giofranchi

Vice versa, I don’t agree with the “Emerging markets new era thesis”. Margins cannot go on expanding ad infinitum, just because emerging markets are consuming more resources than in the past. Capital, imo, is entitled to a fair amount of return. And it cannot grow to the sky. If it does, troubles of any kind will ensue. Anyway, if you don’t like Shiller’s PE, let’s use replacement cost, or market capitalization vs. GDP: they all paint the same picture! Mr. Watsa acknowledges that “the grand disconnect” could resolve itself by economic fundamentals rising to meet the financial markets. If that happens, I believed they will recognize it, and quit their hedging strategy. I think we won’t have to wait much longer to know how this will end. And, even if they are finally proven wrong, is it really that unbearable to live with 2-3 years of 6.5% returns? You would know that during the most uncertain investment environment in our lifetime, we have always been well protected and never risked a permanent loss of capital. I am grateful for that! :) 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

Packer, sincerely the more the market disagrees with Mr. Watsa, the less I am worried… Let me explain: today the Shiller P/E10 of the S&P500 is 23.38. At the beginning of 2012 it was 21.21. If 2013 turns out to be as much “risk-on” as 2012 was, by 2014 it will be nearing 26, and we will ever more clearly be running the risk of finding ourselves in a stock market bubble… In Jan 1, 1929 the Shiller P/E10 was 27.06… Even the greatest fans of Mr. Bernanke’s among you, would then start to get seriously worried! Instead, FFH will have another +6.5% year and won’t have to worry about anything! Never undervalue peace of mind! It is the best place to make sound reasoning and to take the right decisions! :) Moreover, the timing of the hedges was far from perfect the last time they proved to be very useful. Quoting Mr. 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

Mr. Watsa has made reference to this in his recent letter the shareholders: if it weren't so dangerous, it would be very very funny! http://www.businessinsider.com/60-minutes-chinas-ghost-cities-2013-3 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

Liberty, I hadn't seen this before, and it is very much appreciated! 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

shalab, I think your expectations are very conservative. Imo, to be conservative is a great virtue, so nothing to argue. Anyway, let’s examine how I see things: The S&P500 closed year 2012 at 1,426.19. It closed year 2000 at 1,317.51. In the 12 years from 2001 to 2012 the S&P500 distributed a cumulative dividend of 298.22. If you add that cumulative dividend to 2012 year end closing price, you get: 1,426.19 + 298.22 = 1,724.4. That equates to a 2.27% CAGR in price for the S&P500, dividends included. So FFH has outperformed the market by 9.3% - 2.27% = 7% each year. Now, we all read Mr. Buffett letters and we know that the S&P500 achieved a 9.4% CAGR in price (dividends included) for the last 47 years. If in a few years the S&P500 goes back to perform as average, and the outperformance of FFH stays the same, we could expect a 9.4% + 7% = 16% annual return from FFH, if purchased at book value. Furthermore, and imo this is really key!, FFH, under the general supervision of Mr. Barnard, has the very real chance to start underwriting at a profit consistently. That would be a game changer, and the true reason why I said that good businesses have the tendency to surprise on the upside! Think of it this way: in 2012 the market utterly disagreed with FFH’s very defensive stance, and its combined ratio (thank you Sandy!) was 99.8%, barely profitable… and yet BV per share increased 6.5% (dividend included), and Mr. Watsa has written in his letter: Imagine what they could achieve when the market agrees with them, and if they succeed in bringing the combined ratio down to 95% – 96%! Finally, one of the most important features I look for, when I am appraising with whom to partner, is that he/she be and “under-promising, over-achieving” fellow. I am positive Mr. Watsa is that kind of owner-operator. So, if he says FFH could achieve a 15% CAGR in BV per share going on from here, I tend to believe him (and also to expect some pleasant surprise! :) ). 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 ended 2000 at $148 BV per share. From 2002 to 2012 it distributed a cumulative $51.56 in dividends. It ended 2012 at $378 BV per share. If you add the dividends received, you get to a 9.3% CAGR in BV per share. :) Reinvesting the dividends, your return would have been even higher. 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

