giofranchi

Hi txlaw, I really enjoy our discussion about the insurance and banking industry. But maybe this is not the right thread, and maybe other board members are not very interested... So, I have sent you a PM, and maybe we can go on sharing our views that way! :) giofranchi

txlaw, on the contrary, I think I have understood perfectly well what you mean by diversification. And in theory I also agree with you. But in practice I still think it gives a false sense of security. In practice, like Mr. Lewis and many others have demonstrated time and time again, one very bad decision taken by a fool at the wrong time is enough to bring down even the most diversified of business organizations. I don’t understand why it is so difficult to believe that I truly have nothing against trading… It is simply that I don’t like to spend my time looking for statistically cheap stocks, jumping in when I have found one, and out when it gets to IV. But, if FFH does just that on my behalf, with the benefit of float, which I don’t enjoy, well then I am perfectly fine with it! It is a good way to make money! Still, I call it trading, not investing… If it is not clear, think about what they did with International Coal (in attachment) and think about what they are doing with Kennedy Wilson. The first I call trading, the second I call investing. If they do both and make money, well I am very happy! But why insisting in calling investing what instead is trading? If you recognize a statistically cheap stock, and you want to take advantage of it, very well! Do it! But don’t tell me that you know the business very well… because it is even useless to know it very well! Even Mr. Graham has always acknowledged he didn’t know the great majority of the stocks he put money into very well. He just recognized a cheap stock, when he saw one! For what I know also he was an investor at least once, that’s to say in Geico. And he probably really knew that business, and stayed with it for years or decades, and really wanted to own it, he was confident about its future prospects and potential growth, and didn’t care too much about valuation, at least not until its share price really got wildly expensive… Probably, I cannot express myself clearly enough, but to me the difference between playing a temporary undervaluation, and owning a business is self evident… in the first case you don’t really need to know the business, in the second, if you don’t know it very well, you are looking for trouble! How is well enough? I prefer to be conservative and repeat that well enough is how I know the to businesses I personally manage… but, if that is too much, think about twacowfca and how well he knows Lancashire… that would be well enough for me too!! Of course, I completely disagree that FFH is more dangerous than most “well run” banks… whatever “well run” might mean… But I have talked so much about FFH, and here in Italy it is getting late… Let’s just say that the 9 out of 10 a bank collects in bonds and deposits is not safer nor more dangerous than the 1.5 out of 2.5 an insurance company collects in float… to think it is safer is another false sense of security… because it all depends on people and the choices they make. A group of people that collects deposits and feels safe imo is instead in greater danger than a group of people that knows they are dealing with probabilities and are very focused on not making any error and on improving their underwriting skills. One thing about leverage: 2.5 to 1 is a completely different thing than 10 to 1! To get a good 15% ROE, FFH must achieve a 7% return on its portfolio of investments. Instead, a bank that is levered 10 to 1 could achieve less that 2%… and yet FFH has an history of 20% ROE, while the average bank probably doesn’t get to 10% ROE… giofranchi International_Coal.bmp

Come on Sportgamma! Won’t you be a little bit more generous? :) Do you think BV is somehow artificially low? If so, how much do you think their capital really is today? I must admit that, not being quoted on any exchange, I have some “technical” problems to invest in FRMO through my firm… So, I have never examined very deeply their numbers… giofranchi

Hi tripleoptician, I think I have just expressed my views about some topics of yours on this other thread: The 13th Labour of Hercules. Anyway, let me tell you that I believe FFH is great value today… but of course it seems I am the only one to have this view about FFH on the board… so, take my words with a grain of salt! ;) giofranchi

No, not yet. Very difficult to value… Intellectual capital is highly scalable, but the fact they will go on growing BV at the same rate of the past few years is something I simply don’t know how to judge. For now I am watching from the sidelines. giofranchi

