giofranchi

tombgrt, you are right and I always like your posts and find something interesting! But that is exactly true for JNJ as well. During their whole history they have been great capital allocators. And they created the largest conglomerate in the healthcare sector worldwide. Also JNJ could be seen as a collection of much smaller businesses with growth potential. But growth is far from assured! Don’t look further than the last 5 years, during which EPS growth has been negative! My point is simply this: both in a $1 billion company and in a $200 billion company the man at the helm is very important. When JNJ gets “lucky” and chooses an outstanding CEO, growth resumes. Vice versa, when the chosen CEO is not that good, growth stalls. Why should it be different for BRK? There is also another point, that maybe is a little bit subtler: JNJ is much more “impersonal” than BRK. JNJ might be just seen as “the healthcare sector”, or better yet as “the best of the healthcare sector”. BRK, instead, is a very personal collection of businesses. I think it is easier for JNJ to find a new very good CEO, than it is for BRK to find the right person to follow in Mr. Buffett’s footsteps… But then again, I might be completely wrong… just food for thought! As long as return on investment is concerned, what are your views on BRK? I mean, 10 years from now? At which rate do you think BRK can go on increasing shareholders equity? And which multiple of BV do you think BRK deserves? giofranchi Thank you for reminding us about how important it is to have a great CEO. There is a limit to success however that constrains most companies: the returns of their industry. Thus JNJ's returns are constrained by the molecular limitations drug companies are facing when they try to develop new drugs, although their nonprescription business has somewhat better prospects. BRK is different. It's one of the few companies that can go anywhere to pick up a good business in a good industry or a piece of a good business through the public markets. Their culture permits and encourages this. Therefore, having a good energetic younger CEO who understands how BRK does it could lead to increasing success for BRK. Never the less, BRK's size does limit potential returns perhaps to about 30% to 40% above the returns of mega cap companies in general. Time will tell. twacowfca, you know very well that JNJ has 3 divisions: pharmaceuticals, devices, and consumer products. Devices are as large as pharmaceuticals, while consumer products are just a little bit smaller. JNJ is a collection of high quality businesses that encompasses the whole healthcare sector. And the healthcare sector is among the industries with the highest growth prospects for the future. I really like JNJ. It is just that I don’t like to invest in a company that is not managed by its founder/owner… This shrinks my investment universe incredibly, and I am well aware of it! Maybe, it is just a flaw of mine. But I don’t trade, I invest. And anyone can talk about moats, competitive advantages, winning strategies, etc., and have different ideas, and different opinions. Let me give you an example that I find illuminating: When I read “Competition Demystified” by Prof. Bruce Greenwald, I found a comparison between MSFT competitive advantages and AAPL’s. Of course, AAPL was “doomed to failure”, while MSFT was going to keep outperforming… Right?! I guess the only problem with that analysis was that Prof. Greenwald didn’t consider the fact Mr. Gates was leaving, while Mr. Jobs was coming back…! The rest, as they say, is history. When you invest, you are partnering with someone for the long run. If you make sure that the partners you choose are great achievers, you will do very fine. Otherwise… you’d much better trade! giofranchi

Mr. Seth Klarman on QE3, Moral Hazard and Financial Risk. giofranchi Seth_Klarman_on_QE3.pdf

tombgrt, you are right and I always like your posts and find something interesting! But that is exactly true for JNJ as well. During their whole history they have been great capital allocators. And they created the largest conglomerate in the healthcare sector worldwide. Also JNJ could be seen as a collection of much smaller businesses with growth potential. But growth is far from assured! Don’t look further than the last 5 years, during which EPS growth has been negative! My point is simply this: both in a $1 billion company and in a $200 billion company the man at the helm is very important. When JNJ gets “lucky” and chooses an outstanding CEO, growth resumes. Vice versa, when the chosen CEO is not that good, growth stalls. Why should it be different for BRK? There is also another point, that maybe is a little bit subtler: JNJ is much more “impersonal” than BRK. JNJ might be just seen as “the healthcare sector”, or better yet as “the best of the healthcare sector”. BRK, instead, is a very personal collection of businesses. I think it is easier for JNJ to find a new very good CEO, than it is for BRK to find the right person to follow in Mr. Buffett’s footsteps… But then again, I might be completely wrong… just food for thought! As long as return on investment is concerned, what are your views on BRK? I mean, 10 years from now? At which rate do you think BRK can go on increasing shareholders equity? And which multiple of BV do you think BRK deserves? giofranchi