Well, if you fold a sheet of paper 50 times, you cover the distance from earth to sun. The first time you do that, you go from 0.1 mm to 0.2 mm. When you do that for the 51st time, you go back from sun to earth!! ;D ;D Ok, just joking… 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 BV per share at the end of 1985 was $2.08. So, an increase of +180% by 1986 year end means that BV per share grew to $5.89. In the 26 years that followed BV per share has grown to $378: that is a 17.35% CAGR. Don’t forget that we are ending a three years period when BV per share has increased by only approximately 10% (including dividends) cumulatively. PS I was kidding before, but it is all true! Amazing, but true! :) 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 Maybe the numbers I have just told you aren’t correct. If you look at “Consolidated Financial Summary”, you find that BV per share at the end of 1985 was $1.52, while at the end of 1986 it was $4.25. If so, CAGR in BV per share from 1986 to 2012 has been 18.85%. :) 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

Well, if you fold a sheet of paper 50 times, you cover the distance from earth to sun. The first time you do that, you go from 0.1 mm to 0.2 mm. When you do that for the 51st time, you go back from sun to earth!! ;D ;D Ok, just joking… 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 BV per share at the end of 1985 was $2.08. So, an increase of +180% by 1986 year end means that BV per share grew to $5.89. In the 26 years that followed BV per share has grown to $378: that is a 17.35% CAGR. Don’t forget that we are ending a three years period when BV per share has increased by only approximately 10% (including dividends) cumulatively. PS I was kidding before, but it is all true! Amazing, but true! :) 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

Well, if you fold a sheet of paper 50 times, you cover the distance from earth to sun. The first time you do that, you go from 0.1 mm to 0.2 mm. When you do that for the 51st time, you go back from sun to earth!! ;D ;D Ok, just joking… 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

Thanks alot Grenville! Faster than head office and right off the transcript...how great is this board. Cheers! Parsad, What do you see as the future returns on Fairfax from here? From your posts, is this a long-term buy and hold position for you? Thanks in advance. With the leverage they use, and their investment expertise, they can get 15% ROE going forward for at least another 10-15 years under the current team. Cheers! Great businesses have the tendency to surprise on the upside! :) 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! 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

From Michael Steinhardt's Latest Interview: On whether investors should wait for a pullback in the market after the big run-up: "I'm not sure it's going to stop, but I think that one must marvel at where the stock market is in relation to the rest of world, in relation to the economics, the politics... it's not a glorious happy time." On his average net long exposure: "I managed money for 29 years, and my average exposure in my funds for those 29 years was between 30-35% net long, now that's probably as bearish as anybody was in that period. I think having lower risk is a virtue. I'm not sure I'm a perma-bear." 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 should add that Mr. Biglari obviously understands very well the importance of working with permanent capital and the importance of controlling a machine that constantly generates new capital he can deploy wherever he finds compelling bargains. SNS is exactly that kind of machine. Think of how Mr. Buffett has always talked about See’s Candies: by itself See’s cannot grow to the sky (mature industry, limited market, etc.), but by constantly and predictably generating fcf (even if that fcf doesn’t grow much), and investing it shrewdly elsewhere, See’s has been the instrument through which Mr. Buffett has been able to create much wealth for BRK’s shareholders. The same, imo, applies to SNS. 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

WideMoat, the question is: how much did Mr. Biglari pay to get control of SNS equity? That, I think, is the number you should compare to 349m at 2012 year end. Why? Because, once you have used the bulk of your capital to get control of a large business like SNS, what you are left with is SNS, which is a solidly profitable business, but cannot grow BV per share at high rates, and a very small capital invested elsewhere. Result: you must have the time to build up new capital, and deploy it into new investments, before being able to grow BV per share at high rates. If you see how fast Biglari has grown investments in the last 5 years, you get the picture! premfan, I have not read all the archives of the board about BH, but I do have read all his annual reports, the ARs of the Lion Fund included (thanks Christopher1!). You see? I just like the business. It is conceived and structured in a way that makes me believe a good strategist and capital allocator at the helm can compound capital at high rates of return. Mr. Biglari surely is gifted, recognizes a good bargain when he encounters one, and will always be focused on improving fcf and deploying it opportunistically. He also understands the importance of insurance float, and I won’t be surprised if sooner rather than later he gets control over some insurance operations. Cannot he blow up? Of course he can! Every business deals with the future… and the future is always uncertain… That’s why we must put our attention on the process: is he doing the right things and taking the right choices? If so, odds are future results will be very satisfactory! 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

