giofranchi

Visualizing Bob Farrell's 10 Rules 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 visualizing-bob-farrell-10-rules-of-investing.pdf

Hi berkshiremystery! Well, in fact I sort of preceded John Huber! ;D In the thread “The Waiting Game” I had quoted exactly the same comment by 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. Marks on Bloomberg: http://www.gurufocus.com/news/209022/oaktrees-howard-marks-thinks-the-recovery-is-in-the-early-days-and-he-likes-real-estate 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 Keynesian Depression 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-Keynesian-Depression~Guggenheim~12_2012.pdf

Great! Thank you very much, twacowfca. Very useful, as usual! :) 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

Another not so reassuring article on British Pound weakness... 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 Anatole_Kaletsky_»_Britain’s_strength_is_its_weakness_»_Print.pdf

Yes. Being there is the most important thing. I agree. Though, since 14value asked for some writing that might help his friend in such a time of sorrow and need, I attach a very brief tale by Lev Tolstoj. All his Christian short tales have both the simplicity and the power to let me put life in the right perspective, with all the meaning it truly deserves. I hope they will continue to do so, when my time of need and sorrow finally comes. God bless you, Giovanni THE_THREE_QUESTIONS.pdf

Dazel, with all due respect, I don’t quite agree with your analysis. Please, follow me for just a sec, and I will try to explain my reasonings. First, let’s compare FFH returns with the returns of the general market: FFH 2011-2012: FFH BV x share at 2010 year end: $379.46 FFH BV x share at 2012 year end: $378.10 Dividends distributed: $20 Total returns: $378.10 - $379.46 + $10 + $10 = $18.64, or +4.9% of FFH BV x share at 2010 year end. S&P500 2011-2012: Closing price at 2010 year end: 1,257.64 Closing price at 2012 year end: 1,426.19 Dividends distributed: 58.34 Total returns: 1,426.19 – 1,257.64 + 27.09 + 31.25 = 226.89, or +18.04% of the closing price at 2010 year end. So, yes! FFH is trailing behind the general market for the last two years. But… and here is the rub! A 13% cumulative over-performance of the general market could be easily and completely wiped out by a 2 months correction! Now, let’s take a similar look at the 3 years from 2008 to 2010: FFH 2008-2009-2010: FFH BV x share at 2007 year end: $230.01 FFH BV x share at 2010 year end: $379.46 Dividends distributed: $23 Total returns: $379.46 - $230.01 + $5 + $8 + $10 = $172.45, or +74.97% of FFH BV x share at 2007 year end. S&P500 2008-2009-2010: Closing price at 2007 year end: 1,468.29 Closing price at 2010 year end: 1,257.64 Dividends distributed: 77.96 Total returns: 1,257.64 – 1,468.29 + 23.94 + 23.56 + 30.46 = -132.69, or -9.04% of the closing price at 2007 year end. Finally, lets’ take a look at the whole 5 years from 2008 to 2012: FFH 2008-2009-2010-2011-2012: FFH BV x share at 2007 year end: $230.01 FFH BV x share at 2012 year end: $378.10 Dividends distributed: $43 Total returns: $378.10 - $230.01 + $5 + $8 + $10 + $10 + $10 = $191.09, or +83.08% of FFH BV x share at 2007 year end. S&P500 2008-2009-2010-2011-2012: Closing price at 2007 year end: 1,468.29 Closing price at 2012 year end: 1,426.19 Dividends distributed: 136.30 Total returns: 1,426.19 – 1,468.29 + 27.09 + 31.25 + 23.94 + 23.56 + 30.46 = 94.20, or +6.42% of the closing price at 2007 year end. So, how do you go from a total return of +6.42% to a total return of +83.08%? Answer: you want to invest in something that doubles its capital, when right, while still being profitable, when wrong. And you want to have patience, because sometimes that thing will be right, and sometimes it will be wrong. Second, if for “missed opportunity” you refer to the financial industry in the US, well actually Mr. Watsa & Company were among the first to recognize it and to take advantage of it. When Mr. Berkowitz was still dabbling with defensive stocks (say, for instance, Pfizer), Mr. Watsa had already bought a lot of Wells Fargo and US Bancorp at very depressed prices! Later he also chose to make a substantial investment in Bank of Ireland. Finally, if our politicians will definitely prove them wrong, FFH under-performance to the general market will get wider and wider. But I have an extremely hard time believing that… would you prefer to bet on Mr. Watsa & Company, or on our politicians? Com’n let’s be realistic: politicians don’t have a clue about what’s really going on! And, vice versa, if Mr. Watsa & Company will be proven right, the next doubling of FFH’s capital might just be around the corner! :) 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

