the past 15 years, since I’ve been a working professional. Over the past 15 years, the story has been the hedge and macro call from 2010 to 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, it jumps out at me. [laughter] My first question was going to be, David: The first 5 insurance companies they buy are under-reserved. Under-reserved right off the bat, and this business almost puts them out of business. I was wondering: Would Fairfax have been better off without the insurance business? Maybe at this point, no, but for the first 25 years, would they have been better off as a traditional hedge fund, just investing and making macro calls?

Well, impossible to say. They had a pretty good record, so maybe. But they wanted to make it work, and they took a very long-term view. I think if they had decided to follow this kind of model, they were basically taking a Berkshire model, right? They were doing the investments and having the insurers on the other side.

There is a third leg, which we haven't really talked about yet and which we can get to, and that's all the non-insurance operating companies that have really come into play for them. If they were committed to doing this kind of model with those 2 engines, would they have done it the same? I think that's maybe a better question, because they say that they probably would have done it the same.

But there are certain assets that they bought where Prem said, “You know what? I would not today buy an asset in that kind of shape and think that was a good investment,” because it just takes too long to turn around. Would they have done it exactly the same way? I doubt it. But what do I know?

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 ask: Did they change the model? No. Did they bring in new management? No. What they did was learn how to retool their strategy and rethink a core value-investing strategy, and stop buying broken insurers.

The last companies that they bought, especially Allied World in 2017, which was the biggest one, have all been bolt-ons after that. They're not in the business of buying broken, cheap, rundown assets anymore.

It's just that when you read about the early 1990s, when they're buying insurers left and right below book value, you read it and, as somebody who's been doing this for a little bit, think, “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 really careful about that reserve, because they just buy one after the other and they're like, “Oh, there's a lot of asbestos.” It's just funny—the greats are just like us, you know.

I really want to talk about macro because I think macro is the sexiest thing. It's the easiest. But let's talk investments. You mentioned the investments, and obviously they get their start. Prem gets his start running money. He goes to business school. He learns not the Warren Buffett way, but he learns value-investing stuff.

The one area of the book I think gets glossed over is a lot of the stock-picking and stuff. I'd love to talk about what Prem and Fairfax's stock-picking skill is like. They're obviously value investors, but how is their track record at just picking stocks, separating out the macro and the whole company? How has that helped 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, right?

We're going to talk about that as soon as we stop talking about investments, but I'm just talking about the stock—

And those made a lot of money.

Yeah. Every now and then, you'll say, “Hey, this Indian company that they invested 200 million in is now worth 600 million or something,” and you'll be like, “Oh, that's a lot of money,” though it's kind of small in the scale of Fairfax today. But it was the one area where I thought, “I think they're skilled at investing, but it doesn't really break it out.” So I'd love to ask you that as a follow-on to the book.

Yeah, they roll stuff over. They're long-term investors, but the portfolio has changed a lot. If you check in once a decade, you're just going to see different companies. It's not like you associate much fewer companies with someone like Berkshire Hathaway, right? You can go back and look at Gillette and Coca-Cola or whatever. Apple is the big thing now, along with some of the operating companies. It's changed a lot for them.

It's hard to sum it up in a sentence. They love to invest in commodities. They don't really get into technology. He's not into too much technology. They bought Micron before, but not a whole lot. If you're tracking the 13F as an investor and you want to see what they're into today, you're going to see names that you might not even be able to buy.

Something like Eurobank was the huge star holding for them, and it was a huge value win. They bought it, it went down to almost nothing, and this was during the deflationary, post-crisis period, with the PIGS—if you remember the PIGS.

The G in PIGS—Greece.

They bought a bunch of assets there and had to just keep recapitalizing and recapitalizing. Finally, now, it's the biggest holding. Other things they buy would have been publicly traded but have now been privatized, like Poseidon, which is Atlas, run by David Sokol—and that's Seaspan shipping. It's a name that everybody knows, but it's now private. He has a couple of partners there. They control it, but they don't own it outright.