Here is where I believe you are mistaken. BRK already has these outstanding managers. They are the ones that truly run the firm, they broadly report to WEB, but he gives them total freedom in their operations. I feel you have not given his lieutenants enough credit. I confidently feel that if one of his lieutenants like Jain, Abel, Nicely, or Weschler became CEO, BRK would continue to prosper. I do not know anything about FFH, so I don't have an opinion vis a vis BRK. Palantir, of course you might be very well right! I have never actually managed something as big and as complex as BRK is today! Not even something that is 1/1000 of BRK! So, I cannot be sure… All I can do is to try an educated guess with my business knowledge and experience. To paraphrase Mr. Munger, BRK’s success lies in their abilities (his and Mr. Buffett’s) to constantly shift capital from failing businesses to thriving businesses. And I tend to believe it is true. Mr. Schumpeter’s “creative destruction” is becoming more and more relevant in today’s hyper-competitive world, and the best way to deal with this reality is to embrace and to apply Mr. Munger’s lesson. I see those outstanding managers you referred to as a part (maybe the most important part!) of each thriving business Mr. Buffett acquired. But neither Jain, nor Abel, nor Nicely, nor Weschler have ever applied Mr. Munger’s lesson. At least, not to such a complex organization as BRK is today. Each one of them knows extremely well his own business… but what about the remaining 74 businesses of the BRK family? Can you be sure whoever succeeds Mr. Buffett will be able to take the right decisions in shifting capital among 75 different businesses? And among all the other acquisitions that will come in the future? It will be a collection of businesses studied and put together, during the course of a lifetime, by an extraordinarily gifted individual… his successor’s task won’t be an easy one! Most of all, the more I study the performances of outstanding business founders/owners the more I realize that each one of them achieved extreme success in his or her own way. Each one of them did what really worked for him/herself, what most fitted his or her own personality. Not one of them copied another, and was as successful! They were all originals. So, I cannot believe in replicating Mr. Buffett, or in finding someone who will be so intimate with BRK in the future, as Mr. Buffett is today. Please, remember that I am not talking about a good and safe business: BRK will always be a good and safe business! I am talking about outperformance (very, very, very tough!). As I said at the beginning, I might very well be completely wrong! But it is a long time that I have been studying the lives, the habits, and the achievements of outstanding business founders/owners, and I hope my perspective could at least be some food for thought! giofranchi

i think the investments per share question misses the point gio was trying to make. which is simply that, ex the short hedges & the associated short term unrealized losses & ex the rimm losses fairfaxes long only equity portfolio has appreciaTED ABOUT 20 ANNUALIZED FOR THE 9 MONTHS ENDED 9-30-12. not too shabby on the long side. timing on the short side has obviously hurt. ( and my kitten just stepped on my CAPS key, which i'm not inclined to edit... :-\ Ugh...I can't stand this type of argument...it's like saying, "Well if I didn't have a large portion of my portfolio in Enron, I'd be up 40% for the year!" My original point was actually a little bit different: I wanted to point out how the RIM investment had been over-publicized. I started saying that a 14% annual return was achieved by FFH on the long side, RIM included. So, anyone who was too worried about the losses incurred with the RIM investment, just missed the whole picture. On the short side, maybe the timing wasn’t perfect. But I really couldn’t care less… I agree 100% with Mr. Watsa’s strategy and I am willing to be patient together with him. I am sure I am in very good company! :) giofranchi Giofranchi, you have a good point. This view on the investing side is similar to tallying up an insurance company's losses into two columns: attritional and catastrophe. The cat losses will be lumpy, but a negative trend in attritional losses is much more cause for concern than an occasional, but manageable catastrophe loss. :) twacowfca, I hadn’t thought about it that way, but as always yours is a very good comment and comparison! By the way, what’s your take on the damages Sandy is going to cause? Thank you very much, giofranchi