Great answer from Mr. Watsa on the importance of building cash, when there are not many opportunities: Q4 2012 FFH Conference Call 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

VAL9000, I agree with most of what you have written. Except that, personally, I don’t find it so hard “to just sit, wait and do nothing”. Not that I am such a lazy boy! It is just that I can shift my attention to improve the operating side of my businesses. Until things change, and some new, intelligent opportunity for capital allocation comes up. You don’t have to be a business owner, to behave like that. Any profession or a job provide you with the same optionality. Just focus on improving your cash generating abilities, and, when the right moment comes, you will have a lot of capital to put to 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

Find in attachment the full transcript of the Q4 2012 Conference Call. 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 BAM-Q4-2012-Conference-Call.pdf

Find in attachment the full transcript of the Q4 2012 Conference Call. 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-s-management-conference-call-q4-2012.pdf

Here is the link to the full transcript of the Q4 2012 Coference Call: http://seekingalpha.com/article/1188131-fairfax-financial-holdings-limited-management-discusses-q4-2012-results-earnings-call-transcript?source=email_rt_article_title 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

In “Margin of Safety”, where he discusses hedging, Mr. Klarman has written: So, FFH really is “the best of both worlds”! :) 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

Christopher1 pointed me to the very good answer by Mr. Biglari: 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 Biglari-15feb2013.pdf

I just want to point out one thing here. Not that I necessarily disagree, but not everyone may even accept that a secular bear market or a debt super-cycle is even something which exists. That's probably where some differences in thinking are. History is a useful force in finding today's patterns, but you can't get too close to using the patterns of yesterday to define "where you are". rmitz, I do agree with you. But I cannot replicate txitxo strategy. To find stocks that are always statistically cheap on a worldwide basis is something I would be a real patsy at! Most of all because it is something I don’t like to spend my time doing! Have you ever become a master at something, without loving it? I doubt it. Instead, I like to find and study a few enterprises, which I can thoroughly believe in, and where I can put significant amounts of capital. And, if those enterprises aren’t exceptional bargains at the moment, I must somehow assess the risk of owning them. My judgment could be wrong, of course, but I guess a wrong assessment of risk would still be less detrimental to my overall performance, than trying to play a game at which I have neither skill nor interest at all. 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

Q4 2012 and full year results are out. Please, see files 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 BAM_Q4_2012_Letter_to_Shareholders.pdf News_Release_BAM_Q4_2012.pdf BAM_Q4_2012_Financials.pdf

Well, you know I invest like I do business, because that is what I understand and that is where I think I have an edge on other people. To rely too much on numbers simply is not my game. On which numbers, anyway? Peter Lynch managed his fund right at the beginning of the most fantastic secular bull market in history… Are his numbers really reliable for what might happen in a secular bear? Not any secular bear, but a secular bear at the end of a 70-year debt super-cycle? I am skeptical… You have compared, what I called “a deep understanding of a business”, to “solving geometrical problems in 15-D space”… But that’s just because “to do business” is not your game… and so you cannot really be confident to have any kind of edge in taking business decisions! How could it be different? But, listen, I feel exactly the same about your statistical way of choosing investments! Because I know I could never compete with someone like you at that game! A businessman would never invest in a company based on some statistical analysis, exactly the same way a statistician would never invest in a company based on some deep knowledge of how it truly operates and creates wealth… it seems obvious to me! Like it is obvious that both a businessman and a statistician can be very successful, each one playing his or her game! I am confident I can have at least a moderate amount of success, even if I confine my investing to a still narrow circle of competence: 1) it was Mr. Buffett himself, who advised that what really matters is not the ampleness of one’s circle of competence, but the knowledge of its boundaries and the discipline not to stray outside of them, right? 2) I hope my circle of competence will get larger and larger in the future. 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