It's hard to sum up their approach. You can see their returns, though, and they do very well on the equity side. Bonds are the much bigger part, of course, when you're investing the float of an insurance company. They're very good on the bonds.

Let me do one more on investing, and this might smoothly transition us into the macro. When I look at their investments, I look at their 13F, I look at their annual report, and they break out—it’s funny—they break out their common stocks, but they break out the top 6 holdings, and then there's just “other,” which is 75% because they've got so many.

When I look, Orla Mining is the big publicly traded one that they don't fully control. There's Occidental Petroleum, and it has a flavor of—and we're going to talk about their 2020 big inflation bet—but it does have the flavor of someone who is bringing an inflationary, protectionist mindset into the investing. Am I imprinting that, or do they bring their macro views into how they buy and pick common stocks?

That again would primarily be an issue with the bond market, obviously—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. There are sectors that they keep returning to, and they ended up building in and sort of doing a big roll-up called Recipe Unlimited. It's a whole bunch of fast-food and family-food restaurants.

That was an unlikely business you wouldn't normally associate with them, but they've stuck with it and grown it, and now it's a big part of the revenue stream as well.

And shipping. I think what Prem would tell you is it all comes down to management. If somebody has a good company and wants to sell it, be partnered with, help take it private, or whatever, he's going to be investing in management.

They bought a mattress company recently. You wouldn't think, “What macro call would you make to say, ‘I need to be in mattresses’?” I don't know. But they're now in the mattress business. Sleep Country was a big acquisition recently.

The big comparison—I mean, look, Fairfax is obviously modeled a lot off 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 or if Chapter 9 is a section or Chapter 9 overall—but you have a section just talking about the importance of management to Prem. They're talking about one of the CEOs that they currently have. They identify him and say, “This is a Fairfax guy.” They're just like, “Hey, come on over.” And he's like, “Well, what role are you going to give me?” They're like, “We don't know, but you'd be perfect with us.”

It was really interesting because Buffett appreciates management, obviously, and he'll work with them, but he's also the guy who said you have to find a business that can be run by an idiot, because eventually an idiot will run it. I was a little taken by the CEOs' tenures there—20-plus years, 10 years almost across the board—and the focus on management. Am I putting too much into that, or do you think that's accurate?

No, I mean, that's—again, he would say it is about management, management, management. Phil Kuret is somebody that he really admires. There were a couple of cases where some people got hired with no job, and they didn't know what to make of it. He 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, Seaspan Shipping, or the restaurant operators. It’s all part of being decentralized, right? You really have to trust the people to run it.

Decentralization is a huge theme here. Let me ask one more question on the investing side, and then we’ll go to macro.

The one investment that I think really got Fairfax in the news, but that isn’t mentioned a lot in the book, is the BlackBerry investment in the 2010–2012 range. If you’re just a listener, even if you don’t know Fairfax, we’ve talked about macro, buying a shipping company, his 10-K, a mining company, Stelco, which is a steel company—a lot of hard-asset businesses here. You mentioned he bought Micron once, but with BlackBerry, he gets really involved.

He does a take-private that morphs into a convertible bond. They still, I believe, have BlackBerry, but that is just so far out there. I’d love to get the story from you of what happened with BlackBerry. What did he see there? Why did he get so involved? It’s the one investment that sticks out like such a sore thumb versus everything else he’s done.

Yeah. I think a lot of the team saw an opportunity there, and I don’t know what the one overall compelling reason might be. I know that he is attracted to saving companies that need a little bit of help and maybe need a longer leash or a little bit of time, where he thinks a turnaround is going to happen.

You have 2 founders, CEOs, co-CEOs, sort of fighting at RIM, at BlackBerry, and it got kind of messy and wasn’t workable. But John Chen was somebody that Prem really wanted to see in there. I think he really thought it could happen, and they made progress, but it never really got the momentum going.

Again, I don’t think it was, “I need to be in technology.” I think it was, “Hey, here’s this company. It’s got a great past, and maybe they can recover that. John Chen is a guy that I think could really make it work,” and it didn’t quite get there.

