giofranchi

Interesting “montage” piece by Mr. David Hay. giofranchi 575_eva11.30.12na.pdf

It is a bit curious to me that when FFH traded at $370 almost nobody wanted to look at it… Now that it is trading at $350 everybody seem to be very interested to invest in FFH! I have increased my firm’s investment in FFH, but my view on the merits of the investment has not really changed. FFH has the know-how and the culture to compound capital at very satisfactorily rates of returns, while running very low risks, for the next 20 years. It seems to me that, if you invest in FFH, those merits are almost the same, whether its shares are traded at $350, or they are traded at $370. :) giofranchi

I agree, I think it is a very good piece. But… it seems to me that it fails to address the most crucial questions of all: how much capital to put into stocks today? And what to do with the rest of it? He makes this example: “Let’s say you think equities are priced to generate 5% real.” I understand that example is very useful to explain Exhibit 7, but what about the present situation? Previously he stated: “GMO’s current S&P500 forecast is 0% annually”. So, if I read Exhibit 7 correctly, when equities are priced to generate 0% real, it doesn’t really matter whether financial repression lasts 5, 10, or 20 years: your % weight in stocks should be 0 anyhow. Right? But let’s make a more optimistic scenario for stocks, let’s assume the S&P500 is priced to generate 4-5% real and financial repression lasts 20 years. Even under these conditions you should not allocate to stocks more than 50%-60% of your capital. So, two considerations: 1) How many on this board are 40% out of stocks? I guess almost nobody. 2) Even if you think it is right to be 40% out of stocks, where else to put your money? From the beginning of the piece it is very clear that bonds are not the place to be, and cash will lose its purchasing power. Gold? Well, if you look at gold as cash that cannot be printed, maybe 5-10%… You are still left with 30% of your capital to allocate… where?! It doesn’t seem to me Mr. Montier answered that question satisfactorily enough. giofranchi

muscleman, I think that during the Q3 2012 conference call they said to have increased reserves by $43 million (if I remember well) for the quarter, to cover all the claims they expect to pay during the next two years, due to the commercial motor liability contracts. Those contracts are now in run-off. So, yes, I agree those losses could be seen as a one-time charge. But, be careful: GLRE writes short-tail contracts, so it seems to me that every underwriting decision they take, if it is a bad one, could lead to a “one-time charge”… Sum together all those “one-time charges” and you can lose a lot of money! I think they must improve the underwriting side of the business. And the underwriting worries me much more than the investments. giofranchi

Latest White Paper by James Montier. giofranchi The_13th_Labour_of_Hercules_Capital_Preservation_in_the_Age_of_Financial_Repression.pdf

Young guys dont have a clue. We know Rust Never Sleeps, down by the river. Only love can break your heart, when you have a heart of gold, and fell in love with the Cowgirl in the Sand. Well Uccmal, I am young, but I was On The Beach and I saw Cortez The Killer coming with a Powderfinger, and it looked Like an Hurricane. I said to my love: “See The Sky About To Rain”, she answered: “Don’t Let It Bring You Down”, I said: “Tell Me Why”, she answered: “because you are a Soldier and I Am The Ocean”, and I said: “I Believe In You”. ;D giofranchi

IceCap Asset Management Global Markets November 2012. giofranchi IceCapAssetManagementLimitedGlobalMarketsNovember2012.pdf

Please, take a look at the "Solid As An OAK" presentation in attachment. I have found it to be very interesting. :) giofranchi Solid-As-An-OAK.pdf

Just bought more LRE shares. It is a pleasure to average down, when I don’t have doubts about the quality of the stuff I am purchasing. :) giofranchi

Thank you for this insight! Very interesting. I am not a JCP shareholder, but I have a great deal of respect for Mr. Ackman and I would like to see him successful in his JCP endeavor, as he was in many others before. giofranchi

Well, I have not done any homework on linta yet. But I will surely do. Thank you both rimm_never_sleeps and Sportgamma! giofranchi

