giofranchi

Well, I guess that’s right! But how could it be different? I run two businesses personally every day, and the most important thing I have to do is to judge correctly the behavior and the abilities of my associates. Every time I fail to do that, something bad, or just stupid, happens. And my firm loses money… Simply put, that’s the job of every entrepreneur! Otherwise, as a “passive” investor, you could do like Mr. Murray Stahl suggests: “if you listed all the owner-operators in the world, of which there are more or less 100, they’re in different businesses, run by different people, in different companies, with different mindset. … Almost all trade at big discount to book value.” If you don’t feel like choosing among them, just partner with 100 outstanding managers! giofranchi

Giofranchi, curious, do you tend to look\find the type you are looking for more in the US or Europe? In Europe just Lancashire and Third Point Offshore (which has recently sent my firm a very welcomed Xmas present, declaring a substantial special dividend! :) ). I looked at Pargesa SA, but wasn’t convinced... The rest of my firm’s investments are US or Canada based. I basically agree with Mr. Kyle Bass, when he says that investing in Europe now is like picking nickels in front of a bulldozer… But I don’t trade, I don’t jump from one undervalued security to another. I just buy owner/operators in the investment business (the best business, paraphrasing Mr. Buffett), when they are offered at good prices, and I stick with them. Always keeping a lot of powder dry to average down aggressively, if I get the chance. For anyone who trades, instead, Europe might certainly be fertile ground right now. It is just not a game I like to play. giofranchi

Yes, I think so! But don't worry: you ask and I answer! ;D ;D giofranchi

From gurufocus.com: Period Bought/Sold (Sh.) Qtr. End Shares Avrg. Price Gain (%) 2010Q3 +2,065,000 2,065,000 $50.14 -79.5% 2011Q2 +6,308,300 8,373,300 $43.59 -76.5% 2011Q3 +3,425,000 11,798,300 $26.61 -61.4% 2011Q4 +1,000,000 12,798,300 $18.88 -45.7% 2012Q1 +14,050,200 26,848,500 $15.05 -31.8% 2012Q3 +25,006,200 51,854,700 $7.22 42.1% Shares Bought: 51,854,700 Average Price: $16.98/share -40% Average Costs 51,854,700 Average Cost: $17/share -40% Current Price: $10.26 giofranchi

I agree. "... I didn't like the very last scene of "Other People's Money." It felt tacked on, manufactured, concocted out of a Hollywood studio's knee-jerk need to provide a smileyface ending that was not in the spirit of the film. "Other People's Money" is a four-star movie that loses its way in the last, crucial scene, and for that it loses half a star, but that doesn't mean I didn't enjoy every moment right up until the happy ending, which is the unhappiest moment in the movie." - ROGER EBERT giofranchi

I agree with the PlanMaestro’s thesis that moats are not forever. That’s why I invest in owner/operators, because their moats consist in the abilities of their founder/largest owner/manager. And, among owner/operators, I concentrate on the ones which are in the business of buying $1 bills for 50 cents. Because that is a business which will always be with us and will always be highly remunerative. Partnering with extremely successful capital allocators, when you understand what they do and agree with their strategy, is the safest way I know of for accumulating wealth. (Condition n.1: they must be still relatively young, so that they can go on compounding for a long time. Condition n.2: they must have permanent capital, BRK, FFH, etc.. Condition n.3: if they have float, BRK, FFH, etc., even better!). giofranchi

You are welcome! I have found that position sizing is much of a “personal” thing: what I am perfectly confortable with might sound the dumbest thing on earth to someone else… Hope what I have written makes at least some sense to you! :) giofranchi

That's the reason why, as much as I like Lancashire, I still leave some room to eventually average down! ;) giofranchi Gio, how do you allocate your cash in this situation where it appears like a good/great equity but fully or fairly valued. Say for example you would like to have a 10% holding i.e you would like to average in to 10%. Do you buy an initial 2.5% + add gradually + opportunistically for example or would you buy more or less? My goal is to allocate 15% of my firm’s capital to Lancashire. Right now I am at little more than 7%. It is enough for it to be a very profitable position, if what twacowfca predicts never happens and LRE goes on performing quite satisfactorily. Vice versa, if the so-called bump in the road finally happens, I will double down with much greed… ehm… pleasure! ;D That’s what I usually do with owner-operators, which are the only kind of businesses I invest in: they tend to be such good money machines, that I don’t want to miss the boat, but, at the same time, I want to be able and ready to strike, if chance offers me a home run! giofranchi

That's the reason why, as much as I like Lancashire, I still leave some room to eventually average down! ;) giofranchi

