giofranchi

Yes! And that’s why the “average” stock is even more expensive today than it was in 2000… Wow! Maybe you don’t think the S&P500 is overvalued today… Yet, its Shiller P/E has to at least stabilize… If it keeps getting higher and higher… I hope you agree with me that sooner or later we will reach the overvaluation threshold. ;) Gio

No, they are shorting the Russell2000. Gio

ok. but this tends to happen every 30 or 40 years. And it just happened 5 years ago. So is that a wise bet? I see a two tiered market. I see massive overvaluation in a growing number of "hope and change" type companies. And I see reasonable valuation in many good companies like msft apple qcom, etc. Well, they think this happens anytime the disconnect between PRICES and VALUES becomes too large… It happened in 2000, it happened again in 2008… Twice in less than 10 years. Gio

--Page 11 That's precisely what I have been saying for some time. ;) Gio

Packer, As they keep selling stocks, also their equity hedges keep declining… So, what you are suggesting is in fact automatically happening! The problem is: when to aggressively invest in equities again? Here macro imo has very little to do… You might agree with how the Shiller P/E is calculated, or you might disagree… It doesn’t really matter: as long as it keeps getting higher and higher, the disconnect between PRICES and VALUES will get larger and larger. If they think it is already too large, they will need to see a contraction in that metric (or other metrics, like P/S, Market Cap/GDP, the Q Ratio), to move again into equities aggressively. Please note that the larger the capital you manage becomes the more you are affected by “the tide”, or by what the general market does. I don’t know how your portfolio would behave, if the general market were to correct heavily… Maybe, it would keep increasing in value nonetheless… But you know very well your portfolio is not FFH’s: they need to invest in relatively large companies to move the needle, and large companies which are deeply undervalued today are very hard to find. And large companies that in a serious market correction would behave uncorrelated to the general market are even harder to find. Gio

Hi MM! I think TPRE is a wonderful vehicle for compounding capital at high rates for a very long time into the future! Just like Mr. Watsa has written in his latest letter to shareholders of FFH: the reinsurance business is particularly leveraged to a “few good men and women at the top”. Well, Mr. Berger imo is such a “good man”. Mr. Loeb knows how to choose his partners very well and carefully! :) This being said, right now I have no position in TPRE. I simply reasoned that in between FFH and LRE (my firm’s two largest holdings) I was already more than enough involved in the insurance and reinsurance business… I wanted to invest in ALS, and, instead of selling VRX, ENDP, or LMCA, I decided to sell TPRE and GLRE. Yet, I do believe this is only temporary. In the not to distant future I expect to reopen substantial positions in both TPRE and GLRE. ;) Cheers, Gio

Yeah! Of course! I think those are general ideas. I wrote to you just because a few days ago we discussed about how to invest in great compounding machines. My idea was to always be invested in great businesses, but not necessarily to be “all in” at “all times”… If in the days ahead VRX stock price declines further, and gets closer to $110 - $120, I guess I will be proven correct! ;) Gio

Thank you! :) Gio

Phaceliacapital, who wrote that? Thank you! :) Gio

Liberty, I guess we have another lesson here on the nature of the market: everything fluctuates, always. Therefore, you should never be in a hurry to buy anything. Even something that seems to go nowhere but up and up like VRX. Instead, you should always be patient and disciplined: your opportunity to average down will come. With Mr. Chanos and Mr. Grant on the bear camp I would be surprised if VRX stock price wouldn’t decline more in the days ahead. This being said, it is imperative that you know what you own. Because, without the belief you have understood VRX well, you won’t be able to muster the confidence necessary to average down in the coming days. As long as Mr. Pearson and his team don’t commit serious mistakes, VRX will be fine. And what to look at, to judge the quality of their decisions? Sales. If sales keep increasing at a satisfactory rate, Cash EPS will almost surely follow. And VRX will keep on creating shareholders’ value. Last year sales were up more than 40%. Gio

