giofranchi

If you are 112% long and 74% short, it is not so bad either! :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes I am still relatively a newbie in investing. With just 3 years of experience and total return still in red. I explored various methods and eventually believed that the best way of investing is not long/short but instead pure long in a cash account with significant margin of safety. Margin of safety takes care of everything. AIG, for example, has huge cash piles and ready to repurchase shares if the share price goes down. Over time it would be very profitable. But for GLRE, long/short strategy requires the market to be efficient, but there is no rule that says a market has to be efficient. One trading mistake could lead to a lot of problems. I have seen short positions going up way more than long positions. Why? Because long positions are generally out of favor stocks. That is why they get undervalued in the first place. When the market gets irrational and bullish, out of favor stocks may rise much less than hot stocks. What I am looking for is decent business that could be run by monkeys. Not some business that can only be run by the super genius. Remember any genius makes mistakes from time to time. muscleman, I think you should do what you understand. In other words, to stay inside your circle of competence. Imo, the most dangerous thing is to do something you do not understand, just because a lot of highly respected people told you that’s the way to go… If you stick with what you know and understand, I think you will enjoy at least some success, and you will avoid disaster. Take, for instance, the board: Parsad, twacowfca, Eric, Moore, Kraven, Packer, etc., they all have very different investment styles. Yet, they all have gone a long way defining their circles of competence, and they all have the discipline to stick to them. It surely is not just a coincidence that they all are extremely successful! To know what you are doing and not to stray elsewhere: imo, that is the difference between a pro and an amateur. For my part, I like to partner with outstanding capital allocators. The businesses I personally manage have absolutely no moat… unfortunately, life is very hard!… ;D so, I personally understand very well the importance of shrewd capital allocation. Because I must try to do it myself, if I am to generate some wealth over time. I understand much better the success of a good capital allocator, who constantly shifts resources from poor business operations to good business operations, than the success of a business which enjoys a sustainable competitive advantage. What I mean is I find much more predictable the success of an opportunistic capital allocator, than the sustainability of a wide business moat. And, imo, an opportunistic capital allocator knows when to be aggressive, and when to be defensive. When caution is warranted, he knows how to protect his capital. Furthermore, he understands very well the ‘opportunity cost’, and always keeps some ready cash at hand. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

If you are 112% long and 74% short, it is not so bad either! :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Short Side Of Long Issue 2 April 2013 giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes SSOL_Issue_02.pdf

"Contagion Starts Small" by David Kotok giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes Contagion_Starts_Small.pdf

Yes! To start, probably even better! If you want just one novel, instead of a story that spans two books. :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

GreenlightRe portfolio of investments returns +5.8% for the first quarter 2013. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

I agree 100% SwedishValue, and welcome to the board!! :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Unless you like the fantasy genre, I would leave aside both the “Fionovar Tapestry” trilogy, and “Tigana”… too many magicians there! :) (Otherwise, I think they are extremely good) And I would choose among other more historical novels. “Sailing to Sarantium” and “The Lord of Emperors” imo would be a good choice. They are about the city of Byzantium, during the reign of emperor Justinian, and about the building of Santa Sofia. The same Byzantium that enthralled Mr. Yeats and prompted him to write some of his best and most renowned poems. They are about a very gifted artist and about what it really means and is really required to perform exceptional and enduring work. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

I think it is much worse than: "Brussels considers itself a master of game theory". You have guys in charge like the Eurogroup chief Dijsselbloem, better known as Dieselbomb, who needed 6 years to get a BA degree in Agricultural Economy in some small Dutch University, has no MSc or PhD and has been the typical European political hack for most of his career. But he became Finance Minister in November of last year, and although obviously doesn't know squat about anything, is pontificating in the press about how to solve Europe's problems by confiscating money from depositors over the 100k limit and retracting his statements one day later, as we say in Spanish, "dónde dije digo, digo Diego". With idiots like that running the show even SuperMario may not be able to keep the euro together. I am trying to figure out what happened to people who were holding stocks in Laiki and Bank of Cyprus. If they were not affected by the bail-in, then there is going to be a massive bull market in Europe as everybody over the 100k limit who is not able or does not want to transfer their cash abroad puts as much of their money as they can into stocks. Many risk averse people will think that it is much better to put up with the fluctuations of owning BRK or FFH than to get shorn like the poor cypriots. +1 giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Parsad, I know that novels, which have nothing to do with finance and investments, don’t belong here… But Kraven wrote me a message saying: “It’s very peaceful here. I always find that when I get some geographic distance I am able to think more clearly.” And I experience the same kind of clearness of thought each time I read my favorite Canadian author: Guy Gavriel Kay. Generally, I don’t read novels. After reading everything from Hugo, Dickens, Tolstoj, Dostoevskiy, etc, I generally find novels a bit boring… Guy Kay is a glaring exception! The richness of life he is always able to describe, and his poignant observations on human nature, go well beyond any plot scheme (plot which, by the way, never fails to be enthralling!). Every now and then, I really enjoy take a little distance from the daily routine and read (or reread) one novel of his. I always come back happily and enthusiastically recharged! During the last three days (Easter Holidays) I read “Under Heaven”, which I still missed. And I was not disappointed at all! Moreover, today Mr. Kay’s latest novel “River of Stars” is finally out. Again, I beg your pardon, if this is out of place. I just wanted to share on the board something that often enables me “to think more clearly”. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

