giofranchi

wrong. cash EPS is Not earnings without depreciation. it's earnings without amortization. big difference. I suggest you learn the difference before declaring that this company is all about "smoke and mirrors". Hey! We all have different opinions… No need to get upset or be rude, right? ;) This being said, I agree with wellmont: please, take a look at the ENDP’s strategic presentation in attachment. On its last page you find the adjustments to get to Cash EPS starting from GAAP EPS. Evidently, amortization of intangible assets and restructuring costs are what matters the most. And we all know amortization of intangible assets is neither a true cash outflow nor a true cost (unless you have overpaid for those assets), and restructuring costs are something temporary that will be gone when the integration of a new business is finally over. That’s why I believe that Cash EPS are the true measure of profitability for both VRX and ENDP. Gio Endo_Health_Solutions_June_2013_Strategy_Call_Presentation.pdf

Well, I think it is the combination of the two: remember that Mr. Pearson has stated many times they try to buy "durable" assets. Therefore, they are aiming at benefiting from the cash flow generated by those assets throughout their "durable" life, without paying the costs of developing them… That’s not entirely true… Of course they pay for them! What they strive to eliminate from the equation is the uncertainty tied to the development of drugs… because they buy them once they have already been developed by others. But later, when they possess those assets, they act exactly like any other pharma company acts: they produce, advertise, and sell their products. Gio

Well, I think almost any acquisition they have made has proved Cash EPS accretive right away. Imo that translates into creating a lot of value. And I think their strategy is right: get levered, while doing so is reasonably affordable, and build scale, or simply buy as much cash generating assets as you can. Then, should debt cease to be cheap, use the free cash generated by all those assets to reduce the debt load and to continue growing Cash EPS through aggressive cost cutting and shrewd capital allocation. You might not like it. But I do. I always like something, when I realize I would do exactly the same thing, if I were in their stead. Gio

Thank you Packer, it seems a bit strange that Mr. Pearson, who is so focused on a R&D “light” business approach, had invested so much to buy a company which instead requires high R&D expenses to keep generating cash… ??? Anyway, this is certainly an issue to watch closely! Gio

Valeant Pharmaceuticals Reports Fourth Quarter And Full Year 2013 Financial Results http://ir.valeant.com/investor-relations/news-releases/news-release-details/2014/Valeant-Pharmaceuticals-Reports-Fourth-Quarter-And-Full-Year-2013-Financial-Results/default.aspx Gio

Basically, I look at Revenue and Cash EPS growth: both are expected to be 40% higher in 2014 than in 2013. The average Cash EPS is expected to be $8.5, which at yesterday closing price translates into a multiple of around 17x. Certainly not cheap, but given the growth rate of both Revenue and Cash EPS, not wildly expensive either. As far as debt is concerned, their goal is to reduce it to <4x adjusted pro forma EBITDA. Furthermore, it always depends on who is handling the debt… I mean, if debt were always wrong, not matter who is handling it, you would have missed to Mr. Malone story completely… And probably Mr. Malone would not have achieved such an incredible success in business. If management is to be trusted, I think now is the time to take advantage of low interest rates, making use of debt in order to build scale. Of course, you don’t seem to trust management. You say “the management smoke & mirrors”… Well, I would suggest to read VRX’s conference call transcripts, to get better acquainted with Mr. Pearson’s strategic views and actions. Personally, I have found many things that I like and agree with. Gio

I think you would want to look at what happened to GLRE in 2008: it went down a lot, but was not the end of the world for Mr. Einhorn & Co.! Of course, you might say, in 2008 GLRE didn’t experience significant losses on the reinsurance side of the business… therefore, 2008 was not the worst case scenario! And Mr. Einhorn’s investments in 2008 were down far less than Mr. Loeb’s… So, let’s hope two things: 1) Mr. Loeb has learnt the 2008 lesson and won’t be caught so much by surprise next time something similar happens. 2) Mr. Berger has learnt BRK’s true and tested formula for profitable underwriting: never be in a hurry to increase float, never chase volume, only write contracts when properly compensated for taking those risks. I think the odds Mr. Loeb will be good at 1) and Mr. Berger will be good at 2) are high. Though, of course, nothing is certain. ;) Gio

Just waiting for some cash at the end of the month (in a few days), and I will buy more! ;) Gio

Euro-Zone Inflation Falls At Record Speed http://www.marketwatch.com/story/euro-zone-inflation-falls-at-record-speed-2014-02-24?link=MW_home_latest_news Gio

