giofranchi

What I meant is I see no reason why buildings, land, and also equipments shouldn't be recorded on the Balance Sheet at the value they could be sold in the market today. I don't understand why the value recorded on the Balance Sheet should be different from market value. So, is the value of buildings, land, and equipments on the Balance Sheet always the same as market value? If the answer is yes, then this ends the discussion as far as I am concerned! ;) Gio

Thank you, Dazel! Be sure that I understand your thesis about BAC very well and I think it will be a wonderful investment. It is just that I am more comfortable sticking to what I think I know... Especially now that the Shiller P/E of the S&P500 is nearing 27... Cheers, Gio

Maybe... But, if I decide to sell my apartment, I will find someone tomorrow morning willing to give 10 times the cost of the underlying land... Because I would not be selling square meters of land, but square meters of an apartment... An apartment in a building that, if depreciated over a 40 years time horizon, would be worth less than zero today! Cheers, Gio

Of course depreciation schedules for buildings are longer than for equipments... This doesn't mean they make sense. I live in an apartment of a condominuim built in the early '60s. And I have always seen its price go up. And it will continue going up for many years to come! ;) Gio

Yeah! Very strong and valuable brand! But look just two places below: we find McDonald's, which is in the fast-food franchising business ;) Gio

Thank you very much Dazel, Well, maybe… it just seems a bit strange to me that in a business, like the banking business, in which the amount of business you can do is somewhat regulated and closely tied to the capital you have, basically it is a multiple of that capital, equity and its growth are not useful to value the business… After all, banks are not biotech companies, where all the capital you need is of the intellectual kind… Am I wrong? I think the fast-food franchising business is almost the same thing as the royalty business. I don’t see any difference. It is not BH that will do all those things you have listed. BH will only receive a percentage of the revenues from the people who will do all those things you have listed. Gio

I really don’t see why buildings need to be depreciated… Each year you have capital expenditures to maintain their status quo, don’t you? Those capital expenditures reduce your cash flow, which in turn reduces the amount of cash on your balance sheet. Why should you also reduce the value of your buildings on the balance sheet? Moreover, we know that generally the value of buildings (if properly cared for through the years) at least keeps pace with inflation (therefore, it generally increases). Gio

To me the only thing that matters in business is the "money in my pocket". And the only reason I own my businesses is because I think they are good machines to increase that "money in my pocket" at a satisfactory rate. Of course the "money in my pocket" is only figurative. And there are essentially three ways my businesses generate cash that goes to increase what I figuratively call the "money in my pocket": 1) Through a salary (I am CEO and I get paid) 2) Through increasing their capital or equity (I am an owner and I own a percentage of that capital) 3) Through dividends (just add buy backs in the case of a public company) If I don’t receive a salary, and the company doesn’t pay a dividend (nor buys back shares), I want to see its equity grow… Otherwise, where is the money going?? Certainly not in my pocket!! ;) Gio

Anyway, I don’t understand… If you don’t pay-out any dividend, how is it possible that BV is “relatively silly”? Where are all those retained earnings supposed to go? Gio They go to Eric Holder. Or to higher capital/leverage ratios (book value here would grow). Otherwise, they mostly go to shareholders via capital return. They will only go to book value if the bank needs to grow (like if there is the loan demand out there). Eric, I’d really like to understand: Who or what is Eric Holder? What do you mean by higher capital / leverage ratios? What do you mean by via capital return? Dividends? Any multiple depends on growth: growth is not a need, it is an opportunity. And I bet you are willing to pay different P/Es if the opportunity to grow is there, than if it is not. Gio

But don't you think that probably Buffett was laughing because BV is meaningless... if you are not sure to be profitable… and he meant he was not sure about Citigroup's profitability? That’s a completely different story! Gio

Anyway, I don’t understand… If you don’t pay-out any dividend, how is it possible that BV is “relatively silly”? Where are all those retained earnings supposed to go? Gio

Thank you! I will surely look for them! ;) Gio

Ok, then let me put it another way: $2 / $14 = 14.3% $2 / $21 = 9.5% Am I buying a business with a 14.3% ROE, or a 9.5% ROE? Gio

First of all, I absolutely don’t want to lecture people!! I have been accused before of lecturing… and I have already tried to say I couldn’t care less… Please, trust me: if I give that impression, it is only because I might have a too "forceful" way of presenting my ideas and points of view. I know it is something I have to change, and I am working on it… Second, if you know plenty of great entrepreneurs in the banking industry… well, then let me know the names!! ;) Third, and I already know this is going to be the most controversial thing I have written in a while, I am not a huge fan of Jamie Dimon… Results are evidently not all that matter to me! Gio

