giofranchi

Maybe the misunderstanding lies in the fact that by “BV” I don’t mean the exact number reported on the Balance Sheet… Instead, I quite arbitrarily mean the true value at any given time of the capital invested by shareholders in a company… Which, of course, is wrong, because by definition “BV” is the number you find on the “books”… ;) Gio

Ok, so now let’s just follow the money: With every dime my companies earn, I can do two things: 1) I can distribute that dime to my shareholders through a dividend 2) I can keep that dime inside the companies, in which case it goes to increase the capital shareholders own inside the companies If you are aware of something else I could do with that dime, please let me know! Let’s just take into consideration 2), because it seems to be the case that best fits with the BH situation. Each dime I keep inside the companies must be: a) Used to increase my companies’ cash reserve b) Used to be invested in some productive assets (either my own companies, or some new assets) If my companies were public, I’d have a third choice, and that dime could be: c) Used to buy back shares So for instance, Biglari uses shareholders capital to invest in CBRL through the LF, and to buy BH shares that get reported on the books as Treasury Shares. If CBRL were a stupid investment, as soon as Biglari makes use of shareholders capital to buy it, shareholders capital decreases significantly. The vice versa is true, if CBRL were a brilliant investment. NBL0303, The same applied to Enron and Lehman: though they reported positive BV, true shareholders capital already was at zero, because of the stupid ways management decided to make use of it. When I calculate BH BVPS, I always add to reported BV also the market value of the Treasury Shares held by the LF on behalf of BH shareholders. BTShine, The same was true in the case of Autozone: of course, true shareholders capital was not reported BV, which was negative, but reported BV plus all the capital used to buy back shares. Shareholders capital is always meaningful. Because it is a starting point. Apply to that whichever rate of growth you deem appropriate, and calculate what shareholders will own 30 years from now. Discount that number to the present, and you get FV. But all this is obvious… therefore, I must be missing something! ;) Gio

http://www.fairfax.ca/news/press-releases/press-release-details/2014/Fairfax-to-Acquire-Malaysian-General-Insurance-Business/default.aspx Very good! I like it! :) Gio

Well… that’s much easier said than done!! ;) Gio

BVPS is always meaningful. Because that’s the shareholders’ capital. Of course, if you are in a business which generates lots of free cash with small amount of capital, you might be more interested in BVPS growth, rather than BVPS alone (and that’s why I think Biglari’s capital allocation skills are very important!). Yet, the discounted value of the future BVPS, which is FV, takes into consideration both BVPS and its rate of growth for many years into the future. The only exception might be a company that distributes a large percentage of the free cash it generates trough dividends… BH doesn’t seem to be the case! ;) Gio

With this I agree wholeheartedly! :) Gio

Those things might be attractively priced, if everything will be OK with the general market, while they might be expensive, if something rotten is lurking somewhere… Unfortunately, that’s the truth imo… A most uncomfortable truth, but still the truth! Because the companies in my portfolio don’t operate in a vacuum, instead they are deeply affected by what happens to the general environment around them. Ok, thank you! Gio

NBL0303, Could you please tell us what you actually think? Is BH FV: a) way below BV b) little below BV c) circa BV d) little above BV e) way above BV ;) Thank you, Gio

Why should it be either the “bottoms up” approach, or the “macro” approach? I always make use of a bottoms up approach, and simply let my cash reserve increase when I see a general market behavior that I deem too frothy and sometimes even reckless… Let me ask you, if I may: what’s your cash level right now? Is it at zero? Thank you, Gio

I think each quarter Watsa comments on them, and let us know at which percentage of cost they are reported on the books. Gio

That’s the very same question I had already asked! And let me tell you what I think: if I were to decide the level of cash I hold only on the basis of “very cheap” opportunities, I would always be 100% invested. In fact, right now I would be 100% invested. Following the pendulum is nothing but to heed Buffett’s warning: And of course also the opposite is true. And imo the level of cash plays a big role! Gio

