giofranchi

Ok, thank you. If I haven't overpaid for a business, why should I strip-out the goodwill on my balance sheet to compute what I truly own? Gio

Sorry, Eric, clearly don’t want to annoy you! ;) I simply don’t understand why, if I haven’t overpaid for a business, I should strip-out the goodwill on my balance sheet to compute what I truly own. Gio

;D ;D Gio

Mmm… Ok, let’s say he pays IV… even though you teach me a value investor always looks for a discount to IV, right? Anyway, I don’t think he pays more than IV. And I would strip out intangibles and goodwill only if acquisitions wre made above IV. Gio

I guess you forgot management... Are you willing to pay to partner with a good entrepreneur? Gio

IV is partly reflected by the premium that FFH pays when it purchases wholly-owned insurance businesses. Why? I think PW buys wholly owned insurance companies only if he thinks he is paying less than IV, don’t you? Even when he is paying 1.3 x BV. Gio

This thread is about whether 1.15 x BVPS is FFH IV. If its IV is higher or lower than that. HFs don’t enjoy the benefit of float. Ask WB what he thinks about the value of float. Ask PW what he thinks about the value of float. Why is PW going on buying insurance companies all over the world if FFH is nothing but an HF?? Gio

I agree 100%. I guess probably in Europe we are still feeling a pain that in the US was only briefly experienced in 2009-2010… That’s why rising stock prices don’t make us feel so much comfortable… In Italy, and maybe also in England (at least in part!), we feel first-hand the irrationality of asset prices that go up almost every day with tons of qualified people that remain without a job… The piece of news industrial production in Italy declined again last July is just out, the biggest construction companies in Italy have all practically left the country, our debt is the third largest in the world… and yet the Italian government can borrow at a lower cost than the US! Isn’t this irrational enough? Believe me, if you live it each day, it surely is! Gio

Almost all developed economies are plagued by debts that keep rising instead of gradually decreasing. And debt beyond a certain level stifles economic activity, instead of stimulating it. Meanwhile central banks have flooded the world with cheap money, printing like it has never been done before. As a result all asset prices have gone way up. Poor economic activity, high asset prices… what other irrationality do you need?! Fairfax is right about being worried. It’s a $37 billion in assets insurance conglomerate… It must worry about high debts and high asset prices… We might have the luxury to disregard what’s happening around us… Certainly not Fairfax! Anyway, this sums up pretty well what I think: The Schiller PE of the S&P500 is around 26.5, either in the next 2 years it gets to 29 – 30, or it stops getting higher and higher. If the Schiller PE gets to 30, there is no doubt in my mind a bubble has finally developed. Otherwise, we will muddle through. In any case Fairfax’s conservative stance will be finally proven either right or wrong. Not much time left to wait. Gio

A premium to BV doesn’t mean you are paying a premium to IV: if you are paying more than BV, but less than IV, chances are your investment will turn out fine. The point is not really how much Buffett paid for his float (he is among the richest men on earth, isn’t he?!), the point is 1) how much does he think float is worth? 2) Does he think float in the hands of a bad leader is worth as much as float in the hands of a good one? 3) How much does he think underwriting profitability is worth? My answers: 1) A lot, 2) Not at all, 3) A lot, but much more as a sign of how safe insurance operations are, than for the amount of cash generated. Gio

I am not saying what you suggest. But I don’t think Buffett started investing in insurance companies because he liked an intensely competitive market… Buffett has said many times the insurance business is a difficult business… And he doesn’t like difficult businesses. He started investing in insurance companies because of the float and because he thought the securities business is a good business. If I remember well, those are the exact words he used in a letter from the days of his partnership: “the securities business is a good business”. And float is the stuff the securities business is made of. When you buy FFH, you are clearly not only paying for the securities on its balance sheet: instead, your are paying for all its balance sheet. You give $447.5 and you get more or less $1,200 in investments working for you. What’s the difference if Buffett pays for his float and then he uses it himself, or if I pay for my float and then ask Prem Watsa to take care of it? Of course, you might say Buffett didn’t pay more than BV for the insurance companies he bought… I don’t know how much he paid, cannot reply to that… Anyway, it is clear to me he thinks they are worth much more than BV. Gio