You want to take a look at what happened to FFH in 2008. I love the company and management, but as they are currently positioned, I find it hard to justify owning the stock. If the market goes down, FFH will certainly go down in the short term. If the market goes up, FFH will decline in value. I would rather own cash that is earmarked for FFH and buy it once the market declines . . . if the market doesn't decline, I would rather hold cash than FFH. Of course, this makes no sense to me. What I see follows: In a market correction FFH's equity hedges will appreciate faster than its equity investments will decline, interests rate will come down because people will flee towards the safety of government bonds, and insurance operations might still be profitable. Therefore, FFH will make money on its equities portfolio, on its bonds portfolio, and on its insurance operations. FFH’s BVPS after a market correction will be much higher than before. Gio

When you look at the history of us debt levels you would see that current levels are not that high. Around 1945 we had a similar situation when you only look at the numbers and the next 20-25 years were very good for stocks. So its possible that you have to wait a long time until that situation is gone. And the crux is that as the debt levels hit a low of 20% of GDP the stock market crashed in 1973. http://www.multpl.com/u-s-federal-debt-percent/ Thats probably because fresh money is not flowing into bonds when interest rates are low, its going to stocks. frommi, the first picture in attachment clearly shows 2 things: 1) Total US debt today is still extremely high; 2) The last time it was very high (still lower than it is today), it was in the mid-30s’ and a process of deleveraging went on until the early 50s’. Furthermore, we all know that stocks bottomed in 1949, almost exactly when the process of deleveraging came to an end. No wonder for the next 19 years stocks had a wonderful run! (see picture n.2 in attachment) In 1949 the US had the exact opposite combination we have today: that’s to say, low debts + low valuations. This being said, Mr. Shilling thinks that during the next 4 to 5 years the process of deleveraging we are living today will finally be over. I wouldn’t be too surprised if 2019 will turn out to be 1949 all over again! ;) Gio US_Private_and_Public_Debt_as_a_%_of_GDP.bmp

I am never upset! A bit lonely… maybe! But never upset! ;D ;D Cheers, Gio

I don’t really think they are market timers… As you have also pointed out, and rightly so, FFH probably had never used equity hedges until 2002-2003… And of course I cannot know, but I guess they will not go on using them forever… Instead, I think both Mr. Martin and Mr. Klarman and Mr. Watsa, who I am sure would define themselves as “value investors” not “market timers”, at the beginning of the new millennium got scared by the combination of historically very high debts and very high asset prices. Throughout history very high debts alone or very high asset prices alone have usually caused a decent amount of trouble… but the combination of the two have many times wreaked true havoc! That’s why imo we have gone through a 10 years period in which value investors simply behaved much more conservatively than they usually would do and did in the past. Let me be clear about this point: it is not that the concept of insurance is completely foreign to a value investor… Mr. Klarman in “Margin of Safety” asks the following question: person A compounds capital at 20% for 9 years, then loses 15% in year 10; person B compounds capital at 16% for 10 years; who has the largest capital in the end? You already know the answer, without the need to calculate. Therefore, the idea of forgoing some gains, to purchase safety in the form of insurance, is in the DNA of the value investor, who is more concerned about protecting capital than increasing it. What really changed during the last 10 years was the amount of cautiousness those value mangers believed was necessary to employ. And the reason, I believe, was that combination of historically very high debts and very high asset prices I have just referred to. The moment that combination is gone, they most probably will be back to business as usual! Gio

One thing I don’t understand is your comments about Mr. Martin’s returns… For what I see, if I had invested with Mr. Martin since inception of his firm, today I would be worth 25% more than if I had invested in the S&P500… Moreover, this outperformance was accomplished in such a way that today I would hold a ton of liquidity to take advantage of future opportunities… I simply don’t understand what’s not to like about that! Which would you prefer? 1) to be worth 25% more and have 73% of assets in cash today, or 2) to be worth 25% less and be fully invested today. Even Packer, arguably the most bullish poster on the board, recently is admitting that he is looking for opportunities outside the US to find value today… And I take that opinion, from such an astute and smart stock picker as we all know Packer certainly is, as the definitive evidence that today I would rather have a lot of cash than be fully invested. Whoever looks at this pattern: 2003 87.2% of outperformance when stocks are fairly valued, 2007 42.7% of outperformance when stocks are overvalued, 2008 110.7% of outperformance when stocks are fairly valued again, 2013 25.1% of outperformance when stocks are overvalued again; should ask himself what the % of outperformance will probably be, when stocks become fairly valued once again. I guess it will be significant enough! This being said, I am only defending something that I think is unjustly disparaged… But certainly I am not comparing Mr. Martin’s long-term returns to those achieved by the likes of Packer, Eric, Kraven, etc.. If you know how to invest like them, Mr. Martin’s defensiveness today cannot but look foolish to you! Gio

