giofranchi

Thank you very much for the recommendation! Here in Italy we always get movies with a little bit of delay… But, as soon as the DVD is out, I will purchase it and enjoy what looks like a stunning picture! ;) Gio

Gio

Gio

This is the full letter by Mr. Hendry and imo a must read. Enjoy! Gio Hugh-Hendry-Eclectica-December-2013-Letter.pdf

As far as I am concerned, I think that Mr. Shiller’s definition of stock market bubble is very much understandable and agreeable with, and it is summed up in Figure 11 on page 5: another 20% rise in stock prices and finally will get to the “Red Zone”. Gio EVA+12.6..2013+NA.pdf

Please, do it! That would be very kind of you! ;) And welcome to the board!! :) Gio

Generally, I agree. Though, it seems a bit difficult to believe that a huge bank could escape the popping of asset bubbles unscathed… Of course, you may say that asset bubbles are still years away, and you’ll worry about them, when you see them. That’s fine! I was not arguing about timing. Instead, I was trying to point out what I think might be the single largest limitation Keynesian policies suffer from. Gio

+1 Thank you, David, for sharing! :) Gio

I have bought more Lancashire today. :) Cheers, Gio

Ok, thank you, Kraven! Then, I sincerely don’t understand how “green mail” could be compared to what Mr. Biglari has already done for BH’s investment in CBRL… ??? Gio

Look, my idea is very simple (and maybe very wrong! ;D ;D): it is not that Keynesian policies are ineffective in stimulating growth and the economy… because they most certainly are! The problem, instead, is the discrepancy between their effectiveness in increasing values and their effectiveness in increasing prices. Specifically, of course, I think they are much better tools for increasing prices than values. Therefore, the longer they go on, the larger the overvaluation becomes. And overvaluation always ends the same way: deflation. Gio

Gio Comstock-Partners-Why-We-Are-Still-Bearish-Dcember052013.pdf

Could you explain what you mean by “green mail”? During the 80’s I still was in elementary school!! ;D ;D ;D Gio

Yes! This ALSO is true. ;D Thank you, Gio

Yes! This is true. :) Thank you, Gio

I was wondering why Mr. Biglari doesn’t sell CBRL at this point. No board, no special dividend, same obtuse management, a stock that is not clearly undervalued anymore… what is he seeing now in CBRL?! Of course, if CBRL’s stock should decline in price, that would automatically make Mr. Biglari more persuasive with other shareholders… but that would also entail forfaiting important paper gains… I don’t know… I hope at least that he can unload the CBRL position, without forfaiting the majority of paper gains: given BH’s 20% stake in CBRL, it shouldn’t be easy to sell all those shares, without affecting negatively the stock price… Gio

December 2013 Commentary Gio December_Commentary_Canadian_REIT.pdf

LOL! ;D ;D ;D Gio

jay, I don’t see it that way… It is volatility you have to protect yourself against, when you write insurance policies… Because you never know when unexpected accidents might occur, and therefore when you'd need to have cash at hand to cover claims. If it weren’t so, and all that really mattered were the “long term”, I guess a much higher percentage of capital + float would be invested in stocks by both FFH and MKL! Gio

Well, I agree that the problem is return OF capital… But, if you hold 10yr bonds, you now have less than 90% of what your capital was barely 8 months ago… That is not exactly my idea of “return of capital”… And we are not yet in a secular bear for bonds! Instead, a low rates environment will probably still persist for some more years! Of course, you could decrease the duration of your bonds portfolio, but the shorter the duration the more similar bonds become to cash… Therefore, why to keep gathering float, if I cannot use it anyway?! It makes no sense… I assume the risk of making some mistakes in writing insurance contracts, without the benefit of using float as a lever… No, thank you! Instead, float invested in a combination of ready cash for emergencies and free cash flow generating, wholly owned businesses, which each month spawn new cash to be added to the cash reserve, makes a lot of sense to me. It might not be conventional wisdom… but it is 30 years now that a secular bear market for bonds has disappeared from the face of the earth… And conventional wisdom might not be of great help, when a secular bear in bonds finally starts! If you want, as a comparison think about what happened to bond investments in Europe in 2011, when interest rates for Spain and Italy spiked up… Float invested that way is not safe at all! And “return of capital” is not guaranteed at all! I would much prefer to hold a substantial cash pile for any unexpected event, and to buy something like Ferrero, which generates tons of cash each month, than to invest in Italian bonds… wouldn’t you?! Gio

