giofranchi

Sorry guys, I am at home with a terrible flu and haven't checked the board for the last 3 days... There are a lot of things I don't like about Biglari right now: the most obviuos is the compensation agreement, I obviously think it would be much better to pay Biglari far less than shareholders are doing right now! But what matters to me the most is if I see rational behavior, or not. I try to put myself in Biglari's shoes, and ask what I would do: he finds himself managing a company which he owns only a small percentage of... But his goal should obviously be to buy much more of BH over time, and to get control over it through direct ownership. Could he ever achieve that goal without an income? No. Therefore, he is not working for us for free. How much is he asking to be paid then? His roles are both the one of CEO and the one of funds manager... It seems to me he asks to be paid as much as any external CEO would demand, and as much as any external funds manager would demand. As things stand right now, I don't think it could be any different. Of course, we will continue monitoring how the situation evolves: at one point I would like to see him tie his personal wealth solely to the BH stock performance. But right now it simply is not possible: if you think about it, in fact it is the right opposite! The more BH stock price appreciates, the less he will be able to buy... What I want to see him doing right now is to continue accumulating BH stocks, as I try to accumulate them myself. When he finally owns enough, should he go on asking to be paid a very generous incentive, I will question the rationale behind such a decision. Gio

Interesting! ;) But what do you mean exactly by “restructuring company”? Thank you! Gio

Joel, Of course, you are right. But I don’t think your reasoning considers another psychological obstacle: to invest a very large percentage of your capital in a single business is hard. With only three large positions right now I think I have a portfolio more concentrated than most, and Fairfax today represents almost 43.5% of my portfolio. It is already by far the largest investment I have ever held. My cash reserve is around 18.5%… If I use it to buy more Fairfax, I would be making that single investment 62% of my portfolio… It might be the most rational thing to do… But, as much as I like Fairfax, I am not prepared for that yet! ;) Cheers, Gio

Ahahah!!!!... Anyway, no!... I have just increased my investment in FFH meaningfully… Would I have done so, if I thought the stock market might be completely immune to high prices and high debts? Of course not! ;) What I am saying is that, rather than holding cash, in this environment I'd prefer to own a business that will do fine enough, if nothing bad happens, and might turn out to be a spectacular investment, if a deflation scare actually occurs. Of course such businesses are not many. I can think of Fairfax, of course, and maybe Oaktree (which might be able to increase AUM rapidly in a deflation scare). And that’s why I also hold some cash... But, if I could find another business with those same characteristics (namely, that could perform satisfactorily in a muddle through scenario, and could perform even better in a difficult environment), I would gladly part with my cash. Cheers, Gio

It might be… But it seems we have become exceedingly efficient in engineering permanently high asset prices… I don’t know… We will see! ;) Cheers, Gio

Yes, I enjoyed this book too. I already had a great esteem for Mr. Keynes as an investor, and the book made me appreciate him even more! :) I would also suggest to read [amazonsearch]The Forgotten Man[/amazonsearch] by Amity Shlaes and [amazonsearch]The Great Depression: A Diary[/amazonsearch] by Benjamin Roth. Gio

Pete, whenever I find an investment that truly convinces me, I invest. Period. I don’t mind about a low-cagr, high volatility environment. The problem is those opportunities I really like don’t come often. So, what to do while I am waiting? Joel’s paper seems to suggest that it is better to wait invested in a low conviction idea (let’s say for instance a S&P500 ETF today) than to hold cash. And from a purely statistical point of view I might agree with him. But I think this conclusion doesn’t take into consideration the psychological side of the matter: especially for those people who run very concentrated portfolios, I think it is extremely difficult to stay invested in low conviction ideas, waiting for the proverbial “right pitch”… Because the very idea of shunning low conviction ideas is a cornerstone of their investment process. In other words I always look for “absolute” values, not “relative” ones. And, though statistically it might be the right thing to do, at least psychologically it is very tough to switch from an absolute value mentality to a relative value mentality. Surely that’s the greatest difficulty I encounter in my asset allocation strategy. Cheers, Gio

Ah! Good to know that even in my worst case scenario, the one in which Biglari is forced to leave the company, I would still be able to get out with a nice gain! ;D ;D Cheers, Gio