i think the investments per share question misses the point gio was trying to make. which is simply that, ex the short hedges & the associated short term unrealized losses & ex the rimm losses fairfaxes long only equity portfolio has appreciaTED ABOUT 20 ANNUALIZED FOR THE 9 MONTHS ENDED 9-30-12. not too shabby on the long side. timing on the short side has obviously hurt. ( and my kitten just stepped on my CAPS key, which i'm not inclined to edit... :-\ Ugh...I can't stand this type of argument...it's like saying, "Well if I didn't have a large portion of my portfolio in Enron, I'd be up 40% for the year!" My original point was actually a little bit different: I wanted to point out how the RIM investment had been over-publicized. I started saying that a 14% annual return was achieved by FFH on the long side, RIM included. So, anyone who was too worried about the losses incurred with the RIM investment, just missed the whole picture. On the short side, maybe the timing wasn’t perfect. But I really couldn’t care less… I agree 100% with Mr. Watsa’s strategy and I am willing to be patient together with him. I am sure I am in very good company! :) giofranchi

shalab, I am not sure I understood your question correctly: with investments/share you mean the value of the Portfolio investments divided by the number of shares outstanding? If so, why should it have changed? As far as I know, investments/share could increase in four ways: 1) Increasing shareholders’ equity 2) Increasing insurance contract liabilities (increasing float) 3) Increasing debt (or issuing more preferred stocks) 4) Reducing the number of shares outstanding None of them has changed much during the first nine months of 2012. Actually, a Cash Flow Statement could be derived by the changes that occurred in the Balance Sheet from December 31, 2011 until September 30, 2012. And see exactly how investments increased by $263 million. But I guess that is not what you are asking… right? giofranchi

Well, if it really is so, then I don’t like it. When I invest, I want to know exactly whom I am partnering with. If Mr. Buffett is no longer essential to BRK, then I like BRK much less than I used to. I just don’t believe in sustainable outperformance, without an outstanding manager who achieves it. Look, for instance, at JNJ: it is probably the large cap company with the best historical track record in the world, and yet it is clearly underperforming (I am talking about revenue and earnings growth, not share price). Compare it, if you want, with NVS, whose Chairman Mr. Vasella is one of the most accomplished individuals in the pharma industry today. JNJ is trailing NVS both on a revue growth and on an earnings per share growth basis, both on a 5 year and on a 10 year basis. My problem with BRK is only one: to make a $200 billion company grow at a very good rate, an outstanding underwriter is not enough, an outstanding stock picker is not enough, an outstanding businessman is not enough: you need all three. Mr. Buffett is that extraordinary individual, no doubt about that. But he is 82. I know that you all disagree with me, but I prefer FFH, which is an $8 billion company, is led by Mr. Watsa, who is 20 years younger than Mr. Buffett, and is selling at book value. giofranchi Giofranchi, you have nearly persuaded me to reconsider my allocation to FFH. Let me recap the history of about 80% of our portfolio for the last six years. This great majority has been in shifting proportions of LRE, FFH, and BRK. The proportion of LRE has been rising with their price and reinvested dividends while the combined value of FFH and BRK has also risen nicely, especially as we have shifted the allocation between them opportunistically. Most of the time, that allocation has favored FFH. However, for the last 15 months, almost all has been in BRK for reasons that have been discussed. Thanks to your comments, the time may be drawing nigh to reconsider our allocation to FFH. Thank you very much. Well, SharperDingaan has just pointed out something interesting: Most would look for next weeks East Coast weather to generate some very big claims, & a forcing of FFH's P/BV done further because of the re-insurance exposure. If so, I think it could be the right opportunity to start (or to add to) a FFH investment. We will see! giofranchi

Frank, No! It was not me! ;) I try to have no feelings about businesses… ;D No, really: I don’t care how FFH will perform next year or in 2014. All I care about is what they are doing. And I don’t like exposure to market risk, when general stock prices are high and debts are still dangerously unmanaged all over the developed world. Much better to be patient and to concentrate on underwriting profitably. It is just as simple as that. That's why I like what they are doing. Of course, I also don’t jump in and out of stocks. I am sure you are much better than me at doing that, and so you will time the re-entry point in FFH quite satisfactorily! Good for you! :) giofranchi Anyway Frank, I think it might be worth repeating Mr. Watsa’s answer to Mr. Shezad, because it is a great answer, and because it should give some food for thought to all who think they will have a chance in the future to jump on board at a price well below book vale, just because FFH has traded at a discount to book value in the past... Mr. Watsa: “Yes, that was -- Shezad, that's a good question. And so the first thing, just to say you is we've always focused on the long-term and when we went through our 7 lean years, Shezad, we were turning around our company. We were turning around Crum & Forster and the -- take reinsurance and all of that, and that took sometime to turn it around. Today, our companies are in excellent position, they're underwriting-focused, they are well reserved, they've cut back in the soft markets and they are well- positioned to expand significantly at the right time. And then as we are expanding today, you're seeing that in Zenith, and you're seeing it in Crum & Forster, you're seeing it on Odyssey. And the Canadian market's always lag -- have lagged in the past and you'll see it in time in Canada. So underwriting operations are very well-positioned, and our investment philosophy and position -- they're always long term. So when we had credit default swaps in the past, it took a few years for it to work out and as you know, we made a lot of money. And so right now, it's very important not to reach for yield because if you do reach for yield, if you put money into the stock market at these prices, you could suffer permanent losses. We'll take temporary losses but we don't like taking permanent losses. So I don't think we'll be at a position where our results will be poor for a long period of time but you're right for the last year and a half, it hasn't been good. But our results for year ending 2011, for the 5 years, is among the best in the business and of course, for the 26 years ending 2011, it's better than anyone else in our industry. So we're focused on the long-term and we continue, we've always been focused on the long-term, and continue to be focused on doing well for our shareholders always.” giofranchi

Well, if it really is so, then I don’t like it. When I invest, I want to know exactly whom I am partnering with. If Mr. Buffett is no longer essential to BRK, then I like BRK much less than I used to. I just don’t believe in sustainable outperformance, without an outstanding manager who achieves it. Look, for instance, at JNJ: it is probably the large cap company with the best historical track record in the world, and yet it is clearly underperforming (I am talking about revenue and earnings growth, not share price). Compare it, if you want, with NVS, whose Chairman Mr. Vasella is one of the most accomplished individuals in the pharma industry today. JNJ is trailing NVS both on a revue growth and on an earnings per share growth basis, both on a 5 year and on a 10 year basis. My problem with BRK is only one: to make a $200 billion company grow at a very good rate, an outstanding underwriter is not enough, an outstanding stock picker is not enough, an outstanding businessman is not enough: you need all three. Mr. Buffett is that extraordinary individual, no doubt about that. But he is 82. I know that you all disagree with me, but I prefer FFH, which is an $8 billion company, is led by Mr. Watsa, who is 20 years younger than Mr. Buffett, and is selling at book value. giofranchi

berkshiremystery, I sincerely hope all the best to your friend and I applaud your willingness to give him support, in his time of need. You are a caring person. God bless you, giofranchi

Hi Uccmal, I have just checked and found out Mr. Watsa bought 26,848,500 shares of RIM, from 2010Q3 to 2012Q2, at an average price of $26.07. So, FFH invested $700 million in RIM: just in between your figure and mine! By the end of 2011Q4, though, FFH already owned 12,798,300 RIM shares, and they were trading around $19. So, by the end of 2011Q4, FFH’s investment in RIM was worth $243,167,700. Later, in 2012Q1, Mr. Watsa bought another 14,050,200 shares at an average price of $15.05, a total investment of $211,455,510. As of yesterday, FFH’s investment in RIM was worth: $7.57 x 26,848,500 = $203,243,145. In 2012 FFH has lost, only in the RIM investment: ($243,167,700 + $211,455,510) - $203,243,145 = $251,380,065. If you just add back those millions to the $523.7 million of equity gains, you get to an annual return of more than 20% for all the other equity holdings of FFH, Dell included! :) Please, let me know, if you have different numbers! I clearly know nothing about 2013 or even about 2014, but if I could hold just one investment for my son with a 10 years horizon, that investment would be FFH. ;) giofranchi

