giofranchi

Very good presentation! Thank you very much! :) Gio

Well, actually I have just started reading the book… so I cannot truly tell! But I will keep quoting, as I find more interesting ideas and character traits! ;) Gio

--Third Point Q4 2013 Letter Mr. Randal J. Kirk is 60 years old, and could stay at the helm of XON for the next two decades. XON is a $3 billion company with a lot of room to grow. In any market pull-back this one is on my buying list. :) PS I don't know what ECCs look like to you, but to me they look much like royalties! ;) Gio

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To his son, Mr. Baker wrote: Gio

[amazonsearch]George F. Baker and his bank 1840 - 1955[/amazonsearch] --Proverbs 22:29 Gio

Well, I know and follow just two of them: GLRE and TPRE. GLRE practically writes no cat reinsurance… its business is mostly concentrated in high frequency transactions. Severity transactions are selectively chosen and amount to only a very small percentage of its book of business. TPRE reinsurance operations are led by Mr. Berger, who has a long and very successful track-record as insurance / reinsurance underwriter. I don’t know the rest of the lot… and I tend not to speak about things I don’t know… ;) Gio

Mr. Charles Gave and Mr. Louis Gave on "The Emerging Market Panic" --John Mills Gio Daily+1.27.14.pdf

Very good to know! Thank you! :) Gio

Most of the hedges are on the Russell2000. Gio

As far as discount rates are concerned, I like to keep it simple: and I ask myself “is this business better than the average S&P500 company?”, my answer is almost always “Yes”. Then I fetch the last AL by Mr. Buffett and look on page 1 at the compounded annual gain from 1965 to the present day of the S&P500… and I use that number as my discount rate. Period. Gio Discount rate has been the topic of debate in the value investing community forever. Of all the thoughts expounded, this one is the most lucid and logical. -Crip Thank you Crip, very kind of you! :) Gio

I couldn’t agree more! I am a big advocate of owning the right business with the right management through thick and thin for a very long time (unless it gets wildly overvalued!). :) Gio

As far as discount rates are concerned, I like to keep it simple: and I ask myself “is this business better than the average S&P500 company?”, my answer is almost always “Yes”. Then I fetch the last AL by Mr. Buffett and look on page 1 at the compounded annual gain from 1965 to the present day of the S&P500… and I use that number as my discount rate. Period. Gio

Well, it doesn’t seem to me that multiples have been used to get to a “fair value”… Multiples, instead, have been used as a relative valuation tool. And, of course, in a relative valuation analysis multiples can always be used. What do you mean by perpetuity? Businesses generally are assets with a duration of around 50 years, aren’t they? With this I couldn't agree more! As I have already very often expressed! :) Gio

AAPL Full Letter Gio Carl_Icahn_AAPL_Full_Letter.pdf

wescobrk, sorry I had missed your post until now… Anyway, I cannot really answer to your question… Let’s only say that I am content to let him work. :) Gio

Well, original mungerville is very good with numbers… Damn! I am the engineer here… It is me who should be math oriented and skilled with probabilities! ::) Anyway, he has come to the same conclusion I was trying to point out in a much more qualitative way: very big margin of safety at today’s price! :) Gio

If Kami is turned up side down and Jullinne Lake also, then… there will be other projects! ;) And that’s exactly the beauty of partnering with astute capital allocators backed by steady and reliable streams of cash: there might be setbacks, they always happen, but the business usually deals successfully with difficulties and goes on. :) Gio

This reminds me of our discussion about FFH’s bond investments… And my answer is, of course, the same: both mangers are in the business of using capital the best way possible (just like any great entrepreneur would do!). 1) If FFH’s bonds were overvalued (selling above par), it doesn’t matter FFH needs investment income… because they simply would sell overvalued bonds and go looking for cheaper bond investments! They would still get the required investment income, just replacing overvalued bonds with cheaper ones. 2) If ALS keeps the Alderon investment, it should really not be because of “history”… it should be, and it is, because of the future! They probably know Alderon better than anyone else and strongly believe in its future prospects. And, as you say, if Alderon “comes online”, the value of that investment to ALS would be much greater than it is today. Anyway, though I do not agree either manager keeps overvalued assets because they are somehow “forced” to do so, in my last post I have assigned a value to ALS’s portfolio that is 70% its current market value, and still think ALS today is an enticing proposition. :) Gio