Two things: 1) I don’t think investing should be either black or white 2) I don’t think investing should be a static thing 1) If you are 100% aggressive, you’ll end up doing very well in a market that keeps going up. If you are 100% defensive, you’ll end up doing very well in a market that goes south. But in both cases, if the market does something different from what you expect, you’ll end up suffering. The ultimate goal of good investing imo is to put yourself in a position in which your dependence on what the market does gets minimized (again: if the market keeps going up I gain 70, if the market starts going south I gain 30). You might answer that choosing undervalued stocks is the best way to achieve that goal. But I believe that is just a misconception brought up by the fact the last two market crashes we have experienced were both resolved very quickly. 2) That’s why statistics imo are useless, and at times even worse, because they might convince you of something they cannot have valued with nearly enough precision, under the false disguise of analytical rigorousness! I started investing my firm’s funds in 2004, and since then I have already changed the amount of cash I hold at least 5 times: 2004: 100% invested 2006: 70% invested 2009: 100% invested 2012: 80% invested 2014: 70% invested Not only, also the choice of my investments reflected each time more or less aggressiveness. Now tell me: how could ever a statistical paper examine with precision what I have done during the last 10 years, without possibly knowing all the details?! And what I have done is only one possibility in an ocean of other plausible permutations! Simple and good common sense should prompt any of us to ask the following question: why should investors be supposed to act always 100% aggressively, or always 100% defensively? … And just let statistics say whatever they want! ;) In other words, investing imo is an endeavour characterized by many shades of gray and continuous change. Gio

Well, I think the “macro” drag is an illusion. Instead, I look at it this way: I choose to earn 70 if everything goes right and 30 if trouble comes our way, instead of earning 100 if everything goes right and 0 if trouble comes our way. The total is always 100, that’s why I think a “macro” drag doesn’t really exist... But of course, if everything keeps going right, its illusion will surely be strengthened! ;) Gio

Yeah! In fact I must admit I know very little about the IT sector… You believe you might enjoy other kind of advantages than charging the lowest price for your services? Very well then! Of course, the more advantages you enjoy, the less important a low price becomes! ;) Gio

Liberty, my firm’s equity is up 25.83% so far this year… Last November 06 I started a thread titled “Yesterday I doubled my capital for the first time”, saying I was pleased I went from 1 million Euros to 2 million Euros in 4 years… Well, yesterday I was above 2.1 million Euros for the firs time!… Clearly I am doing business, and a generally overvalued stock market doesn’t prevent me from investing 70% of my capital in businesses I think I know well at good prices… Let’s just put it this way: if valuations were lower and the general level of indebtedness were lower, I probably would be holding only 10%-15% in cash, instead of 30%… what’s wrong with that?! As far as I know, no one has ever suggested the Shiller CAPE should be used as a tool to be in or out of investing and doing business… I am always investing and doing business, and sincerely I am more worried about the general level of indebtedness than about stretched stock market valuations. As an aside, this is another point I disagree with the author of the Shiller CAPE article: at the end of that piece he abandons statistical reasonings to venture into the treacherous land of “economics”… And he suggests that human beings become better and better at dealing with crises, therefore the next one will be milder because of our increased ability of dampening its effects… Well, I disagree: if humans being are getting better and better, please can someone explain how we got into a state of indebtedness that has probably never happened before in human history?? When debts are so elevated, a lot of capital must have been used foolishly… And deep losses are inevitable. Either the borrowers will suffer, or the lenders, or both… But there is no easy way out of misallocation of capital. I will be ready to acknowledge a real improvement in human behavior, when we finally learn to grow gradually, without relying too much on the use of debt, and therefore when we show we are able to avoid the building up of an unsustainable level of indebtedness. I am sure we will get there sooner or later, but not this time… This time imo it is already too late. Gio

