giofranchi

Hi Dazel, I agree 100%: Canadian Women are wonderful!! Unfortunately, I invested my short time in Toronto unwisely… I spent it giving some good advices (see picture in attachment), instead of chasing after some beautiful gals… ;D ;D ;D Cheers! Gio

Nothing more to add. Thank you, writser and Myth, I guess the reason you always feel compelled to challenge my posts is simply I cannot sport outstanding results. I certainly don’t have the results of a Packer or an Eric… And this is actually a very good reason! No doubt about it! ;) As far as the “confirmation bias” is concerned, that’s why a like the board so much! Because there is a writser and there is a Myth, who constantly challenge my posts and investment ideas! By doing so, you strongly mitigate the risk of a “confirmation bias”! You have not succeeded in convincing me to change my approach of doing business yet, but please keep on trying!! ;D ;D Gio

FIRST: --2012AL Besides, look at the numbers at 2013 year end: $48 billion of cash, or 21% of equity; $29 billion in bonds, or another 13% of equity; they also have businesses that bring in almost $24 billion of new cash each year, or 11% of equity. Have you ever tried to put together a portfolio that yields 11% in cash and still can grow in value over time? I have! And have come to the conclusion that without leverage it is almost impossible! When people say “I am in Buffett’s camp”… My first reaction is to think: “No! You most definitely are not!” ::) SECOND: In business I experience quite often that it is much better to do nothing, rather than to embark in any venture that presents itself at any time. In business there is certainly no such thing as “a constant flow of good opportunities”… I have just an extremely hard time to believe that the stock market, which is a market of businesses, works so much differently from business itself, and always has to offer some good opportunities. ??? THIRD: Presently I run a very concentrated portfolio: FFH, LRE, ALS, and BH. They have all come down and I think they all are cheap. Yet, VRX and ENDP, which I like, have come down much harder and are approaching my target price for buying more and do so aggressively. If you were in my shoes, would you prefer to have some cash on the sidelines to purchase VRX and ENDP, or be forced to sell some of my 4 investments, even though they also have come down and I think they are cheap? ;) Gio

Who? Mr. Franklin? Mr. Vanderbilt? Mr. Sage? Mr. Baker? Mr. Mellon? Mr. Templeton? Mr. Getty? Even Mr. Buffett and Mr. Munger? No, I don’t think I am assuming anything… They have been the richest and most successful entrepreneurs in history. Period. I certainly don’t know if studying their methods and imitating them might lead to the highest returns possible over the long term… But I am confident enough those returns will be satisfactory. ;) Gio

Joel, I have really a very hard time to believe in models and spreadsheets. Usually in all the models I have seen, put in the slightest of changes, and you get completely different results. To imitate great entrepreneurs of the past and their behavior, or at least try to, is still the most sensible policy I have come up with. ;) Gio

Joel, I understand pretty well what you are saying. But probably the heart of the matter lies in the fact I am trying to run a business, not a portfolio. My portfolio of investments is just a part of my business. A very important part, but still only a part. And I look at and try to imitate great entrepreneur of the past. As far as I know, they have never talked about models nor spreadsheets… Instead, they all agree on one simple truth: they all have repeatedly said never to regret the time when cash was not enough. ;) Gio -J. Paul Getty Gio

Joel, I understand pretty well what you are saying. But probably the heart of the matter lies in the fact I am trying to run a business, not a portfolio. My portfolio of investments is just a part of my business. A very important part, but still only a part. And I look at and try to imitate great entrepreneur of the past. As far as I know, they have never talked about models nor spreadsheets… Instead, they all agree on one simple truth: they all have repeatedly said never to regret the time when cash was not enough. ;) Gio

Joel, How do you know this? Do you have their results on a 5 and 10 years basis without equity hedges? If so, could you please post them and tell us where you have found them? If they weren’t better than the indices, a long/short strategy (while waiting for some great opportunities to present themselves) would be sheer folly… Why do you think Mr. Watsa would have done that, if not convinced their stocks selection could beat the indices?! ::) Gio Well, why does it matter what it is without hedges? They did hedge, and those are their results over that period. I'm sure they beat it without hedging as they are good at investing, but they did choose to hedge, so why would I give them credit as if they didn't? No, no… I didn’t explain myself correctly… There is no denying they have been waiting! While everybody else is rushing to make money, they have made none. Instead they have been waiting. You might say it is wrong to wait. You might even say it is ALWAYS wrong to wait. I don’t know… I clearly think it is not so… but I might be wrong. Anyway, what I meant is there are basically two ways of waiting: the first is to sit on cash, the second is to employ a long/short strategy, which earns some alpha but is more volatile. Either way you are supposed to “be waiting”, and to be waiting means to make no money, but neither to lose it (like the post I commented was suggesting instead!). Gio