Of course the problem is: how much time might QE actually give us?… I don’t know and I am not playing that game! ;) Cheers, Gio

Imo QE will do what it has always done: it will buy us some time. That’s what liquidity does. Because money flows into financial assets, making their prices rise. And almost by definition, when asset prices rise, a deflation scare is averted… or at least postponed! The real question imo is: what will happen when financial assets finally reach prices that cannot be inflated anymore? And debt levels are still too elevated? At that point I don’t see how even liquidity could still be of any meaningful help. Gio

With Europe now truly printing money, I think a deflation scare might be averted for the next 2 years… Instead, we will probably witness a meaningful increase in European stock prices… Later, when also the ECB largesse has run its course, with high asset prices on both sides of the Atlantic, and debt levels probably still very high, deflationary forces will be back in full swing… then, watch out! ;) Gio

Nobel Winner Shiller Joins Pimco in Saying Buy Greek Assets http://www.bloomberg.com/news/articles/2015-01-27/nobel-prize-winning-economist-says-it-s-time-to-buy-greek-stocks Gio

Given the fact Pershing Square Holdings is selling for less than NAV, buying its shares could be a very good way of taking advantage of Ackman’s thesis on Fannie and Freddie. :) Gio

Hi Sanjeev, at which hour will the dinner start? Thank you! Gio

Packer, I still hold an almost 6% investment in OAK anyway… It is much reduced from what it was two days ago… But probably OAK still weighs more in my portfolio than in yours! ;) Can you tell us which percentage of your portfolio is invested in OAK? Thank you very much! Gio

JEast, The Brooklyn Investor ends its post saying: Therefore, it seems the two of you are on the same page! ;) Cheers, Gio

Thank you very much! ;) Gio

Could you post a pdf? Thanks! :) Gio

Packer, I knew my decision would have drawn criticism, and I like yours very much, because it is polite and very well-reasoned! Your objection essentially is that my decision was based on the short term, while I obviously cannot foresee what might happen in a 1 to 2 year timeframe… And I agree with you 100%! As I have said, my view about OAK for the next 5 years hasn’t changed at all… But I have always thought that some kind of crisis caused by a large number of debt defaults has to occur, for OAK to be able to find again high-return investment opportunities, and therefore to increase AUM significantly. In a muddle through scenario like the one we have today, with financial assets that keep performing quite well, I just don’t see how their set of investment opportunities could get any larger than it is now. On the other hand, should defaults actually occur and should financial assets get hit by those defaults, I think that also OAK’s stock price is likely to suffer… at least for a while… even if probably far less than the general market and for a shorter period of time. I have always watched OAK very closely and I will keep watching it. If: 1) No crisis ensues, but they are able to keep increasing AUM at an healthy rate nonetheless, I’ll then admit I was wrong and get back in again; 2) If a crisis ensues and OAK’s stock price doesn’t follow the general market down, I’ll then admit I was wrong and get back in again. In both cases I will have lost some value creation. But again I think I can afford it, without compromising my goal of compounding capital at 15% this year. Gio

I already know I will be much criticized for this, but I don’t mind good criticism… I cannot stand only impolite criticism! ;) Yesterday I sold my investment in OAK for an healthy profit, and redeployed the proceedings in US Treasuries, both short term and long term. Why? I still believe in my 5 years thesis about OAK. But Picasso pointed-out one thing that is true: Therefore, if a market correction is needed to make an investment in OAK a truly enticing proposition, there is a great chance that first of all OAK’s stock price might decline together with the general market, and at the same time OAK might be able to increase AUM… That will be a truly great entry point! An opportunity brought by the almost simultaneous decline in OAK’s stock price and an increase in AUM! After all, OAK is different from FFH: OAK’s increase in AUM and its increase in earnings might not happen at the same time, precisely OAK must increase AUM first and then wait for its investments to pay out (another thing that Picasso underlined correctly imo), while FFH’s increase in BV comes directly from its earnings. I have also been much criticized, because I have let you know January has been an extremely good month and my firm’s equity is up more than 11% since the beginning of the year… Of course, I was the first one to point out such a result doesn’t mean a thing!… But, given my goal of compounding at 15% annual, such a good start of the year might not be so meaningless after all: at least, if nothing else, it surely has bought me some time… The operating results of my firm will contribute for another 10% this year (more or less): if I do nothing else but cash in the 11% achieved in January and add to that the 10% from operating earnings, and just watch the financial markets from the sidelines, at year end I would have achieved a result far better than my original goal! Of course I won’t refrain from investing my firm’s capital in the stock market for the rest of 2015… But the choice of selling a large position like OAK and buying US Treasuries until something more convincing (in the short term) comes along, was made easier (at least imo!) by the good start of the year I have luckily enjoyed! Cheers, Gio

