giofranchi

The leatest from Michael E. Lewitt, for anyone who might be interested. giofranchi 9-1-12_TCS_Ponzi_Games.pdf

Beerbaron, I think your logic is perfect. Imho, delaying the day of reckoning might be useful, only if in the meantime the trade imbalance disappears and the threat of redistribution subsides. To achieve that with a currency that cannot fluctuate, the spending country must increase its revenues (taxes), cut its expenditures, hope that higher taxes and less spending don’t prolong the unfolding recession, and slash its labor cost. Now, the question is: will the turnaround of the spending country be successful? I think nobody knows the answer for sure… giofranchi

If someone is interested, I think the new Gary Shilling Insight is an informative look at deflation. giofranchi insight-0912b.pdf

Very true oddballstocks, I work every day with a lot of real estate developers and most of them are as ignorant as it gets! Though, it is much harder to find a true bargain in the real estate market than in the stock market. I think the answer lies in how the stock market is conceived and organized: the stock market enables anyone who cares to express his judgment about the worth of a company to do so, every second of the trading day. A lot of different opinions, many times ill-informed opinions, are freely expressed without running too much risk. The result is that the worth of a business seems to vary many times during a single trading session… and the stock market can be psychologically very tiring! If restricted to only those endowed with the right temperament, the stock market would be as efficient as the private market or the real estate market. Instead, being open to anyone, mispricings happen quite often. Of course, this is obvious, but it is also the reason that enables experienced money managers to keep rotating their funds from one undervalued stock to the other. giofranchi

Tom, you are very young, and I don’t have any doubt that by the age of 50 you will have accumulated an incredible amount of knowledge! Of course, I read everything I can find about the companies I am interested in. I read commentaries by money managers I admire. I read a lot of history and biographies, I think it was Howard Marks who said: At the beginning of my career I had the chance to ask Mr. Munger three things that would help me improve my investment skills, and he answered: “read history, read history, read history”. I also read about economics in general, both micro and macro. Finally, I really love to read about psychology. Something I would suggest is to use audiobooks extensively: it is an incredible “competitive advantage” over Mr. Buffett! Thanks to the audiobook format, now I can read in just a few days books that once took me weeks to finish. And I can do that in parts of the day I couldn’t devote to reading before! giofranchi

twacowcfa, if you were a German tax-payer, would you bet on the fact that Italy will behave itself like California did? Northern Italy is making the bet that southern Italy will behave itself ever since 1861… Until now it has always been a losing bet… I don’t think Italy is California. California has an entrepreneurship culture that Italy completely lacks: California exports technology all over the world, Italy exports pasta and garments… I believe that northern Italy has great strengths, but, southern Italy has always been and will most probably continue to be a serious drag. Even the fittest of the swimmers runs the risk of drowning, if an heavy stone is tied to his feet… I really hope that everything could end up well. But I am not betting on hope: for now, my firm’s investments stay in America. giofranchi

moore_capital54, I have read your posts on gold and have found them extremely interesting and informative. I really have great respect for your work. Anyway, could you elaborate a little more on your view of the Euro? Even though the ECB is going to “start a massive monetization of the debt”, like Eric50 wrote, I remain very skeptical. Take, for instance, Italy: my country has been mired in public debt for as long as I remember (actually, for as long as my father remembers!). And we had always solved the problem printing new liras, again and again. We have never showed the world that we are able to reduce our debt through austerity, and then to keep it reasonably low. So, why on earth should anyone want to lend money to the Italian government?! I don’t understand. Ok, we will buy two or three years thanks to “massive monetization of the debt”… then what? What is more likely: that all Italians become Germans and show unprecedented fiscal rectitude? Or that the ECB every few years must begin a new bond purchase program to save southern Europe? If the latter, is it really sustainable? It certainly will mean higher and higher inflation in Germany, and higher inflation equates to higher taxation: “Inflation is taxation without legislation.” Milton Friedman. So, will the German tax-payer go on subsidizing southern Europe? While even northern Italy is completely fed up with subsidizing southern Italy?! Even if the German tax-payer would do so, can he really afford it? Mighty Germany balance sheet is reasonably sound, but it is far from pristine! I know that Germany is very mindful about exports and that a weak Euro could boost exports to the US and China, but, once more, is it sustainable? Any country with a trade surplus should have a strong currency, and Germany’s currency should be much stronger than the Euro presently is. Otherwise, unbalances are created: for instance, I don’t see how Italy could close the competitiveness gap with Germany, unless you presume that we will able to cut workers compensation by at least 30% (then, it means you are not aware of the strength of labor unions in Italy!). Maybe, there is something very important that I am missing, so I really would like to read your opinion on this topic! Thank you very much, giofranchi

