giofranchi

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

Just wait until next Thursday and we will know, right? ;) giofranchi

Now that I think about it, the reason might be very simple indeed: almost nobody in Italy or France has read the book in attachment yet!! Well, they really should!! ;D ;D ;D giofranchi 1993-King-Icahn.pdf book-review-king-icahn.pdf

giofranchi

"I'm like the gunfighter you hire to save the town. That gunfighter is there to do good...but he'll only do what he does if he knows he'll get paid for it." —Carl Icahn There is really nothing more that I would add to the topic of capitalism… And I really don’t understand how countries like Italy or France still don’t get such an obvious statement and still embrace communist policies… ::) giofranchi

Yes, I agree! Yet, I find a difference between saying “ok, this company is selling below liquidation value, it is worth more dead than alive, I will put 2% of my assets in it, and I will build a portfolio of 50 stocks all with the same characteristics” , and saying “this company can grow BV per share at (choose a number) % annual for the next 10 to 15 years, I know just a few businesses in which I can put the same confidence, and I will concentrate my assets in those few businesses”. The first sentence requires almost no business judgment, it just requires statistical cheapness and diversification. The second one, instead, requires a lot of business reasoning. And, please, don’t misunderstand me. I want to make this very clear: what you have called “riding the coattails of great investors” might sound to the trader a bit detrimental… to the businessman, instead, shrewd allocation of capital is the number 1 feature he always wants, no requires!, to see in any enterprise. No matter what the enterprise engages in doing or producing, without a CEO who constantly thinks about the maximization of ROIC, the businessman should stay away. Because strategic thinking about capital and resources allocation by the CEO is the number one predictive element hands-down! giofranchi

Not at all! Imo, speculation is something yet different. Speculation is the belief that someone will buy me out at an higher price… because of a trend, because of a fad, because of momentum, etc., but NOT because I have recognized a mistake and I am correcting it! The way I see speculation: somone will buy me out at a higher price, irrespective of "valuation" or "business judgment". The way I see trading, a “valuation” mistake is being addressed. The way I see investing, a “business judgment” mistake is being addressed. I have no idea which among speculation, trading, or investing contributes more to the economy… sincerely, I don’t care. My only point was to emphasize when contrarianism might be (almost) always very useful and effective: and I think it is when you are addressing a “valuation” mistake, when you are trading. By my idea of speculation, if you think of it for a moment, contrarianism might be even less useful to the speculator, than it is to the investor! :) giofranchi

Great trade, Ron! Congratulations!! ;) Hmmm… I must absolutely enlarge my circle of competence… the more I read the posts on this board, the more I realize that mine is a minuscule, almost invisible to the naked eye!, circle of competence… giofranchi

I understand, and I have learnt by heart Mr. Templeton’s teachings! But I cannot believe in contrarianism for contrarianism sake… I MUST always understand what I am doing. The idea of circle of competence always comes first for me, even before the idea of contrarianism… Yet, here I must again make a distinction between trading and investing. Basically, I look at trading as a zero sum game: someone exploits someone else’s mistakes, while no true wealth is created, beyond the one that already exists. My idea of investing, instead, is finding an asset with the potential to create much wealth in the future, and keeping that asset until its full potential has been exploited. Trading is much more short-term, because valuation mistakes tend to be corrected in 1 or 2 years. Investing, instead, is more long-term, because even the best of operations need time to create lasting wealth. So, if you trade, contrarianism really could be your best friend! In a year or two anything could happen! Actually, even if a depressed stock deserves to be depressed (because it really is a bad business!), in the short-term you could count on the market to make the opposite mistake and bid the price of its stock up! ;) An oversold condition truly tends to be bought, while an overbought condition truly tends to be sold… so, a shrewd trader might make a lot of money that way! Investing is different: if you invest, you must understand the quality of the operations you are buying, and the quality of the people you are partnering with. Contrarianism might be useful just as a very attractive entry point. Of course, also investing, to be successful, must rely on some sort of mistake, but I call it a “judgment” mistake, instead of a “valuation” mistake. Entrepreneurs (read investors) recognize value where other people don’t see anything. That’s why they tend in general to create wealth and theirs is not a zero sum game. Furthermore, that’s why I usually like investing much more than trading: because “judgment” mistakes tend to be much bigger than “valuation” mistakes, even if they are much less frequent, and even if they take much more time to be “revealed” and corrected. That’s why you could have invested only once in Berkshire in the early ‘70s and compounded your capital at a 20% annual rate, while a million trading decisions in the meantime would hardly have achieved the same result. giofranchi