No, I hadn't watched it yet! Thank you very much again! :) giofranchi

Hi Sportgamma, actually I tried to give a value to their cable operators business (Starz), while admitting that valuing their portfolio of investments is hard. And the reason is exactly what you have written: Anyway, their track record as value creators is extremely good (just yesterday Cristopher1 suggested me to read “Cable Cowboy”, which I have bought and contains this amazing feat in the first chapter: TCI share price enjoyed a 45% CAGR from 1974 to 1997! Awesome!) and I said I am just confident they will unlock much value from their current portfolio of investments going forward. In attachment you find the list of all their investments as of September 17,2012: “Liberty Media Corporation owns interests in a broad range of media, communications and entertainment businesses. Those interests include subsidiaries Starz, LLC, Atlanta National League Baseball Club, Inc., and TruePosition, Inc., interests in Sirius XM Radio Inc., Live Nation Entertainment, Inc. and Barnes & Noble, Inc., and minority equity investments in Time Warner Inc., Time Warner Cable Inc. and Viacom Inc.” A sum of the parts analysis might be possible, but certainly is not easy to do! For instance, I think TruePosition has a very bright future, it is an asset I like very much to own. But how to properly value it? They have a portfolio of high-growth companies and they can afford to invest that way, because of a lifetime of experience in the media sector, which gives them a true competitive advantage. But what about me? I confess I don’t feel I am very good at valuing high-growth businesses in the media sector… Like most of my investments, I think the business is good, I think the sector has bright prospects, I pay very much attention to the price, but finally also LMCA is most of all a jockey bet: I think I am partnering with outstanding individuals. Thank you for the LINTA suggestion: I will surely check it out! giofranchi LMC-Asset-list-effective-9-17-2012.pdf

Yes, very good advice indeed! I will certainly do it asap! Thank you very much, giofranchi rimm_never_sleeps, I have checked out and here is what I have found: Q3 2012: share repurchased $22.3 million, average price $105.72, Q2 2012: share repurchased $95.9 million, average price $85.03, Q1 2012: share repurchased $120.1 million, average price $86.53, Q4 2011: share repurchased $37.3 million, average price $76.72, Q3 2011: share repurchased $50.7 million, average price $62.85, Q2 2011: share repurchased $4.3 million, average price $78.27, Q1 2011: share repurchased $31 million, average price 72.34. Actually, in Q3 2012 the amount of money spent in share repurchases was much lower than in Q2 and Q1 2012, nonetheless they didn’t stop buying back shares. Moreover, the amount of money spent during Q3 2012 in share repurchases was very much in line with the money spent during 2011 for the same purpose ($30.8 million per quarter on average). Even though the stock price in 2011 was much lower. They are constantly increasing their stake in Sirius, so it is reasonable that, after buying a lot of shares back in Q1 and Q2 2012, they decided to allocate less capital to share repurchases in Q3 2012. This is what Mr. Steven Bregman had to comment about LMCA on last August 28, 2012: “The price right now is probably about $104 a share. If I think about a company in terms of the quality of the business platform, and I might say that in terms of cable channels—not cable infrastructure, which he left quite a long time ago and sold to AT&T, which was a fool for buying it from him—that’s on the right side of the content divide. There’s a lot of foment in the media and technology sector. It’s really a very, very high quality business, with a very, very long product lifecycle. It’s got a lot of intangible assets associated with it, a lot of free cash flow. It’s a wonderful business in terms of quality of platform. It is bizarrely priced. It’s really a wonderful investment. In terms of risk/reward profile, I would say that comes near the top in terms of selection.” My best guess is that, if at $104 LMCA was “near the top in terms of selection”, at $109 it might still turn out to be a pretty good investment. As always, though, I would buy leaving a lot of room to average down aggressively, as soon as the market gives me the chance to buy more at lower prices. giofranchi

ItsAValueTrap, it is a bit strange to hear that from you! Aren’t you “shorting stocks that other value investors are long…”?! :) Anyway, a long/short strategy is something completely different from a short only strategy. What you write might be certainly true for a short only strategy, but for a long/short strategy I guess what Mr. Julian Robertson suggests is mostly true: “I believe that the best way to manage money is to go long and short stocks. My theory is that if the 50 best stocks you can come up with don’t outperform the 50 worst stocks you can come up with, you should be in another business.” Also Mr. Templeton was used to going long the best stocks and going short the worst stocks he could find. That’s what also Mr. Watsa is doing. And Mr. Einhorn is extremely clever… I think you can imagine what it takes to be n.3 in the world in any endeavour: ask Mr. Andy Murray what it takes to be the third best tennis player in the world! I play tennis a lot… I can assure it is tough to be the third best tennis player in my tennis club!! ;D Well, Mr. Einhorn is probably the best non-professional poker player in the world today (he ended n.3, because he was defeated by a professional player, who then won the Poker World Series 2012). And he said he plays poker 10 times a year! No, position size is really the last thing I am worried about: the only reason why he can compete with professional poker players is because he is a real master of position sizing and risk managing! giofranchi