You surely did Kraven! And thank you very much! Please, understand that people like anders and me put great emphasis on capital allocation, enjoy security analysis very much and take it seriously, but are not professional money managers. Like anders wrote, cash is just one of our assets. So, while certainly we have much more to gain listening to you than vice versa, we try to contribute to the discussion, adding some thoughts from a perspective that might be a little different. giofranchi

Yes! Right now I don’t remember exactly where I first read that judgment, but it rang true as soon as I did! And it stayed with me ever since! Many times you just experience something and then someone else writes about it and you click on it immediately! Imho, it is true and I live it every day. giofranchi

Kraven, What is exactly the “level of ownership” you are referring to? And why above that level should it be safe to think of stocks as parts of a business, while below that level it is more harmful than helpful? Most of you are money managers and for you it is perfectly fine to look at stocks as pieces of paper: you just can go on buying those pieces of paper that are the cheapest, waiting for their true value to be recognized, selling them, and looking for the next cheapest pieces of paper you can find. It is a perfectly sound way to become very rich! But businessmen generally don’t act that way. At least, no one that I know of acts that way (and I know and work with a lot of very successful businessmen). Businessmen don’t have the time to study how to jump safely from one piece of paper to the next. Allocation of capital is a very important responsibility, probably the most important one. But it is far from being the sole responsibility of any businessman. Businessmen try to judge the future prospects of a business, the soundness of its business model, the reliability of its management, and, if they like what they see, they try to buy it at a good price. Later, they do not sell, just because the stock price has advanced 30%. They think they will get much more in the future. It was E. H. Harriman who said: “I am not looking for a 15% return, I want something that will grow.” Of course, you must always recognize a very good bargain, when you see one. And at a certain price any business should be sold. The control ownership you referred to is something most businessmen experience every day. I personally control two different but related businesses. Anyway, even in control ownership it is surprising how much you must rely on other people! You are a business owner if you possess a machine that creates wealth and DOESN’T DEPEND ON YOU to achieve that goal. Otherwise, you don’t have a business, you just have a job. Every businessman depend on other people and their abilities and judgment. It is true that in controlled businesses the strategy is up to you, but for the execution you must always rely on others. And strategy, without a careful and effective execution, is useless most of the time. I am not here to say that control ownership and stocks ownership are not different. They surely are. But also in control ownership you must judge people every day, you must rely on them, and the ultimate success is much less dependent only on yourself than you might like to think. giofranchi

Thank you MrB! Always very interesting! When I look at some possible investment for my firm, I usually think of operations that I would like to own, and a team of managers that I would like to partner with, for the next 20 years. That would seem extreme to you… But, at the end of his career, Mr. Graham acknowledged that his gaining in GEICO had been more than all the other gains of Graham-Newman combined; similarly, Mr. Munger often said that the bulk of Berkshire’s returns might be attributable to their 10 best ideas, See’s Candies, GEICO, The Washington Post, Coca Cola, etc., all investments that Berkshire held for 20+ years. I really look for operations that might enhance my firm’s operations, and make it a stronger and more secure organization, for as long as my firm will last. giofranchi

No, absolutely! You are surely right! All I was saying is what I do, to choose those companies “whose operations I like to become parts of my own firm’s operations”. I was not saying what SHOULD be done! Vice versa, I hastened to point out that I don’t have any particular insights into over-leveraged situations, that sell for ridiculously low prices. They might be excellent investment opportunities, but I just don’t venture there. When I buy a business, I want its operations to really become part of my firm’s operations for as long a time as possible. So, I run a very concentrated portfolio, because I must know everything possible about those businesses, and I concentrate on the quality of their operations. And, in my experience, high-quality businesses very seldom are over-leveraged. Therefore, as you can see, I don’t have really nothing against great investment opportunities in over-leveraged companies at wonderful prices! It is just that my goal tends to keep me away from them. giofranchi

marodq, thank you for your first, very interesting contribution! I am not the one who should welcome you to the board (I am also new to the board) ... but welcome anyway!! ;) giofranchi

Write a put on something you wouldn't mind owning at the strike price of the put. :) However, you will probably have to have collateral set aside for your counterparty in the event the put is exercised. The best way to lever up with non recourse leverage is to buy a long dated call or warrant at an attractive price as measured by implied volatility in a time of low interest rates on a stock that you think is a good value. Then, you have the leverage of a margin loan that is non recourse beyond the price you paid for the LEAP or warrant. :) twacowfca, as it happens, I always agree with your writings, so you must surely be right! But I have still to find a broker in Italy that lets me buy long dated call options on a company listed on the NYSE… My firm has also a Tradestation account, but I don’t really like to always wire money overseas… Actually, I cannot say why: it would be much safer in JPMorgan than it is in Intesa SanPaolo!! :-\ Anyway, I reckon an investment in BRK, FFH, GLRE, etc. at book value the best way to “create my own free or profitable long-term float”. Through BRK, FFH and GLRE, my firm owns float and benefits from it. It is just that I am not the one to decide what to do with that float… oh well, I really don’t care much! I am very happy with my float in the hands of Mr. Buffett, Mr. Watsa, and Mr. Einhorn! I am positive that it is working for me and that it is ultra-safe. giofranchi