I agree. But they don't have to stay at 80% indefinitely. And, if it makes sense to change, things will change. Gradually, of course, never in a hurry. But things are not carved in stone. And the transition to acquiring more and more operating businesses will certainly help a shrinking of their bonds portfolio. Also, equity hedges are not here to stay. They will be removed, even at a substantial loss, if they finally are not justified anymore. Gio

Vinod, I asked Mr. Watsa my question exactly because of that concern I share with you. As they keep buying more operating businesses, and building earning power, they might be able to transition to a balance sheet more similar to BRK’s today (where bonds amount to barely 8% of total assets). That way regulatory constrains will become less and less significant. And they have time: interest rates might not come down much more from present levels, but it is not likely they are going up soon either. Also Mr. Watsa’s answer tells me they will find good value propositions wherever they might be (more equities and/or high yield bonds): it might be done and I don’t have any reason to believe he was not in earnest while replying to my question. :) Gio Thank you! My pleasure! We will see. :) Gio

Vinod, I asked Mr. Watsa my question exactly because of that concern I share with you. As they keep buying more operating businesses, and building earning power, they might be able to transition to a balance sheet more similar to BRK’s today (where bonds amount to barely 8% of total assets). That way regulatory constrains will become less and less significant. And they have time: interest rates might not come down much more from present levels, but it is not likely they are going up soon either. Also Mr. Watsa’s answer tells me they will find good value propositions wherever they might be (more equities and/or high yield bonds): it might be done and I don’t have any reason to believe he was not in earnest while replying to my question. :) Gio

Ok, guys! Sorry… I have tried to answer all your points, but it is too daunting a task! I give up. Let me conclude by saying this: in the past FHH has averaged a return on their portfolio of 8.9% annual. Given the amount of float they manage today, a 7% return on their portfolio is enough to compound BV at 15% going forward. Which is 21% worse annually than what they have achieved in the past. I asked Mr. Watsa at the AM my long term concern n.1, which is that in the past FFH has benefited much from a secular bull market in bonds that is now over and won’t probably be repeated for a very long time. He answered they will be opportunistic and they might invest more in equities, in private businesses, or in high-yield bonds. Basically what I had hoped to hear. He didn’t know I was asking him such a question. Therefore, he hadn’t had the time to put together a more elaborate answer. Yet, it seems to me he was very prepared. No one knows the future, but I decidedly like what I see. :) Gio

This makes absolutely no sense. Simply because you cannot judge FFH by BV today. As is always the case, you must know what you own. Gio

Joel, I don’t know which studies you have performed… But it seems very unlikely that in every situation possible the best percentage of cash to hold, by a strictly mathematical point of view, is always zero! How is this possible? Zero, always?! In 1929 as in 1933?! In 1937 as in 1950? In 1950 as in 1968?! In 1982 as in 2000?! In 2003 as in 2007?! In 2009 as in… today?! I am no mathematician, but as an engineer I know some of math and statistics… and your conclusion seems at least unexpected to me! Let alone the fact that in investing math and logic count only up to a certain point. It is psychology that counts the most. All the great capital allocators of the past knew this very well. And they all managed to always keep strong with a substantial cash reserve. Because that gives you calmness, and calmness gives you clear thinking, and clear thinking leads you to better decisions. Either we like it or not, we are all dealing with the future… math imo cannot get you very far. ;) Personally, I try to manage my cash reserve, and let it grow when I see frothy behavior around me, while shrinking it when some great opportunities come along. Gio

