giofranchi

ECRI's latest presentation: The US Business Cycle in The Context of the Yo-Yo Years. 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 ECRI_1303_US_Business_Cycle.pdf

PlanMaestro, thank you very much for the treasure chest of information about Keynes’s ways of investing that you have shared with us! Very much appreciated! :) 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

buylowersellhigh, I just post on the board, when I happen to read something that I reckon to be interesting, or to take part in a good conversation. I don’t think I have really ever elaborated on my investment strategy... But, a paragraph from Mr. Klarman’s latest letter to shareholders is titled “High Bar”, and, if I had to venture what I think my investing strategy is, it would be the following: To set a very high bar, before accepting any business inside my circle of competence. And, if those very few businesses inside my circle of competence aren’t great bargains, to just hold cash and/or hedges, and to concentrate on maximizing the fcf I can extract from the businesses my firm controls. I focus first on my circle of competence, later on price. Stubbornly refusing to look at its stock price, if I am not sure I can put my whole confidence in a business, I almost always end up having the so-called “scarcest of business commodities”: conviction. (Very useful, if you believe in averaging down! In fact, I am a great believer! :) ). Beside this, I am also allergic to “opportunity cost”: I really need to minimize it as much as possible! That’s why I always want to have some ready liquidity at hand, no matter what! Ok, now why did you ask?! It’s clearly boring and it clearly leads to leaving lots of fish on the table 8 years out of 10! So, who cares?! ;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

original mungerville, what can I say? Thank you very much for your kind words! :) Truth be told, the way I have structured my firm has a great weakness: I do both the strategic planning (capital allocation) and the following of day by day operations. And, believe me, those operations are time consuming! In other words, I lack a sort of operating officer, that would take care of the enhancing of the businesses my firm controls. This weakness without any doubt subtracts much from my ability to structure a portfolio of investments that would match your own (I would gladly accept more bouncing around, with higher long term returns! But I cannot get comfortable with options and leverage… so, that is a game I won’t play!), or the portfolio of Parsad, twacowfca, Eric, PlanMaestro, racemize, valueInv, Paker16, beerbaron, moore_capital, and other great investors on this board. As far as a passive strategy is concerned, I love the quote from WEB, LC chose to use as signature: “Lethargy bordering on sloth remains the cornerstone of our investment style.” ;D Because also of the weakness above, the businesses I can claim to truly understand and I truly can be comfortable to invest in are still very few… so, I just stick with them, as long as their price makes sense. 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

The Brooklyn Investor on MKL 2012 AR. 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 markel-2012-annual-report.pdf

I am not really pessimistic… I like to think of my view on the markets as cautious… And that I don’t think it is the right time to reach for yield… or to grow by leaps and bounds. That time will come, but I don’t think it is now. By nature I find much easier to grow 6.5% for 8 years, and then to grow 50% in year 9 and 10. Rather than to grow steadily by 14% each year. And right now I think it is the moment to accept a 6.5% return on my firm’s equity. I don’t think that means I am pessimistic… To get to that 6.5%, in fact, I am still heavily invested in the market! If you ask me: do I agree more with Mr. Watsa or Mr. Marks? … well, that’s really tough! Just let me answer this way: 10% of my firm’s capital is in OAK, 30% is in FFH. :) 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 has immediately become one of my favourite quotes from Mr. Howard Marks. :) 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

Please, find it in attachment. 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 Year+End+letter+2012.pdf

+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

WEB 2012 AL - Mr. Prem Watsa 2012 AL Every extremely successful businessman throughout history possessed one feature: always cash on hand, when a great opportunity presented itself. I don’t know of a single exception to this basic rule. How didn’t they end up like the guy who used to write the Growth Stock Outlook? Don’t ask me! I don’t know! It’s a secret! :) But, for all the differences of economic outlook and portfolio positioning, Mr. Buffett and Mr. Watsa clearly agree on what counts the most. 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

New speech by Kyle Bass: http://media.chicagobooth.edu/mediasite/Viewer/?peid=f15d95d054e8442ab0cc1c60321383101d 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 is always a pleasure to read Mr. Frank Martin! :) 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 mcm_2012_annual_report.pdf

Yep ShahKhezri, I get what you're saying. However, I believe most investors suffer from an illusion that they understand more than they really do. Most companies are highly complex and we just don't understand the minutiae of what makes the company really special or indeed those at risk. For example, take Coke. A great brand right? But how much is the brand and how much is distribution and other factors that we can't quite put our finger on? Neville Isdell headed up Coke's Philippines operations in the early 1980s. At the time, Pepsi dominated the Philippines and looked to have an unassailable lead. Within a couple of years Isdell had turned the situation on its head and it is certain that his success had a lot to do with figuring out Coke's distribution (which I think involved poaching a few of Pepsi's larger distributors). A more current example is how Pepsi looks to have lost its dominant position in Thailand because its distributor Serm Suk has stopped distributing its products and has instead launched a new cola brand Est. Of course, it remains to be seen how Est fares in the long run, but my point is that companies are generally complex and our "System 1" (from Daniel Khaneman) is prone to jumping to overly-simplified analysis. Brookfield Asset Management is in-your-face complex, but in reality perhaps not any more so than your average company. And given how much stock that management owns, I judge that this complexity is for my benefit as a shareholder alongside them. This is more than you can say for most companies! I think the idea very well expressed by WhoIsWarren here is extremely important. And I couldn’t agree with him more! I think many business owners understand this, but among investors it is more easily overlooked. Imo, with the consequence of running unjustified risks. That’s why my circle of competence is still so much narrow and limited! 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