I couldn't agree more. That's why, the only leveraged companies I am interested in are insurance companies. As a rule of thumb, I look for insurance companies with management whose skills are above average, and with underwriting and investment leverage that are below average. That makes me sleep soundly at night. I am not a full time money manager. I run businesses. And I invest in companies that I like, as if their operations became my firm’s operations too. The only difference is that I don’t manage them personally. I don’t jump from one undervalued stock to the other. So, I have never thought hard enough about how good an investment in overleveraged companies at ridiculously low prices might turn out to be. I just don’t want the operations of overleveraged companies to be part of my firm’s operations. Therefore, I don’t look at them. At the portfolio level I agree with MrB. I don’t lever my firm’s portfolio. Right now I cannot remember exactly who was it, but someone once said: “A good investment is just that, leverage doesn’t make it any better or worse.” Probably, he used slightly different words, but I think the meaning is clear. Packer, thank you for the suggestion: I haven’t read that book yet, but I will buy it right away! giofranchi

PlanMaestro, I know that probably you won't care, because you don't hold him in much regard, but GM is Mr. Einhorn's second largest long position, just after Apple. It is a position he established in 2011 Q3, and below is what he had to say about GM: "GM is the largest auto manufacturer in the United States. After the business failed under its legacy high-cost structure during the recession, the U.S. government bailed out the company and took over most of the ownership. Last November, GM completed an IPO of about 30% of its stock at $33 per share. The government continues to own about one-third of the company. After the IPO, the shares initially advanced to almost $40 before retreating. When the shares broke the IPO price, we determined that the shares were attractive, but only purchased a small position, believing that there might be a better opportunity later when the government exited the rest of its stock. Instead, during a weak third quarter where the market punished all cyclical stocks, the shares fell well below the price where we planned to add to our position. We decided that the shares were cheap enough that we were more than fully compensated for the possible overhang of the government’s stake, and we established a position at an average price of $25.78 per share. GM is being priced by the market as a cyclical company trading at less than 6x this year’s earnings. While some may see it as normal to value cyclicals at low multiples of peak earnings, we believe that 2011 is not a peak and, in fact, is below mid-cycle. Prior to the crisis, U.S. auto sales ran between 15 and 19 million units for many years. While sales have bounced from the recession low to about 13 million units, GM is poised to grow earnings from both a return to mid-cycle volumes, which we estimate to be 15 million units, and from a coming major refresh of its North American product portfolio. The market appears focused on GM’s “legacy liabilities.” However, the new GM does not have pension and healthcare liabilities that are likely to over-run the company. Instead, GM sits with $33 billion of gross cash which represents nearly its entire current market capitalization. We see potential for GM to begin to return capital to shareholders over the next year. While we are cognizant of the various investment risks that include near-term global economic weakness and the government ownership overhang, we think these concerns are more than priced in at current levels and see significant upside even if the U.S. experiences a very slow "new normal" type of economic recovery." giofranchi

I think the Hussman 2012AR just published can add a little perspective: on page 1 you can see the Hussman Strategic Growth Fund performance since inception. More interesting still, you can see its performance both with and without hedges. From 2000 until the first half of 2011 its true performance (hedged) was always superior to the hypothetical performance without hedges. It was just last year that the unhedged strategy outperformed the hedged one. Imho, that is a red flag about the state of the market, and should not be ignored. Furthermore, if you know Mr. Hussman, you also are aware of the fact that he completely missed the 2009-2010 recovery. An unfortunate “mistake” that neither Mr. Watsa nor Mr. Einhorn committed. Hadn’t he missed the 2009-2010 recovery, the Strategic Growth Fund performance would have been much better! I think he learned some lessons and won’t do the same mistake again in the future. Anyway, even with the 2009-2010 mistake, the Strategic Growth Fund is still ahead of the Russell 2000 Index and way ahead of the S&P500 Index. giofranchi annrep12.pdf

Thank you farnamstreet! Anything that could help me better understand the Berkshire business model is always very welcomed! giofranchi

