What would you guys buy TODAY? given 100% cash

[DCG]

50% SHLD. 49,99999% cash. For diversification I'd put the rest in a bag of chocolate or fruit. I haven't decided yet.

 

 

The bag of chocolate probably won't depreciate as fast as SHLD's brand & real estate.

[twacowfca]

50% SHLD. 49,99999% cash. For diversification I'd put the rest in a bag of chocolate or fruit. I haven't decided yet.

 

 

The bag of chocolate probably won't depreciate as fast as SHLD's brand & real estate.

 

Chocolate covered cherries is the way to go.  Internal diversification, just like BRK.  :)

[Sportgamma]

Hello Gio,

Take a look at Bestinver's hedgefund and you can see that they have over 20% of their portfolio in Exor. And MOI had a interview of them explaining a bit of it.

I might buy it as well if it goes to 15 :D

Cheers,

ASTA

 

Thank you ASTA!

I know that Bestinver has a meaningful position in Exor. I will look for the interview on their website.

It seems you have already done your homework on Exor: can you tell me their track record on a 5, 10, and 15 years basis? I have checked very quickly, and all I could find was the increase in NAV during the past 3 years. Not enough for me! Also because the management team seems relatively new, and therefore unproved (Enrico Vellano became CFO in 2006, Alessandro Nasi became Vice President of Business Development of CNH in 2008, and Mario Bonaccorso joined Exor in 2007). If I cannot project earnings at least 5 years into the future, with some sort of confidence, I almost never invest. Even if the price looks very cheap.

 

giofranchi

 

How would you project earnings for the next 5 years at Liberty Media or Leucadia for that matter? When you value Exor, the weight should go to analyse how they manage value (Gio, I also recommend that you read Valuation, Measuring and Managing the value of companies, by McKinsey CG). 

 

In regards to management, I would put more weight into J. Elkann and S. Marchionne as they are truly the ones in charge. Elkann has been on the board of Fiat since he was 21 years old (he is an engineer, such as yourself Gio). I don´t think I have seen an Xth generation (I think 4th in his case) descendant in a family business who is as competent as him. He also seems to be have a very humble personality (there is an anecdote about him working at a Fiat factory in Birmingham and even the family he stayed with were unaware of his family background).

 

A few points:

1. Take a look at the transactions and structural changes that Elkann and Marchionne have implemented after they took charge and form an opinion on the quality of their decisions for Exor shareholders. Look at the spin-offs, the acquisitions, buybacks and simplification of capital structure.

2. Giovanni Agnelli & C. owns 59% of ordinary shares and 39% of preferred shares in Exor and J. Elkann has managed to gain total control of Giovanni Agnelli & C. Ask yourself if the fortunes of J. Elkann is aligned with the rest of the Exor shareholders.

3. Compare what Fiat has done since 2008 with, for example, Pegout.

4. Take a look at Fiat, Fiat Industrial, SGS and C&W. You could look at the track records on a 5, 10, and 15 years basis.  You can also review S. Marchionne´s 5 year plan for Fiat and what the expected price per share should be if they accomplish 70% of their goals and look at how sensitive it is to scale efficiencies.

5. Look at the valuation and think about what you find to be the appropriate corporate discount for Exor.

 

[Yours Truly]

DirecTV, LMCA

[alwaysinvert]

I'd still buy me some Dell. And one or two microcaps that I already own.  And Berkshire.

 

But that's about it at the moment. Boring market.

[giofranchi]

Hello Gio,

Take a look at Bestinver's hedgefund and you can see that they have over 20% of their portfolio in Exor. And MOI had a interview of them explaining a bit of it.

I might buy it as well if it goes to 15 :D

Cheers,

ASTA

 

Thank you ASTA!

I know that Bestinver has a meaningful position in Exor. I will look for the interview on their website.

It seems you have already done your homework on Exor: can you tell me their track record on a 5, 10, and 15 years basis? I have checked very quickly, and all I could find was the increase in NAV during the past 3 years. Not enough for me! Also because the management team seems relatively new, and therefore unproved (Enrico Vellano became CFO in 2006, Alessandro Nasi became Vice President of Business Development of CNH in 2008, and Mario Bonaccorso joined Exor in 2007). If I cannot project earnings at least 5 years into the future, with some sort of confidence, I almost never invest. Even if the price looks very cheap.

 

giofranchi

 

How would you project earnings for the next 5 years at Liberty Media or Leucadia for that matter? When you value Exor, the weight should go to analyse how they manage value (Gio, I also recommend that you read Valuation, Measuring and Managing the value of companies, by McKinsey CG). 