IceCap Asset Management March 2013 giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes IceCapAssetManagementLimitedGlobalMarketsMarch2013.pdf

That's a pretty large number -- it isn't like it winds up at 14.99% or something that you can just round up to 15%. .902 * 15% = 13.53%. The interest rate on the debt is higher than the 6.6% assumption you are making on portfolio total return -- so it needs to be stripped out. As for using the "investments per share" number in the AR: I believe in the past they put that number out there despite the fact that ORH and NB had substantial minority interests. In other words, even though FFH didn't own a large chunk of those investments, they were still included in the "investments per share figure". So since then I've never trusted that number again. That’s why I like a margin of safety!! If it is actually 7.6%, instead of 6.6%, I think FFH can achieve a 15% CAGR in BV per share anyway. Even significantly trailing behind its past results! I have a double margin of safety here: one against some errors in my assumptions (as you have pointed out), and another against FFH not being able to replicate past achievements. :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes They will meet my expectations if they achieve results that allow me to earn 10+% total return from their stock. The main concern that drives my lower expectations is that: 1) bond yields low 2) bond yields can't go too much lower Their storied history had this terrific tailwind from not only high bond yields, but those yields kept falling and that gave them sizable capital gains! Otherwise, nothing else to worry about. I do hope their underwriting gets better -- it seems there is a trend in that direction with ORH becoming a bigger slice of the pie and the emerging markets businesses getting larger. Should that trend continue, then perhaps underwriting will one day step forward to boost profits meaningfully. But i don't count on it. I think Mr. Watsa knows that bonds are not going to be a good investment for the next 10 years as well as anyone else! And I think he and his team will invest opportunistically somewhere else. I have always judged Mr. Watsa to be an “under promising and over achieving” kind of manager: if he says 15%, and the math is not completely crazy, I tend to believe him. Then, of course, time will tell! :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

That's a pretty large number -- it isn't like it winds up at 14.99% or something that you can just round up to 15%. .902 * 15% = 13.53%. The interest rate on the debt is higher than the 6.6% assumption you are making on portfolio total return -- so it needs to be stripped out. As for using the "investments per share" number in the AR: I believe in the past they put that number out there despite the fact that ORH and NB had substantial minority interests. In other words, even though FFH didn't own a large chunk of those investments, they were still included in the "investments per share figure". So since then I've never trusted that number again. That’s why I like a margin of safety!! If it is actually 7.6%, instead of 6.6%, I think FFH can achieve a 15% CAGR in BV per share anyway. Even significantly trailing behind its past results! I have a double margin of safety here: one against some errors in my assumptions (as you have pointed out), and another against FFH not being able to replicate past achievements. :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Even if it were 7.6%, why pretty optimistic? When historically FFH has achieved an average total return on portfolio of 9.6%? giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

My numbers are pretty much in line with yours when I went through this exercise after the annual letter. A minor difference is that I also deducted $60 million for preferred debt. To get a ROE of about 13%, I had to assume equity investments, preferred stock, and investment in associates return 12% (compared to a 15 year average for YE 2010 of about 17%) and bonds return 5% (15 year avg of 10%) with a 103 CR and 30% tax rate. Total portfolio return is 7.6%. To me the portfolio return seems to be pretty optimistic. Vinod Well, I just used Mr. Watsa’s numbers… $378 per share of equity, $784 per share in float, $127 per share in net debt = $1,289 in investments per share. $1,289 compounding at 6.6% for 10 years gets you to have $2,442 in investments. If at the end of the 10th year you give back what you owe, both the float and the debt, you must subtract $784 + $127 = $911. Therefore, you are left with a capital of $2,442 - $911 = $1,531. $378 compounded at 15% for 10 years gets you to $1,529. Of course, this doesn’t take into account the yearly coupon FFH must pay on its debt… anyway, long term debt is just 9.8% of total investments. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