But he’s also very patient, so it took them a while to sort of cut free of that. He offered to take it private, and they eventually switched that into a $1 billion, if I remember correctly, kind of distressed convertible loan.

Yeah. The one thing that jumps out also through this book is—I mean, Fairfax, basically, their word is their bond, right? They strike fair deals. Prem and one of his lieutenants are the entire M&A team.

There are multiple examples in the book where he makes an offer, you shake hands, and it’s done within 24 hours. They’re really honorable. You’ve got one where they get a reinsurance transaction that I think, no matter what happens, Fairfax will get paid, and the insurance guy calls them up in a year and says, “This is unfair.” Fairfax, instead of saying, “Pay us,” says, “Oh, you’re right. Let’s reshape this.”

Yeah. Yeah.

Why don’t they take BlackBerry private? They dodge a bullet there, but why don’t they take BlackBerry private? What was the gating factor there?

I can’t even begin to speak to that. They thought there was a strategy there, and they wanted to give him time to try and make it work. They tried to buy it; there were a lot of balls in the air. There were attempts to look at a transaction before they went in and did the convertibles.

Well, they had a public offer. It just 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.

Yeah.

Let’s switch to macro. 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: Is he the best macro trader of all time? 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, a fine investment business, but a guy who just over and over again smashes it on macro trades, and those are what really carry it?

Jim Chanos—we’ll talk about the shorts later—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.” We’ll talk about that later, but let’s just talk about the macro. You can detail all the hits; we can detail the 1 miss, but I’d love to just talk about the macro trade in here.

Yeah, and I think that’s the key: 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.

Sure. So, the later ones we’re going to talk about, he’s actually short. He’s got the CDS trade 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 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—the shorting was a much bigger part of 2000, to some extent, and 2008 in a very big way.

For ’87, and particularly ’89 and 2000, you detail in the book the Julian Robertson Tiger trade.

The thing with Japan and the tech bubble is that there were plenty of people who said this was a bubble and these valuations were crazy.

Yeah. The issue was the shorting, right? If you were short, well, cool. You started shorting in ’98, as Prem does, and the Nasdaq is up 150%, you’ve had your face ripped off, and you’ve got a margin call. I was particularly wondering about Japan, if there was some interesting trade there or anything done, but please continue.

We talked about ’87 and ’89. The ones he’s really known for are tech, the GFC, and the inflation trade. Why don’t we hit those?

Yeah. In terms of macro, it was the same thing with Japan. First, it’s just a matter of selling down your exposures, but then they actively started putting on trades to short the index. They did very well in 2000, and that was also good timing because it was the beginning of a rough patch for them. 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 trade—I mean, they were warning about asset-backed securities and the mortgage market. If you go back to 2003 or 2004, they took positions several years before it all blew up. They were down a lot on those, but they kept doubling down, and they were convinced they were going to do well.

They were trying to figure out how to protect themselves and protect their capital, right? They were looking at vulnerabilities: If they couldn’t pay out and cover on insurance, they had taken out reinsurance. Now they were worried that the reinsurers were all going to go bankrupt, and that Fannie and Freddie, who were funding the reinsurers, were also going to go bankrupt. So they went after all of those to save themselves money, but they quickly figured out that they’d make a bundle if all those companies did fail. And it happened.

Look, I think that’s just the height of investing skill, in my opinion. Not the timing of the trade, but that they looked at it and thought, “Hey, you know, I’m not in insurance, obviously, so maybe I’m just a dumb-dumb, but if I bought reinsurance on something, I’d 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 reinsurers’ balance sheets. Again, yes, there are flaws with the rating agencies, but I’d probably just look and be like, “Oh, my reinsurer is rated A. I’ve got the reinsurer,” and they were thinking, “No, what if they go bankrupt?”