 

In regards to management, I would put more weight into J. Elkann and S. Marchionne as they are truly the ones in charge. Elkann has been on the board of Fiat since he was 21 years old (he is an engineer, such as yourself Gio). I don´t think I have seen an Xth generation (I think 4th in his case) descendant in a family business who is as competent as him. He also seems to be have a very humble personality (there is an anecdote about him working at a Fiat factory in Birmingham and even the family he stayed with were unaware of his family background).

 

A few points:

1. Take a look at the transactions and structural changes that Elkann and Marchionne have implemented after they took charge and form an opinion on the quality of their decisions for Exor shareholders. Look at the spin-offs, the acquisitions, buybacks and simplification of capital structure.

2. Giovanni Agnelli & C. owns 59% of ordinary shares and 39% of preferred shares in Exor and J. Elkann has managed to gain total control of Giovanni Agnelli & C. Ask yourself if the fortunes of J. Elkann is aligned with the rest of the Exor shareholders.

3. Compare what Fiat has done since 2008 with, for example, Pegout.

4. Take a look at Fiat, Fiat Industrial, SGS and C&W. You could look at the track records on a 5, 10, and 15 years basis.  You can also review S. Marchionne´s 5 year plan for Fiat and what the expected price per share should be if they accomplish 70% of their goals and look at how sensitive it is to scale efficiencies.

5. Look at the valuation and think about what you find to be the appropriate corporate discount for Exor.

 

 

Thank you Sportgamma,

actually I have read “Valuation”, among many other books about valuation. However, with the only possible exceptions of “Accounting for Value” by prof. Penman, and “Value Investing” by prof. Greenwald, I find all those books on valuation to be intellectually very interesting, but practically of little help.

 

The reason is that I almost never try to value a company: instead, I am only interested in coming up with a conservative figure for what might possibly be the return on my investment for the next 10 years. And that is never easy, of course, but, as far as Liberty Media and Leucadia are concerned, I am quite comfortable with my assumptions. They are based on an extended and well-documented track-record, with a management that could go on performing very well for the next 10 years. Most important of all, I think I understand what the management of both Liberty Media and Leucadia did in the past, and what they are still doing today. It is this “understanding” that gives me the required confidence to partner with them, even more than their historical track-record.

 

Not so with Exor… not even close!

When I asked Christopher1 what he thought about Exor, he answered: “I rarely invest in Italian companies… I have seen too many bad things happen in the past…”. I couldn’t agree more!

 

That being said, I really do not have an opinion regarding Exor. I don’t know the company and I don’t know its management. I know that almost everyone on this board boos Mr. Biglari, but I think that in his latest letter he wrote at least one thing that can be appreciated:

 

"Our approach to purchasing stocks is to concentrate capital into very few concerns. We focus our attention and capital in an attempt to increase returns yet concomitantly reduce investment risk. Therefore, we limit our appraisals and allocations to businesses we can rationally assess, immersing ourselves in understanding a business rather than attempting to study many shallowly. As a consequence, our range of investments may be narrow, but within it we must be supreme. Analysis that is a mile wide and an inch deep is fool’s gold."

 

Likewise, I don’t pretend to know every bargain that is available (Exor trading at 0.5 x NAV might certainly be a very good bargain!). What I am positive about is that I prefer to know Liberty Media and Leucadia well, then to know Liberty Media, Leucadia, Exor, etc. approximately.

 

giofranchi

[Sportgamma]

Hi Gio and thanks for your response.

 

The reason is that I almost never try to value a company: instead, I am only interested in coming up with a conservative figure for what might possibly be the return on my investment for the next 10 years. And that is never easy, of course, but, as far as Liberty Media and Leucadia are concerned, I am quite comfortable with my assumptions. They are based on an extended and well-documented track-record, with a management that could go on performing very well for the next 10 years. Most important of all, I think I understand what the management of both Liberty Media and Leucadia did in the past, and what they are still doing today. It is this “understanding” that gives me the required confidence to partner with them, even more than their historical track-record.

 

I mention LUK and LMCA because both companies are essentially holding companies that actively manage their portfolio of assets. It is my view that just as with LUK and LMCA, looking at the operating companies of Exor and projecting their future for the next ten years would perhaps not be the appropriate approach. But as you state, your approach is focuses on the jockey.

