giofranchi

Anyway, Pete, I have understood what you mean. And imo your analysis is correct. :) Gio

The beauty, which is also the true value of float, is that you don’t need a ‘seer’ return on investments (6% is far from being a ‘seer’ return) to get a ‘seer’ compound of capital (15% sustained for 25-30 years is a ‘seer’ compound of capital). ;) Gio

Mr. Cohen has done it again! His new work “Popular Problems” is filled with great poetry and music. A true artist still at the top of his game. Highly recommended! Gio

Well, sincerely I don’t think you can assign a probability to the fact a 25-30 years journey will turn-out as expected. I never try to. What I can say is that I think there is a substantial margin of safety. Let me explain: The average annual return FFH achieved on its portfolio of investments from inception is 8.9%. This already taking into consideration the last 4 years which were way below average (2013 was even negative!). Now, if some profitability will be achieved from insurance underwriting, as I expect under the supervision of Barnard, the annual return on their portfolio of investments, needed in order to compound BV at 15% each year, is around 6%. Barnard is surely the first reason I think insurance operations might become profitable. The second reason is FFH strategy to purchase insurance companies worldwide, especially in developing countries. In a competitive business, like insurance underwriting undoubtedly is, to be the first entrant is a huge advantage. We know how little penetration insurance still has in developing countries, therefore I think FFH is doing the right thing betting on their markets. In other words, less competition now than in developed countries, and the opportunity to keep competition at bay in the future. In fact Fairfax Asia is always very profitable! Still small, but growing! People generally think because the great secular bull market in bonds is over, it will not be easy for FFH to replicate past investment success… But I asked this exact question to PW at the 2014 AGM, and he answered saying he doesn’t think they were disproportionately helped by the bond bull market in achieving their investment track record. He said he thinks they will go on finding pockets of value. If US government bonds won’t be good value anymore, they will find something else. And thinking about it, I have come to agree with him once more: I mean, in a world so much loaded with debt there most probably will be distressed debt opportunities… They took advantage of a distressed debt opportunity in 2009, when they purchased municipal bonds in California, a large investment that has turned-out very fine!… And look at what Howard Marks is doing: he is raising funds for distressed debt opportunities… And look at what Dan Loeb has done with Greek and Portuguese government bonds… As other distressed debt opportunities present themselves, the yields on US 10-years and 30-years government bonds will most probably hit new bottoms, following what has already happened in Japan and Germany. It is only logical that in a distressed environment money flows to the (relative) safety of US government bonds. Then, they might sell those bonds and redeploy their proceedings in some distressed debt situations. In this scenario, and to me it seems a very probable scenario, FFH has the possibility to go on achieving investment returns in line with their track record. 6%, instead of 9%, is a margin of safety of more than 30%. Gio

Yes! I understand. Thank you :) Gio

- A mediocre business (insurance underwriting), useful only to generate float at no cost, or even better with a small profit, coupled with a careful investor with a proven track record and a process I understand and like… that, taken as a whole, becomes a good business. - PW and his team are good people. - 1.15 x BV or 1.3 x BV less goodwill and intangibles is a good price, because probably not subject to much more multiple contraction. At least, this is how I see it. Gio PS Of course 1 and 2 are mixed... But I guess that's just the way it is with insurance underwriting and money management, right?

Exactly! We have spent two days on something we simply disagree… People disagree on a whole range of topics every day… Without necessarily making all this fuss… Right?! ;) Gio

I am not talking about repricing FFH!!! How can I explain this??? I am only talking about what I think they could achieve during the next 2-3 decades. You don't believe they could? Fine! We simply disagree. Gio

Eric, if I had said that, I would have predicted an expansion in the multiple FFH will be priced tomorrow. Have I said that? No! Only thing I have said is: if at the end of the 25-30 years period PW is working for he turns out to be very successful, then and only then the market might reward FFH with an higher multiple. What’s wrong with that? Gio

But he also has repeated many times how results of the insurance business in particular depend on good management! Hasn't he? Gio

I would suggest never to chase track records out of this world. Save as much as you can, and invest with good people, in good businesses, at good prices. Gio

No, I do not compare Fairfax to BAC. I only say that in any investment I always look for good people, a good business, and a good price. If you are fine with BAC being led by a mediocre team, well then ok! Maybe the price is wonderful enough to justify that… I am more comfortable with a good price and a good management, rather than a wonderful price and a mediocre management. Gio

Well, but they have to approve it each time, don't they? Or is it utterly automatic? If so... ok, just a coincidence!! ;D Gio

You might say this doesn’t mean anything and the repurchase of Subordinate Voting Shares is very limited indeed… Yet, it strikes me as an odd circumstance FFH declares the intention to repurchase some of its shares just 2 days after I asked if it were a good idea to buy FFH again… ;) Gio PRFFH-Sept-23-2014-Normal-Course-Issuer-Bid.pdf