Who knows, right? I guess both are true: Net Premiums Written increased 5.6% for the third quarter and 9.5% for the first nine months of 2012. So, maybe the market is actually hardening: Mr. Watsa has always said they wouldn’t increase revenue, unless rates improved materially. But I tend also to give due credit to Mr. Barnard’s excellent work: he proved himself many a time while at the helm of OdysseyRe, and now, as supervisor of all insurance operations, I think he is doing well and will continue to perform quite satisfactorily in the future. One more thing: it is easy to dismiss investment returns in a quarter when they were negative… but, please, look at Equity and equity-related investments for the first nine months of 2012: FFH gained $317.1 million in Realized gains and $206.6 million in Unrealized gains, for a total gain of $523.7 million out of a portfolio worth more or less $5 billion. That is a 14% annual rate of return in a year when FFH has lost almost 2/3 of its $900 million investment in RIM. I don’t know how you read those numbers, but to me it seems that Mr. Watsa and his team are going on working their magic on the investment side of the business as well. giofranchi

Frank, I understood you were teasing me… I didn’t make the same mistake I made replying to valuecfa!! ;D Maybe, my answer was too serious nonetheless… I just wasn’t in the vein of joking… sorry! :( giofranchi

+1 giofranchi

I don’t agree. “We continue to maintain our equity hedges and have cash of approximately 33% ($8.1 billion) in our investment portfolios as we are not being adequately paid to take risks with markets at current levels.” In the meantime, the combined ratio has fallen to 95.4%. While not being adequately paid to take risks with markets at current levels, my own firm is focusing on improving its operations. Staying very defensive with its investments and hoarding up cash. The same is true with FFH, and obviously I like this policy. I don’t judge a quarter by the amount of earnings declared, but by the strategy put in place. giofranchi As Tom mentioned, it was a bit of sarcasm on my part Oh… How stupid!!! I completely misunderstood! The fact is, if you compare Q3 2012 with Q3 2011, net earnings of $34.6 million compared to net earnings of $973.9 million, the quarter just ended might actually be labeled “terrible”… Anyway, I should have understood the sarcasm… It is just not a fine day for me… Too many people who don’t do what I ask them to do… or do it superficially… I pay them to solve problems, not to give me problems, right?... Sorry, my mind right now is somewhere else… giofranchi You might profit by reading a book, The Toyota Way, that describes the way Toyota became transformed into a problem unearthing and problem solving organization. I'm wired this way, but most people are not. One of their principles: genchi genbutsu, emphasizes getting up out of one's desk and going to see for yourself what's wrong at the source. That's often the first step to begin the problem solving process. :) Ok, done. I have just bought it! Thank you very much! :) giofranchi

Frank, No! It was not me! ;) I try to have no feelings about businesses… ;D No, really: I don’t care how FFH will perform next year or in 2014. All I care about is what they are doing. And I don’t like exposure to market risk, when general stock prices are high and debts are still dangerously unmanaged all over the developed world. Much better to be patient and to concentrate on underwriting profitably. It is just as simple as that. That's why I like what they are doing. Of course, I also don’t jump in and out of stocks. I am sure you are much better than me at doing that, and so you will time the re-entry point in FFH quite satisfactorily! Good for you! :) giofranchi

I guess Investments in associates are not quoted on any Exchange (I am not sure and I might be wrong), so I don’t really know how their book value is calculated. But I think fair value should give the idea of how much FFH thinks those investments are actually worth. But, please, look at Common stocks: at book (marked to market) they are worth less than cost. Actually, I believe Mr. Watsa thinks they are worth much more than cost! So, which numbers should we use to calculate “fair book value per share”? All in all, I think it is just better to stick to book value per share, while also being aware of the fact that some investments have the potential to increase it substantially in the future. giofranchi