Well, I say that because it is what I always look for before deploying my capital in any investment… But then I also keep the door open to changes that might occur… And actually I change my mind often and often sell… Think about Buffett, instead, who buys and then never sells… He is the one who truly sees the world differently from both you and me! ;) Cheers, Gio

Another thing that should be pointed out is I don’t think the hurdle rate to earn incentives is carved in stone… Incentives should be paid to a manager, if he achieves better results than its peers, or if he/she does better than the index which he uses as his/her benchmark. If we live in a low return world, I think also the hurdle rate could come down. Gio

Well, just listen to their last conference call, or read its transcript, and you’d find Marks there to talk very much about OAK’s strategic vision and to answer to analysts’ questions… It doesn’t seem the behavior of a person no more involved in the business! Gio

thepupil, I don’t think the way we look at the world has anything to do with this… We are simply talking about a business… Either you are right and I am wrong, or vice versa… Period. Now, 20 years is a very long time… So let’s just focus on the next 5 years. Imo 2 things could happen: a) We face another financial crisis, b) We muddle through and debt levels all around the world start coming down. There might be a third scenario: debt levels around the world keep increasing, but this would mean the whole world gets to resemble Japan… and I would attach a very low probability to such a scenario… So, let’s stick to just a) and b). What will happen to OAK? a) I think OAK might double AUM, just like FFH might double BV, actually I would be surprised if they failed to do so! b) I think OAK might still be able to increase AUM… albeit at a much lower rate! Do you think I am too optimist? If so, why? Alternatives AUM is $7 trillion today vs. $2 trillion a decade ago (13% CAGR), Asset management AUM is $64 trillion today vs. $38 trillion a decade ago (5% CAGR), Global Hedge Fund AUM is $2.1 trillion today vs. $0.3 trillion in 2000 (14% CAGR), Global Private Equity has grown at a CAGR of 20% since 1980. Yet, the Top 5 Manager only represent 32% of US Retail Alt’s, 27% of Infrastructure, 16% of Real Estate, 9% of Private Equity, and 8% of Hedge Funds… If a financial crisis comes our way, there will be lots of room for consolidation! And the strongest, like OAK imo, will benefit very much! I like neither the optimist nor the pessimist, because they both tend to be wrong most of the times. Therefore, if I am too optimist about OAK, I really want to know why! Will the market 5 years from now pay the same multiple for OAK it is paying today? Of course, I cannot tell… But, let’s look at The Carlyle Group: today it manages $203 billion and still boasts IRR in between 25% and 30%… Will OAK achieve the same success? I don’t think I am too optimist if I say I think it can. So, all I see is a great opportunity should a) occur, and a mediocre investment should b) occur instead. But no way to lose money! You asked why I am long: whenever I find an investment in which I don’t see how I could lose money, I buy that business gladly. Then, we could meet again 5 years from now, and start another discussion about what to do with OAK! ;) Cheers, Gio

Well, I want to be long because I think OAK is a predictable business run by two great entrepreneurs and investors, who are still young enough to be at the helm for the next two decades. Reinvesting a 5% distribution, AUM have to grow at a CAGR of 12% to make ANI compound at 15% annual. This is in line with what they have achieved since 2000. And the 10’s of billions of dollars they manage must be compared to markets that are worth trillions of dollars and that will probably get larger and larger, especially in EM. If they achieve a performance in line with their (I admit) exceedingly good past, your valuations are way too low. Gio