How do you know that, though? Someone could have written the same thing a couple years ago. What if the market goes up another 30% in the next few years and the real economy picks up a lot? That's the problem with trying to time macro. Over the past 100 years, there were always reasons to think the sky was about to fall, yet our economy mostly keeps driving forward. How many points was the dow jones 100 years ago? Markel and Berkshire will participate fully in a good economy, but they'll also do well if things go to hell. If things go well, FFH will create value more slowly than they would otherwise because the hedges are like a huge weight tied to their ankles, but if things go to hell, they'll just rewind the tape a bit and get back some of the money they lost in the past few years. On the long-term net, I don't think they'll come out ahead unless there's something just as bad or worse than 2008 that happens soon, in which case their other equity holdings would probably suffer more than the average company since they tend to be somewhat distressed situations (how would Blackberry do in a collapse? probably worse than Wells Fargo and Johnson & Johnson, I'd guess). I would rather have seen them reduce their leverage or raise minimum cash to 2b at the holdco level or something like that. That reduces risk, but it's less directional, so that if things don't go the way you think, you still move in the right direction. Gio, what do you think of FFH's performance if you remove the first few years when they were really small? It looks like both BRK and MKL have done better for quite a long time despite not having successfully bet on CDS in the GFC and such. Again, I think FFH could just reduce its leverage a bit and it would make them have to be a lot less paranoid about macro, which is never a position you want to be in anywyay... Liberty, I don’t see it that way… and I suspect neither Mr. Watsa does… though I wouldn’t presume to know what he thinks… Just let me tell you how I see things: All these market prices going up and up are sustained basically by two facts: the printing of an unprecedented amount of money, and the no mark to market policy huge financial institutions are able to employ worldwide. In some way, market prices going up and up are themselves a macro bet! An optimistic bet, not a pessimistic one, but still a macro bet they are! In other words, they are not supported by a significant difference between prices and values. They weren’t in 2012, nor in 2013, certainly not today! This is not an environment in which FFH is finding great opportunities. Therefore, they wait: huge amount of cash, and a long/short equity portfolio. But, and this is key, they have constantly one finger on the trigger, always ready to shoot in case the environment changes for the better! As soon as there is evidence values are much higher than what they think they are today, almost by definition great opportunities will abound, and that will be the time to drop the long/short policy, and to deploy all that cash. What I mean is people assume their long/short policy and their cash burden will go on, unless some market crash comes along… But I don’t think it is true! Absolutely not true! As soon as they see great opportunities, they will seize them. And their asset allocation strategy will change accordingly. They have began doing so with the acquisition of private businesses. But, as I have always said, not in a hurry! You must get comfortable with doing things, unless you risk committing serious mistakes…, and you get comfortable only gradually. But, as they go on acquiring private businesses, the whole process will accelerate! Also their view of the stock market might change, without the need of a market crash, if things develop for the better, and values much higher than prices start to appear once again. After all, if you don’t see a clear difference between values and prices, everything else is “macro”, one way or the other… right? ;) I wouldn’t talk about WFC, because I don’t really know it nearly enough, but I have owned JNJ in the past and I continue to follow it: my idea is that at current prices it is a mediocre investment at best! Like I have already said, take away the first year, ok, but try and take away the last three years too! And compare FFH to BRK and MKL in the remaining 24 years… My guess is FFH would compare favorably. During the last three years Mr. Watsa has been waiting. :) Gio

Joel, How do you know this? Do you have their results on a 5 and 10 years basis without equity hedges? If so, could you please post them and tell us where you have found them? If they weren’t better than the indices, a long/short strategy (while waiting for some great opportunities to present themselves) would be sheer folly… Why do you think Mr. Watsa would have done that, if not convinced their stocks selection could beat the indices?! ::) Gio

Well, I wouldn’t like to see some move that is inconsistent with their way of doing things. Listen, I don’t think there is only one way to achieve great results. What matters is that you get to be the best at what you are doing and what you are doing is sensible, and you have the temperament and strength to follow your strategy till completion. If, on the other hand you are too much affected by temporary failure, and therefore you change course without a true reason, that would worry me… For instance, I decidedly wouldn’t like them taking the equity hedges off right now! ;) On the contrary, one of the reasons I try to answer all your doubts about FFH (and other investments of mine) is that this forces me to constantly revisit potential weaknesses of the businesses I own, and to write down the reasons why I think they still might do fine in the future. It is a continuous monitoring that I like a lot! :) Gio