Or let’s look at it another way: Supposing these two ratios don’t change in the future, Investments / BV and Investments / BV less goodwill and intangibles, an annual return from investments of 4.83% (or whatever it is, taking interests and taxes into consideration, but hopefully also some underwriting profitability) will be required to compound BV at 15% annual, while a return of 4% will be required to compound BV less goodwill and intangibles at 15% annual. If at the end of the 25-30 years period Mr. Market still values FFH 1.15 x BV or 1.3 x BV less goodwill and intangibles, shareholders return will obviously be 15% compounded annually. Therefore, the only interest we might have in those two multiples, 1,15 x and 1.3 x, is to answer the question: how likely is it that Mr. Market might grant those same multiples to FFH in the future? In other words, is there a risk of multiple contraction, or not? Imo not only there is no risk of multiple contraction, but there is also the possibility of multiple expansion! Because, if FFH truly achieves those annual returns on its portfolio of investments for such a long time, it will be most probably regarded by the market like BRK is today. Gio

Either I am right that we as shareholders own BV, or you are right that we as shareholders own BV less goodwill and intangibles, I guess we might agree on the following: Today, anyone can pay $448.5 and get $1,200 in investments supervised by someone of the caliber of Watsa and Bradstreet. Investments that will probably grow thanks to the increasing float generated by an insurance global conglomerate whose operations are supervised by someone of the caliber of Barnard. Gio

Great presentation that I think might fit very well within this thread! :) https://gallery.mailchimp.com/443e8872e35ccdde12b72e8cd/files/BAM_YPO_Presentation_Sep_14_.pdf Gio

I don't think so. If I am right about FFH future compounded growth, it doesn't matter if it is 1.15 or 1.30... It doesn't matter at all! It will be a very satisfactory investment anyway. As I have said I was not putting any multiple on top of anything. On the other hand, if I am wrong, 1.15 or 1.30 won't matter either. It won't be a very satisfactory investment anyway. Gio

Ah! Here it comes! I guess BAC instead isn’t supposed to depend on management, right? Even after what Mr. Lewis has been able to do with just a couple of very stupid decisions some years ago, right? --Charles Munger It is always both: good people and good business. One without the other is the only true optical illusion! ;) Gio

Of course! How could it be different?! Other insurance companies cannot even dream of compounding BV at 15% for many years to come! How could the market allow them an higher multiple?! Listen, it is very easy: either you are right about FFH future, or you are wrong. Period. If I am right, FFH today is very cheap. If I am wrong, FFH today is priced like Mr. Market prices any other insurance company. Great upside if I am right. Small downside if I am wrong. Gio

The double counting is when you are fixated at the low P/B... yet the "low" P/B isn't that low at all. So by looking at something that makes the premium invisible, your mind is being tricked by an optical illusion. You are then trying to put a premium on something that has already had a premium put on it... without regard for measuring the premium that is already there (that's the double counting). Eric, I told you the exact math I use. I am not putting any multiple on top of any number. I am just trying to understand what shareholders truly own today. How that could reasonably grow in the future. Then, discount it back to the present. It is only math, so if wrong it should be mathematically proven incorrect. Not philosophically... Your philosophical response doesn’t help me in the least. PW every quarter reports to shareholders BVPS, not BVPS less goodwill and intangibles. Therefore, he feels it is BVPS that we own as shareholders. And I believe him. I call it BVPS0. Then, I make an assumption for a rate of compounded growth of what we own today. To make no assumption for the future, obviously, is not possible, if you want to understand what IV really is. I think 15% is achievable, because it entails a return from their portfolio of investments of about 6%-7% annual. You might say that is no small feat, but it is way below their average of 9% until now. But you can choose whatever compounded growth you think is most reasonable to expect. This way I calculate BVPS30. Finally, I discount BVPS30 back to the present. As my example of Zenith proves, I don’t see where I am mathematically double counting. But, if I am actually double counting, I hope you can show me… mathematically! Btw, in year 1: BV = $8,194.1 million Portfolio of investments = $25,461.6 6% of portfolio of investment = $1,527.7, which is 18.64% of BV… A return of 4.83% on their portfolio of investments is actually enough to increase BV by 15% in year 1. Gio

No, I am not buying yet. Though ALS is dirt cheap imo! It is just that I keep buying Liberty Media. All new funds go into that idea. Gio

If PW thinks Zenith IV is 1.3 x BV0, with BV0 = BV today, and Zenith BV compounds at 15% annual, and the business prospects for Zenith don’t change, won’t PW still think that Zenith IV would be 1.3 x BV30, with BV30 = BV 30 years from now? Gio

That's exactly right. Double counting. Ok, now I have understood what you mean. But I am not trying to do what you suggest. Instead, I am only trying to compute the true value of what I own today. In doing so I don’t see why I should strip-out goodwill, if PW hasn’t paid more than IV. Then, I am trying to figure out the value of what I could be owning 30 years from now, if the value of what I own today compounds at 15% annual. Then, I discount it back to the present. That’s all I am doing. Where is the double counting? Gio

And don't you think PW works through economic goodwill diligently enough? Gio