On the contrary! Imo, they should be praised for taking a defensive approach! Anyway, let’s put opinions aside for a moment. What really matters is they have the strength to behave like anyone should behave, except that no one else has the strength required to do so... It is anyone’s duty to assess risk, and to choose the proper course of action accordingly. When your judgment hints at a “high risk environment”, you must accept a 6.5% return, and not reach for yield, or try to outperform the market. It really doesn’t matter all that much if your judgment will be proven right or wrong. Because, most probably, sometimes it will be proven right, and sometimes it will be proven wrong. It is the discipline that matters. And we all know that, but we all experience great difficulties going from theory to practice… well, the best practitioner I know of is, without any doubt, 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

At the link below you can find the full transcript of Q4 2012 conference call: http://seekingalpha.com/article/1186581-oaktree-s-management-discusses-q4-2012-results-earnings-call-transcript?source=email_rt_article_title 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

Once again I know many of you will boo me… but once again I must acknowledge how much in fact I do agree with what Mr. Biglari writes and with how he operates. Take, for instance, the following quote from his latest shareholders letter: That’s exactly why I understand and believe in “opportunistic and strategic thinking”. Now, another quote from the same letter: That’s exactly how I think about my still very narrow ‘circle of competence’. 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

Good Q4 2012 for OAK. Find the results 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 Oaktree_Capital_Group_LLC_Announces_Fourth_Quarter_and_Full-Year_2012_Financial_Results.pdf

Some short positions not only might limit drawdowns, which don’t concern me a lot, since I work only with equity, they also diminish opportunity costs. And that, as far as I am concerned, is key! Listen, I think the art of Buffett and others, you referred to before, is really nothing but a deep and “intimate” knowledge about how some businesses work. If you possess that knowledge, you can judge their future prospects better than the market, and therefore take advantage of the fact that the market might repeatedly price them in a wrong way. For instance, I am truly convinced the market is unable to price correctly “machines that can compound capital at high rates of return for many years into the future”, to pay BV for something like FFH is madness. Now, let’s say that I know more or less 20 of those compounding machines very well. With the only exception of FFH, I believe all of them will see the price of their stocks come down in a market correction. And here is my current allocation of capital: 100% of what I would like to have invested in FFH, 50% of what I would like to have invested in other compounding machines. You see? It is the opportunity to buy more of an outstanding business at even lower prices, that I don’t want to give up! I don’t care about drawdowns! The insurance I buy is against opportunity costs that might be too high! Now, let’s say Mr. Buffett and others know 1000 compounding machines, instead of 20. If I know 1 in 20, that I have the confidence to be already 100% invested, Mr. Buffett would at least know 1000 / 20 = 50, let’s say 30 such companies! More than enough to fill a whole portfolio of long only investments. That’s why I think that the so-called ‘circle of competence’ is very important. The wider your circle of competence, the less your need for insurance buying. Because, if you have a portfolio of investments, the return of which will be almost unaffected by whatever the market does in the future, you will incur no opportunity cost. When the opportunities arrive, you just might switch from your current holdings to those new and better bargains. For instance, right now I am 50% invested in LMCA. Should a market correction come, I am positive the LMCA stock price will decline, offering me an even better opportunity. Vice versa, the FFH stock price might hold its current level or even rise a bit in a market correction. Therefore, I will be able to shift some capital from FFH to LMCA. Actually, if I knew 5 FFH, I would not need any insurance at all. And I would be invested 100% long. :) 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, actually I hold very little cash. But I do hold some short positions. Maybe, you are right from a statistical point of view. But the businessman perspective that I always hold very dear (because is what I think I really know and understand) advise me otherwise… Never, not in a single instance, my firm’s engineering works caused any problem from inception (2004). They always adhered to the highest quality standards, and were always delivered on time. Yet I have always bought insurance, which has always been a net loss for my firm, and I will continue to do so nonetheless. I will never do anything (at least not in this world :) ) without buying some insurance. Generally, I don’t like the mutual-fund business model. I think it has some serious flaws. I look for great businesses that I am sure I understand much better than the market. The fact is simply I am convinced great businesses are always led by outstanding capital allocators. Because I understand and believe in “opportunistic and strategic thinking”, while vice versa I don’t believe in “business-plans” or in “star CEOs”. 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 almost impossible to overpay the truly extraordinary CEO… but the species is rare.” - Warren E. Buffett 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