giofranchi

Fed Deflation ;D ;D ;D Gio

Palantir, I am extremely bullish on North America in the long-run, but the next 5 to 10 years are another matter. We are in a deleveraging. And looking back at history, not only 100 years but centuries, deleveragings have really mixed outcomes: some were not so dreadful for stocks and other assets, others were very punishing. So, I guess we simply cannot be sure… Maybe your theory of a very long bull market is right, maybe it is not… What I am almost sure about is that in both cases those billionaires stahleyp referred to will go on making money! No matter what will actually happen, they won’t stop building great wealth. How? This is how I see it: you have basically 3 options: 1) a very long bull market: earn 100, the bull market suddenly stops: earn 0 2) a very long bull market: earn 50, the bull market suddenly stops: earn 50 3) a very long bull market: earn 0, the bull market suddenly stops: earn 100 I guess most of those billionaires have chosen option n.2. I have chosen option n.2. Of course, you might reply: “Hey! I will earn 100 no matter what happens to the general market!”. Then, you simply are in another league! :) Gio

It's a little harder than that, though, no? A great company won't be a great investment at any price. Pay too much, and you won't do well (at least not until a long time, until the IV grows into the market valuation). Being sure that a business is a great business isn't that easy either. Newspapers were great businesses, until they weren't. I'm sure many thought that big banks were great businesses right before 2008. I'm sure some idiot managers found great ways to ruin (at least temporarily) great businesses by diluting them via stupid acquisitions and creating lots of new shares, scaring away top employees with stupid policies, etc. So knowledge about management and IV vs price is definitely crucial when investing. I recognize the Buffett sayings under what you are writing, and that's great. But these are mental models to get you to think about the right things, but they shouldn't be taken entirely literally. Reality is messier, something that you can see in Buffett's actions (he cares a lot about quality of management and price and few businesses meet the 'great business' test and he has encyclopedia knowledge of all the details of all the businesses he invests in and all those he doesn't too). Well, just look at the discussion about Mr. Buffett’s acquisition of XOM… Some people agree, others don’t… And it has always been so since I follow Mr. Buffett… I even remember prof. Greenwald who talked about the acquisition of Burlington as “madness”… Or something of the kind… No! To recognize a business that will be great in the future and to know when it should be bought is not easy at all! ;) Gio

Well, let’s just say that for the next 40+ years I will try to keep company with smart capital allocators who manage stable and predictable businesses (don't need to be great! Actually, I don't think I am very good at recognizing great businesses! ;) ). It might not be a wonderful strategy, but it is what makes me sleep soundly at night. Of course, it is me and only me! Gio

http://seekingalpha.com/article/1843042-is-the-8-yield-of-lancashire-holdings-sustainable?source=email_rt_article_readmore Imo 8% going forward and nothing else, meaning no growth at all, is a bit too conservative... Selling for 1.5 x BVPS, it implies a future ROE no higher than 12%... Significantly less than the track-record Mr. Brindle has created over many years of being in the business. Gio

Ok Eric, I give up! This thread is becoming once again a discussion about FFH, when at the beginning it had nothing to do with FFH… And I am tired of “playing the champion of lost causes”!! Let’s put it this way: you are making a ton of money with BAC 8), I am making no money with FFH :'(… Isn’t that enough for you?!?! Give me a break, I beg you! ::) Gio

In fact, I have said “I think I understand”, not “I am sure I understand”… And I admitted I will make mistakes… If I were sure about something, I wouldn’t expect any error, would I? Therefore, let’s say that I think I understand FFH much better than I understand BAC, or even MCD and PG. Because I think I understand where management is steering the boat with FFH, while I clearly don’t know for the great majority of other companies, be it BAC, MCD, PG, etc. Gio

You are definitely right! And I am sure Eric made a killing with BAC and will go on making a ton of money! Yet, I will keep doing only the things I think I understand. No matter the possible reward that I see… If I don’t understand something, I stay away. With a time horizon of 40+ years I think the best risk management tool is to do ONLY what you think you understand. You will make mistakes anyway, but chances are they will be small enough and far in between. To play the game for 40+ years, concentrating on making the smallest number of errors possible, though won’t get you rich quickly, is imo the surest way to gradually build such a wealth, that not many in the end will be able to match. Gio

Well, I guess the rules of the game are constantly changing… I don’t like to think about rules that regulate a business as the reason why management won’t make big mistakes in the future… I much prefer to have faith in management’s process and abilities… But that’s me and only me! Just wanted to explain why I have such an hard time investing in BAC and others. Gio

I bought it then! Later I sold it booking substantial profits. Probably, a bad decision… but, really, what do I know about something so BIG?! Damn!! As time passes, I find my circle of competence shrinking instead of getting larger… Because I keep requiring to know more and more about a business, before accepting it inside… The net result is an “outflow” of businesses from my circle of competence, instead of an “inflow”… ??? Gio