twacowfca, thank you for your kind comment! Much appreciated! To judge Mr. Einhorn as an investor, I definitely would suggest to read his book “Fooling some of the people all of the time”. When I read it, I was really impressed by the depth of his research and analysis! I like GLRE, but my firm’s portfolio is more heavily weighted on GLRE than on LRE. And I think that is an imprudence, irrespective of price, because LRE’s business model is much more proven. So, while keeping GLRE as a core position of mine, I will make the right adjustment to my firm’s portfolio, giving more relevance to LRE and a little bit less to GLRE. :) giofranchi

Yes, very good advice indeed! I will certainly do it asap! Thank you very much, giofranchi

Thank you, rimm_never_sleeps! I think that Operating Income is so variable from year to year because of Mr. Malone’s “nice habit” to create value through spin-offs of numerous businesses. Operating Income is generated by businesses Liberty Media possesses in their entirety, as opposed to “Dividend and interest income”, “Share of earnings of affiliates”, and “Realized and unrealized gains on financial instruments”, that are generated by their portfolio of investments. Today the most significant business they possess 100% is Starz, and that’s why the great majority of operating earnings are coming from Starz. Right now Mr. Malone and Mr. Maffei are in the process to spin-off Starz, while they seem intent to purchase the entirety of SiriusXM (of which they already own 49,2%). Also, they usually target high-growth companies: for instance, Starz increased Adjusted OIBDA at a 16,7% CAGR from 2009 to 2012. So, also the operating profits it generated increased much from 2009 to 2012. Given the very dynamic nature of Liberty Media, my only intent was to assign a tentative value to what I would be buying today. Knowing that tomorrow the whole company might be quite different, but also believing that Mr. Malone and Mr. Maffei would always strive and do their best to increase its value at a satisfactory rate. giofranchi

Liberty Media is near 52-week high. And generally I don’t like buying things at 52-week high. LMCA, though, seems to be an exception. Please, take a look at the presentation in attachment: on slide n.4 you see that LMCA’s portfolio is worth $11,540 million at market value. If you subtract $541 million of debt, you are left with an $11 billion portfolio. On slide n.7 you see that operating earnings for the past 12 months were $594 million. Interest expenses for the past 12 months were $33 million, and the tax regimen LMCA is subject to is 28%. That leaves us with a net income for the past 12 months equal to $400 million. If we use a multiple of 6.66, it means we are getting a 15% return after taxes the first year of our investment: $400 million x 6.66 = $2,664 million. Given the fact I am inclined to think that Mr. Malone wouldn’t keep an investment portfolio if he weren’t expecting it to compound at least at 15% a year, it seems to me that, as long as LMCA’s market capitalization doesn’t exceeds $11 billion + $2.6 billion = $13.6 billion, we have got the chance to partner with Mr. Malone at very satisfactorily rates of return on our investment. As of last Friday LMCA’s market capitalization was $13.11 billion. The largest investment by far in LMCA’s portfolio is SiriusXM, which is an impressive business. FCFs it generated during the last 5 years are as follows: 2008 $(552) million; 2009 $185 million; 2010 $210 million; 2011 $416 million; 2012E $700 million. It has already grown very fast, but Mr. Malone thinks there is still a lot more growth that can be accomplished. So, what am I missing here? A very high-quality business, near 52-week high, that gives us the chance to partner with one of the most accomplished businessmen and investors in America, and provides us with an expected 15% CAGR for our investment? Sounds too good to be true! Anyone knows LMCA well? If some of you have followed it for a long time, do you find something wrong with my reasoning? Thank you in advance, giofranchi Q3-12-Conf-Call-Slides-LMC-Final.pdf

