giofranchi

Gio

starmitt, sorry… I don’t understand you… I am a businessman, not a philosopher… a businessman simply knows how important are the partners he chooses for himself in business. Period. Not at all! I totally agree with the strategy Mr. Einhorn has followed during the last decade. As I have very often repeated, better safe then sorry! And, by the way, imo the jury is still out! ;) Gio

They are the very same thing!! ;D ;D ;D Someone as shrewd as Mr. Einhorn surely knows what he can and what he cannot do! The amount of money he manages is still relatively small for the strategy he employs. I repeat: he has been too much worried about macro, and has been too aggressive on the short side. Those are the reasons why recent years have not been so good. We will have better years! ;) Gio

Agree completely. What's Greenlight's AUM ? $10 or $11B. It's hard to run a short book that big. If he has 60% of NAV in shorts that is a $6B short book. To have a 3% short in something like JOE (a $2.1B company), he'd have to be short 15% of shares outstanding. The growth in AUM severely limits the opportunity set of juicy shorts. Not saying he won't be able to do well, but he is more constrained than in his early years, like any big long short fund Mr. Einhorn imo will do very well. I have little doubt about it. I strongly advice to read his book... you will understand what kind of person Mr. Einhorn actually is... I have nothing but the utmost respect for him and his skills! :) Gio

Gio

+1 I agree wholeheartedly! Great book! :) Gio

“acquisition of business” is not a cost… it is investment. If opportunities for successful investments suddenly cease to be available, growth will surely suffer. But this is obvious: capital invested in new profitable endeavors is the definition of growth itself! ;) Gio

I really don’t think this is the case. Mr. Einhorn’s way of investing has never changed. He has always employed a long/short value based strategy in mid/large capitalization companies. The funds he manages today are but a small sum if compared to the universe of companies he could invest in. I don’t see AUM being a drag on performance at this point. Also because he is totally free to manage AUM: he can close his fund to new investors, or even give back some capital, if he truly believed he cannot find a large enough number of rewarding opportunities. No, I simply think in 2005 / 2006 he started to get worried… Like Mr. Watsa did. And for good reasons imo! Now, just think of this: a manager who had achieved an average annual return of 10% from 1929 to 1949… what kind of return do you think such a person would have subsequently achieved from 1950 to 1967? That’s how I think about Mr. Einhorn form 2018 onward… In the meantime, if he goes on achieving 10% annual, with present leverage GLRE will compound BVPS at a 13% CAGR, with a bit more leverage (and they certainly can afford it, being still much less leveraged than their peers) a 15% CAGR in BVPS is definitely achievable. Like GLRE’s management says: Gio

Well, just two observations: 1) I never think in terms of “months” while investing: I like years… but I much prefer decades! ;D When I find myself in a “licking boat”, I feel the urge to change business… but I experience the exact opposite feeling, when I own instead a wonderful company! 2) While a good team is a desirable thing to have, I need to see what I call an “entrepreneurial force”, just one man or one woman that I admire a lot… usually a great team develops around such an outstanding entrepreneur. ;) Gio

What do you exactly mean by “after Altius has reached its potential”?! ??? Mr. Dalton is very young and my hope is he will never sell nor leave the company, instead that he will go on piling new projects over old ones and new royalties over old ones for many many years into the future… So, how many decades and $billions away is ALS’s full potential? ;D ;D Gio

EliG, Obviously, I was talking about ALS’s business model… Anglo Pacific might certainly be another good example of such a “unique” business model! My meaning is that it is extremely difficult to find another business model that can afford to paying out almost all the free cash it generates, and still being able to grow… If you know another such business model, please let me know! ;) Gio

[amazonsearch]Born to Run: A Hidden Tribe, Superathletes, and the Greatest Race the World Has Never Seen[/amazonsearch] --Tao Te Ching Ok, this book might have very little, or nothing at all, to do with investing, but: 1) It surely has a lot to say about healthy living: and, if a snowball needs a very long slope to grow bigger and bigger and assume gigantic proportions, I guess we all can agree on the fact that healthy living might be very important for everything we do, investing included. 2) It is a truly amazing story!! 8) I highly recommend this book. ;) Cheers, Gio

What I do think, though, is that in a few years we will finally find out! And then both Mr. Einhorn and Mr. Watsa will be back to business as usual. That’s when their results will start to shine again! ;) Gio

Thank you for that book! I will surely read it! :) “Fight or flight” is not really how we humans are wired to respond to a threat… “What Every Body Is Saying” by Mr. Navarro is a good book on body language… The author tells us the way humans are wired to respond to a threat is, in the right order: freeze, flight, fight. But this has nothing to do with Mr. Einhorn and Mr. Watsa's worries during the last 10 years… Those worries instead are founded in history. Period. I have studied US economic history of the last three centuries, and I have never found a single instance in which times weren’t exceedingly hard when a combination of high total debts and high asset prices came about… Of course, now we know “value investing”, as it was theorized by Mr. Graham in the ‘30s and later applied by Mr. Buffett… But, the jury is clearly still out… The years we are living through are the first time since the ‘30s when that combination of high total debts and high asset prices is present… and those problems are not solved: we still have high total debts and high asset prices. Though this time we are trying to solve the situation spreading the pain over a very long time (two decades), and therefore it is plausible a “business focus” will finally be proven to be the best policy, we simply cannot know for sure… And I like Mr. Einhorn and Mr. Watsa’s policy of “better safe than sorry”… Imo, whoever says he/she knows how this all will play itself out in the end… is simply deluding him/herself! Or at least has no historical evidence on which to base his/her certainties… ;) Gio