Well, I guess one way is to check the ratio Net Premium Earned / Surplus. If it is lower than average, an underwriting loss will be less detrimental than average to shareholders equity. Also, and most important of all, you must have confidence in the management of the company. You must be sure you have partnered with true achievers. Because insurance is nothing but a promise. And how could you know exactly what management has promised?! Paraphrasing Mr. Buffett, if you are willing to promise silly things, people will find you! :) twacowfca, any thought on this crucial topic? giofranchi Net premium/surplus isn't representative for comparison of insurance companies with different underwriting profiles, because one line of underwriting may be more exposed to large losses than another. So, I guess the question is: how can we compare underwriting profiles? First of all there is “frequency” and “severity”: it seems to me that most of the time frequency business is less risky than severity business. Then what? Is there usually sufficient disclosure to dig deeper and know which kind of frequency or severity contracts each insurer is underwriting? giofranchi

Well, I guess one way is to check the ratio Net Premium Earned / Surplus. If it is lower than average, an underwriting loss will be less detrimental than average to shareholders equity. Also, and most important of all, you must have confidence in the management of the company. You must be sure you have partnered with true achievers. Because insurance is nothing but a promise. And how could you know exactly what management has promised?! Paraphrasing Mr. Buffett, if you are willing to promise silly things, people will find you! :) twacowfca, any thought on this crucial topic? giofranchi

I'm wondering if you might be waiting for a long time? I'm thinking this might be like a Munger type buy where the price is not cheap but over a period of time compared to most it will turn out to be a really good equity because it is just a really well run company with a great manager. I personally have continued to add thinking that as it stands and for a long time frame it's really going to work well. +1 But I am leaving some room to average down anyway. I always do! giofranchi

Well, in the first video Mr. Buffett wouldn’t have explained value better, while in the second video Mr. Icahn couldn’t have been more convincing!! ;D ;D giofranchi

"As I look over the stock market picture for the past seven years it occurs to me that next to liquid capital the investor must have patience and courage. The bad break of the past few weeks is the 7th bad break since 1930. In between each break the market arose to heights that would have permitted several hundred percent profit over the previous lows. Any investor who had the patience to wait for a bad break and then bought could have made much money. Most people do not have the patience to wait for the bad break. The average speculator is tied up in the market to the hilt when the break comes and has no liquid cash for the bargains that prevail." November 19, 1937 - The Great Depression A Diary, by Benjamin Roth Who knows this better than Mr. Watsa? By the way, also Mr. Einhorn is pretty conservative right now: 100% long and 73% short. giofranchi

Hey Frank! I had always known and said that you would have timed the entry point in FFH quite satisfactorily and at your big advantage! If the reasons for that 8% drop were the ones I read about on the board, you also got a little bit lucky… because they were simply idiotic! Good for you!! ;) giofranchi

Opps, I'm sorry... actually that was another thread! You can find it in attachment. giofranchi Greenlight_Re_2012_Investor_Meeting.pdf

WhoIsWarren, as you can see on page 5 of the GreenlightRe Presentation I posted in this thread, their business in 2011 was 95% frequency. Anyway, yours is an extremely valid point! …I will not even be able to say that nobody had warned me… ;D That’s why what I want to see most of all is CAUTION. If they just could get to Investments / Surplus = 175%, Earned Premium / Surplus = 50%, if they could maintain a Combined Ratio around 100% and Mr. Einhorn could get a 10% annualized return from his investment strategy, BV per share would compound at 18%! They “don’t need to do extraordinary things to get extraordinary results”. So, please, rule n.1: always be conservative and watch the downside!! giofranchi

+1 giofranchi PS I won't even try to answer your question about sidecars, because we all know who is really knowledgeable on that topic (among many others! :) )

“One of the things we try and do after an event is come in and take advantage of the pricing. In our industry you want to try and move in the reverse direction from the herd if you can - and it is a very herd-like industry. People tend to just increase levels of risk, more and more and more - then something really big happens, and they go "Oh, better get out of that particular line of business". And out they all go - and then smarter people (hopefully including ourselves) will then go into that niche, or pocket of opportunity as Jonny would say, and take advantage of that.” Mr. Charles Brindle You see? Small and nimble entities, like Lancashire or GreenlightRe should just try to be opportunistic. They should relentlessly try to scan the globe for that “niche, or pocket of opportunity” to get into. And, of course, take advantage of that! I don’t really see how very long dated spreadsheets filled with statistics of past accident rates could really make the difference… I might be wrong, but it seems to me they are somehow in a different business than the one CNA Financial deals with (not very satisfactorily) or Geico deals with (quite satisfactorily!). How to recognize that pocket of opportunity? How to analyze it and be sure it is not a trap? How to finally take advantage of it? Only the right management can tell: they should have proved to be sound and conservative decision makers, sound and conservative risk takers. Of course you must check and try to judge what they are doing: for instance, Mr. Einhorn long/short value based with macro hedges strategy of investing makes great sense to me, and with Investments / Surplus = 140%, and Net Premium /Surplus = 45%, I like the fact that GreenlightRe is very much underleveraged. But in the end I think you should believe you have partnered with the right people, who form the right team, and who will be able to act successfully like Mr. Brindle suggests. Otherwise, I agree with you and I would rather stay away from insurance companies. giofranchi