They found a way to make a lot of money. So, look, they hit it out of the park. You’ve got the stats of Michael Burry making this much money on the CDS 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 graduated college, started investing, and all that, and it’s kind of when I know them. I know them as, “Hey, these guys made a bundle in the GFC,” but like so many people who make a bundle in the GFC, they’re bearish on the market as it recovers in 2010, right?

You said they doubled down from 2003–2005 on the CDS to make a bundle. On the shorts, they’re bearish on the market in 2010. They double down, double down, double down, double down from 2010 to 2016. I’d love it—what goes on there? Obviously, anyone can miss, but why the doubling down? Why are they so hesitant? Because, in hindsight, valuations don’t look that expensive then.

Stocks were still cheap, and the economy was recovering. What do you think they missed, or what do you think they learned internally from that experience?

They learned a difficult, hard lesson. The investments they were making ended up losing $4 billion. They just wiped out their earnings. It was, as Prem calls it, protection because they were thinking defense first, but it was very costly protection.

Basically, they learned that there’s a smarter way to play defense. If you’re doing shorts, it’s a one-way bet. If it just keeps going down, you’re 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 CDS trade, right? You buy it, and if it pays off, you make multiples of your money. If it doesn’t, you know exactly how much you’re going to lose.

Yeah, you just let it go. But I think what I tried to raise too is that you were playing it because I was covering economics and reading this stuff every day as well. The people who were looking at deflation—this was always the fear—were people whose learnings were sort of born in the Great Depression. They were always looking for a return to that kind of environment, right? Deflation is a big part of it, and deflation happened in Japan.

Here we are: the crash has happened, inflation is 0%, and it’s dipping into deflation in a lot of markets. Then there’s the debt load. Again, we talked about the PIIGS, whatever. This is all the same sort of period, right? You’ve got countries that are breaking, you’re heading into deflation, and the market is suffering.

We’d never seen what the central banks managed to do. It was unprecedented, right? There was a concerted effort on quantitative easing, buying up Treasuries, bonds, and whatever else. So I don’t know. It’s interesting to imagine how close they were to being right. If they were right, they would have been the smartest macro guys ever.

But in the end, it wasn’t a great call. I think what they learned is that they were doing it for the right reason, but they were doing it wrong. That gave them a totally new approach to shorting and protection.

Look, I haven’t gone through the portfolio in depth, but the other thing that strikes me is that these guys are investors, right? They’re obviously not running a long-short pod or something. You mentioned that they buy in the depths of the crisis—they buy some blue-chip, great companies at crazy valuations—and their intention is to hold them forever.

They sell them in the 2011–2012 range, in part because their earnings were getting wiped out. It just strikes me that one of the best trades you can do if you think things are going to go to hell is to basically run net short, or just run it net zero or net neutral, right? You hold on to Berkshire Hathaway. You hold on to J&J, and you just short the market.

There is basis risk there, but at least if the market keeps rising, your stocks should keep rising, so you don’t have this huge drag. It just surprised me that they went so hard in the other direction with the short, if that makes sense.

Yeah. Well, Prem is really good at owning his mistakes, right? As great letter writers do, they try to turn it into an educational opportunity for shareholders. You treat them like a partner and explain what happened.

He did the math on how much they had to sell because their earnings were getting wiped out from the hedges, and how much they sold of that portfolio you were just talking about. Far from trying to whitewash it, they said, “Here’s how dumb we are. Here’s how badly we got hit. This is a good lesson. You should never do this.”

That’s kind of cool.

As someone who writes, I really appreciate how much he rubs his nose in it, especially as someone who writes a letter and then gives it to the editor. Your editor will always say, “Hey, you’re not putting yourself in the best light here, right?” You want to project confidence, and for them, confidence is the most important thing.

As an insurance company, we’ll come back to this on the short side: You want to project that people want to lend to you. I just love the willingness to do that.

In the end, I want to come to the 2020 and 2022 hits in a second. The end of the big short—in this case, the big short of the equity indices—is 2016. He says, “Look, Trump gets elected and we end it, right? Our fears of deflation are over. We think the market’s going up.”

