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  • Chris Mayer

Epictetus, India and Patience

Below, we’ll take a look at a company trading at a discount to net asset value – yet which also presents a possible multi-bagger opportunity…


But first, some investing wisdom from an unlikely source…


“Some things are up to us…”


How about a former slave from the Roman Empire? Once freed, he became a much-admired philosopher with his own school in Nicopolis. Eager students from all over the empire would sit at his feet. The master lived his own teaching, a hard path built to deal with the ups and downs of being human.


His name was Epictetus, a Stoic philosopher. The opening lines of The Enchiridion set the tone for his project: “Some things are up to us and some are not up to us.” (This is from the Nicholas White translation. I have a couple of others, but I like this opening the best).


Epictetus never wrote anything down. Arrian, a student of his, did. Thanks to him we have the Discourses (four books of the eight survive) and The Enchiridion (a digest of ideas pulled from the Discourses).


For Epictetus, wisdom began with the ability to distinguish what is in our power from what is not. For example, what other people think or do is not in your power. So you are not to concern yourself with them.


But some things are up to you, Epictetus would say, such as the judgments you make about what happens around you. An example may help:


“What, for instance, does it mean to be insulted? Stand by a rock and insult it, and what have you accomplished? If someone responds to insult like a rock, what has the abuser gained with his invective?”


Epictetus says words cannot bother you if you do not let them. Insults gain their power only to the extent you give them that power.


There are many interesting examples from life Epictetus uses to teach us how to keep an even temper. And not just to remain unmoved by the turns of fate, but to welcome whatever comes your way as a challenge.


His discourses touch on everything: death, friendship, politics… And what emerges is a way to live a carefree life. There is also, inadvertently, good advice here for investors too:


“Model yourself after card players. The chips don’t matter, and the cards don’t matter; how can I know what the deal will be? But making careful and skillful use of the deal – that’s where my responsibility begins. So in life our first job is this, to divide and distinguish things into two categories: externals I cannot control, but the choice I make with regard to them I do control.”


This strikes me as an excellent worldview for an investor…


Stock prices? They are not up to you… but your judgment and response to them is. And in this realm, patience is a virtue.


(Of course there is a lot more to Epictetus than just this. Get a copy of The Discourses and Enchiridion here).


"Nothing important comes into being overnight..."


Fairfax India is the name of the stock. I have written about it before. But it is testing my patience. The stock has mostly gone nowhere. It was flat last year. But the underlying performance of the business has been strong…


Fairfax India is a holding company with a portfolio of businesses in India. The big two are BIAL (a 49% stake in the Bangalore airport) and the IIFL companies (which last three split into three publicly traded companies). These two make up more than 60% of net asset value (NAV).


We paid slightly less than NAV when we acquired our shares in January 2019. Our average cost is ~$13.50 per share. As I mentioned, the stock has gone nowhere – which is not up to me, as Epictetus would say. Meanwhile, NAV increased 21.9% last year to end the year at $16.89 per share. The stock, even after a modest bump on Friday, trades for $12.87.


Prem Watsa, during the Fairfax Financial call, talked a bit about Fairfax India. He said, “With a net asset value of close to $17 and stock's trading at $12.5, I don't think you need a lot of work to be done to figure out that it's pretty undervalued.”


But this isn’t one of those ideas where you buy something below NAV and then sell it when it gets to NAV. This stock has multi-bagger potential. As Watsa emphasized, the opportunity in India is tremendous.


He talked about Fairfax India’s biggest investment, BIAL. The current valuation on BIAL is about $3 billion. What’s the potential upside on that? Watsa gave us an analog:


“That's $3 billion for Bangalore International Airport, which is going from 30 million passengers [to, with the] second terminal, second runway to 45 million, 50 million, 60 million, 70 million and ultimately 90 million passengers. If you look at Shanghai, it's trading in excess of USD 20 billion. So this is trading at $3 billion. And it's a long ways off from Shanghai. I understand that. But this is a private airport. It's really well run. And it's in the third-largest city in India, as you know, in Bangalore.”


If Watsa is right, BIAL could be up 6-7x in a decade. Fairfax India’s stake in BIAL would then be worth twice what Fairfax India is worth in its entirety today. And that’s just one investment. I would argue the IIFL companies could compound at ~20% over the next decade.


Of course, not everything in their portfolio will work. But it seems you are well compensated for taking that risk at today’s price. And if you are excited about opportunities in India, having Watsa and his gang ferret out ideas for you seems like a good idea. Especially, since it is impossible to own what they own (unless you can buy stocks in India, which I can’t. Even then, BIAL is private).


Since inception, the company’s NAV increased at a compound rate of 11.2% (11.7% prior to the performance fee payable to Fairfax Financial) from the initial public offering price of $10.00 per share. That’s okay, but remember they started with a pile of cash in 2014. It takes time to put money to work.


If you give them a pass in the early going and start the clock at the end of 2016 then NAV is up about 65% in three years.


Since I have owned Fairfax India for a little over one year now, I can say it has other virtues as a portfolio holding. Most importantly, it seems a low risk holding. I know it is not fashionable to talk about risk. It’s a bull market after all. Forget about antiquated notions like margin of safety; get me some of that Tesla action!


But I still pay attention to margin of safety and the risk of a permanent loss. With Fairfax India, I have that margin of safety in a robust and growing NAV. I don’t worry about this holding – and that is no small thing as a money manager.


Fairfax India has other virtues as well: It seems to have little correlation with US markets. (For what it’s worth, Yahoo finance lists the beta at 0.47). Now that might appear a disadvantage with US markets making new highs, but there will be a time when you wish some portion of your portfolio wasn’t so hitched to the S&P500.


The biggest negative is the fee paid to Fairfax Financial: 1.5% on deployed capital, 0.5% on un-deployed capital, plus a performance fee of 20% over 5%, calculated over a three-year period and payable in shares.


This is a drag and probably not something that will change anytime soon. You’re either okay with it or not. Does the fee justify a discount to NAV? I am not sure. If you get strong performance net of the fee, does the fee matter? I believe the future performance will make the fee worth it. And I like the overall risk-reward profile today, but you may think otherwise.


The stock has traded for a premium to NAV before, when people were excited about investing in India. I suspect there will be another time when people want to exposure to India and will be willing to pay up to own Fairfax India. We will see.


In the meantime, Fairfax India should increase NAV again this year. If it can have a +15% year, then NAV will be over $19 per share by the end of the year.

When the share price will catch up is not up to us, as Epictetus would say.

But he also said:


“Nothing important comes into being overnight; even grapes or figs need time to ripen. If you say that you want a fig now, I will tell you to be patient.”


At some point, patient shareholders in Fairfax India will get their figs.


Thanks for reading.


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Published February 17, 2020

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