Of course I had read that interview, but I do not completely agree. Underwriting profitably is much like investing profitably: study Mr. Brindle as an underwriter and study Mr. Watsa as an investor. What they have in common is that they take calculated risks, always trying to understand where the herd is going wrong. They both are successful, because they gather all the facts scrupulously, they analyze them correctly, and they draw the right conclusions. Furthermore, they are able to take advantage of the fact that other people gather facts approximately, perform sloppy analysis, and therefore often draw the wrong conclusions. So, the question is: are Mr. Einhorn and his team in the same league of Mr. Brindle and his team, or Mr. Watsa and his team? Of course, I don’t know. But I have read “Fooling Some of the People all of the Time”, among many other letters and papers he has penciled during his successful career, and I am quite positive of the fact that Mr. Einhorn doesn’t leave anything unchecked! He is among the least approximate persons I know of! And that is something I like and admire. What I won’t be really worried about is size. Look at Lancashire: not big, but a unique underwriter. Vice versa, look at CNA: among the largest P&C insurance companies in the US, but doesn’t really seem to get their act together! giofranchi

I can't tell if this is good underwriting or not. It seems like a sound thesis to me, but they are making decisions partly based upon perceived changes in loss rates. Wouldn't it be better/easier to try to write business based upon changes in price as opposed to expected changes in loss rates? Any thoughts? I think you are right, but I also think Mr. Einhorn & Company are very well aware of it, and are working to improve their underwriting decisions. If I remember well, during that same conference call Mr. Einhorn sounded quite upset about the underwriting mistake they had committed. So, no wishful thinking here! At least, that was my impression from the conference call. giofranchi

Unfortunately, I have just very few of them... Anyway, I will look for the ones I have and post them as soon as I can. giofranchi The letters in attachment are what I could find from 2011. Hope it helps. giofranchi February_14_2011_Letter.pdf BASSKyle_-_Hayman_Capital_Mgmt_Ltr_12_14_2011.pdf Hayman_Capital_Management_Letter_to_Investors_Nov_2011.pdf

Enjoy! http://www.grahamanddoddsville.net/?p=1561 giofranchi

twacowfca, on page 21 of the presentation you find an annualized investment return of 9,6% since formation of GLRE (2005-2011): 2005: 14.2% 2006: 24.4% 2007: 5.9% 2008: (17.6%) 2009: 32.1% 2010: 11.0% 2011: 2.1% 2012 YTD: 10.5% Those are all after fees and expenses. That’s why I think in more normal times Mr. Einhorn might achieve a 10%-15% investment return after fees and expenses. Actually, from 1996 (inception of his fund) until 2006 Mr. Einhorn achieved an annualized return of 29% (I don’t know if before or after fees… :)). giofranchi

Well twacowfca, I know that what you say about Mr. Einhorn and about GLRE is correct, but: 1) Mr. Einhorn is a good investor, not a great one: true, but I think his long/short value based with macro hedges way of investing is very conservative. It might not lead to outstanding results all the times, but it surely is conservative. And I like conservative investing. Actually, I think that conservative investing is the only kind of investing I could agree with. I think those who shoot for the sky still have to learn how to make their capital truly and effectively work for themselves. That is not to say that I admire cowards! I would never leave my capital in very short term bonds, which earn a pittance! 2) GLRE could not write a lot of business, so the leverage they have gotten from their model has not been great: true, but I like a reinsurer which is underleveraged, a 10% decline in the value of their investments means just a 14% decline in the value of their equity, compared to a 25% decline in the equity of their average peer competitor. And that makes me sleep soundly at night! 3) Notwithstanding 1) and 2), they have achieved a CAGR in BV per share of 11.7% from 2004 to 2011. Not bad, if you think that those years were among the most difficult for investing! What’s not to like about 1), 2), and 3)? Please look also at page 39 of the presentation in attachment: if they grow invested assets to 175% of capital, they would still be underleveraged compared to their peers. Earned Premium at 50% of capital is also a conservative number. With investment returns in between 10% and 15% (reasonable for a “good” investor like Mr. Einhorn) and with a combined ratio in between 90% and 100% (reasonable for a “good” underwriter), they would be compounding BV per share in between 18% and 31% annualized. I bought in at book value. giofranchi Greenlight_Re_2012_Investor_Meeting.pdf