LRE.L - Lancashire Holdings Ltd

[giofranchi]

Lancashire received the Reinsurer of the Year award this week at Reactions London market banquet. :)

 

Very nice! Thank you! :)

 

giofranchi

[twacowfca]

LRE's Issuer Credit Rating was upgraded yesterday from stable to positive by AM Best, meaning that they like their risk management and risk adjusted capitalization.  :)

 

It will be interesting to see what LRE's investment returns vs other insurers will be at the end of Q2.  Their low duration portfolio and their swaptions may help them make their usual, small quarterly investing return, despite the potential for MTM portfolio losses that some insurers may experience as interest rates have risen recently, and equity markets have given up most of the Q2 gains. :)

 

UBS analyst Angela Gu expressed her opinion in a research report released today that Lancashire Holdings is the best situated London market insurer to withstand a spike in interest rates with their low duration portfolio and lack of casualty exposure that has greater potential for claims inflation than LRE's short tail property book.  :)

[giofranchi]

I think the very interesting perspective on Ascent Capital, expressed by Mr. Murray Stahl in his recent interview with The Value Investor Insight, applies surprisingly well also to Lancashire:

In theory, the company could

stop growing, convert to a master limited

partnership and pay out the free cash

flow yield of 13% to shareholders. I don’t

expect that to happen, but if it did, you

could imagine the stock at least doubling.

In fact, the company has a lot of attractive

possibilities to invest that cash flow

and create incremental value. But it’s nice

to know this could be a successful investment

even if it decided not to do that.

At the current market valuation for LRE, assuming a ROE of 19%, just change 13% with 11.5%, and Mr. Murray’s perspective could be easily applied to Lancashire as well. In fact, the Alerian MLP ETF is yielding only 6%...

 

twacowfca, please correct me, if I am wrong! :)

 

giofranchi

 

[twacowfca]

I think the very interesting perspective on Ascent Capital, expressed by Mr. Murray Stahl in his recent interview with The Value Investor Insight, applies surprisingly well also to Lancashire:

In theory, the company could

stop growing, convert to a master limited

partnership and pay out the free cash

flow yield of 13% to shareholders. I don’t

expect that to happen, but if it did, you

could imagine the stock at least doubling.

In fact, the company has a lot of attractive

possibilities to invest that cash flow

and create incremental value. But it’s nice

to know this could be a successful investment

even if it decided not to do that.

At the current market valuation for LRE, assuming a ROE of 19%, just change 13% with 11.5%, and Mr. Murray’s perspective could be easily applied to Lancashire as well. In fact, the Alerian MLP ETF is yielding only 6%...

 

twacowfca, please correct me, if I am wrong! :)

 

giofranchi

 

Generally agree.  LRE is operated very much as if it were a MLP.  This is in the old style tradition  of the syndicates at Lloyd's of London when the investors (names) were limited partners, although with unlimited liability if something should go horribly wrong at a syndicate. 

 

Owning LRE is like having an irregular coupon that on average has been high, but could be skipped after a big loss event. The better MLP's typically have more regular streams of income available for partners. 

 

On the other hand, LRE has optionality that may not be present in MLP's.  LRE can buy back shares if opportune or decide to distribute less capital to shareholders if using that capital to write more business is compelling after rates spike in an attractive area.  Brindle likes his job, but LRE very likely would command top dollar if acquired in a merger or acquisition.

 

For me, these factors balance out.  I like the optionality more than I would like having a lower, but more regular coupon.  :)

 

Interestingly, lets suppose LRE decided to set up an off balance sheet trust that would automatically pay shareholders a special dividend of a certain amount in the event of a big loss of a certain amount of their capital.  That off balance sheet entity could be funded by some of the profits earned in exceptionally good years.  In the future large loss event, LRE would not use funds from its own balance sheet to pay a large dividend that year for two reasons:

 

1) that would not go well with rating agencies who would be concerned about capital adequacy after a big loss.

 

1) that would be the perfect time to have as much capital as possible to support writing lots of business when rates would be very high.

 

For these reasons, taking a small amount of capital out of the company and putting it into a trust to pay a big dividend after a big loss would not be optimal, but that doesn't mean that a long term  LRE shareholder couldn't do the same thing through mental accounting.  Mentally, go back through the largest dividends paid in certain years and imagine that a modest portion of those dividends had been put into an imaginary trust to be paid out to shareholders when the next big loss comes.  That helps put the lumpiness of their distributions in perspective.

 

 

 

[giofranchi]

Generally agree.  LRE is operated very much as if it were a MLP.  This is in the old style tradition  of the syndicates at Lloyd's of London when the investors (names) were limited partners, although with unlimited liability if something should go horribly wrong at a syndicate. 

 

Owning LRE is like having an irregular coupon that on average has been high, but could be skipped after a big loss event. The better MLP's typically have more regular streams of income available for partners. 

 

On the other hand, LRE has optionality that may not be present in MLP's.  LRE can buy back shares if opportune or decide to distribute less capital to shareholders if using that capital to write more business is compelling after rates spike in an attractive area.  Brindle likes his job, but LRE very likely would command top dollar if acquired in a merger or acquisition.

 

For me, these factors balance out.  I like the optionality more than I would like having a lower, but more regular coupon.  :)

 

I also like the optionality much more! :)

 

Anyway, I have found Mr. Stahl’s perspective useful to show how much LRE’s future growth really is needed, to make LRE a very good investment at the current market valuation: even without BVPS annual growth, which I don’t expect to happen, LRE’s stock price would have to almost double, just to yield like the average MLP. Then, when in need of more capital to take advantage of a specific opportunity, LRE could raise it on the market, like any MLP does. My point is: no growth in BVPS is really needed to make LRE a very attractive investment today.

 

Ok… maybe, as always, I am too optimistic… but I don’t see any serious flaw in Mr. Stahl’s reasoning applied to Lancashire!

 

giofranchi

 

[twacowfca]

Generally agree.  LRE is operated very much as if it were a MLP.  This is in the old style tradition  of the syndicates at Lloyd's of London when the investors (names) were limited partners, although with unlimited liability if something should go horribly wrong at a syndicate. 

 

Owning LRE is like having an irregular coupon that on average has been high, but could be skipped after a big loss event. The better MLP's typically have more regular streams of income available for partners. 

 

On the other hand, LRE has optionality that may not be present in MLP's.  LRE can buy back shares if opportune or decide to distribute less capital to shareholders if using that capital to write more business is compelling after rates spike in an attractive area.  Brindle likes his job, but LRE very likely would command top dollar if acquired in a merger or acquisition.

 

For me, these factors balance out.  I like the optionality more than I would like having a lower, but more regular coupon.  :)

 

I also like the optionality much more! :)

 

Anyway, I have found Mr. Stahl’s perspective useful to show how much LRE’s future growth really is needed, to make LRE a very good investment at the current market valuation: even without BVPS annual growth, which I don’t expect to happen, LRE’s stock price would have to almost double, just to yield like the average MLP. Then, when in need of more capital to take advantage of a specific opportunity, LRE could raise it on the market, like any MLP does. My point is: no growth in BVPS is really needed to make LRE a very attractive investment today.

 

Ok… maybe, as always, I am too optimistic… but I don’t see any serious flaw in Mr. Stahl’s reasoning applied to Lancashire!

 

giofranchi

 

I agree.  Their normalized dividend rate may be about double that of a good MLP.  That's why I think they are still a great value as their stock price has increased. I would compare them to Ben Graham's funds, but without the well deserved large override he and his partner got.  One reason they made almost 20% annual returns over many years for their clients was that they paid out almost all the profits.  Had they not done this, their percentage returns would have been much lower, according to B. G.  :)

[WhoIsWarren]

Hi -- I've got a few questions about the company that some of you may be able to help out with.

 

1. On Mr. Brindle.  Is his pre-LRE track record public information?  Twacowfca, you've referenced it a number of times -- have you managed to piece it together?

 

2. Although the company would appear to have been able to replace Neil McConachie and Simon Burton from the 'bench', is there an obvious candidate to replace Mr. Brindle, should anything happen to him?

 

3. I wonder to myself why Mr. Brindle has allowed outside investors piggy-back off his undoubted abilities?  I think the company has paid out, in dividends and buybacks, around $1.5bn since IPO.  The capitalisation of the company is $1.2bn.  What he needs is more of a loan than permanent equity partners! What is the risk that Brindle and his core team leave Lancashire and set up again on terms that are more beneficial to them?  How would that leave Lancashire?

 

4. Related to the last question, how likely is it that a number of Brindle's lieutenants leave to set up on their own?  Would they have a good enough reputation in the market (and if not now, is it only a matter of time)?  Again, how would that leave Lancashire?

 

Thanks in advance!

 

 

[twacowfca]

Hi -- I've got a few questions about the company that some of you may be able to help out with.

 

1. On Mr. Brindle.  Is his pre-LRE track record public information?  Twacowfca, you've referenced it a number of times -- have you managed to piece it together?

 

2. Although the company would appear to have been able to replace Neil McConachie and Simon Burton from the 'bench', is there an obvious candidate to replace Mr. Brindle, should anything happen to him?

 

3. I wonder to myself why Mr. Brindle has allowed outside investors piggy-back off his undoubted abilities?  I think the company has paid out, in dividends and buybacks, around $1.5bn since IPO.  The capitalisation of the company is $1.2bn.  What he needs is more of a loan than permanent equity partners! What is the risk that Brindle and his core team leave Lancashire and set up again on terms that are more beneficial to them?  How would that leave Lancashire?

 

4. Related to the last question, how likely is it that a number of Brindle's lieutenants leave to set up on their own?  Would they have a good enough reputation in the market (and if not now, is it only a matter of time)?  Again, how would that leave Lancashire?

 

Thanks in advance!

 

You can find more info in past postings on this thread so this answer will be short. Brindle's record at Lloyd's was published in the proxy for their IPO in 2005.  LRE has also republished that record more than once as part of their Annual reports and investor presentations.

 

Brindle's record was the main reason we made a large investment in LRE in mid 2006, and increased our investment since then.  Alex or Charles or perhaps others on their underwriting team would be a capable replacement if needed.  Elaine has done a super job as CFO. Neil was excellent; his understudy is proving to be a worthy successor.

 

Lancashire's staff  is becoming much like The Super Investors of Graham and Doddsville.  They have the training and experience.  They know how to do it.  They are doing it.

 

Building a corporate culture of excellence that flexes to exit sub par lines of business and enter more profitable lines is exceedingly rare.  Exporting that culture to a start up business or an established insurer is a tall order.  The Lancashire team knows what it takes to maintain their excellence.  It's far easier for their team leader, whoever that may be in the future, to keep Lancashire performing at their  best than to create a great business or transform another company.  :)

 

 

 

 

[WhoIsWarren]

You can find more info in past postings on this thread so this answer will be short.

 

:-[

 

Twacowfca,

 

Firstly I want to apologise.  I actually have read all of the postings (and a lot more besides) on LRE.  I realise how much time and effort you have tirelessly put into this particular thread, patiently explaining the thesis. And again -- as some other 'newbie' jumps onto the bandwagon without having the decency to find out whether you had previously answered a similar question (embarrassingly, I must count myself in that category).  I was actually conscious of not making that mistake and thought my questions, while similar to previous ones, were slightly nuanced and so not a repeat.  Anyway, my bad -- I obviously wasn't nuanced enough!!  ;D

 

Brindle's record at Lloyd's was published in the proxy for their IPO in 2005.  LRE has also republished that record more than once as part of their Annual reports and investor presentations.

 

I tried to get hold of the IPO document but my usual source -- Bloomberg -- had restricted this; strange I'd never seen that before.  I'm working my way through back issue ARs now, starting 2006...so I'll likely come across it shortly.  Thanks.  Also, if you happen to have a soft copy of the IPO doc, and are ok with posting it, I'd appreciate it very much.

 

The Doddsville analogy is good and makes sense.  I just had no idea whether or not in Brindle we were dealing with a superhuman, irreplaceable.  From your response I take: he's great, yes, but he's also replaceable, which is good.

 

Exporting that culture to a start up business or an established insurer is a tall order.

 

I'm not an insurance specialist -- I certainly have nowhere near your knowledge -- so I find your answer here interesting.  From my reading of Lancashire and the insurance industry generally, the strength of broker / client relationships is extremely important.  My understanding is that those relationships often move with the employee(s), much like the current Lancashire team was able to bring clients with them.  Does it not follow that those with the relationships and the specialist industry knowledge hold all the cards, that they would have a queue of 'like minded' investors willing to back them?  More so now, as they have almost 8 years more 'proof' of success.

 

Unlike the airline industry (did you mention Southwest earlier and then delete? maybe I'm going crazy), which is capital intensive, is highly operationally leveraged and where the probability of success for new entrants is low, I have this idea that insurance is a bit like the asset management business -- a small, low-cost team with a great record and a long list of relationships can relatively easily set up on their own and become successful.  I'm sure it's a lot of hard work and not without risks, but there are enough examples of success in the insurance world to encourage the latest batch of Brindle-students to go and try it themselves. Am I wide of the mark here?

 

Can it be so difficult to recreate the right culture in a start up, when a lot of the same people are involved?  Never having started a business, I am probably grossly underestimating this!

 

You will of course be aware that John Charman, Brindle's mentor and founder of Axis Capital in 2001, left Axis and recently joined Endurance as CEO / Chairman.  Now Charman sounds a bit of a prickly character, so maybe there's no read across, but should we really expect Brindle to stay at LRE forever?  I mean, he has nice money in the company via shares and options etc., but unless he feels that this company is his baby -- like Buffett feels about Berkshire -- I would be somewhat concerned he'll leave.  I pose this because I don't know Brindle's character, how he measures success, what he wants his legacy to be, which you may have some insights into.

 

Anyway, these questions are around the edge of what is a great business, with a great culture and a deep bench of replacements should some 'key' staff leave.  However, perhaps, given the market's current valuation of the business, they are more important for new investors, as the difference between Brindle + 4 / 5 of his best colleagues staying or leaving might be the difference between 20% and say 15% future RoEs.

 

You see where I'm coming from?

 

I apologise for the length of this response.  You probably have 'LRE fatigue' at this stage and no more feel like answering.  I understand!  ;D

 

But any insights would be great too. Cheers.

[twacowfca]

You can find more info in past postings on this thread so this answer will be short.

 

:-[

 

Twacowfca,

 

Firstly I want to apologise.  I actually have read all of the postings (and a lot more besides) on LRE.  I realise how much time and effort you have tirelessly put into this particular thread, patiently explaining the thesis. And again -- as some other 'newbie' jumps onto the bandwagon without having the decency to find out whether you had previously answered a similar question (embarrassingly, I must count myself in that category).  I was actually conscious of not making that mistake and thought my questions, while similar to previous ones, were slightly nuanced and so not a repeat.  Anyway, my bad -- I obviously wasn't nuanced enough!!  ;D

 

Brindle's record at Lloyd's was published in the proxy for their IPO in 2005.  LRE has also republished that record more than once as part of their Annual reports and investor presentations.

 

I tried to get hold of the IPO document but my usual source -- Bloomberg -- had restricted this; strange I'd never seen that before.  I'm working my way through back issue ARs now, starting 2006...so I'll likely come across it shortly.  Thanks.  Also, if you happen to have a soft copy of the IPO doc, and are ok with posting it, I'd appreciate it very much.

 

The Doddsville analogy is good and makes sense.  I just had no idea whether or not in Brindle we were dealing with a superhuman, irreplaceable.  From your response I take: he's great, yes, but he's also replaceable, which is good.

 

Exporting that culture to a start up business or an established insurer is a tall order.

 

I'm not an insurance specialist -- I certainly have nowhere near your knowledge -- so I find your answer here interesting.  From my reading of Lancashire and the insurance industry generally, the strength of broker / client relationships is extremely important.  My understanding is that those relationships often move with the employee(s), much like the current Lancashire team was able to bring clients with them.  Does it not follow that those with the relationships and the specialist industry knowledge hold all the cards, that they would have a queue of 'like minded' investors willing to back them?  More so now, as they have almost 8 years more 'proof' of success.

 

Unlike the airline industry (did you mention Southwest earlier and then delete? maybe I'm going crazy), which is capital intensive, is highly operationally leveraged and where the probability of success for new entrants is low, I have this idea that insurance is a bit like the asset management business -- a small, low-cost team with a great record and a long list of relationships can relatively easily set up on their own and become successful.  I'm sure it's a lot of hard work and not without risks, but there are enough examples of success in the insurance world to encourage the latest batch of Brindle-students to go and try it themselves. Am I wide of the mark here?

 

Can it be so difficult to recreate the right culture in a start up, when a lot of the same people are involved?  Never having started a business, I am probably grossly underestimating this!

 

You will of course be aware that John Charman, Brindle's mentor and founder of Axis Capital in 2001, left Axis and recently joined Endurance as CEO / Chairman.  Now Charman sounds a bit of a prickly character, so maybe there's no read across, but should we really expect Brindle to stay at LRE forever?  I mean, he has nice money in the company via shares and options etc., but unless he feels that this company is his baby -- like Buffett feels about Berkshire -- I would be somewhat concerned he'll leave.  I pose this because I don't know Brindle's character, how he measures success, what he wants his legacy to be, which you may have some insights into.

 

Anyway, these questions are around the edge of what is a great business, with a great culture and a deep bench of replacements should some 'key' staff leave.  However, perhaps, given the market's current valuation of the business, they are more important for new investors, as the difference between Brindle + 4 / 5 of his best colleagues staying or leaving might be the difference between 20% and say 15% future RoEs.

 

You see where I'm coming from?

 

I apologise for the length of this response.  You probably have 'LRE fatigue' at this stage and no more feel like answering.  I understand!  ;D

 

But any insights would be great too. Cheers.

 

Thank you for your insightful questions. The truth is that if I can clearly explain what Lancashire is , this teacher will learn more than the student.

 

I'm a student of management. My wife and I had the joy to take W. E. Deming's management course,  taught by the master himself, not once, but twice before he passed away. We especially  also like the The Toyota Way. That's about a lot more than building cars.  We like Buffett as a manager and also Goldratt. Reichelt and Laura Rittenhouse for their insights into what makes managers and companies become very successful.

 

In my opinion, Brindle is one of the very best managers ever in any industry.  Pick up one or more of his letters in his annual reports plus a copy of Rittenhouse's book, Investing Between the Lines. Read them together and you may conclude that Brindle and the culture he has built at LRE is second to none.  Like the best managers, he leads the devopment of the staff in a collegial manner to be the very best they can possibly be and then keep improving. That's why they have great results.

 

Charman became Brindle's mentor soon after he  joined the London Market "club". Both wound up as CEO's of IPO's.  Charman did OK. Brindle took the road less traveled and built a remarkable machine.

 

I took off the reference to SWAir because I had already used it as an analogy.  But it is important.  SWA took over Air Tran a few years ago. They have not been able to transform the culture there and have only integrated some behind the scenes stuff while allowing the Airlines to run separately.

 

It is a not an infrequent situation that a few key successful managers of a large insurance company who have been allowed to run an operation defect en mass to another company. That's unlikely to happen at LRE for a number of reasons, especially because all underwriters and managers there participate together in a daily underwriting call with the CEO and collegially discuss every underwriting decision before it is made. There are no silos there and no private groups that might want to defect.

  :)

 

Brindle takes home pay and dividends equivalent to about 6% of LRE's earnings.  Plus he has lots of appreciation on his beneficial interest in Lancashire stock and derivatives.  He much prefers running the show to playing politics in a large company like AIG where he managed their London risk. 

 

The only offer he couldn't refuse would likely be an acquisition of LRE at a high multiple plus an agreement that he could run his own show under the umbrella of a large insurer.

 

 

 

[giofranchi]

Thank you, WhoIsWarren, for the very good questions, and thank you, twacowfca, for the very good answers! :)

 

giofranchi

 

[WhoIsWarren]

twacowfca,

 

Thank you for your excellent answer, which has furthered my understanding of the solidity of the Lancashire team.

 

Perhaps -- again to use the asset management example -- Lancashire could be likened to Seth Klarman's Baupost.  While I don't know Baupost intimately, they would appear to have a great culture. And while individuals may leave from time to time to set up on their own, for whatever reason, the ethos of the firm remains intact and high quality replacements, fully paid up disciples of "The Baupost Way", are easily found.

 

You've given me a lot of homework, which I thank you for.  I just ordered the Rittenhouse book as well as a couple on The Toyota Way.  You also mentioned Reichelt -- who is this, I'm interested to know more?

[giofranchi]

I just ordered the Rittenhouse book as well as a couple on The Toyota Way.  You also mentioned Reichelt -- who is this, I'm interested to know more?

 

I have read them both: excellent books!

Yes, twacowfca, I am curious too: who is Reichelt, and why do you admire him so much?

Thank you! :)

 

giofranchi

 

[twacowfca]

I just ordered the Rittenhouse book as well as a couple on The Toyota Way.  You also mentioned Reichelt -- who is this, I'm interested to know more?

 

I have read them both: excellent books!

Yes, twacowfca, I am curious too: who is Reichelt, and why do you admire him so much?

Thank you! :)

 

giofranchi

 

Sorry, that's Fred Reicheld. He has been a managing partner at Bain and Co. His classic and in my opinion best book is, The Loyalty Effect.  Another management book I like is a very short novel by Eli Goldratt, the Goal.  His other books are also good, but more about the nuts and bolts and esoteric aspects of managing, concepts like, "The Evaporating Cloud" which I thought was profound, but our managers thought was "Duh".  :)

[twacowfca]

twacowfca,

 

Thank you for your excellent answer, which has furthered my understanding of the solidity of the Lancashire team.

 

Perhaps -- again to use the asset management example -- Lancashire could be likened to Seth Klarman's Baupost.  While I don't know Baupost intimately, they would appear to have a great culture. And while individuals may leave from time to time to set up on their own, for whatever reason, the ethos of the firm remains intact and high quality replacements, fully paid up disciples of "The Baupost Way", are easily found.

 

You've given me a lot of homework, which I thank you for.  I just ordered the Rittenhouse book as well as a couple on The Toyota Way.  You also mentioned Reichelt -- who is this, I'm interested to know more?

 

Yes! That's a great comparison with the Baupost Group.  Supposedly there are about twenty superbly qualified people waiting in the wings who want to be part of their organization whenever there is an opening.  That's not unlike Lancashire.  They have lost three or so key people over the years, but very well qualified newcomers or existing staff have filled those gaps.  :)

[giofranchi]

twacowfca,

 

Thank you for your excellent answer, which has furthered my understanding of the solidity of the Lancashire team.

 

Perhaps -- again to use the asset management example -- Lancashire could be likened to Seth Klarman's Baupost.  While I don't know Baupost intimately, they would appear to have a great culture. And while individuals may leave from time to time to set up on their own, for whatever reason, the ethos of the firm remains intact and high quality replacements, fully paid up disciples of "The Baupost Way", are easily found.

 

You've given me a lot of homework, which I thank you for.  I just ordered the Rittenhouse book as well as a couple on The Toyota Way.  You also mentioned Reichelt -- who is this, I'm interested to know more?

 

Yes! That's a great comparison with the Baupost Group.  Supposedly there are about twenty superbly qualified people waiting in the wings who want to be part of their organization whenever there is an opening.  That's not unlike Lancashire.  They have lost three or so key people over the years, but very well qualified newcomers or existing staff have filled those gaps.  :)

 

I frankly don’t understand why people are so “obsessed” with succession or possible replacement of present management… If I could invest in the Baupost Group, the opportunity to partner with Mr. Klarman would be reason n.1. Similarly, I have invested heavily in Lancashire, and the opportunity to partner with Mr. Brindle is reason n.1. Take away Mr. Klarman, and the Baupost Group imo becomes an entirely different business. Take away Mr. Brindle, and Lancashire imo becomes an entirely different business. Simply put: if Mr. Klarman is gone, I am gone; if Mr. Brindle is gone, I am gone.

 

giofranchi

[WhoIsWarren]

I frankly don’t understand why people are so “obsessed” with succession or possible replacement of present management… If I could invest in the Baupost Group, the opportunity to partner with Mr. Klarman would be reason n.1. Similarly, I have invested heavily in Lancashire, and the opportunity to partner with Mr. Brindle is reason n.1. Take away Mr. Klarman, and the Baupost Group imo becomes an entirely different business. Take away Mr. Brindle, and Lancashire imo becomes an entirely different business. Simply put: if Mr. Klarman is gone, I am gone; if Mr. Brindle is gone, I am gone.

 

giofranchi

 

Gio, I can see your logic, but I would be prepared to be circumspect about succession (I don't like "hard and fast rules").  I think it really depends on the situation.

 

Speaking generally, I think there is a high probability that successors will display many of the same traits as their predecessors.  If there is a bad culture under one leader, isn't it likely that the same factors that permitted the bad culture fester is the very reason why the successor will be cut from the same cloth?  Similarly with a good culture.  Isn't it likely that the successors to Warren Buffett, to Howard Marks, to Seth Klarman will have the same views, aspirations and motivations as their mentors?  I know you don't think so, because I have seen your comments on Leucadia's transition over to Handler.  You say: prove yourself.  I am prepared to trust the judgement of Cumming & Steinberg, because they are motivated stakeholders and have a record of repeatedly backing the right horses.

 

I preface all that by saying that the more I read and learn, the more I come to realise that genuinely good cultures are very rare! 

 

Also, I will concede is that it is far far easier to go from a good culture to a bad one than the other way around.  This is where the danger lies.  And you must of course bring valuation into the picture -- is the company priced for a perfect transition or not.

 

Perhaps someone has done research on this, which may disprove what I'm saying (easier to disprove than to "prove", right?)?  I'd certainly be interested to hear back.

 

 

[giofranchi]

I frankly don’t understand why people are so “obsessed” with succession or possible replacement of present management… If I could invest in the Baupost Group, the opportunity to partner with Mr. Klarman would be reason n.1. Similarly, I have invested heavily in Lancashire, and the opportunity to partner with Mr. Brindle is reason n.1. Take away Mr. Klarman, and the Baupost Group imo becomes an entirely different business. Take away Mr. Brindle, and Lancashire imo becomes an entirely different business. Simply put: if Mr. Klarman is gone, I am gone; if Mr. Brindle is gone, I am gone.

 

giofranchi

 

Gio, I can see your logic, but I would be prepared to be circumspect about succession (I don't like "hard and fast rules").  I think it really depends on the situation.

 

Speaking generally, I think there is a high probability that successors will display many of the same traits as their predecessors.  If there is a bad culture under one leader, isn't it likely that the same factors that permitted the bad culture fester is the very reason why the successor will be cut from the same cloth?  Similarly with a good culture.  Isn't it likely that the successors to Warren Buffett, to Howard Marks, to Seth Klarman will have the same views, aspirations and motivations as their mentors?  I know you don't think so, because I have seen your comments on Leucadia's transition over to Handler.  You say: prove yourself.  I am prepared to trust the judgement of Cumming & Steinberg, because they are motivated stakeholders and have a record of repeatedly backing the right horses.

 

I preface all that by saying that the more I read and learn, the more I come to realise that genuinely good cultures are very rare! 

 

Also, I will concede is that it is far far easier to go from a good culture to a bad one than the other way around.  This is where the danger lies.  And you must of course bring valuation into the picture -- is the company priced for a perfect transition or not.

 

Perhaps someone has done research on this, which may disprove what I'm saying (easier to disprove than to "prove", right?)?  I'd certainly be interested to hear back.

 

My idea basically is what I have recently written about Mr. Biglari: we don’t really know why a person is so much more successful than the rest of us… In some endeavors of life more than others, for sure, but imo without any obvious exception. We all are the products of million choices, sometimes put together so randomly, that it is very difficult to say what would have happened, if you had changed even 10 of them… I guess we just don’t know.

So, yes, I want to see the right culture, I want to see the right process, and I want to see the right motivations, but I demand that the people I partner with first prove themselves… preferably, over and over again! ;)

 

giofranchi

 

[WhoIsWarren]

My idea basically is what I have recently written about Mr. Biglari: we don’t really know why a person is so much more successful than the rest of us… In some endeavors of life more than others, for sure, but imo without any obvious exception. We all are the products of million choices put together at times so randomly, that it is very difficult to say what would have happened, if you had changed even 10 of them… I guess we just don’t know.

So, yes, I want to see the right culture, I want to see the right process, and I want to see the right motivations, but I demand that the people I partner with first prove themselves… preferably, over and over again! ;)

 

giofranchi

 

True -- but don't you implicitly Mr. Watsa to correctly judge his lieutenants?  Same with Mr. Einhorn and Mr. Malone?  You can trust these decisions, but not the decision of C&S to choose Handler?

 

[i still don't for the life of me understand how you can trust Mr. Big Liar.  He may be great, but how can you trust him to do right by you?]

 

Anyway, we're getting somewhat off topic here, as interesting as it is.

[giofranchi]

My idea basically is what I have recently written about Mr. Biglari: we don’t really know why a person is so much more successful than the rest of us… In some endeavors of life more than others, for sure, but imo without any obvious exception. We all are the products of million choices put together at times so randomly, that it is very difficult to say what would have happened, if you had changed even 10 of them… I guess we just don’t know.

So, yes, I want to see the right culture, I want to see the right process, and I want to see the right motivations, but I demand that the people I partner with first prove themselves… preferably, over and over again! ;)

 

giofranchi

 

True -- but don't you implicitly Mr. Watsa to correctly judge his lieutenants?  Same with Mr. Einhorn and Mr. Malone?  You can trust these decisions, but not the decision of C&S to choose Handler?

 

[i still don't for the life of me understand how you can trust Mr. Big Liar.  He may be great, but how can you trust him to do right by you?]

 

Anyway, we're getting somewhat off topic here, as interesting as it is.

 

One STRONG man at the helm of a GOOD business, that’s all I need to know. That’s all I need to get conviction. And conviction is all I need to buy when everybody else is selling, and also to sell when everybody else is buying.

 

I still don’t know if I prefer Mr. Big Liar, or shalab’s Bulgaria Holdings… what would board members from Bulgaria say about it?! ;D ;D ;D

 

giofranchi

 

[giofranchi]

One STRONG man at the helm of a GOOD business, that’s all I need to know. That’s all I need to get conviction. And conviction is all I need to buy when everybody else is selling, and also to sell when everybody else is buying.

 

"Set The Tone" by Mr. Gary Shilling

 

giofranchi

Set_The_Tone.pdf

[twacowfca]

Good article, Gio. Thank you.

 

There is always cause for concern when there is a change in leadership.  However, with Handler's taking the helm at Leucadia,  that risk is about as low as it gets. His long term record over about three decades at Jefferies is even better than C&S long term record.  Plus, he's worked closely with them as their favorite investment advisor and underwriter since the 1980's.  It doesn't get any better than that as predictors of success.  :)

[jay21]

Good article, Gio. Thank you.

 

There is always cause for concern when there is a change in leadership.  However, with Handler's taking the helm at Leucadia,  that risk is about as low as it gets. His long term record over about three decades at Jefferies is even better than C&S long term record.  Plus, he's worked closely with them as their favorite investment advisor and underwriter since the 1980's.  It doesn't get any better than that as predictors of success.  :)

 

Thanks twacowfca.  I have been trying to say that.  He does have a track record people can look to get comfortable and you shouldn't need to wait to see him prove himself (imo he already has).  He has done a fantastic job with Knight, FMG, and stock and debt buybacks. 

[constructive]

I agree on Handler at Leucadia. His record at Jefferies is certainly more impressive than Biglari's.

 

At first I was disappointed with the Leucadia - Jefferies merger. It seemed to me that Leucadia paid a bit too much, and Leucadia was more of an all weather value creation vehicle than Jefferies. But after thinking about it I'm back on board.

[giofranchi]

Good article, Gio. Thank you.

 

There is always cause for concern when there is a change in leadership.  However, with Handler's taking the helm at Leucadia,  that risk is about as low as it gets. His long term record over about three decades at Jefferies is even better than C&S long term record.  Plus, he's worked closely with them as their favorite investment advisor and underwriter since the 1980's.  It doesn't get any better than that as predictors of success.  :)

 

Thanks twacowfca.  I have been trying to say that.  He does have a track record people can look to get comfortable and you shouldn't need to wait to see him prove himself (imo he already has).  He has done a fantastic job with Knight, FMG, and stock and debt buybacks.

 

twacowfca and jay,

it is not about Mr. Handler at all! …It is about me! I need time to get comfortable with any person, even with someone who has an outstanding track-record like Mr. Handler’s. The more information I can get about him/her, the quicker that process is. With Mr. Brindle, for instance, it was amazingly quick by my standards! Thanks to twacowfca, who has written extensively about him on this thread. Instead, information about Mr. Handler are much harder to find… Look at it this way: when I interview someone for my businesses, and he/she has a fantastic résumé, I nonetheless refrain from assigning him/her great responsibilities, until I have come to know him/her much better. It just takes some time! I seldom invest differently.

 

giofranchi