giofranchi

“We brought the discipline of our investment style into our insurance operations. It doesn’t make sense to us, as value-oriented long term investors, to pay more for a stock or bond than a price on which, in our estimation based on its value, we should earn a good return over time. The same principle holds true for underwriting. The insurance industry as we all know is very cyclical. We focus on avoiding writing business where we are not being properly compensated for assuming the potential liability. If pricing is weak and the business cannot be written profitably, we simply decline to write the business. Similarly, in a hard market where pricing is strong and profitable, we will focus on greatly expanding the amount of business written. Management of our companies understand clearly that they will be measured only on the profitability of their underwriting. As value investors, we focus on preserving capital and not paying too much for assets. That value philosophy drives our approach to the insurance business as well. I think this focus on disciplined underwriting is very powerful and not all that common in the property and casualty industry. We judge our insurance companies by their profitability, not by the volume of business they write. Effectively, this is the same performance standard we use in judging our portfolio returns at Hamblin Watsa.” Prem Watsa, Winter 2011 Frank, I agree with your concern about the “near term”. But I do not agree, when you say that they do not have great underlying businesses… If the business model described above by Mr. Watsa isn’t great, well then I don’t know what great means! giofranchi

Great video from Value Investing World: http://www.valueinvestingworld.com/2012/09/ted-talk-daphne-koller-what-were.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ValueInvestingWorld+%28Value+Investing+World%29 giofranchi

Gio, do you have a link to that interview? I would love to read it as well. It was posted by berkshiremystery and Morgan last February. You can find it in attachment. giofranchi FairfaxNewsletter7_12-20-11.pdf

Well,... they file such a report each year around this time,... so it's nothing unusual. It seems they also have a Buffett like hurdle "at prices no higher than a 10% premium over the then-current book value of the shares." We might see them this year probably buying some more share back at current prices. If so, my firm's stake in FFH is already increasing... I would have waited for another 10% decline in share price, but it doesn't matter! I am perfectly fine with that! I have just finished reading Mr. Watsa's interview on the first issue of the FAIRFAX Newsletter (winter 2011), and once again I was reminded of how clear, resilient, yet very simple the FFH's business model really is. And how the opportunities for growth in China, India, and the Middle East hold significant promise for FFH in the future. Great interview! giofranchi

tombgrt, 1) You will surely be a great investor! No doubt in my mind about it! 2) Your English is perfect! ;) Cheers! giofranchi

Hey berkshiremystery! how could you wet our appetite, then leave us with only 3 pages??!! ;D Just joking! Thank you very much for posting! giofranchi

I couldn’t agree with you more! I know it happened many times in the past, but sincerely I don’t care: FFH trading below book value makes no sense at all. People just don’t do their homework, or are pseudo intellectuals who have never run a business in their whole life… If FFH stock price loses another 10%, I will double my firm’s stake in FFH. Let’s hope so! giofranchi

Thank you again! I will surely check it out! giofranchi

Ok... then, I really hope you will be our good contact!! ;D Keep on sharing your wisdom with us! giofranchi

bmichaud, thank you very much for posting! Last time I checked, a subscription to the Bridgewater daily observations was selling for more than $10.000 per year… Are you a Bridgewater client? Or did you pay the high annual fee? Or is there a more affordable way to get access to Mr. Dalio’s always fascinating musings? ;) giofranchi

I completely agree. A small acquisition, but imho a good one! giofranchi

Frank, I think txitxo explained it very well: 1) Mr. Watsa is locking in the spread between the best stocks he can find and the worst. Furthermore, he has float, which enables him to leverage the return from this strategy. 2) He will know when to remove the hedges better than almost any other investor. 3) If a correction in market prices is coming, Mr. Watsa will have a huge amount of capital to deploy in very good investment opportunities. 4) While waiting, FFH can concentrate on underwriting profitably: it won’t be easy, but with Mr. Barnard at the helm of all insurance operations, I think it can be achieved. Anyway, I am aware of the fact that book value won’t shoot up in the near term… and probably you will have plenty of time to get on board later! giofranchi Actually you have explained it much better :) Thank you txitxo, too kind! I would also add a fifth reason: 5) With US small cap priced to deliver a -0,1% annualized return for the next seven years (see attachment), and US large cap priced to deliver a +0,4% annualized return for the next seven years, the world right now is “greedy” with the US stock market. On the contrary, FFH is “fearful”. giofranchi GMO_7-Year_Asset_Class_Return_Forecasts.pdf

Warrior, actually Mr. Watsa’s market timing has been awful… 100% equity hedged since July 2010… It has already been a long time! Nonetheless, I still believe that in the end Mr. Watsa’s strategy will prove to be a winner. Of course, no one can know for sure… so, we must wait and see! ;) giofranchi

Warrior, welcome to the board! From the beginning of 2011, under IFRS, FFH reports its gains (losses) as marked to market at the end of each quarter. So, you can easily download the Press Releases of the results of previous quarters and see how the price of its hedges and CPI-linked derivatives performed. In 2010 Mr. Watsa wrote that FFH’s equity hedges cost was $936,6 million, while FFH’s CPI-linked derivatives cost was $145,8 million… and they still managed to have net investment gains of $188,5 million! FFH started 2010 with equity hedges at 30%, and raised them at 100% by July 2010. Hope this was helpful. giofranchi

I think this is incorrect: you don't own physical gold, you own a claim to a holding company that holds gold and claims to a refining company. If the worst happens you have to pray that both companies stay solvent. You rely on the solvency of your counterparty, as demonstrated by press releases like this: link. The biggest gold ETF in the world is a trust fund, a form of investment in which you have no credit risk. writser, you are right. I really meant: "to own something (a note) which is backed by physical gold". Think of a currency in the gold standard, instead of Euro or USD today. Obviously, I don’t like what the gold standard caused during the 1930s, and I don’t see the gold standard coming back again… but it is just a fact of life, that any currency backed by gold was much more difficult to depreciate than a currency which is backed by nothing. Could you please elaborate on why I might be spared from praying, if the worst happens, investing in a trust fund (I guess you are referring to GLD)? Thank you, giofranchi

Frank, I think txitxo explained it very well: 1) Mr. Watsa is locking in the spread between the best stocks he can find and the worst. Furthermore, he has float, which enables him to leverage the return from this strategy. 2) He will know when to remove the hedges better than almost any other investor. 3) If a correction in market prices is coming, Mr. Watsa will have a huge amount of capital to deploy in very good investment opportunities. 4) While waiting, FFH can concentrate on underwriting profitably: it won’t be easy, but with Mr. Barnard at the helm of all insurance operations, I think it can be achieved. Anyway, I am aware of the fact that book value won’t shoot up in the near term… and probably you will have plenty of time to get on board later! giofranchi

So you do not actually own physical gold, you just have an unsecured claim with an issuer who might have gold or might have claims to a gold refinery (we don't get to know anything about these claims). In other words: you are buying a bond, and you are paying monthly fees to own it. It is ironic: the gold bugs want physical gold because the huge ETF's are supposedly unsecured and manipulated by the big banks. This led to scores of new issues catering to this niche market. Products like Sprott physical gold trust, issuing shares at a huge premium to net asset value. Or Xetra Gold, which is actually just a bond. These products lure retail investors by offering them the possibility to actually claim physical gold. Obviously at a cost and obviously nobody ever does this. Unless the world collapses and at that point the gold might not actually be there or other creditors have priority over you. It is just a nice marketing ploy. In their search for "extra-physical" gold the gold bugs end up buying shitty products that are specifically marketed to them. The big ETF's are actually the most safe (and the cheapest) way to own a stake in physical gold. Well writser, on page 8 of the Prospectus you read "Use of Issuance Proceeds", and it is clear enough to me. You doubt that the gold they claim to be under the vault is not there? You doubt that the gold which Umicore claims to deliver is not there? If so, why? Anyway, I am absolutely not a gold bug! But I am neither an “Euro bug”, and, though I like USD better than Euro, Mr. Bernanke is really trying to do all he can to depreciate America’s currency! giofranchi

txitxo, I know you are very busy with your Dark Energy endeavor… but I really hope you will write more often in the future! Your latest post was both very thoughtful and funny! ;) giofranchi