It's not so much the interest expense as the non-interest expenses (e.g., salaries, occupancy etc) being spread over a smaller deposit base that drives the cost so high. I agree. But I was referring to the way the money is first collected and then used. Not to the amount of money. A small, very focused team, led by a very driven individual, is much more effective, imo, than a large and widely scattered organization. In the first case errors can be more easily averted and, when committed, can be more easily identified and dealt with, before they become pernicious. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Hey! No problem! You could start a “Ask giofranchi” thread right away!! I would be very pleased to talk about mistakes… I have plenty of experience!! ;D ;D ;D Anyway, jokes aside, I agree that Packer is among the smartest investors out there! :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Kraven, here is what I wrote to Christopher1 just yesterday: Have you ever made a comparison between BNP Paribas (or any other large bank) and Fairfax? BNP Paribas has a ratio total assets vs. tangible equity of 26, for Fairfax that ratio is 3.4. It means that BNP Paribas has put to risk $26 for each $1 it owns, while Fairfax has put to risk $3.4 for each $1 it owns. Moreover Fairfax has put those $3.4 to risk through HWIC, which is a very small corporation, and therefore very easy to manage and control. Doesn’t it strike you as a comparison between two utterly different risk profiles? I also tend to compare the equity of an insurance company to the equity of a bank corporation, the float of an insurance company to the deposits of a bank corporation (though their costs are demonstrably different), and the debt of an insurance company to the debt of a bank corporation. And that is because both float and deposits are liabilities whose risk profile is much safer than long-term debt. Now, please consider, for Fairfax total assets are funded this way: 29.3% equity, 60.8% float, 9.9% debt. Instead, for BNP Paribas total assets are funded this way: 3.8% equity, 29% deposits, 67.2% debt. If Fairfax and BNP Paribas are both black boxes, they certainly are two very different black boxes! :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes Gio, your points are well taken, but it's a bit of a strawman argument. BNP is a weaker bank, so you've compared two things are extremes. I could say look at VERF compared to FFH. VERF is a tiny community bank with about $4 of tangible assets for each dollar of tangible equity. It is almost completely funded with deposits and only $5 mil in debt. Of course it's impossible to buy. I am not saying banks and insurance companies or FFH, in particular, are identical investments. But my point stands. If a bank is a black box, so is an insurance company. It doesn't matter to me that one might be more leveraged than another. Balance a bowling ball on a pin and some level it doesn't matter how thick that pin is (unless it is not really a pin at all but something else with a point on the end). So BNP and FFH may be different kinds of black boxes, but at the end of the day one still has to rely on the numbers as they stated in the financials. Nothing more or less. I agree. Still I believe simple heuristics like “skin in the game” and “small is beautiful” (because small is easy to manage and therefore to control) go a long way in business. Then, hey!, I have learnt: “you don’t know what you cannot know”, right? ;) Cheers! giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Kraven, here is what I wrote to Christopher1 just yesterday: Have you ever made a comparison between BNP Paribas (or any other large bank) and Fairfax? BNP Paribas has a ratio total assets vs. tangible equity of 26, for Fairfax that ratio is 3.4. It means that BNP Paribas has put to risk $26 for each $1 it owns, while Fairfax has put to risk $3.4 for each $1 it owns. Moreover Fairfax has put those $3.4 to risk through HWIC, which is a very small corporation, and therefore very easy to manage and control. Doesn’t it strike you as a comparison between two utterly different risk profiles? I also tend to compare the equity of an insurance company to the equity of a bank corporation, the float of an insurance company to the deposits of a bank corporation (though their costs are demonstrably different), and the debt of an insurance company to the debt of a bank corporation. And that is because both float and deposits are liabilities whose risk profile is much safer than long-term debt. Now, please consider, for Fairfax total assets are funded this way: 29.3% equity, 60.8% float, 9.9% debt. Instead, for BNP Paribas total assets are funded this way: 3.8% equity, 29% deposits, 67.2% debt. If Fairfax and BNP Paribas are both black boxes, they certainly are two very different black boxes! :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

ASTA, thank you very much for your review! I purchased it some time ago, but have not read it yet. After your suggestion, I will surely make it my next book! :) I love to study the ways of the greatest entrepreneurs of the past. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

Find in attachment the HDGE ETF Market Commentary for March 2013. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes HDGE_PMCommentary_032013.pdf

giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes 130326_3_TFTF.pdf Cyprus_-_Telegraph.pdf

I agree with the whole LongTerm’s analysis. He will pretty soon know and understand Italy far better than I do!! :) giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

I agree 100%! Very good business indeed! Though I don’t know if the family is interested in selling… I have never heard of it… Anyway, I guess it is on Mr. Buffett’s elephants list! And he knows it much better than I do! I am such a boring guy, who always eats healthy food, stays away from bad habits, etc. I have read in “The Longevity Project”, a book I highly recommend, that the most common behavioral trait, among those who live long and productive until the end lives, is that they are “prudent and persistent”… So, I generally don’t enjoy Ferrero’s products very much! But I know that it is only me! To all the girls on the board: don’t believe for a second that I am so boring as I have described myself! To tell the truth, I am amazingly bold and reckless, you won’t believe it!! Incredibly cool and handsome!! ;D ;D ;D ;D giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

If we had a United States of Europe, with a banking, a political, and a fiscal union, the Euro imo would be slightly overvalued relative to the USD: PPP is around 1.15, and it simply doesn’t make any sense to me that the cost of living in the “United States of Europe” should be higher than the cost of living in the USA. After all, the USA economy is much more vibrant than its European counterpart, right? Of course, the “United States of Europe” are a distant dream… the reality, instead, is very simple: the Euro today is unbearably high for nations like Italy, Spain, and even France. giofranchi “As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes