giofranchi

And what is a "massive discounts to IV", if you don't know what's the true IV of a business? How could you know the IV of a business, if you don't think you can understand its future prospects? Of course, the answer is that you cannot. Entrepreneurs might be wrong many times, because many times they have a businessman mindset, and lack the mindset of the investor or capital allocator. When you put together those two mindsets, you get much higher probabilities of being on the right path to business success. If you think you can believe "academic reserch", well then I guess you will find some statistical strategy to play the market that suits your temperament well, and be successful... At least, that's what they say, isnt't it? ;) Gio

Topofeaturellc, I think it is obvious it cannot work that way. Entrepreneurs are people who know how to judge the "future prospects" of a business. Successful entrepreneurs are people who judge successfully the future prospects of a business. Period. If you don't feel to be one of them, probably you'd much better find a safe job, save, and buy an index fund. Ah! Of course, I am very skeptical about all those statistical strategies to play the stock market... Successfully... Even the valuation of a business is bound to be terribly wrong (and therefore what you call a risk/reward scenario is bound to be terribly wrong), if you make huge mistakes in assessing a business future prospects. Liberty thinks he can judge VRX's future prospects successfully. And he has done a great job trying to understand the company! I sold my investment, because I admitted I wasn't able to muster enough confidence in VRX's future prospects (mostly because of all its debt...). But I don't judge Liberty's chioce... And I don't pretend if I can't understand something very well, therefore nobody can... I still think chances are Liberty will be proven right on VRX in the end. Gio

If all rights are exercized, there will be 1.721.150 + 344.261 = 2.065.411 shares outstanding. At yesterday's closing price $385.75, it translates into a market cap of: 2.065.411 x $385.75 = $797 million. Equity will be: $618 million + $86 million = $704 million. BH is selling for 797 / 704 = 1.13 x BV. Gio

Hi, I admire Einhorn very much. And I wouldn't mind having GLRE as my only investment, if I had to. Anyway, I like the possibility to split my investments among GLRE and TPRE. Mostly for one reason: to diversify insurance risk. My idea is the more insurance contracts I own, the less each contract, if something unexpected and bad happens, will affect my net worth. Owning both GLRE and TPRE I think is a good way to reduce insurance risk. Right now I have 60% in GLRE and 40% in TPRE. Gio

I am on holidays, and I had missed your first post until now... ;D Anyway, welcome to the board! Cheers, Gio

Yeah, I agree... Therefore muscleman is right: if you report costs that are no true economic costs, your earnings at the end of the year are lower than economic reality. As a consequence, also BV at the end of the year is lower than economic reality. I guess this is muscleman's point. Gio

See page 14 of 2013 BRK AL: I don't understand, how could you declare in the Income Statement Amortization Costs, without a corrisponding loss in value on the Balance Sheet? How are those costs justified? Gio

If you mean that without amortization costs (or at least without part of them... Buffett himself thinks that only 20% of those costs are true costs) BRK earnings would be higher, and therefore BRK BV would be higher, then I agree with you: today you are paying a multiple of 1.3 x a BV that most probably is underrated. Gio

I never compare two things that are orders of magnitude apart... It would be like comparing my boat to Abramovic's yacht... Just because they both float on water... Buffett has bought his operating businesses for much more than their BV. In his ALs he has often said they are on BRK balance sheet at cost, less amortization of goodwill. Therefore, I think they are accounted for far less then their IV, but still more than BV. This being said, the multiple of BV you want to pay for any business depends only on its rate of future growth: I think a 52 years old manager will find it much easier to grow something as small as TPRE, than an 83 years old manager to grow something as big as BRK... Even if the older manager is arguably more gifted than the younger! Gio

On the other hand GLRE has already been through a 2008 with very little damage. Einhorn's macro views are more in line with Watsa's, has a large investment in gold and other macro hedges... In general he is among the most cautious investors I know of... And I think he will be very well prepared, should another credit crisis come our way. Not for insurance companies only! Ask Berkowitz what volatility did to his fund in 2011... Most businesses are affected by volatility, let's face it! Yet, the fact you must manage volatility doesn't mean you can get both low volatility and high returns... Personally, I think that for TPRE and GLRE these words of Watsa's will prove to be true: "Returns will be satisfactory, but lumpy." Gio