 

Although we share fondness of Liberty Media and Leucadia (I hold LUK shares), I´m not sure that I totally agree with you on the here. LUK is already in a management transition and I would suspect that Maffei is being groomed to take charge at Liberty. Handler will hold a significant stake in the new LUK, making him an owner operator in some sense but still, can we look at his track record as an IB-er and assume that he will be as suited for his new position? 

 

When I asked Christopher1 what he thought about Exor, he answered: “I rarely invest in Italian companies… I have seen too many bad things happen in the past…”. I couldn’t agree more!

 

Is it an Italian company? Its listed in Italy but how much of their business actually takes place in Italy? Is Elkann Italian, is Marchionne Italian? Non of these questions are 100% yes.

 

Likewise, I don’t pretend to know every bargain that is available (Exor trading at 0.5 x NAV might certainly be a very good bargain!). What I am positive about is that I prefer to know Liberty Media and Leucadia well, then to know Liberty Media, Leucadia, Exor, etc. approximately.

 

I get your point and your selection of stock (and jockeys) are very much to my liking. However, your original question was:

 

I am curious about EXOR: could you elaborate a little bit? Is it just a matter of the meaningful discount to NAV it is trading at, or do you also really like what you see?

 

...and that prompted my response.

 

[giofranchi]

Hi Sportgamma,

it is always a pleasure to exchange ideas with you, as with many others on this wonderful board. Thank you all!

 

I mention LUK and LMCA because both companies are essentially holding companies that actively manage their portfolio of assets. It is my view that just as with LUK and LMCA, looking at the operating companies of Exor and projecting their future for the next ten years would perhaps not be the appropriate approach.

 

But I don’t look at the operating companies at all! I like LUK and LMCA, and a few other companies, because they are in the business of “buying $1 dollar bills for 50 cents”, without all the weaknesses inherently embedded in the mutual or hedge fund business model. And, among all the endeavours of mankind “to buy $1 dollar bills for 50 cents”, as far as I know, will be the safest way to accumulate wealth for a very long time to come. Because, to paraphrase Mr. Taleb, it is the most anti-fragile business I know of.

 

From page 67 of “Antifragile: Things That Gain from Disorder”:

“Consider, as a thought experiment, the situation of an immortal organism, one that is built without an expiration date. To survive, it would need to be completely fit for all possible random events that can take place in the environment, all future random events. By some nasty property, a random event is, well, random. It does not advertise its arrival ahead of time, allowing the organism to prepare and make adjustments to sustain shocks. For an immortal organism, pre-adaptation for all such events would be a necessity. When a random event happens, it is already too late to react, so the organism should be prepared to withstand the shock, or say goodbye. We saw that our bodies overshoot a bit in response to stressors, but this remains highly insufficient; they still can’t see the future. They can prepare for the next war, but not win it. Post-event adaptation, no matter how fast, would always be a bit late.

To satisfy the conditions for such immortality, the organisms need to predict the future with perfection – near perfection is not enough. But by letting the organism go one lifespan at a time, with modifications between successive generations, nature does not need to predict future conditions beyond the extremely vague idea of which direction things should be heading. Actually, even a vague direction is not necessary. Every random event will bring its own antidote in the form of ecological variation. It is as if nature changed itself at every step and modified its strategy every instant.”

 

That’s exactly my idea: Coca-Cola, or any other business that has been very successful for a very long time, is striving to become the “immortal organism”, the business of “buying $1 dollar bills for 50 cents”, instead, is “nature”.

Of course, even nature itself isn’t immortal, and it might come a time when no more bargains will be there to be found… but, sincerely, I think it will possibly be my grand-grand-nephew’s problem!

 

LUK is already in a management transition and I would suspect that Maffei is being groomed to take charge at Liberty.

 

It is kind of funny that, when I worry about how long Mr. Buffett will be at the helm of BRK, the most common response is the following: “we will deal with the succession problem 10 years from now!”. And Mr. Buffett is 82. Now, Mr. Malone, instead, is just 71… why should he leave Liberty Media anytime soon?! In the article I read yesterday I found this most amazing feat:

 

“Liberty made more than a half billion dollars in loans to Sirius XM nearly four years ago. Taking advantage of Sirius XM's immediate need to refinance debt in a very tight credit market, Liberty was able to earn 15% interest on the loans. In addition to the high interest rate, Liberty was also able to buy a 40% equity stake in Sirius XM for $12,500. The investment also granted Liberty the authority to approve cash certain expenditures in excess of $10 million.

That $12,500 investment is currently worth more than $7 billion at current Sirius XM share prices of $2.75-$2.80.”

