giofranchi

Yet, they are more like consumer products than drugs… How much does P&G / Unilever spend in R&D? What’s P&G / Unilever organic growth? Gio

That’s why I said ALS is a strong long term investment, even without catalysts: selling barely above BV… a company which grew 29% compounded for 17 years… which has just turned into a cash cow… and which can undoubtedly grow for many more years (still very small size, still very young and entrepreneurial founder/manager, huge market)… ;) But, of course, China might crash… ::) Gio

Many of those royalties are based on tonnages… Well, a catalyst is not a sure thing. Without a dividend, or Kami getting financed, ALS gets back to be just a good long-term investment… But, if you fix your attention on the “trouble in China” story, you could surely come to the conclusion that ALS, stripped of catalysts, might be purchased at a lower price in the future (despite being today a good long-term investment!). This imo is Mr. Market thesis right now... Simply the perfect playbook of how to listen to the lemmings and overlook what you are actually getting for your money... ;) Hope this helps. :) Gio

Gary, I agree with Dazel. And I would add that I look both at ALS and at VRX right now in my firm’s portfolio as kind of special situations… I mean this: they both enjoy the presence of near term catalysts. ALS may initiate a dividend some months from now, or may get approval for the financing of Kami and JL… If just one of these things happen before a China’s collapse, my best guess is that we will have to pay a lot more in the future to partner with Mr. Dalton… even if in the future a serious correction in ALS stock price might actually happen! ;) (VRX: similarly, if the deal with Allergan goes through, VRX stock will experience a substantial increase in price.) Gio

http://blogs.marketwatch.com/health-exchange/2014/05/05/einhorns-athenahealth-short-time-to-discount-medical-records-stocks/ Gio

Q1 2014 Results Gio Q1_2014_Earnings_Press_Release_FINAL.pdf

I don’t believe in “fixed capabilities”. I think we can improve and get better. And I want to partner with people who constantly strive to improve and get better. Imo FFH is showing precisely that attitude with its insurance and reinsurance operations: barely a couple of years ago they seemed doomed to always underperform, instead now they have improved their underwriting remarkably, to the point they are even making a profit out of it! And I believe Mr. Barnard won’t behave complacently going forward, instead he will keep pushing to make things better and better. The same applies to their investment capabilities: imo those capabilities have always been very good, but nonetheless I think they will keep improving. How? Well, FFH will focus more on acquiring whole businesses and on searching for quality. Their recent moves already show this tendency, and it will become ever more pronounced. Math imo doesn’t lie: with a small underwriting profit, they must average a return around 6% in their portfolio of investments to compound capital at 15% annual. In the past they have averaged 8.9%. That's my idea of margin of safety! ;) T-bone1, I will try to answer your question: Mr. Prem Watsa. For the next 20 years he will have the last word on any decision about capital and resources allocation that really counts. This doesn’t mean he won’t listen carefully to every suggestion coming from the many talented people he surrounded himself with. :) Gio

Those costs flowed directly to BV. No artificial inflation of BV there! Gio

What do you mean? He paid less than BV for those acquisitions, therefore no goodwill was recorded… Gio Prem should have paid even less than what he did for TIG and C&F. But, hindsight is 20/20. Maybe… But we were talking about how goodwill might sometimes inflate BV. Those two were clearly not the cases. ;) Gio

Btw, Tom, I have never said it would be easy… Far from me! Yet, I know exactly which kind of people I like to partner with, and I constantly look for them. Those people are a necessary prerequisite to develop conviction in (almost… ok, with the exception of KO and JNJ!! ;)) any organization! Sorry to say this, but doing business is not like sitting at your desk and reading thousands of pages of 10-Ks and 10-Qs… I have witnessed businesses with hundreds of million in sales brought down by a couple of very stupid decisions… The fact it is not easy to find people who are truly worthy of our trust and respect, doesn’t mean we can do business without them… Look, it is really as simple as this: If you want to own a business for the value it is going to create in the future, you MUST absolutely have confidence in the people you are partnering with. Instead, if you buy a stock, because it is too cheap no matter what management does, then you better get out as soon as you have the chance to take that last puff! (In this case I would advise a very diversified portfolio a la Kraven!) As far as FFH is concerned, Mr. Watsa is 20 years younger than Mr. Buffett and still runs a much smaller organization than BRK. He undoubtedly is the kind of person I like to partner with, and he can grow FFH at 15% for many years to come. But, the fact I like what I see doesn’t mean he will surely achieve that goal! This we all agree with and imo is self-evident! My conviction in FFH is not driven by the fact that, if Mr. Watsa makes the right choices, it will compound capital at 15%… My conviction in FFH, instead, is driven by the fact that, even if Mr. Watsa might make some bad moves, it will turn out to be a solid investment. When you partner with those people, it is always the downside you get protected, and for a long time! When you know you have taken care of the downside, you can develop conviction. Gio

What do you mean? He paid less than BV for those acquisitions, therefore no goodwill was recorded… Gio