This is the way Warren Buffett commented “Speculative Contagion”: If Warren Buffett enjoys reading Mr. Martin’s letters, I thought the latest letter of his would be an interesting read for this community too… Evidently, I was mistaken…!! ::) Gio

--Seth Klarman --Charles Kindleberger Gio MCM_2013_Annual_Report.pdf

February 2014 Commentary Gio Feb_2014_Commentary_FINAL.pdf

Yeah! Sure! That someone was me! :) Gio

Well, I like the pharmaceutical business. What I don’t like about it are often too high and wasted R&D costs. Both VRX and ENDP are precisely tackling that Achilles hill, aren’t they? Furthermore, Mr. De Silva is a very good entrepreneur. As such, he is taking advantage of low interest rates… while they last. When low interest rates disappear, I am confident enough he will find other opportunities to make the abundant free cash flow from pharma operations work egregiously for the benefit of shareholders. After all, that’s what great entrepreneurs do. Gio

Well, this is your judgment about the business. I don’t think Liberty was asking “what do you think about ENDP?”. Instead, I think he was asking “given the fact ENDP is a great compounding machine, how would you invest in it? Would you wait for the price to go down? And what if the price never goes down?”. At least, that’s what I have understood! ;) Gio

Hi Liberty! Maybe with an example this gets a bit easier: Let’s say for me a full position in ENDP is 10% of my firm’s portfolio. Now, Case 1) It is selling for 18-20x ADCEPS: I establish a 5% position, leaving a lot of room to average down; Case 2) It is selling for 15x ADCEPS: I establish a 7% position, decreasing the room I leave to average down; Case 3) It is selling for 12x ADCEPS: I establish a 9% position, with almost no room to average down; Case 4) It is selling for 10x ADCEPS: I establish a full position. How do I manage Case 3) and Case 4)? Of course, it depends also on my other holdings: if Case 4) becomes Case 1), thanks to an appreciation in price that is faster than ADCEPS growth, while another holding of mine hits a bump in the road and goes from Case 1) or Case 2) to Case 4); well, then I shift some capital from the first holding to the second one. After all, they both are great businesses with what I believe are very good prospects for compounding capital many years into the future… Therefore, why shouldn’t I shift some capital from the one I consider to be more expensive to the other that I consider cheaper? Gio

Hi Liberty! I agree with what you say. But let’s make this distinction: a business that you own in its entirety and a business you own through the stock market. In the first case, I would buy it. Period. And hold it for the very long term. Sure that in the end the entry price would not affect my returns much. The second case, instead, is a little bit different… because you also have to deal with the nature of the stock market. And by its very nature everything that is quoted on an exchange is also volatile. There might be listed companies the price of which did nothing but rise, but they surely are the exception to the rule! Therefore, I have come up with this “solution”: I am always invested in businesses I like and I think will compound capital at high rates for many years to come, but I also leave room to average down. For each of those companies there is in my mind what I call the “offer you cannot refuse” point, at which I would require no more room to average down, and I would hold a full position in those companies. Depending on how far or how close their prices get to those “offer you cannot refuse” points, I respectively increase or shrink the room I leave to average down. That’s basically why I am not selling my investments in ENDP or VRX, even if I am not adding more today. I hope this helps. :) Gio

Buffett's punch card approach to emoticons? (This way your post can have a Buffett reference, as is your wont) You caught me. It is my wont. Why? I think the difficulty of expressing feelings and emotions through posts and e-mails is very well known and documented… And personally I find emoticons useful… Better to add an emoticon, than to risk others would misunderstand your true meaning… No? Therefore, imo the ones among us who don’t write like Victor Hugo used to, should not be shy or ashamed of inserting an emoticon once in a while! ;) ;) ;) ;) ;) Gio

An artiste and a gentleman and a scholar… but no entrepreneur… ah!! That’s a pity… But at the same time it is also very funny! I know what you mean, and I know you are simply great at what you do. As for me, I find very hard to recognize the difference between price and value of things I don’t think I know well. I simply lose faith in my judgment too easily… ::) Gio

Ah! Eric, that’s exactly why rates won’t go nowhere for yet some time! If there is one thing the US should want to manipulate, even more than the stock market, is the interest they pay on their staggering debt! ;) Gio