Hi skanjete, Your reasoning is correct, but once again from a “secular bull market in bonds” point of view! In a secular bear for bonds things look much different! In an environment of rising interest rates, who wants to be the one to predict how and when those rates will rise?! Not me! Think about the ‘70s: you would have lost a lot of money investing in bonds back then! And I think in a rather unpredictable way! I think also Mr. Buffett wrote in a letter of his (I don’t remember exactly if it is a partenrship letter or a BRK letter, I will check) about the danger of investing in bonds in the wrong climate. Just look at what happened recently: in a matter of weeks bond yields moved up more than 100 basis points: which means that bonds with a duration of 10 years declined in value more than 10%… In a long secular bear for bonds do you really want to have your float invested that way?! Gio

Yes, I am! She has told me: “You must take me to Canada someday…!!”. And has followed that with a disarming smile! ;D ;D ;D But… she didn’t specify exactly which day… and I obviously already had a very specific day in my mind!! ;) Cheers! Gio

Another observation I think is important: to have invested float in bonds during the last 30 years had a very clear meaning, that was to invest “money we hold, but do not own” SAFELY. Am I right? Now, of course, we are worried about a secular bear in bonds… And a secular bear in bonds means the probability to lose money investing in bonds for the next 20 years will be much higher! Therefore, can someone explain easily what’s the point of going on investing float in bonds?! If it gets to be as risky an investment policy as investing in equities? And probably riskier than investing in private businesses? I don’t understand. Imho, it is not enough to look at what happened in the past… especially in a period of transition between a secular bull and a secular bear in bonds, like the one we are living through. Gio

Hi ap1234, first of all we should never forget that float is just a kind of “cheap and safe” (if you know what you are doing!) leverage. And a good investor should be able to compound at high rates of return (mid teens) unlevered! Therefore, no matter how you look at it, I don’t think float will ever become a drag on performance. Instead, it will always be an aid... maybe, not as much of an aid as it was before! Second, to calculate ROE, we use the following formula: Return ROE = (P/E) * (100%-CR) + (IA/E) * (IR) where: P = Earned Premium E = Equity CR = Combined Ratio IA = Invested Assets IR = Investment Return Where Investment Return is the return on Invested Assets, or the return on (capital + float). That’s why imo what matters are Invested Assets. Third, I think the answer lies in BRK’s balance sheet: I don’t think it is very useful to look at FFH’s and MKL’s balance sheet today, instead BRK’s balance sheet today is how FFH’s and MKL’s balance sheet might look like 10 years from now. And I think a glance at BRK’s balance sheet today is enough to understand how little bonds count. As they go on investing in private businesses, which generate earnings to increase BV, float will become less and less relevant. FFH and MKL have enjoyed huge success being very different from BRK, and they could have never followed suit. But, as you have pointed out, a secular bear in bonds will force them down that path, if they want to keep compounding capital at high rates of return. Or else you are right and their performance will be hampered. Now I have a question: BRK has Total Assets of $458 billion, Equity of $211 billion, and bonds + cash of $64 billion: $458 - $211 - $64 = $183 billion of assets, that must correspond to an equal amount of liabilities… If float truly is 100% invested in bonds + cash, to which kind of liabilities do those $183 billion correspond to? Finally, and most importantly, I would never bet against those people… We say “never bet against America”, right? Well, those people are America on steroids! ;) Gio

Hi ap1234, why bonds as a % of BV? Total assets is what matter imo. I mean: BRK is leveraged 2.5x, while FFH is leveraged 4.5x, and total assets give me the idea of how them both used not only their own capital but also “borrowed money”. They both have put to use their own capital plus “borrowed money”, and what they earn on their own capital plus “borrowed money” is for them to keep, and goes to increase BV. I agree that what matters is bonds + cash, but I don’t see why the sum must be always the same as a percentage of float… once again, for the man with only a hammer, or better, with only two hammers: stocks and bonds, that percentage should be constant indeed… But what about BRK, which buys entire businesses, and probably today relies more on this type of capital allocation that the other two? The earnings of entire businesses are much less volatile than stock prices, and BRK can count on a steady stream of cash, that certainly helps it to face any unexpected insurance or reinsurance claim which might arise. I mean, we know that BRK’s risk profile today is different than FFH’s or MKL’s, therefore why should they keep the same % of float in bonds + cash? For BKR, in fact, even if you add cash to bonds you get to $64 billion, while equity securities + other investments are worth $129 billion. I am not saying that FFH or MKL won’t be subject to regulation… They most surely will be! I am only saying that they have many “hammers”, or “levers” as you call them, and they are led by people who will constantly recognize which lever to use at any time, given the surrounding circumstances. Gio