I guess "Wtf" means something not very polite... Anyway, the multiple over BV you should be willing to pay both for FFH and for BRK depends on the rate of BV growth they will achieve during the next 40 years (more or less). What do you think will grow faster: A) an $8 billion company led by a 63 self-made billionaire, who is still very motivated and planning for the very long term... With an equity portfolio hedged for the next 2 or 3 years; B) a $300 billion company led by a genius like Warren Buffett... For the next 10 years. If your answer is B, well then I think you might be right... Unpolite, but right... My answer is A! Gio Ajit Jain, Tad Montross, Tony Nicely et al have been running BRK's insurance biz for over 20 years. They have managed the CR, profitable float etc for that entire time. The next 10 or 30 years is likely no different. So, BRK's insurance business promise over the next 50 years has very little to do with WEB's age. Prem has not run a good insurance operation at all over the comparable timeframe. Yes, Odyssey has brought some insurance wherewithal to FFH and thus it is all conjecture at this point that ORH insurance prowess is readily scalable across FFH. I sold out of FFH waiting to see how they do as an insurance operator. Five years at least for me. The only real comparison between BRK and FFH is what would happen if there are two or 3 years of disasters, like KRW & Earthquakes & floods. The insurance clock will be reset then. The largest Insurers of today, State Farm, Allstate are said to be vulnerable. Will FFH be found with or without clothes when that tide goes out? Berkshire will do fine. Especially in the aftermath. What's the probability of this happening? It is non zero. It has happened in the last 100 years. It seems almost anybody tends to overlook the importance of a leader. In general there seems to be the idea that the larger the organization the less important the quality of its leader. I don’t agree. Most people need and even want to be led, either they find themselves in a small or in a large organization. And the quality of their work and their performances is deeply affected by how effectively they are led. I am not saying Berkshire will come to an end after Buffett is gone… After all, the roman empire didn’t come to an end after emperor Nero succeeded emperor Claudius, right?… Of course, results weren’t very satisfactory either…!! ;) Seriously: Berkshire might go on growing like it is doing today after Buffett is gone, but it is not something I want to bet on. Gio

FFH has a long history of not overpaying for assets. Therefore, I don’t see why goodwill and intangibles should be an issue. Of course, if you strip out goodwill and intangibles by default, that’s a different story… But I don’t think they should. On the contrary, investments in associates were recorded at $1.85 billion, while their market value at the end of Q2 2014 was $440 million higher. $440 million is another 5.37% of shareholders equity. Btw, Eric, do you know of any pension fund which increased its equity 17% during the first 6 months of 2014? … Hard to think FFH holds the same investments of the average pension fund! ;) Gio

Well, of course also the quality of management matters... And I highly doubt the average pension fund is managed by someone of the caliber of Watsa & Company! They could do many things... They can increase the equity percentage of their portfolio, and Bradstreet is not exactly the average bond portfolio manager, right? They will go on buying entire businesses, etc. Most of all a 6% for a pension fund is... 6%, for FFH it means 15%... Put whatever multiple to BV you want on that, but I don't think 1 is the right choice! Gio

Maybe… But those insurance operations are here to stay. Actually, they are getting bigger and bigger (the majority of operating companies they have bought recently are in fact insurance companies). And the truth is they have $24 billion in assets with only $8 billion in equity, and a Total Debt / Total Capital ratio of merely 25%. And a 15% increase in equity is achievable with just a 6%-7% return on their portfolio of investments. This is a result of their insurance operations. Gio

Unfortunately, what happened during the last 10 years won’t help you very much to understand what will probably happen during the next 30 years. Insurance operations: During the last 10 years they had to deal with burdensome legacies of the past. Watsa has often posted a slide in his AM presentations, in which he underlines how contracts written during the last 10 years have constantly and reliably been profitable. CRs over 100% were caused by unsound policies written before FFH acquired those companies. Now all of that is almost over. Under the general supervision of Barnard, if the huge success of Odyssey Re is any guide, we will probably see insurance operations solidly profitable for many years to come. Investment results: --Prem Watsa, Q2 2014 Conference Call So, they have been too conservative over the last 10 years. Ok, we all know that. Now the only thing that matters is: what comes next? Easy money either leads to asset bubbles… or it does not. In a 2 or 3 years time we will finally know for sure. If bubbles inflate then burst, 3 years from now we will be here singing praises to Prem & Company; if instead we muddle through, there will be no more reasons to behave so cautiously and it will be business as usual once again… well, not exactly: it will probably be much better, with much stronger insurance operations than before and with some operating companies they are starting to acquire. Gio

Imo a business is nothing but a machine to generate earnings. If those earnings are retained, they go to increase equity. And at the end of the next 40 years all that matters is how much equity will have grown. What will be the source of those retained earnings that go to increase equity is irrelevant – IMO. Gio

