giofranchi

--David Einhorn, Greenlight Re giofranchi

Selected excerpts from Seth Klarman's latest letter. giofranchi Klarman-Q1-2013.pdf

Hi tombgrt, Yeah…! I thought that would be the most likely objection… But I think it misses the true potential of FFH today... And that’s what we should try to understand, investing in any business: its true potential. Both optimism and pessimism won’t do it, realism is all that matters. And what’s unrealistic in saying that it is HIGHLY UNUSUAL for FFH to post a loss on its bonds portfolio? And that it therefore could be just noise? If I had said: without the losses in equity hedges, net earnings would have been… then, I would agree with you! Because we know equity hedges are here to stay, until a big correction in the market comes. Bonds losses instead are an “anomaly” that in Q1 2013 masked the true potential of FFH, provided it keeps doing such a good job with its insurance and reinsurance operations. On the other hand, I agree with you that one quarter doesn’t make a trend… and that it has been quiet for now… Anyway, I cannot help but liking very much the effort FFH, under the leadership of Mr. Barnard, is putting in the betterment of its insurance and reinsurance operations: not only CRs are coming down, but Net Premiums Written are rising too… so far so good! And it bodes well for the future! :) giofranchi

As always, discussion has centered on the equity hedges, but I would like to shift the attention to the $119 million of losses in bonds (basically all unrealized). It doesn’t bother me at all, because, out of a $10.4 billion bonds portfolio, it is just a (1.14)% move, so it should be considered only noise. Yet, I think it shows something important: without that loss, FFH for Q1 2013 would have almost doubled, from $162 million to $281 million. And, adjusted for the $10 per common share dividend paid in Q1 2013, BVPS would have increased 2.25%, instead of 1.3%. Which equates to a 9% increase in BVPS on a yearly basis. If you think that most of the times FFH makes money out of its bonds portfolio, I think something very interesting can be inferred from Q1 2013 Results: If FFH’s insurance and reinsurance operations go on posting combined ratios around 95%, FFH has the possibility to compound BVPS at circa 10% annual, even while keeping in place its deflation and equity hedges, and even while sitting upon $7.5 billion of cash on the sidelines! I know you now will tell me that I am always too optimistic on FFH’s future prospects, but what’s so wrong with my reasoning? :) giofranchi

I really wouldn’t call it “macro obsession”… To me, what Mr. Watsa is doing and has always done, is just the number 1 duty of every investor: to understand when it is the right time to be greedy, and to understand when it is the right time to be fearful. Panic of 1837 (really, it has always been the same!!): Imo, someone who is reaching for yield today, will always reach for yield… Remember that we can always find some sort of “logical explanation” for most choices of ours… “well, maybe I don’t understand that business so well, and therefore I cannot be sure its stock is really cheap… but, compared to any other available investment, it must surely be a bargain!”… something of the sort, right? So, how to be like Mr. Vanderbilt? How to have “an abundance of that most valuable item in a deflationary panic”? Well, to possess “a business that always remains in demand” might be useful. Not to reach for yield at the wrong time might also be useful. But I guess the truth is we do not really know… there is no sure formula… Someone succeeds, many others simply don’t… That’s why it is so difficult to understand what Mr. Watsa is doing! ;) giofranchi

Yes! I know… but that doesn’t really bother me. For me it is always the process… As long as the process is right, I let “the madness of crowds” do whatever it pleases! :) Cheers! giofranchi

FFH Q1 2013 Conference Call Transcript giofranchi FFH-Q1-2013-Conference-Call-Transcript.pdf

--AL 2012 Uccmal, let’s assume a 10% saving rate for the last 25 years, and to understand how optimistic this assumption is, let’s just say that we must go back to 1985, to find the last time the U.S. Personal Saving Rate was around 10%… Cdn$4,000 saved each year for 25 years equates to $100,000. So, the “clueless employee” (by clueless I mean that he didn’t care to study investment opportunities and just dollar cost averaged in FFH), now has 11 times his/her original savings… and that imo surely means making some "money of significance"! It seems very strange that such an extremely accomplished investor like yourself hasn’t succeeded in making money out of FFH… ??? giofranchi

I think it is a very popular paper, but I hadn’t read it till now. Maybe, someone else on this board hasn’t read it yet! So, please, find it in attachment. :) giofranchi Founder-CEOs-Investment-Decisions-and-Stock-Market-Performance.pdf

Inflation: FFH’s deflation hedges have already lost most of their value. Rising interest environment: the price of all assets will fall, a lot of room to be opportunistic for FFH. Rising market environment: I don’t see FFH to be much more out of sync with the market than it was in 2012, so 2012 probably is the worst case scenario. Again, as I have already said, 2 more years like 2012…? I can live with that! :) giofranchi

Uccmal, I think you are very optimistic about the market, and very pessimistic about FFH. If it is true that we have entered a new secular bull market, we must have done so in 2009. That would compress the last secular bear market in just 9 years, from 2000 to 2008, the shortest in history. That would be even more peculiar because of the fact the last secular bull market, from 1982 to 1999, stretched market valuations to levels never seen before. Anyway, I guess in no more than two years we will surely know if your view is right, or if Mr. Watsa’s is the one to be correct. Being invested in FFH now, I will do well either way: - If Mr. Watsa is right, I will protect my capital egregiously, - If you are right, and we have entered a 20 years secular bull market back in 2009, two years from now I will still have more or less 15 years to make a lot of money! ;) giofranchi

[amazonsearch]The Art of Value Investing[/amazonsearch] I have read not so "exalting" things about Mr. Tilson on this board… Many of you probably don’t think he is really a very good investor. I don’t know him well, so I cannot judge. What I do agree with is Mr. Montier’s comment on the book: Imo, one of the best compendium of value investing wisdom out there. :) Cheers! giofranchi