Increase in BV per share by definition is the increase in equity divided by the number of shares outstanding, after all costs are subtracted. It follows that a 15% CAGR in BV per share is by definition after incentive comp. You might view it as rightly due, or you might judge it much too high, anyway incentive comp is just another cost, 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

Sorry Eric, but I cannot agree with your point here… Any business owner, who experiences every day what it really takes to run a business, who understands how much capital allocation is paramount in any business, who constantly studies other businesses, who has developed an interest for the insurance industry in particular, and who knows FFH’s history well, also understands that FFH is not an hedge fund, and that its business model is quite superior to that of any hedge fund. Actually, FFH’s business model is one of the best and most reliable (very predictable in the long term, if not in the short term) I know of. I guess you remember Mr. Chou asking Mr. Watsa: “Do you know how Warren Buffett has accumulated his enormous wealth?”. And I guess you also remember the answer: “Insurance”. Not the hedge fund industry at all. But insurance. Of course, not “mainstream” insurance… But insurance a là Mr. Keynes first, a là Mr. Singleton and Mr. Buffett later, and now a là Mr. 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

Anything that trades at 1.25 x BV per share, and has the ability to grow BV per share at a 15% CAGR for the next 20 years, is undervalued. And those are my assumptions for Biglari Holdings. Although they surely might be wrong (nothing is certain!), I clearly understand how and why BH might succeed in meeting those goals. I don’t invest in businesses, where I don’t understand how and why they might be able to increase BV per share at a 15% CAGR for the next 10 to 20 years. That’s why my circle of competence is so small! :) I don’t like looking for things that are “statistically cheap”, 0.5 x BV per share or something like that, if I don’t understand them very well. Like Mr. E. H. Harriman was used to saying: “I am not interested in ten per cent: I want something that will grow.” And, if BH really succeeds in growing, 1.25 x BV per share will prove to be a true bargain. That being said, I am well aware of Mr. Biglari’s flaws, and BH stays a relatively small position in my firm’s portfolio of businesses. As an aside, I believe Mr. Biglari hasn’t picked “more compelling and even cheaper businesses, rather than go after CBRL”, exactly because he knows his circle of competence very well, and doesn’t stray outside: 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

Kuhndan, I agree with most of the criticisms on this board regarding Mr. Biglari. But I like the way he has conceived and structured Biglari Holdings very much. And I have an investment in BH, that I intend to keep, unless it becomes seriously overvalued. It is true that BH stock price has gone sideways for almost three years. But the reason is overvaluation at the beginning of the three years period. BV per share, instead, has continued growing handsomely. Right now overvaluation is not an issue anymore. Actually, I think BH is quite undervalued. 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

Well, I read a lot of ideas… just for fun. But when it really comes to commit capital, I never stray outside my circle of competence. And my circle is very small… CCH is outside my circle and I really don’t know if it is cheap or expensive right now. But I have found the Broyhill thesis to be much fun anyway! ;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

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 CCH-Thesis-Dec-12.pdf

Have you seen the presentation Broyhill Asset Management published about Coca-Cola Hellenic? I thought it was interesting. :) 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

Mr. Fascione leaving just after the announcement of the LCM initiative… twacowfca, any comments on the subject? Thank you very much, 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 2013-03-06.pdf

I agree. :) 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

Gundlach's "The Big Easy" 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 Gundlach-the-Big-Easy-Slides-FINAL.pdf

Please, find the February 2013 Horizon Kinetics Market Commentary 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 Bits_and_Pieces_Feb_2013.pdf