Hi ilike, Yours are very good questions! So, let me tell you what I think about a consulting business: it is extremely difficult to differentiate yourself from the competition, and therefore it basically is a matter of being the lowest cost player in the field. First of all then I would make sure you can beat the competition on the price you charge for your services. Take my case, for instance: I run a for profit post-graduate master school and a civil engineering company. As you might imagine, lots of synergies can be exploited between the two. Therefore, most of the times I am able to sell at a cheaper price than other engineering companies. The first question I would ask myself if I were you is: am I able to undercut the competition? And how exactly? Then, if the answer to the first question is YES, and you can devise a precise plan to achieve that, I’d suggest you to realize that consulting is basically a PR business: you must enjoy staying among people, going to parties, living the country club, or golf club, or tennis club, etc. lifestyle, getting into different organizations of any kind, getting somehow involved with politics (even if politics might matter more in my field than yours)… In other words you must make yourself known to as many people as possible, and enjoy showing off! The second question I would ask myself if I were you is: do I love always surrounding myself with new people and selling them my expertise? Or am I more the free and intellectual type, who enjoys the solitude of his office? If you like reading all the time like I do (I am half the consultant I could be!), chances are you will encounter difficulties in consulting, even if you beat the competition on prices… My experience is in other kinds of business you might (at least in part!) find a solution hiring a good and effective sales person… But not so in consulting! In consulting you must sell yourself, and no one could do that for you… Good news is, if your are comfortable with both questions of mine, I am almost positive you have all it takes to start a thriving and successful business! Good luck! Gio

If French is your native language, I envy you… Michel Rio is imo the greatest author of “philosophical novels” alive today. And he writes in French! Unfortunately, I was able to find just few novels of his translated either in Italian, or in English, or in Spanish (the three languages that I know)… And I must use Google Translate to read the rest… You might imagine the pleasure of reading gets much diminished that way! :( If I were you, I would visit Amazon.ca, and order all the novels by Michel Rio I could find! Cheers, Gio

Right! Because investing imo is all about finding the best entrepreneurs, who have built and run the best businesses, and partnering with them at the best prices possible! Then, imo you should also acknowledge the fact you are investing in the stock market, and everything in the stock market is somehow linked together, sometimes with stronger ties, other times with ties that are a bit weaker… But to imagine you might be an island is simply not true and therefore dangerous! So, what does statistical analysis have to do with investing? Will it help me understand if Watsa, Malone, and Biglari are great at what they do? Will it help me understand if FFH, LMCA, and BH are good businesses? Will it help me understand if I have paid a fair price for them? Will it help me understand if the permanently high plateau for stock prices engineered by policy makers during the last 20 years is sustainable? Mmm… Sorry, but I just don’t see how… I have also read the Shiller CAPE article: though I have liked it much better than the article on Hussman, statistical analysis always gets in the way and the conclusion the author draws from it bothers me… The author starts the article on the premise the Shiller CAPE has broken down, because since 1990 it has spent 98% of the time above its historical average… Imo this simply doesn’t prove anything! What you must ask yourself is the following: what if policy makers have been successful in engineering permanently high prices for the stock market since 1990? And what if they won’t be as successful in the future? Don’t forget that those permanently high prices for stocks have been achieved only in the US: what about Japan? What about Asia in general? What about Europe? Take Italy for example: do you think you might have an easy time making money in the Italian stock market? Which is stuck at almost the same level for 10 years now? Well, good luck! I can still hear my father complaining “this insurance company cannot remain priced at 0.3xBV!”… A complain that has been going on for the last few years! And still goes on! Furthermore, when you dabble too much with statistical analysis, you might happen to lose sight of the most basic, and imo important, things: the author suggests how to fix the Shiller CAPE, using Pro-Forma earnings, instead of GAAP earnings. And he says that way the stock market looks less expensive. But he completely forgets to tackle another very important issue: valuation by different metrics! We all know how important it is to use and compare different valuation metrics, and ascertain they give us similar results. So, why do the Shiller CAPE, the (Price / Sales), and the (Price / Replacement Cost) hint to almost the exact overvaluation for the stock market, while the “Fixed” Shiller CAPE gives us a different number? Have the (Price / Sales) and the (Price / Replacement Cost) broken down too? If so, how to fix them? The article doesn’t even touch these questions… Yet, I think they are more important than any statistical analysis! Finally, as far as medicine is concerned, I can only say that each discipline has its own practices and needs. The fact statistical analysis might be useful in medicine doesn’t say anything about its usefulness (or lack thereof) in investing. Gio