April 2013 Monthly Report giofranchi 2013-4-April-Monthly-Report-TPOI.pdf

It will be interesting to see if we feel the same way in 12 months time. Right now the hedging as well as the low P/B is what I find so appealing about FFH. nwoodman, I agree 100%! :) giofranchi

Thank you! As always, very helpful! :) giofranchi

+1 giofranchi

Q1 2013 Results --Richard Brindle --Elaine Whelan twacowfca, any comment? Thank you! :) giofranchi 2013-05-02.pdf q1-2013-fs.pdf

Vinod, 1. On the contrary, I had understood what you meant. Probably, I didn’t explain myself properly. Let’s answer this way: if I thought MKL’s BV to be “undervalued”, like it was the case at the beginning of 2009, I would factor in my calculations of IV a CAGR of BVPS in between 17% and 20% (like I actually did back in 2008). Vice versa, if I thought MKL’s BV to be “fairly valued”, I would factor in my calculations of IV a CAGR of BVPS of 15%. Finally, if I thought MKL’s BV to be “slightly overvalued”, I would factor in my calculations of IV a CAGR of BVPS of 12%. That’s exactly what I am doing right now. Why just “slightly overvalued”, and not “very much overvalued”, like I think the market right now is? Two reasons: a) I don’t see Mr. Gayner to keep investments in overvalued stocks, so what applies to the market in general, hardly applies to MKL’s stock portfolio; b) with the acquisition of Alterra, much of MKL’s BV is in cash or short term bonds… it follows it cannot be that much overvalued! 2. From an interview a few days ago: Interviewer: “So, Mr. Zell, are you investing in the stock market right now?” Mr. Sam Zell: “We are always invested in the stock market.” Interviewer: “So, you are putting new money to work!” Mr. Sam Zell: “No. We are building cash.” :) giofranchi

CEO Average Worker Pay Ratio giofranchi

Vinod, first of all during the next 20 years we will have many cycles, and, as I firmly believe, even 20 years are not enough to calculate MKL intrinsic value. But you already know this very well. Second, probably you already know this too, but you might have missed it, Mr. Gayner in the 2012 Letter to Shareholders made it very clear that their “opportunity cost” right now is extremely low, thanks to the acquisition of Alterra, that provides a lot of funds, held in cash or short term bonds, to be redeployed into stocks, when the cycle finally turns. That was perhaps the best piece of news in the Letter, at least imo! :) giofranchi

Then, either I am a bit too optimistic, or he is a bit too conservative… :) giofranchi

Q1 2013 Conference Call Transcript giofranchi MKL-Earnings-Call-Q1-2013.pdf

Mr. Charles Gave on "Implied Assumptions" giofranchi Daily+5.1.13.pdf

Hey when you calculate the future value in ten years, are you just compounding BV*(1+g)^10 = FV? If so, are you discounting by 1/(1.1^10)? Just curious, as my nos. come out diff. Sorry Palantir, I was in a hurry this morning and I guess I made some mistakes… I attach a file with my calculations of the discounted value of equity. And the hypothesis you find is the one I have described as my basic assumption for MKL. Now I get to a discounted value of equity (VOE) that is 1.72 x BV, instead of 1.89 x BV. Anyway, please consider this: starting from an equity base of $4 billion today, if MKL compounds equity at 12% annual for the next 20 years, by then it will have accumulated an equity of $38.6 billion. And it will still be a relatively “small” company… if compared, for instance, to the $191 billion of equity that BRK had accumulated by the end of 2012! It is just too conservative to think that 20 years from now MKL will be liquidated and the proceeds will be distributed among the shareholders! To me it simply makes no sense. So, I stick to my 2 x BV estimate of intrinsic value today. :) giofranchi PS Please, let me know if my numbers are the same as yours now. Thank you! Value_of_Equity.xls

masseyrock, if you believe MKL can compound BV per share at 15% annual for the next 10 years, than liquidate the business and distribute the proceeds to shareholders, a simple discounted value of equity analysis, assuming a discount rate of 10%, will show that FV for MKL today is 1.75 x BV. If you assume a discount rate of 9%, FV for MKL today is 1.88 x BV. Use, instead, a compound rate of 12% annual, and what you get is: with a discount rate of 10%, discounted value of equity equal to 1.38 x BV; with a discount rate of 9%, discounted value of equity equal to 1.48 x BV. On the other hand, if you believe MKL can compound BV per share at 15% annual for the next 20 years, like I do, than liquidate the business and distribute the proceeds to shareholders, the same simple discounted value of equity analysis, assuming a discount rate of 10%, will show that FV for MKL today is 2.62 x BV. If you assume a discount rate of 9%, FV for MKL today is 3.09 x BV. Use, instead, a compound rate of 12% annual, and what you get is: with a discount rate of 10%, discounted value of equity equal to 1.62 x BV; with a discount rate of 9%, discounted value of equity equal to 1.89 x BV. Given its still relatively modest size, I believe MKL can go on compounding at very high rates of return, let’s say 12% annual, for the next 20 years. And I think the proper discount rate for such an outstanding business should be no higher than 9%. If on top of that you believe that MKL will still deserve a residual value 20 years from now, that is to say that 20 years from now MKL will still be worthier alive than dead (it would still be able to compound a bit above the minimum required rate of return, which we have assumed to be 9%), I get to a FV of more or less 2 x BV. That’s why, imo, it is so difficult to value properly an outstanding business. giofranchi Of course, put in other assumptions and you get completely different results… like they say: “garbage in, garbage out”! ;) That’s why what I call “business judgment” is so important. giofranchi