Frank, you are correct. The use float to generate huge returns. Look at their history, FFH has increased book value by almost 24% for 26 years. That is no fluke. They are very good at what they do. The formula is simple: Float + Strong Value Investing = Cash flow machine! Like others here, after reading every annual letter to shareholders since inception I have invested a significant amount into FFH and plan on leaving it there for a good long time. FFH has two enormously important advantages on any hedge fund: 1) Permanent capital: the lack of permanent capital and the constant risk of redemptions are the greatest weaknesses in the hedge fund business model. Like Mr. Buffett has said many times: “Investing is the best business”… except for the risk of redemptions! 2) They have float. And, if they succeed in underwriting profitably, float is, paraphrasing Mr. Buffett, “money that other people pay us to keep… and that puts a great smile on our faces!” Thanks to these two important advantages, I expect FFH’s future performance to be much better than any hedge funds out there. giofranchi

Take a look at their bond results, managed by Brian Bradstreet. Watsa is not alone in this he's got an amazing small team! BeerBaron Beerbaron, I certainly agree with you. And I would add that, with Mr. Barnard as head of all insurance operation, I now expect FFH’s underwriting results to improve markedly in the years to come. Anyway, I want to stress another idea: in my experience, a business so good that even a fool could run it, is the exception, not the rule. Even better: it is an outlier! I can think of Coca-Cola and… well, don’t make me think too hard! Take, for instance, Burlington Northern or Lubrizol (or many other BRK’s businesses): do you think they are going to produce outstanding results without a great management? I don’t think so. Management is important. And a focused and driven management can make their shareholders rich. No doubt about it. If Mr. Watsa, Mr. Barnard, Mr. Bradstreet, etc. would leave, FFH would cease to be the great business I want my firm to be partial owner of. I know it and I am perfectly fine with that. I look for skilled, reliable, and motivated people in the businesses I manage personally. Why shouldn’t I stress this requirement even more in a business that I do not control? giofranchi

I like OAK: it is my fourth largest holding. giofranchi

racemize, sorry... but I don't believe you!!! ;D giofranchi

Anyone who has done the exact opposite of what Dent has recommended the past 12 years probably has made boatloads of money. Look at this list: The Great Crash Ahead (2011) The Great Depression Ahead (2009) The Next Great Bubble Boom (2006) The Roaring 2000s Investor (1999) The Roaring 2000s (1998) The Great Jobs Ahead (1995) The Great Boom Ahead (1993) Our Power to Predict (1989) If his next book is giddy and bullish, sell. I really don’t care about Mr. Dent or his forecasting track record. All his article is pointing at are the 3D (debt, demographics, and deleveraging) that also Mr. Rosenberg always refer to (or Mr. Shilling). It is not who is talking, but what he is saying. Do you think that QE will effectively fight and solve the 3D? Like Packer rightly pointed out it did in Sweden during the 1930s? Fine! Then we will have inflation. But I don’t care who will be right and who will be proven wrong. I only care about ideas, and if I understand and agree with them, or vice versa. giofranchi

FrankArabia, will FFH make money on its CPI-linked derivatives? I really have no clue! But FFH is by far my largest holding. I think that P&C insurance companies, if they underwrite profitably and are led by a great investor, can really be cash-flow machines! I am perfectly comfortable with Mr. Watsa’s strategy, because I think we were forced into a low-return world, and that caution is warranted here. But, even if I didn’t agree with Mr. Watsa current investment strategy, I would buy FFH holding at book value nonetheless. My firm has two businesses and I have a lot of managerial work to do every day. I don’t have the time to shift capital confidently from one bargain to the next. If you can, and you are skilled in doing so, I understand that FFH may not be of great interest to you: for instance, ERICOPOLY is up 100% this year and racemize is up 60%+… who cares about FFH, if you can achieve their returns! My job, instead, is simply to extract as much cash as I can from the operations of my firm, and to use it to buy great businesses at good (or very good!) prices. That’s all I try to do. And FFH is as great as any business I know of. giofranchi

I think page 16 of Mr. Watsa's 2010 Annual Letter may shed some light on this topic. giofranchi