Sorry, I hadn’t read your thread until now… But I have to leave the office, therefore I am going to post my thoughts on this subject tomorrow. ;) Cheers, Gio

I agree! And if I were in the States, OAK would be a very large investment of mine! Unfortunately, their distribution policy is prohibitive for Italian investors, because almost 50% is withdrawn as taxes… What would you do in my stead? Gio

Agreed! And I will go on reading that blog… Probably, I started with the wrong article… But I really HATE ( ;D ;D) statistical analysis! For two reasons: 1) I don’t think it adds much to good investing, 2) It is not contestable, nor verifiable… unless I decide to devote a disproportionate amount of time to something I believe doesn’t add much to good investing! Therefore, how could I judge statistical analysis other than a waste of time? ??? Gio

One idea that I have found interesting in that article is that even after as long a time as 10 years definitely is valuations could still not revert to the mean (FV). Nothing new, but it made me think: It seems to me that’s the best argument anyone can bring up in support of the relevance and great importance of following the pendulum! After all, if on average the price of 500 companies stays away from fair value, it must imply that the majority of those companies, taken as a single entity, keep having prices that diverge from values even after 10 years. As a consequence, the following argument “I buy undervalued stocks, no matter where the pendulum is, because 10 years from now only valuation will matter” must be false and misleading! The fact, instead, is that argument worked very well during the last 20 years, because policy makers were able to engineer an almost permanent state of overvaluation for the markets. And both times markets corrected seriously, they were prompted up again to lofty prices in a matter of just one or two years. The thought “well, the state of things which has prevailed during the last 20 years will go on” might be true, but it is just another way of gauging where the pendulum is and trying to follow it! ;) Imo there is no escaping the fact we all are subject to the pendulum… No matter we are aware or unaware of it… No matter we follow or disregard what happens around us… And those who find themselves going in the opposite direction, run the risk of experiencing unsatisfactory investment results for a very long time. Gio PS Following the pendulum has nothing to do with profiting from a crash in the price of oil! The latter is what I call “macro investing”, the former is something I consider useful even if all you do is investing in a bunch of companies you think you know well at good prices! Which is what I try to do! :)

I really HATE articles like that one! I have spent the time needed to read 20 pages of statistical reasonings, trying to convince me of what?... That the very same valuation metrics we use to gauge if our investments are undervalued, fairly valued, or overvalued: - Price / adjusted earnings - Price / sales - Price / replacement cost cannot be applied to a portfolio of 500 companies… And why? Because they inevitably entail some errors and show some lack of precision! Well, thank you very much, but I already knew that valuation is an imprecise art! And I don’t need anyone to write such a complicated article to remind me of how much future returns calculated on the basis of valuation metrics could deviate from the actual truth! But I also know that (Price / adjusted earnings), (Price / sales), and (Price / replacement cost) are the best metrics we have at our disposal to at least try assigning a valuation to our portfolio of businesses. In fact, do the author of the article suggest something better? Absolutely not! And you know why? Because there is nothing which is better! So, do you want to have an idea where the pendulum is at any given time? Do you think valuations might be useful in that regard? If the answer to both questions is yes, then (Price / adjusted earnings), (Price / sales), and (Price / replacement cost) is what you should use… And to the results you get you should apply whichever margin of safety you deem appropriate! To finally draw one of these conclusions: undervalued, fairly valued, or overvalued. In other words, value investing applied to a portfolio of 500 companies! I like Hussman because his analysis makes a lot of sense… surely not because I think his numbers are 100% correct! ;) Gio

+1!! :) All the best, my friend! Gio

Eric, I wish you a very fast recovery! :) All the best, Gio