 

Some time ago I read “The Greatest Trade Ever” about Mr. John Paulson. Well, that book must certainly be rewritten, because no one ever created so much value as Mr. Malone has done with Sirius XM! If the numbers are true, and I have no way to ascertain that, Mr. Malone is in the business of “buying $1 bills for… 0.00018 cents”!! And that was just 4 years ago!

My assumptions regarding Liberty Media: Mr. Malone will lead us for the next 10 years, and he is right now at the very top of his game.

Of course, my assumptions could be proven wrong today, or tomorrow: “When the facts change, I change my mind. What do you do, sir?” Keynes.

 

One last thought about Exor: their largest investment by far is FIAT. I don’t know how they operate, but I doubt they invested in FIAT opportunistically… They will surely be in FIAT as long as FIAT exists. FIAT right now might be a fantastic trading opportunity, but do you really think it is a good long-term holding? To jump into FIAT, when it is dramatically undervalued, and then get out, when its share price approaches fair value, might be a very rewarding use of capital. But that’s not what they are going to do.

 

giofranchi

[Sportgamma]

The same goes to you Gio, thank you for all your input on this board.

 

I mention LUK and LMCA because both companies are essentially holding companies that actively manage their portfolio of assets. It is my view that just as with LUK and LMCA, looking at the operating companies of Exor and projecting their future for the next ten years would perhaps not be the appropriate approach.

 

But I don’t look at the operating companies at all!

 

 

This is the complete paragraph that you are quoting:

 

I mention LUK and LMCA because both companies are essentially holding companies that actively manage their portfolio of assets. It is my view that just as with LUK and LMCA, looking at the operating companies of Exor and projecting their future for the next ten years would perhaps not be the appropriate approach. But as you state, your approach is focuses on the jockey.

 

Just to clarify, I want to sum up my point:

 

You initially asked if the Exor thesis was just about discount to NAV or if there was more under  the hood. My response was yes, I think there is.

- Just as LMCA and LUK, Exor is an Owner-Operator company (you brought Murray Stalh to my attention and for that I am very grateful, Gio) and their portfolio of assets can change significantly over time.

- You highlighted a couple of persons in the management team to which I replied that those are perhaps not the persons you should focus on. I think its kind of like saying LUK and LMCA have unproven management teams because Wheeler and Maffei have short track records.

- Exor in its current form has only existed for 3 years and I understand perfectly that that is not sufficient for your approach. However, I wanted to point out that in those three years, so much has happened and Elkann & Marchionne have made many strategic decisions. Therefore you can extract considerable amount of information about their quality as operators, financiers and capital allocators.

- Exor is Italian only to a limited extent.

- My main point is, Exor is a misunderstood company. "I doubt they invested in FIAT opportunistically…" Sure, but look at Fiat today and compare it to three years ago. They spun of the industrial divisions (which they will merge with CHN) , they invested in Chrysler, they simplified the capital structure. They have been very opportunistic in my view. You are right that their investment in Fiat is most likely permanent, but it does not mean that they will not implement value accretive actions, such as spin-offs. Personally, I suspect that they will allocate whatever cash flows they get from Fiat to other opportunities.

-What I look for are asymmetrical risk-reward situations. If Exor approaches fair value with considerable downside risk, I will simply be able to sell.

 

I like LUK and LMCA, and a few other companies, because they are in the business of “buying $1 dollar bills for 50 cents”, without all the weaknesses inherently embedded in the mutual or hedge fund business model.

 

On this we do agree but let me add that what the above mentioned companies also monetize when they are able to get more than a dollar and that is what I mean be "actively manage value" (as opposed to buy-and-hold).

 

You say: "I like LUK and LMCA, and a few other companies, because they are in the business of “buying $1 dollar bills for 50 cents”, without all the weaknesses inherently embedded in the mutual or hedge fund business model. And, among all the endeavours of mankind “to buy $1 dollar bills for 50 cents”, as far as I know, will be the safest way to accumulate wealth for a very long time to come. Because, to paraphrase Mr. Taleb, it is the most anti-fragile business I know of."

 

I say, well that is basically what Exor does. You mention the Sirius XM transaction and I agree, it was arguably one of the best documented business done during the crisis. But you could also group the Chrysler transaction by Fiat in that category. That was an exceptional piece of business.

 

 

 

 

[rjstc]

Sportgamma/Giofranchi. Thanks for a great discussion!. Sport what you roughly value Exor at?

Hi Sportgamma,

it is always a pleasure to exchange ideas with you, as with many others on this wonderful board. Thank you all!