Your whole argument about “the long-term” is very misleading. If Mr. Watsa’s defensiveness today is proven right, those numbers will change dramatically in a matter of just a few years… It is exactly like keeping cash for a very long time, and then investing in a truly outstanding opportunity: until that opportunity materializes, your track record seems very poor, than all of a sudden it becomes wonderful! Mr. Watsa at the AM has said the investment business is primarily characterized by how quickly things change. He simply has been waiting for three years now… Gio

The graph about debt: It is total debt that matters. Probably you are looking at gov. debt, which is only a part of total debt. Total debt bottomed at the end of the ‘40s, exactly when stocks bottomed. ;) Gio

CPI Contracts + Blackberry They have been discussed ad nauseam… I wouldn’t really like to hear anything more about them, anyway… CPI Contracts: What matters is only the asymmetrical bet. Nothing else. Macro, micro, bla, bla, bla… If you find a coin and you get the chance to gain 10 if heads comes out or lose 1 if tails comes out, will you flip it? Nothing else to say. Blackberry: As I have always said, much ado about nothing: they have always made mistakes investing in equities, they will go on making mistakes. Their track record has always being stellar, it will continue to be very good. Nothing else to say. Gio

Don’t confuse the short-term with the long-term: in the long-term FFH equity portfolio has always outperformed the indices. In the long-term they will make money, not lose it! Even if nothing truly significant happens to make them change strategy. ;) Gio

The whole part “Cash Burden” is very difficult to understand… Even more so because Mr. Watsa’s actions are crystal clear. They go like this: If you don’t see great opportunities, be patient, stay in cash (at the dinner a member of the FFH team said: I would have liked to invest this way: to stay in cash almost always and to swing only when truly outstanding opportunities come my way… But I was never able to do that!). An alternative to this approach is something Mr. Templeton practiced with success: buy the stock you like the best, sell the one you like the worst. The advantage of this approach over cash is that you should be able to earn an alpha. The disadvantage is that it is much more volatile. So, it depends on what you prefer at a given moment: to earn some alpha, or stability. If Mr. Watsa is selling, it is probably because he wants to be sure about its buying power, should some opportunities arise. He simply prefers right now the stability of cash to the profitability (and great volatility in the short run) of a long/short strategy. That’s all! ;) Gio

AZ_Value, Now to the equity hedges… But we have already talked about them for ages!! With the benefit of hindsight they have been a mistake! And their timing has been terrible! But a past mistake doesn’t mean they will prove to be a mistake at the present time too! As an ex-shareholder you have been lucky enough not to suffer from the bad timing decision to put on the equity hedges… good for you! Now what? Do you still believe they are a mistake also at today’s prices? This is the only question a shareholder should be concerned now. The past is past, the future is the only thing that matters. But, you might argue, if they have made such a mistake in the past, I don’t trust them for the future either… That’s your choice! And one I strongly disagree with. This is the reason: Each company, like each individual investor, has different situations and needs. And each one must devise the best strategy for him/herself, in order to always be solvent, to always continue business undisturbed, and to always have cash when opportunities arise. Lots of people show the arrogance to presume they know FFH’s situation and needs better than Mr. Watsa… They usually say: “I am in Buffett’s camp… look at how Buffett do things… etc.”. Not realizing each company and each individual investor are stories of their own, and that to generalize is the most dangerous thing they could do… You are in Buffett’s camp? No! You are absolutely not! And neither you know better than Mr. Watsa what’s good for FFH. Gio

AZ_Value, I also find your comment on underwriting results a bit misleading. You make it sound like 2013 has been nothing but good luck… Instead, like they have very often shown, it is now more than 10 years the average accident year combined ratios is below 100%, and reserves are redundant. ;) Gio

Packer, First of all let me tell you it was great to meet you in person! ;) Now I have “promised” to answer AZ_Value’s points, therefore I won’t have time to comment much else. But let me tell you I completely disagree with your suggestion. FFH is becoming a powerful force in insurance worldwide, and is buying insurance companies all over the globe in a very opportunistic way. It is what they truly know and what they do best. I asked Mr. Watsa at the AM about regulatory constraints, and he answered they will be able to raise their investments in equities, they will be able to invest in high-yield bonds, they will be able to invest in private businesses, etc. I have no reason to believe he was not sincere. :) Gio