But let’s make a simple exercise: let’s assume that today the market is overpaying for royalty businesses and the right multiple to get a fair value should be 15 instead of 23.3. Let’s also assume that the value of ALS’s portfolio, should a correction in commodity prices come, would be 70% its current market value. Where do these assumptions leave ALS’s shareholders? Well, $12 million x 15 = $180 million, $130 million x 0.7 = $91 million, $180 + $90 = $270 million. With these assumptions, and I guess even ap1234 might agree they are conservative enough!, what we are paying to become ALS’s shareholders today is more or less 1.6 ($430 / $270 = 1.592) x BV, or the true worth of the assets we own. Now, if you discount the value of an equity that compounds 15% annual for 15 years, assuming a discount rate of 9%, you get to a present value of equity of around 2.23 x BV. Not only this valuation uses very conservative assumptions, not only it assumes that 15 years from now ALS simply stops creating value and closes doors, not only it assumes a rate of growth for the next 15 years that is ½ the rate of growth during the last 17 years, it also leads to a present value of equity that is 2.23 / 1.6 = 1.39 times larger than what we shareholders have to pay today. One thing I am sure of: you must have a clear idea of what’s a margin of safety for you… because ask for too much safety and you simply won’t be able to invest in anything. Now I will truly go on reading… but what I suspect I will find are very precise numbers… although very precise numbers have never helped me very much! ;D Gio

Wow, it really seems that ALS makes people think… and write! ;D I have not read everything yet, and I will do so next. Anyway, I think this is basically my answer: even if yearly cash flow were just $12 million, $12 million x 23.3 = $280 million, $430 - $280 = $150 million, which is roughly the value of ALS’s investment portfolio. … And how is growth valued by the market? Zero? A company that has grown 29% annual for the last 17 years? And that is transitioning from a purely cyclical business into a cash flow machine? For which, therefore, imo future growth has even better prospects than in the past? Because it will be based on very safe streams of reliable and constant free cash? Really?! Don’t you think that being able to buy growth basically for free in such a company is a HUGE margin of safety? Now I will go on reading… :) Gio

ap1234, I perfectly agree with you that “a part” of ALS is still cyclical, but please consider: 1) First of all in business you always want to “skate where the puck is going”, right? Therefore, I like very much the transition to a royalty business ALS is going through: should I refrain from investing in ALS now, just because that transition is not completed yet? At which cost? If that transition were already completed, wouldn’t it be also discounted by the market in the form of a much higher share price? 2) It doesn’t really look like the market is assigning any value to ASL’s stock portfolio: $27 million (assuming $3 million of operating expenses) with a 30% tax rate gets you to $19 million after tax x 23.3 = $440 million, slightly higher than today’s market cap. 3) If, like you have said, ALS’s management is very skilled in the mining sector, why do you assume their investment portfolio is not a good one? They should be very well aware of cyclicality, or shouldn't they? I mean, if they are so good, why should we assume they are presently holding overvalued investments? 4) I know very well it is not likely they will put together $125 after tax in 3 years… My reasoning wasn’t to mathematically prove something that cannot be proved… It was more a qualitative reasoning: even if in 3 years they have half the cash they had some months ago, and they use it to opportunistically buy more royalties and to enhance further the transaction to a business that is less and less cyclical, I still much prefer this new business to what ALS was before the PMRL deal. I hope now my meaning is clearer. Thank you, ap1234! Always enjoy your posts very much! :) Gio

Dazel, please walk me through the math… I really don’t care if you sound biased!! ;) Thank you, Gio