Thanks for the input. I agree, they shouldn't be risky in most times, but I am worried about extreme times. Having a large equity position and little cash means that they will be pretty stressed and unable to take advantage of bargains. I would also be worried about rating downgrades and collateral posting having detrimental effects. As far as Einhorn's edge, I think he can outperform the S&P (I would recommend "Fooling Some of the People All of the Time" to get a handle on his edge if you are unfamiliar with his process). Although I am worried about how scale-able his strategy is. Also it appears he did better pre financial crisis when I think his portfolio was a little more catalyst oriented (spin-offs, de-mutualizations, etc.) Now when I look at his portfolio it looks like a lot of low multiple securities (but maybe he sees something I don't?) I have thought about it. The investment side of the business is really the last thing I am worried about. Maybe Mr. Einhorn is not as good an investor as Mr. Buffett, Mr. Klarman, or Mr. Watsa, but one thing I am convinced of: he is an extremely good short seller! And he knows all the dangers and pitfalls of stock investing: if there is a person who won’t fall in the trap of having to post more collateral, that person is Mr. Einhorn. The underwriting side of the business is obviously not proven, it lacks a substantial track record. That’s, of course, a minus. But: how many owner-operator insurance companies you know of that were a disappointing failure? If insurance is all about management, I know of no better management than an owner-operator. I mean, look at, for instance, Geico, when Mr. Buffett started buying the company. It had been badly managed for a few years and was in deep trouble. As far as I know, Mr. Buffett never was in charge of the underwriting operations, he probably merely supervised them and steered the boat in the right direction. Quite readily Geico was back on its feet, and the rest is history. Same story with General Re: we all know it was a real mess, when Mr. Buffett acquired it, but his careful supervision of operations in time worked miracles. Now Gen Re is one of Berkshire greatest assets. My idea is very simple, yet I find it is almost always under-appreciated: “The Eye of a Master, will do more Work than his Hand.” Benjamin Franklin. I might decide to trim my position in GLRE a little bit in the future, but it will remain a core position of mine. giofranchi

Food for thought! Thank you, giofranchi

I know that here twacowfca probably disagrees with me. He wrote that being potentially exposed to super cat losses forces you to think hard about what you are doing, and not to take anything for granted. He also thinks that many “frequency” underwriters are more dangerous, because they tend to deceive themselves, falsely feeling safer, into going on autopilot… Do I interpret your thought correctly? That’s why I think the quality of management is the most important thing: even if they write frequency business, they must always be vigilant and well aware of the downside! giofranchi

Gio, how do you think about the downside here? If they hit a bad cat year and a bad year in the markets, what will happen? Leverage cuts both ways. Well, let’s first address “a bad year in the markets”: Mr. Einhorn is conservatively positioned right now: 100% long and 73% short as of 31-October-2012. Not fully hedged, but almost! Furthermore, with Invested Assets / Surplus nearly 140% they are much underleveraged, if compared to their peers. Also, as far as downside protection is concerned, I always like to a look at how a company fared in 2008: if it survived 2008 almost unscratched, well I judge it hard to die! From Dec-07 to Dec-08 BV per share decreased from $16.57 to $13.39. A 19.2% decrease compared to a 37% decrease of the S&P500. Not bad. Regarding “a bad cat year”, I think it is much more difficult to judge… I like the fact they write 95% high-frequency low-severity business: it seems to me that it mitigates the probability of a huge unexpected loss. And I like the fact that they write less business than their peers: all else being equal, an underwriting loss will have a smaller impact on shareholders equity. But, in the end I guess it all comes down to management: on page 6 of the 2012 Investor Meeting presentation you can find their approach to both Investment and Underwriting. First of all in Investment: Capital preservation on an investment-by-investment basis. First of all in Underwriting: Focus on downside on a deal-by-deal basis. Mr. Einhorn has almost a 20% interest in the company: I am inclined to believe he has chosen the right underwriters to partner with. What’s your thought about it? giofranchi

A sort of farewell letter and a very good lesson on robustness. dcollon, thank you for posting! giofranchi

Portfolio asset allocation on a value basis. giofranchi A-Brief-Update-on-Portfolio-Strategy-Nov-12.pdf