I think even a market correction might be dangerous, because cannot exclude it could turn into a crash: as soon as the markets realize central banks cannot control prices indefinitely, all bets are off… at least, that’s how I see it! Gio

Gio

"Back to German Bashing" by Charles Gave "The euro in action" graph is just terrific!! Italian IP vs. German IP experienced wild fluctuations from 1960 to 2000, but on averaged kept improving. Instead, from 2000 until today it simply cratered! And apparently with no end in sight! Our industrial base is slowly but inevitably suffocating… Difficult to see how this could end well. Gio Daily+11.14.13.pdf

Unfortunately, with a huge bank like BAC even the ground under my feet seems blurry to me… And honestly I cannot say if it is solid rock or quicksand… Just do once again something stupid like the Countrywide acquisition or the Merrill Lynch acquisition, and we go from solid rock to quicksand in a matter of days… Without great confidence in its management, I cannot invest… No matter what the reward might be. Gio

Eric, I am not really arguing with you! At all! But, let’s face it! You are no average investor!!! You have an astronomical track record, that almost no one can match! And I cannot base MY strategy on what YOU are able to do!! It would lead to an utter debacle… Gio

No, not me! Mr. John Hussman says 3%, Mr. Ray Dalio says 4%... I have just used both numbers! ;D Gio

No Eric, I repeat: I’d rather bet on a 7% by FFH than on a 14% by myself. That’s all! Business is business for me. And the heart has nothing to do with it. I can assure you that! As soon as I stop believing that FFH might achieve a 7% more easily and safely than I can achieve a 15% by myself, I am gone. Period. That time has not come yet. Gio

That's because, not in spite, FFH is fully hedged and holds a lot of cash today! ;) Furthermore, a 15% increase in BVPS means they have to achieve a 7% return on their portfolio of investments, right? Hey! I know very well that it won’t be easy… but I’d rather bet on a 7% by FFH than on a 14% by myself!! ;D Gio

Well, good for you that you have come to know something like BAC so well, and are so sure about its future prospects. Unfortunately, I don’t know that bank so well, and I don’t have your kind of confidence. Therefore, I cannot invest in BAC. Are there other businesses in which you have great confidence and which still provide a 14% earnings yield? Thank you, Gio

Furthermore, if the average expected return for the market is 4% and your average expected return is 14%, then you are probably going to beat the market by an average 10% annual for the next 10 years. 1 person in 1000 will be able to achieve such a result… no, wait, 1 person in a million!! And usually they become billionaire... Why should this kind of outperformance be very relevant to an average entrepreneur like me? Gio

Well, but I didn’t say the S&P500 earnings cannot surprise on the upside, did I? They certainly might! And I hope so! :) I just said I think it is useful to know what the tide is probably going to do: --William Shakespeare Gio

Unfortunately, future earnings are not a sure thing. I am not sure what the businesses I personally manage each day will earn next year, and have absolutely no clue what they will earn 5 years from now. Gio

I think the S&P500 today is priced to deliver a 3%-4% annual real return for the next 10 years. In the long-run to be able to beat the market by 5 percentage points yearly on average is EXTREMELY difficult. Only a very small handful of great investors have achieved that. Therefore, if you are among them, and put capital at work today, you might expect an annual return of 8%-9% for the next 10 years. Why anyone should ignore this simple fact, is totally beyond me… Of course, this might be irrelevant to you, if you wear a tight suit with a big red S on your chest and a long floating mantle on your back! ;D ;D Gio

Well, this whole discussion started with a valuation of the S&P500. Therefore, this not like buying back shares of an undervalued company in a richly priced market… Instead, this is like buying back shares of a richly priced company in a richly priced market! If the S&P500 is priced to return 3%-4% for the next 10 years, what we are talking about here is buying shares of the average company, that are priced to return 3%-4% for the next 10 years. It is nonsense to me… Would you buy the index at today’s prices?! Guess what? I’d rather short it instead! ;) Gio

Eric, sometimes I have an hard time to understand exactly what you mean… therefore, I do not really know if my answer is pertinent or not… But I will make a try nonetheless… Let’s say that I want to build a 30% position in LRE. And right now I have only a 20% position, and I am holding some cash, surely enough cash to buy the remaining 10%. But I also want to wait for the opportunity to average down, and don't want to build right away a 30% position at prices that might not be spectacular bargains… Yet, who knows for sure if that opportunity will ever come in the future? Not me! Neither you, I guess… So, at today’s price LRE is a wonderful investment, that I am very confident will make a lot of money for my firm, and therefore I hold it. But I also want to leave some room to get greedy, if ever the chance might be presented to me for buying more at a wonderful price. Furthermore, also Mr. Brindle seems to be thinking something similar: he used to buying back shares, when their price was closer to BVPS, while now he returns capital to shareholders through special dividends… I have no doubt that, if LRE’s share price falls enough in the future, he will start again buying back shares. Gio