If BVPS multiplied by the number of shares a shareholder owns represents his/her true capital (goodwill may detract only if FFH paid too much for an acquisition… and I don’t see Mr. Watsa paying too much…), and that capital grows faster than FFH’s cost of capital, which is the discount rate you should use to calculate its present value of equity per share or IVPS (please, refer to “Accounting for Value” by prof. Stephen Penman), then it is a mathematical reality that IVPS is higher than BVPS. Period. This has nothing to do with the question: is BVPS equal to IVPS? Of course, why should you own ANY business that gives you X %, when you could trade and gain X+Y %??? Gio

Gary, The cost of capital for FFH imo is: Cost of equity: I would say that is the opportunity cost Mr. Buffett talked about, and I would grab 2013 BRK AR, page 4, look at the compounded annual gain 1965-2013 for the S&P500 and get that number. + Cost of float: I would grab FFH 2014 AM presentation and look at page 18. + Cost of debt: I would look at how much FFH pays on its long-term debt. Total capital is Equity + Float + Debt, and its cost should be calculated proportionally. It clearly is lower than the opportunity cost Mr. Buffett talked about. Therefore, I use 9% for FFH (conservatively enough!). Gio

Tom, please read what I write with carefulness, before you quote and answer my post… Read very well line number 3 of my post and think it over a little bit… I am not only quoting… I am giving you my daily experience… working with many entrepreneurs, engaged in many different endeavors! Then, of course, I am also pleased by the fact that, studying the methods of the best entrepreneurs present and past, I find proof of what I experience every day. ;) You think Mr. Watsa didn’t live up to the test? Well, then put him among those 4 or 5 out of 10 that under delivered! Imo it simply makes no sense at all! Gio

Al, of course you might be right. I don’t play that game, but you might be right! ;) Gio

Al, It is a mathematical reality the fact anything that grows BV at a higher rate than its cost of capital has IV higher than BV. Gio

Gary, with this I undoubtedly agree! Unfortunately, I cannot help you… That’s just the way they do business… If you don’t like what you see, then you should stay away! But this has nothing to do with price… ;) Gio

Tom, I focus more on ownership + management, than on management alone. I do so because I experience in everyday business life the difference it truly makes. And, as I go on studying the methods of great entrepreneurs of the past, I find they had very similar experiences about the importance of partnering with great people. Have you read my last quote on the thread about George F. Baker? ;) Be sure that also Mr. Buffett agrees! 3 out of 8 great entrepreneurs profiled in “Outsiders” he invested with, a fourth was he himself, a fifth, Mr. Singleton, came just a little bit too early! ;) This doesn’t mean you will do awesomely all the times… No one knows the future, right? But if the people we partner with truly deliver what they promise 5 or 6 times out of 10, we might get very rich indeed! ;) Cheers, Gio

Gary, You simply cannot point at the fact in 1998 FFH got wildly overvalued - BV was little above $100, while price reached above $525 (see the chart attached) - and say who bought at that precise time only collected the dividends… What does that observation have in common with today’s reality?? Imo NOTHING! Today we are trading at 1.247 x BV, after 3 years BV has gone nowhere, even if IV imo has gone up a lot! Like I have very often repeated, you must know what you own… Otherwise, selling is the right choice… but not because of the price! ;) Gio fairfaxchart.pdf

Well, I look for great people (at the helm of a predictable business), and then I stay with them. I act only when the price is VERY low (averaging down), or when the price is VERY high (selling some, most often not my entire position!). This way I reduce the number of choices I have to make as much as possible! ;) Gio PS I am sure I know that one… Just cannot remember it right now… ::)

Tom, I agree. Unfortunately, this is only theory. For instance, I think FFH is worth much more than 1.3 x BV, I don’t even think its BV makes any sense today… You, on the other hand might think about FFH differently… You see? I think FFH is trading well below IV, you might think it is trading above IV! Practice is much more complicated! ;) What I think we might agree on follows: holding or buying FFH today, you partner with a great entrepreneur and his wonderful team of people, and you pay a fair price to do that. This simple recipe in the long run tends to yield very satisfactory results. Unless, of course, you want to jump in and out… then, good luck to you! ;D ;D ;D Gio

They (the shareholders you are asking) like the price if they choose to hold (unless they do so only for tax savings). Otherwise, it's all too easy to sell and go to cash. Just as easy in fact as having cash and buying the shares at the same price. So how is that any differnt? Buying vs holding? Other than taxes and psychology, they are the same bullish sentiment. Having cash and buying is basically the same vote of confidence as holding and not selling to raise cash (other than taxes and psychology). This imo makes no sense at all… there are a lot of reasons why someone might just hold a business. In fact the great majority of business owners just hold their businesses. But you are traders… Ok! Yet, I still believe the more you trade the more mistakes you will make in the end. So, please go on: jump in and out of FFH! Good luck to you! :) Please, consider this: if the markets are in for a correction, FFH BV will explode (today’s BV multiple basically won’t matter!); if the markets keep getting more and more expensive, FFH will be a mediocre investment. Therefore, why won’t you keep some funds invested in FFH and some other funds invested elsewhere much more correlated with the stock market? Are you so sure about what the market is going to do next?! ;) Gio

Gio

Q1 2014 Conference Call Transcript Gio fairfax-financial-holdings-Q1-2014-conference-call-transcript.pdf

Obama And US Growth by Mr. Charles Gave Gio Daily+5.2.14.pdf