giofranchi

Of course, what’s very difficult for me in this situation is that reading all VRX’s conference call transcripts of the last few years, I have come to appreciate Pearson’s business acumen and strategic vision very much! Therefore… I genuinely think I am making a mistake! But, as I have always said, a very clear and great track record alone is not enough… A very sound business strategy for the future is not enough either… To feel confident and to pull the trigger, I always require both. Gio

original mungerville, probably I have failed to express my thought correctly. I am now trying again to do so quoting Bob Rodriguez: Please, note he is not talking about Shiller PEs, Q Ratios, Market Cap / GDP, etc. … He is talking about how many value opportunities he sees in this market! … And given the fact you are 70% in cash, I guess you might easily agree with him… Am I wrong? Well then… It seems not plausible to me that Pearson is the only person on earth who might be able to discover investment opportunities so undervalued by today’s market as to yield an IRR of 30% in coming years… It is simply not the environment we are living in. Period. If Pearson is truly to achieve such outstanding results, it should be because, after he has purchased a business, he will be able to implement changes which make that business leaner and therefore more profitable… Changes the market is not able to foresee today. If organic growth bothers you, let’s just say the following: I would like to have a clearer view on how purchased businesses are faring and that VRX’s strategic changes are bearing their fruits as expected. Take BH for example: even though Biglari is much disliked on the board, I guess no one can argue against the fact he is very clear about results and how his strategic initiatives to make SNS a better business are evolving and performing. Every quarter BH shareholders know how much the level of Same Store Sales has increased compared not only to the previous year, but also to each quarter since Biglari took control of the business. And that’s the track record I would like to see and that I am talking about: some kind of operating performance measure which could give me confidence in the fact that, even though I know little about the pharmaceutical industry, as I know little about the fast-food franchising business, Pearson is actually implementing the right changes and cutting the truly wasteful costs, just like Biglari imo has done and is still doing. The problem is Biglari has concentrated basically on SNS only since 2008 (with a couple of other small purchases and one major stock market investment)… During the same 6 years VRX has instead acquired 10 to 20 businesses! And such a level of purchasing activity cannot but make things more difficult to be clearly understood… Sincerely, I would really like to see VRX concentrate on running the businesses it already owns and implementing all the improvements possible, cutting all the unnecessary costs. In the process bringing down its debt level, and showing GAAP EPS gradually converge to Adjusted EPS. Then, I would be very pleased to see VRX start its purchasing binge once again. But I guess it is not going to happen that way, right? Anyway, there is no escaping the fact that to get an IRR on their investments of 30%, they cannot rely on “value investing” alone… simply because, if the market is mispricing things today, it is mispricing them on the upside, not the downside!… Instead, to get a 30% IRR, VRX must implement very effective changes, after it has purchased any new business. Therefore, imo, you only have two choices: 1) either you wait for a clearer picture, one which shows Pearson truly is an “outstanding activist investor”; 2) or you simply decide to have trust in Pearson’s abilities. Gio Bob-Rodriguez-02Gen2015.pdf

Hi original mungerville, I have never said organic growth is necessary to get outstanding results… Probably, I have not expressed my thought clearly enough! Organic growth imo is necessary only to give me confidence in VRX’s business model. It has nothing to do with outstanding results, but it is nonetheless of great importance to me. Because without that confidence I cannot but wait and see… A good and clear track record in organic growth is what I need to be convinced those costs which are so vigorously attacked and cut by Pearson & Co. are truly nothing but a waste of resources… In other words, I want to see the evidence those businesses acquired by VRX, and which are subsequently subjected to their costs cutting treatment, keep performing very well. This is because I don’t feel able to judge myself VRX’s costs cutting strategies. If you feel you are able to do that instead, good for you! But I think my knowledge about the pharmaceutical industry is definitely not deep enough… If you know other ways to achieve confidence that something truly works, without “insider” knowledge, please let me know!… Until now, the only thing that has convinced me is a long and great track record. ;) Gio

I was just emphasizing the concept… Overall I agree with you! ;) Cheers, Gio

Well, I don’t think I have ever said something like: if Watsa is gone, I will cease investing… Instead, what I have often repeated is: if Watsa is gone, I will look somewhere else… The world is a very large place, full of talented people! ;) Cheers, Gio

Maybe… But don’t exaggerate on the opposite side either… When Nole Djokovic ceases to be the n.1 tennis player in the world, my best guess is we will have another n.1 tennis player! ;D Would you call him just “a talented follower”?!... Hmmm… Anyway, I think he will be one hell of a tennis player! ;) Well, the overall track record is obviously there for anyone to see! But my issue is with how much clear VRX’s track record in organic growth is until now… Gio