Thank you very much for posting your work on LMCA. I agree with everything you have written, except valuation… A company that returned 15% annual for the last 10 years, and which could go on performing the same way for the next 10 years, is worth much more than NAV. So, I would come up with a higher FV. Of course, this is not the case, if you think that past performance won’t be sustained in the future. Yet, I don’t see why Mr. Malone should fail to deliver very satisfactory results for at least the next 10 years. :) giofranchi

Well, of course as a trader who jumps into statistically cheap stocks and sells when they reach FV, what you are doing makes a lot of sense! And you surely follow a system very well thought out and effective! So, no doubt that’s what you should be doing! ;) But you already know my perspective: I was talking to those who invest in a company and “don’t care if the market stays closed for 10 years”… For those people CONVICTION is everything. And I don’t see how you can muster any conviction about the business climate in Europe today… at least, I am sure I cannot! giofranchi

Well, try to imagine how good it would be, if you had your own currency!! ;) Anyway, txitxo, I really hope you are right! I certainly don’t want to live in a society constantly mired in depression… I really hope your “new” economy will grow and eat the “old” one! :) But I know and understand very few and very simple things… I understand that a country, in which the cost of doing business is high, and which cannot be competitive on prices, because of an overvalued currency, is in deep trouble. This even a child can understand. How the “new” economy will grow, which fruits it will bear, at which costs, and when… it really is beyond me! I don’t understand it, and I stay away from things I do not understand. Instead, I go for “the sure thing”: as long as I can find some bargains there, all my firm’s capital will stay in the US; if this market keeps roaring upward, forcing me to sell my investments, I will accumulate USD and an ever increasing stake in FFH. giofranchi

My experience with the businesses I know of in Italy unfortunately is quite different… The cost of doing business in Italy is not higher than in Germany, because German entrepreneurs are smarter or harder working that their counterparts in Italy… The cost of doing business in Italy is higher, because Italy as a society wastes a lot more resources than the German society does… That’s it! Italian entrepreneurs are among the most capable and brilliant that I know of! The austerity that was imposed on them last year with Mario Monti’s government did nothing but put them out of business… The combination of an overvalued currency and a fiscal pressure among the highest in Europe (that is to say among the highest all over the world!) is a killing formula for every private initiative, because they tend to shrink net margins to almost zero… Well, as if it weren’t enough, Mr. Monti last year decided that the right move was to increase the fiscal pressure even more… ::) And now, businesses should decrease prices by 20+%?! ??? You say that also costs could come down by 20+%… but that is as far from the reality I must live with everyday as it could get… No cost of my firm’s has basically come down… not electricity, not gas, not software or hardware costs, not labor: please, if anyone would like to explain to syndicates in Italy that the cost of labor must come down, you are very welcome!! Because everyone who has tried until today has miserably failed… Ah, I almost forgot… taxes: they have increased and are still increasing! VAT is going to 22% from 21% by next July… And the reason is we are not the German society… if we were, our costs would be as low as the Germans’ and Italy would deserve a currency as strong as the Deutsche Mark! We have not been Germany for centuries… Would you now bet on the fact that we will start behaving like Germany in the next 10 years, and reduce our costs accordingly?! Because, with a common currency, if we do not achieve that goal, there will be no one left to do business in Italy 10 years from now… :( giofranchi

Yes! You might be right! I always look at things from an economic point of view and forget that economics is not all that matters… unfortunately, I am allergic to politics!! ;) So, here we must make a distinction: on the one hand we have the pure economic cost, on the other hand we have a more general and complete cost (economic + political + societal + etc.). Maybe, as you say, the general cost of leaving the Euro is higher than the general cost of keeping a currency that makes no economic sense. But the pure economic cost of depriving not only one, but many nations of currencies that make economic sense will in the end prove to be much higher than the pure economic cost of leaving the Euro. And, while I see how the Euro can be saved and somehow kept from being an economic tragedy… I still don’t see how the Euro could make any economic sense… that is, of course, without a White House in Berlin. If this is truly the case: cannot get rid of the Euro, because the general cost would be too high, but in the meantime the Euro will go on making no economic sense, then… well, put all your assets in the US, and very quickly!! ;D giofranchi

http://seekingalpha.com/article/1377541-why-yahoo-is-worth-34 giofranchi

http://www.gurufocus.com/news/217564/nov--a-good-time-to-buy giofranchi

Hi tripleoptician, no, I didn’t. And my firm is invested in TPOU, not in TPOE. Though they declared they will go on paying a special dividend equivalent to 4-5% of NAV, I would rather see them interrupt this policy and buy back a lot more shares. I don’t see the point of paying large dividends, when they are clearly very much tax inefficient… Anyway, as long as Mr. Loeb goes on doing a great job, I will certainly not sell because of tax matters. :) giofranchi