Hi David! That’s a great quote indeed! Because you truly never know when you’ve reached the top. Yet, I wonder… is it actually a matter of “sell or hold”? Isn’t “sell or hold” too much… “black or white”? Instead, I like shades of many colors… I like to watch other people’s behavior and to adjust my own behavior accordingly. Why do I think that general market prices are important? Exactly because they represent the best mean we possess to judge other people’s behavior: when they are reasonably low, the participant in the market are most probably behaving with prudence; instead, when they become very high, the participant in the market are most probably behaving with arrogance and recklessness. You might never know when the top is coming, but I believe you should study other people’s behavior and act accordingly. When they seem to be behaving with arrogance and recklessness, you might bet something troublesome is brewing somewhere, even if you don’t see it, until it finally happens. That’s why I am a great advocate of constantly letting your “cash reserve” expand or contract gradually, in accordance (or should I say discordance?) with other people’s behavior. The notion of letting your “cash reserve” expand or contract gradually is something I much prefer to the “sell or hold” diatribe. Gio

I cannot truly tell… but no, they are certainly not letting shareholders down… My idea is simply that this kind of dilutive moves are unavoidable once in a while, if you want to grow and at the same time distribute a very large portion of your earnings… see for instance MLPs. Gio

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Sorry twacowfca, I know you look at LRE as you look at every other investments of yours. Therefore, I understand your point of view. Instead, I look at LRE more as a strategic investment, one that fulfills a role no other investment can inside my firm’s portfolio, with the exception of the businesses I personally manage. If it stops paying large, predictable, and tax-efficient special dividends, I won’t know where else to look for a constant replenishment of my cash reserve… and I certainly wouldn’t welcome it... even if LRE truly had the potential to become a compounding machine! Gio

Yes! You are absolutely right! Now the question is: what do you want? As far as I am concerned, the answer is option 1. Maybe option 2… But I surely don’t plan to reinvest dividends indiscriminately. Certainly I don’t care about option 3, and I don’t think LRE is the best vehicle out there for option 3. I want option 1 with very tax-efficient and very predictable special dividend distributions. And I want to use all that cash opportunistically. ;) Gio

In 1936 Mr. Keynes had net assets worth £506,522 and loans worth £299,347. Therefore, his debt / equity ratio was 0.6. It doesn't seem too levered at all... Besides, from 1937 until 1949 the Shiller P/E of the S&P500 contracted from 22.2 to 9.1... Of course, I cannot speak for Mr. Buffett, but I guess even him would have found difficult to navigate such turbolent waters... 2008 in comparison has been a walk in the park... Imagine 12 years of markets going down, instead of just 1! Imo nobody would be spared. So, let's just hope it won't ever happen again! ;) Gio

I also have a copy of "The Collected Writings of John Maynard Keynes: Volume XII: Economic Articles and Correspondence; Investment and Editorial". And I would recommend it. :) Gio

I agree. It is a great book. :) Gio

Gio

I hope the trip to China was fine and you have enjoyed your staying there! :) Cheers, Gio

“To shift” might be misleading… Of course, I won’t abandon either engineering or for-profit education… Instead, LRE’s cash is simply added to the cash provided by both engineering and for-profit education. What really matters to me is that the cash generated by those 3 businesses, viewed as a single entity, and then handed to me, stays a meaningful percentage of my firm’s equity. :) Gio

When twacowfca is not available… just ask WhoIsWarren! ;) Gio

First of all it is my firm that receives LRE’s dividends, not me. In Italy my firm pays 45% on MLPs’ distributions… a ridiculous tax rate! On LRE’s dividends, instead, it pays no taxes. Of course, this might change for the worse in the future… and I will then be forced to revalue my investment thesis accordingly. Gio

Why do you say that? I mean, if you distribute all your earnings, I agree. You cannot grow. But, if you retain some of them, you surely can attain some growth. 12% annual return? It could be divided into a yield of 9%, while 3% goes to increase capital. If opportunities to underwrite with a CR in between 60% and 70% grow accordingly, next year a ROE of 19% will be on a larger capital. Therefore, the return on your investment will be higher than 12%. If you go on like that for 20 years, your annual compounded return will be 15%, not 12%. Of course, this is not my thesis for LRE, and this is not the reason why I want to hold the company for a very long time. Gio

But why is it so? By the very nature of LRE: it works in what is actually a niche business, where it has developed great skills and advantages, but has not much room for growth (this is not to say that future growth will be nonexistent! But it will surely be slow growth). Therefore, I think LRE has the opportunity to keep generating a lot of cash with no true reason to retain it. And it will give that cash to me. ;) Gio