I did read the book, and there are 3 times where politics influences the trade. Trump gets elected and he ends the big short. Modi gets elected in India—I can’t remember the year. 2012? Was it 2013?—and he says, “I’ve been waiting to go whole hog into India. Modi’s going to be great. Let’s go. Let’s get into India.”

Then, in Greece, they start doing the distressed stuff and really lean into it. When the Greek prime minister—I don’t know the Greek prime minister—who I believe is more on the socialist side takes care of everything, that’s 3 times where he lets politics come in and influence the macro and the investing.

That’s interesting to me because politics and macro are obviously very intertwined, but a lot of macro people are aware of the government. This was just, for a value investor, going whole hog—saying, “I like this politician. Let’s go.” I thought it was interesting, so I’d love to hear how you think he equates politics, macro, and investing.

I would draw a direct link back to how we were talking about management. I think what he’s looking for there is just people who have the right vision in an environment where equity values and the economy are all beaten down, or just have so much room to grow, in something like India.

Is Modi, in that instance, the guy who’s going to be able to make enough progress on corruption and deregulation, and do the macro things in the country as a manager? I think that’s just reading the tea leaves in a really smart way.

Excellent. He makes a lot of money in the inflation trade in 2022. We can talk about that if you want, but I don’t think it’s quite as interesting. I think we’ve hit on it a lot, so unless you’ve got any particular insight, I’d love to end the macro call with this: I just went and reread his 2024 annual letter.

Pretty bearish, right?

He says the 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, based on the fact that Apple isn’t only a U.S. company. But he says that the market is more expensive than during the dot-com bubble. He compares it to Japan in 1989, complains about the Magnificent 7, and worries about the downside if the wealth effect of the U.S. stock market ever drops.

I’m probably answering my own question here, but I thought you recently spent time with him. You probably know him better than almost anyone outside of Fairfax. Where do you think he thinks the macro is? Do you think he’s making any big macro plays right now? How do you think about the macro framing for them at the moment?

I’m not aware of any marked change in terms of where their exposures are going. But he’s always been that way. The first thing I did when I started to get to know them was read through 40 years of letters, and he’s always flagging concerns about valuations, distortions, and potential issues. Some of them come good. Others are just, “Hey, let’s watch this.” You’ll get the occasional caveat emptor advice to people to watch out.

It’s not super bearish overall, I don’t think. He’s probably less alarmist these days, certainly compared to the past. But no, that’s just Prem being Prem. Things are expensive, so tread carefully. I think that’s just a general message to investors.

They haven’t completely stopped the buybacks, but they’ve really slowed them down this year. Do you think that’s because, based on when you published your book, you probably wrapped up the writing in early 2025? Is that right?

Yeah, fair. Go ahead. Is that right?

Yeah, yeah, yeah. Fairfax, for those who have been following, has been on a great run from 2020 to 2025. Part of it is that they nailed the inflation trade. A lot of their stocks went up, and the stock is probably a 3- or 4-bagger since 2020. They were still buying back stock as that was happening.

It’s just noticeable to me that this year they’ve really slowed down the repurchases. Do you think that means they’re getting closer to fair value, so they don’t need to be as aggressive? Or do you think they’re saying, “We’re still undervalued, but the world is a scary place. Let’s have dry powder ready, because it’s always served us well in the past”?

I think there is a lot of dry powder. 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. It just starts bringing you into what’s intrinsic—what’s intrinsic value.

If the shares are trading below intrinsic value, they’re going to say, “Whenever we can, we’re probably going to be investing.” He also laid out—this is the Henry Singleton stuff with Teledyne—the incredible allocation of issuing shares, buying up everything, and then buying back all the shares. I don’t know the running total; it changes every month. I’m not totally on top of it, but it’s over 20% since they started this last run of buybacks, and there’s no indication it’s going to be over.

I would just keep reading the letter that he writes each year. There’s no stated plan for where this would end. In 2017, when they sort of said, “Hey, we’ve got to go,” he laid it out at that point and said, “Actually, we’re planning for the next decade to be really going at this.” So maybe they’ve got a couple of years left. Maybe it’s going to keep up.