I don’t agree. “We continue to maintain our equity hedges and have cash of approximately 33% ($8.1 billion) in our investment portfolios as we are not being adequately paid to take risks with markets at current levels.” In the meantime, the combined ratio has fallen to 95.4%. While not being adequately paid to take risks with markets at current levels, my own firm is focusing on improving its operations. Staying very defensive with its investments and hoarding up cash. The same is true with FFH, and obviously I like this policy. I don’t judge a quarter by the amount of earnings declared, but by the strategy put in place. giofranchi As Tom mentioned, it was a bit of sarcasm on my part Oh… How stupid!!! I completely misunderstood! The fact is, if you compare Q3 2012 with Q3 2011, net earnings of $34.6 million compared to net earnings of $973.9 million, the quarter just ended might actually be labeled “terrible”… Anyway, I should have understood the sarcasm… It is just not a fine day for me… Too many people who don’t do what I ask them to do… or do it superficially… I pay them to solve problems, not to give me problems, right?... Sorry, my mind right now is somewhere else… giofranchi

I don’t agree. “We continue to maintain our equity hedges and have cash of approximately 33% ($8.1 billion) in our investment portfolios as we are not being adequately paid to take risks with markets at current levels.” In the meantime, the combined ratio has fallen to 95.4%. While not being adequately paid to take risks with markets at current levels, my own firm is focusing on improving its operations. Staying very defensive with its investments and hoarding up cash. The same is true with FFH, and obviously I like this policy. I don’t judge a quarter by the amount of earnings declared, but by the strategy put in place. giofranchi I'm confused. Is this some kind of devious "double sarcasm" post by Giofranchi? :O tombgrt, my judgment is very simple: I like that they are trying to preserve capital on the investment side of the business, while striving to improve underwriting performance. I think it is the right strategy to employ. And I like it because, even though I am fully aware of the fact that in future quarters earnings will continue to suffer, I think it fits perfectly well with the motto “short term pain for long term gain”. Of course, I might be mistaken! giofranchi

I don’t agree. “We continue to maintain our equity hedges and have cash of approximately 33% ($8.1 billion) in our investment portfolios as we are not being adequately paid to take risks with markets at current levels.” In the meantime, the combined ratio has fallen to 95.4%. While not being adequately paid to take risks with markets at current levels, my own firm is focusing on improving its operations. Staying very defensive with its investments and hoarding up cash. The same is true with FFH, and obviously I like this policy. I don’t judge a quarter by the amount of earnings declared, but by the strategy put in place. giofranchi

Ross812, Bidvest, UPS, and Intel are wonderful businesses. No doubt about that. This is your very interesting description of Bidvest: To me it sounds a lot like BRK! An outstanding manager who chooses and acquire businesses run by other outstanding managers, and let them work their magic. The common denominator always remains the same: outstanding manager. And what about UPS? It is extremely hard to stay among the most efficient civil engineering firm in the metropolitan area of Milan, Italy. Can you imagine how unbelievably hard it must be to stay the most efficient courier worldwide? Of course, they enjoy monstrous competitive advantages! But I would sleep much better at night, if I knew an outstanding manager is at the helm of a machine that must constantly keep such an unbelievable level of efficiency! Finally, Intel: Invest 10B a year? And who chooses how? We all know how easy it is to throw away money! One or two dumb decisions and all of a sudden you find yourself in a deep hole… Better be sure that some outstanding manager is in charge of handling those billions! This is not to say that Bidvest, UPS, and Intel are not wonderful businesses: they most surely are! Instead, it is just to point out that true outperformance, even for mighty machines like those three, hardly can be achieved without the right management. giofranchi

Giofranchi, "Ask, and you shall receive" :) RLI has a great record. However, there is one aspect of their business that is difficult if not impossible for me to understand: surety. The most interesting booklet, The First 25 Years of Fairfax, tells how The investment Group led by Prem was able to take over the nearly insolvent operations of Markel, Canada, that had almost gone under because their main competitor had drastically underpriced their policies. Almost immediately after the sale, that competitor went bankrupt, and the rates on the policies Fairfax was writing went through the roof. Within a year or so, FFH's BV doubled, then soon doubled again, FFH was off to the races, making acquisitions and expanding the business. Then something unexpected happened: the original business acquired from Markel suddenly lost almost all it's NAV, but that was not fatal because the other operations were doing so well. The cause of the monster loss was a tiny part of the original business. It was so small, accounting for only about 1% of premiums written, that Prem didn't even know about iJt. What did that tiny line of business do? It wrote surety. Its loss was about 100 times the annual premiums they wrote! twacowfca, I am seriously beginning to rely on your help way too much!! ;D And I agree that The First 25 Years of Fairfax is very interesting! In 2011 I traveled all the way to Toronto, to attend the AGM of FFH, and also to get my hands on a copy of that booklet! It was undoubtedly worth the effort! Thank you, giofranchi