I think not as much volatile as Mr. Watsa’s record… but close! And I think for the very same reasons: also Mr. Einhorn is worried about too much debt in developed countries and too high asset prices… Like many people seem to believe, they both are probably wrong… Anyway, their "cautiousness" won’t last forever… And this is the reason why I think in a different market environment both Mr. Einhorn and Mr. Watsa could get results more in line with their long-term track records. Gio

2004-2014: not a very good investment decade for Mr. Einhorn… If and when the investment environment changes, and Mr. Einhorn's performance gets back to his long-term track record (or nears it), expect a 20% CAGR in BVPS! ;) Gio

Well, as you can see their leverage is still way below the industry average… This of course doesn’t mean you could afford writing unprofitable business… But I think they are very careful about the business they decide to write… Let’s just put it this way: float in a different environment would have grown much faster! ;) Gio

2014 Investor Meeting Presentation Gio GLRE-Investor-Meeting-Presentation-May-2014-final.pdf

Ah! Ok! I hadn’t read Dazel’s last post yet… He is always one step (two or three steps would be closer to the truth! ;)) ahead of me!! Gio

bizaro, as I have always said, with ALS you might get the best of both worlds: because their PG side of the business, where growth lies, needs very small capital! Therefore, from their portfolio of royalties side of the business, where stable and safe free cash flow lies, they can decide to initiate a dividend, without compromising future growth! I am not saying they should do it, or that I expect a dividend in the near term. In fact, if they could use the free cash flow from their portfolio of royalties to buy more royalties at advantageous prices, I would be very glad to go on without a dividend! Instead, what I am saying is this: ALS imo is very unique… at least, I have still to find a business structured the way ALS is: a machine that generates stable and safe free cash flow, which can be entirely paid out to shareholders, leaving growth prospects utterly intact, almost perfectly undamaged… It is a very rare animal, don’t you agree?! Well, surely Mr. Market doesn’t agree right now… We will see! ;) Cheers, Gio

Well, of course R&D at VRX will be more effective than elsewhere… after all that’s exactly what VRX is supposed to accomplish: to cut financially unjustifiable R&D costs! But I have also listed 3 other ways Mr. Pearson & Co. might succeed in increasing the true worth of the businesses they purchase over time. I look at it this way: it is not as if VRX will “invest for growth” less than its peers; it will invest the same amount, or probably even more… But it will invest DIFFERENTLY. Instead of going "all in" with R&D, Mr. Pearson will spread the funds at his disposal among a), b), c), and d)… Result: the businesses VRX buys will become more and more valuable! Is this “blind trust” in Mr. Pearson?! Well, of course you must believe he has the right capabilities to correctly invest in a), b), c), and d)! But you also must understand the business model, and why investments in a), b), c), and d) might work much better over time, than simply betting everything on R&D… In other words, you must understand the business and judge the quality of management… Is there anything else about investing? Gio

+1 We have already seen a lot of stress among real estate institutional investors in Italy… I work with IDeA Fimit Sgr, Prelios Sgr, Hines, etc. … and it has already been very ugly for them! Somehow, though, prices have not yet come down as I would have expected… Maybe LongTerm explanation is right on spot! ;) Cheers, Gio

Patents that expire will simply be replaced by new patents… the value of the business as a whole will go up… as it happened many times for ABT (my example) during the last 50 years… If I pay 2.5 x BV for the whole ABT today, but its true worth is 3 x BV, and its value keeps increasing for many years ahead, though I must amortize the difference between what I paid for ABT and its BV, and put those amortization charges on my income statement… they are not true costs… how could they be?! ;) Gio

Thank you for posting, Sanjeev! :) In my very humble opinion Europe is still a mess... Gio

Ok, so let’s see if an example might be useful to clear this misunderstanding about goodwill: So, let’s take ABT, for instance: its price share is $39.56, while its BVPS is $15.57. ABT is selling for $39.56 / $15.57 = 2.54 x BVPS. Therefore, if I were to purchase the whole ABT today, I would have to record a goodwill of Market Cap – Total Equity = $Mil 59,417 - $Mil 23,390 = $Mil 36,027. Goodwill that is to be amortized from year 1 for many years into the future. Now, I have paid $Mil 59,417 right away, have I not? So, in which cases are those amortization charges true costs? These two cases, and these two only: 1) $Mil 59,417 is higher that the true worth of ABT (this simply means I have paid too much for ABT), 2) $Mil 59,417 was the true worth of ABT, when I bought it, but then, perhaps through mismanagement or through the erosion of ABT’s competitive position, its true worth is declining. But, if we look at ABT’s history during the last 50 years, it can very briefly summarized as follows: though a lot of patents on drugs came and went, the value of ABT has always kept increasing. And it is imo what will happen also to the businesses purchased by VRX: not only Mr. Pearson has not overpaid for them, but their true worth will keep increasing over time too. If this is true, goodwill amortization charges cannot be true costs. Therefore, how is the true worth of the businesses that join the VRX family going to increase over time? By "simply" following what has become popular today as the 3G strategy for profit maximization: a) By rationalizing costs: cut non-strategic costs, increase strategic costs, b) By performing tuck-in acquisitions (buy R&D cheaply), c) By investing only in the kind of R&D which has a high probability of yielding profitable results, d) By strengthening and training better and better the sales representatives. Of course, if I am wrong, and the true worth of the businesses that join the VRX family decreases over time, then yes!, I might agree with you… at least some of those amortization of goodwill charges are true costs… But it won’t happen!! ;) ;) Gio ABT.pdf