Again, he lays out intrinsic value, but much like Berkshire, he says intrinsic value is higher than book value, but you don’t know by how much. Is it 5 times higher than book value? Is it 2 times higher than book value? It’s interesting because right now they’ve slowed the buyback program. This stock trades for about 2 times price-to-book, so you wonder, again, maybe they think this is around fair value, or maybe they’re just getting their dry powder ready.

I want to talk about one other thing.

I think it’s closer to 1.3 times book, but again, some of the numbers are lagging. A good time to take stock is at the end of December, so we’ll get fresh numbers.

I could be completely off. I just looked at Fairfax Financial Holdings. Maybe I’m doing USD versus CAD; that could be the issue. But Fairfax Financial Holdings trades for $2,400, and I’m looking at Q3, which has the book value at $1,200. But I think the per-share book value is—whatever, it doesn’t matter. Let me go to one last question.

The book value is probably in U.S. dollars, but the $2,400 would be Canadian.

Yeah, so maybe that’s where the issue is. The other place that Fairfax is very famous in financial circles is the short report. You covered the shorts from 2003 to 2006 and detailed a lot of it. I’d love to go through a quick overview of the big short thesis I’m talking about, and then I’ve got some questions that I’d love to dive into with you.

Yeah, just a quick recap. There were a few shorts happening before that, but it really began in earnest when Fairfax took a U.S. listing on the NYSE. Part of the plan there was just more exposure. By this point, most of the acquisitions they’d made in the late 1990s were American, so there was a real American presence there, and they thought that would be a good idea and good exposure for the assets. Things like Odyssey Re.

It’s a long, messy story, but a number of different hedge funds were involved in it. It became quite colorful. They hired some people and some investigators, and it got into some rather questionable tactics, which never actually made it to litigation. 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 still digesting some broken assets. They didn’t have the deep reserves. They had to shuffle money around. They had to buy insurance cover, which is like an extra chunk of reinsurance, just to make sure they had the cash flows to feed companies like Crum & Forster. Odyssey was in better shape by then, but TIG and a few others were American assets.

Anyway, they were pressed, and the shorts managed to get a lot of newspaper coverage, alleging that this was the crime of the century, the fraud of the century. It was another Enron. Prem being Prem thought, “Maybe they’ll just go away, and let’s not fight them.” Eventually, they filed a major suit in 2006. This thing dragged on and on. At that point, they launched a $6 billion suit against the hedge funds.

Let me ask a few questions here. We saw it with Silicon Valley Bank in 2023, right? Insurers—particularly banks, but insurers too—rely on the whims of the market. They’re creatures of the market; they need financing at some point. I think Fairfax was saying, “If our debt ratings get pulled, if we get indicted, whatever, we’re not going to be able to function.”

There are some very bad actors on the short side. One person obviously gets indicted and goes to jail. How much of the short report is, “We think we can create our own destiny by creating a bunch of smoke at this little Canadian company that doesn’t have a PR function and doesn’t know how to respond? We think we can create our own destiny and send it to zero.” In the book, you’ve got them planning to hire Bob Dylan to sing at a party over Labor Day once they zero the stock.

How much is that versus how much is, “Hey, there is real smoke here. There is an under-reserve problem”? Where would you put it on the spectrum between the two?

I don’t think I could weigh one versus the other. But if you were looking at a company like Fairfax that had a bunch of broken assets, 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 cleaning up.

They didn’t get that Fairfax doesn’t operate that way, right? They didn’t get that we were just going to ride it out and fix them. We didn’t want to lay people off. We wanted to make it work. We wanted to make BlackBerry work. We wanted to make Eurobank work, which eventually did.

You can’t blame them, I guess, is what I’m saying. They did look vulnerable. But then you get the issue of them not talking to the media. You get the issue of them having such a wide global reach. You’ve got holding companies in Mauritius for Indian assets. You’ve got joint management of all these different companies that were being used to capitalize their operations.

It can look confusing, and you might think they’re hiding something, or it could just have been confusing. I think it actually was just that they didn’t design it to be confusing. They designed it so they had maximum flexibility in having all their holdings capitalize their network of companies around the world, and they could shuffle it around.

Yeah, I hear you. The one thing that remains crazy to me in hindsight—it’s kind of a throwaway—is that Fairfax has Odyssey Re, one of their gems, and as part of all this shuffling in 2003, they IPO’d a piece of Odyssey Re. Then they had to do a weird convertible deal because they IPO’d too much of Odyssey Re: They owned 74%, and they needed to get to 80% for tax reasons.

That sounds normal, but I also look at it and think, “Look, I’m not a tax expert, but I know you need 80% to consolidate for taxes. I don’t know how a company can accidentally IPO too much of its crown-jewel insurance operation.” I look at that and think, “Man, it wasn’t right in hindsight, but I can see why a short seller would say, ‘This company doesn’t know how much it’s IPO’ing of its subsidiaries and doesn’t know how much.’”

I can see why they were a little worried. That’s pretty simple: reserving for surety bonds and especially slide building[?]. If you can’t get Odyssey Re’s IPO right, how am I supposed to trust your accounting on the reserves?

I guess there was a lot of demand, and maybe they just let it go too far. I don’t know what happened there, but they did buy it back with a convertible.

I want to ask one other question here. Fairfax’s suit against the short sellers: They sued all the short sellers. I believe it eventually got tossed out, for the most part, on jurisdictional grounds and a bunch of other things.

My training today is that when a company sues a short seller, it’s the company that you kind of want to point the eye at. I believe Bethany McLean suggests in one of her articles that this suit was done to muzzle the hedge funds and that it never pays out. I just want to ask you: What did you think about the lawsuit against the hedge funds?

The book covers all the drama. Really, what they were seeing was that the campaign was being stepped up, that Bob Dylan was being hired to sing at their funeral party in the Hamptons. 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. In terms of the strategy, it was jurisdictional: it was New Jersey, and there were racketeering elements to the complaint. So there were reasons why they did it there.

Then they ran into judges excluding some people and some whatever. They won some settlements separately in that, but the whole thing has never officially died. It’s still sort of sitting there.

Yeah. We’ve got about 5 minutes left. I have 1 final question that I want to ask right at the end, but let me just ask about the book’s ending. It talks about succession, right? It talks about Prem’s son becoming the chairman, very much like Warren Buffett’s son, Howard, I believe, will become the chairman of Berkshire Hathaway.

Now, Prem is younger. Prem is in his 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 succession coming up. You identify the CEO-in-waiting in the book and everything, but I just want to ask: What does the future of Fairfax look like?

When you lose the top guy, I know it’s easy to say the culture has been set and all that sort of stuff, but this is a firm that has made its living on big macro swings, as we’ve discussed. You lose the top guy who’s willing to say, “Hey, let’s eat these CDS losses for 2003, 2004, 2005, and 2006 until they pay off in a major way,” and it’s going to be really hard for the next person who doesn’t own as much stock and who doesn’t have that reputation. So, what do you think the future of Fairfax looks like?

Well, for them, they obviously recognized the need to address succession, and they’ve been building a lot of depth in there. From the CEO level, they haven’t been able to say that until the last few years. Now they have Peter Clark.

The architect of the insurance side is Andy Bernard, and his protégé has been working with him for 30 years already. He has fewer years on him. It’s Brian Young, so I think they feel like they’re in pretty good shape.

On the investing side, they’ve still got some of the guys who have worked with Prem alongside him, like Roger Lace and Brian Bradstreet, who’s the bond guy, the bond whiz, the master of their short book. They’re still active, but they’ve got a young team that has been making the investment decisions for the last 10-plus years, and I think they think they’ve got the right people in place.

It’s a different game, too, if you look at who the architect was as a founder in the early days, choosing what to buy and making the strategy to buy all the insurance companies. The way they see it now, it’s more bolt-ons, keeping the insurance companies profitable, and making investments. Especially now that bonds have come back, they’re in a really good space.