Good summary of the risks. A couple of quibbles, though. It's possible that their current BV is about 1.6 now if Q3 is a low loss quarter. We might guess that it is more likely than not that Q4 will also be low loss because we are almost to the end of October, and their greatest exposure, windstorm, is very low this time of year. If Q4 shapes up that way, current price/BV At EOY plus any special dividend may be about 1.5. This is speculative, of course, and it's not good to count chickens before they are hatched. The point is that it doesn't take long to close the gap between P/BV if the expected return continues to match their long term record. Two more "average" years after a good Q3 and Q4 could get them within spitting distance of price parity with book value -- that is assuming that the price doesn't increase. :) :) One more point. Lancashire is a gem. They have nice niches where they are lead underwriters. I would be surprised if they did not continue to do nearly as well with Brindles hand picked and personally trained staff for a few years at least if something should happen to Brindle. However, their corporate culture could be more subject to losing its edge over time if they lost their CEO. I hope I haven't confused people with my comments regarding the desirability of having a terminal value in a DCF present value analysis. That is the common methodology to simplify the analysis. In real life, changes that are associated with regression to the mean are usually gradual. Syndicates at Lloyds that have good niches (the reference for valuing LRE) tend to retain their premium value even when they lose a key person because the broker and client relationships are not easily broken. One such well regarded manager of Lloyds syndicates, Hardy's, lost about half its book value after the 2011 - 2012 catastrophes. Yet such was its regard, that it was taken over at a price of more than 1.5 times its remaining BV. :) I agree 15 quarters is over conservative. In fact, when writing my previous post I considered that bv would likey be reported roughly 5% higher in a few weeks. My job is to allocate money to provide an absolute return which means i have to avoid a permanent loss. If something was to happen to Brindle, i would not be suprised to see an immediate 20% drop and the market would require the company ex-brindle to perform for several years in order to regain its premium. I absolutely believe Lancashire is a gem, I'm just hesitant to allocate too much capital to such a specialized company with key man risk. You can see my investments in my signature. I like dividends, and quality but I'm not afraid to put a lot of money in one idea if I see a margin of safety. Bidvest is currently 30% of my portfolio. Chesepeake preferred are almost 20%. Bidvest is also a great company, led by another best of class CEO, Brian Joffe. Lancashire, though at 1.6 P/B looks like the better buy, however, than Bidvest at 3.1 P/B. as they have similar ROE, if I'm not mistaken. Also, I think Bidvest has a lot more debt than LRE. In truth, companies with fairly young and healthy owner/operator founder CEO's with most of their personal assets in their businesses, do much better than other companies. If these companies were removed from the S&P 500, the remaining businesses would have had pitiful returns, the worst asset class of all. The life expectancy of apparently healthy people like Brindle and Joffe is 99%+ per annum. Plus where would they go? Sell their pride and joys that are a pleasure to manage and go to work as a hired hand at a mega cap company with more politics than the US election? Ross812, I understand the “key man risk” you are talking about. Unfortunately, I don’t really believe in outperformance, without an outstanding manager who achieves it. To look for businesses that could go on autopilot and outperform means to shrink the investment universe to just 2 or 3 ideas… And even those extremely rare exceptions might turn out to be nothing more than the proverbial philosopher's stone… I believe outperformance is achieved by hard-wired and intense entrepreneurship and through the will of very driven individuals. Mr. Brindle is 49 and, as twacowfca has rightly pointed out, just two years of “mediocre” performance will be needed to close the gap between price valuation and BV. Then your downside will be protected. I think it will take really a tragic event for Mr. Brindle to leave LRE within two years… Anyway, I like to spread the “key man risk” among 5 to 10 outstanding managers. That’s why I am curious about RLI. I see you have an investment in RLI: does a thread already exist about RLI? If not, why won’t you start one? giofranchi