Hi, Of course, why not? I tend to agree with muscleman. All the information I gather about a company have only one goal, and it is always the same: to know how and why that business might be able to generate strong results for many years to come. I am not interested in anything else. If I can understand pretty well and easily enough how and why a business might be able to generate strong results for many years to come, I usually find also that: 1) Its price is undervalued by the market. The market is mostly made by bankers, traders, money managers, etc., whose time horizon is very limited indeed (2 or 3 years at best). Entrepreneurs, who are interested to own a business are still a minority. This makes the market quite inefficient in valuing a business with good prospects for value creation in the long run. 2) As a consequence of 1), usually a sound margin of safety is imbedded in my investment thesis: though not impossible (nothing can be utterly excluded...), it is difficult such a good business, and one which I think I understand well, blows up entirely... The downside scenario that usually happens is a much weaker performance than the one I had thought possible/likely. Points 1), 2), 3), and 4) of muscleman's help me understand how and why TPRE might be able to generate strong results for many years to come... Instead, though accurate and well researched, I am not sure all the information in your write-up add much towards that goal. Hope you take this well. ;) Gio

Muscleman, I wouldn't be so sure about that... According to Soros: And Loeb is returning 18% annual for almost 20 years now... And his portfolio in 2008 has been very volatile... I don't see TPRE (nor GLRE) becoming as levered as other insurance/reinsurance companies. Anyway, given Loeb's track record, it doesn't need to! ;) Gio

Tom, I still don't understand why you keep reading my posts... Is it so difficult to leave me alone? Just ignore me, won't you?... Or are you interested in platitudes??! Anyway, listen, a franchise business, led by an outstanding capital allocator, bought at 1.2 x BV is one of the best way to compound capital at 15% for a long time. Because it's a great business purchased very cheap. And if you think you can find such a thing behind every corner, good for you! I cannot. But I am always open for good suggestions! Gio

Hielko, The Lion Fund started in 2001... These 13 years have been the second most difficult 13 years after those in the middle of the GD to generate satisfactory investment returns!! It doesn't mean it will get easier anytime soon... Actually, I don't think it will... But the fact remains Biglari generated great results in a very difficult environment. Listen, as I have said, I always look for something with the "opportunity" or "possibility" to compound BV at very high rates... Because I then will be satisfied even if results would turn out to be much less than what they might have been. Gio

20% is not a number I invented... I try to never invent numbers!!! :)... It is simply Biglari's track record since the inception of the Lion Fund. Fat Pitch, It doesn't make sense to look at how BVPS grew since 2008: SNS was a turn-around, and it was bought for a fraction of BV. If you look at BH's investments in 2008, 2009, and 2010 they were clearly still too small... There was no way in those years to increase BV at high rates... But what matters, of course, is the return on the capital Biglari used to get control of SNS, which was very satisfactory. Then in 2011 BH's investments became comparable to BV and in 2011, 2012, and 2013 BVPS has grown at a CAGR of 20%. You might point out a track record of 13 years is too short... And I would agree. With Biglari that's all we have. I level off to 15% not because BH will be too large, nor Biglari too old... Just because even my optimistic scenario would be "too optimistic" to consider a 20% CAGR for 20 years... Anyway, this is only theory. A CAGR in the low teens for the next two decades purchased at 1.2 x BVPS would yield an investment result very few of you will be able to match buying and selling equity. ;) Cheers, Gio

Yes. When I say CAGR, I mean in BVPS. And that is necessarily after fees, because they are a cost. Before you make too much fun of my wishful thinking, let me add I spoke of "opportunity". Meaning that if: 1) Biglari keeps behaving like the very shrewd entrepreneur he has proved himself to be until now, 2) he doesn't screw his shareholders, Then I think those results, though it won't certainly be a smooth ride, are achievable. Gio

Shalab, I couldn't agree more! The problem is: 1) where you see "grandiosity" and "arrogance" - the change of name into Biglari Holdings - I see a simple and rational business reason - control. 2) where you see a "grabbing" and "manipulating" business reason - control for selfish reasons - I see a business reason that will benefit all shareholders - I have experienced trying to run a company both without and with full control... And I would never go back to the former! Maybe you are right and I am wrong. I don't know for sure. Surely, instead, we both agree the Tao Te Ching is a wonderful read! :) Gio