You are very welcome! :) giofranchi

Hi luck, no, I am from Milan, Italy. And I invested in TPOU through my firm’s bank account (Intesa San Paolo SpA). I am not aware of any peculiar tax consideration for those outside England on capital appreciation. Though, I must say that at the end of 2012 TPOU distributed a very generous special dividend over which my firm was taxed 20%, instead of 15%, the norm in Italy for foreign dividends. Besides, tax considerations for a firm and for an individual might differ a lot. Sorry, I cannot be of much help… giofranchi

Full Year Results for the Twelve Months Ended 31 December 2012 giofranchi 2013-04-25-Full-Year-Results-for-Twelve-Months-Ended-31-December-2012.pdf

IceCap Asset Management April 2013. giofranchi IceCap-Asset-Management-Limited-Global-Markets-2013.4.pdf

txitxo, I think the image in attachment tells the whole story: with the Euro, for Italy to close the gap in competitiveness with Germany, prices should decline by as much as 28.5%. How could Eurobonds solve this enormous problem? giofranchi Pocket-Changes.bmp

Hey! I was thinking about exactly the same thing! You have just posted this question some minutes before I could do it! ;D It is very clear, from what he has written and from the presentation he has attached to one post of his, that Tommm50’s knowledge about the insurance and reinsurance industry is deep (by the way, thank you for answering to my question!) and even a match for twacowfca’s! It would be a real pleasure, and a true learning experience, to spark a conversation among them about Lancashire! ;) Cheers! giofranchi

txitxo, it is DIFFICULT. And men don’t manage difficult things very well. Things should be kept as easy to manage as possible. As soon as they get to be complicated, you can bet on some terrible mistake to be committed and some sort of crash to come. Tell me of a currency union that really lasted throughout history… not a single one. Because they are extremely difficult to manage, in an already highly complex system like human society is. If you tell me that the blue/red bonds proposal of von Weizsacker and Delpla is just a tool to keep us from the brink of disaster, while we work our way to a “White House” in Berlin, than I could agree. Vice versa, if anyone (Mr. Soros included) tells me that it might be the final and permanent solution to all our problems… well, then I have to disagree. Because I don't understand it. The Euro might be the first currency union to be really long lasting, without a political, banking, and fiscal union, but why? I cannot see any true reason. So, the only questions that matter, imo, are: do you really see a "White House" in Berlin? And, if so, how long will it take us to get there? Because in the meantime we must go on dealing with difficult things... :( giofranchi

ap1234, I understand your point very well. Unfortunately, I cannot answer to your question precisely. Because I really don’t know how much float Fairfax must keep in bonds and cash at any time, no matter what. I know it might be an apples to oranges comparison, but, if you look at Berkshire’s Consolidate Balance Sheet at 2012 yearend, you can see $42 billion in cash, $31 billion in fixed maturity securities, $86 billion in equity securities, and $191 billion in total shareholders’ equity. It shows other $5 billion in cash in Railroad, Utilities and Energy and in Finance and Financial Products, and has total assets of $427 billion. So, Berkshire at the end of 2012 had: - 25% of equity in cash - 11% of total assets in cash - 16% of equity in bonds - 7% of total assets in bonds - 41% of equity in bonds + cash - 18% of total assets in bonds + cash - 45% of equity in stocks - 20% of total assets in stocks - 184% of equity in stocks + investments other than cash and bonds - 82% of total assets in stocks + investments other than cash and bonds This is something I have checked out very quickly, so there might be some errors, but I guess it is clear that Berkshire returns in the future won’t depend very much on the bonds environment. I don’t know if Fairfax could replicate the way Mr. Buffett invested Berkshire growing capital through the years, buying an ever increasing number of whole businesses, instead of solely relying on the stock or bond markets, but I guess Mr. Watsa will carefully take it into consideration, if other opportunities for satisfactory investment returns won’t be available. giofranchi