giofranchi, That is almost entirely due to the CDS gains. I do not see that happen in a market crash going forward. I am referring to the fact that if Fairfax did not have CDS gains I think it would have declined along with BRK, LUK, etc. I have benefited a lot from Fairfax during that period but I do not expect a repeat performance. Also I think Market would probably give us some time to load up on Fairfax if any deflation hedges look like they would be a home run. Hence, my preference for cash as a hedge instead of Fairfax. I could be wrong but that is the only way I can sleep well with my portfolio. Vinod Well, in 2008 FFH gained $2,080 million from equity hedges and $1,290 million from CDS. So, when the markets really melted down, FFH actually gained more from its defensiveness than from its macro call. :) Anyway, I understand what you mean, and I like your barbell type portfolio! ;) giofranchi Vinod is likely right. FFH was way down in March 2009, giving an excellent time to invest, if one had the cash. This was despite the fact they were booking billions in gains. In a heavy market sell off FFH will drop too, probably not as much as the S&P, but it will drop. This likely has little to do with FFH and more to do with shareholders being forced to sell at disadvantages prices to pay for margin calls. It is only after the dust settles that the gains will bring FFH to new highs. It is not a perfect portfolio hedge with the time lag. The closest thing to a perfect hedge is cash. Well, after being up +36% in 2008, when the S&P500 was down -37% the same year, it might very well be that FFH stock price sagged in February and March of 2009… But, to take advantage of that, you must have had all the cash needed to invest in a very limited time window (2 months, more or less)… good luck to you!! ;D And you would have lost all the 2008 gains anyway… :( Definitely not my game! 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, thanks for posting these. Worrisome is a good word to use in my opinion as, while I am inclined to temper the tone of both articles, nevertheless they raise a flag or two. Regarding the "Second Wave" article, without knowing the full facts (which we'll probably never know), it would appear that the author is venting frustration at the poor share price over the last year or so. Brookfield may have been fully justified in calling off a sale of the asset based on a "good faith" assessment by management of its long-term worth. That the share price is (greatly) lower today could simply be a combination of changed facts in the intervening period plus a depressed Mr. Market, or perhaps just a mistake! I would add too that Brookfield's Private Equity Group has an excellent long term track record and is motivated to generate long-term value for its investors. Now if Brookfield was trying to engineer it so that Second Wave will ultimately be forced into bankruptcy (allowing Brookfield to pick up the pieces on the cheap), well that's a different story. If anyone has evidence of the latter I would be very interested to hear about it. As for the "Paper World" article, the author has obviously done a lot of work and has highlighted some "worrisome" issues. However, I think it's a pity that he decided to take such a definite negative line of argument throughout the article, because it just looks like he's got an axe to grind (company said considering legal action would do that to you I suppose). Anyone who's studied the Brookfield / Brascan / Edper story will know it has a history of wanting control for limited capital (Jack Cockwell, current board member and the driving force behind the group from the 70s through to the early 2000s, was the brains behind this strategy). So the accusation of a pyramidal control structure, is well, about 40 years old. The focus on the lack of cash flow relative to net profit, particularly in the last 3 years, is just too myopic in my opinion. Net profit / total return is simply the amount that flows through the P&L to the balance sheet / intrinsic value of the company. In assets such as real estate / infrastructure etc., cash flows do not typically reflect an increase or decrease in value. If Brookfield buys a distressed asset on a 10% yield and a year later it's yielding 5%, with no change in cash flows, does this indicate a paper world in a sinister sense? In my view, the pertinent questions are: can the company fund its obligations (mainly interest as capex tends to be minimal), how predictable are its cash flows and obligations and for how much could the company sell its assets, given a reasonable amount of time to find buyers. As a reminder, management believes both book value and its estimate of intrinsic value are understated versus what it could achieve in an orderly wind-down of the company. The author does however raise some interesting points about BIP and BREP, the infrastructure and renewable energy businesses, which I admit I haven't looked at in as fine a detail as BAM. For instance, the renegotiation of the two power purchase contracts with related parties. And they are playing silly games by suggesting that Trevor Eyton is independent, because he most certainly is not! Neither do I much like that Brookfield decided to go down the legal route with the author. Without knowing the specifics of this case, Brookfield has a history of secrecy and are prone to aggression when questioned about their integrity. From Peter Bronfman to Jack Cockwell and then to Bruce Flatt, everything that I've read about them would support the view that Brookfield's culture is one of hard work and high integrity, although there's no denying that for many years they've pushed the "maximum control, limited capital" strategy aggressively, which a lot of people may not ever be comfortable with. Bottom line: do you trust management to "do the right thing"? I do. Thoughts? WhoIsWarren, I like your analysis very much (as always!! :) ) and I definitely agree with it. 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

