Fairfax Financial (TSE: FFH) is a Buy Once Again

For people who have ha the opportunity to follow my posts: my first report on the company, when I commented on the company taking it's subsidiaries private or on a recent acquisition over the past two years, know how much we are fond of Fairfax Financial Holdings limited. This Canadian based insurer has provided great returns for it's shareholders through astute acquisitions and massive gains on credit default swaps derivative contracts in 2008. I am very pleased with it's performance for the past two years I have held at the company's stock.

The company announced on January 18th 2011 that the 99% of the shareholders of First Mercury Financial Corporation that cast their vote had visibly almost unanimously voted in favor of the friendly takeover bid proposed by Fairfax Financial. This acquisition is very typical of the way the company's CEO, the great investor Vivan Prem Watsa manages these operations. For those who are not accustomed to the company, it's name stands for Fair and Frieldly Acquisitions and should not be mistaken with Fairfax county in Virginia. The company will generally come with a bid for a company that is usually higher than the target's current price and win the approval of shareholders.

It is interesting to note that acquisitions and major investments are managed at the holding company level by  Vivam Prem Watsa and his small team. As of the last quarterly earnings release, the company stated that it had $32.5 billion of assets and close to $8.9 billion of shareholder's equity or 416$ per share and this is certainly the first reason to buy the stock. We also know from the 2010 annual meeting slide presentation that when current management took over in 1985, the company's book value was 1.52$ per share. They have to be doing something right in the tough insurance business.

Many other factors have to be taken into account, but I have noticed that when the company is trading under book value per share, it tends to rally back to this value. At the current price of 383$ per share, that implies at least an 8.3% return if book value doesn't change by the next quarterly filing on February 17th 2011.

10 year target price: 910$

Disclosure: The author is long FFH.TO

Investing Performance for 2010

2010 proved to be a very favorable year for me and as I will explain a little further, it is mostly due to the high concentration of almost half of my holdings in one specific company and the use of options contracts that were severy undervalued. More on that later.

The broad rally experienced by stocks during the year is fundamentally attributable to the quantitative easing measures by the Federal Reserve in the US and the rising price of commodities. Because of the intricacy of the canadian economy with the US economy and also because the canadian economy is so greatly influenced by the price of commodities. Provident Energy Trust helped fairly while providing a nice 10% dividend yield during the holding period.

My biggest position was certainly Winalta Inc. The company was going through a tough restructuring process and the uncertainty surrounding the company got it's price gyrating at historic lows during the summer of 2010.

There is also something new this year, options were a fair part of the performance. I acquired them at the end of the month of august as it seemed to me that the investment community was pretty pessimistic about earning results that would be soon announced by several companies and two of them had unfair bearish sentiment surrounding them. I was greatly rewarded as those position took full advantage of the earnings surprise inherent to those companies. 

I also managed to commit some mistakes. My position in Le Chateau Inc. did not perform the way I expected and it ended up slowing my performance. I also succumbed to greed at some extent when I decided to hold my position in my November out-of-the-money call options of Dryships Inc. after the earnings announcement, which caused them to decay as their maturity was getting closer, this proved to be a great error since the stock started sliding  in the days following their earnings release. Ironically, I departed myself from my options on Microsoft, which went to get deeply in the money. 

Here are my positions for the year:

Long:

Provident Energy Trust (TSE: PVE.UN)

Winalta Inc. (CVE: WTA.A)

Le Chateau Inc. (TSE: CTU.A)

Call options long:

Dryships Inc. (NASDAQ: DRYS)

Microsoft Corporation (NASDAQ: MSFT)

Taking those positions into account, my performance in 2010 was a surprising 80.4%, and the S&P/TSX did 14.4%, so it makes it that I over-performed it by 66%. This is very encouraging but I remain cautious, this performance might be due a great deal to chance and it is very improbable that I will be able to replicate it in the future. The downside is that even if I showcased a better performance than this index, it will get harder in the coming year to find such attractive opportunities and repeat a relative performance of this magnitude.

Jim Chuong Investing Performance in 2010

A little over a year ago, I wrote an article about a young canadian investor who had been showcasing outstanding returns over the past decade. It seems than he fared very well since the last time I wrote about him.

As stated previously, Jim Chuong started seriously managing funds in 1998 with a staggering 68% return for the period. His objective was to beat the S&P 500 index and he has managed to do it 9 times since then. An investor who started with 10 000$ invested with him at the beginning of his career would have found himself with  a whooping sum of more than 66 000$ at the end of 2010.

As can bee seen in the chart below, his fund got hit in 2008, as many did, but Jim Chuong still managed to generate positive returns even for investors who got in at the beginning of 2008.

For those who have not done it yet, his website contains the annual letters he provides to explain his performance for the year. They are very insightful as he even adds explanations about the topics that prevailed during the year. He has not yet completed the 2010 letter but he will post it shortly. One can also find the rare copies available on the internet of the partnership letters of Warren Buffett and Benjamin Graham.