Ajit Isaac's Lecture in attachment. Cheers, Gio Ajit_Isaac_Lecture.pdf

True. Anyway, the fact still remains Greece needs to lessen its debt burden. If it is successful in doing so, individuals, corporations, and also the government might start borrowing again… and banks might start lending again! That would be a great development for Eurobank and its share price would surely benefit much. Until the overall debt level remains too high, I just don’t see how more borrowing, and therefore more lending, could do any good and be sustainable… Might a country which controls its own currency manage its debt load more easily than a country which doesn’t? Of course I cannot know for sure… But I am inclined to answer Yes! ;) Gio

Most probably it will! But this goes well beyond VRX… Let me explain: Imo we all invest in a wide range of industries and enterprises… without having a true knowledge about those industries and enterprises… by “true knowledge” I mean that very seldom we are insiders, very seldom we manage a business in the same industry we have invested lots of capital, very seldom our own business (or the business we work for) has anything to do with those enterprises we are interested in. I always keep in mind Keynes words: Hey! Let’s be honest: I know very little about insurance (FFH), and I know very little about the money management business (OAK)… just as I know very little about the pharmaceutical industry (VRX)… I am an engineer, my field of expertise is civil and infrastructural engineering, and I run a for profit master school… what do those things have in common with insurance, the money management business, or the pharmaceutical industry?… Truth be told, very little… probably, nothing! This is why, when I try to evaluate a business and its management, I always look for a very long and “perfect” track record: if I cannot ever be 100% positive about its future, at least I require that its past be crystal clear! Then what I am usually satisfied with is to make sure those conditions and the environment which led to such outstanding results in the past have not changed today, and don’t show any signs of changing for the foreseeable future. Now, coming to VRX, if there is one argument the bears have pointed out, and which I might at least in part agree with, is that VRX’s organic growth track record is not so clear yet… But, for the reasons I have tried to explain, it is very important to me: VRX’s business model is basically based on the premise that a lot of waste is still present in the pharmaceutical industry, therefore they can find bargains to acquire, because later they cut unnecessary costs aggressively… Very fine! I like it a lot!… Except that, as I have said, I don’t really know the pharmaceutical industry… And therefore what could be for me the only real proof those unnecessary costs truly are nothing but a waste of resources? Well… an healthy track record in organic growth, of course! ;) This is how I’ll proceed: I will keep watching VRX closely, if its business model truly is successful, and organic growth shows its success once and for all, I am sure it will be copied! Everything that’s successful gets copied, right? ENDP is already doing something similar, and it is still much smaller than VRX! If I miss the boat with VRX, I’ll have learnt my lesson well, and will be able to invest in ENDP (or in any another company that will follow in VRX’s footsteps). Cheers, Gio

I agree. Though waiting could be costly with such an high quality business like VRX, I still want to see how they manage to increase EPS organically and to reduce debt during the next 12 to 18 months. Then, I would be much more confident about their business model, and I will surely pull the trigger again. The same is true for Endo. Gio

Well, I guess when you have control over your own currency, you enjoy a freedom that otherwise is precluded to you. In an economic environment of too much debt, at least in Europe, the ability to print money shouldn’t be overlooked! I agree: it is nothing but another way to default on your debt… the difference is that to print money is easy! And Greece has a desperate need to reduce its overall debt somehow… Anyhow! ;) Gio

If so I guess the best thing that could happen is Greece finally leaves the EU, we get another 40% devaluation due to currency adjustment, then the Greece economy will boom and Eurobank’s stock might triple or quadruple! ;) Cheers, Gio

Actually I hadn’t realized FFH’s investment in Eurobank was that large… And of course FFH’s exposure to the energy sector will weight on Q4 2014 results… If they post a loss for Q4 2014, we will probably see a contraction in the multiple they are selling for today… And maybe we will get another chance to buy or to increase our investment in FFH. ;) Gio

Ah!!… At last something I like to think about: business decisions, the strategic use of capital and resources in general! Very good, thank you! ;) Gio

--Sanjay Bakshi Find the whole Teaching Note in attachment. Cheers, Gio Teaching-Note-on-Ajit-Isaac.pdf

The fact investment mistakes are often made is just a part of this life… And no one can do anything about that, but accept it as a matter of fact! Probably FFH invested a bit too much in Blackberry… and now all they are doing is trying to defend their investment as best as they can… But I would be very surprised if they deploy new capital that way from now on! Of course, in the end what truly matters are overall results. And until now FFH has proven to be able to achieve very satisfactory overall investment results! ;) Gio

Maybe… But recently they have shifted their attention from the stock market to their insurance & reinsurance underwriting operations and to bonds, significantly shrinking their holdings in stocks and therefore the amount of equity hedges too. I think operating results and the gains from their bonds portfolio might more than offset their losses in equities and equity hedges… But, who knows?! We will see! ;) Cheers, Gio