Unfortunately, that is exactly what I am worried about…! So, undoubtedly that one is a reason, perhaps the most important one. But it is not the only reason. The S&P500 has more than doubled from its 2009 low, the Russell2000 is even more frothy, and I don’t like prices that double in what I think is still a secular bear market, in what I think is still an extremely overleveraged economy, in what I think is still a very weak job market (and don’t forget that the first jobless recovery was 1932-1937… the one we are living through is the second jobless recovery… a bad omen! “The Forgotten Man” by Amity Shlaes is a very good book on the topic, that probably most of you have already read). Of course, I do not even like the fact that all the money creation around the world had the effect to shrink the yield of “safe havens”, prompting investors to look for yield somewhere else, the stock market. Of course, I don’t even like that corporate margin are at a all time high: maybe it is legitimate to argue that a sector or two could go on expanding their margins, but, imho, it is very doubtful that the whole S&P500 could do so on a sustainable basis. It would mean that "Capital" in the future will be entitled to higher returns than in the past… Why? Ok, I know, that’s too much macro… and macro is unreliable! Let’s just put it this way: I am worried about my firm's future operating results and I don’t like prices that double in little more than 3 years! giofranchi

Amen!

Packer16, I have read the posts on gold that berkshiremystery was so kind to share once again. Intuitively, I agree with Parsad (though I enjoyed moore_capital54 very much!): I really loathe any graph that shows parabolic price appreciation! But my firm owns just 1,7% of its equity in gold… Let’s put it this way: My shorts are a protection against something I deem will probably happen in the next two or three years, something not pleasant, but not terrible at all: a 30%-40% retreat of the stock market. They represent a sizeable position. Summary: likely event; not pleasant, but not terrible at all; sizeable position. My gold is a protection against something I deem very unlikely to happen (think, we go back to the gold standard…), that will cause great dismay and uncertainty. It represents a very small position. Summary: very unlikely event; extremely unsettling; very small position. Parsad, I might be wrong, but, if we go back to the gold standard, also a graph already gone parabolic will shoot even higher. giofranchi

Packer16, truth be told, personally I don’t like Italian companies right now. If Italy stays in the Euro, we will be stuck with a very overvalued currency and will end up like Japan in a painful debt-deflationary spiral: our stock market will stay very depressed for a very long time! I just don’t see how we could be able to close the gap of productivity with Germany, which, vice versa, will go on benefiting from an undervalued currency. Imho, if Italy stays in the Euro, that gap will get wider and wider. Instead, if Italy leaves the Euro, the new Lira will depreciate by 40%: it is only then that I would buy a basket of very undervalued Italian stocks! I really think that prices can be deceiving in Italy right now: take for instance Cattolica Assicurazioni. It is an Italian insurance company with €1,3 billion in equity, €15 billion in total investments, of which 90% are in short and medium term Italian government bonds. Right now it trades at 0,45 x book value. And for good reasons! What if the Italian government defaults on 15% of its debt? Is it so far-fetched? How would you incorporate that risk in your assessment of the worth of the company? I really don’t know. My only answer is to stay away. Yes! Even if 0,45 x book value looks like a wonderful price for a company with an history that goes back 116 years! Well, actually we can always believe that modern countries cannot default, and we can always assume that Italians will all become Germans… then, yes!, everything will be OK and Cattolica Assicurazioni is a great bargain! ??? giofranchi

Ed Thorp was one of the first to model that type of long/short strategy in a systematic way. It produced returns of about 20% per annum during the first 10 years he used it, but only about 6% per annum when he gave it up to the increased competition about a decade ago. twacowfca, I am not saying that I will never remove my hedges! I am just saying that, in an environment that made Leucadia’s managers state “opportunities meeting our investment criteria are few and far between”, I am not comfortable being greedy, and I am satisfied to get a 6% per annum return as the spread between my long ideas and the hedges I put in place. If and when valuations improve, I will surely remove all my hedges and I will be fully invested, employing a long only value based strategy. Anyway, it is clear by now that all of you disagree with me. So, probably, it is true that there is some weakness in my temperament… just like PlanMaestro suggested at the beginning… He stated: “The only thing to conclude is that that investor doesn't have the temperament for the game and he would be better off buying an index fund and forgetting about it.” …Hey! Wait… Buy an index fund?! I would never do that!! Actually I am shorting indices right now!! Ahahahahahahah!! I am utterly hopeless… :( giofranchi

Actually, I haven’t found the threads on gold… Thank you berkshiremystery for posting them again: always very helpful!! giofranchi

I hasten to point out that what I wrote about Mr. Gayner was just meant to emphasize the soundness of the Berkshire-type business model, not to underestimate Mr. Gayner’s abilities as an investor! Far from me! I have only the greatest respect for Mr. Gayner and I will very gladly invest with him. I am also comfortable with the fact that, due to the soundness of the business model, and paraphrasing Mr. Buffett, a manager doesn’t have to do extraordinary things to get extraordinary results! giofranchi