giofranchi, That is almost entirely due to the CDS gains. I do not see that happen in a market crash going forward. I am referring to the fact that if Fairfax did not have CDS gains I think it would have declined along with BRK, LUK, etc. I have benefited a lot from Fairfax during that period but I do not expect a repeat performance. Also I think Market would probably give us some time to load up on Fairfax if any deflation hedges look like they would be a home run. Hence, my preference for cash as a hedge instead of Fairfax. I could be wrong but that is the only way I can sleep well with my portfolio. Vinod Well, in 2008 FFH gained $2,080 million from equity hedges and $1,290 million from CDS. So, when the markets really melted down, FFH actually gained more from its defensiveness than from its macro call. :) Anyway, I understand what you mean, and I like your barbell type portfolio! ;) 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 not so sure… stock hedges and deflation hedges are… just hedges! FFH, thanks to leverage and skillful investing, and (hopefully!) profitable underwriting, is able to create much alpha. Just look at 2012: stock hedges went down, deflation hedges went down, BV per share increased 6.5%! So, FFH surely might underperform 2 or 3 years more, but I don’t see how they could lose money. Vice versa, if something goes wrong, and in a deleveraging many things can go wrong, FFH will shine. Again: +6.5% if they are wrong, great results if they are right. Imo, that is the way to go! :) 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

Vinod1, I am not so sure… FFH BV per share increased 53%, 21% and 33% in 2007, in 2008 and in 2009. Its share price increased 24%, 36% and 5% in 2007, in 2008 and in 2009. Better than cash, right? ;) 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

Two worrisome articles on BAM. 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 brookfield-asset-management-seeking-alpha-11mar2013.pdf the-paper-world-of-brookfield-asset-management.pdf

I like the way Dylan Grice writes very much. dcollon, thank you for posting! 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

Thank you! Now I understand what you meant. Although, if Germany doesn’t allow the printing press to run, a 4th scenario becomes the more likely by far: WAR!! ;D No, seriously, I think that Europe will have to print even more than the US. 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

A new article from Seeking Alpha. 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 oaktree-capital-offers-8.4%-yield.pdf

Well, a lot of dumb money, shoveled around by unprepared and naïve people, who get elated by the fact that now at last they can invest in the US, is the stuff gigantic stock market bubbles are made of… I don’t believe that either: the Chinese must deal with a domestic housing bubble that threatens to sweep away the savings accumulated during a lifetime… so, they might be left with little capital to invest abroad! Anyway, even if it were true, it doesn’t mean that “the grand disconnect” is resolving itself by economic fundamentals rising to meet the financial markets, instead it just means that “the grand disconnect” is getting grander and grander. If you really believe in the “Emerging markets new era thesis”, what do you think would happen if the Fed stops printing money and the US Government stops deficit spending? Most probably the economy would tank and the market would crash, and who cares about emerging markets! Competition, be it in the US and Europe, or worldwide (emerging markets included!), is not the only force that will always check the expansion of profit margins, also a sort of “social contract” must be properly taken into account: a world in which the owners of capital reap all the benefits of enterprise at the expense of the others, who will always be the great majority of people on earth, is not sustainable. Improvements must be constantly pursued, and those who succeed must be satisfactorily rewarded, but everyone must be better off because of their achievements. The great and the rich will always have to take care of the little and the poor. And that means capital will always be soundly rewarded, but the reward it is entitled to must be checked. Think of Mr. Buffett’s argument about taxing the rich, when he says the rich will always keep investing, even if they must pay higher taxes, because the rewards are so great anyway… that’s exactly what I mean! Finally, I must admit I didn’t understand very well what you called the 3rd scenario: could you please elaborate a little bit further? I got it presumes some sort of US$ devaluation… Do you really see that?! The US$ has already devalued for 10 years… and it is a much undervalued currency, if compared, for instance, to the Euro… Exchange rates must make economic sense! The cost of life in Europe cannot be higher than the cost of life in the US, when the average US citizen earns 20% more than the average European citizen… A further devaluing of the US$ against other major currencies would wreck havoc around the world, at least surely in Europe! Imo, two are the scenarios that matter: 1) economic fundamentals rise to meet the financial markets: when the economy clearly doesn’t depend on money printing and deficit spending anymore, FFH will quit its hedging strategy. 2) the financial markets nose dive to meet economic fundamentals. 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

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-candidates_1.pdf short-candidates_2.pdf short-candidate_3.pdf

- Mr. Prem Watsa 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