I guess "Wtf" means something not very polite... Anyway, the multiple over BV you should be willing to pay both for FFH and for BRK depends on the rate of BV growth they will achieve during the next 40 years (more or less). What do you think will grow faster: A) an $8 billion company led by a 63 self-made billionaire, who is still very motivated and planning for the very long term... With an equity portfolio hedged for the next 2 or 3 years; B) a $300 billion company led by a genius like Warren Buffett... For the next 10 years. If your answer is B, well then I think you might be right... Unpolite, but right... My answer is A! Gio

Yesterday FFH closed at $447.5, while BVPS at the end of Q2 2014 was $386.77: a multiple of 1.157, below the 1.2 x BVPS Buffett is willing to buy back BRK shares. If FFH has made some money in Q3 2014, that multiple today is even lower. From Q2 2014 Conference Call: --Prem Watsa So, here we have a great entrepreneur, who has already built an $8 billion company, who is among the most reliable CEOs in North America, and who is thinking and planning for the next three decades… Don’t you agree with me it is worth more (much more) than 1.15 x BVPS? Cheers, Gio

Someone once posted (maybe gio?) that Buffett follows Martin. If he's good enough for Buffett, I figure it's good to check in on him every once in a while. Yes, it was me. Though results are very important, I don’t think we should dismiss good ideas simply because they are uttered by someone who has failed to perform recently. I guess what we should do is to understand those ideas, become very aware of the warnings those ideas contain, and then look for investment opportunities that leave us comfortable notwithstanding such threats. I simply don’t see how to drive blindfolded might turn out to be a good idea… ;) Gio

Given the chance we have of holding BH for the next 2 or 3 decades, I think it won’t make such a difference if your entry point is 0.8 x BV or 1 x BV… I have lots of cash, because I always want and feel comfortable owning a meaningful cash reserve, but I am not deferring my purchases of BH at 1 x BV in hopes of buying it later at a lower multiple. Gio

Ok, so no more CBRL purchases… Even if I think there might be a chance BH will end up buying the whole company… But in April I think Biglari will surely give another try to be elected on the CBRL board of directors, and, if successful this time, I think the market might very likely revalue BH stock. So we have a sort of catalyst in a 6 months’ time. Of course he might get rejected once more… but I guess no catalyst is a sure thing, right? ;) Yes, I think BVPS is around $340. Besides BH, I think also Liberty Media is a good bargain today. Selling at approximately 17% discount to NAV. Of course, its NAV depends on the stock price of Sirius and Charter, if they are overvalued, Liberty Media’s NAV might be somewhat inflated… But, if they are no more than 17% overvalued, practically you are partnering with Malone for free… Not bad! Cheers, Gio

Thank you for posting your spreadsheet! Well done! :) Gio

Well, what is he doing exactly?! ??? Besides, I don’t know how you could time such things… Is Biglari buying shares at a cheap price? The only thing I know is I am doing the same! ;) Finally, we just should consider the fact that by April 2015, 6 months from now, the CBRL poison pill is due to expire and Biglari might finally be able to get his seats on the CBRL board of directors. He has more or less $200 million in cash, which might be used to buy another 5%-8% of CBRL. In the meantime CBRL stock has gone nowhere for the last 10 months, it has actually declined -12% from its November 2013 highest price of $118. It is hard to image how CBRL shareholders could be as satisfied now, and therefore as complacent, as they were one year ago… And if nothing changes by April 2015, Biglari will surely have a great chance to get involved in CBRL operations and implement those changes he thinks are necessary to create value. If that happens, it is very difficult to see how the market might go on pricing BH at a multiple of 1 x BV. Gio

I don’t think my doubt has been answered yet. Franco-Nevada has no debt. They could go on buying royalties in the market, whenever they find attractive deals. Altius, instead, has debt. And it will take some years before the debt is eliminated, or sufficiently reduced. On the other hand, they could rely on the project generation side of the business… if it works well. And my doubt is: to work well, isn't it supposed to discover at least one profitable mine? Otherwise, on which other metric could you judge a project generator in the resource market? With debt to be brought down, how else to increase their portfolio of royalties, if not through successful project generation? At least for the next 2-3 years? Will Kami or JL be that profitable mine? Will that profitable mine be found in the land now owned thanks to the CDP acquisition? For some fast growth also in the next 2-3 years? This is not very clear to me yet. Gio