Ah! That is not an easy question to answer… Because FFH is already my largest investment by far! And there are other investments I like as well, see for instance OAK... Let me try to answer this way: if I weren’t invested in FFH right now, I would be buying it, building at least a 10% position. Having already a large investment, instead, I think a would start adding to it, and gradually averaging down, at any price below 1.15 x BVPS. I understand though this might not be of great help…! ??? Gio

Eurozone CPI negative for first time in 5 years http://www.marketwatch.com/story/eurozone-cpi-negative-for-first-time-in-5-years-2015-01-07?siteid=bnbh Gio

I think no one really knows what might happen to the stock price of FFH (or any other security for that matter!) in the short run… But, if it drops together with the market, rather than being worried, I would be delighted! Because it would represent a great opportunity for buying more of a company that I know is bound to surprise the market with much stronger results than expected! If markets keep falling, and FFH’s stock price follows suit, I will be very glad to use my cash reserve and to buy more… Because I know that Q1 2015 results will be spectacular! All I’d have to do is to keep averaging down, and to wait 2-3 months… Before FFH announces a BVPS that has dramatically increased… What would happen then to its stock price?! As value investors we could hardly ask for more! ;) Gio

I still like it. And it is still my largest investment. If you factor in what have probably been strong results for Q4 2014, FFH is selling for a lower multiple. Furthermore, I think BV might grow very rapidly as long as rates keep coming down: I mean, just look at the yield of Spain 10yr Treasuries 1.611%, U.K. 10yr Treasuries 1.566%, Germany 10yr Treasuries 0.464%, Japan 10yr Treasuries 0.30%… And compare those yields to the one of the U.S. 10yr Treasuries 1.959%… It doesn’t make much sense to me… And, if financial markets truly start cooling down or even getting problematic, U.S. Treasuries still have much room to appreciate in value! I think the probabilities that scenario will play itself out in the next 2 to 3 years are quite high: if so, FFH is among the very few investments which could make you some money… And don’t forget that in such a scenario also its equity hedges and its cash reserve might serve you very well. Not to mention those CPI linked contracts, which could start appreciating unexpectedly and fast. In other words, if financial markets get into trouble, FFH’s BV today means very little. ;) If, instead, financial markets keep going up undisturbed, I like FFH’s strategy to concentrate on purchasing whole insurance businesses, especially in EM where insurance penetration is still very low and therefore margins could be very satisfactory, and on building a truly global insurance/reinsurance enterprise. Gio

US 10 yr Treasuries yield below 2%… It looks like Fairfax’s bonds portfolio might post strong results in Q1 2015 too. ;) Cheers, Gio

+2.34% so far this year... Ahahahah!!!! ;) Cheers, Gio

Yes - this makes a lot of sense if the shares are undervalued. It wouldn't make sense if the $250 share price was offered to the general public, meaning non-BH shareholders, but since the $250 per 5 rights was offered only to shareholders - that is not relevant to the market price the company is now re-purchasing their own shares at. The critical question for the share buyback (at least in economic and investing terms, their may be an ethical question regarding the timing of the buyback announcement), is whether BH's shares are undervalued. If so, then buybacks are value creating. (There is also a secondary question of whether, even if the shares are undervalued, this is the best use of capital - meaning the use of capital that generates the highest return.) Further, once the Rights Offering was completed, the proceeds are the company's to allocate; the only question then is - what use of the capital creates the highest return on capital. Thinking about where the funds came from at that point is actually akin to the sunk costs fallacy. Thus, if BH's shares are indeed undervalued, as presumably their shareholders believe they are, then the buybacks are a good use of capital. Obviously there is a difference of opinion whether this is ethical behaviour. Your assertion that once the funds are raised they are Mr. Bigs to allocate as he sees fit is non sense. Presumably there is a token BOD tasked with upholding all shareholder inerests. The funds raise was done under the implicit threat of dilution, and then instead of a straight buyback, he transferred them to his hedge fund to gain from a capital raise which he probably could not do on his own accord due to his perpetually eroding reputation. You apparently believe in the company and Mr Big, and presumably have your money where your mouth is, I am not here to convince anyone of anything, but incessantly defending self servig behaviour, trying to spin things and furthermore calling it a plus for shareholders is complete BS. Mr Big raising funds that way to then transfer into his hedge fund is NOT in shareholders interest. Well put. To me this makes no sense at all. I have never met anyone who runs a business and believes in “corporate democracy”. For those who manage funds, but have never run a business in their whole life, I quote from [amazonsearch]A Money Mind at Ninety [/amazonsearch] by Philip L. Carret, Chapter 26 “Corporate Democracy”: Gio

Yes, it does... But, as far as I am concerned, only two things matter: 1) Purchasing power 2) Business performance If you are interested in 1), forex gains/losses definitely matter to you and should be included in your results. If you are interested in 2), yearly stock market returns are not meaningful... You should just take yearly EPS of your companies and divide that number for your average cost. Therefore, when someone asks yearly results... I always think he/she is referring to purchasing power! ;) Gio