Gio, fair enough on this point. There are many value investors who would agree with you on this notion that BAC is too big to understand. I would disagree. Further I actually think that because BAC is so big, I have the benefits of business diversification that makes BAC a stronger investment than a local bank, sort of like an insurer that is diversified across jurisdictions or a conglomerate that is diversified across businesses. (When is your conglomerate going public, btw? Let me know so I can invest ;) ) If I owned a local or community bank, I feel I would have to watch that company like a hawk to make sure that the local economy was not in peril and to really make sure that the underwriting was very good, since all the eggs would be in that local basket. I'd be exposing myself to localized disasters that could wipe out my investment. But I get your point and respect your hard line decision to stay away from companies like BAC. I'm curious, do you stay away from all banks? Hi txlaw, with all due respect, that’s exactly what I meant when I said that it is very easy to fool ourselves into thinking that we know a company…! Business diversification… doesn’t mean anything to me. Too big, too systemically important, too diversified… to fail? Don’t mean anything to me. We all witnessed how a single decision taken by Mr. Lewis in 2008, to buy Countrywide Financial, almost brought that mighty organization down to its knees… Look, to really know a business, you should be “signing all the checks”, like Mr. Ergen so masterfully put it. That’s why, if it were for me, I would go only after businesses that I own, control, and manage from a strategic point of view, not a day by day running of their operations. Unfortunately, life is hard, the world in which we live is unjust, I am misunderstood and unlucky, etc. … whatever! The simple fact is I don’t have enough capital to buy whole businesses! That’s why, even though regretfully, I must invest in the stock market. And if I cannot do it all by myself, the second best alternative is to partner with someone who owns, controls, and manages from a strategic point of view, not a day by day running of its operations, a business. I demand: 1) that person should put his/her interests and mine at the same level, 2) that person explains very clearly what he is doing, so that I might be positive I would be doing the same things. If I am sure about 1) and 2), well, it then becomes something much similar to a business that I own, control, and manage from a strategic point of view, not a day by day running of its operations! That’s exactly why I have repeated many times that I focus on the modus operandi, on the process, on HOW that person I call my partner is doing things, much more than on WHAT he is doing. That’s why I have repeated many times that I invest in FFH because I would be doing exactly the same things, if I were in their stead. Instead of trying to know and evaluate everything FFH is doing, which I think is impossible because I am not the one “signing all the checks”, I focus on how FFH is conducting its businesses. I hope this answers also to tombgrt’s objection (hey! I know that there will always be uncertainties… as I have said, unfortunately this is only the second best alternative! And even to own whole businesses, my first choice hands down, would entail its own uncertainties and risks). As you might imagine this limits the number of companies in which I would invest very much… to tell the truth the great majority of publicly traded companies are uninvestable to me. Beware! I have said uninvestable, not untradable! Practically all of them are tradable and I agree with tombgrt that there is the potential to make a lot of money trading them… I would add, if that is how you like to spend your time! As far as banks are concerned, I don’t really understand the banking business. I am always skeptical of a business that must be levered 10 to 1, just to produce a mediocre ROE… Anyway, if I had to invest in banks, at the right price I would choose something like BOKF. giofranchi BOKF.bmp

They have probably 1000x more AUM than the average investor on this forum, hence the universe of stocks they can pick from is much smaller. If they don't see interesting opportunities that doesn't mean there are none for you. Well, Awilco Drilling, for instance, is a $3.45 billion capitalization company. Alleghany has only $500 million invested in publicly-traded energy companies... Therefore, if AWLCF is such a good bargain today, it is beyond me to understand why Alleghany wouldn't heed your suggestion! ;) giofranchi