Well, I might be wrong about the notion of "cost of capital in general"... But I know very well what's MY cost of capital: Chosen a risk profile, let's say for instance equity investing, my cost of capital is the return I could achieve "without getting out of bed"... That's why I look at page 1 of the latest BRK AR, and use the annualized return of the S&P500 as my cost of capital. Then, if I am to invest in let's say BH, I try to reason about two things: 1) is BH higher quality than the average S&P500 company, or lower quality? 2) How much work is necessary for me to muster the confidence to invest in BH for the long term? Depending on the answers to 1) and 2), I decide which premium to my cost of capital I demand. Be sure a premium I demand always... And, if I don't see it, I always look somewhere else. PS My idea is BH has the opportunity to achieve a CAGR around 20% for the next 10 years. And 15% for the decade after that. My idea of long term is more or less 20 years. Gio

No, it is actually worth 1.56 x BV. And if you assume a 10% growth from year 11 onward, with a 10% discount rate, it means that after 10 years BH will cease to create any value... It will then be better to close doors, collect the money, and use it somewhere else (provided, of course, you find something that exceeds your 10% hurdle rate! ;) )... If that will be the outcome, I obviously am completely wrong about BH. Gio

Sanjeev, With all due respect I really don't see the leverage problem you are trying to warn us against. These are the numbers that I see: Long term debt: $215 million Obligations under leases: $101 million Shareholders equity: $553 million The Company proportionate share of Company stock held by investment partnerships: $65 million Total equity: $533 + $65 = $618 million Cash and equivalents: $112 million Net debt: $215 + $101 - $112 = $201 million Net debt / Total equity = $201 / $618 = 32.5%. Furthermore, we have $707 million in Land, Buildings, and Equipment, less $355 million of accumulated depreciation on the balance sheet. We know land and buildings mostly don't depreciate, and equipment is barely 30% of those $707 million. Therefore, it is possible the line "Property and equipment, net" understates significantly the true worth of BH's real estate. Of course, the comparison with FFH and MKL doesn't hold... BH started with lots of fcf and is trying to collect float, FFH and MKL started collecting lots of float and are trying to purchase businesses which generate fcf... Those who don't see the difference, simply don't want to... In business you don't choose everything... On the contrary, mostly you react to which opportunities come your way. And Biglari had the opportunity to get control of a business which generates lots of fcf. He seized it. Rightly so. Float is better than debt, of course, but that is not the point: the point is float is riskier than fcf. And companies which enjoy lots of fcf might lever more than companies which use lots of float. Gio

Well, regarding debt I think Biglari is behaving consistently with what he has often said to CBRL's management: Take for instance CBRL: it has equity of $487 million and long term debt of $381 million, 78%. And Biglari advised CBRL's management to increase debt up to $750 million, showing how that change would put CBRL's leverage in line with its peers! Furthermore, BH is much more diversified than CBRL! ;) The comparison with FFH and MKL doesn't hold, because they enjoy lots of float, and very little fcf. The exact opposite of BH! Gio

I guess it is always a matter of control: if those shares were cancelled, which percentage of BH would Biglari control? I agree direct ownership is different than ownership through a fund... Anyway, through the Lion Fund Biglari controls almost 20% of BH. Solely through direct ownership the percentage would be far less... You might not like it, but I guess this is the reason. As always I might be wrong. ;) Gio

No special insight, except that I agree with you! :) TPRE is another business that has the potential to grow BV at high CARs for many years to come. And they are delivering what promised: from an operating point of view they said high CRs were due to start-up costs, and that they would be progressively coming down... That's precisely what's happening. Also keep in mind that a 9% annualized increase in BVPS is not bad at all, for two reasons: 1) third point is underperforming this year (and this will change), 2) TPRE is still the less levered reinsurance company I know of (even less than GLRE, which employs very low leverage): as float grows, a 9% unlevered will easily translate into a double digit levered return. Gio

I have also an investment in TPRE, but it is a bit smaller than my investment in GLRE. Cheers, Gio

+1 ;) Gio