 

I mention LUK and LMCA because both companies are essentially holding companies that actively manage their portfolio of assets. It is my view that just as with LUK and LMCA, looking at the operating companies of Exor and projecting their future for the next ten years would perhaps not be the appropriate approach.

 

But I don’t look at the operating companies at all! I like LUK and LMCA, and a few other companies, because they are in the business of “buying $1 dollar bills for 50 cents”, without all the weaknesses inherently embedded in the mutual or hedge fund business model. And, among all the endeavours of mankind “to buy $1 dollar bills for 50 cents”, as far as I know, will be the safest way to accumulate wealth for a very long time to come. Because, to paraphrase Mr. Taleb, it is the most anti-fragile business I know of.

 

From page 67 of “Antifragile: Things That Gain from Disorder”:

“Consider, as a thought experiment, the situation of an immortal organism, one that is built without an expiration date. To survive, it would need to be completely fit for all possible random events that can take place in the environment, all future random events. By some nasty property, a random event is, well, random. It does not advertise its arrival ahead of time, allowing the organism to prepare and make adjustments to sustain shocks. For an immortal organism, pre-adaptation for all such events would be a necessity. When a random event happens, it is already too late to react, so the organism should be prepared to withstand the shock, or say goodbye. We saw that our bodies overshoot a bit in response to stressors, but this remains highly insufficient; they still can’t see the future. They can prepare for the next war, but not win it. Post-event adaptation, no matter how fast, would always be a bit late.

To satisfy the conditions for such immortality, the organisms need to predict the future with perfection – near perfection is not enough. But by letting the organism go one lifespan at a time, with modifications between successive generations, nature does not need to predict future conditions beyond the extremely vague idea of which direction things should be heading. Actually, even a vague direction is not necessary. Every random event will bring its own antidote in the form of ecological variation. It is as if nature changed itself at every step and modified its strategy every instant.”

 

That’s exactly my idea: Coca-Cola, or any other business that has been very successful for a very long time, is striving to become the “immortal organism”, the business of “buying $1 dollar bills for 50 cents”, instead, is “nature”.

Of course, even nature itself isn’t immortal, and it might come a time when no more bargains will be there to be found… but, sincerely, I think it will possibly be my grand-grand-nephew’s problem!

 

LUK is already in a management transition and I would suspect that Maffei is being groomed to take charge at Liberty.

 

It is kind of funny that, when I worry about how long Mr. Buffett will be at the helm of BRK, the most common response is the following: “we will deal with the succession problem 10 years from now!”. And Mr. Buffett is 82. Now, Mr. Malone, instead, is just 71… why should he leave Liberty Media anytime soon?! In the article I read yesterday I found this most amazing feat:

 

“Liberty made more than a half billion dollars in loans to Sirius XM nearly four years ago. Taking advantage of Sirius XM's immediate need to refinance debt in a very tight credit market, Liberty was able to earn 15% interest on the loans. In addition to the high interest rate, Liberty was also able to buy a 40% equity stake in Sirius XM for $12,500. The investment also granted Liberty the authority to approve cash certain expenditures in excess of $10 million.

That $12,500 investment is currently worth more than $7 billion at current Sirius XM share prices of $2.75-$2.80.”

 

Some time ago I read “The Greatest Trade Ever” about Mr. John Paulson. Well, that book must certainly be rewritten, because no one ever created so much value as Mr. Malone has done with Sirius XM! If the numbers are true, and I have no way to ascertain that, Mr. Malone is in the business of “buying $1 bills for… 0.00018 cents”!! And that was just 4 years ago!

My assumptions regarding Liberty Media: Mr. Malone will lead us for the next 10 years, and he is right now at the very top of his game.

Of course, my assumptions could be proven wrong today, or tomorrow: “When the facts change, I change my mind. What do you do, sir?” Keynes.

 

One last thought about Exor: their largest investment by far is FIAT. I don’t know how they operate, but I doubt they invested in FIAT opportunistically… They will surely be in FIAT as long as FIAT exists. FIAT right now might be a fantastic trading opportunity, but do you really think it is a good long-term holding? To jump into FIAT, when it is dramatically undervalued, and then get out, when its share price approaches fair value, might be a very rewarding use of capital. But that’s not what they are going to do.

 

giofranchi

[giofranchi]

Sportgamma,

I agree with all you have written.

And I really think you have done your homework on Exor remarkably well, and it will surely turn out to be a great investment! ;)

Cheers!

 

giofranchi