So, I don’t think Prem is going to be stepping away anytime soon.

You know, 2 last questions on the future of Fairfax. Number 1, I think you could tell the story of Fairfax in “7 lean years, 7 fat years,” and the cycle just happens over and over again.

I mean, you absolutely can tell that story. Some of that might be luck or whatever, but I would say right now, from 2020 to 2025, we’re in the midst of, toward the tail end of, if you believe the “7 fat years” story. We’re very much in fat years.

Yeah. Do you think it’s a little bit different now, though, because the insurance segment is really working? That might be macro factors or a hard insurance market, or it might be that they’ve got the crown jewels. Do you think we’re going to repeat that cycle? Knowing Fairfax and having seen the history, do you think—I’m not saying tomorrow it goes lean—that we’re going to see another 7 lean years? Or is this just a more stable, bigger company, and the boom-bust cycle is a little bit behind it?

I think the premise of the book is Prem sort of dawning on him just a couple of years ago that we’ve never been in this position before. We talked about this before: It was always a case of the investment side doing really great and the insurers sucking. The insurers came back, and then you had the hedging drag, and it wiped it out.

I think it is interesting to look at that as a sort of passing the baton, passing the baton. What’s happened differently now is this emergence of a third engine, right, which is C-SPANs and the banks. They’ve got banks in Egypt, and they’ve got a lot of new digital insurance companies being nurtured along to their IPOs.

The complexion of it is really changing. I have no idea if things are going to crash or slow down or whatever, but what’s interesting now is that there’s no part of their business that’s broken.

And that’s what they’ve never been able to say before. As you say that, it strikes me that the parallels with Berkshire are there. Berkshire was investing, then it was investing in insurance, and then, starting in the 1990s, it really got the operating businesses going. It owns railways and all that.

Fairfax is hitting that.

Two more questions, and then I’ll let you go. Kennedy Wilson is mentioned a few times throughout the book. Are you familiar with what’s going on there right now at all?

Well, I’m not privy to it. There is an offer to take them private involving the founder. Again, it’s all about the person. The relationship that he’s had with Prem has been really strong.

They collaborated on the rescue of the Bank of Ireland. With that team, they went into Greece after that, so the partnership has been really strong. Then, of course, when rates turned and regional banks got caught in the bear bond market in 2022, Kennedy Wilson brokered a deal with a big regional bank—I forget the name—a Pacific Northwest regional bank—and bought a huge bond portfolio.

In the process, they also took the whole desk that ran that operation and brought it from the bank to Kennedy Wilson. So now, if this all goes through with Fairfax, that’s all going to sort of be in-house, which would be interesting to watch.

It’s been an on-and-off position of mine over the years, and it’s currently on. It’s the 1 thing that Fairfax is most likely to be in the news for in the next 2 months.

Out of personal interest, I had to ask. Nonetheless, the relationship and the way Prem speaks so warmly of him—you mentioned the C-suite—it feels like that’s a business 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’ve taken it down to a 15% long-term target. That’s big, man. That’s a tough target to beat. Do you think that’s still a realistic target for them going forward, or do you think they’re going to have to bring it back in? Berkshire has brought its return targets down over time.

Do you think that, for the next 10 years, that’s still a realistic target, or are they going to be bringing it back in?

They’ve softened it over the years, right? They changed it from an ROE target to 15% growth in book value, and then to not annually but over time. So they changed the calculation a little bit over the years.

Prem has 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, I doubt they’re going to drop it.

Can they hit it every year? Maybe. But they’re closer now than they were a few years ago.

David, thank you so much for coming on. I’ve been wanting to talk about Fairfax for a long time. I’ve followed it loosely for the past 15 years. I learned a lot, especially about the first 20 years, but also a lot about the shorts and a little bit about the macro. I really enjoyed it, so thank you for coming on.

I appreciate it. That’s great. I love talking about it. It was a great book to write. Good talking to you.

A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.