Hi txlaw, Yes! Of course I agree! The view I don’t agree with is that anyone can be confident enough to say: I know BAC well, therefore I can judge its true value, therefore I know it is a bargain. Imo a $2 trillion organization is just too difficult! I always try to keep in mind Mr. Keynes words: If he felt himself entitled to invest in only two or three enterprises, because he was positive they were the only ones he knew well enough, who are we to act differently? Yet, I fear it is way too easy to deceive ourselves into thinking that we know and understand something… Well, of course a combination of the two! My firm falls in the category of those businesses which hold more cash than it is strictly necessary to always assure their operations will be smoothly run. Therefore, I hold some cash both to be sure that working capital will never fall short of what is really necessary, AND to take advantage of future opportunities. You see? I think I know very few businesses… Hey! I am smarter than Mr. Keynes was, so I don’t confine my circle of competence to two or three enterprises… ;D ;D Let’s say I think I know 15-20 names I am perfectly confident to invest my firm’s capital. Unfortunately, no one among them is dirt cheap today… FFH, which I think is dirt cheap, is already 30% of my firm’s portfolio… That’s why I hold cash, hoping to get the chance to average down in those 15-20 names in the future! By the way, I was rereading Alleghany 2012 letter to shareholders and I have found this: This judgment is very common among the managers I admire and respect. Instead, it seems that on this board outstanding opportunities are everywhere! I am not a trader, I don’t follow 100, 500, or 1000 stocks, so I guess I truly cannot know… Yet, I would suggest that this board go and talk to Alleghany and others… No? Why not to sell them your precious ideas? They have deep pockets, but apparently are short of ideas! ;) giofranchi

Packer (and anyone else), is there a good place to find a history of the U.S. financial system, e.g., to read about these periods? I've been looking for a good book that has detailed information about the various financial events, just to have some history to be able to rely on. I'm fairly well-versed from 1923 on, but wouldn't mind beefing that up as well. I would suggest the following list: [amazonsearch]A Monetary History of the United States, 1867-1960[/amazonsearch] [amazonsearch]A History of Interest Rates[/amazonsearch] [amazonsearch]The Great Wave, Price Revolutions and the Rhythm of History[/amazonsearch] [amazonsearch]This Time Is Different, Eight Centuries of Financial Folly[/amazonsearch] Cheers! giofranchi

merkhet, that’s why I invest in FFH: because they were hedged before 2008, not after! ;) BTW, I just wanted to make one more thing very clear: each situation is unique. I hate rules, because they are very impractical. If you follow rules, most of the times you end up lacking the flexibility that is required, to make the best decisions. Take my case, for instance: during the last 3 years I have kept a 30% investment in FFH and a 30% in cash. Yet, I have succeeded in increasing my firm’s BV at 17% annual. How is it possible? Because my firm, thanks God!, generates operating earnings. And those earnings at the end of each year were taxed, then summed to my firm’s equity. (I also paid out some dividends! :) ) I know that, as my firm’s equity gets larger and larger, those operating earnings will contribute less and less. People sometimes argue: in 1996 the S&P500 already was as expensive as it is today, then it shot up for 4 straight years, before a correction finally arrived. So, whoever is hedged or hold large sum of cash today might run the risk of waiting for a long time! Imo, the comparison is clearly fallacious: from 1996 to 2000 the S&P500 behavior ceased to be representative of the US stock market. Technology and Media stocks shot up, distorting the behavior of the whole index, while a lot of other sectors were left in the dust. Today instead, as it were in 2007, the advance is much broader. So, imo the comparison with the 2000 peak is another generalization and is misleading. But, let’s assume vice versa that it is a sound comparison: then, what should be the most likely scenario for my firm? Very low returns from investments for the next 4 years… but we don’t need them! Because during that time operating earning will still be meaningful enough to help us achieve our goal of a 15% CAGR in BV. Then what? Well, if the market keeps marching upward for another 4 years, like it has been doing for a while now, I am almost sure even Packer, Kraven, and others will get scared… and rightly so: because it will then be the most spectacular stock market bubble in human history all over again!! And a needle to prick that gigantic bubble will be just around the corner! Then, exactly when my firm’s equity has increased so much, that operating earnings start to become less relevant, my buying power will be perfectly intact and I will be able to shift focus from operating businesses to investments. A 15% CAGR in BV will go on, only from year 5 or 6 onward the largest contributors will be investments, instead of operating businesses. Most important, this way I see almost zero chance of screwing things up! (Hey! I know I will find a way nonetheless… but don’t tell my partners!! ;D) Now, what’s wrong with my reasoning? I think each one of us must have a strategic vision for his/her very unique situation. Because in the end only a soundly thought out plan, followed with discipline, is what will lead to good results. Rules and quotations won’t get you there. giofranchi