Dazel, you know there are very few people who post on the board that I listen to as carefully as I listen to you. Never heard one irrational thing from you. And your thesis about BAC is very clear and convincing. If I may, I have a question for you: what makes more economic sense, BV per share or Tangible BV per share? Because they are quite different… If you use BV per share, a multiple of 0.77 is a very good price indeed. If, instead, you use Tangible BV per share, the multiple gets to be 1.14. Let’s say it is something in between: (0.77 + 1.14) / 2 = 0.95. So, BAC is trading near “true” BV per share… just like BH… With BAC you have an international brand. With BH (imo) you have an entrepreneur who is doing exactly what I’d like to be doing myself, except at a much larger scale. I choose the person over the brand. And you might say: “Big mistake!... Buffett has always advised to go for the brand!”. Maybe… But what if I think I know how to judge Biglari’s achievements and decisions much better than I know how to judge BAC’s international brand? Shouldn’t we stick to only those things we at least think we know how to do? And I have said “we at least think we know”, because I recognize we might make mistakes anytime… both trying to judge what Biglari is doing and where he is going, and trying to judge how much resilient the BAC’s brand actually is. Let me end saying I have almost no doubt BAC will do much better than BH in the near future. Gio

I wouldn’t be too much worried about the recent decrease in earned premiums and float. In fact, when the market is a difficult one, and not enough opportunities are to be found, you want to see the discipline to shrink the business, instead of increasing it at all costs! Of course, at some point growth has to resume, but right now I think what we are seeing is good discipline and not a failure to do business. Gio

I will try to be more straightforward then… ;) I only invest with people I have come to respect and admire. It is not easy at all to win my respect and admiration as an entrepreneur… because I think I am a good entrepreneur myself… I hope a lack of false modesty on my part doesn’t bother you… And I respect and admire only people I have come to reckon as better entrepreneurs than me! Then I invest with those people only when I can do so at what I consider the right price (which is what I call “value investing”). It might be only a coincidence, but I don’t know a single person in the whole banking industry that I judge to be a great entrepreneur. Certainly not the CEO of BAC. And let me be clear about this point: I know very well I might be wrong in my judgment. Buffett has often expressed admiration for what the CEO of BAC is doing… therefore, probably I am wrong indeed! But I don’t care. Either I get to admire someone, or I don’t. Period. My lack of flexibility is what ni-co referred to. And what Howard Marks often says: every business at the right price is a good investment. Well, I am simply not able to follow that advice… If I don’t see someone I admire, the stock price means nothing to me… But this doesn’t mean I won’t be able to develop a more opportunistic behavior going forward. Gio

Of course they are rational to me… And they have served me well until now… But, like I have just said, admitting a dangerous lack of flexibility, they surely might be improved in many ways! Gio

Yes, I think you are right. And I definitely lack some flexibility… I will have to work hard on that! ;) Gio

frugalchief, thank you very much for your post. It is exactly how I think about BH… and also how I like to reason about business in general! ;) The problem with the BH thread is that it is not evolving in any way… Some like BH, some don’t. And it just doesn’t change… We keep repeating the same things over and over again, but nothing changes… I guess only time will tell. Gio

I agree. But I think it is a mistake to look at two very difficult years… and jump to the conclusion they’d better borrow money than run insurance operations! Gio

What’s the difference, if short tailed risk is always revolving? The fact is float is increasing… slowly, but increasing. As long as float is increasing, I think you want to know its cost, don't you? Gio

Well, I don’t really understand what many of you mean with “black box”… I repeat: I have what I think are very strict criteria for investing in a business. Whenever those criteria are met (and that’s what I mean by “deep knowledge”… or let me correct myself: deep ENOUGH knowledge), I invest. Whenever those criteria aren’t met, I don't invest. Period. And nobody, not even a suggestion from Buffett, usually can change my mind. Gio

Well, but I don’t know anything about WFC either… I simply have a set of rules for investing in businesses… They have served me very well until now… And I stick to them… In retrospect they made me miss fantastic trades like WFC in 2009 and BAC in 2011… But who knows instead how many times they might have actually saved me?! Gio

Well, I know… But this kind of reasoning is still is very difficult for me… In retrospect I was an idiot not to buy a lot of things… Apple… Amazon… Google… even Tesla… The only difference is that Buffett, like you, and like others, thought 50 years from now BAC would probably still be around... while Apple, Amazon, Google, and Tesla... well, who really knows?? Gio