I hesitate to suggest an opportune time for purchase of their stock. They have done so well that delay has not often been rewarded. However, there are times when Mr. Market becomes disenchanted with LRE, usually when they have a loss that's out of sequence with most of the industry. Early this year, LRE had a bigger piece of Costa Concordia than their peers. No big deal other than to remind the market that they don't walk on water. However, that was reason enough for Mr Market to waltz with some other pretty faces for a while until LRE regained favor. They are a little idiosyncratic. Their stock rose during the financial meltdown. Last year, they made a decent profit and paid another special dividend when few cat exposed companies had much if any profit. This year they are a little behind their own curve, but catching up. I wouldn't buy their stock unless I had a long term perspective. For what it's worth, they often advance a few weeks before a special dividen, then pull back a little before the dividend goes ex. Then drop as expected on the ex dividend date. Then regain that drop within a few weeks. That's past. Does the future recap the past? Well, as Niels Bohr said, "Prediction is very difficult, especially about the future." :) My last comment brings up an interesting epistimological point that I may illustrate by an anecdote about a scientific paper that I wrote a few years ago. The heart of the study was analysis by my co author of thousands of data points published by US government agencies for the separate US states over several decades. The correlations and confidence levels were very high for some of the time series, but the data was entirely retrospective, prediction looking back in time. Then, seven more years of data became available for the key variable to correlate with another time series that was current. Suddenly, this was now from my point of view a prospective study. I was looking back to the future to see what was going to happen! My palms literally began to sweat as I updated the two time series on the run chart. The more complete time series had reversed its direction. Would the newly available data for the key variable also reverse and follow that lead? My palms began to sweat more. Yes, it did! Suggesting conditional causality. This is why I have rational and emotional confidence at a high level for Lancashire. I got into share ownership in a big way in 2006, on the speculation that Brindle's Lloyd's record would continue to be best of class at Lancashire. This has now been supported by the ongoing prospective point of view since then. I have had a huge and quite unfair advantage over Mr. Market as tempus fugit. It's as if I have been able to roll the the camera into the future and see the weak hands that Mr. Market will be dealt and the strong cards that Lancashire will hold. Never the less, this is still probabalistic. It remains to be seen what the future will hold, although it's nice to be allowed a peak at the hole cards. :) That’s exactly why I think you have developed a “feeling” for Lancashire that goes well beyond all your knowledge about the company. It is a true competitive advantage and a wonderful thing to have! And it is just great that you share it with us! I could read all the documents on Lancashire’s website and still “understand” a fraction of what you understand about the business. As a consequence, my predictions could never, never, never be as accurate as yours. We are not talking about recognizing an undervalued stock here. We are talking about recognizing a wonderful business that could go on delivering great results for many years into the future. The help of a person who followed the entire history of Lancashire so closely is very much appreciated! giofranchi You are very kind. But there is a warning in your compliment. Emotional attachment may become a ball and chain around the neck of an investor if the facts change. However, people with neurological deficits that render them incapable of feeling emotions have a great handicap when reasoning and making practical decisions. With Lancashire, I agree that the emotional satisfaction of seeing my prediction confirmed to date has been a big plus. It's entirely possible that Lancashire's outstanding record in business results could continue for as long as Brindle is at the helm and for many years afterward. Think about Walter Schloss' amazing record for 50 years after Ben Graham retired or Warren's even longer record. Time will tell. ??? I do believe that, as soon as a change happens in Lancashire, you will be among the very first ones to recognize it. Either it might be a change for the better or a change for the worse! Of course, I cannot say how you will take advantage of that early realization. Personally, I have discovered that I do not get emotionally attached to businesses. I do get emotionally attached to the people I live with, but never to the businesses I possess. And even with people I always try to keep in mind that they might be gone tomorrow (such is life, right?). giofranchi The Bible says: "You do not know what tomorrow will bring. For life is but a vapor that appears for a little while and then vanishes away." -- James 4:14 "For God so loved the world, that he sent his only Son. That whosoever believes in him should not perish, but have eternal life." -- John 3:16 :) Words of enduring wisdom: beautiful and inspiring, just like the first time I read them. giofranchi