shalab, You surely are right! Yet, Mr. Buffett kept 28% of BRK Total Assets in Cash + Bonds at year end 2012… and he can count on $1.2 billion of new cash coming in every months… BRK is exactly the example of a company that always keeps much more cash at hand than what is strictly necessary to run smoothly its operations! ;) giofranchi

Packer, though I know LRE is not a trading opportunity, I firmly believe that the most impressive misjudgments the market commits are in pricing businesses that will go on compounding capital for many years into the future. The market simply ignores how to judge the prospects of a business beyond 2-3 years… That’s exactly why LRE is not a trading opportunity: because the market won’t recognize its error anytime soon… it will probably be a slow and gradual recognition year after year for a very long time to come. Imo in the end LRE shareholders will be handsomely rewarded. The S&P500 is selling for 2.54 x BV with an average ROE of 13%; LRE is selling for 1.7 x BV with an average ROE of 20%. As you can see from the picture in attachment, LRE growth in fully converted book value per share plus dividend since inception, 7.5 years ago, is 270%. It means that $1 in BV at the beginning of 2006 now is worth $3.7. It has compounded value at 19% annual. If LRE goes on performing like it has done since inception for the next 20 years, then it literally disappears (no residual value here!), the present value of its future equity would be $35, using a discount rate of 10%. So, the market is pricing LRE for 1.7 x 7.19 = $12.3, or 35% what it would be really worth, if it succeeds in keeping its ROE at 20% for the next two decades. Of course, the market is absolutely incapable of making such long-term valuations. Generally, I am also not very good at it! But I look for those 5 to 10 investments, witch I have the confidence to invest in for the very long run. And, if I can find them, I am almost sure they will be deeply undervalued! giofranchi

shalab, you surely remember what Mr. Twain used to saying, right? Every time is different and each of us is called to use his/her own judgment. I don’t believe in things on auto-pilot. --GoodHeaven 2013 Semi-Annual giofranchi

Packer, I agree. But I always look only at business results. I don’t care about anything else. And I think LRE operations will be practically undisturbed by any market downturn: it will keep generating a lot of cash, exactly when cash will be needed the most. Second, I don’t know of any other company better positioned than FFH to capitalize on the foolishness of others. And I want to be clear: I don’t think FFH defensiveness is a mistake at all. We have embarked on a lot of never attempted before things… and, just because the outcome is unpredictable, no one should be excused for not seeing or acknowledging the risks involved. Imo we must turn things around: if everything will finally be solved for the better, that would be good luck… instead, the risks of wall-street (financial economy) diverging too much from main-street (real economy) should be evident to everyone… A company like FFH has the duty to protect itself from those risks… even if at the end we all get lucky and the consequences of those risks are averted… and its defensiveness turns out to be nothing more than wasted time and resources. I invest in FFH, because they are doing precisely what I would be doing, if I were in their stead. giofranchi

Kraven, I think we live in a much more uncertain world… Sometime I look back at the file in attachment… either those folks at Value Line were complete fool and wholly incompetent, or we live in a much more uncertain world! giofranchi BAC_-_Value_Line_-_23_nov_2007.pdf

writser, what can I say? As you have suggested, Packer, PlanMaestro, Kraven, and others are heroes! And they will go on doubling, tripling, and quadrupling their money! If there is something I am completely immune to, that something is envy. Therefore, I am sincerely happy for them, but won’t try to emulate them. Instead, I will stick to what I know, understand, and judge the most sensible course of action. I am quite positive I also will create some wealth… Though, of course, much less than Packer, PlanMaestro, Kraven, and all your other heroes! ;) giofranchi

Hi Kraven, think just a second about my firm. The majority of its assets are concentrated in 4 businesses: 1) Engineering services 2) For profit higher education services 3) Fairfax Financial Holdings 4) Lancashire Holdings Then, there is cash. You surely know many companies. Let me ask you a question: how many of them, percentage wise, hold just the minimum cash required to smoothly operate their businesses, and how many hold some cash also for safety? Just in case a rainy day comes? Even if that sad day might never come to pass? I want my firm to be in the second group. If I had to choose between 15% annual + a safety net and 20% annual with no safety net, I would go for the first one without hesitation. And for safety net I mean cash. So, my question in not: do I have to hold cash? Instead, it is: how much cash do I have to hold? Furthermore, it is something that is continuously changing. Both to always hold 5% of cash and to always hold 50% of cash doesn’t make any sense to me… Of course, I tend to decrease the cash level depending on how many opportunities to do business at high rates of return I see out there… But I also like to keep my eyes open and see what other people are doing. Anyone who manages a business know that, even if he does everything perfect and doesn’t commit any error, his results will still be influenced by external forces. More specifically, if everyone around you is going to suffer losses, you will experience some pain too… So, how are they behaving? Soundly or foolishly? If foolishly, I want to increase cash. Finally, I don’t understand your view on FFH or LRE: in 2008, when the market fell (37%), FFH stock price increased from CAD$287 to CAD$390, +35.9%; while LRE stock price increased from 368 GBp to 425 GBp, +15.5%. Furthermore, it is very likely that LRE will go on paying huge dividends also in a downturn, dividends that could be used to scoop up great bargains. So, I sincerely don’t see how anyone could time these things… giofranchi

I know and I understand what you mean. Yet, every bubble in history was supported by some idea and justification. It is not like people all of a sudden get mad in mass and then a bubble ensues. There was always some reasoning behind, that was true… until it wasn’t any more. Today it is: if interest rates are bound to stay at zero for many years into the future, all asset classes are worth more than in the past, stocks included. No matter stocks are already priced to yield no real return over the next 7-10 years, according to the latest GMO letter… No matter negative real rates have led time and time again to the formation of bubbles… I am not saying I am out of the market! I am just saying that I am comfortable leaving some money on the table and playing it safe. giofranchi

What Drives History giofranchi

"The Emergence Of A US Underclass" by Charles Gave giofranchi The_Emergence_Of_A_US_Underclass.pdf

Page 3 is very interesting! Many people say: Shiller P/E for the S&P500 is no longer relevant, because higher margins are here to stay. Therefore, the S&P500 will return more to shareholders and deserves higher valuations… In fact, on page 3 Mr. Stahl & Company argue and explain why the S&P500 will return less in the future… giofranchi

https://sumzero.com/headlines/technology_and_software/BBRY/185-most-hated-blackerry-is-actually-a-buy giofranchi

Q2 2013 Commentary giofranchi Q2_2013_Commentary.pdf

Well, my view is clearly different here. If you buy a bad business with poor management, and you think it will turn out to be a financially rewarding investment, just because you fix the management problem, well, then you are looking for trouble… And Mr. Icahn learnt his lesson well after the TWA episode full of misjudgments! Instead, if you buy a good business, which is selling at a discount to IV, because of bad management, and then you proceed to fix the management problem, well, that’s just great! And as sure a way to make a lot of money as ever existed! The businessman in me cannot but deeply respect and admire whoever is able to tackle and fix the management problem. I myself strive each day to put together the best team of people that I can afford, and I personally experience how much of a difference it really makes. giofranchi

A pity! ;D I had hoped to have a clear reason to expect lower share prices in the future, to keep averaging down… Instead, I guess I will have to wait for the next mini black swan… ;) Thank you, twacowfca! giofranchi